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As filed with the Securities and Exchange Commission on March 11, 1997
Registration No. 0-29038
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
_______________
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 BOULEVARD, SUITE 130
AUSTIN, TEXAS 78727 78727
(Address of principal executive offices) (Zip Code)
(512) 335-4440
Registrant's Telephone Number, Including Area Code
_______________
Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class to be registered each class is to be registered
- ------------------------------------ ------------------------------
NONE NOT APPLICABLE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
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TANISYS TECHNOLOGY, INC.
FORM 10
ITEM PAGE
NUMBER NUMBER
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-- Index 2
1. Business 3
2. Financial Information 22
3. Properties 32
4. Security Ownership of Certain Beneficial Owners
and Management 33
5. Directors and Executive Officers 36
6. Executive Compensation 39
7. Certain Relationships and Related Transactions 46
8. Legal Proceedings 47
9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters 48
10. Recent Sales of Unregistered Securities 49
11. Description of Registrant's Securities to be Registered 50
12. Indemnification of Directors and Officers 53
13. Financial Statements and Supplementary Data 54
14. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 54
15. Financial Statements and Exhibits 55
16. Signatures 105
Index to Exhibits 106
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ITEM 1. BUSINESS.
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS
The following discussions contain trend information and other forward-
looking statements that involve a number of risks and uncertainties. The actual
results of Tanisys Technology, Inc. (the "Company") and its wholly owned
subsidiaries, 1st Tech Corporation ("1st Tech") and DarkHorse Systems, Inc.
("DarkHorse") (collectively, the "Tanisys Group"), could differ materially from
its historical results of operations and those discussed in the forward-looking
statements. The forward-looking statements are based on the beliefs of the
Tanisys Group's management as well as assumptions made by and information
currently available to the Company's management. When used herein, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they relate to the Company or its subsidiaries or the
Tanisys Group's management, are intended to identify forward-looking statements.
Such statements reflect the current risks, uncertainties and assumptions related
to certain factors. Factors that could cause actual results to differ
materially include, but are not limited to, business conditions and growth in
the electronics industry and general economies, both domestic and international;
lower than expected customer orders; customer relationships and financial
condition; relationships with vendors; the interest rate environment;
governmental regulation and supervision; seasonality; distribution networks;
delays in receipt of orders or cancellation of orders; competitive factors,
including increased competition and new product offerings by competitors and
price pressures; the availability of parts and supplies at reasonable prices;
changing technologies; acceptance and inclusion of the Tanisys Group's
technologies by original equipment manufacturers ("OEMs"); changes in product
mix; new product development; the timing of the negotiation of new contracts;
significant quarterly performance fluctuation due to the receipt of a
significant portion of customer orders and product shipments in the last month
of each quarter; product shipment interruptions due to manufacturing problems;
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 Tanisys Group does not intend to update these
forward-looking statements. The forward-looking statements should be read in
light of these factors and the factors identified in "Item 1. Business" and in
"Item 2. Financial Information--Management's Discussion and Analysis of
Financial Condition and Results of Operations." All references to year periods
refer to the Tanisys Group's fiscal years ended September 30, 1996, 1995 or
1994, and references to quarterly periods refer to the Tanisys Group's fiscal
quarters ended December 31, 1996 or 1995, unless otherwise indicated.
GENERAL
The Tanisys Group is a technology solutions company that provides custom
design, engineering and manufacturing services, test solutions and standard and
custom module products to leading OEMs in the computer, networking and
telecommunications industries. The Company's recent acquisitions of 1st Tech
and DarkHorse created a technology company with a diverse product and service
line.
The Tanisys Group has products and capabilities in both hardware and
software development, advanced design, manufacture, marketing, sales and
delivery. The Tanisys Group provides quality,
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sophisticated surface mount assemblies and quick-response turnkey solutions
to OEMs and believes that the turnkey capabilities achieved by it and its
direct competitors provide customers with shorter production and delivery
cycles, more overall flexibility and quicker turnaround than can be obtained
by large memory module manufacturers in the electronics manufacturing
services ("EMS") industry. The products and services of the Tanisys Group
include custom design, engineering, memory test equipment, standard and
custom memory modules, patented touch technology, manufacturing, testing and
logistics services.
The Company was organized under the laws of the Province of British
Columbia, Canada, on January 27, 1984, as Montebello Resources Ltd. to exploit
the mineral, oil and gas exploration business in British Columbia and Manitoba,
Canada. On October 7, 1992, the Company changed its name to First American
Capital Group Inc. The Company was unsuccessful in the oil and gas business,
and in 1992 deemed itself inactive pursuant to the rules and regulations of the
Vancouver Stock Exchange ("VSE"), where its common stock, no par value per share
(the "Common Stock"), had been traded. During the first two quarters of 1993,
the Company was reorganized in accordance with the rules of the VSE. As part of
this reorganization, the Company acquired certain computer game controller
technology, which was the forerunner of the Company's Tanisys Touch technology.
The Company changed its name to Rosetta Technologies Inc. on May 13, 1993. In
June 1993, Rosetta Marketing and Sales, Inc. ("Rosetta") was incorporated in the
State of Texas as a wholly owned subsidiary of the Company to provide marketing
for the Company's products. However, Rosetta was never activated and today
remains a dormant company. On June 30, 1993, the Company acquired all of the
outstanding capital shares of Timespan Communications Corp. ("Timespan") for the
issuance of Common Stock and the assumption of certain indebtedness. Also on
June 30, 1993, the Company filed Articles of Continuance with the Secretary of
State of the State of Wyoming and was issued a Certificate of Continuance, which
continued the corporation's charter under the Wyoming Business Corporation Act
as if it had been incorporated thereunder. On October 1, 1993, the Company
caused all of the software technology owned by Timespan to be transferred to the
Company, and Timespan subsequently has been liquidated. On July 11, 1994, the
Company changed its name to Tanisys Technology, Inc. The Company's Common Stock
trades on the VSE under the symbol "TNS.U," quoted in U.S. dollars.
Through its recent acquisitions of 1st Tech and DarkHorse, the Tanisys
Group has become a quality manufacturer of specialty modules, standard and
custom memory modules and memory test systems for a wide variety of electronic
system applications and industries. The Tanisys Group has extensive design,
engineering, manufacturing, logistics and test expertise, which management
believes provides it with competitive advantages over larger module
manufacturers, including the ability to respond to its customers' rapidly
changing requirements and minimization of inventory exposures. The Tanisys
Group's principal customers include major electronic OEMs, semiconductor
manufacturers, computer distributors, corporate end users, government agencies,
personal computer catalog retailers, value added resellers ("VARs") and system
integrators. OEM customers include Bay Networks, Inc., Compaq Computer
Corporation, Dell Products LP, Hewlett-Packard Company, Siemens AG
Semiconductors and Toshiba Corporation, although no one of these customers
represented at least 10% of the Company's sales revenue in fiscal 1996. In the
first quarter of fiscal 1997, three customers produced more than 10% of net
sales each: Tandy Corp., 18.4%; Algo Marketing, Inc., 16.9%; and Itautec
America, Inc., 14.9%.
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RECENT DEVELOPMENTS
On November 20, 1996, the Tanisys Group signed two contracts with Siemens
Components, Inc. ("Siemens") to provide design engineering, quick-turn
manufacturing, warehousing, distributing and testing of memory modules for
Siemens and certain of its customers. Under the terms of the agreements,
Siemens is utilizing the quick-turn manufacturing and logistics services
provided by the Tanisys Group in order to better service their customers and to
support them in inventory reduction and management. The consummation of these
agreements furthers the Tanisys Group's strategy and represents an important
milestone in establishing long-term relationships with major customers as the
primary provider of turnkey design, development and manufacturing solutions.
ACQUISITIONS
On April 9, 1996, the Company, its wholly owned subsidiary, Tanisys
Acquisition Corp., 1st Tech and 1st Tech's principal stockholder, Gary W.
Pankonien, entered into an Agreement and Plan of Merger, which agreement was
subsequently amended (as amended, the "1st Tech Agreement"). On April 20, 1996,
the stockholders of the Company approved the transactions contemplated by the
1st Tech Agreement. Upon the effective date of the 1st Tech Agreement, an
aggregate of 2,950,000 shares of Common Stock were exchanged for the outstanding
shares of 1st Tech common stock. 1st Tech merged with and into Tanisys
Acquisition Corp., ceasing to exist, with Tanisys Acquisition Corp. changing its
name to 1st Tech Corporation. Presently, 1st Tech operates as a wholly owned
subsidiary of the Company and provides design, engineering and custom
manufacturing services to the electronics market.
On April 9, 1996, the Company, its wholly owned subsidiary, Tanisys
Acquisition Corp. II, DarkHorse Systems, Inc. and its principal stockholders,
Archer Lawrence, Jack Little and Gary W. Pankonien, entered into an Agreement
and Plan of Merger, which agreement was subsequently amended (as amended, the
"DarkHorse Agreement"). On April 20, 1996, the stockholders of the Company
approved the transactions contemplated by the DarkHorse Agreement and an
aggregate of 1,200,000 shares of Common Stock were exchanged for the outstanding
shares of DarkHorse Systems, Inc. common stock. DarkHorse Systems, Inc. merged
with and into Tanisys Acquisition Corp. II, ceasing to exist, with Tanisys
Acquisition Corp. II changing its name to DarkHorse Systems, Inc. Presently,
DarkHorse operates as a wholly owned subsidiary of the Company and designs and
markets tester equipment and technology to a large and diverse marketplace,
including personal computer users and electronic equipment manufacturers.
INDUSTRY OVERVIEW
The following is a summary of the markets in which the Company competes.
For a description of the Company's specific products and services, see "Item 1.
Business--Products and Services."
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The demand for electronic products and components has grown dramatically
over the last several years as a result of expanding unit sales in a number of
industries, including computer, appliance, telecommunications, consumer
electronics and automotive, with expansion into other industries ongoing. The
demand for greater functionality and product integration has required
electronics manufacturers to increase the number and complexity of electronic
devices incorporated into their products. As a result of this trend, the
Tanisys Group believes that the percentage of total product costs represented by
electronic assemblies has risen steadily over the past few years. Integrated
Circuit Engineering ("ICE"), an independent data source, determined that in 1995
the total worldwide market for semiconductor devices exceeded $120 billion.
The Tanisys Group does not design or manufacture any semiconductor devices
or any of the other components that are used in the design and assembly of
memory and other types of modules. All of these items are either furnished by
the customer to be assembled by the Tanisys Group in EMS or purchased by the
Tanisys Group as raw materials for the assembly of modules on a turnkey basis.
Memory integrated circuits encompass several types of devices designed to
perform specific functions within computer and other electronic systems. The
most significant categories of semiconductor memory are dynamic random access
memory ("DRAM"), static random access memory ("SRAM") and non-volatile memory,
including Flash, in addition to an emerging technology known as synchronous DRAM
("SDRAM" or "SyncDRAM"). DRAM provides large capacity "main" memory; SRAM
provides specialized high speed memory; Flash and other non-volatile memory
provide low power memory that retains data after a system is turned off; and
SyncDRAM is quickly becoming the replacement for ("FPM") DRAM. In addition,
within each of these broad categories of memory products, semiconductor
manufacturers are offering an increasing variety of memory devices that are
designed for application specific uses.
The growth in semiconductor memory devices has created an increased demand
for reliable, cost-effective testing solutions. Historically, memory testing
has been the primary responsibility of the memory semiconductor companies due to
the expensive equipment required for the process. However, as the industry
matures, the need for memory test capability has extended into OEMs, VARs,
retail outlets, service centers and end users. This need for increased testing
is being driven by stringent quality requirements, increased production volume,
new complex memory solutions, loss prevention and customer expectations.
Tanisys Group management estimates the worldwide desktop and portable memory
test market for 1997 to be approximately $29 million in revenue, which
represents an estimated 33% increase over 1996. Based upon a survey conducted
by an independent consultant retained by the Company, management estimates that
desktop testers, used by high volume customers such as OEMs, semiconductor
manufacturers and VARs, represent approximately 52% of the projected market and
that portable testers, used by retailers, third-party service companies and
VARs, represent approximately 48% of the projected market. The increase in
memory complexity and the shear number of products continues to fuel significant
growth in this market.
The proliferation of electronic devices throughout the world has
necessitated new approaches to providing intuitive personal access to the
products and their applications. The Tanisys Touch product line competes in
this area through its capacitive touch technology. Any product that uses
switches or controls is a candidate for the application of this technology,
including appliances, personal computers,
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point-of-sale terminals, automated teller machines ("ATMs"), gas pumps,
multimedia kiosks, industrial and medical equipment, financial systems,
computer-based training systems, gaming machines and many other electronic
devices used by the public. Consistent across industries manufacturing these
products is the search for low cost, highly reliable, intuitive user access.
In 1996, the personal computer industry is projected to sell 63.7 million
units for both desktop and notebook systems, according to Dataquest, Inc., a
market research firm.
DESIGN, ENGINEERING, MANUFACTURING AND LOGISTICS SERVICES
The increased cost of capital equipment as well as the complexity and
expertise required to set up and operate an electronic manufacturing operation
has resulted in the trend of outsourcing by OEMs. By outsourcing design,
manufacturing and logistics functions, OEMs are able to focus their resources on
their own areas of core competence and competitive advantage, such as unique
technology, system design and marketing capabilities. OEM outsourcing practices
range from contract manufacturing, in which the OEM may turn to an outside
supplier to procure components and design and manufacture a specific product for
the OEM on a turnkey basis, to consignment, in which the OEM employs the outside
supplier to design, engineer, manufacture, maintain inventory and distribute a
product using components supplied by the OEM.
One of the most significant opportunities is the manufacture of memory
modules. Memory modules are compact circuit board assemblies consisting of
DRAM, SRAM, Flash or other semiconductor memory devices and related circuitry.
The suppliers of memory modules include semiconductor manufacturers who maintain
captive memory module production facilities and independent memory module
manufacturers that source memory devices from a wide variety of suppliers.
Although some semiconductor manufacturers have the ability to manufacture
significant volumes of standard memory modules, generally these companies are
focused on adding value through their silicon expertise, rather than through
their memory module manufacturing capabilities. Management of the Tanisys Group
believes that the business models of most semiconductor manufacturers may not
adequately address OEMs' changing requirements for a broad range of custom and
application specific products.
Independent manufacturers of memory modules have experience with a broad
range of memory devices and offer substantial expertise in component selection
and module product development. Due to the fact that independent manufacturers
do not produce their own semiconductor devices, they have the ability to mix and
match devices from a variety of semiconductor suppliers in a single memory
module. Independent manufacturers of memory modules currently address two
primary market segments: the OEM channel and the personal computer reseller
channel. Suppliers to the OEM channel typically offer custom and application
specific modules to the workstation and telecommunications industries, as well
as standard memory modules for use by computer and peripheral OEMs. Suppliers
to the personal computer reseller channel typically offer standard DRAM memory
modules as an upgrade product sold through computer distributors and retail
channels.
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MEMORY TEST SYSTEMS
The memory test market is growing rapidly due to the increasing and ever
changing complexities, configurations, densities and technologies of memory
devices. Semiconductor manufacturers are the major users of memory test
systems on a chip level as well as on modules. In addition, the market
extends into independent manufacturers of modules, OEMs, retail outlets,
service centers and end users. The Tanisys Group believes that the desire to
produce as well as purchase quality memory products is driving an increased
awareness of the need for memory testing.
Memory test systems can be classified into two main areas:
semiconductor chip level testers and memory module testers. Semiconductor
chip level testers are utilized to completely characterize a semiconductor
device to guarantee its performance to a standard set of specifications.
Memory module testers are utilized to characterize an assembly of
semiconductor devices to a desired specification, whether standard or custom.
This characterization and testing is done to insure quality of performance
following a manufacturing process.
Test systems generally are designed as generic testers that must be
programmed and customized by the user to a specific purpose. The testers may
be configured to test personal computer motherboards, controllers or simply
memory modules. The common features these testers provide are their
abilities to manipulate the semiconductors' inputs and outputs in relation to
time at various voltages. The patterns of tests are known as test algorithms
or test vectors.
MEMORY MODULES
Electronic systems increasingly employ memory modules as building blocks
in system design as a result of the many advantages memory modules offer OEMs
and end users. The use of memory modules enables OEMs to offer a relatively
easy path for upgradeability of a personal computer or workstation, a feature
of system design that is increasingly required by end users. The use of
memory modules allows OEMs to increase flexibility by enabling them to easily
configure a system with a variety of different levels of memory, thus
enabling OEMs to address multiple price points or applications with a single
base system design. To achieve this upgradeability and flexibility, both
personal computer and communications OEMs frequently design their systems to
use memory modules as a "daughter card," reducing the need to include memory
devices on the motherboard. This design structure frees space on the
motherboard and enables the OEM to use a single motherboard as a common
central element for a variety of different systems, resulting in significant
cost savings. The use of memory modules further reduces OEMs' costs by
allowing them to add expensive memory devices to products during the final
stages of the manufacturing process, thereby reducing the need for
work-in-process inventories.
The market for memory modules includes both standard and custom modules.
The high volume standard memory module market includes modules that can be
sourced from many module suppliers and are designed to be incorporated into a
wide variety of equipment. These modules employ designs meeting widely used
industry specifications of the Joint Electronic Development Engineering
Council ("JEDEC"), primarily utilizing DRAM memory, and are available with a
variety of options to address the needs of multiple OEMs. Standard memory
modules typically are used in desktop personal
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computers and printers and are marketed directly to OEMs and through computer
resellers directly to end users.
Specialty memory modules include both custom and application specific
modules. The varying requirements of different electronic systems and the
increased number of memory device options have resulted in a market for
custom memory modules that are designed to enhance the performance of a
particular system or a set of applications. These modules are usually based
on either DRAM, SyncDRAM, SRAM or Flash technologies and may include
additional control circuitry. Custom memory modules typically are sourced
from a limited number of suppliers. Application specific or custom memory
modules generally are used in mobile computers, workstations and
telecommunications devices, such as routers and switches, and are sold
primarily to OEMs.
CAPACITIVE TOUCH TECHNOLOGY
Capacitive touch is an electronic input technology that utilizes the
sensing of touch with a high speed microprocessor circuit, replacing
mechanical input devices. Mechanical input devices typically require a
motion or displacement to sense an event. The capacitive touch technology
eliminates this requirement. The benefits of this technology include longer
life cycles, applications in harsher environments, greater flexibility in
design and lower cost in many cases. The technology can be applied to
products such as gas pumps, appliances, ATMs, cellular telephones and almost
any other electronic appliance.
THE DRAM MARKET
DYNAMIC RANDOM ACCESS MEMORY. A DRAM is a high density, low cost per
bit semiconductor device that stores digital information in the form of bits
and provides high speed storage and retrieval of data. DRAMs are the most
widely used semiconductor memory component in most PC systems. The
development of more powerful personal computers and workstations and the
increasing emphasis on high-throughput networking and telecommunications
products have resulted in the need for higher volumes and greater varieties
of DRAM memory in electronic systems. For example, personal computers
currently based on 486, Pentium-Registered Trademark- and PowerPC-Registered
Trademark- microprocessors frequently employ 8 to 16 megabytes ("Mbytes") of
DRAM, which is significantly more memory than that employed by older
generation personal computers. The adoption of Windows 95 and NT and other
advanced operating systems is further increasing the need for DRAM, as 16
Mbytes of DRAM memory are required for higher performance to support Windows
95 multitasking capabilities.
THE SRAM MARKET
STATIC RANDOM ACCESS MEMORY. A SRAM is a semiconductor device that
performs memory functions much the same as a DRAM, but does not require its
memory cells to be electronically refreshed. In addition, a SRAM can be
designed to operate faster than a DRAM. A SRAM contains more complex
electronic circuitry than a DRAM and consequently has higher per bit
production costs. The market for SRAMs includes the high speed SRAM segment
and the low power SRAM segment. The market for high speed SRAM devices has
grown rapidly over the last few years, driven primarily by the inability of
slower DRAM devices to support the increasing speed requirements of personal
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computer and data communications systems. Due to existing architectural
limitations, DRAM speeds have not increased commensurably with improvements
in microprocessor speeds. DRAMs typically operate at 10 to 20 megahertz
("Mhz"), or 100 to 50 nanoseconds ("ns"), while microprocessor bus speeds for
most Pentium-Registered Trademark- -class personal computers currently sold
are 66 MHz (15 ns) or higher. Operating at 66 MHz or faster, high
performance SRAM devices can be used as "cache" memory, which increases a
system's performance. For example, in a personal computer or workstation,
L2, or secondary, cache memory can increase system performance by acting as
an intermediary between fast microprocessors and slower DRAM main memory. In
disk drives, SRAM cache memories can be used as a high speed buffer to
accelerate data throughput from the drive to the system bus.
The Tanisys Group's SRAM family focuses on the high performance, or
"Very Fast," sector of the SRAM market, supporting cache memory requirements
in computers. Very Fast SRAM provides access times approximately five times
faster than those of a DRAM. The market for Very Fast SRAM has grown with
the number of applications that require a "buffer" or "cache" of high speed
memory between the central processing unit and the main DRAM-based memory.
High speed SRAMs are experiencing rapid advancements in speed,
architecture, organization, density and operating voltages. These
advancements are primarily necessitated by the increasing speed and
functionality of microprocessors such as the Pentium-Registered Trademark-,
the PowerPC-Registered Trademark-, the Alpha-Registered Trademark- and the
SPARC-Registered Trademark-. High speed SRAMs are reaching access times
below 3 ns. High speed SRAM architecture has evolved from asynchronous
random access to synchronous pipelined burst mode corresponding with the
Pentium-Registered Trademark- architecture, and synchronous serial access
corresponding with reduced instruction set computing ("RISC") architectures.
SRAM devices are available in organizations ranging from 1 bit to 36 bits
wide and densities of up to 4 megabits. In addition, industry trends toward
lower voltage microprocessors, such as the Intel P54C (3.3 volt
Pentium-Registered Trademark-), have created a need for new, low voltage SRAM
cache memories.
Low power SRAM devices are used primarily in computing or industrial
applications in which efficient power management is of greatest importance.
Primary applications for low power SRAM devices include mobile computing and
other environments in which electronic systems rely on battery power or
require low power dissipation.
THE FLASH MEMORY MARKET
Flash memory is an application of non-volatile memory used to retain
stored data after a system's power has been turned off. The ability of Flash
devices to be electronically rewritten to update parameters or system
software provides greater flexibility and ease of use than other non-volatile
memory devices, such as older erasable programmable read only memory
("EPROM") devices. Flash memory is one of the fastest growing segments of
the memory market, as a growing range of applications utilize Flash memory in
the computer, telecommunications, networking, consumer electronics,
automotive, industrial control and instrumentation industries. For example,
Flash memory can be used in communication devices such as routers, in which
Flash memory provides storage of control programs and system-critical data.
Another common application for Flash memory is in PC cards, which are small
form factor devices that are inserted into notebook and subnotebook computers
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and consumer electronics products such as personal digital assistants
("PDAs") and digital cameras to provide added storage.
THE SYNCDRAM MARKET
The introduction of the SyncDRAM as a replacement of FPM DRAM, which is
currently occurring, is considered to be a major shift in computing system
architecture creating the requirement to redesign the memory system control
logic. SyncDRAM is unique in that the memory can be accessed by the
processor in a synchronous instead of asynchronous manner, which is
inherently a faster operation. This transition will create the demand for a
total redesign of memory modules and require new testing equipment to
implement its use.
PRODUCTS AND SERVICES
The products and services of the Tanisys Group are divided into three
basic categories based on the areas of product specialization of each of the
three companies that comprise the consolidated group. These products and
services are custom design, engineering, standard and custom memory modules,
manufacturing, testing, logistics services, memory test equipment and
patented touch technology. Memory module products represented approximately
95% of the Tanisys Group's total net sales in fiscal 1996 and in the first
quarter of fiscal year 1997, on a pro forma basis, and semiconductor memory
product testing equipment represented substantially all of the balance of the
Tanisys Group's revenue.
RESEARCH, DESIGN ENGINEERING AND PROTOTYPE TECHNOLOGIES SERVICES
The Tanisys Group believes it is proactively responding to the
increasing competition and shorter product life cycles that its customers are
facing in their respective industries. The Tanisys Group's design engineers
work jointly with customers to design products that will exceed the minimum
requirements and specifications for functionality, quality and reliability.
The transition from concept to prototype to a performance reliable,
manufacturable product with planned production requirements is expertly
managed so that the product volume-to-market cycle is as short as possible,
saving both time and expense. This process is aided by the quick-turn
capabilities in the Tanisys Group's manufacturing and surface mount assembly
processes. The Tanisys Group's intent is to position itself to be the
manufacturer of choice due to its intimate knowledge of the product and the
customers' requirements.
SURFACE MOUNT ASSEMBLY SERVICES
The Tanisys Group has a substantial investment in various pieces of
specialized module assembly equipment, including six Quad Systems, Inc. and
four Amistar Corporation surface mount technology ("SMT") machines, DarkHorse
and Terradyne, Inc. ("Terradyne") testing equipment, reflow soldering
machines, a sophisticated hand-drop assembly line and board washing
equipment. The SMT process solders the leads on integrated circuits and
other electronic components to the surface of the printed circuit board
("PCB"), which replaces older pin-through-hole technology. The SMT process
accommodates substantially greater density than can be achieved with the
older technologies. This allows for a reduction in the size of the PCB,
enhances the performance of the module and usually
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reduces the costs of materials and components. Advanced SMT technologies,
including double-sided attachment of components and fine pitch component
placement on the PCBs, have further increased component density, reduced the
PCB size and achieved substantial economies in the cost of the finished
modules. Double-sided placement attaches SMT components on both sides of the
PCB, and fine-pitch SMT places components that have tightly spaced leads.
Substantially all of the modules assembled by the Tanisys Group employ the
SMT process, and an increasing percentage utilizes fine-pitch component
placement and/or double-sided component attachment. The Tanisys Group
intends to continue investing in the equipment and technologies required to
develop the resources required to exceed customers' expectations and
requirements.
SEMICONDUCTOR MEMORY TESTING EQUIPMENT
The DarkHorse testers are designed, maintained and enhanced by the
Tanisys Group's professional engineering staff. The current emphasis is on
development of a tester for the new and growing SyncDRAM portion of the
module industry. Phase 1 of this development, which has been completed,
consisted of designing attachments which allow the current models to test the
new SyncDRAM modules. New testers that are designed specifically for the new
SyncDRAMs are now in the development stage.
All of the DarkHorse testers are designed by the Tanisys Group's
professional engineers and manufactured by the Tanisys Group's manufacturing
operation, utilizing the SMT process and the hand-drop line. The Tanisys
Group's commitment to continuous quality improvement in its manufacturing
operation has been essential to the success of this product line. DarkHorse
currently offers two testers, the Sigma 2 and the Sigma LC, which compete in
the automatic testing equipment ("ATE") market for the testing of both chips
and modules. DarkHorse's competitors include Terradyne, Terradyne/Megatest
Division of Terradyne ("Megatest") and Realm Systems, Inc. ("Realm"), all of
which provide generic test equipment that requires the user to custom program
the equipment for specific applications. The DarkHorse test systems are
pre-programmed and include an extensive set of pre-programmed algorithms and
test programs that are accessed through an intuitive user interface.
SIGMA 2. The Sigma 2 unit is geared toward accurate, extensive and
expedient testing of memory for the manufacturer who needs additional
parametric testing and performs large volume testing, such as manufacturers
of personal computers and other electronic products. The Sigma 2 has
additional tests not available on the Sigma LC, which are demanded in
high-end testing environments.
SIGMA LC. The Sigma LC unit is portable and tests memory in the same
accurate, extensive and expedient manner as Sigma 2, but is geared toward
single in-line memory module ("SIMM") users whose volume is lower and whose
testing needs are slightly less extensive. The market for the Sigma LC
ranges from in-house service technicians to memory manufacturers.
MEMORY MODULES
The Tanisys Group designs and markets over 400 products consisting of
memory modules, which include DRAM, SRAM, SyncDRAM and Flash memory. The
products offered include custom and application specific memory modules, as
well as standard memory modules that comply with
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industry standards established by JEDEC. The target market segments for
these products include personal computers, mission critical servers,
telecommunications/data communications, custom electronic assemblies, memory
products and contract manufacturing services to the electronics market.
Historically, the majority of the Tanisys Group's revenues have come from
sales of standard products to the memory after-market as well as custom
products and custom assembly for the OEM markets using advanced surface mount
technologies and manufacturing processes.
An important aspect of the Tanisys Group manufacturing operations is its
focus on product testing. The Tanisys Group tests 100% of its memory modules
for full functionality. The Tanisys Group believes that it has established
substantial technical expertise in the testing of memory modules, and its
staff of experienced test engineers develop proprietary testing routines and
parameters that enable it to diagnose problems in system design or memory
components, to characterize the performance of new products and to provide
high quality products in volume.
TOUCH TECHNOLOGY
Tanisys Touch is a proprietary technology which is integrated into
electronic products to provide greater ease of use. Tanisys Touch allows
manufacturers to create devices that can be controlled simply by using your
finger. This intuitive characteristic means that users can rely more on
simple touch controls rather than on complex user control interfaces.
Tanisys Touch has the following advantages: no moving parts, lower cost of
implementation, the ability to be mounted under a variety of materials,
expanded ease-of-use functionality, environmentally robust and monolithic
construction that can be mounted directly to the surface of products,
including compound curves. While applicable markets for touch include any
electronic device, the initial focus is on computers and appliances due to
market size and product development cycles.
AVAILABILITY OF RAW MATERIALS
The Tanisys Group's manufacturing operations use numerous suppliers for
electronic components and materials, including DRAM components, used in its
operations. Shortages of certain types of electronic components have
occurred in the past and may occur in the future. The Tanisys Group's
contract manufacturing operations procure materials and components based on
purchase orders received and accepted from customers while seeking to
minimize the overall level of inventory. Component shortages or price
fluctuations could have an adverse effect on the Tanisys Group's business and
results of operations.
CUSTOMERS, SALES AND MARKETING
The Tanisys Group's principal customers include major and second-tier
electronics OEMs, semiconductor manufacturers, computer and electronics
distributors, VARs, system integrators and major consumer electronics retail
outlets.
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On a pro forma basis, approximately 95% of the Tanisys Group's sales are
derived from the 1st Tech product and service line, which includes standard
and custom memory modules, custom electronics modules, design, engineering,
manufacturing and logistical inventory control services. Substantially all
of the balance of the Tanisys Group's sales are derived from the DarkHorse
tester product line, which also includes design and engineering services,
maintenance contracts and consumable replacement parts. In fiscal 1996, the
top ten customers of the 1st Tech products accounted for 48% of Tanisys Group
sales on a pro forma basis, and no one customer accounted for 10% or more of
such sales. In the first quarter of fiscal 1997, three customers produced
more than 10% of net sales each: Tandy Corp., 18.4%; Algo Marketing, Inc.,
16.9%; and Itautec America, Inc., 14.9%.
The Company believes that it has proven the Tanisys Touch technology and
that the next step is inclusion of this technology by OEMs in the
marketplace. This can occur only if the OEM's product designs include the
technology because the discrete Tanisys Touch technology is not easily
retrofitted into existing products. Since July 1995 and prior to the
acquisitions of 1st Tech and DarkHorse, the Company focused substantially all
of its time and effort in developing and marketing Tanisys Touch to the
personal computer and appliance marketplace through major OEMs. Currently,
the Company is developing a touch-enabled product for personal computers. In
addition, the Company is working with AMP, Incorporated, a leading appliance
parts manufacturer, to introduce a touch-enabled appliance. The Tanisys
Group has no assurance that either of these endeavors will be successful.
The Tanisys Group primarily sells its products and services through
direct sales in the United States, Europe and Asia and also uses a network of
independent sales representatives located throughout the United States and
Europe for certain OEM customers and large retail electronics stores. Sales
outside these areas are made through distributors, which purchase products
for resale outside the United States.
The Tanisys Group's sales and marketing efforts are conducted in an
integrated process involving direct sales people, independent sales
representatives, customer service representatives and senior executives. An
important aspect of the selling cycle is the team approach whereby a senior
executive is combined with marketing, manufacturing, engineering and sales
counterparts to work closely with the major OEM and semiconductor accounts.
Especially important are the related selling opportunities of product lines.
Conceivably, once a relationship is established with an OEM, there is
opportunity to sell all product lines into the same account.
Relationships with leading semiconductor manufacturers located in the
United States, Japan, South Korea, Taiwan and Europe have been developed by
the Tanisys Group, and many of these vendors are also customers. The Tanisys
Group frequently works jointly with these vendors in bidding for customer
designs to be incorporated into an OEM's system.
The Tanisys Group plans to expand its sales and marketing organization
to increase the sales of its products and services and establish Tanisys
Touch, 1st Tech and DarkHorse brand names worldwide. Current marketing
activities include direct mail solicitations and participation in trade
shows, and future marketing activities also will include advertising in trade
publications targeted at high technology industries.
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Sales generally are made pursuant to standard purchase orders. Only
those customer orders for which purchase orders have been accepted and
assigned shipment dates within the next 12 months are included in backlog.
Because the Tanisys Group's current backlog is subject to change in delivery
schedules and is subject to cancellation with only limited or no penalties,
backlog is not necessarily an indication of future net sales. There can be
no assurances that current backlog will necessarily lead to net sales for any
future period. At February 28, 1997, the backlog was $929,358.
TANISYS GROUP STRATEGY
The Tanisys Group's objectives are (i) to continue to develop its
technologies to deliver products and services that provide its customers with
distinct market advantages; (ii) to strengthen its position as a leading
supplier of memory modules and memory test systems in high growth markets;
(iii) to establish and grow long-term relationships with customers for all
product lines by utilizing the combination of creativity and experience of
its personnel to help their customers profitably differentiate their products
by transforming ideas into creative and manufacturable solutions, recognizing
that each customer is different and has unique needs; (iv) to continue to
maintain and continuously improve its world-class manufacturing capabilities;
and (v) to continue to provide extraordinary customer support. The Tanisys
Group has established its strategy in order to accomplish these goals and to
ensure that customers continually improve time-to-market production in
volume. The following are key elements of the Tanisys Group's strategy:
ESTABLISH THE TANISYS GROUP AS A LEADER IN ENGINEERING AND DESIGN SERVICES
The Tanisys Group's engineering, design and manufacturing staff delivers
value-added services, focusing on research, design, prototype, development
and manufacturing services, and gives the Tanisys Group the ability to
differentiate itself from competitors that primarily concentrate on the
manufacturing aspects of the industry. The Tanisys Group believes that its
professionals have the creative ability and experience to understand a
customer's ideas, analyze the technology and work with them to create a
product design. They can then proceed with the building of the necessary
prototypes to prove, design and develop a manufacturing model, thereby moving
the customer from the concept stage to a manufacturable product. The Tanisys
Group maintains a unique advantage in the EMS industry through an obvious
depth of understanding of the product gained by its manufacturing staff from
its engineering staff.
EXPAND MANUFACTURING AND LOGISTICS CAPACITY AND EXPERTISE
Further expansion and automation of manufacturing capacity is planned
through investment in advanced manufacturing equipment, while maintaining
responsiveness to OEMs through short design cycle and rapid turnaround. The
Tanisys Group has made and will continue to make investments in advanced
manufacturing process equipment and technologies, and the Tanisys Group will
continue to work closely with customers concerning the identification and
implementation of all advances in process technologies needed to design and
manufacture new and more complex products. The Tanisys Group believes that
it benefits from significant economics of scale in procurement and equipment
utilization due to its high volume manufacturing of a wide variety of memory
module products. An experienced
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manufacturing staff is in place, and automated specialized surface mount
lines have been established, enabling the manufacture of products in a cost
effective manner. An important aspect of the Tanisys Group's manufacturing
strategy is to focus extensively on product quality to address the stringent
requirements of leading electronics OEMs worldwide. In addition, the Tanisys
Group believes that it has established particular expertise in materials
management through efficient procurement, inventory tracking and control and
management information systems.
DEVELOP NEW CUSTOMERS FOR EXISTING PRODUCTS AND SERVICES
The Tanisys Group intends to expand the marketing of its products and
services worldwide through the use of its in-house sales organization and by
contracting with independent sales representative organizations that have
existing relationships with potential customers for other products and
services. The intent is to establish long-term relationships with major OEMs
as the primary provider of turnkey design, development and manufacturing
solutions for new and existing products and services.
EXPAND THE SCOPE OF PRODUCTS AND SERVICES
The Tanisys Group intends to expand the scope of products and services
provided to existing customers who are already familiar with the total
quality focus of the Tanisys Group. The intent is to establish long-term
relationships as a primary provider of a complete slate of products and
services with these customers.
CONTINUE TO PROVIDE TOTAL QUALITY MANAGEMENT OF PRODUCTION AND BUSINESS
PROCESSES
The Tanisys Group continuously endeavors to improve production quality,
reduce cycle time and provide innovative solutions for customer problems.
The combination of full-service component and materials purchasing, inventory
and materials management and continuous flow manufacturing with sophisticated
computer-aided design and manufacturing capabilities shortens the response
time for fulfilling customer requests. The Tanisys Group is International
Standards Organization ("ISO") 9002 compliant and is in the process of
becoming certified.
EXPAND DEVELOPMENT OF DARKHORSE MEMORY TEST EQUIPMENT PRODUCT LINE
The requirements for reliable and reasonably priced test instrumentation
has grown rapidly as customers' emphasis on quality control in manufacturing
has increased. The transition to dual in-line memory modules ("DIMMs") and
SyncDRAMs and the increasingly smaller sizes require the design or redesign
of sophisticated memory testers. The EMS industry requires larger, more
automated testers that will work in conjunction with continuous flow
manufacturing lines, and the increasingly competitive nature of the industry
necessitates more economic pricing than this type of tester has today. The
retail industry requires reliable and reasonably priced portable testers for
loss prevention with pass/fail testing and for module identification purposes.
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DEVELOP PRODUCTS USING THE TOUCH TECHNOLOGY
The Tanisys Touch strategy is focused on the computer and appliance
industries due to market size and product development cycles, which
management believes will provide shorter time to revenue than other potential
industry markets. Initial focus is on select major manufacturers in the
computer and appliance industries with license agreements used for specific
new product development. This strategy is consistent with the overall focus
on the high volume OEM type customer as opposed to the retail channels.
EXPAND MANUFACTURING CAPABILITIES AND SERVICES
The intensely competitive nature of the electronics manufacturing
industry has forced the major competitors to expand the range of products and
value-added services provided to their principal customers in order to serve
as single-source providers of a comprehensive and growing set of
solutions-based products and services. By providing research, design and
prototype capabilities, the Tanisys Group can assist a customer in the
critical development and pre-production planning phase of product
implementation and follow through with the more traditional manufacturing
services. Industry parts suppliers also are customers of the Tanisys Group,
providing it with direct acquisition channels and thereby creating strategic
alliances. This allows a customer to utilize fewer service providers to
streamline the process and achieve better efficiencies in the development
cycle due to fewer transitions from one provider to another. This type of
strategic relationship gives a competitive advantage to both the electronics
manufacturer and to the customer within their respective industries.
The continuing rapid advances in technology further support customers'
utilization of outsourcing to companies in the electronics industry.
Companies operating in the advanced electronic industries must devote more
and more resources, which ultimately are limited, to the development of new
technologies either for the next generation of an existing product or the
development of new products. Due to continuously reducing sizes and
increasing higher performance expectations and performance standards,
state-of-the-art manufacturing and assembly equipment and processes must be
used in order to meet the volume and time-to-market requirements.
ACHIEVE TECHNOLOGICAL LEADERSHIP IN MEMORY MODULE DESIGN
The Tanisys Group designs both application specific and standard memory
modules. Through its experience with substantially all types of memory
devices supplied by a wide range of leading semiconductor manufacturers, the
Tanisys Group has developed significant expertise in memory module design and
component selection. Its extensive library of product designs and layouts of
memory modules are used to increase speed and efficiency in introducing new
products, assisting its OEM customers in achieving time-to-market advantages.
The Tanisys Group's strategy is to apply its design expertise to continue to
develop new memory modules that address emerging opportunities utilizing
DRAM, SyncDRAM, SRAM and Flash technologies. In addition, a substantial base
of proprietary testing routines and parameters has been developed, which
enables the diagnosing of problems in system design or memory components, in
order to characterize the performance of new products and to provide high
quality products in volume.
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The transition to SyncDRAM should allow the Tanisys Group to continue to
differentiate itself from the competition through its advanced design
capabilities at higher processor speeds. This transition will necessitate a
large number of new designs and the development of new memory test equipment
as well as replacement of older existing test equipment.
INTRODUCE NEXT GENERATION MEMORY TEST EQUIPMENT
The continuing development of new memory technologies and changing
functionality will create the demand for next generation testing equipment
and capabilities. The Tanisys Group believes it is well positioned through
the DarkHorse memory test products to take advantage of these changes and
market expansion. The transition to SyncDRAM will necessitate the
development of new test programs and the replacement of existing test
equipment.
EXPAND OEM RELATIONSHIPS AND DISTRIBUTION CHANNELS
The Tanisys Group's experienced applications engineers continually work
with OEMs to seek and support multiple design opportunities over numerous
product generations. The Tanisys Group plans to continue to develop
relationships with its existing OEM customers and to establish relationships
with new OEM customers both domestically and internationally. The Tanisys
Group is growing its sales force to address new opportunities with OEM
customers and corporate end users worldwide. The Tanisys Group also plans to
broaden its distribution channels by focusing additional marketing and sales
resources on the computer reseller channel and establishing worldwide
recognition of the Tanisys brand name.
EXPAND INTERNATIONAL SALES AND MARKETING
The Tanisys Group is expanding its sales and marketing efforts
internationally with an objective of establishing worldwide recognition of
its products and the Tanisys, 1st Tech and DarkHorse brand names.
RESEARCH AND DEVELOPMENT
Tanisys Group management believes that the timely development of new
products and technologies is essential to maintain the Tanisys Group's
competitive position. In the electronics market, the Tanisys Group's
research and development activities are focused primarily on new module
products, the continual improvement in memory test products and solutions,
and the ongoing improvement in manufacturing processes and technologies.
Additionally, the Tanisys Group provides research and development services
for customers either as joint or contracted development. The Tanisys Group
plans to continue to devote substantial research and development efforts to
the design of new module products which address the requirements of OEM,
corporate and retail customers.
Tanisys Group management believes that its Tanisys Touch technology has
been developed to a viable commercial level and that the next step is
introduction of consumer products utilizing Tanisys Touch into the
marketplace by major OEMs. Support continues to be provided to OEMs in the
personal
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computer and appliance industries toward this end. However, it is not
anticipated that significant additional research and development efforts will
be required for this technology.
The Tanisys Group's research and development expenses were $1.5 million
in fiscal year 1996 and $519 thousand in the first quarter of fiscal 1997.
COMPETITION
The Tanisys Group is a technology solutions company with broad industry
product and service lines and believes that while it faces different
competitors in its three product and service lines, there is no one company
currently competing in all product and service lines because, to the best
knowledge of management, no other company currently offers design and
manufacture of both memory modules and test equipment. Competition in some
products, such as 1st Tech's memory manufacturing, is intense due to the
large number of competitors with substantially greater financial, marketing,
technical, distribution and other resources. However, the DarkHorse and
Tanisys Touch lines are characterized by limited effective competition in the
segments of the markets targeted by the Tanisys Group and its patented
technology.
The basic competitive strategy of the Tanisys Group is to utilize the
high end custom engineering design, advanced manufacturing processes, module
test solutions, targeted sales and marketing and advanced warehousing and
distribution capabilities to deliver advanced technologies, solutions and
services packaged in such a way that a customer is not required to deal with
a substantial number of vendors but can look solely to the Tanisys Group to
satisfy all of its needs. The Tanisys Group will continue to target
customers with which a long-term, primary or sole source relationship can be
established in order to provide broad-based solutions to any technological or
manufacturing needs.
The competitors in the 1st Tech product line include module
manufacturers such as SMART Modular Technologies, Micron Electronics and
Celestica, Inc. Additional competition comes from certain suppliers who may
have the ability to manufacture competitive products at lower costs as a
result of their higher levels of integration. In addition, some current and
prospective customers may currently or in the future manufacture internally.
In the memory testing industry, the DarkHorse line competes primarily
with Terradyne, Megatest and Realm, although they provide only generic test
equipment requiring the user to custom program the equipment for each
specific application. The DarkHorse test systems are pre-programmed with an
extensive set of algorithms and test programs that are accessed through an
intuitive user interface.
The Tanisys Group believes that its competition in the capacitive touch
market is limited to a few companies that are pursuing limited applications
of their technology as opposed to the broader market it has targeted.
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INTELLECTUAL PROPERTY
The Company has filed four applications with the U.S. Patent and Trademark
Office for patents to protect its intellectual property rights for products and
technology that have been sold, licensed or are under development, as follows:
1. Application covering claims for hardware, firmware, software and
methods operations for a broad range of applications for its touch
technology. The patent was granted on April 16, 1996 under
Registration No. 5,508,700. Corresponding international patent
applications have been filed in selected European, Asian and North
American countries. Management of the Company believes that if
competitors decide to pursue the discrete touch market, they could be
in violation of the Company's patent. The Company has no knowledge of
any such infringement to date.
2. Application for "Keyboard Command Operation for Computer System."
This pending application is targeted to protect the Company's
technology that associates multiple commands with different keyswitch
actuations and that is applicable for computer keyboards.
3. Application for "Computer Input Device for Use in Conjunction with a
Mouse Input Device." This pending application is targeted to protect
the Company's technology related to capacitive sensing used in a mouse
pad or other flush-mounted touch device.
4. Application for "Capacitive Sensitive Input Circuit with Common Pad."
This pending application is targeted to protect the Company's touch
technology which could be used in extreme or hostile environments and
can function to improve the reliability of touch sensor operation in
such environments.
There can be no assurance that these pending patent applications will be
approved or approved in the form requested. The Tanisys Group expects to
continue to file patent applications where appropriate to protect its
proprietary technologies; however, the Tanisys Group believes that its continued
success depends primarily on factors such as the technological skills and
innovation of its personnel rather than on patent protection. In addition, the
Tanisys Group attempts to protect its intellectual property rights through trade
secrets and a variety of other measures, including non-disclosure agreements.
There can be no assurance, however, that such measures will provide adequate
protection for the Tanisys Group's trade secrets or other proprietary
information, that disputes with respect to the ownership of its intellectual
property rights will not arise, that the Tanisys Group's trade secrets or
proprietary technology will not otherwise become known or be independently
developed by competitors or that its intellectual property rights can otherwise
be protected meaningfully. There can be no assurance that patents will issue
from pending or future applications or that, if patents are issued, they will
not be challenged, invalidated or circumvented, or that rights granted
thereunder will provide meaningful protection or other commercial advantage.
Furthermore, there can be no assurance that third parties will not develop
similar products, duplicate the Tanisys Group's products or design around the
patents owned by the Tanisys Group or that third parties will not assert
intellectual property infringement claims against the Tanisys Group. In
addition, there can be no assurance that foreign intellectual property laws
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will adequately protect the Tanisys Group's intellectual property rights
abroad. The failure of the Tanisys Group to protect its proprietary rights
could have a material adverse effect on its business, financial condition and
results of operations.
ENVIRONMENTAL REGULATION
The Tanisys Group's operations and manufacturing processes are subject to
certain federal, state, local and foreign environmental protection laws and
regulations. Public attention has increasingly been focused on the
environmental impact of manufacturing operations that use hazardous materials or
generate hazardous wastes, and environmental laws and regulations may become
more stringent over time. There can be no assurance that failure to comply with
either present or future regulations, or to obtain all necessary permits
required under such regulations, would not subject the Tanisys Group to
significant compliance expenses, production suspensions or delay, restrictions
on expansion at its present or future locations, the acquisition of costly
equipment or other liabilities.
EMPLOYEES
At February 28, 1997, the Tanisys Group had 134 full-time and 5 part-time
employees.
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ITEM 2. FINANCIAL INFORMATION.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the captions
"Consolidated Income Statement Data" and "Consolidated Balance Sheet Data" are
derived from the consolidated financial statements of the Company and its
subsidiaries, which financial statements have been audited by Arthur Andersen
LLP (fiscal 1996, 1995 and 1994), independent public accountants, to the extent
indicated in their report included elsewhere herein. On May 21, 1996, the
Company acquired 1st Tech and DarkHorse, which resulted in them becoming wholly
owned subsidiaries of the Company. The acquisitions were accounted for using
the purchase method of accounting. The results for 1st Tech and DarkHorse have
been included in the consolidated financial statements since the date of the
acquisitions.
The selected consolidated financial data set forth below is qualified in
its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements, the notes thereto and the other financial
information included elsewhere in this report.
<TABLE>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31, FISCAL YEARS ENDED SEPTEMBER 30,
------------------- ------------------------------------------------------------
1996(2) 1995 1996 1996(2) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME PRO FORMA(3)
STATEMENT DATA: (UNAUDITED)
Net sales $15,264 $ 84 $66,524 $14,989 $ 359 $ 114 $ - $ -
Cost of goods sold 13,668 9 61,709 12,661 110 34 - -
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 1,595 75 4,814 2,328 249 80 - -
Operating expenses:
Research and development 519 101 1,525 1,080 410 409 181 -
Sales and marketing 698 73 2,831 1,177 1,358 394 117 18
General and administrative 906 298 4,203 1,977 913 1,029 342 12
Depreciation and amortization 1,456 19 5,583 2,474 71 60 28 -
Unusual charge (1) - - - - - 199 - -
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 3,579 491 14,142 6,708 2,752 2,091 668 30
Income (loss) from operations (1,984) (416) (9,327) (4,380) (2,503) (2,011) (668) (30)
Other income (expense), net (154) 15 (347) (30) 58 39 7 (103)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $(2,137) $ (401) $(9,675) $(4,410) $(2,445) $(1,972) $ (660) (133)
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) per share $ (0.13) $(0.04) $ (0.82) $ (0.37) $ (0.29) $ (0.30) $ (0.27) $ (0.13)
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Weighted average common
shares outstanding 16,164 9,097 11,766 11,766 8,436 6,611 2,861 1,025
</TABLE>
<TABLE>
AT DECEMBER 31, AT SEPTEMBER 30,
--------------- -----------------------------------------------
CONSOLIDATED BALANCE 1996(2) 1996(2) 1995 1994 1993 1992
SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,794 $ 2,690 $ 1,317 $ 1,952 $ 2,076 $ 48
Working capital 2,840 2,809 1,183 1,766 2,155 (83)
Total assets 20,039 20,222 1,613 2,295 2,488 48
Short-term debt 4,446 3,075 - - - 121
Long-term obligations 111 123 - - - -
Shareholders' equity 12,138 13,110 1,379 1,941 2,457 (83)
</TABLE>
- --------------------
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(1) As of September 30, 1994, the Company determined that it would not utilize
in its current or future product line certain technology purchased in 1993.
Therefore, the remaining goodwill of $198,739 associated with this purchase
was charged to expense in the period ended September 30, 1994.
(2) On May 21, 1996, the Company acquired 1st Tech and DarkHorse as a result of
which 1st Tech and DarkHorse became wholly owned subsidiaries of the
Company in exchange for the issuance of an aggregate of 4,150,000 shares of
Common Stock. The acquisitions were accounted for using the purchase
method of accounting. Under the purchase method, the excess of purchase
price over the estimated fair value of the net assets acquired
($10,656,998) is classified as goodwill and amortized against earnings over
a two-year period. The amount of goodwill amortized for the fiscal year
ended September 30, 1996 was $2,220,208. The results of operations of 1st
Tech and DarkHorse have been included in the consolidated financial
statements since the date of the acquisitions.
(3) The unaudited pro forma information has been prepared assuming the
acquisitions took place as of October 1, 1995. The unaudited pro forma
information includes adjustments for amortization of intangibles arising
from the transaction and the issuance of common shares. The unaudited pro
forma financial information is not necessarily indicative of the results of
operations as they would have been had the transactions been effective at
the beginning of fiscal 1996, nor is it necessarily indicative of the
results of operations which may occur in the future. The primary reason
for the variation between the pro forma 1996 and actual 1996 results is
that actual results include only operations from 1st Tech and DarkHorse and
amortization of the related goodwill from the date of the acquisitions (May
21, 1996) to year end. Because the 1st Tech and DarkHorse acquisitions
were accounted for as a purchase, the historical results for fiscal 1995,
1994, 1993 and 1992 do not include the results of either 1st Tech or
DarkHorse.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion of the consolidated financial condition and
results of operations of the Tanisys Group for the fiscal years ended September
30, 1996, 1995 and 1994 and for the three-month periods ended December 31, 1996
and 1995. It should be read in conjunction with the Condensed Consolidated
Financial Statements of the Tanisys Group, the Notes thereto and other financial
information included elsewhere herein. For purposes of the following
discussion, references to year periods refer to the Tanisys Group's fiscal years
ended September 30, 1996 and 1995, and references to quarterly periods refer to
the Tanisys Group's fiscal quarters ended December 31, 1996 and 1995.
The Company was organized under the laws of the Province of British
Columbia, Canada, on January 27, 1984, as Montebello Resources Ltd., and
operated unsuccessfully as an oil and gas exploration company in British
Columbia and Manitoba, Canada. In October 1992, the Company changed its name to
First American Capital Group Inc. The Company then deemed itself inactive
pursuant to the rules and regulations of the VSE, where its Common Stock had
been traded. During the first two quarters of 1993, the Company was reorganized
in accordance with the rules of the VSE. As part of this reorganization, the
Company acquired certain computer game controller technology. The Company
changed its name to Rosetta Technologies Inc. in May 1993 and to Tanisys
Technology, Inc. in July 1994. Until May 21, 1996, the Company focused on
research and development of highly specialized applications of capacitive touch
sensing technology.
Effective May 21, 1996, the Company acquired, through mergers with its
wholly owned subsidiaries, all of the outstanding common stock of 1st Tech and
DarkHorse and began operations in Austin, Texas as a consolidated group of
companies providing custom design, engineering and manufacturing of memory
modules, design and manufacturing of memory test equipment and capacitive
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touch sensing products to leading OEMs in the computer networking and
telecommunications industries. In consideration for the acquisitions of 1st
Tech and DarkHorse, the Company issued 2,950,000 and 1,200,000 shares,
respectively, of Common Stock. Prior but subject to the consummation of the
acquisitions of 1st Tech and DarkHorse by the Company, 1st Tech issued
1,150,000 shares of its common stock for $2.00 per share in an equity
financing, raising a total of $2.3 million, the proceeds of which were used
to reduce short-term debt and provide working capital for 1st Tech. The
Company believes that 1st Tech's offering was exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act"), by reason of
Section 4(2) of the Securities Act.
The Tanisys Group's net sales and gross profit increased dramatically in
the last two quarters of fiscal year 1996 and the first quarter of the current
fiscal year due to the acquisitions of 1st Tech and DarkHorse. In fiscal 1996,
revenues were $15.0 million with gross profit of $2.3 million (15.5% of revenue)
versus fiscal 1995 revenues of $.4 million and gross profit of $.2 million
(69.4% of revenue). This is an increase of revenues of $14.6 million, in excess
of 4,000%, and in gross profit of $2.1 million, more than 800%. Net losses
increased to $4.4 million in fiscal 1996, or 29.4% of gross revenues, from $2.4
million in fiscal 1995, or 681.6% of gross revenues. The increases in revenues,
gross profit and net losses are due primarily to the acquisitions of 1st Tech
and DarkHorse on May 21, 1996. Management believes that revenues and gross
profits could fluctuate in the foreseeable future due to the continuing
oversupply of memory chips, which dramatically drives down the prices of the
Tanisys Group's products; the continuing fluctuations in the cost of memory and
components; the fact that many of the Tanisys Group's competitors are better
capitalized and can purchase inventory in sufficient quantities to obtain more
favorable pricing; and other factors, including, changes in pricing by suppliers
and competitors and changes in the proportion of contract manufacturing done--
where the customer consigns the material--versus manufacturing on a turnkey
basis--where the Tanisys Group purchases the necessary materials.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of income
data of the Tanisys Group expressed as a percentage of net sales on a combined
basis, taking into account the acquisitions of 1st Tech and DarkHorse as if they
had occurred October 1, 1995, with the exception of the amortization of
goodwill, which is from May 21, 1996, the date of the acquisitions:
24
<PAGE>
<TABLE>
(UNAUDITED)
COMBINED COMBINED
THREE MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -----------------
1996 1995 1996
------ ------ -----------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 89.5 96.7 92.8
----- ----- -----
Gross profit 10.5 3.3 7.2
Operating expenses:
Research and development 3.4 0.7 2.3
Sales and marketing 4.6 2.5 4.3
General and administrative 5.9 2.8 11.0
Depreciation and amortization 9.5 0.1 3.7
Unusual charge 0.0 0.0 0.0
----- ----- -----
Total operating expenses 23.5 6.2 21.3
----- ----- -----
Operating income (loss) -13.0 -2.9 -14.1
Other income (expense), net -1.0 -0.3 -0.5
----- ----- -----
Net income -14.0% -3.2% -14.6%
----- ----- -----
----- ----- -----
</TABLE>
The following table sets forth certain consolidated statement of income
data of the Tanisys Group expressed as a percentage of sales giving effect to
the acquisitions of 1st Tech and DarkHorse on May 21, 1996:
<TABLE>
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31, FISCAL YEARS ENDED SEPTEMBER 30,
------------------ --------------------------------
1996 1995 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 89.5 10.7 84.5 30.7 29.8
----- ----- ----- ----- -----
Gross profit 10.5 89.3 15.5 69.3 70.2
Operating expenses:
Research and development 3.4 120.3 7.2 114.2 359.6
Sales and marketing 4.6 87.3 7.9 378.6 346.1
General and administrative 5.9 356.5 13.2 254.6 897.1
Depreciation and amortization 9.5 22.3 16.5 19.8 60.2
Unusual charge 0.0 0.0 0.0 0.0 174.6
----- ----- ----- ----- -----
Total operating expenses 23.5 586.5 44.8 767.2 1837.6%
----- ----- ----- ----- -----
Operating income (loss) -13.0 -497.2 -29.2 -697.9 -1733.0
Other income (expense), net -1.0 17.4 -0.2 16.3 34.2
----- ----- ----- ----- -----
Net income -14.0% -479.8% -29.4% -681.6% -1733.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
NET SALES
On the historical accounting basis, net sales consist of software sales,
less returns and discounts, and design engineering fees from 1994 to May 21,
1996, the date of the acquisitions of 1st Tech and DarkHorse. After the May 21,
1996 acquisitions, net sales consist of custom manufacturing services, custom
memory modules, standard memory modules, design engineering fees, memory module
test
25
<PAGE>
solutions, advanced technology services and computer software, less returns
and discounts. Net sales increased from $84 thousand in the first quarter of
fiscal 1996 to $15.3 million in the first quarter of fiscal 1997. The
increase in fiscal 1997 is due primarily to the acquisitions of 1st Tech and
DarkHorse and, to a lesser degree, to increases in sales volume in the 1st
Tech memory module product line. Net sales increased from $114 thousand in
fiscal 1994 to $359 thousand in fiscal 1995, a 215% increase, and to $14.989
million in fiscal 1996, a 4,075% increase. The increase in sales in fiscal
1995 from fiscal 1994 was due primarily to new software products and
additional distributors. The increase in fiscal 1996 is due to the
acquisitions of 1st Tech and DarkHorse.
On a pro forma basis, net sales decreased from $33.6 million in the first
quarter of fiscal 1996 to $15.3 million in the first quarter of fiscal 1997.
The decrease in fiscal 1997 is due primarily to the substantial decrease in the
cost of the chips and components used in the manufacture of memory modules,
which are purchased by the Tanisys Group and become a major component in cost of
goods sold. Net sales were $67.952 million in fiscal 1996.
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. On the historical accounting basis, gross profit
increased from $75 thousand in the first quarter of fiscal 1996 to $1.6 million
in the first quarter of fiscal 1997. Gross margin decreased from 89.3% in first
quarter fiscal 1996 to 10.5% in first quarter fiscal 1997. The increase in
gross profit as well as the decrease in gross margin were due primarily to the
acquisitions of 1st Tech and DarkHorse and the dramatic change in the types of
products being sold by the Company before and after the acquisitions. To a
lesser extent, the improvement in the Company's gross profit was due to the
addition of consignment inventory of certain memory components, shortening the
manufacturing response time and making it possible to compete on the basis of
timeliness of delivery rather than price alone, while not exposing the Tanisys
Group's assets to the risk of carrying larger inventories. Gross profit
increased from $80 thousand in 1994 to $249 thousand in fiscal 1995, a 211%
increase, to $2.328 million in fiscal 1996, an 835% increase. Gross profit
margin declined from 70% in fiscal 1994 to 69% in fiscal 1995 to 16% in fiscal
1996. The profit margins in fiscal 1994 and 1995 were primarily attributable to
the sale of software developed in conjunction with research and development on
the capacitive touch technology, which had very little cost of sales associated
with that development. The gross profit margin in fiscal 1996 is primarily from
the manufacturing operation subsequent to the acquisitions and is discussed in
the next paragraph.
On a pro forma basis, gross profit increased from $1.1 million in the first
quarter of fiscal 1996 to $1.6 million in the first quarter of fiscal 1997. For
the same period, gross margin increased from 3.3% to 10.5%. The increases in
gross profit as well as gross margin are due primarily to the change in product
mix between the two periods. In fiscal 1996, gross profit was $5.138 million
and gross profit margin was 7.56%. The Company consistently made strategic
purchasing and pricing decisions during fiscal 1996 that sacrificed gross profit
percentage to establish relationships with customers and vendors.
26
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the costs associated with the
design and testing of new technologies and products. These costs relate
primarily to the costs of materials, personnel, management and employee
compensation and engineering design consulting fees. On the historical
accounting basis, research and development expenses increased from $101 thousand
in first quarter fiscal 1996 to $519 thousand in first quarter fiscal 1997,
representing an increase of 415.6% from period to period. The substantial
increase was due primarily to the acquisitions of the additional product lines
of 1st Tech and DarkHorse and related research and development expenditures.
Research and development increased from $409 thousand in fiscal 1994 to $410
thousand in fiscal 1995 and to $1.080 million in fiscal 1996, a 163% increase.
The increases in fiscal 1994 and 1995 were associated with development of the
capacitive touch technology, and the substantial increase in fiscal 1996 was due
to the acquisitions of 1st Tech and DarkHorse.
On a pro forma basis, research and development expenses increased from $234
thousand in the first quarter of fiscal 1996 to $519 thousand in the first
quarter of fiscal 1997, representing an increase of 122% period to period. The
substantial increase was due primarily to the availability of operating capital
with which to fund research and development by 1st Tech and DarkHorse after the
acquisitions. Research and development expenses were $1.511 million in fiscal
1996. The steady growth of research and development expense reflects the
commitment to continuing development of new products, including module products,
testing equipment, advanced technology and computer software.
SALES AND MARKETING
Sales and marketing expenses include all compensation of employees and
independent sales personnel, as well as the costs of advertising, promotions,
trade shows, travel, direct support and overhead. On the historical accounting
basis, sales and marketing expenses increased from $73 thousand in first quarter
fiscal 1996 to $698 thousand in first quarter fiscal 1997, an 855.5% increase.
In the first quarter of fiscal years 1996 and 1997, sales and marketing expenses
expressed as a percentage of revenues were 87.3% and 4.6%, respectively. The
increase in actual funds expended was connected with the acquisitions of the
product lines of 1st Tech and DarkHorse. The decrease in expenses expressed as
a percentage of revenues is primarily caused by the significant increase in
revenues related to the acquisitions of 1st Tech and DarkHorse. Sales and
marketing expenses are expected to remain approximately the same or to grow
slightly when expressed as a percentage of revenue and to continue to increase
significantly in terms of absolute dollars in future periods as revenues
continue to grow. Sales and marketing expenses increased from $394 thousand in
fiscal 1994 to $1.358 million in fiscal 1995, a 245% increase, and decreased to
$1.177 million in fiscal 1996, a 13% decrease. In fiscal years 1994, 1995 and
1996, sales and marketing expenses expressed as a percent of revenues were 346%,
378% and 8%, respectively. The increase from fiscal 1994 to fiscal 1995 was
connected with the effort to establish markets for the software products
developed by the Company. The decrease in 1996, after the acquisitions of 1st
Tech and DarkHorse, reflects the decrease in commission expenses due to the
decrease in sales revenue discussed under the paragraph heading "Net Sales"
above.
On a pro forma basis, sales and marketing expenses decreased from $844
thousand in the first quarter of fiscal 1996 to $698 thousand in the first
quarter of fiscal 1997. The decrease between the two
27
<PAGE>
periods was due primarily to the decrease in revenues, as discussed under the
paragraph heading "Net Sales" above, and the corresponding reduction of
commission expense. Sales and marketing expenses were $2.828 million in
fiscal 1996. Sales and marketing expenses are expected to remain
approximately the same or to grow slightly when expressed as a percentage of
revenue and to continue to increase significantly in terms of absolute
dollars in future periods as revenues continue to grow.
GENERAL AND ADMINISTRATIVE
General and administrative costs consist primarily of personnel costs,
including all compensation and employee benefits, and support costs including
utilities, insurance, professional fees and all costs associated with a
reporting company. On the historical accounting basis, general and
administrative expenses increased to $906 thousand in first quarter fiscal 1997
from $298 thousand in first quarter fiscal 1996, a 203.9% increase. In the
first quarter of fiscal years 1996 and 1997, general and administrative expenses
expressed as a percentage of revenues were 356.5% and 5.9%, respectively. The
increase in actual funds expended in fiscal 1997 is due primarily to the
acquisitions of 1st Tech and DarkHorse and, to a lesser extent, to the
institution of cost controls on general and administrative expenses. The
absolute dollar expenses associated with the general and administrative area are
expected to increase significantly in future periods due to anticipated
continued growth in business activity and increased costs associated with being
a reporting company. The general and administrative expenses are not expected
to grow significantly in future periods when expressed as a percentage of
revenue. General and administrative expenses decreased from $1.089 million in
fiscal 1994 to $984 thousand in fiscal 1995, a 10% decrease, and increased to
$4.451 million in fiscal 1996, a 352% increase. The decrease in fiscal 1995
from fiscal 1994 reflects the implementation of cost saving measures designed to
make general and administrative expenditures more effective. The increase in
fiscal 1996 is due to the acquisitions of 1st Tech and DarkHorse.
On a pro forma basis, general and administrative expenses decreased to $906
thousand in the first quarter of fiscal 1997 from $949 thousand in the first
quarter of fiscal 1996. The slight decrease is due to the decreased level of
revenues, as discussed under the paragraph heading "Net Sales" above. General
and administrative expenses were $4.541 million in fiscal 1996. Expressed as a
percentage of net sales, general and administrative expenses were 7% in fiscal
year 1996. The general and administrative expenses are not expected to grow
significantly in future periods when expressed as a percentage of sales.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes the depreciation for all fixed
assets and the amortization of intangibles, including goodwill incurred in the
acquisitions of 1st Tech and DarkHorse. Depreciation and amortization increased
to $1.5 million in first quarter fiscal 1997 from $19 thousand in first quarter
fiscal 1996. The substantial increase is due primarily to the amortization of
the goodwill recorded in conjunction with the acquisitions of 1st Tech and
DarkHorse.
28
<PAGE>
UNUSUAL CHARGE
On the historical accounting basis, other income (expense) increased from
$39 thousand in fiscal 1994 to $59 thousand in fiscal 1995, a 51.3% increase,
and decreased to -$30 thousand in fiscal 1996, a 151.0% decrease. On a pro
forma basis, other income (expense) was -$294 thousand in fiscal 1996. The
expense shown in fiscal 1994 relates to the recognition by the Company that the
computer game controller technology acquired in 1993 would not be utilized in
the Company's current or future operations. Therefore, the remaining $199
thousand of goodwill associated with that purchase was charged as an unusual
charge in fiscal 1994. No other goodwill chargeoffs are currently expected
except through amortization charges over the useful life of the respective
assets.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income less
interest expense. Interest expense is attributable to borrowings from a bank
credit line. Substantially all of the interest expense in the three-year pro
forma period 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. The Company had no debt and earned interest on its
available cash until its May 21, 1996 acquisitions of 1st Tech and DarkHorse.
Thereafter, the Company incurred net interest expense due to increased balances
of inventories and accounts receivable. The Tanisys Group expects to continue
to require borrowings to fund growth in inventories and accounts receivable in
the future and therefore expects to continue to reflect net interest expense.
PROVISION FOR INCOME TAXES
The Company has never paid income taxes and at September 30, 1996 had a net
operating loss carryover of $4.3 million. While there can be no assurance that
the Tanisys Group will generate the taxable income required to use all or any
part of the carryover prior to the expiration of the carryover, the Tanisys
Group would be able to incur taxable income in the carryover period equal to the
total loss carryover without the payment of taxes. The existing carryover
expires 15 years after the year in which it was incurred. Therefore, if the
carryover is not used to offset future taxable income, the $4.3 million net
operating loss carryforward at September 30, 1996 will expire in fiscal years
2010 ($2.548 million) and 2011 ($1.785 million).
The availability of the net operating loss carryforward 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
ownership change as defined in Section 382 of the Code. This section states
that after reorganization or other change in corporate ownership, the use of
certain carryovers may be significantly limited or prohibited. There are two
kinds of ownership changes that can trigger carryover limitation: an ownership
change involving a 5% stockholder and any tax-free reorganization. In either
case, one or more 5% stockholders must have increased their percentage of
ownership in the corporation by more than 50% over the pre-change ownership
percentage generally within three years of ownership change. The Company does
not believe that an IRS Code Section 382 limitation currently exists.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the three fiscal years presented in this analysis, until the May 21,
1996 acquisitions of 1st Tech and DarkHorse, the Company primarily utilized
funds generated by equity financings of its Common Stock and the exercise of
warrants issued in certain of those equity financings to generate the funds
required to fund its research and development activities, acquire capital
equipment and pay its general and administrative expenses.
Since inception and until the May 21, 1996 acquisitions by the Company, 1st
Tech and DarkHorse used funds generated from operations, an equity financing,
capital leases, operating leases, vendor credits and certain bank borrowings to
support their respective operations, acquire capital equipment and finance
inventory acquisitions and accounts receivable balances. During the first
quarter of fiscal 1997, the Company generated $2.5 million in net cash from
financing activities versus $.1 million in the first quarter of fiscal 1996.
The $2.5 million in fiscal 1997 consisted of $1.2 million from the exercise of
warrants and options to purchase common stock and $1.4 million of net draws on
the Company's revolving credit note.
Subsequent to the May 21, 1996 acquisitions, the Tanisys Group has utilized
the funds acquired in an equity financing of its Common Stock prior to such date
and from the exercise of 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, finance accounts
receivable balances and pay its general and administrative expenses. There have
been no further offerings or issuances of unregistered securities other than in
connection with the issuance of Common Stock upon the exercise of warrants and
stock options. At the date of the acquisitions of 1st Tech and DarkHorse, these
companies had $2.8 million in cash, of which $2.3 million was obtained by 1st
Tech in the equity financing closed simultaneously with the Company's
acquisitions of 1st Tech and DarkHorse. At December 31, 1996, the Tanisys Group
had $1.794 million of cash and $2.840 million of working capital.
The Company currently has approximately $2.0 million in accounts receivable
which are not in compliance with the agreed payment terms. The Company is
aggressively attempting to collect the accounts and has been assured that full
or partial payment will be made. However, at this time there is no assurance
that the accounts will be collected or if collected, what time period will be
required for full collection. The Company has a total of $250 thousand of
insurance coverage on these accounts. Until collection can be made, the Company
will be required to use virtually all of its cash and cash equivalents to carry
these accounts. Accounts over 90 days are excluded from the borrowing base
available credit under the revolving credit note discussed in the next
paragraph.
The Tanisys Group has a $6 million revolving credit note at a financial
institution bearing interest at the financial institution's prime rate plus a
percentage between one and three percent (8.25% as of December 31, 1996)
depending upon a ratio which is calculated monthly. This revolving credit note
is due on the earlier of demand or when the note matures June 30, 1998 and is
secured by all of the Company's assets. Draws are made as necessary from funds
available for borrowing, which are limited to the lower of the commitment amount
or a borrowing base amount calculated based on certain levels of accounts
receivable. At December 31, 1996, $4.4 million was outstanding and there were
no
30
<PAGE>
additional borrowings available under the revolving credit note. The
revolving credit note, as amended as of February 21, 1997, has certain
restrictions concerning, among other things, the payment of dividends,
acquisition of additional debt and no material changes in management. In
addition, conditions of the note contain a minimum tangible net worth
requirement, which at February 28, 1997 was $4 million, and require a
combined ratio of earnings before interest, taxes, depreciation and
amortization (adjusted) to interest expense of 1.25:1. Due to losses
sustained, at February 28, 1997 and December 31, 1996, the Tanisys Group did
not comply with this ratio or the net worth requirement. The financial
institution has waived compliance with the covenants for the three months
ended December 31, 1996. In connection with the granting of the waivers, the
Company agreed with the financial institution to phase the total amount of
the revolving credit note down to $4 million over an eight-week period
beginning February 21, 1997, and to reduce the percentage of qualified
accounts receivable included in the borrowing base from 80% to 70% by 1% per
week for five weeks and then 1% per month over the subsequent five-month
period. At February 28, 1997, the Company had utilized $4.8 million of its
revolving credit note and had $675 thousand available thereunder.
Capital expenditures totaled approximately $523 thousand, $815 thousand,
and $852 thousand in fiscal years 1994, 1995 and 1996, respectively, and
approximately $8 thousand and $436 thousand in the first quarter of fiscal years
1996 and 1997, respectively. These expenditures were primarily for the purchase
of computer systems, manufacturing equipment, test equipment and the expansion
of manufacturing facilities. The Tanisys Group plans to spend approximately $2
million in the remainder of fiscal 1997 in capital expenditures for additional
manufacturing capacity.
The Tanisys Group has entered into certain capital lease arrangements. The
outstanding principal on these obligations at December 31, 1996 was $163
thousand. See Note 6 to the Company's Consolidated Financial Statements.
The Tanisys Group believes that its existing funds, anticipated cash flow
from operations and amounts available from future vendor credits, bank
borrowings, the exercise of outstanding warrants issued in prior equity
financings, and equity financings will be sufficient to meet its working capital
and capital expenditure needs for the next 12 months. However, if the warrant
holders should choose not to exercise a significant amount of the outstanding
warrants, the Company would be required to obtain alternate sources for
additional debt and rely upon a future equity offering or offerings for such
funding. Management is considering proposals to reduce the exercise price of
outstanding warrants. There is no assurance that the warrant holders will
choose to exercise their warrants or, in the event that they choose not to
exercise, 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 Tanisys Group's net sales is produced by a
relatively small number of customers. In the first quarters of fiscal 1996 and
1997, the ten largest customers accounted for approximately 66% and 73% of net
sales, respectively. No single customer produced as much as 10% of net sales
during the first quarter of fiscal year 1996. In the first quarter of fiscal
year 1997, each
31
<PAGE>
of three customers produced more than 10% of net sales: Tandy Corp., 18.4%;
Algo Marketing, Inc., 16.9%; and Itautec America, Inc., 14.9%. 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 fiscal 1997 will continue to
utilize the Company's products or services. The actual customers producing
the sales are different between the two periods, and the Company expects this
type of variation of volume of purchases from a particular customer to
continue throughout this fiscal year.
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. Therefore, 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.
ITEM 3. PROPERTIES.
At February 28, 1997, the Company and its wholly owned subsidiaries, 1st
Tech and DarkHorse, leased and occupied approximately 33,000 square feet of
space for their production facility and corporate and administrative offices at
12201 Technology Boulevard, Suite 130, Austin, Texas, pursuant to a lease which
expires on April 30, 1998. The lease has certain expansion options, renewal
options and rights of first refusal. The Company currently is paying annual
rental of $184,118, plus a pro rata charge for property taxes, common area
maintenance and insurance. The Company believes that its current facilities are
adequate to meet its current needs.
32
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known by the Company
regarding the beneficial ownership of Common Stock by persons owning
beneficially more than 5% of the outstanding Common Stock at February 28, 1997.
A total of 16,635,155 shares of the Company's Common Stock were issued and
outstanding at February 28, 1997.
NO. OF SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OF CLASS (2)
------------------------------------ ------------- ------------
Gary W. Pankonien 1,995,000 12.0%
12201 Technology Boulevard, Suite 130
Austin, Texas 78727
Parris H. Holmes, Jr. 1,018,425 (3) 6.1%
9311 San Pedro, Suite 400
San Antonio, Texas 78216
James E. Sowell 1,332,648 (4) 7.7%
3131 McKinney Avenue, Suite 200
Dallas, Texas 75204
- -----------------
(1) Unless otherwise noted, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) The percentages indicated are based on outstanding stock options, Class B,
Class C and other Common Stock Purchase Warrants (collectively, the
"Warrants") exercisable within 60 days for each individual and 16,635,155
shares of Common Stock issued and outstanding at February 28, 1997.
(3) Includes 105,000 shares that Mr. Holmes has the right to acquire upon
exercise of stock options, exercisable within 60 days, and 42,000 shares
that Mr. Holmes has the right to acquire upon the exercise of Warrants,
exercisable within 60 days.
(4) Represents 788,824 shares owned by Jim Sowell Construction Co., Inc., a
private company owned 100% by Mr. Sowell, 558,824 shares that Mr. Sowell
has the right to acquire upon the exercise of Warrants owned by Jim Sowell
Construction Co., Inc., exercisable within 60 days, and 15,000 shares that
Mr. Sowell has the right to acquire upon exercise of stock options,
exercisable within 60 days.
33
<PAGE>
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock at February
28, 1997 by (i) each person known by the Company to own beneficially more than
5% of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each named executive officer and (iv) all executive officers
and directors as a group. A total of 16,635,155 shares of the Company's Common
Stock were issued and outstanding at February 28, 1997.
<TABLE>
COMMON STOCK
-------------------------
5% BENEFICIAL OWNERS, DIRECTORS NUMBER
AND NAMED EXECUTIVE OFFICERS OF SHARES(1) PERCENT(2)
------------------------------- ------------ ----------
<S> <C> <C>
Mark C. Holliday 422,578 (3) 2.5%
Gary W. Pankonien 1,995,000 12.0%
Joe O. Davis 8,000 *
Chris Efstathiou, Jr. 25,000 *
Guy L. Fielder 0 *
Benjamin S. Marz 71,957 (4) *
Donald R. Turner 25,000 *
Parris H. Holmes Jr. 1,018,425 (5) 6.1%
Gordon H. Matthews 152,500 (6) *
Alan H. Portnoy 0 *
James E. Sowell 1,332,648 (7) 7.7%
Theodore W. Van Duyn 175,000 (8) 1.0%
All executive officers and directors as a group
(12 persons, including the executive officers
and directors listed above) 5,226,108 (9) 29.2%
</TABLE>
- -----------------
*Represents less than one percent (1%) of the issued and outstanding shares of
Common Stock.
(1) Unless otherwise noted, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) The percentages indicated are based on outstanding stock options, Class B,
Class C and other Common Stock Purchase Warrants (collectively, the
"Warrants") exercisable within 60 days for each individual and 16,635,155
shares of Common Stock issued and outstanding at February 28, 1997.
(3) Includes 306,666 shares that Mr. Holliday has the right to acquire upon
exercise of stock options, exercisable within 60 days, and 14,706 shares
that Mr. Holliday has the right to acquire upon the exercise of Warrants,
exercisable within 60 days.
(4) Includes 66,667 shares that Mr. Marz has the right to acquire upon exercise
of stock options, exercisable within 60 days.
34
<PAGE>
(5) Includes 105,000 shares that Mr. Holmes has the right to acquire upon
exercise of stock options, exercisable within 60 days, and 42,000 shares
that Mr. Holmes has the right to acquire upon the exercise of Warrants,
exercisable within 60 days.
(6) Includes 55,000 shares that Mr. Matthews has the right to acquire upon
exercise of stock options, exercisable within 60 days, and 1,900 shares
owned by his daughter.
(7) Represents 788,824 shares owned by Jim Sowell Construction Co., Inc., a
private company owned 100% by Mr. Sowell, 558,824 shares that Mr. Sowell
has the right to acquire upon the exercise of Warrants owned by Jim Sowell
Construction Co., Inc., exercisable within 60 days, and 15,000 shares that
Mr. Sowell has the right to acquire upon exercise of stock options,
exercisable within 60 days.
(8) Includes 75,000 shares that Mr. Van Duyn has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(9) Includes 623,333 shares that 12 directors and executive officers have the
right to acquire upon exercise of stock options, exercisable within 60
days, and 615,530 shares that such directors and executive officers have
the right to acquire upon the exercise of Warrants, exercisable within 60
days.
35
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The Company's directors, executive officers and key employees and their
respective ages and positions as of February 28, 1997 are as follows:
NAME AGE POSITION(S)
---- --- -----------
Mark C. Holliday 44 Chairman of the Board and Chief
Executive Officer
Gary W. Pankonien 46 President, Chief Operating Officer and
Director
Joe O. Davis 53 Senior Vice President, Chief Financial
Officer and Corporate Secretary
Chris Efstathiou, Jr. 37 Vice President of Materials
Guy L. Fielder 43 Vice President of Engineering
Benjamin S. Marz 44 Vice President of Sales and Customer
Service
Donald R. Turner 41 Corporate Controller
Parris H. Holmes, Jr. 53 Vice Chairman of the Board (1)(2)(3)
Gordon H. Matthews 60 Director (1)
Alan H. Portnoy 51 Director (1)
James E. Sowell 48 Director (2)(3)
Theodore W. Van Duyn 48 Director (2)(3)
- -----------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Committee.
The following are biographies of the Company's executive officers,
directors and key employees for the past five years.
MARK C. HOLLIDAY joined the Company as President, Chief Executive Officer
and a Director in February 1994 and was elected Chairman of the Board in March
1994. Mr. Holliday has over 20 years of computer industry experience in large
multinational companies as well as new ventures in computer software
development, most recently with BMC Software, Inc., a software development
company, where he served as director of research and development from March 1988
to February 1994.
GARY W. PANKONIEN was appointed President and Chief Operating Officer of
the Company after the acquisition of 1st Tech and DarkHorse in May 1996 and
elected a Director in July 1996. Prior to 1st Tech's acquisition by the
Company, Mr. Pankonien served as Chairman and Chief Executive Officer of 1st
Tech since its inception in January 1993 and as Chairman and Chief Executive
Officer of DarkHorse since May 1992. He was Chief Operations Officer of Stratum
Technologies, Inc., a memory module manufacturer and reseller located in Austin,
Texas, from January 1992 until August 1992, when he purchased Stratum and was
appointed Chairman of the Board and Chief Executive Officer. Stratum was
dissolved in June 1995. He was employed with Compaq Computer Corporation, a
personal computer manufacturer, from February 1984 until October 1991 as
Notebook Computer Design and Operations Manager and co-developed and currently
holds the patent for the first notebook computer.
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<PAGE>
JOE O. DAVIS, CPA, joined the Company as Senior Vice President, Chief
Financial Officer and Corporate Secretary in July 1996. Prior to joining the
Company, Mr. Davis served from June 1990 to April 1993 as Chief Financial
Officer of San Marcos Telephone Company, which was acquired by Century Telephone
Enterprises, a long distance telephone company listed on the New York Stock
Exchange and located in Monroe, Louisiana, in April 1993. He continued his
employment with Century Telephone Enterprises as Vice President of Finance and
Planning until July 1996. He has 27 years of experience in financial management
and business planning, both domestically and internationally, has served as a
member of the board of directors of various public and private companies in the
United States and Australia, and was a partner with Peat Marwick Mitchell & Co.,
now known as KPMG Peat Marwick, for three years.
CHRIS EFSTATHIOU, JR., Vice President of Materials, has more than 15 years
of experience in the electronics industry in high-tech purchasing. He joined
1st Tech in December 1994 as Vice President of Materials and the Company in May
1996 upon its acquisition of 1st Tech. Previously, Mr. Efstathiou worked from
May 1990 to December 1994 as the Director of Strategic Materials for Dell
Computer Corporation, a personal computer manufacturer. Prior to working with
Dell, he was involved for more than 10 years in high-tech purchasing, including
4 years with Advent Corporation and more than 2 years with Wang Laboratories,
Inc.
GUY L. FIELDER, Vice President of Engineering, joined the Company in
October 1996. Mr. Fielder was self-employed as an engineering consultant from
October 1991 to November 1996. He was employed with Compaq Computer Corporation
from May 1982 to October 1991, where he was the 18th employee, a member of its
start-up team and intimately involved in the formation of Compaq's organization,
structure and culture. As a senior research and development manager at Compaq,
he developed state-of-the-art portable personal computers that won numerous
industry awards and grossed over $2 billion in sales.
BENJAMIN S. MARZ, Vice President of Sales and Customer Service, joined the
Company in April 1994. Prior to joining the Company, Mr. Marz was Vice
President of Sales and Customer Service of Technology Works, Inc., a memory
manufacturing company, from February 1993 to April 1994 after serving two years
on their board. He was President of Computerland in Austin, Texas from July
1990 to February 1993 and Executive Vice President of Crown Furniture and
Jewelry from August 1984 to July 1990.
DONALD R. TURNER, CPA, Corporate Controller, joined the Company effective
upon the acquisition of 1st Tech in May 1996. He was a founding officer and
board member of 1st Tech, where he served as Vice President, Chief Financial
Officer and Secretary-Treasurer from January 1993 until the purchase by Tanisys
in May 1996. He was Controller of Stratum Technologies, Inc. from September
1992 to January 1993. Prior to joining Stratum, he was Controller of Phillips
Distribution, a San Antonio, Texas based packaging distribution company, from
March 1984 until September 1992.
PARRIS H. HOLMES, JR. has served as a Director of the Company since August
1993, having served as Chairman of the Board until March 1994, at which time he
was elected Vice Chairman of the Board. Mr. Holmes is Chairman and Chief
Executive Officer of Billing Information Concepts Corp., a
37
<PAGE>
third-party billing clearinghouse and information management services
business, and Chairman of U.S. Long Distance Corp., a telecommunications
company which he founded in 1985.
GORDON H. MATTHEWS has served as a Director of the Company since September
1994. Since June 1992, Mr. Matthews has owned and operated Matthews Voice Mail
Management, Inc., which provides voice mailboxes on a monthly rental basis for
specialized applications. He has owned and operated Matthews Communications
Systems, Inc., which tracks the pace of golf course play and increases
efficiency and net profitability of golf courses, since May 1989. In June 1996,
Mr. Matthews started a new company, Matthews Communications Management, Inc.,
which offers advanced telephone control products. He serves on the Board of
Directors of V-Tel Corporation, an Austin, Texas company specializing in
teleconferencing services.
ALAN H. PORTNOY has served as a Director of the Company since July 1996.
Since October 1996, Mr. Portnoy has served as President of Macronix America
Inc., a semiconductor manufacturing company. From January 1994 to October 1996,
he served as President of Galactic Enterprises, Inc., which provides corporate
development and strategic marketing services for high technology start-up
companies and multinational corporations in the semiconductor, computer and
communications fields. From September 1987 to January 1994, he was Executive
Vice President and Chief Operating Officer of Goldstar America, Inc., a
subsidiary of the Lucky-Goldstar Group, a Korean conglomerate.
JAMES E. SOWELL has served as a Director of the Company since May 1995 and
is the founder of Jim Sowell Construction Co., Inc., which began in 1972
primarily for single-family home construction. Since 1972, the company has
expanded its scope of operations and ownership to include land development,
income property development, financial institutions, country club and golf
course operations and ownership, hotel and restaurant ownership and operations,
as well as interests in major corporations. Mr. Sowell has served as a Director
of the Company since 1995 and also is a Director of Billing Information Concepts
Corp. He was Chairman of the Board of Business Capital Corporation ("BCC"),
Arlington Golf Club, Inc. ("AGC") and Sable Homes, Inc. ("SHI") and a general
partner of SBS Venture ("SBS"). All of these entities filed petitions for
relief under the U.S. Bankruptcy Code--BCC in March 1991 (emerged in January
1992), AGC in April 1992 (dismissed in January 1993), SHI in September 1993
(liquidated in December 1993) and SBS in September 1991 (petition withdrawn in
December 1991).
THEODORE W. VAN DUYN has served as a Director since March 1994. Mr. Van
Duyn has been Chief Technology Officer for BMC Software, Inc. since February
1993. He joined BMC Software, Inc. in 1985 as Director of Research and served
as Senior Vice President, Research and Development, from 1986 until assuming his
current position.
All directors hold office for their elected term or until their successors
are duly elected and qualified. If a director should be disqualified or unable
to serve as a director, the vacancy so arising may be filled by the Board of
Directors for the unexpired portion of his term. All officers serve at the
discretion of the board of Directors. There are no family relationships between
members of the Board of Directors or any executive officers of the Company.
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<PAGE>
COMMITTEES AND BOARD COMPENSATION
The Board of Directors conducts its business through meetings of the Board
of Directors and through its committees. In accordance with the Bylaws of the
Company, the Board of Directors has established a Compensation Committee, an
Audit Committee and a Stock Option Committee. The Board of Directors does not
currently utilize a nominating committee or committee performing similar
functions.
COMPENSATION COMMITTEE
The Compensation Committee reviews and makes recommendations to the Board
of Directors concerning major compensation policies and compensation of officers
and executive employees. This committee is comprised of Directors Holmes,
Sowell and Van Duyn.
AUDIT COMMITTEE
The Audit Committee acts on behalf of the Board of Directors with respect
to the Company's financial statements, record-keeping, auditing practices and
matters relating to the Company's independent public accountants, including
recommending to the Board of Directors the firm to be engaged as independent
public accountants for the next fiscal year; reviewing with the Company's
independent public accountants the scope and results of the audit and any
related management letter; consulting with the independent public accountants
and management with regard to the Company's accounting methods and the adequacy
of its internal accounting controls; approving professional services by the
independent public accountants; and reviewing the independence of the
independent public accountants. The Audit Committee is comprised of Directors
Holmes, Matthews and Portnoy.
DIRECTORS' COMPENSATION
Directors are not paid a fee for attending Board of Director or committee
meetings, but are reimbursed for their travel expenses to and from the meetings.
Outside directors were granted stock options under the Company's 1993 Stock
Option Plan at the time of their election or appointment to the Board of
Directors from April 1994 until January 1997, when the Board of Directors
approved the Company's 1997 Non-Employee Director Plan. See "Item 6. Executive
Compensation--Benefit Plans--1997 Non-Employee Director Plan."
ITEM 6. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth information concerning
compensation of the Company's Chief Executive Officer and each of the two other
most highly compensated executive officers of the Company whose aggregate cash
compensation exceeded $100,000 (collectively, the "Named Executive Officers")
for each of the three fiscal years ended September 30, 1996, 1995 and 1994:
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
FISCAL ------------------- SECURITIES UNDER
PRINCIPAL POSITION YEAR SALARY($) BONUS OPTIONS/SARS GRANTED(#))
------------------ ---- --------- ------ ------------------------
<S> <C> <C> <C> <C>
Mark C. Holliday 1996 $127,341 $ 0 100,000
Chairman of the Board 1995 125,000 0 110,000
and Chief Executive Officer 1994 62,500(1) 0 200,000
Gary W. Pankonien 1996 95,336 66,664 150,000
President and 1995 N/A N/A N/A
Chief Operating Officer 1994 N/A N/A N/A
Benjamin S. Marz 1996 103,262 0 0
Vice President of Sales 1995 102,000 0 0
and Customer Service 1994 40,625(2) 0 100,000
</TABLE>
- -------------------
1) Amount shown reflects Mr. Holliday's salary from February 14, 1994, the
beginning date of his employment with the Company, through the end of
fiscal 1994.
(2) Amount shown reflects Mr. Marz's salary from April 18, 1994, the beginning
date of his employment with the Company, through the end of fiscal 1994.
STOCK OPTION GRANTS
The following table provides information related to stock options granted
to the named executive officers during fiscal 1996 and the first three months of
fiscal 1997:
<TABLE>
INDIVIDUAL GRANTS
------------------------------ POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(2)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(#)(1) 1996 ($/SH) DATE 5%($) 10%($)
- ----------------- ------------- ----------- -------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Mark C. Holliday 100,000 12.3% $3.62 3/27/01 $100,014 $221,005
Gary W. Pankonien 150,000 18.5% 3.69 5/09/01 152,922 337,917
Benjamin S. Marz 0 - - - - -
</TABLE>
- -------------------
(1) For each named executive officer, the option listed represents a grant
under the Company's 1993 Stock Option Plan. See "Executive Compensation--
Employee Benefit Plans--1993 Stock Option Plan." The options granted in
1996 are exercisable one-third on each of the three anniversaries following
the date of grant.
(2) Calculation based on stock option exercise price over period of option
assuming annual compounding. The columns present estimates of potential
values based on certain mathematical assumptions. The actual value, if
any, that an executive officer may realize is dependent upon the market
price on the date of option exercise.
40
<PAGE>
AGGREGATED STOCK OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION
VALUES
The following table provides information related to stock options exercised
by the named executive officers during the 1996 fiscal year and the number and
value of options held at fiscal year end. The Company does not have any
outstanding stock appreciation rights.
<TABLE>
INDIVIDUAL GRANTS
---------------------- NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE(1) OF UNEXERCISED
ACQUIRED OPTIONS AT FY END(#) IN-THE-MONEY
UPON OPTION VALUE -------------------------- OPTIONS AT FY END($)
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark C. Holliday 0 N/A 169,999 240,001 $329,032 $253,068
Gary W. Pankonien 0 N/A 0 150,000 N/A 39,000
Benjamin S. Marz 0 N/A 66,666 33,334 189,998 95,002
</TABLE>
- -------------------
(1) Market value of the underlying securities at September 30, 1996 ($3.95),
minus the exercise price.
EMPLOYEE BENEFIT PLANS
401(k) RETIREMENT PLAN
On May 21, 1996, the effective date of the Company's acquisition of 1st
Tech, the Company adopted the 1st Tech 401(k) Plan (the "401(k) Plan").
Participation in the 401(k) Plan is offered to eligible employees of the Tanisys
Group (collectively, the "Participants"). Generally, all employees of the
Tanisys Group who are 21 years of age and who have completed six months of
service during which they worked at least 500 hours are eligible for
participation in the 401(k) Plan.
The 401(k) Plan is a form of defined contribution plan that provides that
Participants generally may make voluntary salary deferral contributions, on a
pre-tax basis, of between 1% and 15% of their base compensation in the form of
voluntary payroll deductions up to a maximum amount as indexed for cost-of-
living adjustments ("Voluntary Contributions"). Since its adoption of the
401(k) Plan, the Company has not made any matching contributions, but may elect
in the future to make matching contributions of up to 100% of the first 6% of a
Participant's compensation contributed as salary deferral.
STOCK OPTION PLANS
1993 STOCK OPTION PLAN.
ADMINISTRATION OF THE PLAN. The Company's 1993 Stock Option Plan (as
thereafter amended, the "1993 Option Plan") is administered by a committee (the
"Stock Option Committee") of three members
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<PAGE>
of the Board of Directors. The Stock Option Committee currently consists of
three non-employee members of the Board of Directors, Parris H. Holmes, Jr.,
James E. Sowell and Theodore W. Van Duyn. The 1993 Option Plan grants broad
authority to the Stock Option Committee to grant options to key employees and
consultants selected by the Stock Option Committee; to determine the number
of shares subject to options; the exercise or purchase price per share,
subject to VSE requirements; the appropriate periods and methods of exercise
and requirements regarding the vesting of options; whether each option
granted shall be an incentive stock option ("ISO") or a non-qualified stock
option ("NQSO") and whether restrictions such as repurchase options are to be
imposed on shares subject to options and the nature of such restrictions, if
any. In making such determinations, the Stock Option Committee may take into
account the nature and period of service of eligible participants, their
level of compensation, their past, present and potential contributions to the
Company and such other factors as the Stock Option Committee in its
discretion deems relevant.
The 1993 Option Plan further directs the Stock Option Committee to set
forth provisions in option agreements regarding the exercise and expiration of
options according to stated criteria. The Stock Option Committee oversees the
methods of exercise of options, with attention being given to compliance with
appropriate securities laws and regulations.
The options have certain anti-dilution provisions and are not assignable or
transferable, other than by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order. During the lifetime of an
optionee, the options granted under the 1993 Option Plan are exercisable only by
the optionee or his or her guardian or legal representative. The Company or its
subsidiaries may not make or guarantee loans to individuals to finance the
exercise of options under the 1993 Option Plan. The duration of options granted
under the 1993 Option Plan cannot exceed ten years (five years with respect to a
holder of 10% or more of the Company's shares in the case of an ISO).
GENERAL. The 1993 Option Plan was approved by the Company's stockholders
on March 31, 1994 and adopted by the Board of Directors on October 25, 1993.
The purposes of the 1993 Option Plan are to advance the best interests of the
Tanisys Group by providing its employees and consultants who have substantial
responsibility for the Tanisys Group's management, success and growth, with
additional incentive and to increase their proprietary interest in the success
of the Tansiys Group, thereby encouraging them to remain in the Tanisys Group's
employ or service.
The 1993 Option Plan provides for the grant of ISOs, under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and stock options
that do not qualify under Section 422 of the Code ("NQSOs"). The option price
for ISOs may not be less than 100% of the fair market value of the Common Stock
on the date of grant, or 100% of fair market value with respect to any ISO
issued to a holder of 10% or more of the Company's shares. The exercise price
of NQSOs also is limited to the fair market value of the Common Stock on the
date of grant. Common Stock issued under the 1993 Option Plan may be newly
issued or treasury shares. The 1993 Option Plan does not permit the use of
already owned Common Stock as payment for the exercise price of options. If any
option granted under the 1993 Option Plan terminates, expires or is surrendered,
new options may thereafter be granted covering such shares.
42
<PAGE>
Under the terms of the 1993 Option Plan, 2,600,000 shares of Common Stock
have been reserved for the granting of options. At February 28, 1997, options
to purchase 1,909,900 shares had been granted under the 1993 Option Plan,
leaving 690,100 shares available for future grants under the 1993 Option Plan.
In addition, at February 28, 1997, options to purchase 142,500 shares
("compensation contract options") had been granted outside the 1993 Option Plan,
prior to its adoption. The compensation contract options vested one third on
each of the first three anniversaries of the date of grant, are exercisable for
five years after the date of grant and included grants of options for 45,000
shares each to three non-employee directors of the Company and 20,000 shares to
a design engineer employed by the Company. The exercise price for each of the
compensation contract option grants represents the average closing price of the
Common Stock as quoted on the VSE for the two-week trading period preceding the
date of grant.
AMENDMENT AND TERMINATION OF THE 1993 OPTION PLAN. The 1993 Option Plan
terminates on October 24, 2003. The Stock Option Committee is authorized to
amend or terminate the 1993 Option Plan at any time, except that it is not
authorized without stockholder approval (except with regard to adjustments
resulting from changes in capitalization) to (i) increase the aggregate number
of shares which may be issued under options pursuant to the provisions of the
1993 Option Plan; (ii) reduce the option price at which an ISO may be granted to
an amount less than the fair market value per share at the time such option is
granted; (iii) change the class of employees eligible to receive options; (iv)
materially modify the requirements as to affiliate eligibility for participation
in the 1993 Option Plan; (v) materially increase the benefits accruing to
participants under the 1993 Option Plan; or (vi) effect an amendment that would
cause ISOs issued pursuant to the 1993 Option Plan to fail to meet the
requirements of "incentive stock options" as defined in Section 422 of the Code,
provided, however, that the Stock Option Committee shall have the power to make
such changes in the 1993 Option Plan and in the regulations and administrative
provisions thereunder or in any outstanding option as in the opinion of counsel
for the Company may be necessary or appropriate from time to time to enable any
ISOs granted pursuant to the Plan to continue to qualify as "incentive stock
options" under the Code and the regulations which may be issued thereunder as in
existence from time to time.
1997 NON-EMPLOYEE DIRECTOR PLAN.
ADMINISTRATION OF THE PLAN. The Company's 1997 Non-Employee Director Plan
(the "Director Plan") is administered by the Board of Directors. The Director
Plan authorizes the granting of nonqualified options to eligible persons.
GENERAL. The Director Plan was adopted by the Company's Board of Directors
on January 15, 1997. Prior to this date, non-employee directors were granted
options under the 1993 Option Plan. The purpose of the plan is to advance the
interests of the Company by providing an additional incentive to attract and
retain qualified and competent directors, upon whose efforts and judgment the
success of the Company is largely dependent, through the encouragement of stock
ownership in the Company by such persons.
The Director Plan authorizes the granting to non-employee directors
(totaling five eligible individuals at February 28, 1997) of nonqualified
options ("Director Options") exercisable for the
43
<PAGE>
purchase of 25,000 shares of Common Stock on the date they are elected or
appointed to the Board of Directors, whether at the annual meeting of
stockholders or otherwise, at an exercise price equal to the fair market
value of the Common Stock on the date such non-employee director is elected
or appointed. In addition, upon their re-election, each non-employee
director receives, on the first business day after the date of each annual
meeting of stockholders of the Company, commencing with the annual meeting of
stockholders immediately following the full vesting of any previously granted
Director Option, a Director Option to purchase an additional 25,000 shares of
Common Stock at an exercise price per share equal to the fair market value of
the Common Stock on the date of grant. In each case, such Director Options
vest in three equal portions over three years from the first date of the
individual's service to the Company as a director or date of grant, as the
case may be, and are exercisable for a period of five years from the date of
grant.
The Director Plan also provides for the granting of discretionary options
("Discretionary Options") from time to time by the Board of Directors to any
non-employee director of the Company. The Discretionary Options will vest
according to the vesting schedule determined by the Board of Directors and will
expire five years from the date of grant. At least six months must elapse from
the date of the acquisition of the Discretionary Option to the date of
disposition of the Director Fee Option (other than upon exercise or conversion)
or its underlying Common Stock.
Common Stock issued under the Director Plan may be newly issued or treasury
shares. Already owned Common Stock may be used as payment for the exercise
price of options if approved by the Board of Directors at the time of exercise.
If any option granted under the Director Plan terminates, expires or is
surrendered, new options may thereafter be granted covering such shares.
Under the terms of the Director Plan, 800,000 shares of Common Stock
(subject to certain adjustments) have been reserved for issuance upon exercise
of Director Options and Discretionary Options, including options for 287,500
shares previously granted to current outside directors under the 1993 Option
Plan. At February 28, 1997, no options had been granted under the Director Plan
except for the 287,500 shares previously granted under the 1993 Option Plan.
Options, once granted and to the extent vested and exercisable, will remain
exercisable throughout their term, except that the unexercised portion of a
Director Option will terminate 30 days after the date an optionee ceases to be a
director for any reason other than death, in which case the Director Option will
terminate one year after the optionee's death or six months after the optionee's
death if the death occurs during the 30-day period referenced above.
TERMINATION OF THE DIRECTOR PLAN. The Director Plan terminates on January
15, 2007, and any Director Option or Discretionary Option outstanding on such
date will remain outstanding until it has either expired or been exercised.
EMPLOYMENT AGREEMENTS
Effective February 15, 1994 and April 18, 1994, the Company entered into
employment agreements with Mr. Holliday and Mr. Marz, respectively, with a term
of one year, after which they continue on a month-to-month basis until
terminated by the Company or the employee upon 120 days'
44
<PAGE>
notice as provided therein. Pursuant to the terms of the employment
agreements, annual base salaries are $127,341 for Mr. Holliday and $103,262
for Mr. Marz.
The Company entered into an employment agreement with Gary W. Pankonien
effective May 21, 1996 with a term of two years and automatic annual renewals if
mutually agreed upon by the Company and the employee. The Company or the
employee may terminate the agreement upon giving notice at least 30 days prior
to the expiration of the then current term. Pursuant to the terms of the
employment agreement, Mr. Pankonien's annual base salary is $125,000. In
addition, he will be paid minimum bonuses of $200,000 and $150,000 payable pro
rata on a monthly basis during the first and second years of employment,
respectively. In the event the employment relationship is terminated by the
Company during the initial two-year term, other than for "cause" as defined
therein, the employee is entitled to receive, within 45 days of such
termination, salary, bonus and other benefits which would have been payable for
a 24-month period based on amounts in effect on the termination date, but in no
event less than a total of $300,000. The agreement also provides that in the
event his employment is terminated, Mr. Pankonien will continue to be a Director
of the Company as long as he beneficially owns at least 1,000,000 shares of
Common Stock he received as consideration for the acquisition by the Company of
1st Tech.
Effective July 11, 1996, the Company entered into an employment agreement
with Joe Davis with a term of one year, after which the agreement continues on a
month-to-month basis until terminated by the Company or the employee upon 120
days' notice as provided therein. Pursuant to the terms of the employment
agreement, Mr. Davis' annual base salary is $115,000 and he was granted a stock
option under the 1993 Option Plan, exercisable over a five-year period, for the
purchase of an aggregate of 120,000 shares of Common Stock at $3.13 per share.
The shares underlying the option vest one-third on each of the first three
anniversaries of the grant date.
The Company entered into an employment agreement with Guy Fielder effective
October 11, 1996. The employment agreement has a one-year term after which it
continues on a month-to-month basis until terminated by the Company or the
employee upon 120 days' notice as provided therein. Pursuant to the terms of the
employment agreement, Mr. Fielder's annual base salary is $96,000 and he was
granted a stock option under the 1993 Option Plan, exercisable over a five-year
period, for the purchase of an aggregate of 100,000 shares of Common Stock at
$4.17 per share. The shares underlying the option vest one-third on each of the
first three anniversaries of the grant date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Directors Holmes, Sowell and Van Duyn comprise the Compensation Committee
of the Board of Directors of the Company.
Parris H. Holmes, Jr., Vice Chairman of the Board and a member of the
Audit, Compensation and Stock Option Committees, is Chairman of the Board and
Chief Executive Officer of Billing Information Concepts Corp. and is Chairman of
the Board of U.S. Long Distance Corp.
45
<PAGE>
James E. Sowell, a Director of the Company and a member of the Compensation
and Stock Option Committees, is a Director and serves on the Audit and
Compensation Committees of Billing Information Concepts Corp.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Upon the closing of the acquisitions of 1st Tech and DarkHorse on May 21,
1996, Parris H. Holmes, Jr., Vice Chairman of the Company's Board of Directors,
was paid a consulting bonus fee of 207,500 shares of Common Stock, representing
5% of the aggregate shares of Common Stock issued in connection with such
acquisitions. These shares were issued in payment for services rendered in
connection with the acquisitions, including consulting and negotiation
strategies. Based on the closing price of the Common Stock on May 21, 1996, the
value of these shares was $871,500.
Upon the acquisitions of 1st Tech and DarkHorse by the Company on May 21,
1996, Gary W. Pankonien, the principal stockholder of 1st Tech and one of the
principal stockholders of DarkHorse, was issued an aggregate of 1,995,000 shares
of Common Stock in exchange for shares of 1st Tech and DarkHorse owned by him.
The 1,995,000 shares had a total value of $8,379,000 based on the closing price
of the Common Stock on May 21, 1996. Mr. Pankonien also was granted a stock
option under the 1993 Option Plan, exercisable over a five-year period, for the
purchase of an aggregate of 150,000 shares of Common Stock at $3.69 per share.
The shares underlying the option vest one-third on each of the first three
anniversaries of the grant date. In connection with the acquisitions, Mr.
Pankonien was granted the right to designate two individuals for appointment to
the Company's Board of Directors and to name an advisory director. Mr.
Pankonien and Alan Portnoy were appointed Directors, and Archer Lawrence became
an advisor to the Board of Directors, in July 1996.
On May 21, 1996, 1st Tech purchased a Quad QSP-2 High Speed Fine Pitch
Surface Mount Assembly System from Gary Pankonien for $225,000. Previously,
this equipment had been leased by Mr. Pankonien. The purchase price represented
the fair market value of the equipment, and the price and terms are similar to
what could have been obtained from a third party.
Since the May 21, 1996 effective date of the Company's acquisition of 1st
Tech, the Tanisys Group has paid $10,000 to 1st Tech Molding, Inc., a private
company owned 45% by Mr. Pankonien, as payment for plastic packaging products
required for various products manufactured by the Tanisys Group. In addition,
the Tanisys Group has paid 1st Tech Molding, Inc. $25,000 as an advance for
product currently being produced for DarkHorse but not yet invoiced by 1st Tech
Molding, Inc. The prices and terms are similar to what could have been obtained
from a third party.
The Company paid a fee for consulting services of 45,555 shares of Common
Stock to Parris H. Holmes, Jr. upon the closing of its $1,600,000 equity
financing effective December 20, 1995, which shares had a total value of $91,110
based on the closing price of the Common Stock on December 20, 1995.
On October 3, 1994, the Company has entered into a Consulting Contract with
Mr. Holmes for services outside his responsibility as a member of the Company's
Board of Directors, including assisting with financial planning, capital
structure and development of corporate strategy. The contract was
46
<PAGE>
amended on June 22, 1995. During fiscal year 1996, Mr. Holmes was paid
$8,000 per month from October 1995 through May 1996 with a final payment of
$3,000 for June 1996. A total of $67,000 was paid to Mr. Holmes under this
Consulting Contract.
Since June 1, 1996, the Tanisys Group has reimbursed Mr. Holmes $49,913 for
expenses incurred in connection with issues involving corporate finance,
business operations and business opportunities.
ITEM 8. 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.
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<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Since March 20, 1995, the Common Stock has been traded on the VSE under
the symbol "TNS.U," with prices quoted in U.S. dollars. From July 11, 1994
to March 19, 1995, the Common Stock was traded on the VSE under the symbol
"TNS," with prices quoted in Canadian dollars. From July 7, 1993 to July 10,
1994, the Common Stock was traded under the symbol "RSG," with prices quoted
in Canadian dollars. In January 1993, the Company voluntarily deemed itself
inactive and its Common Stock did not trade until July 7, 1993.
The table below sets forth the high and low closing prices of the Common
Stock from October 1, 1994 through March 7, 1997, as reported by the VSE.
These price quotations reflect interdealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual
transactions.
COMMON STOCK
---------------
QUARTER ENDED HIGH LOW
------------- ----- -----
FISCAL 1995:
December 31, 1994(1) $3.54 $2.22
March 31, 1995(2) 5.24 2.95
June 30, 1995 3.95 2.05
September 30, 1995 3.80 1.85
FISCAL 1996:
December 31, 1995 $3.00 $1.70
March 31, 1996 4.90 2.45
June 30, 1996 5.20 3.25
September 30, 1996 4.20 2.50
FISCAL 1997:
December 31, 1996 $6.25 $3.50
January 1 through
March 7, 1997 $5.35 $3.25
- -------------------
(1) Closing prices were quoted in Canadian dollars during this quarter,
converted at a rate of .73 per $1.00 Cdn. on December 5, 1994 (high for the
quarter) and .74 per $1.00 Cdn. on October 26, 1994 (low for the quarter).
(2) Closing prices were quoted in Canadian dollars through March 17, 1995,
converted at a rate of .71 per $1.00 Cdn. on February 16, 1995 (high for
the quarter).
48
<PAGE>
HOLDERS
On March 7, 1997, the closing price of the Common Stock on the VSE was
$3.35 per share. At March 7, 1997, there were 248 registered holders of
record of the Common Stock, and the number of beneficial holders was unknown.
DIVIDENDS
To date, the Company has not declared or paid any dividends with respect
to the Common Stock, and the current policy of the Board of Directors is to
retain earnings, if any, to provide for the growth of the Company's business.
Consequently, no cash dividends are expected to be paid on the Common Stock
in the foreseeable future. Further, there can be no assurance that the
proposed operations of the Company will generate the revenue and cash flow
needed to declare a cash dividend or that the Company will have legally
available funds to pay dividends at any time in the future. In addition, the
Company's bank borrowings prohibit the payment of cash dividends.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The Company believes that the transactions set forth below were exempt
from registration under the Securities Act by reason of Section 4(2) of the
Securities Act. In connection with each of these transactions, the shares
were sold to a limited number of persons, all of whom were accredited
investors as defined by Item 501 of Regulation D of the Securities and
Exchange Commission (the "Commission"), such persons were provided access to
all relevant information regarding the Company and/or represented to the
Company that they were "sophisticated" investors, and such persons
represented to the Company that the shares were purchased for investment
purposes only and with no view to distribution. Restrictive legends were
placed on all stock certificates.
On August 24, 1994, the Company sold an aggregate of 1,500,000 shares of
Common Stock to 13 accredited investors for cash at an offering price of
$1.00 per share. These purchasers also received nontransferable Class A
Stock Purchase Warrants (the "Class A Warrants") to purchase an aggregate of
1,500,000 shares of Common Stock. Each Class A Warrant entitled the holder
thereof to purchase, at any time until August 31, 1995, one share of Common
Stock at an exercise price of $1.00, subject to adjustment. If the Class A
Warrants were not exercised during such period, each Class A Warrant entitled
the holder thereof to purchase, at any time from September 1, 1995 until
August 31, 1996, one share of Common Stock at an exercise price of $1.25,
subject to adjustment. All of the Class A Warrants were exercised prior to
their expiration date of August 31, 1996.
On May 8, 1995, the Company sold an aggregate of 900,000 shares of
Common Stock to 11 accredited investors for cash at an offering price of
$2.00 per share. The purchasers also received nontransferable Class B Stock
Purchase Warrants (the "Class B Warrants"). Each Class B Warrant entitled
the holder thereof to purchase, at any time until May 8, 1996, one share of
Common Stock at an exercise price of $2.00, subject to adjustment. If the
Class B Warrants were not exercised during such period, each Class B Warrant
entitles the holder thereof to purchase, at any time from May 9, 1996 until
May 8, 1997, one share of Common Stock at an exercise price of $2.30, subject
to adjustment.
49
<PAGE>
Following May 8, 1997, the Class B Warrants will no longer be exercisable and
will have no value. At February 28, 1997, Class B Warrants have been
exercised for the purchase an aggregate of 115,000 shares of Common Stock.
In October 1995, a warrant granting the right to acquire 34,000 shares
of Common Stock for a period of two years was issued to W. Audie Long, Esq.,
an unaffiliated party, as payment for legal services rendered. The warrant
entitled the holder to purchase, at any time until October 12, 1996, one
share of Common Stock at an exercise price of $2.00 per share, subject to
adjustment, and if not exercised during such period, entitles the holder to
purchase at any time until October 13, 1997, one share of Common Stock at an
exercise price of $2.25 per share, subject to adjustment. Following October
13, 1997, this warrant will no longer be exercisable and will have no value.
At February 28, 1997, the warrant had not been exercised.
In December 1995, the Company sold an aggregate of 941,177 shares of
Common Stock to 11 accredited investors for cash at an offering price of
$1.70 per share. The purchasers also received nontransferable Class C Stock
Purchase Warrants (the "Class C Warrants"). Each Class C Warrant entitled
the holder to purchase, at any time until December 20, 1996, one share of
Common Stock at an exercise price of $1.70 per share, subject to adjustment.
If the Class C Warrants have not been exercised during such period, each
Class C Warrant entitles the holder to purchase, at any time from December
21, 1996 until December 20, 1997, one share of Common Stock at an exercise
price of $1.95 per share, subject to adjustment. Following December 20,
1997, the Class C Warrants will no longer be exercisable and will have no
value. At February 28, 1997, Class C Warrants have been exercised for the
purchase an aggregate of 544,118 shares of Common Stock.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company currently consists of
50,000,000 shares of no par value Common Stock and 10,000,000 shares of
preferred stock, par value $1.00 per share (the "Preferred Stock"), which is
subject to designation and issuance by the Board of Directors in the future.
On February 28, 1997, there were 16,635,155 shares of Common Stock
outstanding and held of record by approximately 248 registered stockholders,
and the number of beneficial holders was unknown. There are currently no
outstanding shares of Preferred Stock. At February 28, 1997, there were a
total of 3,555,959 shares of Common Stock reserved for issuance upon exercise
of outstanding stock options under the 1993 Option Plan, compensation
contract options and the Warrants. See "Executive Compensation--Employee
Benefit Plans" and "Warrants" below.
COMMON STOCK
Holders of Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors from funds legally available therefor.
See "Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters - Dividend Policy." Each share of Common
Stock entitles the holder thereof to one vote upon matters voted upon by the
stockholders.
50
<PAGE>
Cumulative voting for the election of directors is not permitted, which means
that the holders of a majority of shares voting for the election of directors
can elect all members of each class of the Board of Directors. Except as
otherwise required by applicable Wyoming law, a majority vote is sufficient
for any action that requires the vote or concurrence of stockholders, except
that a plurality vote is sufficient to elect directors.
The holders of Common Stock do not have any preemptive, subscription,
redemption or conversion rights or privileges. Upon liquidation or
dissolution of the Company, the holders of Common Stock are entitled to share
ratably in the net assets of the Company remaining after payment of
liabilities and liquidation preferences of any outstanding shares of
Preferred Stock. All shares of Common Stock now outstanding are fully paid
and non-assessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series, without further stockholder approval or
action, with such designations, powers, limitations, restrictions,
qualification, rights, preferences and privileges as the Board of Directors
may determine.
WARRANTS
The Company currently has outstanding three series of Warrants to
purchase Common Stock. The Class B and Class C Warrants were issued to
investors purchasing shares of Common Stock in equity financings closed
effective August 24, 1994 and December 20, 1995, respectively. In addition,
a warrant was issued in October 1995 to W. Audie Long, Esq., an unaffiliated
party, in payment of legal fees. The Class B Warrants, the October 1995
warrant and the Class C Warrants are referred to herein as the "Warrants."
CLASS B WARRANTS. A total of 900,000 Class B Warrants were issued in
May 1995 in connection with the Company's $1,800,000 equity financing. Each
Class B Warrant entitled the holder thereof to purchase, at any time until
May 8, 1996, one share of Common Stock at an exercise price of $2.00 per
share, subject to adjustment. Class B Warrants not exercised as of May 8,
1996 entitle the holders thereof to purchase, at any time from May 9, 1996
until May 8, 1997, one share of Common Stock at an exercise price of $2.30,
subject to adjustment. Following May 8, 1997, the Class B Warrants will no
longer be exercisable and will have no value. At February 28, 1997, Class B
Warrants have been exercised for the purchase of 15,000 shares of Common
Stock at $2.00 per share and 100,000 shares at $2.30 per share.
OCTOBER 1995 WARRANT. In October 1995, a warrant granting the right to
acquire 34,000 shares of Common Stock for a period of two years was issued to
W. Audie Long, Esq., an unaffiliated party, in payment for legal services
rendered. This warrant entitled the holder to purchase, at any time until
October 12, 1996, one share of Common Stock at an exercise price of $2.00 per
share, subject to adjustment, and if not exercised during such period,
entitles the holder to purchase at any time until October 13, 1997, one share
of Common Stock at an exercise price of $2.25 per share, subject to
adjustment. Following October 13, 1997, this warrant will no longer be
exercisable and will have no value. At February 28, 1997, this warrant had
not been exercised.
51
<PAGE>
CLASS C WARRANTS. A total of 941,177 Class C Warrants were issued as of
December 1995 in connection with the Company's $1,600,000 equity financing.
Each Class C Warrant entitles the holder thereof to purchase, at any time
until December 20, 1996, one share of Common Stock at an exercise price of
$1.70 per share, at any time until December 20, 1996, subject to adjustment.
If the Warrants have not exercised, then for the period December 21, 1996 to
December 20, 1997, each Class C Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $1.95 per share, subject to
adjustment. At February 28, 1997, Class C Warrants have been exercised for
the purchase of 544,118 shares Common Stock at $1.70 per share.
The Warrants may be exercised in whole only upon surrender of the
Certificate therefor on or prior to the expiration dates at the offices of
the Company with the Exercise Form attached to the certificate duly completed
and executed, accompanied by payment (in the form of cash or certified or
bank cashier's check payable to the order of the Company) of the full
exercise price.
The Warrants contain provisions that provide for adjustment of the
exercise price in the event the outstanding shares of Common Stock shall be
subdivided into a greater number of shares, a non-cash dividend in Common
Stock shall be paid in respect of Common Stock or the outstanding shares of
Common Stock shall be combined into a smaller number of shares thereof.
The Company is not required to issue fractional shares, and in lieu
thereof, will make a cash payment based upon the current estimated fair
market value of such fractional shares. The registered owner of a Warrant
will not possess any rights as a stockholder of the Company unless and until
the Warrant is exercised. Upon the respective expiration date of the
Warrants, they will no longer be exercisable for shares of Common Stock and
will not have any value.
TRANSFER AGENT. The Company's transfer agent and registrar is Montreal
Trust Company of Canada, Vancouver, B.C., Canada.
CERTAIN PROVISIONS OF THE ARTICLES AND THE BYLAWS
Certain provisions in the Articles and Bylaws and the Wyoming Business
Corporation Act (the "WBCA") could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to first negotiate with the Company. The
Company believes that the benefits of increased protection of the Company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantage of discouraging third party proposals that may be favored by
some stockholders because, among other things, negotiation of such proposals
could result in an improvement of their terms.
CLASSIFIED BOARD OF DIRECTORS. The Articles and the Bylaws provide that
the Board of Directors is divided into three classes of directors, each
containing, as nearly as possible, an equal number of directors. Directors
within each class are elected to serve three-year terms, and approximately
one-third of the directors sit for election at each annual meeting of the
Company's stockholders. A classified
52
<PAGE>
board of directors may have the effect of deterring or delaying any attempt
by any group to obtain control of the Company by a proxy contest because such
third party would be required to have its nominees elected at two separate
annual meetings of the Board of Directors in order to elect a majority of the
members of the Board of Directors. The Bylaws provide that the number of
directors will be fixed from time to time exclusively by the Board of
Directors but shall consist of not more than 15 nor less than 3 directors.
The Company's Bylaws allow the Board of Directors to increase the number of
directors from time to time and to fill any vacancies on the Board of
Directors, including vacancies resulting from an increase in the number of
directors. This provision gives the Board of Directors flexibility to deal
with an attempted hostile takeover by a stockholder who may acquire a
majority voting interest in the Company without paying a premium therefor.
This provision allows the Board of Directors to increase its size and prevent
a "squeeze-out" of any remaining minority interest soon after a new majority
stockholder gains control over the Company. However, the Company's Bylaws
permit the removal of a director with or without cause.
PREFERRED STOCK. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company, making
removal of present management more difficult, or resulting in restrictions
upon the payment of dividends and other distributions to the holders of the
Common Stock or adversely affecting the market price of the Common Stock. In
addition, the voting and conversion rights of any class or series of
Preferred Stock issued by the Company could adversely affect, among other
things, the voting rights of existing stockholders.
STOCK OPTIONS. The Company's 1993 Option Plan provides that in the
event of a change in control of the Company, the Stock Option Committee may
waive vesting limitations to provide that all options then outstanding shall
be exercisable in full. For the purposes of the 1993 Option Plan, a "change
in control" of the Company shall mean a change in control of a nature that is
reportable in response to Item 5(f) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") as
in effect on the date hereof, provided that, without limitation, such a
change in control shall be deemed to have occurred if: (i) any "person" (as
such term is used in the Exchange Act) that does not own, directly or
indirectly, any shares of the Company's capital stock on the date of adoption
of the 1993 Option Plan is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities; or (ii)
during any period of two consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Company cease for any
reason to constitute at least a majority thereof.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws provide that the Company shall indemnify any and
all persons who may serve or who have served at any time as directors or
officers, or who at the request of the Board of Directors of the Company may
serve or at any time have served as directors or officers of another
corporation in which the Company at such time owned or may own shares of
stock or of which it was or may be a creditor, and their respective heirs,
administrators, successors and assigns, against any and all expenses,
including amounts paid upon judgments, counsel fees and amounts paid in
settlement (before or after suit is commenced), actually and necessarily
incurred by such persons in connection with the defense or settlement of any
claim, action, suit or proceeding in which they, or any of them, are made
53
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parties, or a party, or which may be asserted against them or any of them, by
reason of being or having been directors or officers or a director or officer
of the Company, or of such other corporation, except in relation to matters
as to which any such director or officer or former director or officer or
person shall be adjudged in any action, suit or proceeding to be liable for
his own negligence or misconduct in the performance of his duty. Such
indemnification shall be in addition to any other rights to which those
indemnified may be entitled under any law, by-law, amendment, vote of
stockholders or otherwise.
LIMITATION OF LIABILITY
Article 12 of the Articles provides that no director shall be personally
liable to the Company or any shareholder for monetary damages for breach of
fiduciary duty as a director, except for any matter in respect of which such
director shall be liable under Section 17-16-834 of the Wyoming Business
Company Act (the "WBCA") or any amendment thereto or successor provision
thereto, or shall be liable by reason that, in addition to any and all other
requirements for such liability, he (i) shall have breached his duty of
loyalty to the Company or its shareholders, (ii) shall not have acted in good
faith or, in failing to act, shall not have acted in good faith, (iii) shall
have acted in a manner involving intentional misconduct or a knowing
violation of law or, in failing to act, shall have acted in a manner
involving intentional misconduct or a knowing violation of law, (iv) shall
have derived an improper personal benefit, or (v) shall have voted for or
assented to a distribution made in violation of Section 17-16-640 of the
WBCA or the Articles of the Company if it is established that he did not
perform his duties in compliance with Section 17-16-830 of the WBCA.
This provision may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter
stockholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful,
might otherwise have benefited the Company and its stockholders. However,
this provision, together with the provision described above that requires the
Company to indemnify its officers and directors against certain liabilities,
is intended to enable the Company to attract qualified persons to serve as
directors who might otherwise be reluctant to do so.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been
informed that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
NONE.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE.
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ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS. Included at the page indicated are (i) the
consolidated condensed financial statements of the Company and its wholly
owned subsidiaries, 1st Tech and DarkHorse, at December 31, 1996 and for the
three months of fiscal 1997 and 1996; (ii) the consolidated financial
statements of the Company, 1st Tech and DarkHorse at September 30, 1996 and
1995 and for the fiscal years ended September 30, 1996, 1995 and 1994 and the
related report of the Company's independent public accountants thereon; (iii)
the combined financial statements at March 31, 1996 and 1995 and for the
three months of 1996 and 1995; (iv) the combined financial statements of 1st
Tech and DarkHorse at December 31, 1995 and 1994 for the fiscal years ended
December 31, 1995, 1994 and 1993 and the related report of the Company's
independent public accountants thereon; and (v) pro forma combined statement
of operations for the Company, 1st Tech and DarkHorse for the fiscal year
ended September 30, 1996.
ITEM PAGE
---- ----
INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - December 31, 1996
(Unaudited) and September 30, 1996. . . . . . . . . . . . . . . . 58
Consolidated Condensed Statements of Loss - For the Three-Month
Periods Ended December 31, 1996 and 1995 (Unaudited). . . . . . . 59
Consolidated Condensed Statements of Cash Flows - For the
Three-Month Periods Ended December 31, 1996 and 1995 (Unaudited). 60
Notes to Interim Consolidated Condensed Financial
Statements (Unaudited). . . . . . . . . . . . . . . . . . . . . . 61
CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 1996 AND 1995
AND FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994:
Report of Independent Public Accountants as to the Company's
financial statements. . . . . . . . . . . . . . . . . . . . . . . 64
Consolidated Balance Sheets of the Company at September 30,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Consolidated Statements of Loss of the Company for the Years
Ended September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . 66
Consolidated Statements of Stockholders' Equity of the Company
for the Years Ended September 30, 1996, 1995 and 1994 . . . . . . 67
Consolidated Statements of Cash Flows of the Company for the
Years Ended September 30, 1996, 1995 and 1994 . . . . . . . . . . 68
Notes to the Company's Consolidated Financial Statements . . . . . 69
COMBINED FINANCIAL STATEMENTS AT AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 (UNAUDITED):
Combined Balance Sheets - March 31, 1996 and 1995. . . . . . . . . 80
Combined Statements of Income and Retained Earnings - For the
Three-Month Periods Ended March 31, 1996 and 1995 . . . . . . . . 82
Combined Statements of Cash Flows - For the Three-Month Periods
Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . 83
1ST TECH AND DARKHORSE COMBINED FINANCIAL STATEMENTS AT
DECEMBER 31, 1995 AND FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995,
1994 AND 1993:
Report of Independent Public Accountants as to 1st Tech's and
DarkHorse's financial statements. . . . . . . . . . . . . . . . . 85
1st Tech and DarkHorse Combined Balance Sheets at
December 31, 1995 and 1994. . . . . . . . . . . . . . . . . . . . 86
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1st Tech and DarkHorse Combined Statements of Income for the
Years Ended December 31, 1995, 1994 and 1993. . . . . . . . . . . 87
1st Tech and DarkHorse 1995 and 1994 Combined Statements of
Stockholders' Equity for the Years Ended December 31, 1995,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . 88
1st Tech and DarkHorse Combined Statements of Cash Flows for
the Years Ended December 31, 1995, 1994 and 1993. . . . . . . . . 89
Notes to Combined Financial Statements of 1st Tech and DarkHorse . 91
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE COMPANY,
1ST TECH AND DARKHORSE FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1996 (UNAUDITED). . . . . . . . . . . . . . . . . . . 98
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TANISYS TECHNOLOGY, INC.
AND SUBSIDIARIES
INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
AT DECEMBER 31, 1996 (UNAUDITED) AND SEPTEMBER 30, 1996
AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
57
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PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,794,323 $ 2,689,569
Trade accounts receivable, net of allowance of $98,450 and 6,383,341 5,069,399
$84,557, respectively
Accounts receivable from related parties 17,691 17,691
Inventory 2,043,833 1,804,458
Prepaid expense 391,159 217,570
- -----------------------------------------------------------------------------------------------
Total current assets 10,630,347 9,798,687
- -----------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation of 2,131,481 1,817,479
$1,081,516 and $906,589, respectively
Incorporation costs, net 896 1,024
Patents and trademarks, net 87,905 84,337
Goodwill, net of accumulated amortization of $3,552,333 and 7,104,665 8,436,790
$2,220,208, respectively
Other assets 84,127 84,000
- -----------------------------------------------------------------------------------------------
$ 20,039,421 $ 20,222,317
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,762,142 $ 2,920,530
Accounts payable to related parties -- 64,618
Accrued liabilities 582,621 929,376
Revolving credit note 4,445,851 3,075,000
- -----------------------------------------------------------------------------------------------
Total current liabilities 7,790,614 6,989,524
- -----------------------------------------------------------------------------------------------
Obligations under capital lease 111,059 123,000
- -----------------------------------------------------------------------------------------------
Total liabilities 7,901,673 7,112,524
- -----------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Share capital-Common stock, no par value, 50,000,000 shares 25,120,576 23,955,136
authorized, 16,626,655 and 15,978,537 shares issued and
outstanding at December 31, 1996 and September 30,
1996, respectively
Accumulated deficit (12,975,883) (10,838,398)
Accumulated foreign currency translation adjustment (6,945) (6,945)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 12,137,748 13,109,793
- -----------------------------------------------------------------------------------------------
$ 20,039,421 $ 20,222,317
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
58
<PAGE>
TANISYS TECHNOLOGY, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF LOSS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1996 1995
- -----------------------------------------------------------------------
Net sales $15,263,661 $ 83,643
Cost of goods sold 13,668,236 8,969
- -----------------------------------------------------------------------
Gross profit 1,595,425 74,674
- -----------------------------------------------------------------------
Operating expenses:
Research and development 518,708 100,611
Sales and marketing 697,986 73,053
General and administrative 906,315 298,224
Depreciation and amortization 1,456,340 18,692
- -----------------------------------------------------------------------
Total operating expenses 3,579,349 490,580
- -----------------------------------------------------------------------
Operating loss (1,983,924) (415,906)
- -----------------------------------------------------------------------
Other income (expense):
Interest income 11,709 14,589
Interest expense (165,270) --
- -----------------------------------------------------------------------
Net loss $(2,137,485) $(401,317)
- -----------------------------------------------------------------------
Loss per weighted average common share $ (0.13) $ (0.04)
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Weighted average number of common shares 16,163,626 9,097,305
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
59
<PAGE>
TANISYS TECHNOLOGY, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,137,485) $ (401,317)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 1,456,340 18,692
(Increase) decrease in accounts receivable (1,313,942) 3,986
(Increase) decrease in inventory (239,375) 3,987
Increase in prepaid expense (173,589) (9,610)
Decrease in accounts payable and accrued liabilities (569,761) (86,744)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,977,812) (471,006)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (435,690) (7,720)
Patents and trademark costs (6,094) (8,831)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (441,784) (16,551)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 115,000
Draws (payments) on revolving credit note, net 1,370,851 -
Principal payments on capital lease obligations (11,941) -
Net proceeds from exercise of stock options 10,440 -
Net proceeds from exercise of warrants 1,155,000 -
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,524,350 115,000
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (895,246) (372,557)
Cash and cash equivalents, beginning of period 2,689,569 1,317,024
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,794,323 $ 944,467
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 165,270 $ 0
Interest received $ 11,709 $ 14,589
Non-cash activity:
Shares issued to related parties and others to satisfy accrued liabilities $ 0 $ 47,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
60
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of Tanisys Technology, Inc. and
its wholly-owned subsidiaries (the "Company") as of the dates and for the
periods indicated. All material intercompany accounts and transactions have
been eliminated in consolidation.
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. It is recommended that these interim condensed financial
statements be read in conjunction with the Company's consolidated financial
statements and the notes thereto for the fiscal year ended September 30, 1996
contained in the Company's Registration Statement on Form 10 (SEC File No.
0-29038) filed with the Securities and Exchange Commission on November 27, 1996,
as amended by Form 10/A Amendment No. 1 filed January 24, 1997.
In the opinion of management, all adjustments, which are of a normal recurring
nature, considered necessary to present fairly the consolidated financial
position as of December 31, 1996, the consolidated results of operations for the
three-month periods ended December 31, 1996 and 1995 and the consolidated cash
flows for the three-month periods ended December 31, 1996 and 1995 have been
made.
NOTE 2: RECEIVABLES
One customer accounted for a significant percentage of the Company's accounts
receivable at December 31, 1996. Accounts receivable from one memory module
customer represented $1.8 million, or 27%, of the $6.4 million balance of
accounts receivable at December 31, 1996. Management believes the receivables
will be collected within a year, although there is no assurance that such will
be the case. The Company's business, financial condition and results of
operations will depend in significant part upon its ability to obtain orders
from new customers, as well as the financial condition and success of its
customers, the success of its customers' products and the general economy.
Factors affecting any of the Company's major customers and their respective
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
NOTE 3: INVENTORY
Inventory consists of the following:
(Unaudited) (Audited)
December 31, September 30,
1996 1996
----------- -------------
Raw materials $1,306,194 $1,343,522
Work-in-process 131,411 203,017
Finished goods 606,228 257,919
----------- -----------
$2,043,833 $1,804,458
61
<PAGE>
NOTE 4: REVOLVING CREDIT NOTE
At December 31, 1996, the Company did not comply with certain financial
covenants. The financial institution has waived compliance with those covenants
as of and for the three months ended December 31, 1996. See "Note 7: Subsequent
Events" below.
NOTE 5: SHARE CAPITAL, OPTIONS AND WARRANTS
STOCK OPTIONS
During the first quarter of fiscal 1997, stock options were exercised for the
purchase of 4,000 common shares for total gross proceeds of $10,440.
WARRANTS
During the first quarter of fiscal 1997, warrants were exercised for the
purchase of 644,118 common shares for total gross proceeds of $1,155,000.
NOTE 6: COMMITMENTS AND CONTINGENCIES
The Company is not currently using the computer game controller technology, and
the associated royalty does not relate to any of the Company's current products.
NOTE 7: SUBSEQUENT EVENTS
In January 1997, stock options were exercised for the purchase of 8,500 common
shares for total gross proceeds of $22,460.
In February 1997, in connection with the waiver of the non-compliance with the
financial covenants noted in "Note 4" above, the Company agreed to reduce the
maximum amount of available borrowings of the revolving credit note referred to
in "Note 4" above from $6 million to $4 million over an eight-week period. In
conjunction with this reduction, the Company also agreed to reduce the
percentage of qualified accounts receivable included in the borrowing base from
its current 80% to 70%. This reduction would occur 1% per week over a five-week
period and an additional 1% per month over the subsequent five-month period.
The Company had outstanding borrowings against the revolving note of $4.4
million at February 15, 1997.
The Company has a total of $1.5 million in accounts receivable which are in
excess of 90 days past invoice date. Two customers, one of which is discussed
in "Note 2" above, account for $1.1 million of the amount past due over 90 days.
The total accounts receivable on these two accounts is $2.2 million, of which
the Company has insurance coverage of $250 thousand and therefore exposure of
approximately $1.95 million in potential loss.
62
<PAGE>
TANISYS TECHNOLOGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AT SEPTEMBER 30, 1996 AND 1995
AND FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
63
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tanisys Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Tanisys
Technology, Inc. (a Wyoming corporation), and subsidiaries as of September 30,
1996 and 1995, and the related consolidated statements of loss, shareholders'
equity and cash flows for each of the three years in the period ended
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tanisys Technology, Inc., and
subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 25, 1996
64
<PAGE>
TANISYS TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
<TABLE>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,689,569 $ 1,317,024
Trade accounts receivable, net of allowance of $84,557 5,069,399 60,454
and $25,000 in 1996 and 1995, respectively
Accounts receiable from related parties 17,691 --
Inventory 1,804,458 15,414
Prepaid expense 217,570 24,735
- ----------------------------------------------------------------------------------------------------------
Total current assets 9,798,687 1,417,627
- ----------------------------------------------------------------------------------------------------------
Property and equipment, net (includes $200,000 in 1996 of 1,817,479 118,705
equipment purchased from a related party, Note 8)
Incorporation costs, net 1,024 2,283
Patents and trademarks, net 84,337 74,468
Goodwill, net 8,436,790 --
Other assets(includes $25,000 in 1996 of a long term deposit to 84,000 --
1st Tech Molding, a related party, Note 8)
- ----------------------------------------------------------------------------------------------------------
$ 20,222,317 $ 1,613,083
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,920,530 $ 112,853
Accounts payable to related parties 64,618 --
Accrued liabilities 929,376 121,315
Revolving credit note 3,075,000 --
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 6,989,524 234,168
- ----------------------------------------------------------------------------------------------------------
Obligations under capital lease 123,000 --
- ----------------------------------------------------------------------------------------------------------
Total liabilities 7,112,524 234,168
- ----------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Share capital-Common stock, no par value, 50,000,000 shares 23,955,136 7,814,341
authorized, 15,978,537 and 9,065,305 shares issued and
outstanding in 1996 and 1995, respectively
Accumulated deficit (10,838,398) (6,428,481)
Accumulated foreign currency translation adjustment (6,945) (6,945)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,109,793 1,378,915
- ----------------------------------------------------------------------------------------------------------
$ 20,222,317 $ 1,613,083
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
65
<PAGE>
TANISYS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF LOSS
(Expressed in U.S. Dollars)
<TABLE>
FOR THE YEARS ENDED SEPTEMBER 30,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 14,988,946 $ 358,726 $ 113,786
Cost of goods sold 12,660,900 110,097 33,901
- ----------------------------------------------------------------------------------------------------------
Gross profit 2,328,046 248,629 79,885
- ----------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 1,079,927 409,805 409,150
Sales and marketing 1,177,214 1,358,032 393,786
General and administrative (Note 8) 1,976,597 913,375 1,028,808
Depreciation and amortization 2,474,313 71,043 60,472
Unusual charge -- -- 198,739
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 6,708,051 2,752,255 2,090,955
- ----------------------------------------------------------------------------------------------------------
Operating loss (4,380,005) (2,503,626) (2,011,070)
- ----------------------------------------------------------------------------------------------------------
Other income (expense):
Foreign exchange gain -- 2,290 --
Interest income 74,238 56,250 39,145
Interest expense (108,332) -- --
Other 4,182 -- --
- ----------------------------------------------------------------------------------------------------------
Net loss $ (4,409,917) $(2,445,086) $(1,971,925)
- ----------------------------------------------------------------------------------------------------------
Loss per weighted average common share $ (0.37) $ (0.29) $ (0.30)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Weighted average number of common shares 11,765,850 8,436,320 6,610,710
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
66
<PAGE>
TANISYS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
ACCUMULATED
FOREIGN
SHARE CAPITAL CURRENCY TOTAL
------------------------- ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENT EQUITY
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1993 6,495,325 $ 4,468,700 $ (2,011,470) $ 0 $ 2,457,230
- ------------------------------------------------------------------------------------------------------------------------
Net loss (1,971,925) (1,971,925)
Private placements 1,500,000 1,462,756* 1,462,756
Foreign currency translation adjustment (6,945) (6,945)
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 7,995,325 5,931,456 (3,983,395) (6,945) 1,941,116
- ------------------------------------------------------------------------------------------------------------------------
Net loss (2,445,086) (2,445,086)
Private placements 900,000 1,607,232* 1,607,232
Issued as payment of commission 48,980 120,001** 120,001
Exercise of stock options 6,000 12,724 12,724
Issued for retirement of debt 115,000 142,928 142,928
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 9,065,305 7,814,341 (6,428,481) (6,945) 1,378,915
- ------------------------------------------------------------------------------------------------------------------------
Net loss (4,409,917) (4,409,917)
Acquisition of businesses (Note 2) 4,150,000 11,786,000* 11,786,000
Issued as payment of consulting bonus
(Note 2) 207,500 788,500** 788,500
Private placements (Note 7) 975,177 1,511,796* 1,511,796
Issued as payment of commission 45,555 102,499** 102,499
Exercise of stock warrants 1,515,000 1,905,000 1,905,000
Issued for retirement of debt 20,000 47,000 47,000
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 15,978,537 $23,955,136 $(10,838,398) $(6,945) $13,109,793
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* net of issuance costs
** paid to related parties
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
67
<PAGE>
TANISYS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
FOR THE YEARS ENDED SEPTEMBER 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,409,917) $(2,445,086) $(1,971,925)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 2,474,313 71,043 60,472
Write-downs 21,927 - -
Unusual charge - - 198,739
Decrease (increase) in trade
accounts receivable (856,885) 84,855 (99,926)
Increase in accounts receivable
from related parties (17,691) - -
Decrease in investment tax
credits receivable - - 57,456
Increase in inventory (156,733) (2,757) (12,657)
Increase in prepaid expense (103,789) (13,810) (3,843)
(Decrease) increase in accounts
payable and accrued liabilities (1,323,521) 22,870 323,392
- -----------------------------------------------------------------------------------------------
Net cash used in operating activities (4,372,296) (2,282,885) (1,448,292)
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (342,882) (48,962) (96,414)
Incorporation costs - - (1,010)
Patents and trademark costs (32,763) (42,776) (38,261)
Cash obtained in acquisition of
businesses 2,817,230 - -
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 2,441,585 (91,738) (135,685)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of
common stock 1,614,295 1,727,233 1,462,756
Draws (payments) on revolving
credit note, net (195,881) - -
Principal payments on capital
lease obligations (20,158) - -
Net proceeds from exercise of
stock options - 12,724 -
Net proceeds from exercise
of warrants 1,905,000 - -
- -----------------------------------------------------------------------------------------------
Net cash provided by financing
activities 3,303,256 1,739,957 1,462,756
- -----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - (3,169)
- -----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 1,372,545 (634,666) (124,390)
Cash and cash equivalents, beginning
of period 1,317,024 1,951,690 2,076,080
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 2,689,569 $ 1,317,024 $ 1,951,690
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Supplemental disclosure of cash
flow information:
Interest paid $ 108,332 $ 1,152 $ 121
Interest received $ 74,238 $ 57,402 $ 35,153
Non-cash activity:
Shares issued to related parties
and others to satisfy accrued
liabilities $ 47,000 $ 142,928 -
Shares issued to purchase businesses $12,574,500 - -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
68
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Tanisys
Technology, Inc. ("Tanisys") and its wholly-owned subsidiaries, 1st Tech
Corporation ("1st Tech"), DarkHorse Systems, Inc. ("DarkHorse"), Timespan
Communications Corp. ("Timespan") and Rosetta Marketing and Sales Inc.
(collectively, the "Company"). The Company provides custom design,
engineering and manufacturing services, test solutions and standard and
custom module products to leading original equipment manufacturers in the
computer, networking and telecommunications industries. Numerous factors
affect the Company's operating results, including general economic
conditions, competition, changing technologies, component shortages or price
fluctuations. A change of any of these factors could have an adverse effect
on the Company's financial position or results of operations. The Company
has experienced losses since inception. The Company continues to develop
additional products, and with current year acquisitions (Note 2), the Company
has existing salable products. The continued success of the Company depends
upon the Company's ability to generate sufficient sales from the development
of new products or increased sales of existing products.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States which, as
applied to these financial statements, conform in all material respects with
accounting principles generally accepted in Canada. All significant
intercompany balances and transactions have been eliminated in consolidation.
Tanisys is a Wyoming corporation which was originally organized in British
Columbia, Canada to pursue oil and gas exploration. Unsuccessful in the
exploration business and dormant pursuant to the rules and regulations of the
Vancouver Stock Exchange, several investors gained control of the Company to
raise financing and complete the acquisition of Timespan. Timespan had
software technology and patent applications which, in part, are the
foundation of the Company's development and marketing efforts.
Tanisys changed its name from Rosetta Technologies Inc. on July 11, 1994.
Prior to Rosetta Technologies Inc., the Company had been known as First
American Capital Group Inc. and Montebello Resources Ltd.
Certain reclassifications of amounts related to 1994 and 1995 have been made
to conform with the 1996 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be classified as cash equivalents. Cash
equivalents are carried at cost, which approximates market. The Company
places its cash investments in high credit quality instruments.
69
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECEIVABLES
The Company grants credit to domestic and international original equipment
manufacturers, distributors and end users. The Company carries a business
credit policy covering certain accounts receivable. The insurance policy
provides protection against losses from uncollectible accounts resulting from
insolvency of specified customers. As of September 30, 1996, the total
available coverage under the policy was $2,050,000.
INVENTORY
Inventory is stated at the lower of cost or market. In the third quarter of
1996, the Company changed its method of accounting for inventories from the
first-in, first-out (FIFO) method to a weighted average cost basis. The
change did not have a significant effect on results of operations for 1996,
nor is it anticipated that it will have a material effect on future periods.
Prior to the change, the Company's inventory costs would not have differed
significantly under the two methods. Costs include direct materials, direct
labor and certain indirect manufacturing overhead expenses.
REVENUE RECOGNITION
Revenues from direct sales and sales to resellers are recognized when the
related products are shipped. The Company warrants products against defects
and has a policy concerning the return of products.
DEPRECIATION AND AMORTIZATION
The Company uses the straight-line method of depreciation. Under the
straight-line method of depreciation, the Company is using the following
lives:
Machinery and equipment 3-7
Office and engineering equipment 5
Computer equipment and software 3
Furniture and fixtures 5
Vehicles 5
Leasehold improvements Shorter of useful life or
remaining term of the lease
Incorporation costs are amortized on a straight-line basis over five years.
Upon dissolution of Timespan, the Company wrote-off $747 in unamortized
incorporation costs. Accumulated amortization at September 30, 1996, 1995
and 1994 was $512, $1,522 and $761, respectively.
Patents and trademarks are amortized on a straight-line basis over 10 years.
In fiscal 1995, the Company wrote-off $12,095 in trademark costs related to
the registration of the name SpinWizard, since the product associated with
that trademark is no longer being sold. Accumulated amortization at
September 30, 1996, 1995 and 1994, was $10,799, $6,569 and $0, respectively.
70
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company reviews the carrying amount of its intangible assets and related
amortization periods on an annual basis for impairment by reviewing
undiscounted cash flow projections, excluding interest as is required under
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of."
Impairment loss is recognized based upon the amount that the carrying amount
of the assets exceed fair value. Fair value is determined based upon the
present value of estimated expected future cash flows using a discount rate
commensurate with risks involved. Based on its review, the Company believes
no impairment has occurred as of September 30, 1996.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
the exchange rate at the balance sheet date. Revenues, costs, and expenses
are translated at average rates of exchange prevailing during the year.
Gains and losses on foreign currency transactions are included in other
expenses. Translation adjustments resulting from this process are charged or
credited to equity.
RESEARCH AND DEVELOPMENT
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," capitalization of software development costs begins upon
the establishment of technological feasibility. The ongoing assessment of
the recoverability of these costs requires considerable judgment by
management with respect to certain external factors, including, but not
limited to, anticipated future gross product revenues, estimated economic
life and changes in software and hardware technology. After considering the
above factors, the Company has determined that software development costs
incurred for the years ended September 30, 1996, 1995 and 1994 were properly
expensed.
LOSS PER SHARE
Loss per share is calculated based upon the weighted average number of common
shares outstanding during the year.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (FAS 121), was issued. Under FAS 121, an impairment loss
must be recognized, for long-lived assets and certain identifiable
intangibles to be held and used by an entity, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. FAS 121 is effective for financial statements issued for fiscal
years beginning after December 15, 1995, and must be adopted on a prospective
basis. Restatement of previously issued financial statements is not
permitted. The Company adopted FAS 121 effective October 1, 1995. Such
adoption did not have a material effect on the financial condition or results
of operations of the Company.
71
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), was issued. FAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method
of accounting for all of their employee stock compensation plans. Under the
fair value based method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period of
the award, which is usually the vesting period. However, FAS 123 also allows
entities to continue to measure compensation costs for employee stock
compensation plans using the intrinsic value method of accounting prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25). Entities electing to remain with the accounting
prescribed by APB 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method recommended by FAS 123
had been applied. The accounting requirements of FAS 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The disclosure requirements of FAS 123 are effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
intends to measure compensation costs in accordance with APB 25 and to
provide pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting under FAS 123 had been applied.
Therefore, FAS 123 will not have a material effect on the financial position
or results of operations of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. ACQUISITIONS OF 1ST TECH AND DARKHORSE
On May 21, 1996, the Company acquired 1st Tech and DarkHorse, as a result of
which 1st Tech and DarkHorse became wholly owned subsidiaries of the Company
in exchange for 4,150,000 shares of the Company's common stock. 1st Tech is
engaged primarily in the design, manufacture and sale of standard memory
products to the memory aftermarket and custom memory assemblies to original
equipment manufacturers, and offers engineering design and contract
manufacturing services. DarkHorse designs and markets memory testing
equipment primarily to electronic equipment manufacturers.
At the closing of the acquisitions, the Company granted options for the
purchase of 550,000 common shares to key employees of 1st Tech and DarkHorse,
allowed Mr. Gary W. Pankonien, former owner of 1st Tech and one of the three
former owners of DarkHorse, to appoint two members to the Company's
seven-member Board of Directors, and paid a consulting bonus to a Director of
the Company of 207,500 common shares at a price of $3.80 per share.
72
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
2. ACQUISITIONS OF 1ST TECH AND DARKHORSE (CONTINUED)
The acquisitions of 1st Tech and DarkHorse were accounted for using the
purchase method of accounting. The net purchase price was allocated as
follows:
Purchase price $11,786,000
Assets acquired:
Working capital other than note payable 3,907,459
Fixed assets 1,607,771
Other assets 241,627
Liabilities assumed:
Note payable (3,276,674)
Other liabilities (137,365)
Commission paid (788,500)
Closing costs (425,316)
-----------
Excess of purchase price over net assets acquired - Goodwill $10,656,998
The fair value of working capital, fixed assets, other assets, note payable
and other liabilities was based on the historical cost from the financial
statements of 1st Tech and DarkHorse. The fair value of the commission paid
was 207,500 shares at a price of $3.80 at the date of issuance. Goodwill was
determined as the number of shares issued to 1st Tech and DarkHorse
(3,492,500) at the closing price on May 21, 1996 of ($5.05) discounted by 40%
to $3.03 to give effect to the restrictiveness of the shares and the risks
involved.
Goodwill is being amortized against earnings over a two-year period. The
amount of goodwill amortized for the year ended September 30, 1996 was
$2,220,208. The results of operations of 1st Tech and DarkHorse have been
included in the consolidated financial statements since the acquisition date.
The unaudited pro forma information has been prepared assuming that these
acquisitions had taken place at the beginning of the fiscal year. The
unaudited pro forma information includes adjustments for amortization of
intangibles arising from the transactions and common shares issued. The
unaudited pro forma financial information is not necessarily indicative of
the results of operations as they would have been had the transactions been
effective at the beginning of fiscal 1996 or fiscal 1995, nor is it
necessarily indicative of the results of operations which may occur in the
future. The unaudited pro forma information is as follows:
1996 1995
(Unaudited) (Unaudited)
----------- ------------
Net sales $66,523,607 $106,668,217
Net loss (9,674,523) (7,095,706)
Net loss per common share (0.82) (.84)
73
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
3. INVENTORY
Inventory consists of the following:
1996 1995
---------- --------
Raw materials $1,343,522 $ ---
Work-in-process 203,017 ---
Finished goods 257,919 15,414
---------- -------
$1,804,458 $15,414
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
1996 1995
--------------------------------------------------------------------------------------
Accumulated Accumulated
Depreciation & Net Book Depreciation & Net Book
Cost Amortization Value Cost Amortization Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Manufacturing equipment $1,055,964 $234,159 $ 821,805 $ --- $ --- $ ---
Office equipment 579,117 224,102 355,015 29,084 11,038 18,046
Engineering equipment 253,482 77,807 175,675 17,507 7,022 10,485
Computer equipment 118,696 87,448 31,248 97,829 57,585 40,244
Computer software 223,872 115,821 108,051 21,971 15,114 6,857
Furniture and fixtures 295,585 90,186 205,399 40,170 12,641 27,529
Vehicles 39,445 9,861 29,584 --- --- ---
Leasehold improvements 157,907 67,205 90,702 25,854 10,310 15,544
- --------------------------------------------------------------------------------------------------------------------
$2,724,068 $906,589 $1,817,479 $232,415 $113,710 $118,705
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had approximately $266,000 and $0 of property and equipment
acquired under capital lease at September 30, 1996 and 1995, respectively.
The accumulated amortization related to these assets totaled $47,000 and $0
at September 30, 1996 and 1995, respectively. The related amortization
expense was $16,000 and $0 for the years ended September 30, 1996 and 1995,
respectively.
5. REVOLVING CREDIT NOTE
The Company has a revolving credit note with a financial institution of
$6,000,000 bearing interest at the financial institution's prime rate plus a
percentage between one and three percent (8.25% as of September 30, 1996)
depending upon a ratio. The ratio is computed monthly, combining 1st Tech and
DarkHorse indebtedness to annualized earnings before income taxes,
depreciation and amortization. At September 30, 1996, the Company did not
comply with certain financial covenants. The financial institution has
amended and waived the covenants at September 30, 1996 and for prior periods.
Additionally, the financial institution will issue, when needed, letters of
credit up to $2,000,000. The revolving credit note extends through June 30,
1998 and is secured by all of the Company's assets. Paydowns on the note are
made by daily collections of accounts receivable. Draws are made as
necessary. The amount outstanding at September 30, 1996 was $3,075,000. The
amount available on the line at September 30, 1996 was $2,925,000 limited by
qualified accounts receivable as defined in the note. At September 30, 1996,
there were no outstanding letters of credit.
74
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
6. LEASE COMMITMENTS
The Company leases certain equipment and office space under noncancelable
leases with expiration dates ranging from 1997 through 2000.
Future minimum lease payments under all leases at September 30, 1996 were as
follows:
Capital Leases Operating Leases
-------------- ----------------
1997 $ 62,661 $376,804
1998 57,276 219,841
1999 56,481 66,288
2000 27,528 27,620
--------- --------
Total minimum lease payments 203,946 690,553
Amounts representing interest (33,159)
--------
Present value of minimum capital
lease payments 170,787
Less: current portion 47,787
--------
Long-term capital lease obligation $123,000
--------
--------
Rent expense recorded under all operating leases was $118,189, $48,619 and
$34,377 for 1996, 1995 and 1994, respectively.
7. PRIVATE PLACEMENTS
In December 1995, the Company completed an equity financing of 941,177 common
shares and common stock purchase warrants to purchase 941,177 shares of
common stock at an exercise price of $1.70 in 1997 and $1.95 in 1998. The
warrants expire after 1998. A commission of 45,555 shares at the price of
$2.25 per share was paid to AWL Enterprises Ltd. In November 1995, the
Company completed an equity financing of 34,000 common shares and common
stock purchase warrants to purchase 34,000 shares of common stock at an
exercise price of $2.00 in 1996 and $2.25 in 1997. The warrants expire after
1997.
8. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries entered into the following related party
transactions:
General & administrative expense includes consulting fees and expenses.
Consulting fees and expenses in the amount of $870,000 ($788,500 of which
was paid in stock--see Note 2), $159,000 and $256,000 were paid to the
Company's directors or companies that they owned for the years ended
September 30, 1996, 1995 and 1994, respectively.
General & administrative expense includes professional fees. Professional
fees in the amount of $122,000, $97,000 and $42,000 were paid to two
stockholders of the Company for legal and other services provided for the
years ended September 30, 1996, 1995 and 1994, respectively.
75
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
At September 30, 1996, each of two former stockholders of DarkHorse were
owed $32,309 ($64,618 in accounts payable to related parties) and a third
stockholder owed the Company $17,691 (in accounts receivable from related
parties). Prior to the acquisition, DarkHorse was an S-corporation.
These amount arose at the date of acquisition, to cover the taxes on
earnings passed on to the three stockholders for the period from January 1,
1996 to the date of acquisition.
Upon the acquisitions of 1st Tech and DarkHorse by the Company on May 21,
1996, Gary W. Pankonien, the principal stockholder of 1st Tech and one of
the three principal stockholders of DarkHorse, was issued an aggregate of
1,995,000 shares of Common Stock in exchange for shares of 1st Tech and
DarkHorse owned by him. The 1,995,000 shares had a total value of
$8,379,000 based on the closing price of the Common Stock on May 21, 1996.
Mr. Pankonien also was granted a stock option under the Company's 1993
Stock Option Plan, exercisable over a five-year period, for the purchase
of an aggregate of 150,000 shares of the Common Stock at $3.69 per share.
The shares underlying the option vest one-third on each of the first three
anniversaries of the grant date. In connection with the acquisitions, Mr.
Pankonien was granted the right to designate two individuals for
appointment to the Company's Board of Directors and to name an advisory
director. Mr. Pankonien and Alan Portnoy were appointed Directors, and
Archer Lawrence became an advisor to the Board of Directors in July 1996.
On May 21, 1996, 1st Tech purchased a Quad QSP-2 High Speed Fine Pitch
Surface Mount Assembly from Gary Pankonien for $225,000. Previously, this
equipment had been leased by Mr. Pankonien.
Since May 21, 1996, Tanisys has paid $10,000 to 1st Tech Molding for
payment for plastic packaging products required for various products
manufactured by Tanisys, and $25,000 in 1996 as a long-term deposit.
1st Tech Molding is a private company owned 45% by Mr. Pankonien.
9. SHARE CAPITAL, OPTIONS AND WARRANTS
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with
$1 par value. There were no preferred shares issued and outstanding at
September 30, 1996 and 1995.
76
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
9. SHARE CAPITAL, OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTIONS
<TABLE>
1996 1995
------------------------------ ------------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-Beginning of year 1,364,450 $1.10 to 3.32 US 1,003,000 $1.50 to 3.70CDN
Granted 834,900 3.13 to 3.72 US 958,750 2.02 to 3.32 US
4.00 CDN
Canceled or expired (395,250) 2.02 to 3.72 US (591,300) 2.80 US
2.33 to 4.00 CDN
Exercised --- --- (6,000) 2.40 to 3.55 CDN
- -------------------------------------------------------------------------- -------------------------------
Outstanding-End of year 1,804,100 $1.10 to 3.69 US 1,364,450 $2.02 to 3.32 US
$1.50 to 4.00 CDN
- -------------------------------------------------------------------------- -------------------------------
Exercisable-End of year 555,232 265,001
- -------------------------------------------------------------------------- -------------------------------
</TABLE>
In February 1996, the Board of Directors approved a resolution to translate
all option prices currently in CDN$ to US$. The exchange rate used was 1.00
CDN$ to .7353 US$. This was the exchange rate on the date of the board
resolution.
The Company's 1993 Stock Option Plan is for the Company's directors, key
employees and consultants as an incentive for them to remain in the Company's
employ or service. Options granted vest over a three year period, one-third
per year, and expire after five years, or thirty days after the date of
termination. The grant price is determined by the Option Committee of the
Board of Directors, but in no instance shall it be lower than the fair market
value of the stock as of the date of grant. Fair market value shall be
determined as the average closing price of the Company's stock on the
Vancouver Stock Exchange for the two weeks preceding the grant. Under the
terms of the 1993 Stock Option Plan, 2,600,000 shares are reserved for the
granting of options.
WARRANTS
Each warrant entitles the holder to purchase one share of common stock at a
particular price during the first year following the date of issuance and at
a second price in year two. The warrants expire after year two. During
fiscal 1996, 1,515,000 warrants were exercised and no warrants expired.
975,177 warrants were issued as part of the Company's two private placements
in 1995 and 1996. The Company had warrants outstanding for the purchase of
its common stock in 1996 and 1995 as follows:
NUMBER OF WARRANTS EXERCISE PRICE
--------------------- ---------------------
ISSUE DATE 1996 1995 YEAR 1 YEAR 2
---------- --------- --------- -------- --------
August 1994 --- 1,500,000 $1.00 $1.25
May 1995 885,000 900,000 $2.00 $2.30
November 1995 34,000 --- $2.00 $2.25
January 1996 941,177 --- $1.70 $1.95
--------- ---------
Total 1,860,177 2,400,000
--------- ---------
--------- ---------
77
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
10. INCOME TAXES
The Company accounts for deferred income taxes using the liability method. At
September 30, 1996, the Company's Canadian subsidiary, Timespan, had a
non-capital loss carryforward of approximately CDN $127,000 which may be
applied against future taxable income. The loss carryforward results in a
deferred tax asset of CDN $57,000 which expires in 2000. Additionally, at
September 30, 1996, Timespan had deferred tax assets of CDN $43,000
principally relating to unclaimed investment tax credits.
During 1996 and 1995, the Company incurred consolidated net operating losses
for U.S. income tax purposes of approximately $1,785,000 and $2,548,000,
respectively. The loss carryforwards expire in 2011 and 2010, respectively.
During 1996, the Company had temporary differences resulting in future tax
deductions of $693,000 principally representing tax basis in accrued
liabilities and intangible assets. Deferred income tax assets from the loss
carryforwards and asset basis differences aggregate $2,240,000.
For financial reporting purposes, valuation allowances of $2,240,000 and
$1,413,000 have been recorded to offset the deferred tax assets due to the
uncertainty as to whether the benefits will be realized.
The availability of the net operating loss carryforward 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 carryovers 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 carryovers may be limited or prohibited. There are two kinds of
ownership changes that can trigger the income limitation: an ownership change
involving a 5% stockholder and any tax-free reorganization. In either case,
one or more 5% stockholders must have increased their percentage of
ownership in the corporation by more than 50% over the lowest pre-change
ownership percentage generally within three years of ownership change. The
Company does not believe that an IRS Code Section 382 Limitation exists as of
September 30, 1996.
No federal or state taxes were due or paid in 1996 and 1995.
11. UNUSUAL CHARGE
At September 30, 1994, the Company determined that it would not utilize in
its current or future products, the computer game controller technology
purchased from Timespan. Therefore, the remaining goodwill associated with
the Timespan acquisition of $198,739 was charged to expense as an unusual
charge in the period ended September 30, 1994 (Note 13).
12. EMPLOYEE BENEFITS
Effective January 1, 1995, 1st Tech sponsored an employee benefit plan (the
Plan) which qualifies under Section 401(k) of the Internal Revenue Service
Code for eligible employees. Eligible employees may defer a portion of their
annual compensation under the Plan subject to maximum limitations. The
requirements for eligibility include a minimum age of 21 and a minimum of six
months of service. As of the date of acquisition, all employees of the
Company joined the Plan.
78
<PAGE>
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
12. EMPLOYEE BENEFITS (CONTINUED)
Under provisions of the Plan, the Company may elect to make matching
contributions to the Plan for the benefit of the participants. No
contributions were made in 1996.
13. COMMITMENTS AND CONTINGENCIES
During fiscal 1993, the Company's subsidiary Timespan entered into a five
year royalty agreement with its former principal stockholders. The agreement
provides for royalties to be paid for the use of the computer game controller
technology. The royalties are to be paid subsequent to Timespan achieving a
CDN $3,000,000 net cumulative profit from the sale of devices involving the
technology. The royalties will be calculated as the lesser of CDN $250,000
per annum or 5% of the gross wholesale receipts, as defined in the agreement,
from sales exceeding the above noted amount. If the amount payable is less
than CDN $250,000 in any particular year, the difference will be carried
forward to the following year to increase the maximum amount payable in that
year. The Company is not currently using the computer game controller
technology and the royalty does not relate to the Company's current products
(Note 11).
14. SUBSEQUENT EVENTS
In October 1996, the Company granted, subject to regulatory approval, stock
options to key employees for the purchase of 423,000, 110,000 and 5,000
common shares at a per share price of $4.09, $4.17 and $4.44, respectively.
These options are not considered outstanding until approved by the Vancouver
Stock Exchange.
Timespan, a wholly owned subsidiary of the Company, was dissolved as of
October 23, 1996.
79
<PAGE>
TANISYS TECHNOLOGY, INC.
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED FINANCIAL STATEMENTS AT AND FOR
THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
80
<PAGE>
TANISYS TECHNOLOGY, INC.
1ST TECH TECHNOLOGY, INC.
DARKHORSE SYSTEMS, INC.
COMBINED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
MARCH 31, MARCH 31,
1996 1995
- ---------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 495,173 $ 16,864
Accounts receivable 4,509,245 7,470,424
Inventory 2,649,242 3,662,028
Prepaid expense 128,065 273,118
- ---------------------------------------------------------------------------
Total current assets 9,300,422 11,422,434
- ---------------------------------------------------------------------------
Fixed assets, net of accumulated depreciation 1,382,050 693,333
Other assets 136,647 11,500
- ---------------------------------------------------------------------------
$9,300,422 $12,127,267
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,915,469 $ 4,796,170
Accrued expenses 1,135,904 1,420,576
Note payable 3,766,846 5,000,000
- ---------------------------------------------------------------------------
Total current liabilities 8,818,219 11,216,746
- ---------------------------------------------------------------------------
Obligations under capital leases 181,940 62,700
- ---------------------------------------------------------------------------
Total liabilities 9,000,159 11,279,446
- ---------------------------------------------------------------------------
Commitment
Stockholders' equity:
Share capital 9,525 9,500
Deficit 720,520 838,321
Distributions to stockholders (429,782) 0
- ---------------------------------------------------------------------------
Total stockholders' equity 300,263 847,821
- ---------------------------------------------------------------------------
$9,300,422 $12,127,267
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
81
<PAGE>
TANISYS TECHNOLOGY, INC.
1ST TECH TECHNOLOGY, INC.
DARKHORSE SYSTEMS, INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995
- -------------------------------------------------------------------
Revenue $13,637,582 $21,472,813
Cost of goods sold 12,342,354 19,638,168
- -------------------------------------------------------------------
Gross profit 1,295,228 1,834,645
- -------------------------------------------------------------------
Expenses:
Research and development 197,467 93,638
Sales and marketing 551,676 331,454
General and administration 689,153 789,213
- -------------------------------------------------------------------
Total expenses 1,438,296 1,214,305
- -------------------------------------------------------------------
Other items:
Interest income 145 0
Interest expense (150,891) (109,289)
Other income 24,845 17,660
- -------------------------------------------------------------------
Total other items (125,901) (91,629)
- -------------------------------------------------------------------
Net income (loss) before taxes (268,969) 528,711
Income tax expense 0 0
- -------------------------------------------------------------------
Net income (loss) (268,969) 528,711
Deficit, beginning of period 989,489 309,610
- -------------------------------------------------------------------
Deficit, end of period 720,520 838,321
- -------------------------------------------------------------------
82
<PAGE>
TANISYS TECHNOLOGY, INC.
1ST TECH TECHNOLOGY, INC.
DARKHORSE SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (268,969) $ 528,711
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 69,654 58,146
Decrease (increase) in accounts receivable 3,129,235 (2,086,351)
Decrease (increase) in inventory 527,142 (2,070,578)
Decrease (increase) in prepaid 45,268 (228,618)
(Decrease) increase in accounts payable
and accruals (481,531) 1,904,359
- ------------------------------------------------------------------------------
Net cash used in operating activities 3,020,799 (1,894,331)
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Receipts (payments) made for other assets (52,647) 29,500
Purchase of fixed assets (143,191) (10,330)
- ------------------------------------------------------------------------------
Net cash used in investing activities 195,838 19,170
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (362,782) 0
Draws (payments) on revolving credit note (3,528,752) 1,687,000
Principal payments on capital lease obligations (17,816) (46,300)
- ------------------------------------------------------------------------------
Net cash provided by financing activities (3,528,752) 1,640,700
- ------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (703,791) (234,461)
Cash and cash equivalents, beginning of period 1,198,964 251,325
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of period 495,173 16,864
- ------------------------------------------------------------------------------
Supplemental disclosure:
Interest paid $ 150,891 $ 109,283
83
<PAGE>
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED FINANCIAL STATEMENTS
AT DECEMBER 31, 1995 AND FOR THE
FISCAL YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
TOGETHER WITH AUDITORS' REPORT
84
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 1st Tech Corporation and
DarkHorse Systems, Inc.:
We have audited the accompanying combined balance sheets of 1st Tech
Corporation and DarkHorse Systems, Inc. (Texas corporations), as of December
31, 1995 and 1994, and the related combined statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 1st Tech Corporation and
DarkHorse Systems, Inc., as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 25, 1996
85
<PAGE>
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED BALANCE SHEETS -- DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
----------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,198,964 $ 251,325
Accounts receivable, net of allowance for
doubtful accounts of $124,500 and $0,
respectively 7,438,903 5,184,073
Inventory 3,176,384 1,591,450
Accounts receivable, related parties 199,577 200,000
Prepaid expenses and other 173,333 44,500
----------- ----------
Total current assets 12,187,161 7,271,348
----------- ----------
PROPERTY AND EQUIPMENT, net 1,261,232 632,649
----------- ----------
OTHER LONG-TERM ASSETS 84,000 41,000
----------- ----------
Total assets $13,532,393 $7,944,997
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
----------- ----------
CURRENT LIABILITIES:
Book overdrafts $ 574,000 $ 698,000
Accounts payable 3,291,738 2,539,134
Accrued expenses 1,057,926 463,253
Income taxes payable 58,000 10,000
Revolving credit note 6,915,000 3,313,000
Notes payable to related parties 509,240 493,000
Current portion of obligations under
capital leases 42,000 109,000
----------- ----------
Total current liabilities 12,447,904 7,625,387
----------- ----------
OBLIGATIONS UNDER CAPITAL LEASES 152,000 -
----------- ----------
Total liabilities 12,599,904 7,625,387
----------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital stock, no par value-
1st Tech, 1,000,000 shares authorized,
issued and outstanding - -
DarkHorse, 100,000,000 shares authorized;
1,155,000 issued and outstanding - -
Contributed capital 10,000 10,000
Retained earnings 989,489 309,610
Due from stockholder (67,000) -
----------- ----------
Total stockholders' equity 932,489 319,610
----------- ----------
Total liabilities and stockholders' equity $13,532,393 $7,944,997
----------- ----------
----------- ----------
The accompanying notes are an integral part
of these combined financial statements
86
<PAGE>
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
------------ ----------- -----------
NET PRODUCT SALES $106,309,491 $42,707,651 $22,965,821
COST OF SALES 99,443,822 39,263,567 20,424,645
------------ ----------- -----------
6,865,669 3,444,084 2,541,176
------------ ----------- -----------
OPERATING EXPENSES:
Sales and marketing 2,249,637 1,299,603 387,266
General and administrative 2,902,629 1,394,211 1,459,527
Research and development 394,338 273,935 90,440
------------ ----------- -----------
Total operating expenses 5,546,604 2,967,749 1,937,233
------------ ----------- -----------
INCOME FROM OPERATIONS 1,319,065 476,335 603,943
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (728,169) (383,149) (239,171)
Interest income 21,451 425 2,283
Other income (expense) (7,468) 13,122 34,156
------------ ----------- -----------
(714,186) (369,602) (202,732)
------------ ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 604,879 106,733 401,211
------------ ----------- -----------
PROVISION FOR INCOME TAXES 58,000 23,020 142,305
------------ ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 546,879 83,713 258,906
------------ ----------- -----------
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 133,000 - -
------------ ----------- -----------
NET INCOME $ 679,879 $ 83,713 $ 258,906
------------ ----------- -----------
------------ ----------- -----------
UNAUDITED PRO FORMA DATA (Note 3):
Income before provision for income
taxes and cumulative effect of
change in accounting principle $ 604,879 $ 106,733 $ 401,211
Pro forma adjustments to reflect
federal and state income tax 223,805 39,491 148,448
------------ ----------- -----------
Pro forma income from continuing
operations after provision for
income tax and before cumulative
effect of change in accounting
principle 381,074 67,242 252,763
------------ ----------- -----------
Adjustment to reflect change in
accounting principle - 91,342 41,469
------------ ----------- -----------
Pro forma net income $ 381,074 $ 158,584 $ 294,232
------------ ----------- -----------
------------ ----------- -----------
The accompanying notes are an integral part
of these combined financial statements.
87
<PAGE>
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
COMMON STOCK
--------------------------------------------------------
1ST TECH DARKHORSE
--------------------------- ---------------------------
SHARES SHARES TOTAL
ISSUED AND CONTRIBUTED ISSUED AND CONTRIBUTED TREASURY DUE FROM RETAINED STOCKHOLDERS'
OUTSTANDING(1) CAPITAL OUTSTANDING(2) CAPITAL STOCK STOCKHOLDER EARNINGS EQUITY
-------------- ----------- -------------- ----------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992 - $ - 360,937 $ 3,000 - $ - $ (2,979) $ 21
Net income - - - - - - 258,906 258,906
Issuance of stock 1,000,000 1,000 842,188 50,000 - - - 51,000
--------- ------ --------- ------- ----------- -------- -------- --------
BALANCE, December 31,
1993 1,000,000 1,000 1,203,125 53,000 - - 255,927 309,927
Net income - - - - - - 83,713 83,713
Purchase of
treasury stock - - (842,188) (44,000) 70,000,000 - (30,030) (74,030)
Retirement of
treasury stock - - - - (70,000,000) - - -
Stock split
(3.2 for 1) - - 794,063 - - - - -
--------- ------ --------- ------- ----------- -------- -------- --------
BALANCE, December 31,
1994 1,000,000 1,000 1,155,000 9,000 - - 309,610 319,610
Net income - - - - - - 679,879 679,879
Distributions - - - - - (67,000) - (67,000)
--------- ------ --------- ------- ----------- -------- -------- --------
BALANCE, December 31,
1995 1,000,000 $1,000 1,155,000 $ 9,000 - $(67,000) $989,489 $932,489
--------- ------ --------- ------- ----------- -------- -------- --------
--------- ------ --------- ------- ----------- -------- -------- --------
</TABLE>
(1) Reflects a 10:1 stock split approved by 1st Tech board of directors on
May 25, 1995.
(2) Reflects a 1:83 reverse stock split approved by DarkHorse board of
directors on April 9, 1996.
88
<PAGE>
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 679,879 $ 83,713 $ 258,906
Adjustments to reconcile net income before
cumulative effect of change in accounting
principle to net cash provided by (used
in) operating activities-
Depreciation and amortization 138,400 232,877 89,239
Changes in operating assets and liabilities-
Increase in accounts receivable (2,254,830) (4,347,867) (836,206)
(Increase) decrease in accounts
receivable, related parties 423 (88,156) (2,540)
Increase in inventory (1,584,934) (509,358) (1,068,927)
(Increase) decrease in prepaid
expenses and other assets (171,833) 36,970 (122,470)
Increase in accounts payable 752,604 904,895 1,518,126
(Decrease) increase in bank overdrafts (124,000) 698,000 -
Increase in accrued expenses 794,923 231,671 240,782
----------- ----------- -----------
Net cash provided by (used in) operating
activities (1,769,368) (2,757,255) 76,910
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (549,678) (446,189) (308,070)
----------- ----------- -----------
Net cash used in investing activities (549,678) (446,189) (308,070)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in revolving credit note 3,602,000 3,113,000 200,000
Principal payments on capital leases (132,305) (86,506) -
Advances to shareholder (67,000) - -
Borrowings (payments) on note payable
to shareholders (136,010) (14,696) 492,696
Purchase of stock - (24,030) -
Issuance of stock - - 1,000
----------- ----------- -----------
Net cash provided by financing activities 3,266,685 2,987,768 693,696
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 947,639 (215,676) 462,536
CASH AND CASH EQUIVALENTS, beginning of year 251,325 467,001 4,465
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,198,964 $ 251,325 $ 467,001
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
89
<PAGE>
<TABLE>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 571,478 $ 350,549 $ 19,750
----------- ----------- -----------
----------- ----------- -----------
Income taxes $ 14,449 $ 145,700 $ -
----------- ----------- -----------
----------- ----------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of certain accrued expenses to
notes payable to shareholders (see Note 9) $ 152,250 $ - $ -
----------- ----------- -----------
----------- ----------- -----------
Note issued to shareholder for stock $ - $ 74,000 $ -
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
90
<PAGE>
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
1. BASIS OF PRESENTATION AND ORGANIZATION:
The accompanying combined financial statements include the accounts of 1st
Tech Corporation and DarkHorse Systems, Inc. (collectively referred to as the
Companies). The Companies' financial statements have been combined as both
of these entities are under common ownership. All significant intercompany
accounts and transactions have been eliminated in combination.
1st Tech Corporation (1st Tech) is a privately held S-Corporation that was
incorporated under the laws of the State of Texas on January 20, 1993. 1st
Tech is engaged primarily in the design, manufacture and sale of standard
memory products to the memory aftermarket and custom memory assemblies to
original equipment manufacturers. In addition, 1st Tech offers engineering
design and contract manufacturing services. The principal market for the
Company's products is domestic-based original equipment manufacturers in the
electronics industry, including personal computer manufacturers and
telecommunications service providers.
DarkHorse Systems, Inc. (DarkHorse), is a privately held S-Corporation that
was incorporated under the laws of the State of Texas in 1992. DarkHorse is
engaged in the business of designing and marketing memory testing equipment
primarily to domestic electronic equipment manufacturers.
Effective May 21, 1996, Tanisys Technology, Inc. (Tanisys), acquired all of
the outstanding common stock of the Companies in exchange for 4.15 million
shares of Tanisys' common stock (Note 14).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Revenue is stated net of actual and estimated returns. Sales are recognized
when the related products are shipped. The Company warrants products against
defects and has a policy concerning the return of products.
CASH AND CASH EQUIVALENTS
The Companies consider all highly liquid investments with original maturities
of three months or less to be classified as cash equivalents. Cash
equivalents are carried at cost, which approximates market.
INVENTORY
Inventory is stated at the lower of cost or market, with cost being
determined on a weighted average cost basis. Costs include direct materials,
direct labor and certain indirect manufacturing overhead expenses.
91
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment has been computed by the straight-line method
beginning January 1, 1995. Depreciation and amortization of property and
equipment in prior years was computed by the double declining balance-method.
The straight-line method of depreciation was adopted in order to provide for
depreciation and amortization expense on a basis more consistent with the
property and equipment's actual utilization and has been applied to
acquisitions of prior years. The effect of the change in 1995 was to
increase income from operations by approximately $95,000. The pro forma
amounts shown on the statement of income have been adjusted for the effect of
retroactive application of depreciation and amortization on the straight-line
basis.
Additionally, the Companies changed the estimated useful lives for its
property and equipment beginning in 1995. The effect of this change did not
have a material impact on income from operations for 1995. Depreciation and
amortization expense are provided over the following estimated useful lives:
Machinery and equipment 3 - 7 years
Office computer equipment and software 3 - 5 years
Furniture and fixtures 5 - 7 years
Leasehold improvements Shorter of useful life or
remaining term of the lease
BANK OVERDRAFTS
Bank overdrafts represent outstanding checks in excess of funds on deposit
where legal right to offset does not exist.
INCOME TAXES
In 1993, 1st Tech elected and was treated for federal and certain state
income tax purposes as a C-Corporation. In 1994, 1st Tech changed its
federal tax status from a C-Corporation to an S-Corporation.
In 1993, DarkHorse elected and was treated for federal and certain state
income tax purposes as a C-Corporation. DarkHorse changed its federal tax
status from a C-Corporation to an S-Corporation in 1995.
In 1995, the Companies have elected and have been treated for federal and
certain state income tax purposes as an S-Corporation under Subchapter S of
the Internal Revenue Code of 1986, as amended. As a result, the income of
the Companies for federal and certain state income tax purposes is included
in the income tax return of the individual shareholders. The accompanying
combined financial statements include recognition of those federal and state
income taxes which are levied on the Companies. (See Note 3 for pro forma
income tax information.)
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (FAS 121), was issued. Under FAS 121, an impairment loss
must be recognized, for long-lived assets and certain identifiable
intangibles to be held and used by an entity, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. FAS 121 is effective for financial statements issued for fiscal
years beginning after December 15, 1995, and must be adopted on a prospective
basis. Restatement of previously issued financial statements is not
permitted. The Companies adopted FAS 121 effective January 1, 1996. Such
adoption did not have a material effect on the financial condition or results
of operations of the Companies.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
92
<PAGE>
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. PRO FORMA INFORMATION (UNAUDITED):
Pro forma net income has been determined assuming that the Companies had been
taxed as C-Corporations for federal and certain state income tax purposes
since January 1, 1993. The pro forma adjustments to reflect federal and
state income tax assume a blended tax rate of 37 percent. Additionally, the
pro forma amounts shown on the statements of income have been adjusted for
the cumulative effect of change in accounting principle. (See Note 2.)
4. INVENTORIES:
Inventories consist of the following:
December 31
-----------------------
1995 1994
---------- ----------
Raw materials $1,680,101 $ 952,746
Work in process 98,619 17,245
Finished goods 1,397,664 621,459
---------- ----------
Total inventory $3,176,384 $1,591,450
---------- ----------
---------- ----------
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31
-----------------------
1995 1994
---------- ----------
Machinery and equipment $ 805,000 $ 518,000
Office computer equipment and software 553,711 295,765
Furniture and fixtures 249,732 78,000
Leasehold improvements 113,305 63,000
----------- ----------
1,721,748 954,765
Less- Accumulated depreciation and
amortization 460,516 322,116
----------- ----------
Property and equipment, net $ 1,261,232 $ 632,649
----------- ----------
----------- ----------
See Note 2 for description of change in method of calculating depreciation
expense which occurred effective January 1, 1995.
93
<PAGE>
The Companies have $440,704 and $195,506 of property and equipment acquired
under capital leases as of December 31, 1995 and 1994, respectively. The
accumulated depreciation related to these assets totaled $81,312 and $30,257
as of December 31, 1995 and 1994, respectively. The related depreciation
expense was $51,055, $27,929 and $2,328 for the years ended 1995, 1994 and
1993, respectively.
6. REVOLVING CREDIT NOTE:
Effective October 1994, 1st Tech obtained a revolving credit note with a
financial institution which provided for maximum borrowings of $5,000,000.
In July 1995, 1st Tech restructured the revolving credit note with the same
financial institution increasing maximum borrowings to $12,000,000. Advances
bear interest at the financial institution's prime rate plus 2 percent (10.50
percent as of December 31, 1995). The borrowings are secured by assets. As
a condition precedent to the restructured note, a $35,000 commitment fee was
paid upon closing. In addition, the revolving credit note contains certain
restrictive covenants. Specifically, 1st Tech must maintain a minimum
tangible net worth as determined by the financial institution, profitability
by quarter as well as compliance with certain financial ratios specified by
the financial institution. 1st Tech is required to report its borrowing
base, determined by eligible accounts receivable, to the financial
institution each week and cannot enter into any additional debt agreements
without prior approval from the financial institution. Indebtedness under
the note was guaranteed by 1st Tech's sole shareholder. As of December 31,
1995 and 1994, advances outstanding under the revolving credit note amounted
to $6,915,000 and $3,313,000, respectively. As of December 31, 1995,
$5,085,000 was available for future borrowings. The revolving credit note is
discretionary and may be modified, suspended or terminated at the election of
the lender at any time.
The carrying amount of the revolving credit note approximates fair value.
As of December 31, 1995, 1st Tech was in violation of certain covenants of
the revolving credit note. 1st Tech obtained a one-time waiver from the
financial institution with respect to these covenant violations. In
addition, as of our report date, the company was not in compliance with
certain debt covenants. A debt waiver has been obtained by the company for
all of the periods.
7. LEASE COMMITMENTS:
The Companies lease certain equipment and office space under noncancelable
leases with expiration dates ranging from 1996 through 2000.
Future minimum principal lease payments under all leases are as follows:
Capital Operating
Leases Leases
------- ----------
1996 $ 57,276 $ 461,817
1997 57,276 443,788
1998 57,276 214,436
1999 54,096 66,287
2000 15,594 11,048
-------- ----------
Present value of minimum capital
lease payments 241,518 $1,197,376
----------
----------
Less- Amount representing interest 47,518
--------
194,000
Less- Current present value of
minimum lease payments 42,000
--------
Long-term capital lease obligations $152,000
--------
--------
94
<PAGE>
Rent expense recorded under all operating leases was approximately $240,000,
$115,000 and $66,000 for 1995, 1994 and 1993, respectively.
8. INCOME TAXES:
Effective January 1, 1994, 1st Tech converted from a C-Corporation to an
S-Corporation.
Effective January 1, 1995, DarkHorse converted from a C-Corporation to an
S-Corporation. Upon conversion, DarkHorse computed its built-in gain,
principally relating to inventory, for federal income tax purposes as
approximately $33,000.
The provision for income taxes for the years ended December 31, 1995, 1994
and 1993, consists of the following:
1995 1994 1993
------- ------- --------
Current-
Federal income tax $ - $11,525 $142,305
Federal built-in gain 33,000 - -
Texas franchise tax 25,000 11,495 -
------- ------- --------
$58,000 $23,020 $142,305
------- ------- --------
------- ------- --------
9. RELATED-PARTY TRANSACTIONS:
1st Tech's sole shareholder has a one-third interest in DarkHorse. During
1995, 1994 and 1993, the Companies had certain intercompany transactions
which are eliminated in the combined financial statements.
In November 1995, 1st Tech entered into an operating lease for certain
manufacturing equipment with its sole shareholder. The lease extends for a
period of 36 months with monthly payments totaling $6,200. The future
minimum lease payments associated with this lease are included in the amounts
disclosed in Note 7. In conjunction with the acquisition of the Companies,
as described in Note 14, the leased equipment was purchased from the
shareholder in May 1996 for $200,000 and the lease was canceled.
1st Tech made a loan to its sole shareholder during 1994 of approximately
$195,300. Interest on the loan accrues on a monthly basis at 1st Tech's
incremental borrowing rate of prime plus 2 percent (10.50 percent as of
December 31, 1995). Amounts due from the sole shareholder relating to this
loan and other cash advances totaled $199,000 and $148,000 as of December 31,
1995 and 1994, respectively. In conjunction with the acquisition of the
Companies, as described in Note 14, the then outstanding balance of $204,772
was charged to equity as a deemed shareholder distribution.
During 1993, 1st Tech's sole shareholder loaned $443,000 to 1st Tech. The
loan is subordinated to 1st Tech's existing notes payable to bank, and no
principal amounts can be repaid to the sole shareholder as long as amounts
remain outstanding under the bank line of credit. The loan bears interest at
prime plus 2-1/2 percent (11 percent as of December 31, 1995). Interest
payments on the loan are due quarterly and the principal was due December 31,
1995, with a contingency option to extend the due date up to an additional
three years. In conjunction with the acquisition of the Companies, as
described in Note 14, the loan was credited to equity as a deemed shareholder
contribution.
Additionally, as of December 31, 1993, 1st Tech had approximately $331,000
payable to Stratum Technologies, Inc., a separate corporation wholly owned by
the sole shareholder of 1st Tech Corporation. The balance was subsequently
paid during 1994.
95
<PAGE>
In 1994, 1st Tech loaned approximately $40,000 to Granite Software, Inc., a
company 20 percent owned by 1st Tech's sole shareholder. During 1995, this
amount was written off as uncollectible.
During 1994, DarkHorse repurchased certain ownership interests from two
shareholders for amounts totaling approximately $74,000 in exchange for notes
payable bearing interest at 9 percent per annum. Principal payments totaling
approximately $69,000, representing the remaining outstanding balances, were
made during 1995 on these notes payable.
Additionally, as of December 31, 1994, approximately $232,400 of salaries and
bonuses were outstanding to 1st Tech's shareholders. During 1995, $152,400
was converted to notes payable bearing interest at 9 percent per annum; while
the remaining $80,000 was paid in cash. Principal payments totaling
approximately $92,000 were made on these notes payable during 1995. The
remaining amounts outstanding on the notes, including accrued interest, were
paid in full in April 1996.
10. SIGNIFICANT CUSTOMERS:
The Companies sell their products to a variety of domestic-based memory
aftermarkets and original equipment manufacturers in the electronics
industry. The Companies perform ongoing credit evaluations of their
customers' financial condition and, generally, require no collateral from
customers. If the financial condition and operations of these customers
deteriorate, the Companies' operating results could be adversely affected.
For the year ended December 31, 1994, the Companies had one customer that
accounted for approximately 13 percent of its total combined revenue. The
Companies had no customers whose sales accounted for greater than 10 percent
of combined revenue for the years ended December 31, 1995 and 1993.
1st Tech carries a business credit insurance policy covering certain accounts
receivable. The insurance policy provides protection against losses from
uncollectible accounts resulting from insolvency of specified customers. As
of December 31, 1995, the total available coverage under the policy was
approximately $9,925,000.
11. EMPLOYEE BENEFITS:
Effective January 1, 1995, 1st Tech sponsored an employee benefit plan (the
Plan) which qualifies under Section 401(k) of the Internal Revenue Code for
all eligible employees. Eligible employees may defer a portion of their
annual compensation under the Plan subject to maximum limitations. The
requirements for eligibility include a minimum age of 21 and a minimum of one
year of service.
Under the provisions of the Plan, 1st Tech makes a discretionary matching
contribution to the Plan for the benefit of the participants. 1st Tech made
contributions of approximately $41,000 during 1995.
Effective September 1, 1995, DarkHorse established a defined contribution
plan (the DarkHorse Plan) whereby eligible employees are allowed to
contribute up to 10 percent of their gross wages, subject to limitations.
All employees of DarkHorse are eligible to participate in the DarkHorse Plan.
Under the provisions of this plan, DarkHorse may make discretionary matching
contributions to the DarkHorse Plan for the benefit of the participants.
DarkHorse made matching contributions of approximately $33,000 during 1995.
96
<PAGE>
12. COMMITMENTS AND CONTINGENCIES:
On December 13, 1995, 1st Tech Molding, Inc. (Molding), a company 50 percent
owned by the sole shareholder of 1st Tech, entered into an office space lease
agreement. The lease agreement is for five years commencing on February 1,
1996, with total aggregate minimum lease payments of approximately $610,000.
1st Tech served as the guarantor for the Molding office space lease
agreement. In conjunction with the acquisition of the Companies, as
described in Note 14, the guarantee was removed.
Additionally, on February 14, 1996, Molding entered into a five-year loan and
security agreement used to purchase certain equipment totaling approximately
$476,000. 1st Tech served as the guarantor for the Molding loan and security
agreement. In conjunction with the acquisition of the Companies, as
described in Note 14, the guarantee was removed.
13. PREFERRED STOCK:
The Company is authorized to issue 1,000,000 shares of preferred stock.
There are no preferred shares issued and outstanding as of December 31, 1995
and 1994.
14. SUBSEQUENT EVENTS:
Effective May 21, 1996, Tanisys Technology, Inc., acquired all of the
outstanding common stock of the Companies in exchange for 4.15 million shares
of Tanisys' common stock. Prior to the closing of the acquisition and as a
precedent to the acquisition, 1st Tech completed a private placement of
1,150,000 shares of its common stock for gross proceeds of $2,300,000.
Additionally, DarkHorse issued 45,000 shares of its common stock to certain
key employees.
97
<PAGE>
TANISYS TECHNOLOGY, INC.
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
98
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(UNAUDITED)
The following unaudited pro forma combined statements of operations for the
year ended September 30, 1996, give effect to the following:
The acquisitions of 1st Tech and DarkHorse, which were effective
as of May 21, 1996 are assumed to have occurred as of October 1,
1995.
The unaudited pro forma consolidated statement of operations for the year
ended September 30, 1996 reflects the unaudited historical income statement
of the Company for the year ended September 30, 1996, and the unaudited
historical income statements for 1st Tech and DarkHorse for the year ended
September 30, 1996.
The pro forma financial information does not reflect the effects of any of
the anticipated changes to be made by the Company as a result of the
acquisitions.
The pro forma statements are provided for informational purposes only and
should not be construed to be indicative of the Company's results of
operations had the transactions actually been completed on the date assumed
and do not project the Company's results of operations for any future period.
The significant assumptions and adjustments are disclosed in the
accompanying notes to the unaudited pro forma combined statement of
operations.
The following unaudited pro forma consolidated statement of operations and
accompanying notes should be read in conjunction with the audited financial
statements and other financial information pertaining to the Company and its
subsidiaries included elsewhere in this report.
99
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS(1)
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
9/30/96 9/30/96 9/30/96 Adjusted
1st Tech DarkHorse Tanisys Combined Adjustments Combined
----------- ---------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales $64,282,000 $3,495,000 $ 195,311 $67,952,322 $(1,428,704)(b) $ 66,523,607
Cost of sales 61,201,000 1,600,000 9,618 62,810,618 (1,101,275)(b) 61,709,343
----------- ---------- ----------- ----------- ----------- ------------
Gross Profit 3,061,000 1,895,000 185,693 5,141,693 (327,429) 4,814,264
----------- ---------- ----------- ----------- ----------- ------------
Research & Development 237,000 611,000 677,342 1,525,342 1,525,342
Sales & Marketing 2,107,000 424,000 299,934 2,830,934 2,830,934
General & Administrative 2,710,000 442,000 1,356,919 4,508,919 (52,000)(c) 4,456,919
Goodwill amortization --- --- 2,220,208 2,220,208 3,108,291 (a) 5,328,499
----------- ---------- ----------- ----------- ----------- ------------
Operating expenses 5,054,000 1,477,000 4,554,403 11,085,403 3,056,291 14,141,694
----------- ---------- ----------- ----------- ----------- ------------
Operating income (1,993,000) 418,000 (4,368,710) (5,943,710) (3,383,720) (9,327,429)
Other income (expense) (383,000) 14,000 73,906 (295,094) (52,000)(c) (347,094)
Provision for taxes --- --- --- --- --- ---
----------- ---------- ----------- ----------- ----------- ------------
Net income $(2,376,000) $ 432,000 $(4,294,804) $(6,238,804) $(3,435,720) $ (9,674,523)
----------- ---------- ----------- ----------- ----------- ------------
Weighted average
number of common
shares outstanding 11,765,850
Earnings per
common share $(0.82)
</TABLE>
- -------------------
(1) The acquisitions of 1st Tech and DarkHorse which were effective as of
May 21, 1996 are assumed to have occurred as of October 1, 1995.
(a) Increased amortization of goodwill expense related to the acquisitions
of 1st Tech and DarkHorse to reflect a full year of amortization.
(b) Eliminated intercompany sales between 1st Tech and DarkHorse.
(c) Eliminated miscellaneous charges between 1st Tech and DarkHorse.
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(b) EXHIBITS
The exhibits listed below are filed as part of this report. See
the Index of Exhibits included with the exhibits.
3.1 Articles of Continuance dated June 30, 1993 (Exhibit
3.1 to General Form for Registration of Securities on
Form 10, filed November 27, 1996)
3.2 Articles of Amendment to Articles of Continuance dated
July 11, 1994 (Exhibit 3.2 to General Form for
Registration of Securities on Form 10, filed November
27, 1996)
3.3 Articles of Amendment dated April 28, 1995 (Exhibit 3.3
to General Form for Registration of Securities on Form
10, filed November 27, 1996)
3.4 Articles of Amendment dated April 15, 1996 (Exhibit 3.4
to General Form for Registration of Securities on Form
10, filed November 27, 1996)
3.5 Restated Bylaws of the Company (Exhibit 3.5 to General
Form for Registration of Securities on Form 10, filed
November 27, 1996)
4.1 Form of Warrant Agreement dated May 17, 1995 (Exhibit
4.1 to General Form for Registration of Securities on
Form 10, filed November 27, 1996)
4.2 Form of Class B Warrant (Exhibit 4.2 to General Form
for Registration of Securities on Form 10, filed
November 27, 1996)
4.3 Share Purchase Warrant Certificate dated October 13,
1995 (Exhibit 4.3 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
4.4 Form of Warrant Agreement dated as of December 20, 1995
(Exhibit 4.4 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
4.5 Form of Class C Warrant (Exhibit 4.5 to General Form
for Registration of Securities on Form 10, filed
November 27, 1996)
4.6 Specimen of Common Stock Certificate (Exhibit 4.6 to
General Form for Registration of Securities on Form 10,
filed November 27, 1996)
10.1 Credit Agreement dated as of May 20, 1996, by and
between 1st Tech, DarkHorse, the Company and Chemical
Bank (now The Chase Manhattan Bank), as amended
(Exhibit 10.1 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
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10.2 Revolving Credit Note dated as of May 20, 1996, by and between 1st
Tech, DarkHorse and Chemical Bank (now The Chase Manhattan Bank)
(Exhibit 10.2 to General Form for Registration of Securities on
Form 10, filed November 27, 1996)
10.3 Agreement and Plan of Merger dated as of April 9, 1996, by and
between Tanisys Technology, Inc., Tanisys Acquisition Corp., 1st
Tech Corporation and Gary W. Pankonien ("1st Tech Merger
Agreement") (Exhibit 10.3 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.4 Amendment No. 1 dated May 16, 1996, to 1st Tech Merger Agreement
(Exhibit 10.4 to General Form for Registration of Securities on
Form 10, filed November 27, 1996)
10.5 Articles of Merger (Delaware) of 1st Tech with and into Tanisys
Acquisition Corp., dated May 31, 1996 (Exhibit 10.5 to General
Form for Registration of Securities on Form 10, filed November 27,
1996)
10.6 Articles of Merger (Texas) of 1st Tech with and into Tanisys
Acquisition Corp., dated May 31, 1996 (Exhibit 10.6 to General
Form for Registration of Securities on Form 10, filed November 27,
1996)
10.7 Agreement and Plan of Merger dated as of April 9, 1996, by and
between Tanisys Technology, Inc., Tanisys Acquisition Corp. II,
DarkHorse Systems, Inc., Jack Little, Archer Lawrence and Gary W.
Pankonien ("DarkHorse Merger Agreement") (Exhibit 10.7 to General
Form for Registration of Securities on Form 10, filed November 27,
1996)
10.8 Amendment No. 1 dated May 16, 1996, to DarkHorse Merger Agreement
(Exhibit 10.8 to General Form for Registration of Securities on
Form 10, filed November 27, 1996)
10.9 Articles of Merger (Delaware) of DarkHorse with and into Tanisys
Acquisition Corp. II, dated May 31, 1996 (Exhibit 10.9 to General
Form for Registration of Securities on Form 10, filed November 27,
1996)
10.10 Articles of Merger (Texas) of DarkHorse with and into Tanisys
Acquisition Corp. II, dated May 31, 1996 (Exhibit 10.10 to General
Form for Registration of Securities on Form 10, filed November 27,
1996)
10.11 Employment Agreement dated February 15, 1994 by and between the
Company and Mark C. Holliday (Exhibit 10.11 to General Form for
Registration of Securities on Form 10, filed November 27, 1996)
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10.12 Employment Agreement dated April 18, 1994 by and between the
Company and Benjamin S. Marz (Exhibit 10.12 to General Form for
Registration of Securities on Form 10, filed November 27, 1996)
10.13 Consulting Contract dated October 3, 1994 by and between the
Company and Parris H. Holmes, Jr., as amended (Exhibit 10.13 to
General Form for Registration of Securities on Form 10, filed
November 27, 1996)
10.14 Employment Agreement dated May 20, 1996 by and between the Company
and Gary W. Pankonien (Exhibit 10.14 to General Form for
Registration of Securities on Form 10, filed November 27, 1996)
10.15 Employment Agreement dated July 11, 1996 by and between the
Company and Joe Davis (Exhibit 10.15 to General Form for
Registration of Securities on Form 10, filed November 27, 1996)
10.16 Employment Agreement dated October 11, 1996 by and between the
Company and Guy Fielder (filed herewith)
10.17 1993 Stock Option Plan, as amended through May 20, 1996 (Exhibit
10.17 to General Form for Registration of Securities on Form 10,
filed November 27, 1996)
10.18 Form of Stock Option Agreement (Exhibit 10.18 to General Form for
Registration of Securities on Form 10, filed November 27, 1996)
10.19 401(k) Plan (Exhibit 10.19 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.20 Lease Agreement dated May 18, 1993 by and between Tanisys
Technology, Inc., assumptor of 1st Tech Corporation, and AEtna
Life Insurance Company, as amended (Exhibit 10.20 to General Form
for Registration of Securities on Form 10, filed November 27, 1996)
10.21 Master Lease Agreement dated November 9, 1994 by and between 1st
Tech and Copelco Capital Inc. (Exhibit 10.21 to General Form for
Registration of Securities on Form 10, filed November 27, 1996)
10.22 Manufacturing Agreement dated as of November 1, 1996 by and
between the Company and Siemens Components, Inc. (filed herewith)
10.23 Inventory Management Service Agreement dated as of November 1,
1996 by and between the Company and Siemens Components, Inc.
(filed herewith)
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10.24 Amendment and Restatement of Credit Agreement, dated as of
February 21, 1997, by and between 1st Tech, DarkHorse, the Company
and The Chase Manhattan Bank (filed herewith)
10.25 Revolving Credit Note dated as of February 21, 1997, by and
between 1st Tech, DarkHorse, the Company and The Chase Manhattan
Bank (filed herewith)
10.27 1997 Non-Employee Director Plan of Tanisys Technology, Inc. (filed
herewith)
10.28 Form of Non-Employee Director Stock Option Agreement (filed
herewith)
12.1 Statement re Computation of Per Share Earnings for the Fiscal Year
Ended September 30, 1996 (Exhibit 12.1 to General Form for
Registration of Securities on Form 10, filed November 27, 1996)
12.2 Statement re Computation of Per Share Earnings for the Three Months
Ended December 31, 1996 (filed herewith)
21.1 Subsidiaries of the Company (Exhibit 21.1 to General Form for
Registration of Securities on Form 10, filed November 27, 1996)
27.1 Financial Data Schedule for the Fiscal Year Ended September 30,
1996 (Exhibit 27.1 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
27.2 Financial Data Schedule for the Three-Month Period Ended December
31, 1996 (filed herewith)
99.1 Schedule II - Consolidated Valuation and Qualifying Accounts (filed
herewith)
104
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
TANISYS TECHNOLOGY, INC.
Date: March 11, 1997 By: /s/ MARK C. HOLLIDAY
----------------------------
Chairman of the Board and
and Chief Executive Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
3.1 Articles of Continuance dated June 30, 1993 (Exhibit
3.1 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
3.2 Articles of Amendment to Articles of Continuance
dated July 11, 1994 (Exhibit 3.2 to General Form for
Registration of Securities on Form 10, filed
November 27, 1996)
3.3 Articles of Amendment dated April 28, 1995 (Exhibit
3.3 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
3.4 Articles of Amendment dated April 15, 1996 (Exhibit
3.4 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
3.5 Restated Bylaws of the Company (Exhibit 3.5 to
General Form for Registration of Securities on Form
10, filed November 27, 1996)
4.1 Form of Warrant Agreement dated May 17, 1995
(Exhibit 4.1 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
4.2 Form of Class B Warrant (Exhibit 4.2 to General Form
for Registration of Securities on Form 10, filed
November 27, 1996)
4.3 Share Purchase Warrant Certificate dated October 13,
1995 (Exhibit 4.3 to General Form for Registration
of Securities on Form 10, filed November 27, 1996)
4.4 Form of Warrant Agreement dated as of December 20,
1995 (Exhibit 4.4 to General Form for Registration
of Securities on Form 10, filed November 27, 1996)
4.5 Form of Class C Warrant (Exhibit 4.5 to General Form
for Registration of Securities on Form 10, filed
November 27, 1996)
4.6 Specimen of Common Stock Certificate (Exhibit 4.6 to
General Form for Registration of Securities on Form
10, filed November 27, 1996)
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10.1 Credit Agreement dated as of May 20, 1996, by and
between 1st Tech, DarkHorse, the Company and
Chemical Bank (now The Chase Manhattan Bank), as
amended (Exhibit 10.1 to General Form for
Registration of Securities on Form 10, filed
November 27, 1996)
10.2 Revolving Credit Note dated as of May 20, 1996, by
and between 1st Tech, DarkHorse and Chemical Bank
(now The Chase Manhattan Bank) (Exhibit 10.2 to
General Form for Registration of Securities on Form
10, filed November 27, 1996)
10.3 Agreement and Plan of Merger dated as of April 9,
1996, by and between Tanisys Technology, Inc.,
Tanisys Acquisition Corp., 1st Tech Corporation and
Gary W. Pankonien ("1st Tech Merger Agreement")
(Exhibit 10.3 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.4 Amendment No. 1 dated May 16, 1996, to 1st Tech
Merger Agreement (Exhibit 10.4 to General Form for
Registration of Securities on Form 10, filed
November 27, 1996)
10.5 Articles of Merger (Delaware) of 1st Tech with and
into Tanisys Acquisition Corp., dated May 31, 1996
(Exhibit 10.5 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.6 Articles of Merger (Texas) of 1st Tech with and into
Tanisys Acquisition Corp., dated May 31, 1996
(Exhibit 10.6 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.7 Agreement and Plan of Merger dated as of April 9,
1996, by and between Tanisys Technology, Inc.,
Tanisys Acquisition Corp. II, DarkHorse Systems,
Inc., Jack Little, Archer Lawrence and Gary W.
Pankonien ("DarkHorse Merger Agreement") (Exhibit
10.7 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
10.8 Amendment No. 1 dated May 16, 1996, to DarkHorse
Merger Agreement (Exhibit 10.8 to General Form for
Registration of Securities on Form 10, filed
November 27, 1996)
10.9 Articles of Merger (Delaware) of DarkHorse with and
into Tanisys Acquisition Corp. II, dated May 31,
1996 (Exhibit 10.9 to General Form for Registration
of Securities on Form 10, filed November 27, 1996)
10.10 Articles of Merger (Texas) of DarkHorse with and
into Tanisys Acquisition Corp. II, dated May 31,
1996 (Exhibit 10.10 to General Form for Registration
of Securities on Form 10, filed November 27, 1996)
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10.11 Employment Agreement dated February 15, 1994 by and
between the Company and Mark C. Holliday (Exhibit
10.11 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
10.12 Employment Agreement dated April 18, 1994 by and
between the Company and Benjamin S. Marz (Exhibit
10.12 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
10.13 Consulting Contract dated October 3, 1994 by and
between the Company and Parris H. Holmes, Jr., as
amended (Exhibit 10.13 to General Form for
Registration of Securities on Form 10, filed
November 27, 1996)
10.14 Employment Agreement dated May 20, 1996 by and
between the Company and Gary W. Pankonien (Exhibit
10.14 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
10.15 Employment Agreement dated July 11, 1996 by and
between the Company and Joe Davis (Exhibit 10.15 to
General Form for Registration of Securities on Form
10, filed November 27, 1996)
10.16 Employment Agreement dated October 11, 1996 by and
between the Company and Guy Fielder (filed herewith)
10.17 1993 Stock Option Plan, as amended through May 20,
1996 (Exhibit 10.17 to General Form for Registration
of Securities on Form 10, filed November 27, 1996)
10.18 Form of Stock Option Agreement (Exhibit 10.18 to
General Form for Registration of Securities on Form
10, filed November 27, 1996)
10.19 401(k) Plan (Exhibit 10.19 to General Form for
Registration of Securities on Form 10, filed
November 27, 1996)
10.20 Lease Agreement dated May 18, 1993 by and between
Tanisys Technology, Inc., assumptor of 1st Tech
Corporation, and AEtna Life Insurance Company, as
amended (Exhibit 10.20 to General Form for
Registration of Securities on Form 10, filed
November 27, 1996)
10.21 Master Lease Agreement dated November 9, 1994 by and
between 1st Tech and Copelco Capital Inc. (Exhibit
10.21 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
10.22 Manufacturing Agreement dated as of November 1, 1996
by and between the Company and Siemens Components,
Inc. (filed herewith)
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10.23 Inventory Management Service Agreement dated as of
November 1, 1996 by and between the Company and
Siemens Components, Inc. (filed herewith)
10.24 Amendment and Restatement of Credit Agreement, dated
as of February 21, 1997, by and between 1st Tech,
DarkHorse, the Company and The Chase Manhattan Bank
(filed herewith)
10.25 Revolving Credit Note dated as of February 21, 1997,
by and between 1st Tech, DarkHorse, the Company and
The Chase Manhattan Bank (filed herewith)
10.27 1997 Non-Employee Director Plan of Tanisys
Technology, Inc. (filed herewith)
10.28 Form of Non-Employee Director Stock Option Agreement
(filed herewith)
12.1 Statement re Computation of Per Share Earnings for
the Fiscal Year Ended September 30, 1996 (Exhibit
12.1 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
12.2 Statement re Computation of Per Share Earnings for
the Three Months Ended December 31, 1996 (filed
herewith)
21.1 Subsidiaries of the Company (Exhibit 21.1 to General
Form for Registration of Securities on Form 10,
filed November 27, 1996)
27.1 Financial Data Schedule for the Fiscal Year Ended
September 30, 1996 (Exhibit 27.1 to General Form for
Registration of Securities on Form 10, filed
November 27, 1996)
27.2 Financial Data Schedule for the Three Months Ended
December 31, 1996 (filed herewith)
99.1 Schedule II - Consolidated Valuation and Qualifying
Accounts (filed herewith)
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Exhibit 10.16
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made effective the 11th day of October,
1996, by and between TANISYS TECHNOLOGY, INC., a Wyoming corporation, with
principal offices located at 12201 Technology Blvd., Suite 130, Austin, Texas
78727 (hereinafter referred to as the "Employer"), and Guy Fielder, a
resident of Houston, Texas (hereinafter referred to as the "Employee").
WITNESSETH:
WHEREAS, the Employer desires to employ the Employee, and the Employee
and Employer desire to enter into an agreement relating to such employment,
outlining the duties and obligations of each:
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein set forth, it is agreed as follows:
ARTICLE I - DEFINITIONS
1.1 "Confidential Information" shall mean any and all information held
in confidence by Employer including information relating to Employer's
Inventions (as defined below), and to Employer's trade secrets including
concepts, prototypes, algorithms, research and development, technology
strategies, product strategies, marketing strategies, supplier lists,
customer lists, personnel lists, personnel assignments, business
relationships, business opportunities, legal proceedings, finances, and
assets. Confidential Information further shall include information made
available to Employer by other parties under a confidential relationship.
1.2 "Invention(s)" shall mean any idea, innovation, concept, creation,
discovery, development, technique, algorithm, method, process, procedure,
prototype, hardware, software, product, improvement, or enhancement,
whether or not protectable by patent, copyright, trade secret or mask work,
and whether or not reduced to practice, but which is (a) within the scope
of Employer's current, later existing, or anticipated business and
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technology, and (b) is created, conceived, discovered, invented, reduced
to practice, developed, or made by Employee during the term of employment
by Employer, whether individually or jointly with others.
1.3 "Intellectual Property Rights" shall mean:
1.3.1 All rights, title and interests in all Letters Patent and
applications for Letters Patent including any reissue,
division, continuation or continuation-in-part applications
throughout the world now or hereafter filed;
1.3.2 All rights, title and interests in all trade secrets, and all
trade secret rights and equivalent rights arising under the
common law, state law, federal law and laws of foreign
countries;
1.3.3 All rights, title and interests in all mask work
registrations, copyrights, and copyrighted interests, and all
mask work registration rights, copyright rights and other
literary property or author's rights, whether or not
protectable by copyright or by mask work registration; and
1.3.4 All rights, title and interests in any and all know-how and
show-how, whether or not patentable, copyrightable or
protectable by trade secret or mask work registration.
ARTICLE 2 - TERMS AND CONDITIONS
2.1 EMPLOYMENT. The Employer agrees to employ the Employee, and the Employee
agrees to be employed by the Employer, subject to the terms and conditions set
forth herein.
2.2 TERM. Subject to the provisions hereof, the term of the Employee's
employment by the Employer under this Agreement shall expire November 1, 1997;
provided that such term of employment shall continue thereafter unless and until
terminated by either the Employer or the Employee upon no less than one hundred
twenty (120) days prior written notice to the other of the desire to terminate
such employment. The term of the
2
<PAGE>
Employee's employment hereunder, including any continuation of the original
term, is hereinafter referred to as the "Employment Period."
2.3 POSITION AND DUTIES. During the Employment Period, the Employee shall
serve as Vice President of Engineering of the Employer with such assignments,
powers and duties as are assigned or delegated to him by the President of the
Employer. Such assignments, powers and duties may, from time to time, be
modified by the Employer, as the Employer's needs may require. The Employee
shall also, at the request of the Employer, perform similar services for any
Affiliate (as hereinafter defined) of the Employer without additional
compensation. Except as set forth in an Amendment to the Agreement signed by
both parties and effective on the 17th day of October 1996, the Employee
agrees to devote all of his business time, skill, attention and best efforts
to the business of the Employer and its Affiliates in the advancement of the
best interests of the Employer and its Affiliates. As used in this
Agreement, the term "Affiliate" of the Employer means any person or
corporation that, directly or indirectly through one or more intermediaries,
controls or is controlled by or is under the control of the Employer.
2.4 COMPENSATION.
A. For all services rendered by the Employee to the Employer during
the Employment Period, the Employer shall pay the Employee a salary at the
rate of $96,000 per year. The compensation is to be payable, subject to such
withholdings as are required by law, in installments in accordance with the
Employer's customary payroll practices.
B. Contingent upon the approval by the Board of Directors, you will be
granted an option to purchase 100,000 shares of its common stock at an option
price determined by the policies, guidelines, rules and regulations of the
Vancouver Stock Exchange. One third of such option shall vest on each of the
first, second and third anniversaries of the date of grant and shall expire
five (5) years from the date of grant.
2.5 OFFICE FACILITIES. During the Employment Period, the Employer will
furnish the Employee, without charge, suitable office facilities for the
purpose of performing his duties hereunder, which facilities shall include
secretarial, telephone, clerical and support personnel and services and shall
be similar to those furnished to employees of the Employer having comparable
positions.
3
<PAGE>
2.6 FRINGE BENEFITS; VACATIONS. During the Employment Period, the Employee
shall be entitled to participate in or receive benefits under such pension,
medical and life insurance and other employee benefit plans of the Employer
which may be in effect from time to time, to the extent he is eligible under
the terms of those plans, on the same basis as other employees of the
Employer having comparable positions.
2.7 EXPENSES.
A. Subject to such policies regarding expenses and expense
reimbursement as may be adopted from time to time by the Employer and
compliance therewith by the Employee, the Employee is authorized to incur
reasonable expenses in the performance of his duties hereunder, and the
Employer will reimburse Employee for such reasonable out-of-pocket expenses
upon the presentation by the Employee of an itemized account and receipts
satisfactory to the Employer.
B. The Employee will be reimbursed up to, but not to exceed $5,000.00
for the costs of moving personal effects from his current place of residence
to the Austin area. This is to be used within 12 months of the signing of
this agreement.
2.8 TERMINATION.
A. If the Employee dies or becomes disabled during the Employment
Period, the Employee's salary and other rights under this Agreement or as an
employee of the Employer (except for salary and other rights accrued prior
thereto) shall terminate at the end of the month during which death or
disability occurs. For purposes of this Agreement, the Employee shall be
deemed to be "disabled" if, at any time during the Employment Period, the
Employee shall have been unable to perform the duties of his employment
hereunder due to physical or mental incapacity for a period of ninety (90)
days or any ninety (90) days in a period of two hundred seventy (270) days.
B. If the Employee fails to perform his duties hereunder or to comply
with any of the provisions hereof or commits any act of misconduct,
malfeasance, gross negligence or disloyalty, the Employment Period and the
Employee's salary and other rights under this Agreement as an employee of the
Employer, subject to Section 2.8(C) below, shall terminate upon written
notice from the Employer to the Employee, but such termination
4
<PAGE>
shall not affect the liability of the Employee by reason of his misconduct,
malfeasance, gross negligence or disloyalty.
C. If it is determined that the Employer has terminated the Employee
without cause as determined in accordance with Section 2.8(B) above, the
Employee will not be subject to the provisions of Section 2.10, COVENANT NOT
TO COMPETE, herein.
2.9 COVENANT NOT TO DISCLOSE. Employee covenants and agrees to hold in
strict confidence, and not disclose to others, any Confidential Information
or Inventions in any form. Employee further covenants and agrees that
Confidential Information and Inventions shall only be used in the performance
of work for Employer and its Affiliates, and otherwise be held in trust for
the sole benefit of Employer, and its Affiliates, successors and assigns.
2.10 COVENANT NOT TO COMPETE. As a reasonable precaution against
unauthorized disclosure and use of Confidential Information and Inventions
disclosed to Employee in the performance of Employee's duties during the
period of employment by Employer. Employee covenants and agrees that for a
period of one (1) year after the voluntary resignation of the Employee or
termination for cause as outlined in Section 2.8(B) above, Employee will not
engage in any work relating to electronic products for workstations, network
servers, peripheral products, personal computers, memory test equipment and
touch sensory products within the State of Texas.
2.11 DUTY OF DISCLOSURE TO EMPLOYER. Employee agrees to promptly disclose
to Employer all Confidential Information and Inventions which come into
Employee's possession or to which Employee is exposed during the period of
employment by Employer. Employee further agrees to promptly disclose to
Employer all business opportunities which come to Employee's attention during
the period of employment by Employer and which relate to Employer's business
or technology.
2.12 ESSENTIAL NATURE OF COVENANTS. The covenants of the Employee contained
in Sections 2.9 and 2.10 shall be construed as independent of any other
provision of this Agreement; and the existence of any claim or cause of
action of the Employee against the Employer or any of its subsidiaries,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Employer of said covenants. The
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Employee understands that the covenants contained in Sections 2.9 and 2.10
are essential elements of the transactions contemplated by this Agreement
and, but for the agreement of the Employee to Sections 2.9 and 2.10, the
Employer would not have agreed to enter into such transactions.
2.13 TITLE RIGHTS. All Intellectual Property Rights in and to Confidential
Information and Inventions are and shall remain vested in Employer. Further,
Employee agrees that all copyrightable works prepared under this Agreement
are "works made for hire' under applicable copyright laws.
2.13.1 Employee agrees to assign and hereby assigns to Employer all
Intellectual Property Rights that Employee may now or hereafter have in
Confidential Information and Inventions. Employee agrees to take such
action, including, but not limited to, the execution, acknowledgment,
delivery and preparation of documents, and the giving of testimony, as may
be requested by Employer to evidence, transfer, vest or confirm Employer's
rights, titles, and interests in Confidential Information and Inventions.
2.13.2 Employee hereby waives all moral rights in copyrightable works,
including but not limited to the rights of attribution and integrity
arising under the copyright and equivalent laws throughout the world.
2.13.3 Employee shall not contest the validity of any copyright, any
trademark, or any mask work registration owned by or vesting in Employer
under this Agreement.
2.13.4 NOTICE: Notwithstanding the provisions of Section 2.13.1 above,
this Agreement does not obligate Employee to assign or offer to assign to
Employer any of Employee's rights in an invention which:
(i) was conceived and reduced to practice without the use of
equipment, supplies, facilities, Confidential Information, ,or
Inventions of Employer;
(ii) was conceived and reduced to practice entirely on Employee's
own time; and
(iii) does not relate to the current, later existing or reasonably
anticipated business and technology of Employer.
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2.14 REMEDIES. In the event of a breach or threatened breach by the
Employee of Section 2.9 or 2.10, the Employer shall be entitled to a
temporary restraining order and an injunction restraining the Employee from
the commission of such breach. Nothing herein contained shall be construed
as prohibiting the Employer from pursuing any other remedies available to it
for such breach or threatened breach, including the recovery of money damages.
2.15 WAIVER OF BREACH. The waiver by one party of a breach of any provision
of this Agreement by the other party shall not operate or be construed as a
waiver of any subsequent breach by the other party, whether of a same or
different nature.
2.16 BINDING EFFECT. This Agreement shall inure to the benefit of and shall
be binding upon the parties hereto and their respective successors, assigns,
heirs and legal representatives. This Agreement, being personal, cannot be
assigned.
2.17 SEVERABILITY. The invalidity of all or any part of any section of this
Agreement shall not render invalid the remainder of this Agreement or the
remainder of such section. If any provision of this Agreement is
unenforceable, such provision shall be interpreted to be reformed as
necessary to become enforceable.
2.18 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall, when executed, be deemed to be an
original, but all of which together shall constitutes one and the same
instrument.
2.19 GOVERNING LAW. This Agreement shall be construed (both as to validity
and performance) and enforced in accordance with and governed by the laws of
the State of Texas.
2.20 NOTICE. All Notices which are required or may be give under this
Agreement shall be in writing and shall be deemed to have been duly given
when delivered in person or three (3) days after being mailed by registered
or certified first-class mail, postage prepaid, return receipt requested, if
to the Employee at 6546 Auden, Houston, Texas, 77005, or if to the Employer,
at the address listed above, or to such other address as such party shall
have specified by notice to the other party hereto as provided in this
section.
2.21 ENTIRE AGREEMENT. This Agreement and the Amendment to this Agreement
effective October 17, 1996, which is incorporated herein and made a part
hereof,
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constitutes the entire agreement between the parties hereto and supersedes
all prior agreements, understanding and arrangements, oral or written,
between the parties hereto with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and date first above written.
TANISYS TECHNOLOGY, INC.
By: /s/ GARY W. PANKONIEN
------------------------------
Name: Gary W. Pankonien
Title: President & Chief
Operating Officer
/s/ GUY FIELDER
- ---------------------------------
GUY FIELDER
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ADDENDUM A TO EMPLOYMENT AGREEMENT
Mr. Guy L. Fielder and Mr. Paul N. Alito, each a U.S. citizen and
respectively residing at 6546 Auden, Houston, Texas 77005, and 11626 Gatesden
Drive, Tomball, Texas 77375 (hereafter "Innovators"), and Tanisys Technology,
Inc., a United States corporation with principal officers at 12201 Technology
Boulevard, Suite 130, Austin, Texas 78727 (hereafter "Tanisys"), agree that
Innovators have independently developed prior to their employment by Tanisys the
following confidential and proprietary technology on which they are now filing
patent applications:
"Authentication and encryption communications technology, both with and
without unique tamper resistant security modules (TRSMs), for authenticating
originating systems, answering systems, and TRSM systems occurring singularly
or in networks, and encrypting information to be exchanged among such systems
with encryption keys which are highly resistant to cryptographic analysis and
brute force trial and error attacks, and encryption key management processes
which do not require the maintenance of key directories."
Innovators will be continuing their research and development of the
above technology during their employment by Tanisys, and Tanisys agrees that
all rights, title, interests, and intellectual property rights, including
patent, copyright, trademark, mask work, and trade secret rights, in the
above technology and in all modifications, improvements, enhancements and
derivatives of the above technology either conceived or made by Innovators
before, during or after Innovators employment by Tanisys, are owned solely by
and vested solely in Innovators to the complete exclusion of Tanisys.
NOW THEREFORE, the parties have signed or have caused this Addendum to be
signed by their duly authorized representative.
Tanisys Technology, Inc. Guy L. Fielder Paul N. Alito
By: /s/ GARY W. PANKONIEN /s/ GUY L. FIELDER /s/ PAUL N. ALITO
------------------------ -------------------- --------------------
Gary W. Pankonien Date: 10/17/96 Date: 10/17/96
Title: President and COO
Date: 10/17/96
<PAGE>
Exhibit 10.22
MANUFACTURING AGREEMENT
between
TANISYS TECHNOLOGY, INC.
12201 Technology Blvd.
Austin, TX 78727
U.S.A.
and
SIEMENS COMPONENTS, INC.
10950 North Tantau Avenue
Cupertino, CA 95014
U.S.A.
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INDEX TO AGREEMENT
1. BASIC AGREEMENT: SIEMENS - TANISYS
2. ATTACHMENT A: SIEMENS SPECIFIED MODULES AND LOOSE PARTS
3. ATTACHMENT B: ASSEMBLY, TEST AND REPAIR PRICES: MEMORY MODULES (MM)
4. ATTACHMENT C: LOGISTICS/TECHNICAL TERMS OF DELIVERY
5. ATTACHMENT D: SIEMENS Rolling Forecast
6. ATTACHMENT E: SIEMENS Processing and Quality Specification
7. ATTACHMENT F: EDI Agreement
8. ATTACHMENT G: SIEMENS and TANISYS Listing of Contacts
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MANUFACTURING AGREEMENT
This Agreement made effective November 1st, 1996 between Tanisys Technology,
Inc. 12201 Technology Blvd., Austin, TX 78727, U.S.A (TANISYS) and SIEMENS
Components, Inc. 10950 North Tantau Avenue, Cupertino, CA 95014 (SIEMENS)
(see Article 1.16).
WHEREAS, SIEMENS wants and TANISYS is willing to assemble quantities of
certain products exclusively for SIEMENS in accordance with these terms and
conditions, the parties agree:
1. PARTS OF AGREEMENT: DEFINITIONS
In this Agreement, the following expressions, except where the context
otherwise requires, shall have the following meanings:
1.0 "Affiliates" shall mean those corporate entities controlled by or
controlling, directly or indirectly, by capital or votes, either SIEMENS
or TANISYS, but only so long as the entities are so related.
1.1 "Contract products" (Products) shall mean those specific Memory Modules
(equipped printed circuit boards) defined in Attachment A.
1.2 "CONFIDENTIAL Information" shall mean all such technical information as
well as know-how (given orally, in writing or in other tangible form)
necessary for the manufacture of Products, which one party shares with
the other. "Confidential Information" includes the specification necessary
for the procurement of the components required for the manufacture of
Products, with the exception of DRAMs, as defined in Attachment A.
1.3 "Effective Date" shall mean the date on which this Agreement enters into
force as set forth at the beginning of this Agreement.
1.4 "Date of Shipment" shall mean the date on which the Products are shipped
out "Ex-Works" TANISYS by SIEMENS' appointed forwarder.
1.5 "Purchase orders" (Orders) shall mean the order(s) issued by SIEMENS
confirming purchase of Products from TANISYS requiring delivery within the
time frame indicated in the order.
1.6 "Specification" means the technical description of goods contained or
referred to in the order.
1.7 "Allowed Capacity" is the capacity TANISYS has dedicated for SIEMENS.
1.8 "Golden Devices" shall mean Products, tested by SIEMENS using the tester
and the test programs as well the test protocols containing the respective
results.
1.9 "Subsidiaries" shall mean legal entities controlled directly or indirectly,
by capital or votes, by fifty percent or more by SIEMENS or TANISYS, but
only as long as the entities are so controlled.
1.10 "Requirements for Quality Assurance" shall mean the general quality
requirements for processing of Devices enclosed as Attachment E to this
Agreement, including any future updates or modifications of Attachment E.
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1.11 "Packing Specification" shall mean the specification according to which
the Products shall be packed and labelled by TANISYS using the material as
specified in the "Packing specification", which is part of the "Processing
specification".
1.12 "Processing specification" (see Attachment E) shall mean the specification
and documentation for testing, burn-in and packing as well as specific
quality requirements agreed upon in the written form between the parties
for processing of the Products. For each type of Products or a family of
Products, a "Processing specification" shall be agreed upon between the
parties.
1.13 "Electronic Mail", "Internet" or "Electronic Data Interchange" (EDI) shall
mean those communications governed by the EDI Agreement attached as
Attachment F.
1.14 "Ex Works TANISYS" shall mean that title and risk of loss to the Products
will be transferred from TANISYS at the time at which TANISYS deposits the
properly packed Products with the freight carrier designated by SIEMENS at
TANISYS' facilities, or delivered to customer location. TANISYS will use
SIEMENS' shipping accounts when possible.
1.15 "FCA (Free Carrier) TANISYS" shall mean that SIEMENS will provide the DRAMs
to TANISYS' facilities for use per this Manufacturing Agreement with all
related charges until they reach that site paid by SIEMENS.
1.16 "SIEMENS" means legal entity, and means the list of contacts as specified
in Attachment G.
2. SCOPE OF WORK
Subject to these terms and conditions, TANISYS shall, in accordance to
instructions from SIEMENS, manufacture, test and ship quantities of Products
to SIEMENS or to those companies or locations to which SIEMENS directs
(Customers). On acceptance by SIEMENS or upon receipt by the Customer of
those Products, TANISYS shall be paid the amounts specified in Attachment B
for such Products.
Upon TANISYS receiving products and signing a "Warehouse Receipt" for any
given shipment, the quantity and description thereon will be deemed an
absolute indication that TANISYS has accepted risk of loss for that quantity
of that item. The only exception will be that TANISYS will be allowed until
the close of business twenty-four (24) hours after receipt of any given
shipment to advise in writing (by FAX) as to any discrepancies at the carton
level; within forty-eight (48) hours at the part number and ident number
detail level.
3. DELIVERY BY SIEMENS
3.1 SIEMENS or its "affiliates" shall deliver to TANISYS free of charge,
subject to respective orders (on the basis "FCA" TANISYS) the quantity of
DRAMs (as defined in Attachment A) necessary to fulfill the Contractor
Manufacturer's obligation according to Article 4 and the Orders placed by
SIEMENS as per Article 7 or 8 below.
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4. QUALITY ASSURANCE
4.1 QUALITY ASSURANCE MANUAL AND WORKMANSHIP STANDARD
TANISYS shall prepare and submit to SIEMENS, within 30 days following the
Effective Date of this Agreement, an official quality assurance Manual and
workmanship standard and shall implement such standard. SIEMENS may request
alterations to the manual and workmanship standard in order to improve the
overall product quality of the Products. Notwithstanding the above, the
responsibility for such Manual and workmanship standard shall rest with
TANISYS.
4.2 GENERAL INSPECTION SYSTEM
TANISYS shall provide and maintain an inspection system acceptable to
SIEMENS Quality Assurance covering the Products. Records of all inspections
shall be kept complete and available for review by the SIEMENS Quality
Assurance representative in accordance with the data retention periods
specified in the Processing and Quality specification (Attachment E).
4.3 FIRST ARTICLE TEST
If SIEMENS chooses to perform a first article test upon the Products, then
such test may be performed at TANISYS' premises before delivery of the
first quantity shipment of each type or any modified version thereof and
further deliveries shall be subject to successful performance of such test.
Such tests shall be performed at no cost to SIEMENS by TANISYS and under
the observation of the SIEMENS Quality Assurance representative where
necessary.
4.4 QUALIFICATION
Reference devices for the various packages will be submitted by TANISYS
during the initial production to SIEMENS for qualification. The production
shall not start until approval is given by SIEMENS after the qualification
tests on these parts.
4.5 AUDITS
SIEMENS reserves the right to conduct an audit of the Quality Assurance
system or Process Conformance of manufacturing and other fields with
respect to quality, reliability and reporting.
4.6 RECORD RETENTION
Records of all Production and quality data shall be kept for tracking and
available for review by SIEMENS. The data retention period to be as
specified in the Processing and Quality specification (Attachment E).
4.7 FINAL INSPECTION/TEST
TANISYS shall conduct a final inspection test on each Product (100% test)
prior to shipment. Such test shall demonstrate compliance with the
applicable specification of the Products in question. The parties will
agree on the details of such final inspection tests and document same in a
writing signed by both parties (Attachment E).
4.8 SIEMENS PERSONNEL
SIEMENS shall be responsible for the expense of sending any SIEMENS
personnel to TANISYS' premises.
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4.9 SIEMENS ACCEPTANCE AT DESTINATION
All Products ordered are subject to final acceptance at SIEMENS or its
Customers. SIEMENS or its customers may perform an incoming inspection
test based on random samples according to the quality assurance
instructions. If any Products should fail to pass such test as a result
of TANISYS' work, SIEMENS will notify TANISYS of such defects in writing,
i.e. by E-Mail or FAX. If the Products fail to pass such test based upon
an agreed and correlated test method, SIEMENS may return the failed
Products for rework by TANISYS free of charge with all handling, packing,
forwarding transport cost and insurance cost incurred to be paid by
TANISYS, and
a) TANISYS shall, upon request, promptly supply replacement, or
b) TANISYS shall, if SIEMENS requests it, replace the failed Products
delivery lot free of charge on an emergency basis, or
c) SIEMENS may return the failed Products to TANISYS at no cost to SIEMENS
for respective credit if the failed Products cannot be reworked to
conform with the agreed specification.
5. CHANGE IN PRODUCTS
5.1 SIEMENS may request technical changes of the Products relating to
improvement, reliability, serviceability or to requests of the market,
customers, or requirement of authorities and TANISYS must comply with such
change request. TANISYS will inform SIEMENS within ten (10) working-days
after receiving such requests of the result of its evaluation of the change
in writing. The parties shall mutually agree upon prices and
implementation schedules for such changes.
5.2 If TANISYS proposes to modify or change the Products so as to deviate from
the specifications set forth in Attachment A to this Agreement, TANISYS
shall inform SIEMENS in writing. SIEMENS may approve or disapprove such
modifications or change request and will inform TANISYS in writing thirty
(30) working days after receipt of notice of such a change in request. Such
a proposed modification or change may only be implemented by TANISYS upon
the express approval by SIEMENS. When modification or changes are approved
and introduced into manufacturing, TANISYS shall inform SIEMENS as to final
technical version of change and when the first shipment may be expected.
SIEMENS will then determine how many units of the ordered or forecasted
amount shall be shipped without the modifications or changes until first
shipment takes place according to the new revision level.
5.3 Regarding changes as per Article 5.2 above, TANISYS shall, upon request,
submit to SIEMENS free of charge, samples of the modified Products at
least thirty (30) days before first delivery of said products, for testing
purposes.
6. PURCHASE OF PRODUCTS
The scope of TANISYS' delivery and SIEMENS' purchase obligations shall depend
on the forecasts and Orders placed by SIEMENS in writing.
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6.1 Issue of "Purchase forecast"
a) Two weeks before the end of each quarter, SIEMENS shall forward a
"Purchase Forecast" (Forecast) setting forth the anticipated demand
for Products by SIEMENS for the succeeding six (6) quarters. The
Forecasts are projections for planning purposes only (see Attachment
C).
b) TANISYS shall ensure sufficient material (such as Printed Circuit
Boards (PCBs) and Packing Material) as specified in Attachment C. If
any change in the design of the Products requires sudden change of PCBs
or packing material, or if a Products is terminated and that
circumstance then renders TANISYS' specific SIEMENS' stock as obsolete
or unusable, SIEMENS shall be financially responsible for TANISYS'
stock of PCB and Packing Material in the quantities specified in
Attachment C.
6.2 Issuing of Order
a) SIEMENS shall issue to TANISYS a firm Order to purchase the quantity
and type of Products. Each Order shall be placed in writing via EDI,
fax or Internet. See Attachment C.
b) The Order shall govern all requirements of the Products by SIEMENS and
deliveries by TANISYS. Only the quantities and type of Products given
therein are firm order commitments.
c) All Orders have to be confirmed within one (1) working day by EDI, fax
or Internet (see Attachment C).
7. LEAD TIMES, EMERGENCY ORDERS
Lead times, "Ex-Works" TANISYS shall for either Products or Replacement
products as specified in Attachment C.
Leadtimes for Emergency orders are separately defined in Attachment C. Any
delay in delivery or pre-scheduled Products to SIEMENS affected by the
emergency order shall not be construed as a delay under Article 9.3, unless
total deliveries made within the relevant period concerned is less than the
quantity deliverable by TANISYS fully utilizing the declared capacity of
TANISYS which is dedicated for SIEMENS' Products. In such case of
under-utilization and delays in delivery, TANISYS shall be liable under
Article 9.3 for the portion short delivered.
Deliveries under emergency orders shall be effected separately. TANISYS shall
notify SIEMENS of the dispatch date (flight number, AWB number) by EDI, fax
or Internet.
8. DELIVERY OF PRODUCTS/LATE DELIVERIES
8.1 Delivery shall be effected on the basis delivered "Ex-Works" TANISYS to
SIEMENS' appointed forwarder. Each delivery shall be accompanied with
appropriate shipping papers. All dispatch notes and/or invoices must
include the Order number, the part numbers of Products shipped and any
other information specified in the Order.
8.2 Title and risk of loss shall pass upon delivery of product to SIEMENS'
specific customer locations or to SIEMENS' appointed freight forwarder.
SIEMENS shall indicate, in writing, a specific freight forwarder or means
of transportation or routing to TANISYS and TANISYS shall comply with such
directions. The Products shall be packed suitable for road/air
transportation as agreed with the SIEMENS' appointed freight forwarder.
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8.3 DELAYS
a) TANISYS shall make its best effort to ensure on-time delivery of the
Products. If TANISYS is in default with the delivery of Products
except by reasons of Force Majeure, Article 15, and/or delayed delivery
of parts and components supplied by SIEMENS, SIEMENS may claim
liquidated damages in the amount of 0.2% (two-tenths percent) of the
Tanisys invoice as per Attachment B "Assembly Pricing" for the
respective late delivered Products for every calendar day of the delay
from the "Date of Shipment" which is confirmed or deemed accepted by
TANISYS according to Section 6.2. The liquidated damages may accrue up
to a maximum amount of 5% (five percent) in total or five thousand
dollars ($5,000.00) maximum, notwithstanding any other rights SIEMENS
may have.
b) In addition to these rights, any delays extending for more than a week,
regardless of the cause (even if caused by late deliveries of TANISYS'
subcontractors), SIEMENS shall be entitled to cancel the order wholly
or in part without incurring any liability, and shall re-order the
quantities according to then existing needs of SIEMENS after the
circumstances interrupting the delivery have ended.
8.4 If any circumstances should arise which could result in a delayed delivery
of parts to TANISYS or of Products by TANISYS, the parties shall promptly
notify each other.
8.5 TANISYS shall only deliver full boxes of Products. Any incompletely filled
boxes shall be retained by TANISYS and delivery made together with Products
in the next Production Lot.
TANISYS shall deliver to SIEMENS on the 15th of each month:
a) All incomplete filled boxes of Products, and
b) All scrap DRAMs and modules for disposal by SIEMENS.
9. PRICES AND TERMS OF PAYMENT
9.1 Prices for the Products as stated in Attachment B to this Agreement are in
U.S. Dollars, on the basis of delivery "Ex-Works" TANISYS and including
appropriate packaging as specified by SIEMENS.
9.2 PRICING ADJUSTMENTS
a) The prices stated in Attachment B are fixed for the period stated in
Attachment B except in the case of changes under Article 5. The
parties will review the market conditions, currency effect, material
and labor cost influencing the price to be fixed for the next SIEMENS
fiscal year (October through September) in good faith, on an annual
basis, within the period of the last quarter of each SIEMENS fiscal
year and mutually agree and decide the price applicable for the next
SIEMENS fiscal year which price shall reflect the result of reviewing
the aforesaid factors.
b) However, the parties will review, in good faith, the market conditions,
currency effect, material and labor cost specifically costs affecting
printed circuit board and packing material and volumes influencing the
prices, on a quarterly basis, three weeks before the end of each
quarter and will mutually update the price applicable for the next
SIEMENS' quarter to reflect the result of reviewing these factors.
c) If the parties cannot work out a mutually acceptable solution, either
party may terminate this Agreement with six (6) months written notice.
Notwithstanding such right of termination, TANISYS shall continue to
deliver Products at the most recent contractual prices during this six
months' period. However, if the parties come to an agreement for
solution within such six (6) months from the notice of termination,
then the new price shall be supplied retro-actively from
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the date of termination notice and the respective party shall compensate
the other party the difference of the Purchase Price accrued from that
date.
9.3 TERMS OF PAYMENT
Payment shall be due thirty (30) days net after receipt of the respective
invoice from TANISYS.
10. WARRANTY/DEFECTS OF EPIDEMIC NATURE
TANISYS warrants that the Products conform with the applicable specifications
and are free from defects in material and workmanship subject to these
conditions:
10.1 The warranty period for the Products shall end at the earlier of
thirty-six (36) months after the delivery to Customers or receipt of the
Products by SIEMENS.
10.2 If any Products supplied by TANISYS fails to conform with this warranty
due to manufacturing defects, TANISYS shall replace at its sole cost and
expense such defective Products without delay after receipt of SIEMENS'
return shipment. The expenses required for returning such defective
Products to TANISYS shall be borne by SIEMENS; the expenses required for
re-sending Products to SIEMENS or to its Customer shall be borne by
TANISYS.
If, within thirty (30) days after receipt at TANISYS, such replacement
Products are not shipped, SIEMENS shall have the right to replace the
defective Products with products from TANISYS' latest shipment or
SIEMENS' stock which shall then be deemed as replacement under
warranty. TANISYS shall ship on an emergency basis and on its own
account such number of Products as to make up for the thus diminished
SIEMENS stock.
10.3 Replacements shall be subject to a new 36 month warranty period,
beginning with the receipt of the product by SIEMENS or its Customer.
10.4 If defects or malfunctions which appear to be excessive or of an
epidemic nature result from the manufacturing or use of unsuitable
materials by TANISYS, then TANISYS shall take appropriate actions to
remedy such defects in agreement with SIEMENS and in accordance with
reasonable standards applicable to the individual circumstances. TANISYS
shall inform SIEMENS about its actions to be taken within two (2) weeks
after notification.
10.5 The provisions of this Article 10 shall also apply after termination of
this Agreement.
10.6 If any technical problem, defect or malfunction occurs, SIEMENS will
promptly be informed by TANISYS. TANISYS will immediately start
investigations and supply a first substantial answer within five (5)
working days after receipt of SIEMENS' notification.
10.7 TANISYS does not warrant consigned DRAMs, except as to damage or defects
which result from TANISYS' storage or use of the consigned DRAMs.
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10.8 TANISYS SPECIFICALLY DISCLAIMS ALL OTHER WARRANTIES EXCEPT THOSE
SPECIFICALLY PROVIDED HEREIN, INCLUDING WARRANTIES OF FITNESS FOR A
PARTICULAR PURPOSE AND OF MERCHANTABILITY.
11. LIABILITY, RESPONSIBILITY
11.1 It is SIEMENS' responsibility to defend and resolve at SIEMENS' expense
any dispute arising from a claim that the Products infringe a third
party's patent to the extent that the alleged infringement is due to the
use of SIEMENS Information and/or DRAMs supplied by SIEMENS and
incorporated in Products manufactured by TANISYS.
11.2 Notwithstanding Section 11.1 above, it is TANISYS' responsibility to
defend or otherwise resolve at TANISYS' expense any dispute arising from
a claim that the Products infringe a third party's patent, due to
specific components in Products manufactured by TANISYS or purchased by
TANISYS from any third source or due to the manufacturing process
employed by TANISYS unless directly specified by SIEMENS'.
11.3 If a third party alleges an infringement of its patent, then the party
to this Agreement against which this claim is raised shall immediately
inform the other party and both parties shall discuss how to handle
such claim or lawsuit in the best way possible; such discussion limited
to consultations only.
11.4 SIEMENS shall indemnify and hold TANISYS harmless against any claims,
costs and expenses due to non-patent claims related to the Products
which arise from TANISYS' use of SIEMENS SUPPLIED Information or DRAMs
supplied by SIEMENS.
11.5 TANISYS shall indemnify and hold SIEMENS (and/or SIEMENS'
Subsidiaries/Affiliates and/or its Customers) harmless against any
claims, costs and expenses due to any other liability than SIEMENS
liability as per Sections 11.1 and 11.4. TANISYS may at SIEMENS'
request maintain general comprehensive liability insurance in a minimum
amount of $_______; in such case SIEMENS shall be named as an additional
insured. SIEMENS reserves the right to carry such general comprehensive
liability insurance concurrent with existing SIEMENS insurance policies
in effect.
11.6 These indemnities are conditioned upon the party seeking indemnification
promptly notifying the other party; making no admissions of liability
and cooperating in the defense of the claim.
11.7 NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, SPECIAL
OR CONSEQUENTIAL DAMAGES THAT RESULT FROM PERFORMANCE UNDER THIS
AGREEMENT, EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
12. ARBITRATION
12.1 SIEMENS and TANISYS shall attempt in good faith to resolve any dispute
arising out of or relating to this Agreement promptly by negotiation
between executives who have authority to
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settle the controversy. The executive will be at the CEO, CFO or COO
level and will not have had direct responsibility for administration of
this Agreement. Either party may give the other written notice of any
dispute not resolved in the ordinary course of business. Within fifteen
(15) days after delivery of the notice the party receiving the notice
shall submit to the other a written response.
The notice and response shall include a statement of the party's
positions regarding the matter in dispute, a summary of arguments in
support, and the name and title of the executive who will represent that
party and any other person who will accompany that executive. Within 30
days after delivery of the initial notice, the designated executives
shall meet at a mutually acceptable time and place, and thereafter as
often as they reasonably deem necessary to attempt to resolve the
dispute. All reasonable request for information made by one party to the
other shall be honored in a timely fashion.
All negotiations conducted pursuant to this Section 12 (and any of the
party's submissions in contemplation hereof) shall be kept confidential
by the parties and shall be treated by the parties and their respective
representatives as compromise and settlement negotiations for purposes
of the Federal Rules of Evidence and any similar state rules.
12.2 If any matter in dispute arising under this Agreement has not been
resolved within sixty (60) days after delivery of the notice or if the
parties fail to meet within thirty days (30) days, the matter will be
submitted to binding arbitration. Either party may initiate binding
arbitration as contemplated herein.
Either party (the claimant) may give written notice to the other
(respondent) of its intention to arbitrate, which notice shall contain a
statement setting forth the nature of the dispute, the amount involved,
if any, and the remedy sought, and file with the appropriate office of
the American Arbitration Association three copies of the notice and
three copies of the arbitration provision of this Agreement, together
with the appropriate filing fee as provided in the Schedule on page 21
of the AAA Commercial Rules as Amended and Effective on November 2, 1993.
The AAA shall give notice of such filing to the respondent which may
file an answering statement in duplicate with the AAA within ten days
after notice from the AAA, in which event the respondent shall at the
same time send a copy of the answering statement to the claimant. If a
counterclaim is asserted, it shall contain a statement setting forth the
nature of the counterclaim, the amount involved, if any, and the remedy
sought. If a counterclaim is made, the appropriate fee shall be
forwarded to the AAA with the answering statement. If no answering
statement is filed within the stated time, it will be treated as a
denial of the claim. Failure to file an answering statement shall not
operate to delay the arbitration.
12.3 The AAA Commercial Arbitration Rules, as modified or revised by the
provisions herein, shall govern these proceedings. The arbitration shall
be conducted by three arbitrators, one selected by each party and the
third selected by those two arbitrators. After the arbitrators are
selected, the parties agree to try in good faith to settle the dispute
by mediation administered by the American Arbitration Association under
its Commercial Mediation Rules.
12.4 The place of the arbitration proceedings shall be San Francisco,
California if TANISYS initiates the arbitration and in Austin, Texas if
SIEMENS initiates the arbitration. The decision of the arbitration panel
shall be rendered in writing.
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12.5 The parties agree that procedural rules will be those of the State in
which the arbitration is to OCCUR, as amended by this Agreement. In
addition, the parties agree that discovery will take place informally to
the extent possible through document production, interrogatories limited
to identification of witnesses and documents and no more than five (5)
depositions per side.
13. SUBSTANTIVE LAW
All disputes shall be settled in accordance with the provisions of this
Agreement and all other Agreements regarding its performance, in accordance
with the substantive law of the State identified in Section 12.4 (except for
its conflict of laws provision) without reference to other law. The United
Nations Convention on contracts for the International Sale of Goods of April 1,
1980 shall not apply.
14. CONFIDENTIALITY
14.1 The parties undertake to keep secret, even after termination of this
Agreement, Confidential Information furnished hereunder insofar as, and
as long as, it has not otherwise lawfully come into the public domain or
the party which disclosed the information has not consented in writing
that it may be disclosed to third parties.
14.2 The parties further agree that it will only use Confidential Information
supplied under this Agreement for purposes set forth in this Agreement.
14.3 Information shall not be subject to the above confidentiality provisions
to the extent that a party can demonstrate that the information
- is known to or is in the possession of that party before transmission
by the other party;
- became legally available to that party from a source other than the
other party or is in or passed into the public domain other than by
reach of this Agreement;
- is developed independently by that party;
- the disclosure of which is expressly authorized by the other party.
14.4 Except as required by law, neither party shall disclose the existence of
this Agreement, including insurance coverage and values thereunder,
except as mutually agreed.
15. FORCE MAJEURE
Neither party shall be liable to the other for failure or delay in the
performance of any of its obligations under this Agreement for the time and
to the extent such failure or delay is caused by Force Majeure such as, but
not limited to, riots, civil commotion, wars, hostilities between nations,
governmental laws, orders or regulations, actions by the government or any
agency thereof, storms fires, strikes, lockouts, sabotages, explosion or any
other contingencies beyond the reasonable control of the respective party and
of its sub-contractors or supplier. In such events, the affected party shall
immediately inform the other party of such circumstances together with
documents of proof, if any, and the performance of obligations hereunder
shall be suspended during, but not longer than, the period of existence of
such cause and the period reasonable required to perform the obligations in
such cases.
Should a circumstance of Force Majeure continue without interruption for a
period of more than six (6) months, then either party has the right to
forthwith terminate this Agreement and/or the respective
12
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individual orders by registered letter. The parties may also negotiate for a
reasonable extension or adjustment of this Agreement.
16. TERM AND TERMINATION
16.1 This Agreement shall be in effect for a period of two (2) years and
shall be extended automatically by periods of one year each unless
terminated by written notice at least six (6) months before the end of
such 2 year period or the end of a one year extension period. The term
of notice shall be six (6) months.
16.2 This Agreement may by written notice be prematurely terminated with
immediate effect by the party having such right as herein provided, and
notwithstanding any other rights such party may have, upon the
occurrence of either one or more of the events stated below:
- by either party if the other party voluntarily files a petition in
bankruptcy or has such a petition involuntarily filled against it
(which petition is not discharged within ninety (90) days after
filing), or is placed in an insolvency proceeding, or if an order
is entered appointing a receiver or trustee for a levy or
attachment is made against a substantial portion of its assets
which order shall not be vacated, set aside or stayed within
thirty (30) days from date of entry, or if any assignment for the
benefit of its creditors is made.
- by either party if the other has failed substantially in the
performance of any material contractual obligation, provided that
such default is not remedied to the other party's satisfaction,
within sixty (60) days after written notice to the other party
specifying the nature of such default and requiring remedy of the
same.
16.3 A waiver of any default by either party of any of the terms and
conditions of this Agreement but shall apply solely to the instances to
which such waiver is granted.
16.4 In the event of termination of this Agreement, SIEMENS shall be entitled
to request delivery of, and TANISYS shall be obliged to deliver, subject
to the terms of this Agreement, all quantities of Products ordered from
TANISYS before the Effective Date of termination.
17. PROVISIONS COVERING THE TIME AFTER TERMINATION
17.1 After termination of this Agreement, TANISYS shall continue to supply to
SIEMENS according to the terms of this Agreement Products which SIEMENS
needs in order to fulfill contractual delivery obligations which have
been entered into on the basis of quotations before termination of this
Agreement; SIEMENS will continue to meet its payment obligations under
this Agreement.
17.2 When this Agreement is terminated, either party shall, upon written
request by the other, return all Confidential Information received, as
well as all copies made of such Confidential Information.
17.3 This Article 17 shall survive the termination of this Agreement.
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18. MISCELLANEOUS
18.1 For orders placed by SIEMENS under this Agreement no other conditions
than those specified herein shall be applicable.
18.2 All changes and amendments to this Agreement must be in writing to be
valid. This requirement of written form can only be waived in writing.
18.3 Notices and communications between TANISYS and SIEMENS shall be given in
writing or by FAX or E-Mail in English Language to the following
addresses of the parties or to such other address as the party concerned
may subsequently notify in writing to the other party:
If to TANISYS: TANISYS Technology, Inc.
12201 Technology Blvd.
Austin, TX 78727
FAX: 512/258-3689
If to SIEMENS: SIEMENS Components, Inc.
10950 North Tantau Avenue
Cupertino, CA 95014
Attn: Mr. Kleinjan Du Preez, Director, Memory Products
FAX: 408/777-4974
18.4 TANISYS shall not be permitted to assign this Agreement, or parts
thereof, or any right or obligation hereunder, wholly or partially to
any third party (which term includes "Subsidiaries") without the prior
written consent of SIEMENS. SIEMENS shall not be permitted to assign
this Agreement, or rights or obligations hereunder, wholly or partially
to any third party, without the prior written consent of TANISYS.
However, SIEMENS shall be permitted to assign the contract to any entity
formed by or resulting from changes in the structure of SIEMENS
activities in the U.S., so long as the resulting entity continues to be
part of the Siemens family.
18.5 If for any reason a court of competent jurisdiction finds any provision
of this Agreement, or portion thereof, to be unenforceable, that
provision of this Agreement shall be enforced to the maximum extent
permissible so as to effect the intent of the parties, and the remainder
of this Agreement shall continue in full force and effect.
18.6 The titles to the Articles of this Agreement are for convenience or
reference only and are not part of this Agreement and shall not in any
way affect its interpretation.
18.7 When this Agreement becomes effective, it shall constitute the entire
understanding and agreement between the parties with respect to the
manufacture of Products, and shall supersede and cancel all previous
agreements, negotiations and commitments, either oral or written.
18.8 All rights and remedies conferred under this Agreement or by any other
instrument or law shall be cumulative, and may be exercised singularly
or concurrently. Failure by either party to enforce any provision of
this Agreement shall not be deemed a waiver of further enforcement of
that or any other provision.
18.9 THE PARTIES agree to comply with all U.S. federal, state, and local laws
and regulations that are applicable to the Products.
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19. EXPORT REGULATIONS
SIEMENS Information and supplies and products to be provided under this
Agreement are subject to governmental export regulations and the obligations
to provide same are subject to receipt of appropriate approvals.
TANISYS agrees to use the freight carrier so designated by SIEMENS which will
handle all coordination, brokerage and customs activities for all export
activity.
20. ORDER OF PRECEDENCE
In the event of any contradiction occurring between the various documents
contained in this Agreement, the order of precedence shall follow the order
listed below with the first item (1) having first precedence and the last
item enjoying lowest precedence.
1. This AGREEMENT: SIEMENS TANISYS
2. ATTACHMENTs: In ascending Order (A, B, ....)
15
<PAGE>
IN WITNESS THEREOF, the parties hereto have caused this Manufacturing
Agreement to be executed by their duly authorized representatives as of the
date first written above.
TANISYS TECHNOLOGY, INC. SIEMENS COMPONENTS, INC.
__________________________ __________________________
/s/ Gary W. Pankonien /s/ Kleinjan Du Preez
- ----------------------------------- ----------------------------------
By By
GARY W. PANKONIEN KLEINJAN DU PREEZ
- ----------------------------------- ----------------------------------
Printed Name Printed Name
PRESIDENT & CHIEF OPERATING OFFICER DIRECTOR, MEMORY PRODUCTS
- ----------------------------------- ----------------------------------
Title Title
11/20/96 11/20/96
- ----------------------------------- ----------------------------------
Date Date
/s/ Joe O. Davis /s/ Christiane Walter
- ----------------------------------- ----------------------------------
JOE DAVIS CHRISTIANE WALTER
- ----------------------------------- ----------------------------------
Printed Name Printed Name
CHIEF FINANCIAL OFFICER DIRECTOR, CORPORATE CONTROLLING
- ----------------------------------- ----------------------------------
Title Title
11/20/96 11/21/96
- ----------------------------------- ----------------------------------
Date Date
16
<PAGE>
EXHIBIT 10.23
INVENTORY MANAGEMENT SERVICE AGREEMENT
between
TANISYS TECHNOLOGY, INC.
12201 Technology Blvd.
Austin, TX 78727
U.S.A.
and
SIEMENS COMPONENTS, INC.
10950 North Tantau Avenue
Cupertino, CA 95014
U.S.A.
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INDEX TO AGREEMENT:
-------------------
BASIC AGREEMENT: SIEMENS - TANISYS
ATTACHMENT A: Products
ATTACHMENT B: Siemens Fiscal Calendar Cutoff Dates
ATTACHMENT C: Cost Basis and Pricing Structure
ATTACHMENT D: Compaq-specific Warehouse Requirements
ATTACHMENT E: EDI Agreement
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INVENTORY MANAGEMENT SERVICE AGREEMENT
This agreement is made effective November 1, 1996 between Tanisys Technology,
Inc. 12201 Technology Blvd., Austin, TX 78727, U.S.A (TANISYS) and Siemens
Components, Inc. 10950 North Tantau Avenue, Cupertino, CA 95014 (SIEMENS).
In consideration of the mutual covenants and agreements set forth below, the
parties agree as follows.
1. TANISYS WILL PROVIDE THE FOLLOWING:
a) Inventory receiving and dispatching including notification to SIEMENS
in case of shipping damage.
b) Storage area in a warehouse facility located at the TANISYS
manufacturing facility at 12201 Technology Blvd. Suite 130, Austin
Texas.
c) On demand delivery service to locations of SIEMENS, SIEMENS customers,
or any other location which SIEMENS requires. See Attachment D for
details of customers.
d) Inventory reports to SIEMENS via EDI per Article 11 below, and per
Attachment E.
e) Insurance per Article 16 below, if so required by SIEMENS.
f) All licenses and permits required to comply with all applicable U.S.
federal, state and local laws and regulations, for services rendered.
g) TANISYS will make shipments to locations as stated above in accordance
with SIEMENS' releases, provided per the EDI daily shipment
instructions as generated by SIEMENS.
h) TANISYS will deviate from the above planned shipments only upon
receipt of a telephone call request confirmed by FAX signed by an
authorized SIEMENS representative. TANISYS agrees to document to the
best of their ability any such deviations and to report the actual
shipments made, via EDI daily 856 Ship Notice/Manifest.
i) Deliveries by TANISYS to SIEMENS customers may require SIEMENS-
generated ASNs to SIEMENS customers. SIEMENS will retrieve from the
SIEMENS mailbox, each morning or as required, the Receiving Advice
(EDI 861) from SIEMENS customers covering shipments made by TANISYS
on behalf of SIEMENS.
2. SIEMENS WILL PROVIDE THE FOLLOWING:
a) Payment for the services performed in each calendar month during the
term of this Agreement will be made to TANISYS within thirty (30)
calendar days of SIEMENS' receipt of invoice from TANISYS. All amounts
in this Agreement are in U.S. dollars.
b) Monthly service charges shall be as agreed and documented in
Attachment C "Cost Basis and Pricing Structure".
3. TERMINATION AND DISCRETION:
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a) This Agreement may be terminated by SIEMENS for any reason in its sole
discretion upon thirty (30) days advance written notice to TANISYS.
Such termination will be with no cost or obligation to SIEMENS, except
for SIEMENS' obligation to remove all of its product from the premises
of TANISYS within thirty (30) days after such termination. SIEMENS
further agrees to bear the cost of storage, packing and moving.
b) This Agreement may be terminated by TANISYS for any reason at its sole
discretion upon ninety (90) days advance written notice to SIEMENS.
4. TERMINATION FOR CAUSE:
If for any reason SIEMENS, in its sole opinion, determines that TANISYS is
not performing this Agreement in a satisfactory manner, including but not
limited to, not delivering product according to SIEMENS requests, delivering
short or wrong quantities, losing inventory, failure to report in a timely
manner, or failure to complete billings or receipts in a timely manner;
SIEMENS will give TANISYS written notice of such default and TANISYS will
have ten (10) days to cure the default after receipt of the written notice.
If not cured, SIEMENS may immediately terminate this Agreement without
further notice. If SIEMENS so terminates the Agreement, TANISYS will
immediately return to SIEMENS whatever parts remain in TANISYS' inventory or
direct the inventory to be shipped to a successor firm or any other location
as SIEMENS requires.
5. RELATIONSHIP BETWEEN PARTIES:
a) This Agreement is not intended to and does not create any
employer/employee relationship between the parties. TANISYS is and
shall remain an independent contractor providing a service to SIEMENS.
TANISYS agrees that in the context of the service it is rendering to
SIEMENS that it will not claim or represent that it is operating or
doing business as a SIEMENS sales office, nor will it purport to pledge
the credit of, or enter into any contract for, or on behalf of SIEMENS.
b) This Agreement does not convey, nor shall TANISYS claim, any property
interest in SIEMENS' corporate name, trademarks, trade names or patents,
or other proprietary rights. TANISYS shall indemnify and hold SIEMENS
harmless from all claims, demands, suits, and actions for damages to
property or persons, including legal or attorney's fees incurred by
SIEMENS made by any third party resulting from TANISYS' negligence or
willful misconduct in providing these services. This obligation to
indemnify shall survive the termination of this Agreement.
c) Neither SIEMENS nor TANISYS shall be liable for failure to perform
any obligation under this Agreement if such failure is caused by
circumstances not directly under such party's reasonable control,
including, but not limited to, failures resulting from acts of God,
acts of public authorities, war and war measures, strikes, fires,
failures or delays of suppliers or carriers, inability to obtain
materials or supplies, demand for products within the forecast
period over available supply, regulations under Agreements between
governments or any interruption for any reason in the manufacture of
products by suppliers.
6. TANISYS WILL ALSO DO THE FOLLOWING:
a) TANISYS agrees to provide and maintain, without expense to SIEMENS,
a suitable place of business with adequate facilities including a
monitored security alarm system and sufficient personnel for the timely
receiving and delivery of the products to SIEMENS' customers. "Products"
for purposes of this Agreement shall include those referred to in
Attachment A "Products" and such others as SIEMENS may decide to add
into its shipments under the terms
4
<PAGE>
terms of the Agreement. TANISYS shall provide secure and segregated
areas for consigned and finished goods conspicuously marked as
SIEMENS areas.
b) TANISYS shall maintain and use its facilities in such a manner as
to ensure proper care for SIEMENS products, including at a minimum,
proper temperature and humidity controls, proper anti-static equipment,
and proper facilities to permit incoming, outgoing or other inspection
of product. TANISYS shall maintain and use its facilities to ensure
prompt handling of orders and shipments, careful attention to customer
complaints, and servicing for all products covered by this Agreement.
c) TANISYS shall maintain records of inventory, shortages, receiving and
shipments of products and make such records available to SIEMENS or
its representatives upon request during normal business hours to make
certain that all of the requirements of this Agreement such as
facilities, personnel and record integrity are being met.
7. PRODUCTS:
a) TANISYS agrees to coordinate shipment of product to specified customers
upon notification and approval by SIEMENS.
b) SIEMENS shall not be required to provide TANISYS any products.
c) SIEMENS may issue revisions to Attachment A from time to time to keep
TANISYS informed of current products to be delivered.
8. TITLE AND SHIPMENT RESPONSIBILITIES:
a) SIEMENS may withdraw any product with reasonable notice of 24 hours
to TANISYS.
b) Inventories will be subject to verification and audit by SIEMENS or
its designated representative. All inventory shrinkage at TANISYS
will be charged directly to TANISYS and invoiced accordingly to TANISYS.
c) SIEMENS retains title in all products while in the TANISYS warehouse.
d) Notwithstanding (b) above, but subject to Articles 16 and 17 below,
SIEMENS will bear risk of loss for the inventory (except for losses
attributable to the willful or negligent act of TANISYS) until it is
signed for by SIEMENS' customer.
e) All shipments from SIEMENS to TANISYS will be made such that SIEMENS
pays freight costs. SIEMENS is responsible for filing any freight
claims that might arise. All deliveries from TANISYS to SIEMENS'
customers will be made by TANISYS at SIEMENS' customer's or SIEMENS
direct expense, as instructed by SIEMENS.
9. INVENTORY:
5
<PAGE>
a) TANISYS will maintain the inventory of products furnished by SIEMENS
and will cooperate with SIEMENS in periodic reviews of inventory
based on daily, weekly and monthly inventory report submissions.
b) Upon request by SIEMENS, TANISYS will complete cycle count
verification and audit within 24 hours of request, and will submit
to SIEMENS a written reconciliation including historical activity
for identified variances within 3 working days of the request.
10. RETURNS:
TANISYS, under this Service Agreement, shall bear responsibility for returns
as outlined below.
a) In the event of damaged or functional rejects by SIEMENS' customers,
TANISYS will accept returns, provided that such returns are authorized
by SIEMENS.
b) TANISYS shall make an evaluation as to the reason for product failure.
In case of a manufacturing defect caused by TANISYS in assembly,
TANISYS shall rework or replace at TANISYS' expense any defective
product and will ship at TANISYS' expense such replacement product
to SIEMENS' customer. Additional services rendered by TANISYS for
rework, test and repair for other than TANISYS' processed activity
will be available to SIEMENS as per Attachment F.
c) Any product deemed by TANISYS to have failed due to SIEMENS component
failure shall be transferred to scrap inventory, and recorded as such
in TANISYS' inventory, until advised by SIEMENS as to disposition.
11. REPORTS:
a) TANISYS will provide same-day notification to SIEMENS of shipments
to SIEMENS customers' location by product and ident number. In
addition, TANISYS shall submit a shipment report, by product and ident
number, no later than the Monday following the end of the SIEMENS
fiscal month. The report shall provide a listing of shipments during
that month, identified by part number, product ident number (BNR),
ASN number and date, quantity shipped and balance of product held by
as inventory. (See Attachment B: SIEMENS Fiscal Month Ending Dates).
b) Daily transmissions shall occur via EDI 846 transactions for SIEMENS'
defined stock, including but not limited to on-hand consigned
quantities of loose parts, work in process (WIP), rework, scrap,
finished stock, cumulative to-date shipments, "red flag" critical
issues, and running perpetual inventory listings.
c) TANISYS will work with SIEMENS to track performance indicators such
as data integrity and timeliness of data entry. Through continuous
improvement and a team-oriented problem solving approach, SIEMENS and
TANISYS will ensure the quality of service expected in this Agreement.
12. ASSIGNMENT:
TANISYS shall not delegate any duties or assign any rights under this Agreement
or any interest herein without SIEMENS prior written consent, which may be
granted or withheld at the sole discretion of SIEMENS; otherwise such may, at
SIEMENS' option, be deemed to be a termination of this Agreement by TANISYS. The
merger or consolidation of TANISYS, or any other transaction effecting a
substantial change in the ownership or control of TANISYS, shall be deemed at
SIEMENS' option an
6
<PAGE>
assignment requiring prior written consent by SIEMENS. This Agreement may be
assigned by SIEMENS to such other corporations as may be incorporated in
North America and deemed by SIEMENS to be the appropriate corporation(s) to
succeed TANISYS.
13. DURATION AND TERMINATION:
a) This Agreement shall commence on the date first written above and
unless terminated, in accordance with the terms hereof, shall remain
in effect until December 31, 1997. Either party may decline to renew
this Agreement with or without cause (in the sole discretion of that
party) by giving at least ninety (90) days' prior written notice of
that party's election to decline to renew. If no such notice is given,
this Agreement shall be deemed to be renewed and extended on a yearly
basis. Neither party makes any promise nor is under any obligation,
expressly or implied, to renew this Agreement upon its expiration.
b) If TANISYS should become insolvent or take or have brought against it
bankruptcy proceedings or if a distress or analogous process is
levied against all or part of its property, or if a receiver for their
property or a substantial part thereof shall be appointed, SIEMENS may
at its option terminate this Agreement by giving notice of its election
to do so and such termination shall be effective on the date notice is
given.
c) Upon termination of this Agreement, TANISYS agrees to return to SIEMENS
and SIEMENS shall accept return of any and all SIEMENS` inventory of
those SIEMENS products which were listed on TANISYS` last daily
inventory report, inclusive of receipts and shipments made after the
previous days' closing date. TANISYS agrees that, upon such termination,
it will ship such inventory FCA shipping point, freight collect to
SIEMENS as SIEMENS shall direct.
d) Acceptance of any order from or the shipment of any product to TANISYS
after termination shall not be construed as a renewal or extension of
the Agreement nor as a waiver of any termination notice.
14. CONFIDENTIALITY:
14.1 "Confidential Information" shall mean all such technical information as
well as know-how (given orally, in writing or in other tangible form)
necessary for the manufacture of Products, which one party shares with
the other. "Confidential Information" includes the specification
necessary for the procurement of the components required for the
manufacture of Products, with the exception of DRAMs, as defined in
Attachment A.
14.2 The parties undertake to keep secret, even after termination of this
Agreement, Confidential Information furnished hereunder insofar as, and
as long as, it has not otherwise lawfully come into the public domain
or the party which disclosed the information has not consented in writing
that it may be disclosed to third parties.
14.3 The parties further agree that it will only use Confidential Information
supplied under this Agreement for purposes set forth in this Agreement.
7
<PAGE>
14.4 Information shall not be subject to the above confidentiality provisions
to the extent that a party can demonstrate that the information
- is known to or is in the possession of that party before transmission
by the other party;
- became legally available to that party from a source other than the
other party or is in or passed into the public domain other than by
reach of this Agreement;
- is developed independently by that party;
- the disclosure of which is expressly authorized by the other party.
14.5 Except as required by law, neither party shall disclose the existence
of this Agreement, including insurance coverage and values thereunder,
except as mutually agreed.
15. SCOPE OF AGREEMENT:
a) This Agreement supersedes and cancels any previous understanding or
agreement between the parties relating to the Services to be provided.
There are no other inventory management or warehousing terms and
conditions, representations or undertakings, except those set forth in
this Agreement. No other agreement or understanding purporting to
modify or supplement this Agreement, nor any promises made by a
party's representative shall be binding upon that party unless confirmed
in writing by a duly authorized representative of that party.
b) The failure of a party to enforce at any time any of the provisions
of this Agreement, or any right with respect thereto, shall not be
construed as a waiver of such provisions or rights or any other
provision or right.
c) This Agreement becomes binding only when executed by both parties.
16. INSURANCE:
a) TANISYS may at SIEMENS' request procure and maintain comprehensive
general liability insurance including property damage with limits of
not less than $XXXXXX (XXXXXX Dollars) Property Coverage with A+ rated
companies, which covers both the Manufacturing Agreement Section 11 and
this Agreement. In such case, SIEMENS shall be an additional named
insured in all such policies. TANISYS shall provide current
certificates of such insurance. Under no conditions may such insurance
be modified, canceled and/or replaced without thirty (30) days advanced
written notice to SIEMENS. SIEMENS reserves the right to carry such
general comprehensive liability insurance concurrent with existing
SIEMENS insurance policies in effect.
b) TANISYS shall be fully liable for any and all damages caused due to
breach of this section.
17. SECURITY INTEREST and WAREHOUSE RECEIPT:
a) Upon TANISYS receiving products and signing a "Warehouse Receipt" for
any given shipment, the quantity and description thereon will be
deemed an absolute indication that TANISYS has accepted risk of loss
for that quantity of that item. The only exception will be that TANISYS
will be allowed until the close of business twenty-four (24) hours
after receipt of any given shipment to advise in writing (by FAX) as
to any discrepancies at the carton level; within forty-eight (48) hours
at the partnumber and ident number detail level.
All such notifications are to include:
1) Packing List number (or similar identification)
2) Number of cartons received
3) Nature of discrepancy
8
<PAGE>
4) Date shipped from SIEMENS.
b) There will be no requirement for SIEMENS to prove negligence in
order to obtain reimbursement, if any product, or any portion thereof,
is, for any reason whatever, subsequently found to have been lost,
stolen or damaged while under the control of TANISYS.
c) TANISYS shall not, under any circumstances, pledge as collateral any
SIEMENS product in any undertaking, and/or hypothecate any of the
products entrusted in its care.
d) TANISYS shall complete and forward daily all inventory transactions,
receipts, and ASN activity detail to SIEMENS via EDI, Internet or
FAX within one (1) hour of the close of TANISYS' normal business
day (no later than 5:00 P.M. Central Standard Time).
18. NOTICES:
All notices required to be made thereunder shall be given by (a) Registered
or first-class mail, return receipt requested, or (b) Telecommunications - EDI,
Internet or FAX. Notices given under clause (a) shall be deemed to be given
on the fifth day after mailing. Notices given under clause (b) shall be
deemed to be given when transmitted unless transmitted after ordinary business
hours of the party to be noticed, in which case it shall be deemed to be given
on the next business day.
19. ARBITRATION:
19.1 SIEMENS and TANISYS shall attempt in good faith to resolve any dispute
arising out of or relating to this Agreement promptly by negotiation
between executives who have authority to settle the controversy. The
executive will be at the CEO, CFO or COO level and will not have had
direct responsibility for administration of this Agreement. Either party
may give the other written notice of any dispute not resolved in the
ordinary course of business. Within fifteen (15) days after delivery of
the notice the party receiving the notice shall submit to the other a
written response.
The notice and response shall include a statement of the party's
positions regarding the matter in dispute, a summary of arguments in
support, and the name and title of the executive who will represent that
party and any other person who will accompany that executive. Within 30
days after delivery of the initial notice, the designated executives
shall meet at a mutually acceptable time and place, and thereafter as
often as they reasonably deem necessary to attempt to resolve the dispute.
All reasonable request for information made by one party to the other
shall be honored in a timely fashion.
All negotiations conducted pursuant to this Section 19 (and any of the
party's submissions in contemplation hereof) shall be kept confidential
by the parties and shall be treated by the parties and their respective
representatives as compromise and settlement negotiations for purposes
of the Federal Rules of Evidence and any similar state rules.
19.2 If any matter in dispute arising under this Agreement has not been
resolved within sixty (60) days after delivery of the notice or if the
parties fail to meet within thirty days (30) days, the matter will be
submitted to binding arbitration. Either party may initiate binding
arbitration as contemplated herein.
9
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Either party (the claimant) may give written notice to the other
(respondent) of its intention to arbitrate, which notice shall contain
a statement setting forth the nature of the dispute, the amount involved,
if any, and the remedy sought, and file with the appropriate office of
the American Arbitration Association three copies of the notice and
three copies of the arbitration provision of this Agreement, together
with the appropriate filing fee as provided in the Schedule on page 21
of the AAA Commercial Rules as Amended and Effective on November 2, 1993.
The AAA shall give notice of such filing to the respondent which may
file an answering statement in duplicate with the AAA within ten days
after notice from the AAA, in which event the respondent shall at the
same time send a copy of the answering statement to the claimant. If a
counterclaim is asserted, it shall contain a statement setting forth the
nature of the counterclaim, the amount involved, if any, and the remedy
sought. If a counterclaim is made, the appropriate fee shall be forwarded
to the AAA with the answering statement. If no answering statement is
filed within the stated time, it will be treated as a denial of the claim.
Failure to file an answering statement shall not operate to delay the
arbitration.
19.3 The AAA Commercial Arbitration Rules, as modified or revised by the
provisions herein, shall govern these proceedings. The arbitration
shall be conducted by three arbitrators, one selected by each party and
the third selected by those two arbitrators. After the arbitrators are
selected, the parties agree to try in good faith to settle the dispute
by mediation administered by the American Arbitration Association under
its Commercial Mediation Rules.
19.4 The place of the arbitration proceedings shall be San Francisco,
California if TANISYS initiates the arbitration and in Austin, Texas
if SIEMENS initiates the arbitration. The decision of the arbitration
panel shall be rendered in writing.
19.5 The parties agree that procedural rules will be those of the State in
which the arbitration is to occur, as amended by this Agreement. In
addition, the parties agree that discovery will take place informally
to the extent possible through document production, interrogatories
limited to identification of witnesses and documents and no more than
five (5) depositions per side.
20. SUBSTANTIVE LAW:
All disputes shall be settled in accordance with the provisions of this
Agreement and all other Agreements regarding its performance, in accordance
with the substantive law of the State identified in Section 19.4 (except for
its conflict of laws provision) without reference to other law. The United
Nations Convention on contracts for the International Sale of Goods of April 1,
1980 shall not apply.
21. LIMITATION OF LIABILITY:
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, SPECIAL OR
CONSEQUENTIAL DAMAGES THAT RESULT FROM PERFORMANCE UNDER THIS AGREEMENT,
EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
IN WITNESS THEREOF, the parties hereto have caused this Service Agreement to
be executed by their duly authorized representatives as of the date first
written above.
TANISYS TECHNOLOGY, INC. SIEMENS COMPONENTS, INC.
- ------------------------------ -----------------------------------
/s/ Gary W. Pankonien /s/ Kleinjan Du Preez
- ------------------------------ -----------------------------------
By By
10
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GARY W. PANKONIEN KLEINJAN DU PREEZ
- ----------------------------------- -----------------------------------
Printed Name Printed Name
PRESIDENT & CHIEF OPERATING OFFICER DIRECTOR, MEMORY PRODUCTS
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Title Title
11/20/96 11/20/96
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Date Date
/s/ Joe O. Davis /s/ Christiane Walter
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JOE DAVIS CHRISTIANE WALTER
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Printed Name Printed Name
CHIEF FINANCIAL OFFICER DIRECTOR, CORPORATE CONTROLLING
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Title Title
11/20/96 11/21/96
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Date Date
11
<PAGE>
Exhibit 10.24
AMENDMENT AND RESTATEMENT OF CREDIT AGREEMENT
(BORROWING BASE)
THIS AMENDMENT AND RESTATEMENT OF CREDIT AGREEMENT (as amended, restated and
supplemented from time to time, this "AGREEMENT") by and between 1ST TECH
CORPORATION (1st "Tech"), a Delaware corporation, DARKHORSE SYSTEMS,
INCORPORATED ("Darkhorse"), a Delaware corporation and TANISYS TECHNOLOGY,
INC. ("Tanisys"), a Wyoming corporation (jointly and severally, "Borrowers"
and each a "Borrower"); and THE CHASE MANHATTAN BANK, a New York state bank,
("BANK", including Bank's predecessor by merger Chemical Bank, a New York
state bank) is executed as of February 21, 1997 ("Effective Date").
PRELIMINARY STATEMENT. 1st Tech, Darkhorse, Tanisys and Bank entered into a
Credit Agreement dated May 20, 1996 (as amended, "Prior Agreement"), and have
agreed to amend and restate it in its entirety to, among other things,
provide that Tanisys will be an additional Borrower; to provide for certain
reductions in the amount of the Commitment and the advance rate on the
Borrowing Base; to provide for waiver of certain financial covenant defaults;
and to change a financial covenant. The parties therefore agree as follows:
1. THE LOANS.
REVOLVING CREDIT NOTE 1.1.A Subject to the terms and conditions hereof, Bank
agrees to make loans ("Loan" or "Loans") to any Borrower from time to time
before the Termination Date, not to exceed at any one time outstanding the
lesser of the Borrowing Base or the Maximum Amount ("Commitment"). Borrowers
may borrow, repay and reborrow upon a Loan Request in Proper Form submitted
by either Borrower. Loans may only be used to finance accounts receivable
and inventory from Borrowers' regular business operations. Chapter 15 of the
Texas Credit Code will not apply to this Agreement, the Note or any Loan.
The Loans will be evidenced by, and will bear interest and be payable as
provided in, Borrowers' promissory note dated the Effective Date (together
with any and all renewals, extensions, modifications and replacements thereof
and substitutions therefor, "Note"), given to replace and modify the
$6,000,000.00 Revolving Credit Note executed by 1st Tech and Darkhorse
executed and delivered to Bank as of the Prior Agreement Effective Date
("Prior Note"). "TERMINATION DATE" means the earlier of (a) June 30, 1998;
or (b) the date specified by Bank pursuant to SECTION 6.1 hereof
MAXIMUM AMOUNT OF COMMITMENT 1.1.B The "Maximum Amount" of the Commitment
shall be the amount determined as follows: (a) on the Effective Date the
Maximum Amount is $6,000,000.00; and (b) at the close of business Friday,
February 21, 1997, and at the close of business each Friday thereafter, the
Maximum Amount shall be reduced by $250,000.00 below the value of the Maximum
Amount immediately preceding such weekly reduction, UNTIL (c) the Maximum
Amount shall have been reduced to $4,000,000.00, whereupon it shall not
reduce further.
LETTERS OF CREDIT 1.1.C Bank in its sole absolute discretion may issue
sight draft commercial and/or standby letters of credit up to the day before
the Termination Date for the account of Borrowers and in favor of such Person
or Persons as may be designated by either Borrower upon an application
substantially in the form of Bank's then current application and agreement
therefor or other application acceptable to Bank ("APPLICATION"), duly
completed and executed by either Borrower in Proper Form not less than two
(2) Business Day(s) prior to the date on which the letter of credit is to be
issued. "LETTER OF CREDIT" means any Letter of Credit issued by Bank upon an
Application of Borrowers. No Letter of Credit shall have an expiry date
later than a date 3 months from the Termination Date. Letters of Credit may
be commercial or standby. "L/C OBLIGATIONS" means the sum of (a) the face
amount of all outstanding Letters of Credit less any drawings that have been
paid by Borrowers either with a Loan or other means acceptable to Bank and
(b) any other amounts owing to Bank under the Applications not already
included in (a). Borrowers will pay a fee in an amount equal to the greater
of: (a)(i) for commercial L/Cs, one percent (1.0%) per quarter or fraction
thereof on the face amount of the Letter of Credit and (ii) for Standby L/Cs,
three percent (3.0%) per annum or fraction thereof on the face amount of the
Letter of Credit; and (b) Bank's minimum fee in effect on the issue date of
the Letter of Credit. The fee shall be paid to the Bank at its main offices
to the attention of the Manager, Documentary Services Division prior to the
issuance of the Letter of Credit. Bank may at any time, but is not required
to, make a Loan without prior notice to Borrowers to pay any drawing under a
Letter of Credit and to pay any L/C Obligation. Letters of Credit shall be
for the purpose of financing trade credit extended to either Borrower in its
regular course of business. L/C Obligations shall never exceed $2,000,000.00
("LETTER OF CREDIT SUBLIMIT").
BORROWING BASE 1.2:
(a) The BORROWING BASE on each Business Day is the "Total Availability on
Accounts Receivable and Inventory" calculated in accordance with the
Borrowing Base Certificate in Exhibit A, the "Accounts Receivable Loan
Administration Procedures" ("Procedures") delivered by Bank to Borrower
and incorporated herein by reference as if fully set forth, but PROVIDED,
HOWEVER THAT to the extent that any provision of this Agreement and the
Procedures shall be in conflict, the provisions of this Agreement shall
be controlling. The Borrowing Base shall include only Accounts receivable
of Borrower. No inventory shall be included in the Borrowing Base.
(b) The calculations, definitions and other criteria set out in Exhibit A
shall be subject to the following definitions and adjustments:
(i) The Advance Rate (the amount by which Net Eligible Receivables
is multiplied in the Borrowing Base Certificate) shall be determined
as follows: (a) on the Effective Date the Advance Rate is 80%; and
(b) at the close of business Friday, February 21, 1997, and at the
close of business each Friday thereafter, the Advance Rate shall
be reduced by 1% below the value of the Advance Rate immediately
preceding such weekly reduction (e.g., to 79% on February 21, 1997),
UNTIL (c) the Advance Rate shall have been reduced to 75%, whereupon
it shall be reduced 1% per month until it reaches 70%.
(ii) "Other" ineligible Accounts means all Accounts not subject to Bank's
first and prior lien and security interest and such assets deemed
from time to time to be, in the sole judgment of the Bank,
ineligible for purposes of determining the Borrowing Base; Memo A/R
and Evaluation A/R shall be Ineligible Accounts. "'Memo' and
'Evaluation' A/R" shall include all Accounts of the type typically
referred to as such by Borrower prior to the Effective Date, and
any accounts which do not represent payments finally earned or
which result from a sale subject to product evaluation by the buyer.
Outstanding Loans, interest and fees counted against Total
Availability on Accounts Receivable and Inventory shall use Bank's
standard estimation provided by Bank to Borrower.
(iii) In addition to the periodic reductions in the Accounts Advance
Factor set out in Exhibit A, each Accounts Advance Factor may be
increased or decreased by the Bank at any time and from time to
time upon written notice to Borrower, in the reasonable exercise
of Bank's sole underwriting discretion. Without limiting the
generality of the foregoing, Bank shall be deemed to have exercised
reasonable discretion if it reduces the Accounts Advance Factor in
reasonable proportion to increased dilution of Accounts which Bank
believes exceeds 5% of the amount existing at the Effective Date
of the Agreement.
REQUIRED PAYMENT 1.3 If the unpaid amount of the Loans and L/C Obligations
on any Business Day exceeds the Commitment on such day (including any such
excess resulting from scheduled reductions in the Maximum Amount and/or the
Advance Rate), Borrowers shall make a payment on the Note in an amount
sufficient to reduce the total unpaid principal balance of the Note to an
amount no greater than the Commitment, such payment due and payable on the
date such excess occurs, to accompany timely delivery of Borrowers' monthly
Borrowing Base Report or Daily Collateral Certificate, as the case may be.
If the balance on the Note is zero and the amount of L/C Obligations still
exceeds the Commitment, Borrowers will promptly deliver cash collateral to
Bank in an amount sufficient to eliminate such excess.
FACILITY FEES 1.4 Borrowers shall continue to pay an Administration Fee of
$50,000 per annum payable in installments which began on the Prior Agreement
Effective Date of this Agreement and continuing on the first date of each
third month thereafter. Borrowers authorize Bank in its discretion and
without prior notice to advance against the Commitment and Note to pay these
fees when due.
PAST DUE AMOUNTS 1.5 Each amount due to Bank in connection with the Loan
Documents will bear interest from its due date until paid at the Highest
Lawful Rate unless the applicable Loan Document provides otherwise.
Page 1 of 7 Pages
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RATIFICATION AND CONFIRMATION OF SECURITY INTERESTS 1.6 Each Borrower
confirms and ratifies each of the liens, security interests and other
interests granted in each and all security agreements executed in connection
with, related to, or securing the Prior Note and Prior Agreement ("Prior
Obligations") as extending to and securing the Note, the Loans, Applications
and L/C Obligations, including, but not limited to, each of those interests
and liens described in the following listed Security Agreements. The terms
"secured indebtedness", "indebtedness secured hereby" and any similar
reference in any Security Agreement include, but are not limited to, each and
all indebtedness of all character and kind related to or evidenced by the
Note, each Loan, Application and L/C Obligation or related to any other Loan
Document. "Security Agreements" includes the General Security Agreements
executed and delivered, respectively, by 1st Tech and Darkhorse dated May 20,
1996; the Security Agreement - Pledge of Certificate of Deposit and
Assignment of Deposit Accounts executed and delivered by 1st Tech dated May
20, 1996; the Third Party Security Agreement - Pledge executed and delivered
by Gary Pankonien dated May 20, 1996; and the Third Party Security Agreement
- -- Accounts And General Intangibles executed and delivered by Tanisys dated
December 17, 1996. Borrowers acknowledge that the Prior Agreement and
certain of the Loan Documents executed in connection with the Prior Agreement
were executed for Bank by an officer of Bank's affiliate Texas Commerce Bank
National Association in accordance with Bank's instructions, and Bank and
each Borrower hereby ratifies and confirms the Prior Agreement (subject to
the amendment and restatement herein as of the Effective Date) and each of
the other Loan Documents so executed.
LIMITED WAIVER -- PRIOR AGREEMENT COVENANTS 1.7 Borrowers have reported that
their tangible net worth and ratio of adjusted EBITDA to interest expense for
the period ending December 31, 1996 were each below the levels agreed to be
maintained in the Prior Agreement, and have requested that such defaults be
waived. Bank has agreed to waive the foregoing prior period defaults, for
the specific instances described for those prior periods only, subject to the
terms of this waiver provision. This waiver is subject to the conditions and
understandings that: (i) no other waivers are promised by the Bank; (ii) Bank
understands the requested waivers to address all defaults as to covenants,
representations and warranties known to Borrowers as of the Date of this
Agreement, Borrower having represented that in all other respects no event of
default has occurred and is continuing under the Prior Agreement or under
this Agreement as of its execution; (iii) Borrower will not in any way rely
upon the any future waiver of any default; and (iv) any future delay or
election not to exercise rights by the Bank shall not be deemed any waiver of
rights. Bank's rights in the event of a default are set out in this
Agreement, the Note and the other Loan Documents. This provision is the only
evidence of Bank's waiver.
2. CONDITIONS PRECEDENT.
ALL LOANS AND L/C OBLIGATIONS 2.1 Bank is not obligated to make any Loan
unless: (a) Bank has received the following, duly executed and in Proper
Form: (1) a Request for Loan substantially in the form of the sample letter
set out in Exhibit A not later than 11 am Central Time on the date (which
shall be a Business Day) of the proposed Loan, or an Application for Letter
of Credit as provided in section 1.1C, as the case may be; provided however,
Bank may accept and act upon verbal advance requests received from a
Borrower's representative reasonably believed by Bank to be authorized to
make such requests, each such request to be confirmed in writing in Proper
Form; (2) a Borrowing Base Report within the time required by this Agreement;
and (3) such other documents as Bank reasonably may require; (b) no Event of
Default exists; and (c) the making of the Loan is not prohibited by, or
subjects Bank to any penalty or onerous condition under any Legal Requirement.
FIRST LOAN 2.2 In addition to the matters described in the preceding
section, Bank will not be obligated to make the first Loan unless Bank has
received all of the Loan Documents specified on ANNEX I in Proper Form.
3. REPRESENTATIONS AND WARRANTIES. To induce Bank to enter into this
Agreement and to make Loans and create L/C Obligations, each Borrower
represents and warrants as of the Effective Date, the date of each request
for a Loan, and each presentation by any Borrower of any financial
information, report, notice and certificate hereunder, that each of the
following statements is and shall remain true and correct throughout the term
of this Agreement:
ORGANIZATION AND STATUS 3.1 Each Borrower and Subsidiary of each Borrower is
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization; has all power and authority to conduct its
business as presently conducted, and is duly qualified to do business and in
good standing in each jurisdiction in which the nature of the business
conducted by it makes such qualification desirable. No Borrower has any
Subsidiary other than those listed on ANNEX II and each Subsidiary is owned
as set forth on ANNEX II. If any Borrower is subject to the Texas Revised
Partnership Act ("TRPA"), Borrower agrees that Bank is not required to comply
with Section 3.05(d) of TRPA and agrees that Bank may proceed directly
against one or more partners or their property without first seeking
satisfaction from partnership property.
FINANCIAL STATEMENTS 3.2 All financial statements delivered to Bank are
complete and correct and fairly present, in accordance with generally
accepted accounting principles, consistently applied ("GAAP") (or the other
accounting basis specified herein, if expressly provided for in this
Agreement), financial condition and results of operations as at the dates and
for the periods indicated, on consolidated and consolidating bases. If this
Agreement provides for audited, reviewed or compiled financial statements,
such service shall have been provided by an independent certified public
accountant acceptable to Bank, and if audited statements are provided such
statements shall be certified with an unqualified opinion in accordance with
generally accepted auditing standards ("GAAS"). No material adverse change
has occurred in the assets, liabilities, financial condition, business or
affairs of any Borrower or any Subsidiary of any Borrower since the dates of
such financial statements. No Borrower or Subsidiary of any Borrower is
subject to any instrument or agreement materially and adversely affecting its
financial condition, business or affairs.
ENFORCEABILITY 3.3 The Loan Documents are legal, valid and binding
obligations of the Parties enforceable in accordance with their respective
terms, except as may be limited by bankruptcy, insolvency and other similar
laws affecting creditors' rights generally. The execution, delivery and
performance of the Loan Documents have all been duly authorized by all
necessary action; are within the power and authority of the Parties, do not
and will not violate any Legal Requirement, the Organizational Documents of
the Parties or any agreement or instrument binding or affecting the Parties
or any of their respective Property.
COMPLIANCE 3.4 Each Borrower and each Subsidiary of each Borrower has filed
all applicable tax returns and paid all taxes shown thereon to be due, except
those for which extensions have been obtained and those which are being
contested in good faith and for which adequate reserves have been
established. Each Borrower and each Subsidiary of each Borrower is in
compliance with all applicable Legal Requirements and manages and operates
(and will continue to manage and operate) its business in accordance with
good industry practices. No Borrower or Subsidiary of any Borrower is in
default in the payment of any other indebtedness or under any agreement to
which it is a party. The Parties have obtained all consents of and
registered with all Governmental Authorities or other Persons required to
execute, deliver and perform the Loan Documents.
LITIGATION 3.5 Except as previously disclosed to Bank in writing, there is
no litigation or administrative proceeding pending or, to the knowledge of
any Borrower, threatened against, nor any outstanding judgment, order or
decree affecting any Borrower or Subsidiary of any Borrower before or by any
Governmental Authority.
TITLE AND RIGHTS 3.6 Each Borrower and Subsidiary of each Borrower has good
and marketable title to its Property, free and clear of any Lien except for
Liens permitted by this Agreement and the other Loan Documents. Except as
otherwise expressly stated in the Loan Documents or permitted by this
Agreement, the Liens of the Loan Documents will constitute valid and
perfected first and prior Liens on the Property described therein, subject to
no other Liens whatsoever. Each Borrower and Subsidiary of each Borrower
possesses all permits, licenses, patents, trademarks and copyrights required
to conduct its business. All easements, rights-of-way and other rights
necessary to maintain and operate each Borrower's Property have been obtained
and are in full force and effect.
REGULATION U; BUSINESS PURPOSE 3.7 None of the proceeds of any Loan will be
used to purchase or carry, directly or indirectly, any margin stock or for
any other purpose which would make this credit a "purpose credit" within the
meaning of Regulation U of the Board of Governors of the Federal Reserve
System. All Loans will be used for business, commercial, investment or other
similar purpose and not primarily for personal, family, or household use or
primarily for agricultural purposes as such terms are used in Chapter One of
the Texas Credit Code.
Page 2 of 7 Pages
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ENVIRONMENT 3.8 Each Borrower and Subsidiary of each Borrower have complied
with applicable Legal Requirements in each instance in which any of them have
generated, handled, used, stored or disposed of any hazardous or toxic waste
or substance, on or off its premises (whether or not owned by any of them).
No Borrower or Subsidiary of any Borrower has any material contingent
liability for non-compliance with environmental or hazardous waste laws. No
Borrower or Subsidiary of any Borrower has received any notice that it or any
of its Properly or operations does not comply with, or that any Governmental
Authority is investigating its compliance with, any environmental or
hazardous waste laws.
INVESTMENT COMPANY ACT/PUBLIC UTILITY HOLDING COMPANY ACT 3.9 No Borrower or
Subsidiary of any Borrower is an "investment company" within the meaning of
the Investment Company Act of 1940 or a "holding company" or an "affiliate"
of a "holding company" or a "public utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
STATEMENTS BY OTHERS 3.10 All statements made by or on behalf of any
Borrower, Subsidiary of any Borrower or any other Party in connection with
any Loan Document constitute the joint and several representations and
warranties of all Borrowers hereunder.
NOTICE OF ACCOUNT DEBTORS 3.11 Borrower has sent to each Account Debtor
written instructions in the form previously delivered and approved by Bank,
to remit all payments and remittances in respect to the Accounts directly to
the Lockbox.
4. AFFIRMATIVE COVENANTS. Each Borrower agrees to do, and if necessary
cause to be done, and cause its Subsidiaries to do, each of the following:
CORPORATE FUNDAMENTALS 4.1 (a) Pay when due all taxes and governmental
charges of every kind, including without limitation those upon franchises,
income, profits or Property, unless and only to the extent that the same
shall be contested in good faith and adequate reserves have been established
therefor; (b) Renew and keep in full force and effect all licenses, permits
and franchises; (c) Do all things necessary to preserve corporate existence
and qualifications and rights in all jurisdictions where such qualification
is necessary or desirable; (d) Comply with all applicable Legal Requirements;
and (e) Protect, maintain and keep in good repair its Property and make all
replacements and additions to Property as may be reasonably necessary to
conduct business properly and efficiently.
INSURANCE 4.2 Maintain insurance with such reputable financially sound
insurers, on such Property and personnel, in such amounts and against such
risks as is customary with similar Persons or as may be reasonably required
by Bank, and furnish Bank satisfactory evidence thereof promptly upon
request. These insurance provisions are cumulative of the insurance
provisions of the other Loan Documents. Bank will be named as a beneficiary,
loss payee or additional insured of such insurance as its interest may appear
and Borrowers will provide Bank with copies of the policies of insurance and
a certificate of the insurer that the insurance required by this section may
not be canceled, reduced or affected in any manner without 30 days' prior
written notice to Bank.
FINANCIAL INFORMATION/BORROWING BASE REPORT 4.3 Each Borrower will furnish
to Bank in Proper Form: (a) the scheduled financial information, reports and
certificates set out in EXHIBIT B, within the times agreed to therein and
certified by the president or chief financial officer of the reporting
entity; (b) promptly after such request is submitted to the appropriate
Governmental Authority, any request for waiver of funding standards or
extension of amortization periods with respect to any employee benefit plan;
(c) copies of special audits, studies, reports and analyses prepared for the
management of such Borrower by outside parties and (d) such other information
relating to the financial condition and affairs of any Borrower and
guarantors and their Subsidiaries as Bank may request from time to time in
its discretion.
MATTERS REQUIRING NOTICE 4.4 Notify Bank immediately, upon acquiring
knowledge of (a) the institution or threatened institution of any lawsuit or
administrative proceeding which, if adversely determined, might adversely
affect any Borrower; (b) any material adverse change in the assets,
liabilities, financial condition, business or affairs of any Borrower; (c)
any Event of Default; or (d) any reportable event or any prohibited
transaction in connection with any employee benefit plan.
INSPECTION 4.5 Permit Bank and its affiliates to inspect and photograph its
Property, to examine and copy its files, books and records, and to discuss
its affairs with its officers and accountants, at such times and intervals
and to such extent as Bank reasonably desires.
ASSURANCES 4.6 Promptly execute and deliver any and all further agreements,
documents, instruments, and other writings that Bank may request to cure any
defect in the execution and delivery of any Loan Document or more fully to
describe particular aspects of the agreements set forth or intended to be set
forth in the Loan Documents.
CERTAIN CHANGES 4.7 Notify Bank at least 30 days prior to the date that any
of the Parties changes its name or the location of its chief executive office
or principal place of business or the place where it keeps its books and
records or the location of any of the Collateral.
EXHIBIT B 4.8 Comply with each of the other affirmative covenants set forth
in EXHIBIT B.
LANDLORD'S RESERVE 4.9 Maintain an investment deposit account with Bank in
an amount equal to no less than 4 times the amount of the monthly rental for
each location of Borrower for which Bank does not have a Landlord's waiver in
proper form ("Landlord's Reserve"). The investment time deposit shall not be
pledged to any person and Bank shall have the right to use such amounts to
pay any rent owed by Borrower.
LOCKBOX PROCESSING AGREEMENT/COLLECTION ACCOUNT 4.10 A. (i) Establish a
deposit account maintained by Texas Commerce styled "_____ [name of Borrower]
_______ Borrowing Base Accounts Receivable" ("Collection Account") at such
Borrower's sole expense into which all revenues, money checks and income,
howsoever evidenced, received by such Borrower and its subsidiaries will be
deposited; (ii) Execute and deliver a lockbox processing agreement (which may
take the form of an addendum to the Texas Commerce Treasury Management
Services Agreement) between such Borrower, Bank and Texas Commerce ("Lockbox
Processing Agreement") in Proper Form, provided however that should there be
a conflict between the terms of this Agreement and the Lockbox Processing
Agreement or the Terms and Conditions of the Collection Account, the terms
of this Agreement shall govern; (iii) Deliver, or cause to be delivered,
directly to the Bank for deposit to the Collection Account, all revenues,
monies, checks, drafts income and proceeds of Accounts received by such
Borrower or by others on behalf of such Borrower with such collections on the
Accounts accompanied by sufficient information to identify the invoice to
which such collections relate; (iv) Cause each Account Debtor to make all
payments due to such Borrower by check payable to such Borrower and to mail
or deliver the checks to the Lockbox, for deposit to the Collection Account;
(v) Take all action as Bank may request to permit Bank to have continuous
domain and control over the Lockbox and Collection Account. B. COLLECTION
ACCOUNT: Bank shall have full right and authority at any time to notify and
direct any Account Debtor to deliver all payments directly to Bank for
deposit into the Collection Account. Bank shall have the sole right to make
withdrawals from, and to administer the Collection Account. Any collections
on account of any Accounts received directly by such Borrower or any
subsidiary of such Borrower shall be received in trust for the benefit of
Bank, segregated from other funds of such Borrower and paid over to Bank in
same form as received with any endorsement to be held in the Collection
Account. Bank shall be entitled to daily apply all collected deposits in the
Collection Account first to the principal amount of the Loans then to
interest on the Loans then to fees and expenses and other amounts owing to
Bank and any excess after such application shall be maintained in the
Collection Account. C. POWER OF ATTORNEY. Each Borrower hereby appoints
Bank as such Borrower's attorney-in-fact and grants Bank full right and
authority: (a) at all times during the term of this Agreement, to supply any
necessary endorsement signature of any Borrower on checks, drafts and any
other form of payment received, including endorsing such Borrower's name
thereon as appropriate and to forward such items for collection in normal
course and deposit the proceeds thereof, and on any invoice or bill of lading
related to any Collateral, (b) after the occurrence of an Event of Default
which is continuing, to notify the U.S. Postal Service and any other person
to change address for delivery of any Borrower's mail to such address as may
be designated by Bank; and (c) to do all such other acts and things in the
name of Borrower reasonably necessary or convenient to assuring Bank the full
benefit of the provisions of this section 4.10. This power of attorney is
irrevocable, shall survive the dissolution or liquidation of such Borrower,
and is deemed coupled with an interest. This power of attorney shall
terminate only at such time as all Obligations have been paid in full.
Termination of the power of attorney shall not affect the validity of any
acts performed by the Bank pursuant to the power of attorney prior to
termination. This power of attorney evidences rights which are cumulative
with all other rights granted in all other Loan Documents, and is entitled in
all respects to the indemnity appearing in section 7.8. D. GRANT OF
Page 3 of 7 Pages
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SECURITY INTEREST. Each Borrower assigns and pledges to Bank, and grants to
Bank a security interest in, all of such Borrower's right, title and interest
in and to the Collection Account, and all certificates and instruments, if
any, from time to time representing or evidencing the Collection Account; and
all proceeds of any and all of the foregoing. E. OPERATING ACCOUNTS. Each
Borrower shall maintain all of its operating accounts with Bank or Texas
Commerce, except accounts with balances never exceeding $25,000.00 at
locations not served by either such bank.
5. NEGATIVE COVENANTS. Except as expressly permitted on Exhibit B, no
Borrower or Subsidiary of Borrower will:
INDEBTEDNESS 5.1 Create, incur, or permit to exist, or assume or guarantee,
directly or indirectly, or become or remain liable with respect to, any
Indebtedness, contingent or otherwise unless there is a permitted amount set
forth in EXHIBIT B, EXCEPT: (a) Indebtedness to Bank, or secured by Liens
permitted by this Agreement, or otherwise approved in writing by Bank, and
renewals and extensions (but not increases) thereof; and (b) current accounts
payable and unsecured current liabilities, not the result of borrowing, to
vendors, suppliers and Persons providing services, for expenditures for goods
and services normally required by it in the ordinary course of business and
on ordinary trade terms.
LIENS 5.2 Create or permit to exist any Lien upon any of its Property now
owned or hereafter acquired, or acquire any Property upon any conditional
sale or other title retention device or arrangement or any purchase money
security agreement; or in any manner directly or indirectly sell, assign,
pledge or otherwise transfer any of its accounts or other Property, EXCEPT:
(a) Liens, not for borrowed money, arising in the ordinary course of
business, (b) Liens for taxes not delinquent or being contested in good faith
by appropriate proceedings; (c) Liens in effect on the date hereof and
disclosed to Bank in writing, so long as neither the indebtedness secured
thereby nor the Properly covered thereby increases, and (d) Liens in favor of
Bank, or otherwise approved in writing by Bank. Notwithstanding anything to
the contrary herein, no Borrower or Subsidiary of Borrower will permit any
Lien on any inventory that secures the Loans and L/C Obligations unless Bank
shall provide Borrower with Bank's prior written consent.
FINANCIAL AND OTHER COVENANTS 5.3 Fail to comply with the required financial
covenants and other covenants described, and calculated as set forth, in
EXHIBIT B. Unless otherwise provided on EXHIBIT B, all such amounts and
ratios will be calculated: (a) on the basis of GAAP; and (b) on a
consolidated basis. Compliance with the requirements of EXHIBIT B will be
determined as of the dates of the financial statements to be provided to Bank.
CORPORATE CHANGES 5.4 In any single transaction or series of transactions,
directly or indirectly: (a) liquidate or dissolve; (b) be a party to any
merger or consolidation; (c) sell or dispose of any interest in any
Subsidiary, or permit any Subsidiary to issue any additional equity other
than to a Borrower; (d) sell, convey or lease all or any substantial part of
its assets, EXCEPT for sale of inventory in the ordinary course of business;
or (e) permit any change in ownership of any Borrower.
RESTRICTED PAYMENTS 5.5 At any time: (a) redeem, retire or otherwise
acquire, directly or indirectly, any shares of its capital stock or other
equity interest; (b) declare or pay any dividend (EXCEPT stock dividends and
dividends paid to another Borrower); or (c) make any other distribution or
contribution of any Property or cash or obligation to owners of an equity
interest in their capacity as such.
NATURE OF BUSINESS; MANAGEMENT 5.6 Change the nature of its business or
enter into any business which is substantially different from the business in
which it is presently engaged, or permit any material change in its
management.
AFFILIATE TRANSACTIONS 5.7 Enter into any transaction or agreement with any
Affiliate except upon terms substantially similar to those obtainable from
wholly unrelated sources.
SUBSIDIARIES 5.8 Form, create or acquire any Subsidiary.
LOANS AND INVESTMENTS 5.9 Make any advance, loan, extension of credit, or
capital contribution to or investment in, or purchase, any stock, bonds,
notes, debentures, or other securities of, any Person, except: (a) readily
marketable direct obligations of the United States of America or any agency
thereof with maturities of one year or less from the date of acquisition; (b)
fully insured certificates of deposit with maturities of one year or less
from the date of acquisition issued by any commercial bank operating in the
United States of America having capital and surplus in excess of
$50,000,000.00; and (c) commercial paper of a domestic issuer if at the time
of purchase such paper is rated in one of the two highest rating categories
of Standard and Poor's Corporation or Moody's Investors Service.
CHANGE IN LOCKBOX 5.10 Instruct or otherwise permit any Account Debtor to
remit payments to any account, lockbox or other location other than the
Lockbox.
6. EVENTS OF DEFAULT AND REMEDIES.
EVENTS OF DEFAULT 6.1 Each of the following is an "Event of Default":
(a) Any Obligor fails to pay any principal of or interest on any Note or any
other obligation under any Loan Document as and when due; or
(b) Any Obligor or any Subsidiary of any Borrower fails to pay at maturity,
or within any applicable period of grace, any principal of or interest on any
other borrowed money obligation or fails to observe or perform any term,
covenant or agreement contained in any agreement or obligation by which it is
bound; or
(c) Any representation or warranty made in connection with any Loan Document
was incorrect, false or misleading when made; or
(d) Any Obligor violates any covenant contained in any Loan Document; or
(e) An event of default occurs under any other Loan Document; or
(f) Final judgment for the payment of money is rendered against Obligor or
any Subsidiary of any Borrower and remains undischarged for a period of 30
days during which execution is not effectively stayed; or
(g) The sale, encumbrance or abandonment (except as otherwise expressly
permitted by this Agreement) of any of the Collateral or the making of any
levy, seizure, garnishment, sequestration or attachment thereof or thereon;
or the loss, theft, substantial damage, or destruction of any material
portion of such Property; or
(h) Any order is entered in any proceeding against any Borrower or any
Subsidiary of any Borrower decreeing the dissolution, liquidation or split-up
thereof, and such order shall remain in effect for 30 days; or
(i) Any Obligor or any subsidiary of any Borrower makes a general assignment
for the benefit of creditors or shall petition or apply to any tribunal for
the appointment of a trustee, custodian, receiver or liquidator of all or any
substantial part of its business, estate or assets or shall commence any
proceeding under any bankruptcy, insolvency, dissolution or liquidation law
of any jurisdiction, whether now or hereafter in effect; or any such petition
or application shall be filed or any such proceeding shall be commenced
against any Obligor or any subsidiary of any Borrower and the Obligor or such
subsidiary by any act or omission shall indicate approval thereof, consent
thereto or acquiescence therein, or an order shall be entered appointing a
trustee, custodian, receiver or liquidator of all or any substantial part of
the assets of any Obligor or any subsidiary of any Borrower or granting
relief to any Obligor or any subsidiary of any Borrower or approving the
petition in any such proceeding, and such order shall remain in effect for
more than 30 days; or any Obligor or any subsidiary of any Borrower shall
fail generally to pay its debts as they become due or suffer any writ of
attachment or execution or any similar process to be issued or levied against
it or any substantial part of its property which is not released, stayed,
bonded or vacated within 30 days after its issue or levy; or
(j) Any Obligor or any Subsidiary of any Borrower conceals or removes any
part of its Property, with intent to hinder, delay or defraud any of its
creditors, makes or permits a transfer of any of its Property which may be
fraudulent under any bankruptcy, fraudulent conveyance or similar law; or
makes any transfer of its Property to or for the benefit of a creditor at a
time when other creditors similarly situated have not been paid; or
(k) A material adverse change occurs in the assets, liabilities, financial
condition, business or affairs of any Obligor or any Subsidiary of Borrower;
or
(l) Any change occurs in the ownership of Borrower; or
(m) Any individual Obligor dies or any Obligor that is not an individual
dissolves.
If any Event of Default occurs, then Bank may do any or all of the following:
(1) declare the Obligations to be immediately due and payable without notice
of acceleration or of intention to accelerate, presentment and demand or
protest, all of which are hereby expressly waived; (2) without notice to any
Obligor, terminate the Commitment and accelerate the Termination Date; (3)
set off, in any order, against the indebtedness of any Borrower under
Page 4 of 7 Pages
<PAGE>
the Loan Documents any debt owing by Bank to any Borrower (whether such debt
is owed individually or jointly), including, but not limited to, any deposit
account, which right is hereby granted by each Borrower to Bank; and (4)
exercise any and all other rights pursuant to the Loan Documents, at law, in
equity or otherwise.
REMEDIES CUMULATIVE 6.2 No remedy, right or power of Bank is exclusive of
any other remedy, right or power now or hereafter existing by contract, at
law, in equity, or otherwise, and all remedies, rights and powers are
cumulative.
7. MISCELLANEOUS.
NO WAIVER 7.1 No waiver of any default or Event of Default will be a waiver
of any other default or Event of Default. No failure to exercise or delay in
exercising any right or power under any Loan Document will be a waiver
thereof, nor shall any single or partial exercise of any such right or power
preclude any further or other exercise thereof or the exercise of any other
right or power. The making of any Loan during either the existence of any
default or Event of Default, or subsequent to the occurrence of an Event of
Default will not be a waiver of any such default or Event of Default. No
amendment, modification or waiver of any Loan Document will be effective
unless the same is in writing and signed by the Person against whom such
amendment, modification or waiver is sought to be enforced. No notice to or
demand on any Person shall entitle any Person to any other or further notice
or demand in similar or other circumstances.
NOTICES 7.2 All notices required under the Loan Documents shall be in writing
and either delivered against receipt therefor, or mailed by registered or
certified mail, return receipt requested, in each case addressed to the
address shown on the signature page hereof or to such other address as a
party may designate. Except for the notices required by SECTION 2.1, which
shall be given only upon actual receipt by Bank, notices shall be deemed to
have been given (whether actually received or not) when delivered (or, if
mailed, on the next Business Day).
GOVERNING LAW AND JURISDICTION 7.3 (a) THIS AGREEMENT AND THE NOTES SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW
YORK (WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES); PROVIDED THAT THE BANK
SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR
OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION
AND DELIVERY OF THIS AGREEMENT, EACH OF THE BORROWERS AND THE BANK CONSENTS,
FOR ITSELF AND IN RESPECT OF ITS PROPERTY TO THE NON-EXCLUSIVE JURISDICTION
OF WHOSE COURTS. EACH OF THE BORROWERS AND THE BANK IRREVOCABLY WAIVES ANY
OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
GROUNDS OF FORUM NON CONVENIENS WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS
AGREEMENT OR ANY DOCUMENT RELATED HERETO. EACH BORROWER HEREBY IRREVOCABLY
DESIGNATES, APPOINTS AND EMPOWERS THE PRENTICE HALL CORPORATION SYSTEM, INC.,
WITH OFFICES ON THE DATE HEREOF AT 15 COLUMBUS CIRCLE, NEW YORK, NEW YORK 10023
AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, ACCEPT AND ACKNOWLEDGE FOR AND
ON ITS BEHALF AND IN RESPECT OF ITS PROPERTY, SERVICE OF ANY AND ALL LEGAL
PROCESS, SUMMONS, NOTICES AND DOCUMENTS WHICH MAY BE SERVED IN ANY SUCH ACTION
OR PROCEEDING. IF FOR ANY REASON SUCH DESIGNEE, APPOINTEE AND AGENT SHALL CEASE
TO BE AVAILABLE TO ACT AS SUCH, EACH BORROWER AGREES TO DESIGNATE A NEW
DESIGNEE, APPOINTEE AND AGENT IN NEW YORK ON THE TERMS AND FOR THE PURPOSES OF
THIS PROVISION SATISFACTORY TO THE BANK. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, EACH BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF
ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING
OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT ITS
ADDRESS SET FORTH IN THE LOAN DOCUMENTS, SUCH SERVICE TO BECOME EFFECTIVE TEN
DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE BANK
TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE ANY
PROCEEDINGS OR OTHERWISE PROCEED AGAINST EACH BORROWER IN ANY OTHER
JURISDICTION. EACH BORROWER AND THE BANK EACH WAIVE PERSONAL SERVICE OF ANY
SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS
PERMITTED BY NEW YORK LAW.
WAIVER OF JURY TRIAL 7.4 EACH BORROWER AND THE BANK EACH WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS
OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING
OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY
OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER
WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. EACH BORROWER
AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED
BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES
FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY
OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY
OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR
THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS,
SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
SURVIVAL; PARTIES BOUND; TERM OF AGREEMENT 7.5 (a) All representations,
warranties, covenants and agreements made by or on behalf of each Borrower in
connection with the Loan Documents will survive the execution and delivery of
the Loan Documents; will not be affected by any investigation made by any
Person, and will bind Borrower and the successors, trustees, receivers and
assigns of each Borrower and will benefit the successors and assigns of Bank;
PROVIDED that Bank's agreement to make Loans to Borrowers will not inure to
the benefit of any successor or assign of any Borrower. Except as otherwise
provided herein, the term of this Agreement will be until the later of the
final maturity of the Note and the full and final payment of all Obligations
and all amounts due under the Loan Documents. (b) Borrowers shall be
entitled to terminate the Commitment by written notice to Bank, which notice
shall become effective as to the accrual of fees payable hereunder upon the
happening of the latest of (i) 30 days after Bank's receipt of such notice;
and (ii) repayment in full of all amounts outstanding under the Note and
otherwise under the Agreement.
DOCUMENTARY MATTERS 7.6 This Agreement may be executed in several identical
counterparts, on separate counterparts; each counterpart will constitute an
original instrument, and all separate counterparts will constitute but one
and the same instrument. The headings and captions in the Loan Documents
have been included solely for convenience and should not be considered in
construing the Loan Documents. If any provision of any Loan Document is
invalid, illegal or unenforceable in any respect under any applicable law,
the remaining provisions will remain effective. The Loans and L/C
Obligations and all other obligations and indebtedness of Borrower to Bank
are entitled to the benefit of the Loan Documents.
EXPENSES AND FEES 7.7 Any provision to the contrary notwithstanding, and
whether or not the transactions contemplated by this Agreement are
consummated, Borrowers agree to pay on demand all out-of-pocket expenses
(including, without limitation, the fees and expenses of counsel for Bank) in
connection with the negotiation, preparation, execution, filing, recording,
modification, supplementing and waiver of the Loan Documents and the making,
servicing and collection of the Loans and L/C Obligations. Borrower agrees
to pay Bank's standard (i) Documentation Preparation and Processing Fee for
preparation, negotiation and handling of this Agreement; (ii) lockbox
processing fees as provided for in the separate agreement therefor; (iii)
account maintenance fees for the Collection Account; (iv) any expenses of
collection or other expenses incurred by Bank in connection with the
maintenance of the Collection Account, shall be reimbursed by Borrowers to
Bank at customary fee rates charged by the Bank for the services. In
consideration of Bank's services of collecting the Accounts hereunder and
monitoring and examining the Borrowing Base, Borrowers agree to pay Bank the
Administration Fee provided for in Section 1.4. Bank may obtain
reimbursement by causing other depository accounts of either Borrower at Bank
to be charged from time to time therefor. The obligations of Borrowers
under this and the following section will survive the termination of this
Agreement but the accrual of periodic fees accrued during the existence of
the Commitment shall be subject to the termination provisions in Section 7.4.
Page 5 of 7 Pages
<PAGE>
Each Borrower authorizes Bank in its discretion and without prior notice to
advance against the Commitment and Note to pay any or all such fees, expenses
and other such Obligations when due.
INDEMNIFICATION 7.8 EACH BORROWER AGREES TO INDEMNIFY, DEFEND AND HOLD BANK
HARMLESS FROM AND AGAINST ANY AND ALL LOSS, LIABILITY, OBLIGATION, DAMAGE,
PENALTY, JUDGMENT, CLAIM, DEFICIENCY AND EXPENSE (INCLUDING INTEREST,
PENALTIES, ATTORNEYS' FEES AND AMOUNTS PAID IN SETTLEMENT) TO WHICH BANK MAY
BECOME SUBJECT ARISING OUT OF OR BASED UPON THE LOAN DOCUMENTS, ANY LOAN, OR
THE RECEIPT, HANDLING, PAYMENT AND APPLICATION OF THE MONIES RECEIVED IN
CONNECTION WITH THE COLLECTION ACCOUNT, INCLUDING THAT RESULTING FROM BANK'S
OWN NEGLIGENCE, EXCEPT AND TO THE EXTENT CAUSED BY BANK'S GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT.
USURY NOT INTENDED 7.9 Borrowers and Bank intend to conform strictly to
applicable usury laws. Therefore, the total amount of interest (as defined
under applicable law) contracted for, charged or collected under this
Agreement or any other Loan Document will never exceed the Highest Lawful
Rate. If Bank contracts for, charges or receives any excess interest, it
will be deemed a mistake. Bank will automatically reform the Loan Document
or charge to conform to applicable law, and if excess interest has been
received, Bank will either refund the excess to Borrowers or credit the
excess on any unpaid principal amount of the Note or any other Loan Document.
All amounts constituting interest will be spread throughout the full term of
the Loan Document or applicable Note in determining whether interest exceeds
lawful amounts.
RIGHTS OF BORROWER AND BANK 7.10 Bank has not exercised any control, and
Bank shall not exercise any control, over Borrowers in the determination of
which of Borrowers' creditors Borrower will pay or which payments any
Borrower will make in the ordinary course of any Borrower's business. Each
Borrower, alone, shall exercise such judgment and determination. Nothing
contained herein, however, shall, in any manner, affect, limit or impair the
rights or remedies of Bank under this Agreement or any other Loan Documents
as otherwise provided by applicable law, whether with regard to realization
on the Collateral, rights of set off, compensation or otherwise.
PARTICIPATION; SETOFF 7.11 Borrowers and Bank acknowledge and agree that
Bank, in Bank's sole discretion, may assign its interest or sell
partcipation(s)) in the Loans and Note to third parties, including without
limitation Texas Commerce, without consent of or notice to Borrowers.
Borrowers and Bank agree that each such participant shall be treated, to the
extent of its pro rata interest in Borrowers' indebtedness, as if it were a
party thereto, and shall be accorded and is hereby granted the right of
setoff against any deposits, credit balances, or other funds of each Borrower
which are or may be in its possession (without regard to maturity, tenor or
other elements of otherwise mutual indebtedness).
NO COURSE OF DEALING 7.9 NO COURSE OF DEALING BY ANY BORROWER WITH BANK, NO
COURSE OF PERFORMANCE AND NO TRADE PRACTICES OR OTHER EXTRINSIC EVIDENCE OF
ANY NATURE MAY BE USED TO CONTRADICT, VARY, SUPPLEMENT OR MODIFY ANY TERM OF
THIS AGREEMENT.
8. DEFINITIONS. Unless He context otherwise requires, capitalized terms
used in Loan Documents and not defined elsewhere shall have the meanings
provided by GAAP, except as follows:
ACCOUNTS shall have the meaning assigned to it in the Uniform Commercial Code
applicable to this Agreement.
AFFILIATE means, as to any Person, any other Person (a) that directly or
indirectly, through one or more intermediaries, controls or is controlled by,
or is under common control with, such Person; (b) that directly or indirectly
beneficially owns or holds five percent (5%) or more of any class of voting
stock of such Person; or (c) five percent (5%) or more of the voting stock of
which is directly or indirectly beneficially owned or held by the Person in
question. The term "control" means to possess, directly or indirectly, the
power to direct the management and policies of a Person, whether through the
ownership of voting securities, by contract, or otherwise. Bank is not under
any circumstances to be deemed an Affiliate of any Borrower or any of its
Subsidiaries.
AUTHORITY DOCUMENTS means certificates of authority to transact business,
certificates of good standing, borrowing resolutions (with secretary's
certificate), secretary's certificates of incumbency, and other documents
which empower and enable any Borrower or its representatives to enter into
agreements evidenced by Loan Documents or evidence such authority.
ACCOUNTS means all accounts as such term is defined in the Uniform Commercial
Code.
ACCOUNT DEBTOR means any person in any way obligated on or in connection with
any Account.
BUSINESS DAY means a day when the main office of Bank is open for the conduct
of commercial lending business.
COLLATERAL means all Property, tangible or intangible, real, personal or
mixed, now or hereafter subject to Security Documents, or intended so to be.
CORPORATION means corporations, partnerships, limited liability companies,
joint ventures, joint stock associations, associations, banks, business
trusts and other business entities.
GOVERNMENT ACCOUNTS means receivables owed by the U.S. government or by the
government of any state, county, municipality, or other political subdivision
as to which Bank's security interest or ability to obtain direct payment of
the proceeds is governed by any federal or state statutory requirements other
than those of the Uniform Commercial Code, including, without limitation, the
Federal Assignment of Claims Act of 1940, as amended.
GOVERNMENTAL AUTHORITY means any foreign governmental authority, the United
States of America, any state of the United States and any political
subdivision of any of the foregoing, and any agency, department, commission,
board, bureau, court or other tribunal having jurisdiction over Bank or any
Obligor, or any Subsidiary of any Borrower or their respective Property.
HIGHEST LAWFUL RATE means the maximum nonusurious rate of interest permitted
to be charged by applicable Federal or state law (whichever permits the
higher lawful rate) from time to time in effect. If (notwithstanding the
election of the parties as to choice of law herein) Chapter One of the Texas
Credit Code establishes the Highest Lawful Rate, the Highest Lawful Rate is
the "indicated rate ceiling" as defined in that Chapter.
INDEBTEDNESS means and include (a) all items which in accordance with GAAP
would be included on the liability side of a balance sheet on the date as of
which Indebtedness is to be determined (excluding capital stock, surplus,
surplus reserves and deferred credits), (b) all guaranties, endorsements and
other contingent obligations in respect of, or any obligations to purchase or
otherwise acquire, Indebtedness of others, and (c) all Indebtedness secured
by any Lien existing on any interest of the Person with respect to which
indebtedness is being determined, in Property owned subject to such Lien,
whether or not the Indebtedness secured thereby has been assumed.
INVENTORY shall have the meaning assigned to it in the Uniform Commercial
Code applicable to this Agreement.
LEGAL REQUIREMENT means any law, ordinance, decree, requirement, order,
judgment, rule, regulation (or interpretation of any of the foregoing) of,
and the terms of any license or permit issued by, any Governmental Authority.
LIEN shall mean any mortgage, pledge, charge, encumbrance, security interest,
collateral assignment or other lien or restriction of any kind, whether based
on common law, constitutional provision, statute or contract.
LOAN DOCUMENTS means this Agreement, the agreements, the Notes, Applications,
documents, instruments and other writings contemplated by this Agreement or
listed on Annex I, all other assignments, deeds, guaranties, pledges,
instruments, certificates and agreements now or hereafter executed or
delivered to the Bank pursuant to any of the foregoing, and all amendments,
modifications, renewals, extensions, increases and rearrangements of, and
substitutions for, any of the foregoing.
LOCKBOX means the postal lockbox(s) maintained by Texas Commerce Bank
National Association (Lockbox #_____ and #_____) into which Borrowers directs
Account Debtors to make payment and remittance in respect to Accounts.
OBLIGATIONS means all principal, interest and other amounts which are or
become owing under this Agreement, the Note, any Application or any other
Loan Document.
OBLIGOR means each Borrower and any guarantor, surety, co-signer, general
partner or other person who may now or hereafter be obligated to pay all or
any part of the Obligations.
ORGANIZATIONAL DOCUMENTS means, with respect to a corporation, the
certificate of incorporation, articles of incorporation and bylaws of such
corporation; with respect to a limited liability company, the articles of
organization, regulations and other documents establishing such entity, with
respect to a partnership, joint venture, or trust, the agreement, certificate
or instrument establishing such entity; in each case including all
modifications and supplements thereof as of the date of the Loan Document
referring to such Organizational Document and any and all future
modifications thereof which are consented to by Bank.
PARTIES means all Persons other than Bank executing any Loan Document.
PERSON means any individual, Corporation, trust, unincorporated organization,
Governmental Authority or any other form of entity.
Page 6 of 7 Pages
<PAGE>
PROPER FORM means in form and substance satisfactory to the Bank.
PROPERTY means any interest in any kind of property or asset, whether real,
personal or mixed, tangible or intangible.
SECURITY DOCUMENTS means those Security Agreements listed on ANNEX I and all
supplements, modifications, amendment, extensions thereof and all other
agreements hereafter executed and delivered to Bank to secure the Loans and
L/C Obligations.
SUBORDINATED DEBT means any Indebtedness subordinated to Indebtedness due
Bank pursuant to a written subordination agreement in Proper Form by and
among Bank, subordinated creditor and the relevant Borrower which at a
minimum must prohibit: (a) any action by subordinated creditor which will
result in an occurrence of an Event of Default or default under this
Agreement, the subordination agreement or the subordinated Indebtedness; and
(b) upon the happening of any Event of Default or default under any Loan
Document, the subordination agreement, or any instrument evidencing the
subordinated Indebtedness (i) any payment of principal and interest on the
subordinated Indebtedness; (ii) any act to compel payment of principal or
interest on subordinated Indebtedness; and (iii) any action to realize upon
any Property securing the subordinated Indebtedness .
SUBSIDIARY means, as to a particular parent Corporation, any Corporation of
which 50% or more of the indicia of equity rights is at the time directly or
indirectly owned by such parent Corporation or by one or more Persons
controlled by, controlling or under common control with such parent
Corporation.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN BANK AND
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF BANK AND THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN BANK AND THE PARTIES.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
BORROWER: 1ST TECH CORPORATION
By: /s/ MARK C. HOLLIDAY
- ----------------------------------------
Name: Mark C. Holliday
Title: Chairman and CEO
Address: 12201 Technology Boulevard, Suite 130, Austin, Texas 78727
BORROWER: DARKHORSE SYSTEMS, INCORPORATED
By: /s/ MARK C. HOLLIDAY
- ----------------------------------------
Name: Mark C. Holliday
Title: Chairman and CEO
Address: 12201 Technology Boulevard, Suite 130, Austin, Texas 78727
BORROWER: TANISYS TECHNOLOGY, INC.
By: /s/ MARK C. HOLLIDAY
- ----------------------------------------
Name: Mark C. Holliday
Title: Chairman and CEO
Address: 12201 Technology Boulevard, Suite 130, Austin, Texas 78727
BANK: THE CHASE MANHATTAN BANK
By: /s/ GEORGE LOUIS MCKINLEY
- ----------------------------------------
Name: George Louis McKinley
Title: Vice President
Address: 633 Third Ave., NY, New York
EXHIBITS:
A ACCOUNTS RECEIVABLE LOAN ADMINISTRATION PROCEDURES
B REPORTING REQUIREMENTS, FINANCIAL COVENANTS
C LOCKBOX PROCESSING AGREEMENT
ANNEXES:
I LOAN DOCUMENTS
II SUBSIDIARIES
Page 7 of 7 Pages
<PAGE>
EXHIBIT A
[INSERT ACCOUNTS RECEIVABLE LOAN ADMINISTRATION PROCEDURES
INCORPORATED BY REFERENCE]
******NOTE*******
BORROWING BASE IS WHERE REDUCING ADVANCE RATE
SHOULD BE INDICATED
<PAGE>
ANNEX I
Loan Documents
"Loan Documents" includes, but is not limited to, the following:
1. Agreement
2. Note
3. Lockbox Processing Agreement (in file)
4. Pledge of 50% of Guarantor's stock held by Gary Pankonien after merger
(in file)
6. Borrowing Base Report; Daily Collateral Certificate Compliance Certificate
7. For each Borrower in Proper Form: General Security Agreement (all
accounts and general intangibles; inventory and equipment); Deposit account
(Collection Account)
8. Financing Statements
9. Certified Copies of Organizational and Authority Documents (including
without limitation all documents, agreements, certificates and legal
opinions requested by Bank in connection with transactions described in
the Preliminary Statement)
10. Insurance policies and certificates (including account credit insurance for
accounts covered under Old 1st Tech Facility)
11. Financial Statements of Borrower and Guarantor
12. UCC search
Loan Documents - ANNEX I Page 1 of 1
<PAGE>
ANNEX II
Subsidiaries
IF NONE AS OF THE EFFECTIVE DATE, CHECK NONE
Subsidiary Name and Sub of which State Where
Address % Owned Borrower Incorporated
- ------------------- ------------ ------------
ANNEX II Page 1 of 1
<PAGE>
<TABLE>
<S> <C> <C>
EXHIBIT B: 1ST TECH CORPORATION, DARKHORSE SYSTEMS, INCORPORATED, TANISYS TECHNOLOGY, INC.
REPORTING REQUIREMENTS, FINANCIAL COVENANTS AND
COMPLIANCE CERTIFICATE FOR CURRENT REPORTING PERIOD ENDING __________ ,199__ ("END DATE")
A. REPORTING PERIOD. Borrowers will provide this Exhibit completed in Proper Form with each financial statement delivered under
the Agreement.
THIS REPORT IS FOR THE [ ] MONTH [ ] FISCAL YEAR ("REPORTING PERIOD") ENDING _________, 199__ ("END
DATE")
A. FINANCIAL REPORTING. The following financial information will be provided within the times indicated.
WHO WHEN DUE WHAT COMPLIANCE
CIRCLE:
EACH BORROWER
GAAP financial statements (balance sheet, income
and cash flow statements) audited (with
unqualified opinion) by independent CPAs
satisfactory to Bank, with Compliance
Certificate
Unaudited monthly and YTD financial statements Yes No
(ii) Within 20 days of each month End Date with Compliance Certificate
including FYE month
(iii) Within 15 days of each month End Date Borrowing Base Report with A/R aging and listing, Yes No
including FYE month inventory report, and A/P listing (refer to Exhibit A)
(iv) Each Business Day Daily Collateral Certificate (refer to Exhibit A) Yes No
(v) Within 90 days of the end of each FYE 2 year forward projections of Borrowers' and Yes No
and mid FY quarter end Guarantor's balance sheet, income statement and
cash flow statement, by quarter, prepared on same
basis as projections provided to Lenders prior to
execution of this Agreement
TANISYS (vi) Within 10 days of filing All Forms 10-K, 10-Q and 8-K Yes No
C. FINANCIAL COVENANTS. Borrowers and Guarantor will comply with the following financial covenants, applying GAAP, Compliance
the definitions in Section 8, and THE CALCULATIONS AND ADJUSTMENTS FROM THE ACTUAL REPORTED COLUMN BELOW (fiscal (Circle)
periods refer to Borrower's fiscal periods).
ACTUAL REPORTED. For current Reporting
REQUIRED. Each applies at all times and is reported as indicated: Period or as of the End Date, as appropriate:
1. Borrowers on a consolidated basis shall maintain Tangible Net Stockholders' Equity $________ Yes No
Worth as adjusted of at least $4,000,000.00. Minus: Goodwill $________
Other Intangible Assets $________
Loans/Advances to
Equity holders $________
Loans to Affiliates $________
Plus: Subordinated Debt $________
= Tangible Net Worth as adjusted $________
2. Borrowers shall have a combined ratio of EBDITA (Adjusted) to_ Net income for prior 3 months $________ Yes No
interest expense of at least 1.25: 1.00, as of the end of each month. Plus: Tax Expense $________
Interest Expense $________
Depreciation/Amortization $________
Minus: Capital expenditures $________
Nonrecurring Items $________
Equals: EBDITA (adjusted )
$__________ $_______________ = _____
EBDITA(Adjusted) Interest Expense Ratio
3. No more than $150,000 total Indebtedness (including all funded Yes No
and trade debt) to 1st Tech and Darkhorse from Guarantor shall Indebtedness to 1st Tech: $_________
be outstanding at any time.*
Indebtedness to Darkhorse: $_________
Total: $_________
THE ABOVE SUMMARY REPRESENTS SOME OF THE COVENANTS AND AGREEMENTS CONTAINED IN THE AGREEMENT AND DOES NOT IN ANY WAY RESTRICT OR
MODIFY THE TERMS AND CONDITIONS OF THE AGREEMENT. IN CASE OF CONFLICT BETWEEN THIS EXHIBIT AND THE AGREEMENT, THE AGREEMENT SHALL
CONTROL. The undersigned hereby certifies that the above information and computations are true and correct and not misleading as
of the date hereof, and that since the date of the Borrower's most recent Compliance Certificate (if any):
[ ] No default or Event of Default has occurred under the Agreement during the current Reporting Period, or been discovered from
a prior period, and not reported.
[ ] A default or Event of Default (as described below) has occurred during the current Reporting Period or has been discovered
from a prior period and is being reported for the first time and: [ ] was cured on _______________
[ ] was waived by Bank in writing on ___________ [ ] is continuing.
Description of Event of Default:_________________________________________________________________________________________________
Executed _______________, 19___:
</TABLE>
<PAGE>
BORROWER: 1ST TECH CORPORATION
BY:
--------------------------------
NAME:
------------------------------
TITLE:
-----------------------------
BORROWER: TANISYS TECHNOLOGY, INC.
BY:
--------------------------------
NAME:
------------------------------
TITLE:
-----------------------------
BORROWER: DARKHORSE SYSTEMS, INCORPORATED
BY:
--------------------------------
NAME:
------------------------------
TITLE:
-----------------------------
EXHIBIT B Page 1 of 1
<PAGE>
BORROWING BASE
Borrowing Base shall mean as at any date the applicable Advance Rate times
the net amount of Eligible A/R assigned by the borrowers.
Total A/R $__________
less Ineligible $__________
Eligible A/R $__________
Advance Rate % $__________
Borrowing Base $__________
The Advance Rate will be
79% to Feb. 28 1997
78% March 7, 1997
77% March 14, 1997
76% March 21, 1997
75% April 21, 1997
74% May 21, 1997
73% April 21, 1997
72% June 21. 1997
71% April 21, 1997
70% Thereafter
<PAGE>
EXHIBIT 10.25
REVOLVING CREDIT NOTE
(this "NOTE")
FOR VALUE RECEIVED, ON OR BEFORE the Termination Date (as defined in the
Credit Agreement), 1ST TECH CORPORATION, DARKHORSE SYSTEMS, INCORPORATED, and
TANISYS TECHNOLOGY, INC. (jointly and severally, "BORROWERS") promise to pay
to the order of THE CHASE MANHATTAN BANK ("Bank") at its office at 633 Third
Avenue, New York NY 10017 or such other location as Bank may designate, in
immediately available funds and lawful money of the United States of America,
the sum of SIX MILLION AND NO/100THS UNITED STATES DOLLARS (U.S.
$6,000,000.00) or the aggregate unpaid amount of all advances hereunder,
whichever is lesser, plus interest on the unpaid principal balance
outstanding from time to time at a rate per annum equal to the lesser of (i)
the Stated Rate (as hereinafter defined) from time to time in effect or (ii)
the Highest Lawful Rate. If the Stated Rate at any time exceeds the Highest
Lawful Rate, the actual rate of interest to accrue on the unpaid principal
amount of this Note will be limited to the Highest Lawful Rate, but any
subsequent reductions in the Stated Rate due to reductions in the Prime Rate
will not reduce the interest rate payable upon the unpaid principal amount of
this Note below the Highest Lawful Rate until the total amount of interest
accrued on this Note equals the amount of interest which would have accrued
if the Stated Rate had at all times been in effect.
The "STATED RATE" at any time shall be the rate indicated by the following
chart:
Determining Ratio Stated Rate
----------------- -----------
Over 3.0X Prime Rate +3.0%
l.5X to 3.0X Prime Rate +2.0%
1.0X to 1.4X Prime Rate +1.5%
Less than 1.0X Prime Rate +1.0%
The "DETERMINING RATIO" on any date shall be the ratio (determined for
all Borrowers combined, as of the end of the most recently ended calendar
month) of (i) Indebtedness to (ii) Annualized EBDITA (Adjusted). Annualized
EBDITA (Adjusted) shall mean (a) for the first 11 months after May 20, 1996,
Borrowers' average combined monthly EBDITA (Adjusted) (as correctly reported
in Borrowers' Compliance Certificates in the form of Exhibit C of the Credit
Agreement) for all months reported to the date the ratio is determined, times
twelve; and (b) thereafter, the sum of Borrowers' combined monthly EBDITA
(Adjusted) (as correctly reported) for the 12 months preceding the date the
ratio is determined.
"PRIME RATE" means that rate as determined from time to time by Bank as
being its prime rate in effect at its principal office in New York City.
Without notice to Borrowers or any other Person, the Prime Rate shall change
automatically from time to time as and in the amount by which said prime rate
shall fluctuate with each such change to be effective as of the date of each
change in such prime rate. THE PRIME RATE IS A REFERENCE RATE AND DOES NOT
NECESSARILY REPRESENT THE LOWEST OR BEST RATE. BANK MAY MAKE LOANS AT RATES
OF INTEREST AT, ABOVE OR BELOW THE PRIME RATE.
This Note is the Revolving Credit Note described in Section I .1.A of
the Credit Agreement (Borrowing Base) between Borrowers and Bank dated as of
February 21, 1997 (as amended, restated and supplemented from time to time,
the "Credit Agreement" or "Agreement") and sometimes referred to therein as
the Note. Capitalized terms used in this Note have the meanings used in the
Agreement.
Accrued and unpaid interest shall be due and payable monthly, beginning
on March 31, 1997, and continuing on the last day of each month thereafter
and at Termination Date when all unpaid principal and accrued and unpaid
interest shall be finally due and payable. Borrowers must make the payments
required by Sections 1.3, 1.4 and 1.5 of the Agreement.
Interest shall be computed on the basis of the actual number of days
elapsed and a year comprised of 360 days, unless such calculation would
result in a usurious interest rate, in which case interest will be calculated
on the basis of a 365 or 366 day year, as applicable.
All past-due principal and, as permitted by applicable law, interest on
this Note, shall, at Bank's option, bear interest at the Highest Lawful Rate,
or if applicable law shall not provide for a maximum nonusurious rate of
interest, at a rate per annum equal to eighteen percent (18%).
The unpaid principal balance of this Note at any time shall be the total
amounts advanced by Bank, less the amount of all payments of principal.
Absent manifest error, the records of Bank shall be conclusive as to amounts
owed. Subject to the terms and conditions of the Agreement, Borrowers may use
all or any part of the credit provided for herein at any time before the
Termination Date.
Time is of the essence. Borrowers may at any time pay the full amount or
any part of this Note without the payment of any premium or fee. At Bank's
sole option, all payments may be applied to accrued interest, to principal,
or to both.
If any Event of Default occurs, then Bank may exercise any and all
rights and remedies under the Loan Documents, at law, in equity or otherwise.
Each and all Obligors severally waive notice, demand, presentment for
payment, notice of nonpayment, notice of intent to accelerate, notice of
acceleration, protest, notice of protest, and the filing of suit and
diligence in collecting this Note and all other demands and notices, and
consent and agree that their liabilities and obligations shall not be
released or discharged by any or all of the following, whether with or
without notice to them or any of them, and whether before or after the stated
maturity hereof: (i) extensions of the time of payment; (ii) renewals; (iii)
acceptances of partial payments; (iv) releases or substitutions of any
collateral or any Obligor; and (v) failure, if any, to perfect or maintain
perfection of any security interest in any collateral. Each Obligor agrees
that acceptance of any partial payment shall not constitute a waiver.
Bank and any subsequent owner or holder hereof reserves the right, in
its sole discretion, without notice to Borrowers, to sell participations or
assign its interest or both, in all or any part of this Note. For purposes of
this Note, any assignee or subsequent holder of this Note will be considered
the "Bank," and each successor to each Borrower will be considered a
"Borrower."
IN WITNESS WHEREOF, Borrowers have executed this Note effective as of the
Effective Date.
BORROWER: 1ST TECH CORPORATION
By: /s/ MARK C. HOLLIDAY
- -----------------------------------
Typed Name: Mark C. Holliday
Title: President and CEO
BORROWER: DARKHORSE SYSTEMS, INCORPORATED
By: /s/ MARK C. HOLLIDAY
- -----------------------------------
Typed Name: Mark C. Holliday
Title: President and CEO
BORROWER: TANISYS TECHNOLOGY, INC.
By: /s/ MARK C. HOLLIDAY
- -----------------------------------
Typed Name: Mark C. Holliday
Title: President and CEO
BANK: THE CHASE MANHATTAN BANK
By: /s/ GEORGE LOUIS MCKINLEY
- -----------------------------------
Typed Name: George Louis McKinley
Title: Vice President
<PAGE>
Exhibit 10.27
1997 NON-EMPLOYEE DIRECTOR PLAN OF
TANISYS TECHNOLOGY, INC.
1. PURPOSE. The purpose of this Plan is to advance the interests of
Tanisys Technology, Inc., a Wyoming corporation (the "Company"), by providing
an additional incentive to attract and retain qualified and competent
directors, upon whose efforts and judgment the success of the Company is
largely dependent, through the encouragement of stock ownership in the
Company by such persons.
2. DEFINITIONS. As used herein, the following terms shall have the
meaning indicated:
(a) "Board" shall mean the Board of Directors of Tanisys
Technology, Inc.
(b) "Committee" shall mean the committee, if any, appointed by the
Board pursuant to Section 12 hereof.
(c) "Date of Grant" shall mean the date on which an Option is
granted to an Eligible Person pursuant to this Plan.
(d) "Director" shall mean a member of the Board.
(e) "Eligible Person(s)" shall mean those persons who are Directors
of the Company and who are not employees of the Company or a Subsidiary.
(f) "Fair Market Value" of a Share on any date of reference shall
be the closing price on the business day immediately preceding such date.
For this purpose, the closing price of the Shares on any business day shall
be (i) if the Shares are listed or admitted for trading on any United States
national securities exchange, the last reported sale price of Shares on such
exchange, as reported in any newspaper of general circulation, (ii) if actual
transactions in the Shares are included in the Nasdaq Stock Market Small Cap
Market ("Nasdaq-SCM") or are reported on a consolidated transaction reporting
system, the last sales price of the Shares on such system, (iii) if Shares
are otherwise quoted on the National Association of Securities Dealers
Automated Quotation System ("Nasdaq"), or any similar system of automated
dissemination of quotations of securities prices in common use, the mean
between the closing high bid and low asked quotations for such day of Shares
on such system, (iv) if none of clause (i), (ii) or (iii) is applicable, the
mean between the high bid and low asked quotations for Shares as reported by
the National Daily Quotation Service if at least two securities dealers have
inserted both bid and asked quotations for Shares on at least five (5) of the
ten (10) preceding days.
(g) "Internal Revenue Code" or "Code" shall mean the Internal
Revenue Code of 1986, as it now exists or may be amended from time to time.
(h) "Nonqualified Stock Option" shall mean an option that is not an
incentive stock option as defined in Section 422 of the Internal Revenue Code.
<PAGE>
(i) "Option" (when capitalized) shall mean any option granted under
Section 4 or 5 of this Plan.
(j) "Optionee" shall mean a person to whom a stock option is
granted under this Plan or any successor to the rights of such person under
this Plan by reason of the death of such person.
(k) "Plan" shall mean this 1997 Non-Employee Director Plan of
Tanisys Technology, Inc.
(l) "Share(s)" shall mean a share or shares of the common stock, no
par value per share, of the Company.
(m) "Subsidiary" shall mean any corporation (other than the
Company) in any unbroken chain of corporations beginning with the Company if,
at the time of the granting of the Option, each of the corporations other
than the last corporation in the unbroken chain owns stock possessing more
than fifty percent (50%) of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
3. SHARES AND OPTIONS. (a) The maximum number of Shares to be issued
pursuant to Options under this Plan, including shares issued on the exercise
of Shares granted to Eligible Persons prior to the adoption of the Plan under
the Company's 1993 Stock Option Plan adopted in October 1993, shall be EIGHT
HUNDRED THOUSAND (800,000) Shares. Shares issued pursuant to Options granted
under this Plan may be issued from Shares held in the Company's treasury or
from authorized and unissued Shares. If any Option granted under this Plan
shall terminate, expire, or be cancelled or surrendered as to any Shares, new
Options may thereafter be granted covering such Shares.
(b) Each Option granted hereunder shall be evidenced by an option
agreement (an "Option Agreement") and shall contain such terms as are not
inconsistent with this Plan or any applicable law. Any person who files with
the Committee, in a form satisfactory to the Committee, a written waiver of
eligibility to receive any Option under this Plan shall not be eligible to
receive any Option under this Plan for the duration of such waiver. Any
Option granted hereunder shall be a Nonqualified Stock Option.
(c) Neither the Plan nor any Option granted under the Plan shall
confer upon any person any right to continue to serve as a Director.
4. AUTOMATIC GRANT OF OPTIONS. (a) Options shall automatically be
granted to Eligible Persons as follows:
(i) Each Director who is an Eligible Person shall automatically
receive an Option for TWENTY-FIVE THOUSAND (25,000) Shares on the date
such Eligible Person is initially appointed or elected a Director of the
Company, and such Option will
-2-
<PAGE>
vest as to one third of such Shares on each of the first three
anniversaries of the Date of Grant; and
(ii) Each Director who is an Eligible Person will receive, upon their
re-election at the annual meeting of stockholders of the Company
immediately following the full vesting of any previously granted Director
Option, an option to purchase TWENTY-FIVE THOUSAND (25,000) Shares, and
such Option will vest as to one third of such Shares on each of the first
three anniversaries of the Date of Grant.
(b) The Options automatically granted to Directors under this Plan
shall be in addition to regular director's fees, discretionary Option grants
under Section 5 or other benefits with respect to the Director's position
with the Company or its Subsidiaries.
5. DISCRETIONARY GRANTS OF OPTIONS. (a) At any time and from time to
time during the duration of this Plan and subject to the provisions herein,
Options may be granted by the Board to any Eligible Person for such number of
Shares as the Board in its discretion shall deem to be in the best interest
of the Company and which will serve to further the purposes of the Plan.
Upon the grant of an Option, the Company shall promptly deliver to such
Eligible Person an Option Agreement. Options granted pursuant to this
Section 5 shall vest according to the vesting schedule provided in the Option
Agreement.
(b) The Options granted to Directors pursuant to this Section 5
shall be in addition to regular directors' fees, automatic grants of Options
under Section 4 herein or any other benefits with respect to the Director's
position with the Company or its Subsidiaries.
6. OPTION PRICE. The option price per Share of any Option granted
pursuant to this Plan shall be one hundred percent (100%) of the Fair Market
Value per Share on the Date of Grant.
7. EXERCISE OF OPTIONS. Options may be exercised at any time after the
date on which the Options, or any portion thereof, are vested until the
Option expires pursuant to Section 8; provided, however, that at least six
months must elapse from the date of the acquisition of the Option to the date
of disposition of the Option (other than upon exercise or conversion) or its
underlying Common Stock. An Option shall be deemed exercised when (i) the
Company has received written notice of such exercise in accordance with the
terms of the Option Agreement, (ii) full payment of the aggregate option
price of the Shares as to which the Option is exercised has been made and
(iii) arrangements that are satisfactory to the Committee in its sole
discretion have been made for the Optionee's payment to the Company of the
amount, if any, that the Committee determines to be necessary for the Company
to withhold in accordance with applicable federal or state income tax
withholding requirements. Pursuant to procedures approved by the Committee,
tax withholding requirements, at the option of an Optionee, may be met by
withholding Shares otherwise deliverable to the Optionee upon the exercise of
an Option. Unless further limited by the Committee in any Option Agreement,
the Option price of any Shares purchased shall be paid solely in cash, by
certified or cashier's check, by money order, with Shares (but with Shares
only if permitted by the Option Agreement or otherwise permitted by the
Committee in its sole discretion at the time of exercise) or by a combination
of the above; provided, however, that the Committee in
-3-
<PAGE>
its sole discretion may accept a personal check in full or partial payment of
any Shares. If the exercise price is paid in whole or in part with Shares,
the value of the Shares surrendered shall be their Fair Market Value on the
date the Shares are received by the Company.
8. TERMINATION OF OPTION PERIOD. The unexercised portion of an Option
shall automatically and without notice terminate and become null and void at
the time of the earliest to occur of the following:
(a) with respect to Options granted automatically pursuant to
Subsection 4(a), thirty (30) days after the date that an Optionee ceases to
be a Director regardless of the reason therefor other than as a result of
such termination by death of the Optionee;
(b) with respect to Options granted automatically pursuant to
Subsection, 4(a), (y) one (1) year after the date that an Optionee ceases to
be a Director by reason of death of the Optionee or (z) six (6) months after
the Optionee shall die if that shall occur during the thirty-day period
described in Subsection 8(a); or
(c) the fifty (5th) anniversary of the Date of Grant of the Option.
9. ADJUSTMENT OF SHARES. (a) If at any time while this Plan is in
effect or unexercised Options are outstanding, there shall be any increase or
decrease in the number of issued and outstanding Shares through the
declaration of a stock dividend or through any recapitalization resulting in
a stock split-up, combination or exchange of Shares, then and in such event:
(i) appropriate adjustment shall be made in the maximum number of
Shares then subject to being optioned under this Plan, so that the same
proportion of the Company's issued and outstanding Shares shall continue
to be subject to being so optioned; and
(ii) appropriate adjustment shall be made in the number of Shares and
the exercise price per Share thereof then subject to any outstanding
Option, so that the same proportion of the Company's issued and outstanding
Shares shall remain subject to purchase at the same aggregate exercise
price.
In addition, the Committee shall make such adjustments in the Option
price and the number of shares covered by outstanding Options that are
required to prevent dilution or enlargement of the rights of the holders of
such Options that would otherwise result from any reorganization,
recapitalization, stock split, stock dividend, spin-off, combination of
shares, merger, consolidation, issuance of rights or any other change in
capital structure of the Company.
(b) Except as otherwise expressly provided herein, the issuance by
the Company of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection
with a direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason
-4-
<PAGE>
thereof shall be made with respect to, the number of or exercise price of
Shares then subject to outstanding Options granted under this Plan.
(c) Without limiting the generality of the foregoing, the existence
of outstanding Options granted under this Plan shall not affect in any manner
the right or power of the Company to make, authorize or consummate (i) any or
all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business; (ii) any merger or consolidation
of the Company; (iii) any issue by the Company of debt securities, or
preferred or preference stock that would rank above the Shares subject to
outstanding Options; (iv) the dissolution or liquidation of the Company; (v)
any sale, transfer or assignment of all or any part of the assets or business
of the Company; or (vi) any other corporate act or proceeding, whether of a
similar character or otherwise.
10. TRANSFERABILITY OF OPTIONS. Each Option Agreement shall provide
that such Option shall not be transferable by the Optionee otherwise than by
will or the laws of descent and distribution or pursuant to a qualified
domestic relations order and that so long as an Optionee lives, only such
Optionee or his or her guardian or legal representative shall have the right
to exercise the related Option.
11. ISSUANCE OF SHARES. No person shall be, or have any of the rights
or privileges of, a stockholder of the Company with respect to any of the
Shares subject to an Option unless and until certificates representing such
Shares shall have been issued and delivered to such person. As a condition
of any transfer of the certificate for Shares, the Committee may obtain such
agreements or undertakings, if any, as it may deem necessary or advisable to
assure compliance with any provision of this Plan, any Option Agreement or
any law or regulation, including, but not limited to, the following:
(i) A representation, warranty or agreement by the Optionee to the
Company, at the time any Option is exercised, that he or she is acquiring
the Shares to be issued to him or her for investment and not with a view
to, or for sale in connection with, the distribution of any such Shares;
and
(ii) A representation, warranty or agreement to be bound by any legends
that are, in the opinion of the Committee, necessary or appropriate to
comply with the provisions of any securities law deemed by the Committee
to be applicable to the issuance of the Shares and are endorsed upon the
Share certificates.
Share certificates issued to an Optionee who is a party to any
stockholder agreement or a similar agreement shall bear the legends contained
in such agreements.
12. ADMINISTRATION OF THE PLAN. (a) This Plan shall be administered by
a stock option committee (the "Committee") consisting of not fewer than three
(3) members of the Board; provided, however, that if no Committee is
appointed, the Board shall administer this Plan and in such case all
references to the Committee shall be deemed to be references to the Board.
The Committee shall have all of the powers of the Board with respect to this
Plan. Any
-5-
<PAGE>
member of the Committee may be removed at any time, with or without cause, by
resolution of the Board, and any vacancy occurring in the membership of the
Committee may be filled by appointment by the Board.
(b) The Committee, from time to time, may adopt rules and
regulations for carrying out the purposes of this Plan. The determinations
and the interpretation and construction of any provision of this Plan by the
Committee shall be final and conclusive.
(c) Any and all decisions or determinations of the Committee shall
be made either (i) by a majority vote of the members of the Committee at a
meeting or (ii) without a meeting by the written approval of a majority of
the members of the Committee.
(d) This Plan is intended and has been drafted to comply with Rule
16b-3, as amended, under the Securities Exchange Act of 1934, as amended. If
any provision of this Plan does not comply with Rule 16b-3, as amended, this
Plan shall be automatically amended to comply with Rule 16b-3, as amended.
13. INTERPRETATION. (a) If any provision of this Plan is held invalid
for any reason, such holding shall not affect the remaining provisions
hereof, but instead this Plan shall be construed and enforced as if such
provision had never been included in this Plan.
(b) THIS PLAN SHALL BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE
STATE OF WYOMING, WITHOUT REFERENCE TO DELAWARE CONFLICT OF LAW PROVISIONS.
(c) Headings contained in this Plan are for convenience only and
shall in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine or neuter gender shall
be a reference to such other gender as is appropriate.
14. SECTION 83(b) ELECTION. If as a result of exercising an Option an
Optionee receives Shares that are subject to a "substantial risk of
forfeiture" and are not "transferable" as those terms are defined for
purposes of Section 83(a) of the Code, then such Optionee may elect under
Section 83(b) of the Code to include in his gross income, for his taxable
year in which the Shares are transferred to such Optionee, the excess of the
Fair Market Value of such Shares at the time of transfer (determined without
regard to any restriction other than one which by its terms will never
lapse), over the amount paid for the Shares. If the Optionee makes the
Section 83(b) election described above, the Optionee shall (i) make such
election in a manner that is satisfactory to the Committee, (ii) provide the
Company with a copy of such election, (iii) agree to promptly notify the
Company if any Internal Revenue Service or state tax agent, on audit or
otherwise, questions the validity or correctness of such election or of the
amount of income reportable on account of such election, and (iv) agree to
such withholding as the Committee may reasonably require in its sole and
absolute discretion.
-6-
<PAGE>
15. EFFECTIVE DATE AND TERMINATION DATE. The effective date of this
Plan or any amendment thereto is the date on which the Board adopted this
Plan or such amendment. This Plan shall terminate on January 15, 2007, and
any Option outstanding on such date will remain outstanding until it has
either expired or has been exercised.
-7-
<PAGE>
Exhibit 10.28
[DATE]
[NAME]
[ADDRESS]
[ADDRESS]
Dear [Mr./Ms.] [OPTIONEE'S LAST NAME]:
On behalf of Tanisys Technology, Inc. (the "Company"), I am pleased to
announce that you (the "Participant") have been awarded, under the terms of
the 1997 Non-Employee Director Plan of Tanisys Technology, Inc. (the "Plan"),
a non-qualified stock option to purchase _______ shares of common stock of
the Company (the "Shares"). The option to acquire the Shares is awarded and
granted upon the following terms and conditions as well as those terms,
conditions, and limitations as set forth in the Plan, which is attached
hereto and incorporated herein for all purposes:
1. The exercise price for each share of common stock is $[OPTION PRICE].
2. For so long as you are a director of the Company, the right to
exercise such option shall vest as follows:
(a) 33-1/3% (_____ shares) on [FIRST ANNIVERSARY DATE OF GRANT];
(b) 33-1/3% (_____ shares) on [SECOND ANNIVERSARY DATE OF GRANT]; AND
(c) 33-1/3% (_____ shares) on [THIRD ANNIVERSARY DATE OF GRANT].
3. Subject to Paragraph 5 herein, the options which have vested in
accordance with the schedule set forth in Paragraph 2 above may be exercised
at any time on or before [EXPIRATION DATE]. No partial exercise of such
option may be for less than 100 full shares. In no event shall the Company
be required to transfer fractional shares to the Participant.
4. The option granted under this Agreement shall be exercisable from
time to time, as provided above, by the payment in cash to the Company of the
purchase price of the shares which the Participant elects to purchase. The
Company shall not be required to transfer or deliver any certificate or
certificates for shares of the Company's common shares purchased upon
exercise of the option granted under this Agreement until all then applicable
requirements of law have been met.
<PAGE>
[OPTIONEE'S NAME]
[DATE]
Page Two
5. Subject to the limitations imposed pursuant to Section 7 of the
Plan, the option and all rights granted by this Agreement, to the extent
those rights have not been exercised, will terminate and become null and void
on [EXPIRATION DATE]. If the Participant dies, the person or persons to whom
his vested rights under the option shall pass, whether by will or by the
applicable laws of descent and distribution, may exercise such vested option
to the extent the Participant was entitled to exercise the option on the date
of death, at any time within a period of one year after his death, but not
after [EXPIRATION DATE].
6. During the lifetime of the Participant, the option and all rights
granted in this Agreement shall be exercisable only by the Participant, and
except as Paragraph 5 otherwise provides, the option and all rights granted
under this contract shall not be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise), and shall
not be subject to execution, attachment or similar process. Upon any attempt
to transfer, assign, pledge, hypothecate or otherwise dispose of such option
or of such rights contrary to the provisions in this Agreement, or upon the
levy of any attachment or similar process upon such option or such rights,
such option and such rights shall immediately become null and void.
7. Notwithstanding the foregoing, upon the sale of substantially all of
the assets of the Company or change in control of forty percent (40%) of the
outstanding voting shares of the Company, all non-vested options shall
immediately vest.
8. In the event of any change in the common shares of the Company
subject to the option granted hereunder, through merger, consolidation,
reorganization, recapitalization, stock split, stock dividend or other change
in the corporate structure, without consideration, appropriate adjustment
shall be made by the Company in the number of shares subject to such option
and the price per share. Upon the dissolution or liquidation of the Company
other than in connection with a transaction to which such Section is
applicable, the option granted under this Agreement shall terminate and
become null and void, but the Participant shall have the right immediately
prior to such dissolution or liquidation to exercise the option granted
hereunder to the full extent not before exercised.
9. Neither the Participant nor his executor, administrator, heirs or
legatees shall be or have any rights or privileges of a shareholder of the
Company in respect of the shares transferable upon exercise of the option
granted under this Agreement, unless and until certificates representing such
shares shall have been endorsed, transferred and delivered and the transferee
has caused his/her name to be entered as the shareholder of record on the
books of the Company.
10. The Shares underlying your options have been registered with the
Securities and Exchange Commission, and the Shares issued upon the exercise
of your options will be freely tradable, subject, with respect to Shares held
by "affiliates" of the Company, to compliance with Rule 144 of the Securities
and Exchange Commission.
11. The Company does not attempt to advise you on any consequences
arising from your acquisition of the Shares through the exercise of the
option.
<PAGE>
[OPTIONEE'S NAME]
[DATE]
Page Three
12. The terms and conditions of the Plan, unless expressly supplemented
by this Agreement, shall continue unchanged and in full force and effect. To
the extent that any terms or provisions of this Agreement are or may be
deemed expressly inconsistent with any terms or conditions of the Plan, the
terms of this Agreement shall control.
13. The Participant hereby agrees to take whatever additional actions
and execute whatever additional documents the Company may in its reasonable
judgment deem necessary or advisable in order to carry out or effect one or
more of the obligations or restrictions imposed on the Participant pursuant
to the express provisions of this Agreement.
14. The rights of the Participant are subject to modification and
termination in certain events as provided in this Agreement and the Plan.
15. This Agreement shall be governed by, and construed in accordance
with, the substantive laws of the State of Delaware applicable to contracts
made and to be wholly performed therein.
16. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
17. This Agreement and the Plan constitute the entire agreement between
the parties with respect to the subject matter hereof, and supersede all
previously written or oral negotiations, commitments, representations and
agreements with respect thereto.
If the foregoing represents your understanding of the terms and
conditions upon which your options have been granted, please execute in the
space provided below, returning an executed copy to the undersigned.
Sincerely,
Mark C. Holliday
Chairman of the Board and
Chief Executive Officer
AGREED:
- ------------------------------
[OPTIONEE'S NAME]
<PAGE>
Exhibit 12.2
TANISYS TECHNOLOGY, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
Month Shares Outstanding at Month End
- ----- -------------------------------
Sept 96 15,978,537
Oct 96 15,978,537
Nov 96 16,070,773
Dec 96 16,626,655
-----------
4 month total 64,654,502
Weighted Average Shares 16,163,626
Net Loss $(2,137,485)
Loss per Weighted Average Shares $ (.13)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMAITON EXTRACTED FROM THE
COMPANY'S FISCAL 1997 FIRST QUARTER CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE
NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,794,323
<SECURITIES> 0
<RECEIVABLES> 6,401,032
<ALLOWANCES> 98,450
<INVENTORY> 2,043,833
<CURRENT-ASSETS> 10,630,347
<PP&E> 2,131,481
<DEPRECIATION> 1,081,516
<TOTAL-ASSETS> 20,039,421
<CURRENT-LIABILITIES> 7,790,614
<BONDS> 0
0
0
<COMMON> 25,120,576
<OTHER-SE> (12,982,828)
<TOTAL-LIABILITY-AND-EQUITY> 20,039,421
<SALES> 15,263,661
<TOTAL-REVENUES> 15,263,661
<CGS> 13,668,236
<TOTAL-COSTS> 13,668,236
<OTHER-EXPENSES> 3,579,349
<LOSS-PROVISION> 46,841
<INTEREST-EXPENSE> 165,270
<INCOME-PRETAX> (2,137,485)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,137,485)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,137,485)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
<PAGE>
Exhibit 99.1
TANISYS TECHNOLOGY, INC.
AND SUBSIDIARIES
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
ADDITIONS
---------------------
ALLOWANCE FOR BALANCE AT CHARGED CHARGED BALANCE AT
UNCOLLECTIBLE BEGINNING TO COSTS & TO OTHER END OF
ACCOUNTS OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------- ---------- ---------- -------- ---------- ----------
1996 $25,000 $29,496 $185,803* $155,742** $84,557
1995 15,852 19,003 -- 9,855** 25,000
1994 0 15,852 -- -- 15,852
* Represents the beginning balances of 1st Tech Corporation and DarkHorse
Systems, Inc. as of the date of acquisition, May 21, 1996. Activity for
the businesses acquired is included since the date of acquisition.
** Deductions consist principally of write-offs, net of collections of
receivables considered uncollectible.
