UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission File Number 0-29038
TANISYS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
WYOMING 74-2675493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12201 TECHNOLOGY BLVD., SUITE 125
AUSTIN, TEXAS 78727
(Address of principal executive offices) (Zip Code)
(512) 335-4440
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicated below are the number of shares outstanding of the
Registrant's common stock and 5% Series A Convertible Preferred Stock at
February 10, 1999:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
-------------- -----------
Common Stock, no par value 23,356,155
Preferred Stock, $1.00 par value 255
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - December 31, 1998 and September 30, 1998............ 3
Consolidated Statements of Operations - For the Three Month Periods Ended
December 31, 1998 and 1997..................................................... 4
Consolidated Statements of Cash Flows - For the Three Month Periods
Ended December 31, 1998 and 1997............................................... 5
Notes to Interim Consolidated Condensed Financial Statements (Unaudited).......... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 14
Item 2. Changes in Securities and Use of Proceeds......................................... 14
Item 6. Exhibits and Reports on Form 8-K.................................................. 15
SIGNATURES...................................................................................... 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1998 1998
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 895,945 $ 253,107
Restricted cash 16,095 154,271
Trade accounts receivable, net of allowance of $396,465 and
$406,157, respectively 7,396,224 4,206,919
Inventory 3,987,109 3,224,671
Prepaid expenses and other 757,841 643,398
- ----------------------------------------------------------------------------------------------------------------
Total current assets 13,053,214 8,482,366
- ----------------------------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation of
$3,571,407 and $3,053,548, respectively 6,594,352 6,751,800
Other noncurrent assets 764,991 679,134
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 20,412,557 $ 15,913,300
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,408,456 $ 4,648,129
Accrued liabilities 2,637,637 4,177,286
Revolving credit note 5,302,048 2,266,260
Current portion of obligations under capital lease 455,595 262,171
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 13,803,736 11,353,846
- ----------------------------------------------------------------------------------------------------------------
Long-term debt to stockholders, net of discount 1,568,875 -
Long-term portion of obligations under capital lease 1,433,127 754,751
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 16,805,738 12,108,597
- ----------------------------------------------------------------------------------------------------------------
Mandatorily redeemable convertible preferred stock:
5% Series A Convertible Preferred Stock, $1 par value, 400
shares authorized, 345 and 400 shares issued and outstanding,
respectively 2,593,077 2,390,475
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, no par value, 50,000,000 shares authorized,
22,253,679 and 20,799,714 shares issued and outstanding,
respectively 30,318,553 29,114,774
Additional paid-in capital 1,687,312 1,687,312
Accumulated other comprehensive income 33,998 (2,625)
Accumulated deficit (31,026,121) (29,385,233)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,013,742 1,414,228
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 20,412,557 $ 15,913,300
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
3
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------
Net sales $12,919,530 $ 9,675,823
Cost of goods sold 10,940,081 7,522,657
- -----------------------------------------------------------------------------------------------------------------
Gross profit 1,979,449 2,153,166
- -----------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 534,274 810,565
Sales and marketing 693,605 671,672
General and administrative 1,182,319 1,018,363
Depreciation and amortization 235,148 1,067,205
Bad debt expense - 108,943
- -----------------------------------------------------------------------------------------------------------------
Total operating expenses 2,645,346 3,676,748
- -----------------------------------------------------------------------------------------------------------------
Operating loss (665,897) (1,523,582)
- -----------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 18,110 19,526
Interest expense (293,883) (155,132)
- -----------------------------------------------------------------------------------------------------------------
Net loss $ (941,670) $(1,659,188)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Reconciliation of net loss to net loss applicable to common stock:
Net loss $ (941,670) $(1,659,188)
Preferred stock dividends and amortization of the value
of the beneficial conversion feature on the preferred stock (699,218) -
- -----------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(1,640,888) $(1,659,188)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share $ (0.08) $ (0.08)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 21,049,454 20,397,486
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
4
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (941,670) $(1,659,188)
Adjustment to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 558,826 1,140,636
Changes in operating assets:
Restricted cash 138,176 1,471,985
Accounts receivable, net (3,189,305) (1,024,605)
Inventory (789,614) 711,931
Prepaid expenses and other (114,505) (34,989)
Accounts payable and accrued liabilities 176,592 (800,572)
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,161,500) (194,802)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (333,234) (187,313)
Proceeds from sale of property and equipment - 21,637
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (333,234) (165,676)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt to stockholders 2,000,000 -
Payment of debt financing costs (21,350) -
Proceeds from issuance of common stock - 75,000
Draws on revolving credit note, net 3,035,788 150,803
Payments on capital lease obligations (127,239) (11,287)
Proceeds from exercise of stock options and warrants 213,750 128,250
Other 36,623 -
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,137,572 342,766
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 642,838 (17,712)
Cash and cash equivalents, beginning of period 253,107 1,990,017
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 895,945 $ 1,972,305
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 205,755 $ 155,132
Interest received 18,110 19,526
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease additions 999,039 -
Issuance of stock warrants for debt financing costs 75,000 -
Issuance of stock warrants in connection with issuance of
debt to stockholders 461,538 -
Preferred stock dividends paid in common stock 5,795 -
Preferred stock dividends accrued 43,125 -
Amortization of beneficial conversion feature on preferred stock 650,298 -
Conversion of preferred stock to common stock 447,696 -
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
5
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements present the
financial position, results of operations and cash flows of Tanisys
Technology, Inc. ("Tanisys") and its wholly owned subsidiaries (collectively
referred to as the "Company") as of the dates and for the periods indicated.
All material intercompany accounts and transactions have been eliminated in
consolidation. All adjustments have been made to the accompanying interim
consolidated financial statements which are, in the opinion of the Company's
management, necessary for fair presentation of the Company's operating
results.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. It is recommended that these interim consolidated
financial statements be read in conjunction with the Company's consolidated
financial statements and the notes thereto for the fiscal year ended
September 30, 1998 contained in the Company's Form 10-K as filed with the
Securities and Exchange Commission on December 29, 1998.
NOTE 2: INVENTORY
Inventory consists of the following:
DECEMBER 31, SEPTEMBER 30,
1998 1998
- --------------------------------------------------------------------------
Raw materials $3,564,113 $2,770,338
Work-in-process 252,787 280,445
Finished goods 170,209 173,888
- --------------------------------------------------------------------------
Total inventory $3,987,109 $3,224,671
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Inventory is stated at the lower of cost or market value. Inventory
costs include direct materials, direct labor and certain indirect
manufacturing overhead expenses.
NOTE 3: LONG-TERM DEBT
In November 1998, the Company issued $2 million in debt with attached
stock warrants to certain stockholders of the Company. The debt is due in two
years and carries an interest rate of 10 percent per annum, due quarterly and
payable in either unregistered shares of common stock or cash, at the option
of the Company. One stock warrant was issued for each dollar of debt,
resulting in the issuance of 2 million stock warrants. Each warrant is
exercisable into one share of common stock beginning on December 1, 1998, at
an exercise price of $0.25 per share. The exercise price increases to $0.50
per share after August 1, 1999 and $1.00 per share after October 1, 2000. The
warrants expire on November 1, 2001. The stock warrants and underlying shares
of common stock carry no registration rights.
6
The Company determined the fair value of the warrants to be
approximately $462 thousand and has reflected this value as a discount on the
debt. The debt discount is being amortized to interest expense over the life
of the related debt. Long-term debt to stockholders consists of the following
at December 31, 1998:
-------------------------------------------------------------------------
Notes payable to stockholders, interest of 10% per annum
Payable quarterly in cash or common stock,
Unsecured, due November 1, 2000 $ 2,000,000
Less - unamortized discount (431,125)
--------------------------------------------------------------------------
Long-term debt to stockholders, net of discount $ 1,568,875
--------------------------------------------------------------------------
--------------------------------------------------------------------------
In connection with the placement and issuance of this debt, the Company
incurred costs of $21 thousand and issued 100,000 stock warrants to the
Company's chairman of the board and 25,000 stock warrants to its external
counsel. Each warrant is exercisable for one share of common stock at $0.01
per share beginning on December 1, 1998, and the warrants expire on November
1, 2001. The stock warrants and underlying shares of common stock carry no
registration rights. The Company valued the warrants at $0.60 per share, or
$75 thousand. The total debt issuance costs of $96 thousand have been
reflected in other noncurrent assets in the accompanying unaudited
consolidated balance sheet and are being amortized over the life of the
related debt.
NOTE 4: PREFERRED STOCK
Pursuant to a Convertible Stock Purchase Agreement dated June 30,
1998 (the "Stock Purchase Agreement"), the Company issued 400 shares of its 5
percent Series A Convertible Preferred Stock, par value $1.00 per share
("Series A Stock"), for $4 million.
The Series A Stock is convertible into the Company's common stock at
the option of the holder beginning 90 days after the June 30, 1998 closing
date. During the next 150 days, the holder agreed to convert no more than 15
percent per month of the Series A Stock if certain quarterly revenue targets
were met by the Company through December 31, 1998. Such targets were met.
The Company also agreed to register the underlying common stock by October
15, 1998. The conversion price is the lesser of the fixed conversion price of
$2.31 per share or a variable conversion price based on 80 percent of the
average of the three lowest prices of the common stock in the 30 consecutive
days preceding each conversion. On the closing date, the variable conversion
price was lower than the fixed conversion price, resulting in an immediate
benefit to the preferred stockholders of approximately $1.4 million. The $1.4
million value of this beneficial conversion feature was reflected in
additional paid-in capital and is being charged to the accumulated deficit
through the earliest date of conversion. At December 31, 1998, $215 thousand
of the value of the beneficial conversion feature remains to be amortized.
The Series A Stock carries mandatory redemption rights that can be
exercised by the holder if certain triggering events occur. These redemption
rights could require the Company to redeem the Series A Stock for cash based
on a formula provided in the Stock Purchase Agreement. The Company cannot
estimate if or when the triggering events might occur nor the redemption
price. Therefore, the mandatory redemption feature has not been valued.
Should a triggering event occur, the Company will record a charge to the
accumulated deficit equal to the difference between the redemption price and
the carrying value of the Series A Stock.
Dividends are payable quarterly in registered shares of common
stock, but must be paid in cash upon the occurrence of certain events.
Attached to the Series A Stock were warrants to purchase 199,999 shares
of common stock at $3.00 per share. The warrants currently are exercisable
and have a term of four years. The Company valued the warrants at
approximately $284 thousand and reflected this amount in additional paid-in
capital.
During the three months ended December 31, 1998, the holder of the
preferred stock converted 55 shares of Series A Stock into 473,965 common
shares.
7
At December 31, 1998, the carrying value of the Series A Stock
consists of the following:
-----------------------------------------------------------------
Balance, September 30, 1998 $ 2,390,475
Conversion of 55 shares of preferred stock
to 473,965 shares of common stock (447,696)
Amortization of beneficial conversion feature 650,298
-----------------------------------------------------------------
Balance, December 31, 1998 $ 2,593,077
-----------------------------------------------------------------
-----------------------------------------------------------------
NOTE 5: LOSS PER SHARE
Loss per share has been calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Basic
loss per share is computed by dividing the net loss applicable to common
stock by the weighted average number of common shares outstanding during the
period. Diluted loss per share is computed by dividing net loss applicable to
common stock by the weighted average number of common and common equivalent
shares (if dilutive). Diluted loss per share is the same as basic loss per
share since the effect of common equivalent shares and assumed conversion of
the convertible preferred stock is antidilutive. Following is a
reconciliation of the basic and diluted loss per share computations:
For the Three Months Ended
December 31,
1998 1997
---------------------------------------------------------------------------------
Net loss $ (941,670) $ (1,659,188)
Less
Preferred stock dividends (48,920) -
Amortization of the value of the
beneficial conversion feature
on the preferred stock (650,298) -
- -------------------------------------------------------------------------------------
Net loss applicable to common stock
(basic and diluted) $ (1,640,888) $ (1,659,188)
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Weighted average common shares used
in computing basic and diluted
Loss applicable to common stock
per share 21,049,454 20,397,486
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Loss applicable to common stock per
Share (basic and diluted) $ (0.08) $ (0.08)
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
NOTE 6: COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This standard establishes rules for the reporting of
comprehensive income and its components. Comprehensive income consists of net
income and foreign currency translation adjustments, as follows:
For the Three Months Ended
December 31,
1998 1997
----------------------------------------------------------------------------------
Net loss, as reported $ (941,670) $ (1,659,188)
Foreign currency translation adjustment 36,623 -
----------------------------------------------------------------------------------
Comprehensive loss $ (905,047) $ (1,659,188)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
8
The adoption of this standard had no net effect on the Company's net
loss or stockholders' equity for the three months ended December 31, 1998 and
1997. Prior year financial statements have been reclassified to conform to
the requirements of this standard.
NOTE 7: SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which the Company adopted in the first quarter of fiscal 1999.
This standard establishes requirements for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Under this
standard, operating segments are to be determined consistent with the way
management organizes and evaluates financial information internally for
making operating decisions and assessing performance. The disclosure
provisions of this standard are not applicable for interim period in the year
of adoption. The adoption of this new standard is not expected to have a
material impact on the Company's financial position or results of operations.
NOTE 8: SUBSEQUENT EVENT
In January 1999, the holder of the Series A Stock converted 90
shares of the Series A Stock into 693,744 common shares.
In January 1999, 300,000 warrants relating to the long-term debt
issuance referred to in Note 3 were exercised for 300,000 Common Shares.
9
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS AND INFORMATION RELATING TO TANISYS AND ITS SUBSIDIARIES THAT ARE
BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE
BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED
IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," AND
"INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE
COMPANY OR ITS MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT RISKS, UNCERTAINTIES AND
ASSUMPTIONS RELATED TO CERTAIN FACTORS INCLUDING, WITHOUT LIMITATIONS,
COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER CONCENTRATIONS,
CUSTOMER RELATIONSHIPS AND FINANCIAL CONDITIONS, RELATIONSHIPS WITH VENDORS,
THE INTEREST RATE ENVIRONMENT, GOVERNMENTAL REGULATION AND SUPERVISION,
SEASONALITY, DISTRIBUTION NETWORKS, PRODUCT INTRODUCTIONS AND ACCEPTANCE,
TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY PRACTICES, ONE-TIME EVENTS AND
OTHER FACTORS DESCRIBED HEREIN. BASED UPON CHANGING CONDITIONS, SHOULD ANY ONE
OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY UNDERLYING
ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR INTENDED.
THE COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion of the interim consolidated financial
condition and results of operations of the Company for the three-month
periods ended December 31, 1998 and 1997. It should be read in conjunction
with the Consolidated Financial Statements, the Notes thereto and other
financial information included elsewhere in this report, and in the Company's
Annual Report Form 10-K for the year ended September 30, 1998 as filed with
the Securities and Exchange Commission on December 29, 1998. For purposes of
the following discussion, references to year periods refer to the Company's
fiscal year ended September 30, 1998 and references to quarterly periods
refer to the Company's fiscal quarters ended December 31, 1998 and 1997.
On November 2, 1998 the Company issued $2 million in debt with
attached stock warrants to certain stockholders of the Company. The debt is
due in two years and carries an interest rate of 10 percent per annum, due
quarterly, and payable in either unregistered shares of common stock or cash,
at the option of the Company.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated operations data
of the Company expressed as a percentage of net sales (unaudited) for the
periods ended December 31, 1998 and 1997:
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
-------------- -------------
Net sales 100.0% 100.0%
Cost of goods sold 84.7% 77.7%
-------------- -------------
Gross profit 15.3% 22.3%
-------------- -------------
Operating expenses:
Research and development 4.1% 8.4%
Sales and marketing 5.4% 6.9%
General and administrative 9.2% 10.5%
Depreciation and amortization 1.8% 11.0%
Bad debt expense 0.0% 1.1%
-------------- -------------
Total operating expenses 20.5% 38.0%
-------------- -------------
-------------- -------------
Operating loss (5.2)% (15.7)%
-------------- -------------
Other (expense), net (2.1)% (1.4)%
-------------- -------------
Net loss (7.3)% (17.1)%
-------------- -------------
-------------- -------------
10
NET SALES
Net sales consist of build-to-order ("BTO") services, turnkey and
off-the-shelf semiconductor memory modules, memory test solutions and
licensing of its proprietary Tanisys Touch technology, less returns and
discounts. Net sales increased 33.5% to $12.9 million in the first quarter of
fiscal 1999 from $9.7 million in the first quarter of fiscal 1998. The
increase in the first quarter of fiscal 1999 is due primarily to sales
increases in the Company's Comprehensive Logistics and Supply Services
("CLASS") from new customers and its off-the-shelf and turnkey memory products,
also primarily from new customers.
COST OF SALES AND GROSS PROFIT
Cost of sales includes the costs of all components and materials
purchased for the manufacture of products and the direct labor and overhead
costs associated with manufacturing. Gross profit declined to $2.0 million in
the first quarter of fiscal 1999 from $2.2 million in first quarter of fiscal
1998. Expressed as a percent of sales, gross margin declined to 15.3% from
22.2% in the first quarters of fiscal 1999 and 1998, respectively. The
decrease in gross profits was due to the increased manufacturing costs
included in "cost of sales" and lower margins on turnkey and off-the-shelf
memory components in the first quarter of fiscal 1999 versus the first
quarter of fiscal 1998. Cost of sales reflects a 137% increase in component
placements in the first quarter of 1999 compared to the same period in fiscal
1998. Component placement costs are the main drivers of manufacturing expenses
and are expected to increase in absolute dollars in the future due to increasing
sales volumes. Per placement costs are expected to decline with increasing sales
volume as fixed manufacturing expenses are spread over greater unit volumes.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the costs associated with
the design and testing of new technologies and products. These relate
primarily to the costs of materials, personnel and employee compensation and
engineering design consulting fees. Research and development expenses
decreased to $534 thousand from $811 thousand in the first fiscal quarters of
1999 and 1998, respectively. The first quarter of fiscal 1998 reflected
unusually high expenditures relating to the DarkHorse Sigma-3 memory tester
and the development of a new family of memory modules. Expenses relating to
research and development are expected to increase slightly in absolute
dollars but decrease as a percentage of revenue.
SALES AND MARKETING
Sales and marketing expenses include all compensation of employees
and independent sales and marketing personnel, as well as the costs of
advertising, promotions, trade shows, travel, direct support and overhead.
Sales and marketing expenses increased $22 thousand to $694 thousand in the
first quarter of fiscal 1999 from $672 thousand in the first quarter of
fiscal 1998. The 3.2% increase in sales and marketing expenses versus the
33.5% increase in net sales for the same period reflects the change in
customer base between the periods. Sales and marketing expenses will increase
in future periods as expected increases in sales revenues materialize but are
expected to decrease slightly when expressed as a percent of revenues.
GENERAL AND ADMINISTRATIVE
General and administrative costs consist primarily of personnel costs
and support costs, including compensation, employee benefits, utilities,
insurance, professional fees and all costs associated with a reporting company.
General and administrative expenses increased to $1.2 million in the first
quarter of fiscal 1999 from $1.0 million in the first quarter of fiscal 1998.
The increase was primarily due to the addition of the Scotland facility.
General and administrative expenses are expected to remain relatively constant
during fiscal 1999 and decrease when expressed as a percent of sales.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes the depreciation for all fixed
assets exclusive of those used in the manufacturing process and included as
part of "cost of sales" and the amortization of intangibles, including
goodwill incurred in the May 1996 acquisitions of 1st Tech Corporation ("1st
Tech") and DarkHorse Systems, Inc. ("DarkHorse"). Depreciation and
amortization decreased to $235 thousand in first quarter fiscal 1999 from
$1.1 million in first quarter fiscal 1998. The decrease is due primarily to
the complete amortization in
11
April 1998 of goodwill relating to the acquisitions of 1st Tech and DarkHorse.
Depreciation expenses are expected to decrease as a percentage of revenue and
increase in terms of absolute dollars with additional facility expansions and
equipment purchases used in manufacturing and research and development.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists primarily of interest income
less interest expense. Interest expense is attributable to borrowings from a
revolving credit note, capital leases and notes payable. A major portion of
the interest expense relates to credit line draws made for short-term
inventory requirements and to fund accounts receivable. Interest income
relates to investment of available cash in short-term interest bearing
accounts and cash equivalent securities. Other income (expense) increased to
$276 thousand in the first quarter of fiscal 1999 from $136 thousand in the
first quarter of fiscal 1998. The increase is due primarily to interest
expense relating to capital leases and long-term notes payable. The Company
expects to continue to require borrowings to fund growth in accounts
receivable and inventory in the future. The Company anticipates adding
manufacturing capacity financed with additional capital leases and long-term
notes, which will increase interest costs in future periods.
PROVISION FOR INCOME TAXES
For the years ended September 30, 1998 and 1997, the Company incurred
consolidated net operating losses for U.S. income tax purposes of approximately
$5.3 million and $6.0 million and for non-U.S. income tax purposes of
approximately $369 thousand and $-0-, respectively. The loss carryforwards
begin to expire in 2011. At September 30, 1998 and 1997, the Company had
temporary differences resulting in future tax deductions of approximately $756
thousand and $513 thousand, respectively, principally representing tax basis
in accrued liabilities and reserves. Deferred income tax assets from the loss
carryforwards and asset basis differences aggregate approximately $6.9 million
and $4.6 million at September 30, 1998 and 1997, respectively.
For financial reporting purposes, a valuation allowance of $6.9
million and $4.7 million at September 30, 1998 and 1997, respectively, has
been recorded to offset the deferred tax assets due to uncertainty as to
whether the benefits will be realized.
The availability of the net operating loss carryforwards and future tax
deductions to reduce taxable income is subject to various limitations under
the Internal Revenue Code of 1986, as amended (the "Code"), in the event of
an ownership change as defined in Section 382 of the Code. The Company may
lose the benefit of such net operating loss carryforwards due to Internal
Revenue Service ("IRS") Code Section 382 limitations. This section states
that after reorganization or other change in corporate ownership, the use of
certain carryforwards may be limited or prohibited. The Company believes that
the IRS Code Section 382 limitation did not exist at September 30, 1998 and
if triggered, the consequence is expected to have no material impact on the
Company's consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Tanisys has utilized the funds acquired in equity
financings of its common stock and preferred stock, the exercise of stock
warrants and stock options, capital leases, operating leases, vendor credits,
certain bank borrowings and funds generated from operations to support its
operations, carry on research and development activities, acquire capital
equipment, finance inventories and accounts receivable balances and pay its
general and administrative expenses.
During the first quarter of fiscal 1999, the Company generated $5.1
million in net cash from financing activities. The $5.1 million in fiscal
1999 consisted primarily of $2.0 million from issuance of debt to
stockholders and $3.0 million from net draws on the Company's credit line.
The Company used $4.2 million of cash in operating activities in the first
quarter of fiscal 1999, of which $3.2 million was used to increase accounts
receivable and $800 thousand was used to increase inventories. The increase
in accounts receivable and inventory resulted from a 41% increase in sales
during the same period. While management does not believe that the same
inventory growth will occur in similar high growth quarters, sales increases,
changes in customer mix, new customers, new products and product mix require
working capital. Management anticipates inventory levels to drop during the
second quarter and then grow as anticipated sales increase.
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The Company had $896 thousand in cash and a working capital deficit of
$751 thousand at December 31, 1998. The Company anticipates that working
capital will increase as manufacturing equipment is financed and reclassified
as a long-term liability. Currently, the obligations are classified under
"Accrued Liabilities" on the December 31, 1998 balance sheet. The anticipated
increase in working capital will be $1.8 million, less the current portion.
The Company also anticipates securing additional working capital from either
debt or equity financing.
Capital expenditures totaled approximately $333 thousand for the first
quarter of fiscal 1999. The Company is planning to lease or finance through debt
approximately $11.3 million of capital equipment during the remaining fiscal
year in anticipation of customer demand. The actual commitment and purchase of
the equipment will be dependent upon achieving certain sales levels.
The Company believes that its existing funds, anticipated cash flows
from operations and amounts available from future vendor credits, bank
borrowings, operating and capital lease financing, long-term borrowings, the
exercise of outstanding warrants and stock options and equity financings will
be sufficient to meet its working capital and capital expenditure needs for
the next 12 months.
There is no assurance that the Company will be able to locate an
alternate source or sources for the required increase in its outstanding debt
or that it will be successful in its attempts to raise a sufficient amount of
funds in a subsequent equity offering or offerings. In such event, the
Company's inability to raise needed funds could have a material adverse
effect on the Company.
SIGNIFICANT CUSTOMER CONCENTRATION
A significant percentage of the Company's net sales are produced by
a relatively small number of customers. In the first quarter of fiscal 1999,
the ten largest customers accounted for approximately 91.6% of net sales
compared to approximately 68% in same period in fiscal 1998. Three customers
represented 29.1%, 14.8% and 12.6%, respectively, in the first quarter of fiscal
1999. The customer representing 14.8% of sales in the first quarter of fiscal
1999 represented 29.5% of the Company's sales in the first quarter of fiscal
1998. While the Company expects to continue to be dependent on a relatively
small number of customers for a significant percentage of its net sales, there
can be no assurance that any of the top ten customers in the first quarter of
fiscal 1999 will continue to utilize the Company's products or services.
One of the Company's largest customers has announced it will be
purchased by a competing company and the operations of the two companies
combined. While a relationship exists with the purchasing Company, Tanisys
does not presently have a contractual relationship with the purchasing
company. Management of the Company expects to benefit from the increased
sales volumes resulting from the combined companies.
The Company in general has no firm long-term volume commitments from
its customers and generally enters into individual purchase orders with its
customers. Customer purchase orders are subject to change, cancellation or
delay with little or no consequence to the customer. The Company has
experienced such changes and cancellations and expects to continue to do so
in the future. The replacement of canceled, delayed or reduced purchase
orders with new business cannot be assured. The Company's business, financial
condition and results of operations will depend significantly on its ability
to obtain purchase orders from existing and new customers, upon the financial
condition and success of its customers, the success of customer's products
and the general economy. Factors affecting the industries of the Company's
major customers could have a material adverse effect on the Company's
business, financial condition and results of operations.
YEAR 2000 COMPLIANCE
The Year 2000 problem concerns the inability of certain computer systems to
appropriately recognize the year 2000 when the last two digits of the year are
entered in the date field. The Company has assessed its Year 2000 requirements
and believes that its major computer systems and programs are Year 2000
compliant and that the remaining systems are either already Year 2000 compliant
or will become Year 2000 compliant as the Company continues to replace obsolete
or non-functional systems as part of its normal asset replacement cycle.
Therefore, the Company believes that its costs to become Year 2000 compliant
have been immaterial and will continue to be immaterial in the future.
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The Company, however, could be adversely affected by the Year 2000
problem if computer systems of third parties such as banks, suppliers and
others with which the Company does business fail to address the Year 2000
problem successfully. While the Company continues to gather data on the Year
2000 compliance status of its customers and suppliers, there can be no
assurance that the Year 2000 problem, if experienced by such third parties,
will not have a material adverse effect upon the Company's business,
operating results and financial condition.
Many companies may need to modify or upgrade their information systems
to address the Year 2000 problem. The effects of this issue and of the
efforts by other companies to address it are unclear. The Company believes
that Year 2000 issues might affect the purchasing patterns of customers and
prospective customers. Many companies are expending significant resources to
correct their current software systems for Year 2000 compliance. These
expenditures might result in reduced funds available to purchase services and
products such as those offered by the Company.
The above Year 2000 disclosure constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure
Act (the "Act"), which was signed into law on October 19, 1998. The Act
provides added protection from liability for certain public and private
statements concerning a company's Year 2000 readiness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there is any material risk
exposure with respect to derivative or other financial instruments which
would require disclosure under this item.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At the date hereof, there are no pending, or to the best knowledge
of the Company, threatened matters involving litigation involving the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) In November 1998, the Company issued $2 million in debt with attached
stock warrants (the "Warrants") to certain stockholders of the Company
(the "Noteholders"). The promissory notes evidencing the debt have a
two-year term and bear interest at 10% per annum, with interest due
quarterly and payable in either unregistered shares of common stock or
cash, at the option of the Company. One stock warrant was issued for
each dollar of debt, resulting in the issuance of 2 million stock
warrants. Each warrant is exercisable into one share of common stock
beginning December 1, 1998, at an exercise price of $0.25 per share,
increasing to $0.50 per share after August 1, 1999 and to $1.00 per
share from October 1, 2000 through the expiration date of November 1,
2001. 850,000 shares of common stock were issued upon exercise of the
Warrants by the Noteholders as of December 31, 1998. The shares of
common stock issuable in payment of dividends and underlying the
warrants were not registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to the exemptions of such
registration provided under Regulation D ("Regulation D") of the rules
and regulations promulgated under the Securities Act by the Securities
and Exchange Commission and Section 4(2) of the Securities Act. The
Company relied upon certain representations and warranties of the
Noteholders, including, among other things, as to their status as
"accredited investors" (as that term is defined in Rule 501(a) of
Regulation D) and their ability to evaluate the merits and risks
involved and that the Common Stock was acquired solely for their own
account for investment and not with a view to distribution.
Pursuant to a Convertible Stock Purchase Agreement dated June 30, 1998
(the "Stock Purchase Agreement") among the Company, and KA Investments
LDC, the Company issued 400 shares of its Five Percent Series A
Convertible Preferred Stock, par value $1.00 per share and stated value
of
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$10,000 per share (the "Series A Stock"), for consideration of
$4 million. The Series A Stock is convertible into the Company's common
stock at the option of the holder beginning 90 days after the June 30,
1998 closing date. The conversion price is the lesser of the fixed
conversion price of $2.31 per share or a variable conversion price
based on 80 percent of the average of the three lowest prices of the
common stock in the 30 consecutive days preceding each conversion. On
the closing date, the variable conversion price was lower than the
fixed conversion price, resulting in an immediate benefit to the
preferred stockholder of approximately $1.4 million. The Series A Stock
carries mandatory redemption rights that can be exercised by the holder
if certain triggering events occur, which could require the Company to
redeem the Series A Stock for cash based on a formula provided in the
Stock Purchase Agreement. Dividends are payable quarterly in registered
shares of common stock but must be paid in cash upon the occurrence of
certain events. Attached to the Series A Stock were four-year warrants
to purchase 199,999 shares of common stock at $3.00 per share. During
the three months ended December 31, 1998, the holder of the preferred
stock converted 55 shares of Series A Stock into 473,965 shares of
common stock.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
The exhibits listed below are filed as part of or incorporated by
reference in this report. Where such filing is made by incorporation by
reference to a previously filed document, such document is identified in
parentheses.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Articles of Incorporation of Tanisys Technology, Inc., as
amended (Exhibit 3.1 to Form S-3 Registration Statement filed
August 13, 1998)
3.2 Restated Bylaws of the Company (Exhibit 3.5 to Form 10
Registration Statement filed November 27, 1996)
10.1 Form of Promissory Note issued by Tanisys Technology, Inc.
in connection with $2 million debt closed November 2, 1998
(filed herewith)
10.2 Form of Warrant Agreement entered into between Tanisys
Technology, Inc. and subscribers to the $2 million debt
offering closed November 2, 1998, and form of attached
Stock Purchase Warrant issued thereunder (filed herewith)
27.1 Financial Data Schedule (filed herewith)
(b) CURRENT REPORTS ON 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TANISYS TECHNOLOGY, INC.
Date: February 15, 1999 By: /s/ JOE O. DAVIS
----------------------------
Joe O. Davis
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
CORPORATE SECRETARY
(Duly authorized and Principal
Financial Officer)
Date: February 15, 1999 By: /s/ DONALD R. TURNER
----------------------------
Donald R. Turner
CORPORATE CONTROLLER
(Duly authorized and Principal
Accounting Officer)
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