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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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<S> <C>
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER: 0-29038
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TANISYS TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
WYOMING 74-2675493
(State of Incorporation) (I.R.S. Employer
Identification Number)
12201 TECHNOLOGY BLVD., SUITE 130 78727
AUSTIN, TEXAS (Zip Code)
(Address of Principal Executive Office)
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(512) 335-4440
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements in
Part III of this Form 10-K or any amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of November 30, 1997 was approximately $43.3 million based upon
the closing sale price of the Common Stock as reported on the Nasdaq Stock
Market's SmallCap Market (the "Nasdaq SmallCap Market"). Shares of Common Stock
held by each executive officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. There were 20,409,714
shares of the Registrant's Common Stock outstanding at November 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
1997 ANNUAL REPORT ON FORM 10-K
INDEX
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PAGE
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PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings.............................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............................................ 10
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters......................... 11
Item 6. Selected Financial Data........................................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition & Results of Operations............ 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 24
Item 8. Financial Statements and Supplementary Data.................................................... 24
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........... 42
PART III
Item 10. Directors and Executive Officers of the Company................................................ 43
Item 11. Executive Compensation......................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 53
Item 13. Certain Relationships and Related Transactions................................................. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 55
SIGNATURES.................................................................................................. 58
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PART I.
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., and its wholly owned subsidiaries,
1st Tech Corporation ("1st Tech"), DarkHorse Systems, Inc. ("DarkHorse") and
Rosetta Marketing and Sales, Inc. ("Rosetta") (collectively, the "Company" or
"Tanisys"), 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 Company'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 Company'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
Company's technologies by original equipment manufacturers ("OEMs"); changes in
product mix; new product development; 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 Company 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 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations." All references to year periods refer to the Company's fiscal
years ended September 30, 1997, 1996 or 1995, and references to quarterly
periods refer to the Company's fiscal quarters ended December 31, March 31, June
30 and September 30.
GENERAL
The Company offers build-to-order services, designs and markets products
consisting of semiconductor memory modules, designs and builds memory module
testers and provides design services in conjunction with the licensing of its
Touch sensor products. Operating under the Tanisys Technology name since 1994,
the Company is rapidly growing into a prominent independent manufacturer of
standard and custom semiconductor memory modules for a variety of computer and
electronics OEMs. The Company also markets the DarkHorse line of memory testers
and licenses its proprietary Tanisys Touch technology. In 1997, the Company
changed its focus from selling off-the-shelf semiconductor memory modules to
specializing in services designed to provide OEM customers with build-to-order
board-level solutions. The Company has developed extensive design and
manufacturing expertise under its Comprehensive Logistics and Supply Solutions
("CLASS") Program to respond to its customers' rapidly changing requirements. To
this end, the Company maintains a design center as well as manufacturing
facilities in Austin, Texas. The Company's principal customers include
electronic OEMs, semiconductor manufacturers, computer distributors, value-added
resellers ("VARs") and system integrators. The Company's OEM customers include
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Siemans AG, Bay Networks Inc., Compaq Computer Corporation, Dell Computer
Corporation, Packard-Bell NEC Company and Solectron Corp.
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. was incorporated in the State of
Texas as a wholly owned subsidiary of the Company to provide marketing for the
Company's products. 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
has traded on the Nasdaq SmallCap Market under the symbol "TNSU" since May 22,
1997.
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 services, test
solutions and standard and custom module products to leading OEMs in the
computer networking and telecommunications industries.
INDUSTRY BACKGROUND
The demand for semiconductor memory modules in digital electronic systems
has grown significantly over the last several years, resulting in the increased
importance of memory in determining system performance. An increasing demand for
greater system performance requires that electronics manufacturers increase the
amount of memory incorporated into a system.
Factors contributing to the growing demand for memory include growing unit
sales of personal computers ("PCs") in the business and consumer market
segments; increasing use of PCs to perform memory-intensive graphics tasks;
increasingly faster microprocessors; the release of increasingly memory-
intensive software; and the increasing performance requirements of workstations,
servers and networking and telecommunications equipment.
Semiconductor memory products are segmented into three primary classes:
Dynamic Random Access Memory ("DRAM"), Static Random Access Memory ("SRAM") and
non-volatile memory, such as Flash memory. DRAM typically is the large "main"
memory of systems; SRAM provides higher performance; and Flash memory and other
non-volatile memory retain their contents when power is removed. In addition,
within each of these broad categories of memory products, semiconductor
manufacturers are offering an increasing variety of memory devices which are
designed for application specific uses.
The growing variety of memory components also drives demand for memory
tester systems to test each of these memory module types.
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MARKETS
THE DRAM MARKET
Of the three primary classes of semiconductor memory, DRAM is predominately
used in computers due to lower cost and increased performance. Market demand for
higher performance PCs and workstations and the increased focus on
high-throughput networking and telecommunications systems are creating a need
for higher volumes of DRAM memory in electronic systems. For example,
International Business Machines Corp ("IBM") has estimated that PCs use 70% of
all memory, and market researcher International Data Corporation ("IDC") expects
the average amount of memory used by each PC to grow from 19.6 megabytes in 1996
to 96 megabytes by 2001.
The Company believes the near-term DRAM market will fragment into increased
numbers of semiconductor memory module designs due to different architectures,
voltages and densities emerging for new systems while demand continues for
current and older designs. Popular among the architectures are Synchronous DRAM
("SDRAM"), Synchronous Graphics RAM ("SGRAM"), RAMBUS (a new proprietary memory
technology), Video RAM ("VRAM"), Fast Page Mode ("FPM") and Extended Data Out
("EDO"). DRAM integrated circuits are undergoing a shift to 64 megabits
("Mbits") and in operating voltages from 5.0 volts to 3.3 volts and less.
Therefore, the Company anticpates the combinations of module types are likely to
proliferate greatly over the next number of years.
THE SRAM MARKET
The market for SRAM typically is segmented into low power and high speed
segments. Low power SRAM devices are used primarily in computing or electronics
industry applications in which minimal power consumption is the top priority.
Popular uses of low power SRAM devices include portable computers that rely on
battery power.
The primary market demand for high speed SRAM devices is to "buffer" fast
system components from slower system components. In PCs, the most common use of
SRAM devices has been as "cache" memory, which increases a system's performance
and avoids having the increasingly faster microprocessor waiting on slower DRAM.
Access rates of DRAMs have not increased as fast as the speed of
microprocessors, and therefore, the demand for cache memory has increased. High
speed SRAMs also are seeing a rapid proliferation of configuration combinations
due to advances in speed, architecture, density and operating voltages. These
advances are needed primarily due to the increasing speed and complexity of
microprocessors such as the Pentium II, Pentium Pro, the PowerPC and the Alpha
microprocessor family. High speed SRAMs are achieving access times below 3
nanoseconds and are developing synchronous modes similar to SDRAMs to meet the
needs of these new microprocessors.
THE FLASH MEMORY MARKET
Flash memory is a specialized non-volatile memory that can be updated
similar to DRAM but retains its data after power has been turned off. The
ability to update the contents of Flash memory is the main benefit relative to
most other non-volatile memory devices, such as erasable programmable read only
memory ("EPROM") devices, that makes Flash memory useful for containing software
which is likely to need updating. Typical uses include Basic Input Output System
("BIOS") for PCs, control memory for the rapidly evolving market of thin
client/network computer/Windows terminals, control programs for routers and
other networking equipment and storage for portable computers, personal digital
assistants and digital cameras. Consequently, the market for Flash memory is
growing rapidly.
Flash memory is often packaged in removable modules to meet the needs of
portable applications. These modules vary widely for their target systems. There
are many Flash memory architectures available in the market today, which are
often offered in multiple modes and voltages. Therefore, Flash memory has many
configurations and the number of configurations has proliferated widely.
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MEMORY MODULE MARKET
Semiconductor memory modules are small printed circuit board assemblies
containing semiconductor memory devices and support circuitry. Many computer and
electronic systems use semiconductor memory modules as standard architectural
components. The modules permit OEMs to easily upgrade their systems and to
increase flexibility by permitting different types of modules to configure the
one base system for multiple price or performance targets. Semiconductor memory
modules often attach directly to a computer system board, eliminating or
reducing the need to include memory devices on the system board for space
reasons as well as flexibility of the base system. Semiconductor memory modules
also permit OEMs to manufacture systems on a build-to-order basis by permitting
the OEM to configure the system after the customer's order is placed. The
benefits of build-to-order for OEMs are faster availability, increased customer
satisfaction, reduced investment in inventories and reduced costs. Semico
Research Corporation estimates that the market size for semiconductor memory
modules in 1997 is $22.6 billion worldwide.
The memory module market is segmented into off-the-shelf and custom
components. Off-the-shelf modules often comply with industry standards and are
available from multiple vendors. These are usually popular, high volume designs
using DRAM memory which are used in desktop PCs, notebook computers, network
routers, disk drive controllers and printers. These modules typically are sold
directly to OEMs and to end users via computer resellers.
Custom semiconductor memory modules meet the unique needs of OEM computer
and electronic systems. The proliferation of memory device options has resulted
in specialized semiconductor memory modules that are ideal for the performance
of a particular system or a set of applications but are not available
off-the-shelf. These custom modules are typically contracted from a few
suppliers. The limited market for such modules often dictates build-to-order
manufacturing in order to limit inventory risks.
Computer and electronics manufacturers frequently choose to use memory
expert partners for the design and manufacture of semiconductor memory modules
due to the wide array of memory devices which can be considered for a target
system. Increasing speeds make the design and testing of modules more complex,
thus using memory partners permits system manufacturers to focus on
differentiating their product. OEMs outsource these services in a range of
levels, including build-to-print (manufacturing only), turnkey design and
manufacture, vendor specification and build-to-order.
The manufacturers of semiconductor memory modules consist of two subsets:
semiconductor manufacturers who build modules and independent third parties who
acquire memory devices and integrate them into modules. Although semiconductor
vendors dominate the business today, third party vendors are rapidly gaining
market share. The Company expects this trend to continue as it believes that
semiconductor manufacturers may not have a business model in place which is
suited to meet the needs of many large customers of custom semiconductor memory
modules, including support for build-to-order.
Independent third party manufacturers of semiconductor memory modules supply
product to two primary market segments: the OEM channel and the reseller
channel. Third party suppliers to the OEM channel typically offer custom
product, although some computer and peripheral OEMs use off-the-shelf
semiconductor memory modules. Third party suppliers to the reseller channel
typically offer standard DRAM semiconductor memory modules as an upgrade product
sold through computer distributors and retail channels. Semiconductor
manufacturers sell modules almost exclusively to OEMs. Both semiconductor memory
suppliers and independent third party module manufacturers are customers for
module testers, and as such, represent both potential customers and competitors
of the Company. The memory module tester market is described below under the
heading "Memory Module Tester Market."
MEMORY MODULE TESTER MARKET
Memory module testers are important to assure that semiconductor memory
modules meet the necessary specifications of performance. Memory module tester
use typically is segmented into system
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manufacture and system aftermarket. System manufacture typically involves the
manufacturer of the memory module being able to test its completed modules. This
usually requires "at speed" testing, where the module is exercised under the
same demands as actual use. Buyers generally evaluate reliability, productivity,
accuracy, advanced automation, software flexibility, service, customer support
and price. The Company believes that these purchase criteria are typical of
module tester buyers as well. Most manufacturers of semiconductor memory modules
perform "at speed" testing of all modules with exacting and accurate testers.
Significant expansion of test capacity is likely due to changing architectures
and strong growth of memory demand.
The actual test for a module is unique to its design in terms of
architecture, pinout, speed rating, voltage, organization and size which will
use any of several common test algorithms. Therefore, the number of potential
memory test configurations is much greater than the number of semiconductor
memory modules. This makes test development a potentially costly task. The
ability of a tester manufacturer to provide support for the development of low
cost, accurate tests is a significant consideration in the buying decision.
Module testing requirements for the system aftermarket are typically less
robust. Memory additions to systems in use typically are already tested in
accordance with the needs of the system manufacture segment and need only module
identification to assure the correct module is being installed. Servicing of
failed systems often requires limited testing of modules but typically does not
require "at speed" testing. As a result, aftermarket module testing usually has
higher sensitivity for portability and cost than does module testing at the time
of system manufacture.
TOUCH SENSOR MARKET
The touch sensor market is extremely broad since the sensor is capable of
being utilized in any application where a switch is needed. Any product which
benefits from a low profile, sealed, environmentally robust, highly durable, low
cost, simple or easily customized switch is a very good candidate for a touch
sensor switch.
PRODUCTS
The Company offers build-to-order services, designs and markets products
consisting of semiconductor memory modules, designs and builds memory module
testers and provides design services in conjunction with the licensing of its
Touch sensor products. The Company's semiconductor memory modules include DRAM,
SRAM and Flash memory. The Company offers custom semiconductor memory modules,
as well as standard semiconductor memory modules that comply with industry
standards established by the Joint Electronic Development Engineering Council
("JEDEC"). The Company's memory module testers are oriented for both system
assembly and aftermarket purposes and include a broad line of test fixtures and
test algorithems.
COMPREHENSIVE LOGISTICS AND SUPPLY SOLUTIONS
The Company offers build-to-order services for custom products under its
CLASS program. CLASS is oriented toward building alliances with semiconductor
suppliers and major computer and electronic manufacturers. The Company will
assist these customers in achieving fast time-to-market for new products as well
as rapid manufacturing cycle times. The Company will assist semiconductor
suppliers develop increased market share and help the computer and electronic
manufacturers to be faster to market, providing lower cost and more rapidly
satisfying the needs of their customers.
Specific functions of CLASS include design/development, quick-turn
prototyping, assembly, test development, documentation, supply chain management,
complete Electronic Data Interchange ("EDI") integration, support services and
security/disaster recovery plan. The Company offers design expertise in
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memory and other product areas and is unique in maintaining its own commercial
test equipment capabilities.
SEMICONDUCTOR MEMORY MODULES
DRAM. The Company offers a wide line of DRAM semiconductor memory modules,
including single in-line semiconductor memory modules ("SIMMs"), dual in-line
semiconductor memory modules ("DIMMs") and small outline dual in-line
semiconductor memory modules ("SO DIMMs"). The Company's DRAM modules are
available in various configurations of up to 168 pins and densities of up to 256
MBytes. These modules are available in FPM, EDO, SDRAM and SGRAM architectures,
with both 5.0 volt and 3.3 volt versions.
The following chart summarizes the Company's more than 550 off-the-shelf
DRAM module products:
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PRODUCT DESCRIPTION TYPES MODES DENSITIES PRIMARY USAGE
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168-pin Synchronous DIMM X64/x72ECC SDRAM 8MB-256MB Newest PCs, high-end
workstations
168-pin DIMMs (Unbuffered) X64/x72ECC FPM/EDO 8MB-256MB Newer PCs, servers,
workstations, routers
144-pin SO DIMM X64 FPM/EDO 8MB-64MB Newer notebooks, network PCs,
switches, routers
72-pin SO DIMM X32 FPM/EDO 4MB-32MB Legacy laptops, notebooks and
set-tops
72-pin SIMMs X32/x36/x40 FPM/EDO 4MB-128MB Legacy PC systems, servers,
routers
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MEMORY MODULE TESTER PRODUCTS
The Company's memory module testers are marketed under the DarkHorse brand
name to utilize existing brand awareness. The tester line is oriented toward
both module manufacturers for system assembly and aftermarket purposes. The
SIGMA-2 tester is designed for module manufacturers who need to perform "at
speed" tests of synchronous and asynchronous DRAM, SRAM, Flash memory and VRAM
modules. It is aggressively priced relative to major competitors. The SIGMA-2 is
being used widely by leading module manufacturers throughout the world.
The Company also markets the portable SIGMA-LC and SYNC-LC testers for the
aftermarket segment. Customers in this segment value the ease-of-use and rapid
identification of module type. The types of customers for these testers include
module manufacturers, module retailers, large retail chains using them for PC
service purposes, and distributors. New tester development is ongoing, driven by
new memory industry developments.
The DarkHorse testers have standard or optional capabilities to support the
following types of products:
-- 30 and 72 pin SIMMs for PCs -- Buffered 168 pin DIMMs for PCs
-- Buffered 168 pin DIMMs for Apple Computer Inc. computers
-- Unbuffered 168 pin DIMMs for PCs
-- Unbuffered 168 pin SDRAM DIMMs for PCs
-- 144 pin SO DIMMs for certain proprietary notebook computers
-- 144 pin JEDEC SO DIMMs
-- SOJ normal DRAM components
-- SOJ SRAM components
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-- SOJ wide DRAM components
-- TSOP DRAM components
-- DIP SRAM components
-- Notebook docking adapters
-- 60, 68 and 88 pin credit card semiconductor memory modules
-- VRAM upgrades for Apple Computer Inc. computers
-- Modules for Sun Microsystems Inc. SPARC workstations
-- Modules for Silicon Graphics Inc. workstations
-- Modules for Dell Computer Corp. Servers
-- 80 pin JEDEC Flash memory
-- Modules for Intel Corp. "COAST" architecture
-- Prototype development of proprietary test fixtures
The Company differentiates its testers by targeting its tester features
specifically for the purpose of testing memory products. The products are
planned for comparable performance relative to general purpose testers from
Hewlett-Packard Company and Advantest at significantly lower prices.
TOUCH SENSOR PRODUCTS
Tanisys Touch is a proprietary technology which is protected by patents,
copyrights and trademarks and is an intellectual property asset available for
licensing to third parties for incorporation into their products. The Company
licenses Tanisys Touch to OEMs which embed it into various products as a robust
switching mechanism. The touch sensor market is primarily an alternative to a
variety of switch technologies such as mechanical switches, membrane switches
and bubble switches.
Some advantages of Tanisys Touch relative to alternative switch technologies
are no moving parts, high reliability, ability to work through most plastics,
easy customization, abiltiy to work on multiple materials and low cost. Relative
to other vendors' touch implementations, Tanisys Touch does not need reference
capacitors, analog to digital converters or multiple electrodes. Instead, the
Company's proprietary technology is designed to be a reliable, simple, low cost
touch implementation, and the Company intends to position these advantages
against alternative switch technologies.
CUSTOMERS, SALES AND MARKETING
The Company's primary customers include computer and electronics OEMs,
semiconductor manufacturers, distributors, corporate end users, VARs and systems
integrators. In fiscal 1997 and 1996, the Company's ten largest customers
accounted for approximately 53.2% and 45.3% of net sales, respectively. During
fiscal 1997, the Company had one customer, Tandy Corporation, that accounted for
12.0% of net sales. In fiscal 1996, no one customer accounted for more than 10%
of net sales.
The Company primarily sells its module products directly and through a
network of independent sales representative organizations to OEM customers
worldwide. The Company sells the majority of its tester products directly to
other module manufacturers and sells a portion through distribution partners and
independent sales representative organizations. Licensing of Tanisys Touch is
through licensing agreements direct to the customer.
The Company maintains relationships with leading global suppliers of memory
semiconductor devices and frequently works jointly with these suppliers in
quoting customer opportunities.
The Company's OEM marketing activities include advertising in trade and
business magazines, direct mail and solicitation via the Company's Internet web
site.
Sales generally are made against standard customer purchase orders. The
Company's backlog generally includes those customer orders for which it accepted
purchase orders and planned shipment dates within the next year. Backlog is not
an indicator of future sales, and orders in the backlog are subject
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to change in delivery terms or even cancellation. Accordingly, there is no
assurance that current backlog will lead to future sales. The Company's total
backlog was $2.4 million and $356 thousand at fiscal 1997 and 1996 year end,
respectively.
RESEARCH AND DEVELOPMENT
The Company's management believes that the timely development of new
products and technologies is essential to maintain the Company's competitive
position. In the electronics market, the Company'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 Company provides
research and development services for customers either as joint or contracted
development. The Company 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.
The Company's 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 OEMs. Support
continues to be provided to OEMs in the PC and appliance industries toward this
end. It is not anticipated that significant additional research and development
efforts will be required for this technology.
The Company's research and development expenses were $2.6 million in fiscal
1997, $1.1 million in fiscal 1996 and $410 thousand in fiscal 1995.
COMPETITION
The memory module and memory test equipment industries are intensely
competitive. Each of these markets includes a large number of competitive
companies, several of which have achieved a substantial market share. Certain of
the Company's competitors in each of these markets have substantially greater
financial, marketing, technical, distribution and other resources, greater name
recognition, lower cost structures and larger customer bases than the Company.
In the memory module market, the Company competes against semiconductor
manufacturers that maintain captive memory module production capabilities,
including Samsung Electronics Company Ltd. ("Samsung") and Micron Electronics,
Inc. (a subsidiary of Micron Technology, Inc.). The Company also competes with
independent memory module manufacturers, including Smart Modular Technologies,
Inc. and Kingston Technology, Inc. In the memory tester market, the Company
competes primarily with companies such as Hewlett-Packard, Inc. and Advantest,
Inc. Competition for the Company's CLASS business of manufacturing services
includes SCI Systems, Inc. and Avex Electronics, Inc. The Company faces
competition from current and prospective customers that evaluate the Company's
capabilities against the merits of manufacturing products internally. In some
cases the Company's tester customers represent direct competition to the
Company's memory module business. In addition, certain of the Company's
competitors, such as Samsung, are significant suppliers to the Company. These
suppliers may have the ability to manufacture competitive products at lower
costs than the Company as a result of their higher levels of integration. The
Company also faces competition from new and emerging companies that have
recently entered or may in the future enter the markets in which the Company
participates.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products. There can be no assurance that enhancements to or future
generations of competitive products will not be developed that offer better
prices or technical performance features than the Company's products. To remain
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, improve quality levels, offer flexible
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delivery schedules, deliver finished products on a reliable basis, reduce
manufacturing and testing costs and compete favorably on the basis of price. In
addition, increased competitive pressure has led in the past, and may continue
to lead to, intensified price competition, resulting in lower prices and gross
margin, which could materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully in the future.
INTELLECTUAL PROPERTY
The Company has filed seven 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 "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.
3. 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.
4. Application for "Capacitive Sensitive Switch Method and System,"
This pending application relates generally to touch sensor switches, and
more particularly to an automated digital system for sensing the capacitance
of touch pads to determine when a physical object has come into contact with
a touch pad.
5. Application for "Synchronous Memory Identification System." This
application relates generally to memory test systems, and more particularly
to an automated method and system for identifying SDRAM and SGRAM memories.
6. Application for "Nested Loop Method of Identifying Synchronous
Memories." This application relates generally to memory test systems, and
more particularly to a nested loop method which may be used in a memory test
system to identify SDRAM and SGRAM memories.
7. Application for "Synchronous Memory Test System." This application
relates generally to memory test systems, and more particularly to a test
system for SDRAM and SGRAM memories.
There can be no assurance that these pending patent applications will be
approved or approved in the form requested. The Company expects to continue to
file patent applications where appropriate to protect its proprietary
technologies; however, the Company 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 Company 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 Company's
trade secrets or other proprietary information, that disputes with respect to
the ownership of its intellectual property rights will not arise, that the
Company'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
9
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no assurance that third parties will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company or that
third parties will not assert intellectual property infringement claims against
the Company. In addition, there can be no assurance that foreign intellectual
property laws will adequately protect the Company's intellectual property rights
abroad. The failure of the Company to protect its proprietary rights could have
a material adverse effect on its business, financial condition and results of
operations.
ENVIRONMENTAL REGULATION
The Company'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 Company 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 September 30, 1997, the Company had 143 full-time employees. Those
employees included 27 engineering and product development employees, 28 finance
and administration employees, 20 employees in the sales, marketing, technical
and customer support areas and 68 manufacturing employees.
Recruitment of personnel in the computer industry, particularly engineers,
is highly competitive. The Company believes that its future success will depend
in part on its ability to attract and retain highly skilled management,
engineers, sales, marketing, finance and technical personnel. There can be no
assurance of the Company's ability to recruit and retain the employees that it
may require.
FACTORS THAT AFFECT FUTURE RESULTS
The Company's business, financial condition and results of operations can be
impacted by a number of factors. See "Item 7. Management's Discussion And
Analysis Of Financial Condition And Results Of Operations--Factors That May
Affect Future Results."
ITEM 2. PROPERTIES
At November 30, 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 August 15, 2000. The Company has the right to terminate the lease
anytime after August 31, 1998 upon sixty days' advance written notice . The
lease has certain expansion options, renewal options and rights of first
refusal. The Company currently is paying annual rental of $209,721, 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.
ITEM 3. LEGAL PROCEEDINGS
At the date hereof, there is no pending, or to the best knowledge of the
Company, threatened litigation involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
On May 22, 1997, the Company began trading on the Nasdaq SmallCap Market
under the symbol "TNSU." From March 20, 1995 to June 6, 1997, the Common Stock
was traded on the VSE under the symbol "TNS.U," with prices quoted in U.S.
dollars. On June 6, 1997, the Company voluntarily delisted its stock on the VSE,
as a result of the change to Nasdaq. 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.
The table below sets forth the high and low closing prices of the Common
Stock from October 1, 1994 through May 22, 1997, as reported by the VSE, and
from May 23, 1997 to September 30, 1997, as reported on the Nasdaq SmallCap
Market. These price quotations reflect interdealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
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
March 31, 1997............................................................... 5.35 2.75
June 30, 1997................................................................ 4.50 2.87
September 30, 1997........................................................... 5.56 4.06
FISCAL 1998:
Through December 22, 1997.................................................... $ 4.15 $ 2.00
</TABLE>
STOCKHOLDERS
On September 30, 1997, there were 20,334,714 shares of Common Stock
outstanding held by 299 holders of record. The last reported sales price on the
Common Stock on November 28, 1997 was $2.75 per share.
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, at this time restrictions
in the Company's revolving credit facility prohibit the payment of cash
dividends.
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<PAGE>
PRIVATE PLACEMENT
In July 1997, the Company completed an equity financing of 2,240,000 shares
of Common Stock for cash at an offering price of $2.50 per share. The Company
believes that the transaction was exempt from registration under the Securities
Act by reason of Section 4(2) of the Securities Act. 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, 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.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below are derived from
the Consolidated Financial Statements of the Company, which financial statements
have been audited by Arthur Andersen LLP, independent public accountants, to the
extent indicated in their report included elsewhere herein.
On May 21, 1996, the Company acquired 1st Tech Corporation and Darkhorse
Systems, Inc. The acquisitions were accounted for using the purchase method,
resulting in total goodwill of $7.2 million to be amortized over a two-year
period. The results of operations have been included in the consolidated
financial statements since the acquisition date.
The selected consolidated financial data set forth below are qualified
entirely by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales................................................... $ 47,674 $ 14,989 $ 359 $ 113 $ 0
Loss from continuing operations............................. (10,114) (3,684) (2,445) (1,972) (660)
Goodwill amortization expense............................... (3,585) (1,494) N/A N/A N/A
Loss per weighted average common share...................... (0.58) (0.31) (0.29) (0.30) (0.27)
Total assets................................................ 17,232 17,463 1,613 2,295 2,488
Long-term debt.............................................. 81 123 0 0 0
</TABLE>
ITEM 7. 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 Company for the fiscal years ended September 30,
1997, 1996 and 1995. It should be read in conjunction with the Consolidated
Financial Statements of the Company, the Notes thereto and other financial
information included elsewhere in this report. For purposes of the following
discussion, references to year periods refer to the Company's fiscal year ended
September 30, and references to quarterly periods refer to the Company's fiscal
quarters ended December 31, March 31, June 30 and September 30. (See
"Business--Forward Looking Statements--Cautionary Statements.")
The Company was organized under the laws of the Province of British
Columbia, Canada, on January 27, 1984, as Montebello Resources Ltd., and pursued
oil and gas exploration in British Columbia and Manitoba, Canada. In October
1992, the Company changed its name to First American Capital Group Inc.
Unsuccessful in the exploration business, the Company became dormant pursuant to
the rules and regulations of the VSE. 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 Timespan and its
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<PAGE>
computer game controller technology. Timespan, a wholly owned subsidiary of the
Company, was dissolved as of October 23, 1996. 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
Corporation ("1st Tech") and DarkHorse Systems, Inc. ("DarkHorse") and began
operations in Austin, Texas as a consolidated group of companies providing
custom design, engineering and manufacturing services, test solutions and
standard and custom module products to leading original equipment manufacturers
("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's net sales and gross profit increased dramatically in the
current fiscal year and the last two quarters of fiscal year 1996, due to the
acquisitions of 1st Tech and DarkHorse. In fiscal 1997, revenues were $47.7
million with gross profit of $6.2 million (13.0% of revenue) versus fiscal 1996
revenues of $15.0 million and gross profit of $2.3 million (15.5% of revenue).
This is an increase in revenues of $32.7 million, or 218.1%, and in gross profit
of $3.9 million, or 166.1%. The increase in revenues and gross profits are due
primarily to the acquisitions of 1st Tech and Darkhorse on May 21, 1996. Net
losses increased to $10.1 million in fiscal 1997, or 21.2% of revenues, from
$3.7 million in fiscal 1996, or 24.7% of 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 will fluctuate due to
the continuing oversupply of memory chips, which dramatically drives down the
prices of the Company's products, the continuing fluctuations in the cost of
memory and components 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 Company purchases the necessary
materials.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data of the
Company expressed as a percentage of net sales for the fiscal years ended
September 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0%
Cost of goods sold...................................... 87.0 84.5 30.7
------ ------ ------
Gross profit............................................ 13.0 15.5 69.3
------ ------ ------
Operating expenses:
Research and development.............................. 5.4 7.2 114.2
Sales and marketing................................... 6.4 7.9 378.6
General and administrative............................ 7.6 12.9 249.3
Depreciation and amortization......................... 8.8 11.7 19.8
Bad debt expense...................................... 4.7 0.3 5.3
------ ------ ------
Total operating expenses................................ 32.9 40.0 767.2
------ ------ ------
Operating loss.......................................... (19.9) (24.5) (697.9)
Other income (expense), net............................. (1.3) (0.2) 16.3
------ ------ ------
Net loss................................................ (21.2)% (24.7)% (681.6)%
------ ------ ------
------ ------ ------
</TABLE>
NET SALES
Until the date of the acquisitions of 1st Tech and DarkHorse on May 21,
1996, net sales consisted of software sales, less returns and discounts, and
design engineering fees. After the acquisitions, net sales consist of custom
manufacturing services, custom semiconductor memory modules, standard
semiconductor memory modules, design engineering fees, memory module test
solutions and advanced technology services, less returns and discounts. Net
sales for fiscal 1997 increased to $47.7 million from $15.0 million in fiscal
1996. The increases in fiscal 1997 are primarily due to the acquisitions of 1st
Tech and DarkHorse and, to a lesser degree, to increases in sales volume in both
the memory and tester product lines. Net sales increased to $15.0 million in
fiscal 1996 from $359 thousand in fiscal 1995. This increase in sales was
primarily due to the acquisitions of 1st Tech and DarkHorse.
COST OF SALES AND GROSS PROFIT
Cost of sales includes the costs of all components and materials purchased
for the manufacture of products and the direct labor and overhead costs
associated with manufacturing. Gross profit for fiscal 1997 increased to $6.2
million from $2.3 million in fiscal 1996. Gross profit margin decreased to 13.0%
from 15.5% in 1997 versus 1996. The decrease in gross profit margin was
primarily due 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.
Gross profit increased to $2.3 million in 1996 from $249 thousand in 1995,
an increase of 836.4%. Gross profit margin declined to 15.5% in 1996 from 69.3%
in 1995. The increase in gross profit and the decrease in gross profit margin
are primarily due to the change in concentration of product sales resulting from
the acquisitions of 1st Tech and DarkHorse.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the costs associated with the
timely development of new products and technologies. These relate primarily to
the costs of materials, personnel, management and employee compensation and
engineering design consulting fees. Research and development expenses
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<PAGE>
increased to $2.6 million in fiscal 1997 from $1.1 in fiscal 1996, representing
a 140.2% increase from year to year. The substantial increase is due to the
acquisitions of the additional product lines of 1st Tech and DarkHorse and the
related research and development expenditures, and the development of new memory
module products and new tester products.
Research and development expenses increased to $1.1 million in fiscal 1996
from $410 thousand in fiscal 1995, a 163.5% increase. The substantial increase
is due to the acquisitions of the additional product lines of 1st Tech and
DarkHorse and the related research and development expenditures, and the
development of new memory module products and new tester products.
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. Sales and marketing expenses
increased to $3.0 million in fiscal 1997 from $1.2 million in fiscal 1996, a
158.6% increase. In fiscal years 1997 and 1996, sales and marketing expenses
expressed as a percentage of revenues were 6.4% and 7.9%, respectively. The
increases in actual funds expended are connected with the acquisitions of the
product lines of 1st Tech and DarkHorse. The decreases in the expenses expressed
as a percentage of revenues are caused primarily by the significant increases 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 decreased to $1.2 million in fiscal 1996 from
$1.4 million in fiscal 1995, a decrease of 13.3%. Expressed as a percentage of
revenues, sales and marketing expenses were 7.9% in 1996 and 378.6% in 1995. 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. The decrease in actual expenditures is due in large part to the
decrease in commission expenses relating to software revenue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of personnel costs,
including employee compensation and benefits, and support costs including
utilities, insurance, professional fees and all costs associated with a
reporting company. In fiscal years 1997 and 1996, general and administrative
expenses increased to $3.6 million from $1.9 million, an 88.2% increase. General
and administrative expenses expressed as a percentage of revenues were 7.6% and
12.9% in fiscal years 1997 and 1996, respectively. The increase in actual funds
expended in fiscal 1997 is due primarily to the acquisitions 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 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 sales.
General and administrative expenses increased to $1.9 million in fiscal 1996
from $894 thousand in fiscal 1995, representing an increase of 115.8%. General
and administrative expenses expressed as a percentage of revenues were 12.9% and
249.3% in fiscal years 1996 and 1995, respectively. The increase in general and
administrative expenses and the decrease as a percentage of revenue during this
time period were due to the acquisitions of 1st Tech and DarkHorse.
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<PAGE>
BAD DEBT EXPENSE
Bad debt expense consists of amounts charged to expense because of trade
accounts receivable becoming uncollectible. The Company's method of accounting
for bad debts is to use historical actual expenses to estimate the amount of
current sales which will be uncollectible and provide for them by creating an
allowance which is netted against the trade accounts receivable. The Company
writes off amounts related to specific accounts as the collection of these
accounts becomes questionable. For fiscal 1997, the amount charged to bad debt
expense was $2.2 million, compared to a total of $46 thousand for fiscal 1996.
The increase in fiscal 1997 bad debt expense is primarily due to a $1.7 million
bad debt expense for one customer and to increased sales in conjunction with the
acquisitions of 1st Tech and DarkHorse.
Bad debt expense increased to $46 thousand for fiscal 1996 from $19 thousand
for fiscal 1995, due primarily to the increase in sales relating to the
acquisitions of 1st Tech and DarkHorse.
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. In fiscal 1997, depreciation and
amortization increased to $4.2 million from $1.7 million in fiscal 1996. The
substantial increases are due primarily to the amortization of goodwill recorded
in conjunction with the acquisitions of 1st Tech and DarkHorse and to the
depreciation of the acquired assets of 1st Tech and DarkHorse.
Depreciation and amortization increased to $1.7 million in fiscal 1996 from
$71 thousand in fiscal 1995. The substantial increases are due primarily to the
amortization of goodwill recorded in conjunction with the acquisitions of 1st
Tech and DarkHorse.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income less
interest expense. Interest expense is primarily attributable to borrowings from
a revolving credit note. Substantially all of the interest expense relates to
credit line draws made for short-term inventory requirements and to fund trade
accounts receivable. Interest income relates to investment of available cash in
short-term interest bearing accounts and cash equivalent securities. Other
income (expense), increased to $616 thousand of expense in fiscal 1997 from $30
thousand of expense in fiscal 1996 and $59 thousand of income in fiscal 1995.
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 the increased balances of inventories,
accounts receivable and borrowings. The Company 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
During 1997 and 1996, the Company incurred consolidated net operating losses
for U.S. income tax purposes of approximately $6.0 million and $1.8 million,
respectively. The loss carryforwards expire in 2012 and 2011, respectively.
During 1997 and 1996, the Company had temporary differences resulting in future
tax deductions of $513 thousand and $693 thousand, respectively, principally
representing tax basis in accrued liabilities and intangible assets. Deferred
income tax assets from the loss carryforwards and asset basis differences
aggregate $4.6 million and $2.2 million, respectively, at September 30, 1997.
For financial reporting purposes, valuation allowances of $4.6 million and
$2.2 million 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
16
<PAGE>
lose the benefit of such net operating loss carryforwards due to Internal
Revenue Service ("IRS") Code Section 382 limitations. This section states that
after reorganization or other change in corporate ownership, the use of certain
carryforwards may be limited or prohibited. The Company does not believe that an
IRS Code Section 382 limitation exists as of September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has utilized the funds acquired in equity
financings of its Common Stock, in the exercise of warrants, exercise of stock
options, capital and operating leases, vendor credits, certain bank borrowings
and funds generated from operations to support its operations, carry on research
and development activities, acquire capital equipment, finance inventories and
accounts receivable and pay its general and administrative expenses. For fiscal
1997, the Company generated $9.2 million in net cash from financing activities
versus $3.3 million in fiscal 1996. The $9.2 million in fiscal 1997 consisted of
$2.5 million from the exercise of warrants and options, $1.1 million of net cash
draws on the Company's revolving credit note and $5.6 million in private
placements of Common Stock. At September 30, 1997, the Company had $2.0 million
of cash, $1.5 million of restricted cash and a working capital surplus of $3.1
million. Restricted cash represents customer payments deposited into the
Company's lockbox account but not yet transferred to pay down the Company's line
of credit.
On June 27, 1997, the Company received approval of an $8.5 million,
three-year revolving credit facility from a new financial institution. The
transaction was completed on July 24, 1997. Borrowings under the line of credit
are based on eligible accounts receivable, inventory and equipment and subject
to the terms and conditions of the credit agreement. The line of credit is
collateralized by all of the Company's assets. The interest rate on this line of
credit is prime plus 2%.
Capital expenditures totaled approximately $1.5 million and $404 thousand in
fiscal years 1997 and 1996, respectively. These capital expenditures were
primarily for the purchase of enterprise information systems, manufacturing
equipment, test equipment and the expansion of manufacturing facilities. The
Company expects to fund capital expenditures of approximately $625 thousand in
the first quarter of fiscal 1998 for additional manufacturing capacity, test
equipment and expansion of manufacturing facilities through working capital,
operating leases and capital leases.
The Company entered into a 60-month operating lease for equipment valued at
$1.5 million effective March 1, 1997. This lease required a letter of credit
equal to approximately 40% of the equipment cost for the first year of the
lease, with annual decreases in the letter of credit over the life of the lease.
During fiscal 1997, there were significant declines in DRAM and SRAM
semiconductor prices. Since the fiscal 1997 year end, there have been continued
declines in certain DRAM and SDRAM semiconductor prices. Because a substantial
portion of the Company's net sales are attributable to the resale of
semiconductor memory devices, future price declines could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business, financial condition and results of operations could
be impacted by a number of factors, including without limitation the following.
SIGNIFICANT CUSTOMER CONCENTRATION
A significant percentage of the Company's net sales are produced by a
relatively small number of customers. In fiscal 1997 and 1996, the ten largest
customers accounted for approximately 53.2% and 45.3% of net sales,
respectively. One customer, Tandy Corporation, accounted for 12.0% of total
sales in fiscal 1997, while no one customer accounted for more than 10% of total
sales in fiscal 1996. While the Company expects to continue to be dependent on a
relatively small number of customers for a significant
17
<PAGE>
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. Absent replacement or other sales growth, the loss of any significant
customer could materially and adversely affect the Company's result of
operations, business and financial condition. The actual customers producing the
sales are different between the two periods, and the Company expects this type
of variation in volume of purchases from a particular customer to continue.
The Company in general has no firm long-term volume commitments from its
customers and generally enters into individual purchase orders and agreements
with non-binding forecasts. Customer purchase orders and forecasts 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.
PRODUCT CONCENTRATION; DEPENDENCE ON MEMORY MARKET
A substantial majority of the Company's net sales is derived from memory
products. The market for memory products is characterized by frequent
transitions in which products rapidly incorporate new features and performance
standards. A failure to develop products with required feature sets or
performance standards or a delay as short as a few months in bringing a new
product to market could significantly reduce the Company's net sales for a
substantial period, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The market for semiconductor memory devices has been cyclical. The industry
has experienced significant economic downturns at various times, characterized
by diminished product demand, accelerated erosion of average selling prices and
production over capacity. During fiscal 1997, there were significant declines in
DRAM and SRAM semiconductor prices. Since the fiscal 1997 year end, there have
been continued declines in certain DRAM and SDRAM semiconductor prices. Because
a substantial portion of the Company's net sales are attributable to the resale
of semiconductor memory devices, future price declines could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON SEMICONDUCTOR, COMPUTER, TELECOMMUNICATIONS AND NETWORKING
INDUSTRIES
The Company may experience substantial period-to-period fluctuations in
future operating results due to factors affecting the semiconductor, computer,
telecommunications and networking industries. From time to time, each of these
industries has experienced downturns, often in connection with, or in
anticipation of, declines in general economic conditions. A decline or
significant shortfall in growth in any one of these industries could have a
material adverse impact on the demand for the Company's products and therefore a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, changes in end-user demand for the products
sold by any individual OEM customer can have a rapid and exaggerated effect on
demand for the Company's products from that customer in any given period,
particularly in the event that the OEM customer has accumulated excess
inventories of products purchased from the Company. There can be no assurance
that the Company's net sales and results of operations will not be materially
and adversely affected in the future due to changes in demand from individual
customers or cyclical changes in the semiconductor, computer,
telecommunications, networking or other industries utilizing the Company's
products.
18
<PAGE>
INTENSE COMPETITION
The memory module and memory test equipment industries are intensely
competitive. Each of these markets includes a large number of competitive
companies, several of which have achieved a substantial market share. Certain of
the Company's competitors in each of these markets have substantially greater
financial, marketing, technical, distribution and other resources, greater name
recognition, lower cost structures and larger customer bases than the Company.
In the memory module market, the Company competes against semiconductor
manufacturers that maintain captive memory module production capabilities,
including Samsung Electronics Company Ltd. ("Samsung") and Micron Electronics,
Inc. (a subsidiary of Micron Technology, Inc.). The Company also competes with
independent memory module manufacturers, including Smart Modular Technologies,
Inc. and Kingston Technology, Inc. In the memory tester market, the Company
competes primarily with companies such as Hewlett-Packard, Inc. and Advantest,
Inc. Competition for the Company's CLASS business of manufacturing services
includes SCI Systems, Inc. and Avex Electronics, Inc. The Company faces
competition from current and prospective customers that evaluate the Company's
capabilities against the merits of manufacturing products internally. In some
cases the Company's tester customers represent direct competition to the
Company's memory module business. In addition, certain of the Company's
competitors, such as Samsung, are significant suppliers to the Company. These
suppliers may have the ability to manufacture competitive products at lower
costs than the Company as a result of their higher levels of integration. The
Company also faces competition from new and emerging companies that have
recently entered or may in the future enter the markets in which the Company
participates.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products. There can be no assurance that enhancements to or future
generations of competitive products will not be developed that offer better
prices or technical performance features than the Company's products. To remain
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, improve quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis, reduce
manufacturing and testing costs and compete favorably on the basis of price. In
addition, increased competitive pressure has led in the past and may continue to
lead to intensified price competition, resulting in lower prices and gross
margin, which could materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully in the future.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations and gross margin have fluctuated
significantly from period to period in the past and may in the future continue
to fluctuate significantly from period to period. Aside from fluctuations
typically resulting from the different products and customer mix associated with
acquisitions, the primary factors that have affected and may in the future
affect the Company's results of operations include the loss of a principal
customer or customers or the reduction in orders from a customer due to excess
product inventory accumulation by such customers, adverse changes in the mix of
products sold by the Company and the inability to procure required components.
Other factors that may affect the Company's results of operations in the future
include fluctuating market demand for and declines in the selling prices of the
Company's products, market acceptance of new products and enhanced versions of
the Company's products, delays in the introduction of new products and
enhancements to existing products, and manufacturing inefficiencies associated
with the startup of new product introductions. In addition, the Company's
operating results may be affected by the timing of new product announcements and
releases by the Company or its competitors, the timing of significant orders,
the ability to produce products in volume, delays, cancellations or
reschedulings of orders due to customer financial difficulties or other events,
inventory obsolescence, including the reduction in value of the Company's
19
<PAGE>
inventories due to unexpected price declines, unexpected product returns, the
timing of expenditures in anticipation of increased sales, cyclicality in the
Company's targeted markets, and expenses associated with acquisitions. In
particular, declines in DRAM, SDRAM, and SRAM semiconductor prices could affect
the valuation of the Company's inventory which could result in adverse changes
in the Company's business, financial condition and results of operations. The
concentration of the Company's assets in its Austin, Texas facility could make
the Company's exposure to business disruptions greater than if the Company's
assets were more geographically dispersed.
The Company's net sales and gross margin have varied and will continue to
vary significantly based on a variety of factors, including the mix of products
sold and the manufacturing services provided, the channels through which the
Company's products are sold, changes in product selling prices and component
costs, the level of manufacturing efficiencies achieved and pricing by
competitors. The selling prices of the Company's existing products have declined
in the past, and the Company expects that prices will continue to decline in the
future. In particular, during fiscal 1997 and 1996, the selling prices of the
Company's existing products declined due to significant declines in DRAM, SDRAM
and SRAM semiconductor prices. Moreover, since the fiscal 1997 year end,
declines in the selling prices of certain of the Company's existing products
have continued due to further declines in certain DRAM and SDRAM semiconductor
prices. Because a substantial portion of the Company's turnkey sales are
attributable to the resale of semiconductor devices, continued decline in the
prices of these components could have a material adverse effect on the Company's
net sales. Accordingly, the Company's ability to maintain or increase net sales
will be highly dependent upon its ability to increase unit sales volumes of
existing products and to introduce and sell new products in quantities
sufficient to compensate for the anticipated declines in selling prices.
Declining product selling prices may also materially and adversely affect the
Company's gross margin unless the Company is able to reduce its cost per unit to
offset declines in product selling prices. There can be no assurance that the
Company will be able to increase unit sales volumes, introduce and sell new
products or reduce its cost per unit. In addition, the Company's business has in
the past been subject to seasonality. The Company expects that its business will
experience more significant seasonality as it expands its sales and marketing
efforts in Europe.
Sales of the Company's individual products and product lines toward the end
of a product's life cycle are typically characterized by steep declines in
sales, pricing and gross margin, the precise timing of which may be difficult to
predict. The Company could experience unexpected reductions in sales of products
as customers anticipate new product purchases. In addition, to the extent that
the Company manufactures products in anticipation of future demand that does not
materialize, or in the event a customer cancels outstanding orders during a
period of either declining product selling prices or decreasing demand, the
Company could experience an unanticipated decrease in sales of products. These
factors could give rise to charges for obsolete or excess inventory, returns of
products by distributors, or substantial price protection charges or discounts.
In the past, the Company has had to write-down and write-off excess or obsolete
inventory. To the extent that the Company is unsuccessful in managing product
transitions, its business, financial condition and results of operations could
be materially and adversely affected.
The need for continued significant expenditures for capital equipment
purchases, research and development and ongoing customer service and support,
among other factors, will make it difficult for the Company to reduce its
operating expenses in any particular period if the Company's expectations for
net sales for that period are not met. The Company has significantly increased
its expense levels to support its growth, and there can be no assurance that the
Company will maintain its current level of net sales or rate of growth for any
period in the future. The Company believes that period-to-period comparisons of
the Company's financial results are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to the foregoing factors,
it is likely that in some future period the Company's operating results will be
below the expectations of public market analysts or investors. In such event,
the market price of the Company's securities would be materially and adversely
affected.
20
<PAGE>
DEPENDENCE ON SOLE OR LIMITED SOURCES OF SUPPLY
The Company is dependent on certain suppliers, including limited and sole
source suppliers, to provide key components used in the Company's products. In
particular, the Company is dependent in significant part upon certain limited or
sole source suppliers for critical components in the Company's memory module and
tester products. The electronics industry has experienced in the past, and may
experience in the future, shortages in semiconductor devices, including DRAM,
SDRAM and SRAM memory. The Company has experienced and may continue to
experience delays in component deliveries and quality problems with respect to
certain component deliveries which have caused and could in the future cause
delays in product shipments and have required and could in the future require
the redesign of certain products. The Company generally has no written
agreements with its suppliers. There can be no assurance that the Company will
receive adequate component supplies on a timely basis in the future. The
inability to continue to obtain sufficient supplies of components as required,
or to develop alternative sources if required, could cause delays, disruptions
or reductions in product shipments or require product redesigns which could
damage relationships with current or prospective customers, could increase costs
and/or prices and could have a material adverse effect on the Company's
business, financial condition and results of operations.
MANAGEMENT OF GROWTH; EXPANSION OF OPERATIONS
The Company has significantly expanded its operations over the last several
years. This growth has resulted in a significant increase in responsibility for
existing management which has placed, and may continue to place, a significant
strain on the Company's limited personnel and management, manufacturing and
other resources. The Company's ability to manage the recent and any possible
future growth will require a significant expansion of its manufacturing
capacity, accounting and other internal management systems and the
implementation of a variety of procedures and controls. There can be no
assurance that significant problems in these areas will not occur. Any failure
to expand these systems and implement such procedures and controls in an
efficient manner and at a pace consistent with the Company's business could have
a material adverse effect on the Company's business, financial condition and
results of operations.
In connection with the Company's acquisitions and growth, the Company's
operating expenses have increased significantly, and the Company anticipates
that operating expenses will continue to increase in absolute dollars in the
future. In particular, in order to continue to provide quality products and
customer service and to meet anticipated demands of its customers, the Company
will be required to continue to increase staffing and other expenses, including
expenditures on capital equipment, sales and marketing. Should the Company
increase its expenditures in anticipation of a future level of sales that does
not materialize, the Company's business, financial condition and results of
operations would be materially and adversely affected. Certain customers have
required and may continue to require rapid increases in production and
accelerated delivery schedules which have placed and may continue to place a
significant burden on the Company's resources. In order to achieve anticipated
sales levels and profitability, the Company will continue to be required to
manage its assets and operations efficiently. In addition, should the Company
continue to expand geographically, it may experience certain inefficiencies from
the management of geographically dispersed facilities.
The Company anticipates that future demand for its products will require
expansion of its current operations and the addition of new production lines in
the future. It also anticipates it will be required to move to a larger
facility. Should the Company's relocation to this facility be delayed or should
the Company experience any unexpected disruptions associated with this
transition, the Company's results of operations could be materially and
adversely affected. There can be no assurance that any such expansion will be
completed successfully.
21
<PAGE>
RAPID TECHNOLOGICAL CHANGE
The semiconductor, computer, telecommunications and networking industries
are subject to rapid technological change, short product life cycles, frequent
new product introductions and enhancements, changes in end-user requirements and
evolving industry standards. The Company's ability to be competitive in these
markets will depend in significant part upon its ability to invest significant
amounts of resources for research and development efforts, to successfully
develop, introduce and sell new products and enhancements on a timely and
cost-effective basis and to respond to changing customer requirements that meet
evolving industry standards. For example, the semiconductor memory market is
currently transitioning from fast page mode and EDO memory to SDRAM. The success
of the Company in developing new and enhanced products will depend upon a
variety of factors, including integration of the various elements of its complex
technology, timely and efficient completion of product design, timely and
efficient implementation of manufacturing and assembly processes, availability
of production capacity, achievement of acceptable manufacturing yields and
product performance, quality and reliability. The Company has experienced, and
may in the future experience, delays from time to time in the development and
introduction of new products. Moreover, there can be no assurance that the
Company will be successful in selecting, developing, manufacturing and marketing
new products or enhancements. There can be no assurance that defects or errors
will not be found in the Company's products after commencement of commercial
shipments, which could result in the delay in market acceptance of such
products. The inability of the Company to introduce new products or enhancements
that contribute to sales could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. The Company's future operating
results also depend in significant part upon its ability to attract, train and
retain qualified management, manufacturing and quality assurance, engineering,
marketing, sales and support personnel. The Company is actively recruiting such
personnel. However, competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting, training or
retaining such personnel now or in the future. There may be only a limited
number of persons with the requisite skills to serve in these positions, and it
may be increasingly difficult for the Company to hire such persons over time.
The loss of any key employee, the failure of any key employee to perform in his
or her current position, the Company's inability to attract, train and retain
skilled employees as needed or the inability of the officers and key employees
of the Company to expand, train and manage the Company's employee base could
materially and adversely affect the Company's business, financial condition and
results of operations.
INTERNATIONAL SALES
International sales accounted for 3.5% and 2.7% of net sales in fiscal 1997
and 1996, respectively. The Company anticipates that international sales will
increase in future periods and will account for an increasing portion of net
sales. As a result, an increasing portion of the Company's sales will be subject
to certain risks, including changes in regulatory requirements, tariffs and
other barriers, timing and availability of export licenses, political and
economic instability, difficulties in accounts receivable collections, natural
disasters, difficulties in staffing and managing foreign subsidiary and branch
operations, difficulties in managing distributors, difficulties in obtaining
governmental approvals for telecommunications and other products, foreign
currency exchange fluctuations, the burden of complying with a wide variety of
complex foreign laws and treaties and potentially adverse tax consequences. The
Company is also subject to the risks associated with the imposition of
legislation and regulations relating to the import or export of high technology
products. The Company cannot predict whether quotas, duties, taxes or other
charges or restrictions upon the importation or exportation of the Company's
products will be implemented by the
22
<PAGE>
U.S. or other countries. Because sales of the Company's products have been
denominated to date primarily in U.S. dollars, increases in the value of the
U.S. dollar could increase the price of the Company's products so that they
become relatively more expensive to customers in the local currency of a
particular country, leading to a reduction in sales and profitability in that
country. Future international activity may result in increased foreign currency
denominated sales. Gains and losses on the conversion to U.S. dollars of
accounts receivable, accounts payable and other monetary assets and liabilities
arising from international operations may contribute to fluctuations in the
Company's results of operations. Some of the Company's customer purchase orders
and agreements are governed by foreign laws, which may differ significantly from
U.S. laws. Therefore, the Company may be limited in its ability to enforce its
rights under such agreements and to collect damages, if awarded. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY
The Company expects that its customers will continue to establish demanding
specifications for quality, performance, reliability and delivery. In the past,
the Company has experienced quality problems resulting in product returns and
cancellations. To date, the Company's quality problems have not had a
significant effect on the Company's results of operations and the known quality
problems have been or are in the process of being remedied. There can be no
assurance that the problems will not occur in the future with respect to
quality, performance, reliability and delivery of the Company's products. If
such problems occur, the Company could experience increased costs, delays in or
cancellations or reschedulings of orders or shipments, delays in collecting
accounts receivable and increases in product returns and discounts, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS
In the semiconductor, computer, telecommunications and networking
industries, it is typical for companies to receive notices from time to time
alleging infringement of patents, copyrights or other intellectual property
rights of others. While there is currently no material pending intellectual
property litigation involving the Company, the Company may from time to time be
notified of claims that it may be infringing patents, copyrights or other
intellectual property rights owned by third parties. There can be no assurance
that these or other companies will not in the future pursue claims against the
Company with respect to the alleged infringement of patents, copyrights or other
intellectual property rights. In addition, litigation may be necessary to
protect the Company's intellectual property rights and trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against third party claims of invalidity. Any litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use or
ownership claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future. The failure to obtain a
license under a patent or intellectual property right from a third party for
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of the products utilizing the
intellectual property. In addition, should the Company decide to litigate such
claims, such litigation could be extremely expensive and time consuming and
could materially and adversely affect the Company's business, financial
condition and results of operations, regardless of the outcome of the
litigation.
The Company attempts to protect its intellectual property rights through a
variety of measures, including non-disclosure agreements, trademarks, trade
secrets and to a lesser extent, patents. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information, that disputes with respect to the
ownership of its intellectual
23
<PAGE>
property rights will not arise, that the Company's trade secrets or proprietary
technology will not otherwise become known or be independently developed by
competitors or that the Company can otherwise meaningfully protect its
intellectual property rights.
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company expects to make acquisitions
of, or significant investments in, businesses that offer complementary products
and technologies. Any such future acquisitions or investments would expose the
Company to the risks commonly encountered in acquisitions of businesses. Such
risks include, among others, difficulty of assimilating the operations,
information systems and personnel of the acquired businesses, the potential
disruption of the Company's ongoing business, the inability of management to
maximize the financial and strategic position of the Company through the
successful incorporation of acquired employees and customers, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and customers as a result of any integration of new
management personnel. There can be no assurance that any potential acquisition
will be consummated or, if consummated, that it will not have a material adverse
effect on the Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICES
There has been a history of significant volatility in the market prices of
the common stock of technology companies, including the Common Stock of the
Company, and it is likely that the market price of the Company's Common Stock
will continue to be subject to significant fluctuations. Factors such as the
timing and market acceptance of new product introductions by the Company, demand
for products of the Company's customers, the introduction of new products by the
Company's competitors, variations in quarterly operating results, changes in
securities analysts' recommendations regarding the Company's Common Stock,
developments in the technology industry and general economic conditions may have
a significant impact on the market price of the Company's Common Stock. In
addition, the equity markets in recent years have experienced significant price
and volume fluctuations that have affected the market prices of technology
companies and that have often been unrelated to the operating performance of
such companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company and the related report
of the Company's independent public accountants thereon are included in this
report at the pages indicated.
<TABLE>
<CAPTION>
ITEM PAGE
- ------------------------------------------------------------------------------------------------------------- -----
<S> <C>
Report of Independent Public Accountants..................................................................... 25
Consolidated Balance Sheets at September 30, 1997 and 1996................................................... 26
Consolidated Statements of Operations for the Years Ended September 30, 1997, 1996 and 1995.................. 27
Consolidated Statements of Stockholders' Equity for for Years Ended September 30, 1997, 1996 and 1995........ 28
Consolidated Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995.................. 29
Notes to Consolidated Financial Statements................................................................... 30
</TABLE>
24
<PAGE>
[LETTERHEAD]
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,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 24, 1997
25
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 1,990,017 $ 2,689,569
Restricted cash................................................................. 1,539,448 --
Trade accounts receivable, net of allowance of $180,157 and $84,557 in 1997 and
1996, respectively............................................................ 3,519,369 5,069,399
Accounts receivable from related parties........................................ 12,371 17,691
Inventory....................................................................... 4,489,050 1,804,458
Prepaid expense................................................................. 364,042 217,570
-------------- --------------
Total current assets.......................................................... 11,914,297 9,798,687
-------------- --------------
Property and equipment, net of accumulated depreciation of $1,732,524 and $906,589
in 1997 and 1996, respectively.................................................. 2,539,324 1,817,479
Organization costs, net........................................................... 512 1,024
Patents and trademarks, net....................................................... 80,327 84,337
Goodwill, net of accumulated amortization of $5,079,457 and $1,493,958 in 1997 and
1996, respectively.............................................................. 2,091,541 5,677,040
Other noncurrent assets........................................................... 605,957 84,000
-------------- --------------
Total Assets.................................................................. $ 17,231,958 $ 17,462,567
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 3,917,786 $ 2,920,530
Accounts payable to related parties............................................. 250 64,618
Accrued liabilities............................................................. 710,189 929,376
Revolving credit note........................................................... 4,172,516 3,075,000
-------------- --------------
Total current liabilities..................................................... 8,800,741 6,989,524
-------------- --------------
Obligations under capital lease................................................. 81,114 123,000
-------------- --------------
Total liabilities............................................................. 8,881,855 7,112,524
-------------- --------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, no par value, 50,000,000 shares authorized, 20,334,714 and
15,978,537 shares issued and outstanding, at September 30, 1997 and September
30, 1996, respectively.......................................................... 28,599,524 20,469,136
Accumulated deficit............................................................... (20,249,421) (10,119,093)
-------------- --------------
Total stockholders' equity...................................................... 8,350,103 10,350,043
-------------- --------------
Total Liabilities and Stockholders' Equity........................................ $ 17,231,958 $ 17,462,567
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Net sales.......................................................... $ 47,673,950 $ 14,988,946 $ 358,726
Cost of goods sold................................................. 41,479,865 12,660,900 110,097
-------------- ------------- -------------
Gross profit....................................................... 6,194,085 2,328,046 248,629
-------------- ------------- -------------
Operating expenses:
Research and development......................................... 2,593,866 1,079,927 409,805
Sales and marketing.............................................. 3,044,052 1,177,214 1,358,032
General and administrative....................................... 3,632,895 1,930,204 894,372
Depreciation and amortization.................................... 4,190,583 1,748,063 71,043
Bad debt expense................................................. 2,230,808 46,393 19,003
-------------- ------------- -------------
Total operating expenses....................................... 15,692,204 5,981,801 2,752,255
-------------- ------------- -------------
Operating loss..................................................... (9,498,119) (3,653,755) (2,503,626)
-------------- ------------- -------------
Other income (expense):
Interest income.................................................. 45,659 74,238 56,250
Interest expense................................................. (661,368) (108,332) --
Other income..................................................... -- 4,182 2,290
-------------- ------------- -------------
Net loss........................................................... $ (10,113,828) $ (3,683,667) $ (2,445,086)
-------------- ------------- -------------
Loss per weighted average common share............................. $ (0.58) $ (0.31) $ (0.29)
-------------- ------------- -------------
-------------- ------------- -------------
Weighted average number of common shares........................... 17,537,914 11,765,850 8,436,320
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OFSTOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
------------ ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, September 30, 1994......................... 7,995,325 $ 5,931,456 $ (3,990,340) $ 1,941,116
------------ ------------- -------------- --------------
Net loss............................................ -- -- (2,445,086) (2,445,086)
Private placements, net............................. 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 (6,435,426) 1,378,915
------------ ------------- -------------- --------------
Net loss............................................ -- -- (3,683,667) (3,683,667)
Acquisition of businesses, net (Note 2)............. 4,150,000 8,300,000 -- 8,300,000
Issued as payment of consulting bonus
(Note 2).......................................... 207,500 788,500 -- 788,500
Private placements, net (Note 9).................... 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 20,469,136 (10,119,093) $ 10,350,043
------------ ------------- -------------- --------------
Net loss............................................ -- -- (10,113,828) (10,113,828)
Private placements, net (Note 9).................... 2,280,000 5,600,000 -- 5,600,000
Exercise of stock options........................... 16,000 42,420 -- 42,420
Exercise of stock warrants.......................... 2,060,177 2,487,968 -- 2,487,968
Other (Note 9)...................................... -- -- (16,500) (16,500)
------------ ------------- -------------- --------------
Balance, September 30, 1997......................... 20,334,714 $ 28,599,524 $ (20,249,421) $ 8,350,103
------------ ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $ (10,113,828) $ (3,683,667) $ (2,445,086)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization..................................... 4,420,359 1,808,693 71,043
Write-downs....................................................... -- 21,927 --
Increase in restricted cash....................................... (1,539,448) -- --
(Increase) decrease in accounts receivable........................ 1,550,030 (856,885) 84,855
(Increase) decrease in accounts receivable from related parties... 5,320 (17,691) --
Increase in inventory............................................. (2,684,592) (156,733) (2,757)
Increase in prepaid expense and other............................. (146,472) (103,789) (13,810)
Increase in other noncurrent assets............................... (521,957) -- --
Increase (decrease) in accounts payable and accrued liabilities... 713,700 (1,323,521) 22,870
-------------- ------------- -------------
Net cash used in operating activities............................... (8,316,888) (4,311,666) (2,282,885)
-------------- ------------- -------------
Cash flows from investing activities:
Purchases of fixed assets......................................... (1,546,088) (403,512) (48,962)
Patents and trademark costs....................................... (6,094) (32,763) (42,776)
Cash obtained in acquisition of businesses........................ -- 2,817,230 --
-------------- ------------- -------------
Net cash (used in) provided by investing activities................. (1,552,182) 2,380,955 (91,738)
-------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock........................ 5,600,000 1,614,295 1,727,233
Draws (payments) on revolving credit note, net.................... 1,097,516 (195,881) --
Principal payments on capital lease obligations................... (41,886) (20,158) --
Net proceeds from exercise of stock options....................... 42,420 -- 12,724
Net proceeds from exercise of stock warrants...................... 2,487,968 1,905,000 --
Other............................................................. (16,500) -- --
-------------- ------------- -------------
Net cash provided by financing activities........................... 9,169,518 3,303,256 1,739,957
-------------- ------------- -------------
Increase (decrease) in cash and cash equivalents.................... (699,552) 1,372,545 (634,666)
Cash and cash equivalents, beginning of year........................ 2,689,569 1,317,024 1,951,690
-------------- ------------- -------------
Cash and cash equivalents, end of year.............................. $ 1,990,017 $ 2,689,569 $ 1,317,024
-------------- ------------- -------------
-------------- ------------- -------------
Supplemental disclosure of cash flow information:
Income taxes paid................................................. -- -- --
Interest paid..................................................... $ 661,368 $ 108,332 $ 1,152
Non-cash investing and financing activities:
Shares issued to related parties and others to satisfy accrued
liabilities..................................................... -- $ 47,000 $ 142,928
Shares issued to purchase businesses (Note 2)..................... -- $ 9,088,500 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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"). Timespan was dissolved as of October 23, 1996.
The Company provides custom design, engineering and manufacturing services, test
solutions and standard and custom module products to original equipment
manufacturers in the computer, networking and telecommunications industries.
Numerous factors affect the Company's operating results, including, but not
limited to, general economic conditions, competition, changing technologies,
component shortages and price fluctuations. A change in any of these factors
could have an adverse effect on the Company's consolidated financial position or
results of operations. The Company has experienced losses since inception. The
Company continues to develop additional products, and with acquisitions during
fiscal year 1996 (Note 2), now 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 Company believes that its existing funds, anticipated cash flow
from operations, amounts available from future vendor credits, bank borrowings
and equity financings will be sufficient to meet its working capital and capital
expenditure needs for the next 12 months at the projected level of operations.
However, if there should be a significant increase in sales levels which require
additional investments in equipment, inventory and accounts receivable, the
Company would be required to obtain alternate sources for additional debt and
rely upon a future equity offering or offerings for such funding. There is no
assurance that the Company will be able to locate an alternate source or sources
for the required increase in its outstanding debt or that it will be successful
in its attempts to raise a sufficient amount of funds in a subsequent equity
offering or offerings. In such event, the Company's inability to raise needed
funds could have a material adverse effect on the Company.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. All significant intercompany balances
and transactions have been eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications of amounts related to 1996 and 1995 have been made
to conform with the 1997 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 value. The Company places its
cash investments in high credit quality instruments. Restricted cash represents
deposits which are available only to pay down the revolving credit note. (Note
6)
INVENTORY
Inventory is stated at the lower of cost or market value. In the third
quarter of fiscal 1996, the Company changed its method of accounting for
inventories from the first-in, first-out method to a
30
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
weighted average cost basis. The change did not have a significant effect on
results of operations for 1996 or 1997, 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.
Inventory costs include direct materials, direct labor and certain indirect
manufacturing overhead expenses.
REVENUE RECOGNITION
Revenue from sales is recognized when the related products are shipped,
typically freight on board ("FOB") shipping point or at the time the services
are rendered. The Company warrants products against defects and has a policy
concerning the return of products and accrues the cost of warranting these
products as they are shipped.
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
estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment.................... 3-7 years
Office and engineering equipment........... 5 years
Computer equipment and software............ 3 years
Furniture and fixtures..................... 5 years
Vehicles................................... 5 years
Leasehold improvements..................... Shorter of useful life or
remaining term of the lease
</TABLE>
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 ("SFAS") 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 difference between the carrying amount of the
assets and the fair value. Fair value is determined based upon the net present
value of estimated expected future cash flows using a discount rate commensurate
with risks involved. Effective October 1, 1995, the Company adopted SFAS No.
121. The impact of adoption was not material to the Company's consolidated
financial position or the results of operations. Based on its review, the
Company believes no impairment has occurred as of September 30, 1997.
LOSS PER SHARE
Loss per share is calculated based upon the weighted average number of
common shares outstanding during the year. Common stock equivalents have not
been included because their effect would be antidilutive.
31
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 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, SFAS No. 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 ("APB") No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting prescribed by APB
No. 25 must make pro forma disclosures of net income and earnings per share as
if the fair value based method recommended by SFAS No. 123 had been applied. The
accounting requirements of SFAS No. 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995. The disclosure
requirements of SFAS No. 123 are effective for financial statements for fiscal
years beginning after December 15, 1995. The Company measures compensation costs
in accordance with APB No. 25 and provides pro forma disclosures of net loss and
loss per share as if the fair value based method of accounting under SFAS No.
123 had been applied. (Note 9)
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in June 1996. This
statement will require the Company to classify its financial assets pledged as
collateral separately in financial statements. This statement is effective for
fiscal years beginning after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The FASB
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement 125." SFAS 127 moves forward some, but not all, of the provisions
of SFAS 125 to December 31, 1997. The Company believes that the adoption of this
statement will not have a material impact on the financial condition or results
of operation of the Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting earning per share ("EPS") for
entities with publicly held common stock or potential common stock. SFAS No. 128
simplifies the standards for computing EPS previously found in APB Opinion No.
15, "Earning Per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS, which excludes dilution. It also requires dual presentation of basic
and diluted EPS on the face of the statements of operations, for all entities
with complex capital structures. SFAS No. 128 is effective for financial
statement for periods ending after December 15, 1997 and early adoption is not
permitted. Management of the Company does not anticipate that the adoption of
SFAS No. 128 will have a material difference from EPS as currently presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997, with earlier application permitted. The Company believes that
the adoption of this statement will not have a material effect on the financial
condition or results of operations of the Company.
32
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 an aggregate of 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 the primary stockholder of 1st Tech, who is also 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.
The acquisitions of 1st Tech and DarkHorse were accounted for using the
purchase method of accounting. The net purchase price was allocated as follows:
<TABLE>
<S> <C>
Purchase price.................................................. $8,300,000
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..... $7,170,998
</TABLE>
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, which was estimated to be materially equal
to fair market value. The fair value of the consulting bonus paid was 207,500
shares at a price of $3.80 at the date of issuance. Purchase price was
determined as the number of shares issued for 1st Tech and DarkHorse (4,150,000)
at a per share price of $2.00, utilizing the offering price of the private
placement of shares of common stock of 1st Tech immediately prior to the
acquisition.
33
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
2. ACQUISITIONS OF 1ST TECH AND DARKHORSE (CONTINUED)
Goodwill is being amortized against earnings over a two-year period. The
amount of goodwill amortized at fiscal year ended September 30, 1997 and
September 30, 1996 was $5,079,457 and $1,493,958, respectively. The results of
operations of 1st Tech and DarkHorse have been included in the consolidated
financial statements since the acquisition date.
3. TRADE ACCOUNTS RECEIVABLE
The Company grants credit to domestic and international original equipment
manufacturers, distributors and end users. Until February 28, 1997, the Company
carried a business credit policy covering certain accounts receivable. The
insurance policy provided protection against losses from uncollectible accounts
resulting from nonpayment by specified customers. At September 30, 1997, no
credit policy was in place. Effective November 1, 1997 the Company purchased a
business credit policy covering certain accounts receivable. This insurance
policy will provide protection against losses from uncollectible accounts
resulting from nonpayment by specified customers and has a deductible of $50
thousand with a maximum policy amount of $5 million.
During fiscal 1997, the Company had a single significant customer who
accounted for 12% of net sales. In fiscal 1996 and 1995, no single customer
accounted for more than 10% of net sales.
At September 30, 1997, two customer balances exceeded 10% of total trade
accounts receivables, with one customer balance at 13% and the second at 22% of
total trade accounts receivables. At September 30, 1996 two customers had
balances exceeding 10% of accounts receivable, with one customer at 12% and
another at 12% of total trade accounts receivables.
For fiscal 1997, the amount charged to bad debt expense was $2.2 million,
compared to a total of $46 thousand for fiscal 1996 and $19 thousand for fiscal
1995. The increase in fiscal 1997 bad debt expense is primarily due to a $1.7
million write off for one customer and to increased sales in conjunction with
the acquisitions of 1st Tech and DarkHorse.
4. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 3,659,465 $ 1,343,522
Work-in-process................................................... 204,783 203,017
Finished goods.................................................... 624,802 257,919
------------ ------------
$ 4,489,050 $ 1,804,458
</TABLE>
$882 thousand of inventory was for one customer. This customer is
financially responsible for inventory purchased by the Company that decreases in
value or is rendered obsolete or unsalable provided the inventory was acquired
in accordance with contractual terms.
34
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
5. PROPERTY AND EQUIPMENT
Property and equipment at September 30 consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------ ------------------------------------------
ACCUMULATED NET ACCUMULATED NET
DEPRECIATION & BOOK DEPRECIATION & BOOK
COST AMORTIZATION VALUE COST AMORTIZATION VALUE
------------ -------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Manufacturing
equipment.............. $ 1,447,039 $ 432,668 $ 1,014,371 $ 1,055,964 $ 234,159 $ 821,805
Office equipment......... 579,117 393,939 185,178 579,117 224,102 355,015
Engineering equipment.... 320,783 154,583 166,200 253,482 77,807 175,675
Computer equipment....... 514,892 157,846 357,046 118,696 87,448 31,248
Computer software........ 623,856 251,270 372,586 223,872 115,821 108,051
Furniture and fixtures... 359,614 163,306 196,308 295,585 90,186 205,399
Vehicles................. 39,445 17,750 21,695 39,445 9,861 29,584
Leasehold improvements... 385,410 159,470 225,940 157,907 67,205 90,702
------------ -------------- ------------ ------------ -------------- ------------
$ 4,270,156 $ 1,730,832 $ 2,539,324 $ 2,724,068 $ 906,589 $ 1,817,479
------------ -------------- ------------ ------------ -------------- ------------
------------ -------------- ------------ ------------ -------------- ------------
</TABLE>
The Company had approximately $280,000 and $266,000 of property and
equipment acquired under capital leases at September 30, 1997 and 1996,
respectively. The accumulated amortization related to these assets totaled
$96,000 and $47,000 at September 30, 1997 and 1996, respectively. The related
amortization expense was $49,000 and $16,000 for the years ended September 30,
1997 and 1996, respectively.
Depreciation and amortization expense as reflected in the accompanying
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION
EXPENSE FOR FISCAL YEAR
-------------------------------------
1997 1996 1995
------------ ------------ ---------
<S> <C> <C> <C>
Cost of Goods Sold......................................................... $ 229,776 $ 60,630 $ --
Operating Expenses......................................................... 4,190,583 1,748,063 71,043
------------ ------------ ---------
Total Depreciation and Amortization Expense................................ $ 4,420,359 $ 1,808,693 $ 71,043
------------ ------------ ---------
</TABLE>
6. REVOLVING CREDIT NOTE
The Company obtained a new $8,500,000 revolving credit note effective July
24, 1997 with a financial institution. The revolving credit note contains an
annual commitment fee of $85,000 and bears interest at the prime rate as quoted
in The Wall Street Journal plus 2% (10.50% at September 30, 1997). The Company
also issued 65,000 stock purchase warrants to the lender at a price of $5.38,
which was 5% over the market closing price on the date of signing the note
agreement. These stock purchase warrants expire on July 24, 2002. The revolving
credit note has a maturity date of July 24, 2000 and is secured by all of the
Company's assets. Such date will automatically be extended for successive
additional terms of three years each unless one party gives written notice to
the other, not less than sixty days prior to the maturity date, that such party
elects not to extend the maturity date. Borrowings are based upon 85% of
eligible accounts
35
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
6. REVOLVING CREDIT NOTE (CONTINUED)
receivables and eligible inventory amounts as defined in the borrowing
agreement. The amount outstanding at September 30, 1997 was $4,172,516. The
amount available to draw at September 30, 1997 was $1,089,124. In addition, the
Company is required to maintain a lockbox account to be used for the collection
of the Company's trade accounts receivable. All collections must be applied to
reduce the outstanding balance of the revolving credit note. The balance of this
lockbox account is shown as restricted cash in the accompanying consolidated
balance sheet.
On July 1, 1997, the Company's previous revolving credit note with a
different financial institution was terminated. Borrowings under the agreement
were limited to 73% of eligible accounts receivable and were secured by
substantially all of the Company's assets. The financial institution continued
to grant the Company's loan requests at an interest rate of prime plus 1% to 3%
depending on a ratio computed monthly until the new revolving credit note was in
place on July 24, 1997.
7. LEASE COMMITMENTS
The Company leases certain equipment and office space under noncancellable
leases with expiration dates ranging from 1998 through 2002.
Future minimum lease payments under all leases at September 30, 1997 were as
follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
1998........................................................ $ 91,823 $ 631,689
1999........................................................ 57,275 599,956
2000........................................................ 41,821 576,747
2001........................................................ 0 321,447
2002........................................................ 0 160,973
------------- ----------------
Total minimum lease payments................................ $ 190,919 $ 2,290,812
Amounts representing interest............................... 33,854
-------------
Present value of minimum capital lease payments............. 157,065
Less: current portion....................................... 75,951
-------------
Long-term capital lease obligation.......................... $ 81,114
-------------
-------------
</TABLE>
Rent expense recorded under all operating leases was $540,039, $118,189 and
$48,619 for fiscal 1997, 1996 and 1995, respectively. The Company had a letter
of credit totaling $579,415 as collateral for an operating lease for
manufacturing equipment.
8. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries entered into the following related party
transactions:
General and administrative expense includes consulting fees and expenses in
the amount of $112,089, $870,000 ($788,500 of which was paid in stock--Note 2)
and $159,000 paid to the Company's directors for the fiscal years ended
September 30, 1997, 1996 and 1995, respectively.
36
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
8. RELATED PARTY TRANSACTIONS (CONTINUED)
In July 1997, the Company entered into a contract with a director for
consulting services in consideration of the issuance of warrants exercisable for
the purchase of 200,000 shares of Common Stock at $0.01 per share from January
31, 1998 through December 31, 1999.
General and administrative expense includes professional fees in the amount
of $197,623, $100,000 of which was paid in stock--see Note 9-- and $122,000 and
$97,000 of which was paid in cash to two stockholders of the Company for legal
and other services provided for the years ended September 30, 1997, 1996 and
1995, respectively.
During the fiscal year ended September 30, 1997, two former stockholders of
Darkhorse were paid $37,809 each. A third stockholder debt to the Company was
reduced by $5,500, from $17,691 to $12,191. Prior to the acquisition, Darkhorse
was an S-Corporation. These amounts 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, the principal stockholder of 1st Tech and one of three principal
stockholders of DarkHorse became president and chief operating officer of the
Company until October 1997, and 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. This stockholder 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 Company's
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, this stockholder was granted the right to designate two
individuals for appointment to the Company's Board of Directors and to name an
advisory director.
On May 21, 1996, 1st Tech purchased a Quad QSP-2 High Speed Fine Pitch
Surface Mount Assembly from the president and chief executive officer of 1st
Tech, who became president and chief operating officer of the Company, for
$225,000. Previously, this equipment had been leased.
To take advantage of an inventory purchase opportunity, the Company
requested that all outstanding stock purchase warrantholders exercise their
warrants by March 31, 1997, which was substantially prior to the scheduled
expiration dates of the warrants. As an inducement for this early exercise, the
exercise price was discounted 50%. An additional incentive was offered to stock
purchase warrantholders who funded their subscription immediately upon notice of
such request. This inducement consisted of an offer of 200,000 warrants at an
exercise price of $.01 per share, prorated among the warrantholders who funded
upon notice of such request. (Note 9)
9. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS
In the past three fiscal years, the Company has closed three separate
private placements. In July 1997, the Company completed an equity financing of
2,240,000 common shares for gross proceeds of $5,600,000. Legal fees related to
the financing were settled through the issuance of 40,000 common shares at the
price of $2.50 per share. (Note 8)
37
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
9. STOCKHOLDERS' EQUITY (CONTINUED)
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 per share of $1.70 in 1996 and $1.95 in 1997.
The stock warrants have been exercised. Legal fees in connection with the equity
financing were paid through the issuance of 45,555 shares of Common Stock at a
price of $2.25 per share, to a stockholder acting as legal counsel.
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 per share of $2.00 in 1996 and $2.25 in 1997. The
stock warrants have been exercised.
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, 1997 and 1996.
RETAINED EARNINGS
A final distribution in the amount of $16,500 was made during fiscal year
1997 to the prior owners of Darkhorse pursuant to the terms of the acquisition
agreement. The purpose of this distribution was to cover federal income taxes
incurred by the prior owners as a result of their investment in the S-
Corporation. (Note 8)
STOCK OPTIONS
A rollforward of stock option activity is as follows:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
-------------------------- --------------------------
STOCK OPTION STOCK OPTION
SHARES PRICE SHARES PRICE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding--Beginning of year............... 1,804,100 $ 1.10 to 3.69 1,364,450 $ 1.10 to 3.32
Granted...................................... 882,500 3.41 to 5.81 834,900 3.13 to 3.72
Canceled or expired.......................... (283,283) 1.10 to 5.81 (395,250) 2.02 to 3.72
Exercised.................................... (16,000) 2.61 to 2.72 -- --
---------- -------------- ---------- --------------
Outstanding--End of year..................... 2,387,317 1.10 to 5.81 1,804,100 $ 1.10 to 3.69
Exercisable--End of year..................... 1,083,700 555,232
</TABLE>
The Company's 1993 Stock Option Plan permits grants to the Company's
directors, key employees and consultants as an incentive for them to remain in
the Company's employ or service. The duration of options granted under the 1993
Stock Option Plan cannot exceed ten years (five years with respect to holder of
10% or more of the Company's shares in the case of incentive stock options). 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 closing price of
the Company's stock on the Nasdaq SmallCap Market for the date of the grant.
Under the terms of the 1993 Stock Option Plan, 2,600,000 shares are reserved for
the granting of stock options. At September 30, 1997, options to purchase
1,885,817 shares had been granted under the 1993 Option Plan and remain
outstanding, leaving 714,183 shares available for future grants under the 1993
Option Plan. In
38
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
9. STOCKHOLDERS' EQUITY (CONTINUED)
addition, at September 30, 1997, options to purchase 139,000 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, and are exercisable
for five years after the date of grant.
The Company's 1997 Non-Employee Director Plan (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 this 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 six
eligible individuals at November 30, 1997) of nonqualified options ("Director
Options") exercisable for the purchase of 25,000 shares of Common Stock on the
date they are elected or appointed to the Board of Directors. Options granted
under the Director Plan vest in three equal portions over three years from the
date of grant and are exercisable for a period of five years from the date of
grant. The grant price shall be valued at the fair market value per share on the
date of grant, as determined by the closing price of the Company's stock on the
Nasdaq SmallCap Market on the date of grant. 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 362,500 shares previously granted to current
outside directors under the 1993 Option Plan. At September 30, 1997, no options
had been granted under the Director Plan except for the 362,500 shares
previously granted under the 1993 Option Plan.
Options granted from the inception of the 1993 Stock Option Plan through
April 1997 vest one third on each of the first three anniversaries of the date
of grant and are exercisable for five years after the date of the grant. Options
granted after April 1997 vest one fourth on each of the first four anniversaries
of the date of grant and are exercisable for seven years after the date of the
grant.
WARRANTS
Each stock warrant entitles the holder to purchase one share of common stock
at a particular price, vesting period and expiration date to be specified within
each individual warrant agreement. During fiscal 1997, 2,060,177 stock warrants
were exercised and no stock warrants expired. During 1997, 200,000 stock
warrants with an exercise price of $.01 per share were issued to stock purchase
warrantholders who exercised warrants by March 31, 1997 upon request of the
Company (Note 8). In addition, 200,000 stock
39
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
9. STOCKHOLDERS' EQUITY (CONTINUED)
warrants were issued to a director at an exercise price of $.01 per share as a
consulting bonus. The Company had stock warrants outstanding for the purchase of
Common Stock in 1997 and 1996 as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996
---------------------------- ----------------------------
STOCK WARRANT STOCK WARRANT
SHARES PRICE SHARES PRICE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding--Beginning of year...................... 1,860,177 $ 1.70 to $2.30 2,400,000 $ 1.00 to $2.30
Granted............................................. 489,999 $ .01 to $5.38 975,177 $ 1.70 to $2.25
Exercised........................................... 2,060,177 $ .01 to $1.15 1,515,000 $ 1.25 to $2.00
---------- ---------------- ---------- ----------------
Outstanding--End of year............................ 289,999 $ .01 to $5.38 1,860,177 $ 1.70 to $2.30
Exercisable--End of year............................ 0 1,860,177 $ 1.70 to $2.30
</TABLE>
STOCK BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This new standard defines a fair value based method of accounting
for employee stock options or similar equity instruments. SFAS No. 123 gives
entities a choice of recognizing related compensation expense by adopting the
new fair value method or to continue to measure compensation using the intrinsic
value approach under APB 25. If APB No. 25 is used by an entity, SFAS No. 123
requires supplemental disclosure to show the effects of using SFAS No. 123 for
stock option issuances effective after December 15, 1994. The Company continues
to account for stock options under APB No. 25. Had compensation expense for all
of the Company's stock option plans been determined consistent with SFAS No.
123, the Company's net loss would have been increased to the following pro forma
amounts:
<TABLE>
<CAPTION>
FOR YEAR
FOR YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------------- -------------
<S> <C> <C>
Net loss:
As reported.................................................. $ (10,113,828) $(3,683,667)
Pro forma.................................................... (10,988,475) (3,809,027)
-------------- -------------
Loss per share:
As reported.................................................. (0.58) (0.31)
Pro forma.................................................... (0.63) (0.32)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to stock
options issued prior to December 15, 1994, the resulting pro forma compensation
expense may not be representative of that to be expected in future years. The
fair value of each option is estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted-average assumptions
used for grants in 1997 and 1996: risk-free interest rate of approximately 6.5%;
expected volatility of approximately 79% based on the performance of publicly
traded businesses within the Company's industry; expected lives of approximately
5 years for the 1993 Stock Option Plan, and no dividends are expected to be
paid.
40
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
10. INCOME TAXES
During 1997 and 1996, the Company incurred consolidated net operating losses
for U.S. income tax purposes of approximately $6,023,000 and $1,785,000,
respectively. The loss carryforwards expire in 2012 and 2011, respectively.
During 1997 and 1996, the Company had temporary differences resulting in future
tax deductions of $513,000 and $693,000, respectively, principally representing
tax basis in accrued liabilities and intangible assets. Deferred income tax
assets from the loss carryforwards and asset basis differences aggregate
$4,649,000 and $2,240,000 respectively at September 30, 1997.
For financial reporting purposes, valuation allowances of $4,649,000 and
$2,240,000 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 carryforward due to Internal Revenue Service
("IRS") Code Section 382 limitations. This section states that after
reorganization or other change in corporate ownership, the use of certain
carryforwards may be limited or prohibited. The Company does not believe that an
IRS Code Section 382 limitation exists as of September 30, 1997.
11. EMPLOYEE BENEFITS
Effective January 1, 1995, 1st Tech sponsored the 1st Tech 401(k) Plan (the
"Plan") which qualifies under Section 401(k) of the IRS 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 a full
time employee. As of the date of acquisition, all employees of the Company
became eligible to participate in the Plan. Effective August 1, 1997, the Plan
changed its name to The Tanisys Technology Inc., 401(k) Plan.
Under provisions of the Plan, the Company may elect to make discretionary
matching contributions to the Plan for the benefit of the participants. No such
discretionary contributions were made in fiscal 1997, 1996 or 1995.
12. SUBSEQUENT EVENTS
In October 1997, Mark C. Holliday, Chairman of the Board and Chief Executive
Officer, and Gary W. Pankonien, President and Chief Operating Officer, stepped
down and Charles T. Comiso assumed the responsibilities of President and Chief
Executive Officer. Parris H. Holmes, Jr., Vice Chairman of the Board, was named
Chairman of the Board. These changes were immediate. Messrs. Holliday and
Pankonien both agreed to remain on the Company's Board of Directors.
The Company entered into an employment agreement with Charles T. Comiso
effective October 21, 1997. This agreement expires on October 20, 1998 and will
continue thereafter unless terminated by either party with 120 days' notice. Mr.
Comiso's annual salary will be $180,000 until such time as the Company reports
positive cash flow from operations for all three months of a fiscal quarter,
then his annual salary will increase to $240,000. The agreement provides for the
granting of a seven-year option to purchase 1,000,000 shares of Common Stock at
an exercise price to be determined during the first 60 days of the employment
period. The exercise price has been determined to be $2.00 per share. The option
shall vest as to 100,000 and 150,000 shares on the first and second
anniversaries of the agreement, respectively, and as
41
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
12. SUBSEQUENT EVENTS (CONTINUED)
to 250,000 shares on each of the third, fourth and fifth anniversaries of the
agreement. Additionally, at such time as the Company reports positive cash flow
from operations for all three months of a fiscal quarter, the Company will grant
to Mr. Comiso a seven-year option to purchase 500,000 shares of Common Stock at
an exercise price equal to the closing price of the Company's Common Stock as
reported on the Nasdaq SmallCap Market on the date of grant. The option shall
vest as to 125,000 shares on each of the second, third, fourth and fifth
anniversaries of the date of grant. As part of the employment agreement, Mr.
Comiso agreed to purchase $150,000 of the Company's Common Stock at a maximum
price of $3.00 per share. Subsequently, Mr. Comiso purchased 50,000 shares of
Common Stock, from the Company for $75,000 and has committed to purchase an
additional 50,000 shares for $75,000 in January 1998. These shares are
restricted, and the Company has no registration obligations.
The Board of Directors of the Company has approved the establishment of
severance packages that provide for the continuation of the salaries and bonuses
of both Mark C. Holliday, the former Chairman of the Board and Chief Executive
Officer, and Gary W. Pankonien, the former President and Chief Operating
Officer, until April and May of 1998, respectively. While the Board of Directors
and the former officers have agreed to the general terms, the specific
agreements are still in the process of being completed and signed.
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The Company's directors, executive officers and key employees and their
respective ages and positions as of November 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Charles T. Comiso (1)........................... 60 President, Chief Executive Officer and Director
Joe O. Davis.................................... 54 Senior Vice President, Chief Financial Officer
and Corporate Secretary
John R. Bennett................................. 37 Vice President of Sales and Customer Service
Chris Efstathiou, Jr. .......................... 38 Vice President and General Manager
Joseph C. Klein................................. 41 Vice President of Engineering
Donald G. McCord................................ 41 Vice President of Marketing
Donald R. Turner................................ 42 Corporate Controller
Parris H. Holmes, Jr. .......................... 54 Chairman of the Board (2)(3)(4)
Mark C. Holliday................................ 45 Director
Gordon H. Matthews.............................. 61 Director (2)
Gary W. Pankonien............................... 47 Director
Alan H. Portnoy................................. 52 Director (2)
Theodore W. Van Duyn............................ 49 Director (3)(4)
</TABLE>
- ------------------------
(1) Mr. Comiso was named President and Chief Executive Officer and appointed to
the Board of Directors in October 1997.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) 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.
CHARLES T. COMISO joined the Company as President, Chief Executive Officer
and Director in October 1997. Prior to joining the Company, Mr. Comiso served as
a Senior Officer of Wyse Technology, Inc. from 1984 to September 1997. From 1995
to September 1997, Mr. Comiso served as Senior Vice President of the parent
company and from 1990 to 1995 as President and Chief Executive Officer of Link
Technologies, Inc., a wholly owned subsidiary of Wyse Technology, Inc. Mr.
Comiso is an electrical engineer with more than 35 years of technology industry
experience and also has held positions with Hewlett Packard Company, Texas
Instruments, IT&T Labs and Bendix Corporation.
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
43
<PAGE>
Enterprises, a long distance telephone company listed on the New York Stock
Exchange and located in Monroe, Louisiana, in April 1993. Mr. Davis 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.
JOHN R. BENNETT, Vice President of Sales and Service, joined the Company in
November 1996 with many years of sales and marketing experience in the
electronics, computer and peripherals businesses. Prior to being promoted to his
current position of Vice President, Sales and Customer Service in October 1997,
Mr. Bennett most recently acted in the role as Director of Sales at Tanisys,
with prior responsibilities for the sales management of Tanisys's DarkHorse line
of memory test equipment. Other positions held by Mr. Bennett include Senior
Consultant, IBM, from October 1995 to November 1996, Vice President, Marketing,
CACTUS Inc., from August 1994 to October 1995 and National Marketing Manager and
National Sales Manager, CalComp (Division of Lockheed), from July 1988 to August
1994.
CHRIS EFSTATHIOU, JR., Vice President and General Manager, has more than 17
years of experience in the electronics industry in high-tech purchasing. Mr.
Efstathiou joined 1st Tech in December 1994 as Vice President of Materials and
the Company in May 1996 upon its acquisition of 1st Tech. Mr. Efstathiou was
promoted to Vice President and General Manager of the Company in September 1997.
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, Mr. Efstathiou 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.
JOSEPH C. KLEIN, Ph.D., Vice President of Engineering, joined the Company in
November 1997. Dr. Klein has over 15 years of experience in the electronics and
computer industry. Prior to joining the Company, Dr. Klein was Vice President of
Engineering/Research and Development for PNY Technologies, Inc. from November
1994 to November 1997 and was World Wide Manager of Semiconductor Memory Product
for IBM from November 1984 to November 1994.
DONALD G. MCCORD, Vice President of Marketing, joined the Company in June
1997 initially as a consultant and then as Vice President of Marketing. Mr.
McCord has over seventeen years in high technology businesses. Mr. McCord served
as Regional Sales Manager for Creative Labs from August 1994 to November 1996
and Manager of Desktop Development for IBM's AMBRA subsidiary from October 1993
to August 1994. Marketing roles have included Manager of Desktop Product
Marketing at Dell Computer from August 1988 to October 1993 as well as positions
at Intel, Western Digital and Texas Instruments, Inc.
DONALD R. TURNER, CPA, Corporate Controller, joined the Company effective
upon the acquisition of 1st Tech in May 1996. Don Turner 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. Mr. Turner was Controller of Stratum Technologies, Inc. from
September 1992 to January 1993. Prior to joining Stratum, Mr. Turner 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 Chairman of the Board since October 1997
and as Director of the Company since August 1993, Mr. Holmes also served as
Chairman of the Board from August 1993 until March 1994, at which time he was
elected Vice Chairman of the Board. Mr. Holmes has been Chairman and Chief
Executive Officer of Billing Information Concepts Corp., a third-party billing
clearinghouse and information management services business, since May 1996. Mr.
Holmes served as Chairman of the Board of USLD Communications Corp. from
September 1986 until August 1996 and continued as Chairman of the Board of USLD
Communications Corp. until June 1997.
44
<PAGE>
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. In October 1997, Mr. Holliday resigned as Chairman of the Board and Chief
Executive Officer and currently serves the Company in the capacity of Director.
Mr. Holliday has over 20 years of computer industry experience in large
multinational companies as well as new ventures in computer software
development. Prior to joining Tanisys Mr. Holliday was with BMC Software, Inc.,
a software development company, where he served as director of research and
development from March 1988 to February 1994.
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. Mr. Matthews 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. Mr. Matthews
serves on the Board of Directors of V-Tel Corporation, an Austin, Texas company
specializing in teleconferencing services.
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 was
elected a Director in July 1996. In October 1997, Mr. Pankonien resigned as
President and Chief Operating Officer and currently serves the Company in the
capacity of Director. 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. Mr. Pankonien 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. Mr. Pankonien 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.
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,
Mr. Portnoy 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, Mr. Portnoy was
Executive Vice President and Chief Operating Officer of Goldstar America, Inc.,
a subsidiary of the Lucky-Goldstar Group, a Korean conglomerate.
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.
Mr. Van Duyn 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.
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
45
<PAGE>
Compensation and Stock Option Committees and an Audit Committee. The Board of
Directors does not currently utilize a nominating committee or committee
performing similar functions.
COMPENSATION AND STOCK OPTION COMMITTEES
The Compensation Committee reviews and makes recommendations to the Board of
Directors concerning major compensation policies and compensation of officers
and executive employees including stock options. This committee is comprised of
Directors Holmes and Van Duyn.
The Stock Option Committee meets semi-annually and makes recommendations to
the Board of Directors concerning the granting of stock options under the 1993
Option Plan. This committee is comprised of Directors Holmes 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 11, Executive
Compensation--Benefit Plans--1997 Non-Employee Director Plan."
46
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth information concerning
compensation of the Company's Chief Executive Officer and each of the four other
most highly compensated executive officers of the Company whose base salary and
bonus exceeded $100,000 for fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
-------------------------
ANNUAL COMPENSATION SECURITIES UNDERLYING
FISCAL ---------------------- OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (#)
- -------------------------------------------------------------------- ------ ---------- --------- -------------------------
<S> <C> <C> <C> <C>
MARK C. HOLLIDAY (1) 1997 $ 131,043 $ 0 0
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER 1996 127,341 0 100,000
1995 125,000 0 110,000
GARY W. PANKONIEN (2) 1997 125,000 182,667 100,000
PRESIDENT AND CHIEF OPERATING OFFICER 1996 95,336 66,664 150,000
1995 N/A N/A N/A
BENJAMIN S. MARZ (3) 1997 118,791 0 60,000
VICE PRESIDENT OF SALES AND CUSTOMER SERVICE 1996 103,262 0 0
1995 102,000 0 0
CHRIS EFSTATHIOU 1997 116,884(4) 0 60,000
VICE PRESIDENT AND GENERAL MANAGER 1996 37,458 0 60,000
1995 N/A N/A N/A
JOE O. DAVIS 1997 115,000 0 30,000
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND CORPORATE 1996 55,322(5) 0 120,000
SECRETARY 1995 N/A N/A N/A
JOHN R. BENNETT (6) 1997 109,032 25,000 50,000
VICE PRESIDENT OF SALES AND CUSTOMER SERVICE 1996 N/A N/A N/A
1995 N/A N/A N/A
</TABLE>
- ------------------------
(1) Mr. Holliday resigned as Chairman of the Board and Chief Executive Officer
in October 1997 and currently serves as a member of the Board of Directors
of the Company.
(2) Mr. Pankonien resigned as President and Chief Operating Officer in October
1997 and currently serves as a member of the Board of Directors of the
Company. The amount shown as compensation for fiscal 1996 is from May 21,
1996, the date Mr. Pankonien became an employee of the Company, through the
end of fiscal 1996.
(3) Since October 4, 1997, Mr. Marz is no longer an employee of the Company.
(4) The amount shown reflects Mr. Efstathiou's salary from May 21, 1996, the
date he became an employee of the Company, through the end of fiscal 1996.
(5) Amount shown reflects Mr. Davis's salary from July 11, 1996, the beginning
date of his employment with the Company, through the end of fiscal 1996.
(6) Mr. Bennett was elected Vice President of Sales and Customer Service on
October 1, 1997 and previously served as Director of Sales of the Company.
Amount shown reflects Mr. Bennett's salary from November 1, 1996, the
beginning date of his employment with the Company, through the end of fiscal
1997.
47
<PAGE>
STOCK OPTION GRANTS
The following table provides information related to stock options granted to
the named executive officers during fiscal 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM(2)
OPTIONS IN FISCAL BASE PRICE EXPIRATION ----------------------
NAME GRANTED(#)(1) 1997 ($/SH) DATE 5%($) 10%($)
- ----------------------------- ------------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gary W. Pankonien 100,000 11.3% $ 4.50 (3) $ 124,327 $ 274,730
Chris Efstathiou 60,000 6.8% $ 4.09 10/10/01 67,799 149,819
Joe O. Davis 30,000 3.4% $ 4.09 10/10/01 33,900 74,910
</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 fiscal 1997
to Mr. Pankonien are exercisable one-fourth on each of the four
anniversaries following the date of grant. The options granted in fiscal
1997 to Messrs. Efstathiou and Davis 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.
(3) In the process of being determined as part of the finalization of Mr.
Pankonien's severance package.
AGGREGATED STOCK OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR END OPTION
VALUES
The following table provides information related to stock options exercised
by the named executive officers during the 1997 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>
<CAPTION>
INDIVIDUAL GRANTS NUMBER OF SECURITIES VALUE(1) OF UNEXERCISED
-------------------------------- UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED OPTIONS AT FY END(#) AT FY END($)
UPON OPTION VALUE -------------------------- --------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ------------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark C. Holliday 0 N/A 306,667 103,333 $ 556,688 $ 70,666
Gary W. Pankonien 0 N/A 200,000 50,000 $ 18,650 ($ 6,400)
Benjamin S. Marz 0 N/A 66,667 0 $ 197,338 0
Chris Efstathiou 0 N/A 20,000 100,000 $ 7,460 $ 13,300
Joe O. Davis 0 N/A 40,000 110,000 $ 37,320 $ 73,830
</TABLE>
- ------------------------
(1) Market value of the underlying securities at September 30, 1997 ($4.06),
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
48
<PAGE>
employees of the Company (collectively, the "Participants"). Generally, all
employees of the Company who are 21 years of age and who as of December 31 or
July 31 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. 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 of the Board of Directors. The Stock Option
Committee currently consists of two non-employee members of the Board of
Directors, Parris H. Holmes, Jr. 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 SEC 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 purposes of the 1993 Option Plan are to advance the best interests
of the Company by providing its employees and consultants who have substantial
responsibility for the Company's management, success and growth, with additional
incentive and to increase their proprietary interest in the success of the
Company, thereby encouraging them to remain in the Company's employ or service.
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).
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 110% 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. Fair market value is
49
<PAGE>
defined as the closing price of the Common Stock as reported for that day in THE
WALL STREET JOURNAL listing of composite transactions for Nasdaq.
On March 31, 1994, the stockholders of the Company approved the 1993 Option
Plan, which was adopted by the Board of Directors on October 25, 1993. Under the
terms of the 1993 Option Plan, 2,600,000 shares of Common Stock have been
reserved for the granting of options. At September 30, 1997, options to purchase
1,885,817 shares had been granted under the 1993 Option Plan, leaving 714,183
shares available for future grants under the 1993 Option Plan. In addition, at
September 30, 1997, options to purchase 139,000 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 represented the average closing price of the Common Stock
as quoted on the VSE for the two-week trading period preceding the date of
grant.
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. 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.
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 November 30, 1997) of nonqualified
options ("Director Options") exercisable for the 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
50
<PAGE>
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 Discretionary 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 362,500
shares previously granted to current outside directors under the 1993 Option
Plan. At September 30, 1997, no options had been granted under the Director Plan
except for the 362,500 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.
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
The Company entered into an employment agreement with Charles T. Comiso
effective October 21, 1997. This agreement expires on October 20, 1998 and will
continue thereafter unless terminated by either party with 120 days' notice. Mr.
Comiso's annual salary will be $180,000 until such time as the Company reports
positive cash flow from operations for all three months of a fiscal quarter,
then his annual salary will increase to $240,000. The agreement provides for the
granting of a seven-year option to purchase 1,000,000 shares of Common Stock at
an exercise price to be determined during the first 60 days of the employment
period. The exercise price has been determined to be $2.00 per share. The option
shall vest as to 100,000 and 150,000 shares on the first and second
anniversaries of the agreement, respectively, and as to 250,000 shares on each
of the third, fourth and fifth anniversaries of the agreement. Additionally, at
such time as the Company reports positive cash flow from operations for all
three months of a fiscal quarter, the Company will grant to Mr. Comiso a
seven-year option to purchase 500,000 shares of Common Stock at an exercise
price equal to the closing price of the Company's Common Stock as reported on
the Nasdaq SmallCap Market on the date of grant. The option shall vest as to
125,000 shares on each of the second, third, fourth and fifth anniversaries of
the date of grant. As part of the employment agreement, Mr. Comiso agreed to
purchase $150,000 of the Company's Common Stock at a maximum price of $3.00 per
share. Subsequently, Mr. Comiso purchased 50,000 shares of Common Stock, from
the Company for $75,000 and has committed to purchase an additional 50,000
shares for $75,000 in January 1998. These shares are restricted, and the Company
has no registration obligations.
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
51
<PAGE>
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.
Effective September 11, 1997, the Company entered into an employment
agreement with Don McCord 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' prior written notice to the other of the desire to
terminate such employment. Pursuant to the terms of the employment agreement,
Mr. McCords' annual base salary is $100,000 and he was granted a seven-year
stock option under the 1993 Option Plan, vesting in equal installments over four
years, for the purchase of an aggregate of 100,000 shares of Common Stock at an
exercise price of $4.63 per share.
Effective November 10, 1997, the Company entered into an employment
agreement with Joseph C. Klein, Ph.D., for a term of two years at an annual base
salary of $120,000. Pursuant to the terms of the employment agreement, Dr. Klein
was granted a seven-year stock option under the 1993 Option Plan, vesting in
equal installments over four years, for the purchase of an aggregate of 100,000
share of Common Stock at an exercise price of $2.00 per share and an additional
stock option to purchase of 50,000 shares of Common Stock upon the Company
reporting a profitable quarter and shipments of the Company's new Tester System.
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' notice as provided
therein. Pursuant to the terms of the employment agreements, annual base
salaries were $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, Mr.Pankonien would receive the prorata balance of his salary, bonus and
benefits which would have been payable for a 24-month period based on amounts in
effect on the termination date. The minimum amount he would be entitled to
receive under the agreement is $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.
In October 1997, Mark C. Holliday, Chairman of the Board and Chief Executive
Officer, and Gary W. Pankonien, President and Chief Operating Officer, stepped
down and Charles T. Comiso assumed the responsibilities of President and Chief
Executive Officer. Parris H. Holmes, Jr., Vice Chairman of the Board, was named
Chairman of the Board. These changes were immediate. Messrs. Holliday and
Pankonien both agreed to remain on the Company's Board of Directors.
The Board of Directors of the Company has approved the establishment of
severance packages that provide for the continuation of the salaries and bonuses
of both Mark C. Holliday, the former Chairman of the Board and Chief Executive
Officer, and Gary W. Pankonien, the former President and Chief Operating
Officer, until April and May of 1998, respectively. While the Board of Directors
and the former officers have agreed to the general terms, the specific
agreements are still in the process of being completed and signed.
52
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.
ITEM 12. 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 November 30, 1997.
A total of 20,409,714 shares of the Company's Common Stock were issued and
outstanding at November 30, 1997.
<TABLE>
<CAPTION>
NO. OF SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) CLASS(2)
- ---------------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Gary W. Pankonien........................................................... 2,045,000(3) 9.4%
3107 Toro Ring
Austin, Texas 78746
Clark A. Gunderson.......................................................... 1,092,940 5.0%
2615 Enterprise Boulevard
Lake Charles, Louisiana 70601
</TABLE>
- ------------------------
(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 exercisable
within 60 days for each individual and 20,409,714 shares of Common Stock
issued and outstanding at November 30, 1997.
(3) Includes 50,000 shares that Mr. Pankonien has the right to acquire upon
exercise of stock options, exercisable within 60 days.
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock at November 30,
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 20,409,714 shares of the Company's Common Stock were
issued and outstanding at November 30, 1997.
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
5% BENEFICIAL OWNERS, DIRECTORS NUMBER OF
AND NAMED EXECUTIVE OFFICERS SHARES(1) PERCENT(2)
- --------------------------------------------------------------------------- --------------- -----------
<S> <C> <C>
John R. Bennett............................................................ 26,817(3) *
Joe O. Davis............................................................... 58,000(4) *
Chris Efstathiou, Jr....................................................... 65,000(5) *
Parris H. Holmes Jr........................................................ 1,070,425(6) 4.9%
Mark C. Holliday........................................................... 500,245(7) 2.3%
Gordon H. Matthews......................................................... 170,900(8) *
Gary W. Pankonien.......................................................... 2,045,000(9) 9.4%
Alan H. Portnoy............................................................ 8,333(10) *
Theodore W. Van Duyn....................................................... 265,000 1.2%
Clark A. Gunderson......................................................... 1,092,940 5.0%
All executive officers and directors as a group (12 persons, including the
executive officers and directors listed above) 5,372,827(11) 24.8%
</TABLE>
- ------------------------
* Represents less than one percent (1%) of the issued and outstanding shares
of Common Stock.
53
<PAGE>
(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
exercisable within 60 days for each individual and 20,409,714 shares of
Common Stock issued and outstanding at November 30, 1997.
(3) Includes 6,667 share that Mr. Bennett has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(4) Includes 50,000 shares that Mr. Davis has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(5) Includes 40,000 shares that Mr. Efstathiou has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(6) Includes 105,000 shares that Mr. Holmes has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(7) Includes 306,666 shares that Mr. Holliday has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(8) Includes 82,500 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.
(9) Includes 50,000 shares that Mr. Pankonien has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(10) Includes 8,333 shares that Mr. Portnoy has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(11) Includes 722,500 shares that 12 directors and executive officers have the
right to acquire upon exercise of stock options, exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the fiscal year ended September 30, 1997 the Company reimbursed Parris
H. Holmes, Jr., then Vice Chairman of the Board of Directors, $67,779.46 for
expenses incurred in connection with issues involving corporate finance,
business operations and business opportunities.
In March 1997, to take advantage of an inventory purchase opportunity, the
Company requested that all outstanding stock purchase warrantsholders exercise
their warrants by March 31, 1997 which was substantially prior to the scheduled
expiration dates of the warrants. As an inducement for this early exercise, the
exercise price was discounted 50%. An additional incentive was offer to stock
purchase warrantholders who funded their subscription early in anticipation of
the successful exercise of the warrants. The warrantholders who funded their
subscriptions immediately upon notice of such request were issued warrants for
the purchase of a total of 200,000 shares of Common Stock at an exercise price
of $.01 per share prorated among the warrantholders who funded upon notice of
such request. Among the investors who took advantage of this opportunity were
several directors and a 5% beneficial owner. Clark Gunderson, a 5% beneficial
owner, exercised 100,000 warrants at a price of $1.15, discounted from $2.30,
and was issued 40,000 warrants with an exercise price of $.01 per share. Mark
Holiday, a member of the Board (Chairman of the Board at the time of the
transaction), exercised 14,412 warrants at a price of $.98, discounted from
$1.96, and received 4,000 of the $.01 warrants. Mr. Holmes exercised 37,950
warrants at a price of $1.15, discounted from $2.30, and received 32,000 of the
$.01 warrants. Theodore Van Duyn, a member of the Board, exercised 40,000
warrants at a price of $1.15, discounted from $2.30.
In July 1997, the Company completed a private placement of its restricted
Common Stock at a price of $2.50 per share. Among the investors participating in
this private placement were several directors and a
54
<PAGE>
5% beneficial owner. Mr. Gunderson purchased 150,000 shares. Mr. Van Duyn and
Mr. Holmes purchased 50,000 shares each. As compensation for consulting with
management of the Company, including this transaction, warrants to purchase
200,000 shares of Common Stock at an exercise price of $.01 per share were
issued to Mr. Holmes. These warrants may be exercised on or after January 31,
1998 through December 31, 1999.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits:
The exhibits listed below are filed as part of or incorporated by reference
in this report. Where such filing is made by incorporation by reference to a
previously filed document, such document is identified in parentheses.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
<C> <S>
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)
4.6 Specimen of Common Stock Certificate (Exhibit 4.6 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)
</TABLE>
55
<PAGE>
<TABLE>
<C> <S>
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)
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)
10.14 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)
10.17 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. (Exhibit 10.22 to Amendment No. 2 to General Form for Registration of
Securities on Form 10, filed March 11, 1997)
10.23 Inventory Management Service Agreement dated as of November 1, 1996 by and between the Company
and Siemens Components, Inc. (Exhibit 10.23 to Amendment No. 2 to General Form for
Registration of Securities on Form 10, filed March 11, 1997)
10.27 1997 Non-Employee Director Plan of Tanisys Technology, Inc. (Exhibit 10.27 to Amendment No. 2
to General Form for Registration of Securities on Form 10, filed March 11, 1997)
10.28 Form of Non-Employee Director Stock Option Agreement (Exhibit 10.28 to Amendment No. 2 to
General Form for Registration of Securities on Form 10, filed March 11, 1997)
</TABLE>
56
<PAGE>
<TABLE>
<C> <S>
10.30 Master Lease Agreement dated January 30, 1997 by and between the Company and Copelco Capital,
Inc. (Exhibit 10.30 to March 31, 1997 Form 10-Q)
10.32 Loan and Security Agreement, dated as of July 24, 1997, by and between Tanisys Technology,
Inc., 1st Tech Corporation, DarkHorse Systems, Inc., the Company and NationsCredit
Commercial Corporation, through its NationsCredit Commercial Funding Division (filed
herewith)
10.33 Memory Module Corporate Purchase Agreement, dated July 22, 1997, by and between Tanisys
Technology, Inc. and Compaq Computer Corporation (filed herewith)
10.34 Employment Agreement, dated as of September 11, 1997, by and between Tanisys Technology, Inc.
and Don McCord (filed herewith)
10.35 Employment Agreement, dated as of October 20, 1997, by and between Tanisys Technology, Inc.
and Charles T. Comiso (filed herewith)
10.36 Employment Agreement, dated as of November 10, 1997, by and between Tanisys Technology, Inc.
and Joseph C. Klein, Ph.D. (filed herewith)
11.1 Statement regarding computation of per share earnings (filed herewith)
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of Arthur Andersen LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
</TABLE>
(b) Reports on Form 8-K.
None.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: December 29, 1997 TANISYS TECHNOLOGY, INC.
By: /s/ CHARLES T. COMISO
-----------------------------------------
Charles T. Comiso
CHIEF EXECUTIVE OFFICER PRESIDENT AND
DIRECTOR
</TABLE>
Date: December 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on the 29th day of December 1997.
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ CHARLES T. COMISO
- ------------------------------ Chief Executive Officer
Charles T. Comiso President and Director
/s/ JOE O. DAVIS
- ------------------------------ Senior Vice President and
Joe O. Davis Chief Financial Officer
/s/ DONALD R. TURNER
- ------------------------------ Corporate Controller
Donald R. Turner
/s/ PARRIS H. HOLMES, JR.
- ------------------------------ Chairman of the Board
Parris H. Holmes, Jr.
/s/ MARK C. HOLLIDAY
- ------------------------------ Director
Mark C. Holliday
/s/ GORDON H. MATTHEWS
- ------------------------------ Director
Gordon H. Matthews
/s/ GARY W. PANKONIEN
- ------------------------------ Director
Gary W. Pankonien
/s/ ALAN H. PORTNOY
- ------------------------------ Director
Alan H. Portnoy
/s/ THEODORE W. VAN DUYN
- ------------------------------ Director
Theodore W. Van Duyn
58
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<S> <C>
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)
4.6 Specimen of Common Stock Certificate (Exhibit 4.6 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)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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)
10.14 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)
10.17 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. (Exhibit 10.22 to Amendment No. 2 to General Form for Registration of
Securities on Form 10, filed March 11, 1997)
10.23 Inventory Management Service Agreement dated as of November 1, 1996 by and between the
Company and Siemens Components, Inc. (Exhibit 10.23 to Amendment No. 2 to General Form for
Registration of Securities on Form 10, filed March 11, 1997)
10.27 1997 Non-Employee Director Plan of Tanisys Technology, Inc. (Exhibit 10.27 to Amendment No. 2
to General Form for Registration of Securities on Form 10, filed March 11, 1997)
10.28 Form of Non-Employee Director Stock Option Agreement (Exhibit 10.28 to Amendment No. 2 to
General Form for Registration of Securities on Form 10, filed March 11, 1997)
10.30 Master Lease Agreement dated January 30, 1997 by and between the Company and Copelco Capital,
Inc. (Exhibit 10.30 to March 31, 1997 Form 10-Q)
10.32 Loan and Security Agreement, dated as of July 24, 1997, by and between Tanisys Technology,
Inc., 1st Tech Corporation, DarkHorse Systems, Inc., the Company and NationsCredit Commercial
Corporation, through its NationsCredit Commercial Funding Division (filed herewith)
10.33 Memory Module Corporate Purchase Agreement, dated July 22, 1997, by and between Tanisys
Technology, Inc. and Compaq Computer Corporation (filed herewith)
10.34 Employment Agreement, dated as of September 11, 1997, by and between Tanisys Technology, Inc.
and Don McCord (filed herewith)
10.35 Employment Agreement, dated as of October 20, 1997, by and between Tanisys Technology, Inc.
and Charles T. Comiso (filed herewith)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.36 Employment Agreement, dated as of November 10, 1997, by and between Tanisys Technology, Inc.
and Joseph C. Klein, Ph.D. (filed herewith)
11.1 Statement regarding computation of per share earnings (filed herewith)
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of Arthur Andersen LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
</TABLE>
<PAGE>
NATIONS CREDIT COMMERCIAL FUNDING
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement (as it may be amended, this
"AGREEMENT") is entered into on July 24, 1997 by and among NATIONSCREDIT
COMMERCIAL CORPORATION, THROUGH ITS NATIONSCREDIT COMMERCIAL FUNDING DIVISION
("LENDER"), having an address at 1177 Avenue of the Americas, 36th Floor, New
York, New York 10036 TANISYS TECHNOLOGY, INC., a Wyoming corporation
("TANISYS"), 1ST TECH CORPORATION, a Delaware corporation ("TECH"), and
DARKHORSE SYSTEMS, INC., a Delaware corporation ("DARKHORSE") (Tanisys, Tech
and Darkhorse are individually and collectively referred to herein as
"BORROWER"), each of whose chief executive office is located at 12201
Technology Blvd., Suite 130, Austin, Texas 78727 ("BORROWER'S ADDRESS").
The Schedules to this Agreement are an integral part of this Agreement and
are incorporated herein by reference. Terms used, but not defined elsewhere,
in this Agreement are defined in Schedule B.
1. LOANS AND CREDIT ACCOMMODATIONS.
1.1 AMOUNT. Subject to the terms and conditions contained in this
Agreement, Lender will:
(a) REVOLVING LOANS AND CREDIT ACCOMMODATIONS. From time to time
during the Term at Borrower's request, make revolving loans to Borrower
("REVOLVING LOANS"), and make letters of credit, bankers acceptances and
other credit accommodations ("CREDIT ACCOMMODATIONS") available to Borrower,
in each case to the extent that there is sufficient Availability at the time
of such request to cover, dollar for dollar, the requested Revolving Loan or
Credit Accommodation; PROVIDED, that after giving effect to such Revolving
Loan or Credit Accommodation, (x) the outstanding balance of all monetary
Obligations (INCLUDING the principal balance of any Term Loan and, solely for
the purpose of determining compliance with this provision, the Credit
Accommodation Balance) will not exceed the Maximum Facility Amount set forth
in Section 1(a) of Schedule A and (y) none of the other Loan Limits set forth
in Section 1 of Schedule A will be exceeded. For this purpose,
"AVAILABILITY" means:
(i) the aggregate amount of Eligible Accounts (less maximum
existing or asserted taxes, discounts, credits and allowances) multiplied
by the Accounts Advance Rate set forth in Section 1(b)(i) of Schedule A
but not to exceed the Accounts Sublimit set forth in Section 1(c) of
Schedule A;
PLUS
(ii) the lower of cost or market value of Eligible Inventory
multiplied by the Inventory Advance Rate(s) set forth in Section 1(b)(ii)
of Schedule A, but not to exceed the Inventory Sublimit(s) set forth in
Section 1(d) of Schedule A;
1
<PAGE>
NATIONS CREDIT COMMERCIAL FUNDING LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
MINUS
(iii) all Reserves which Lender has established pursuant to
Section 1.2 (including those to be established in connection with the
requested Revolving Loan or Credit Accommodation);
MINUS
(iv) the outstanding balance of all of the monetary Obligations
(EXCLUDING the Credit Accommodation Balance and the principal balance of
the Term Loan); and
PLUS
(v) the Overadvance Amount, if any, set forth in Section 1(g)
of Schedule A.
(b) TERM LOAN. On the date of this Agreement, make an advance to
Borrower computed with respect to the value of Borrower's Eligible Equipment
(the ("EQUIPMENT ADVANCE") in the principal amount, if any, set forth in
Section 2(a) of Schedule A. The Equipment Advance is sometimes referred to
herein as the "TERM LOAN."
1.2 RESERVES. Lender may from time to time establish and revise such
reserves as Lender deems appropriate in its sole discretion ("RESERVES") to
reflect (i) events, conditions, contingencies or risks which affect or may
affect (A) the Collateral or its value, or the security interests and other
rights of Lender in the Collateral or (B) the assets, business or prospects
of Borrower or any Obligor, (ii) Lender's good faith concern that any
Collateral report or financial information furnished by or on behalf of
Borrower or any Obligor to Lender is or may have been incomplete, inaccurate
or misleading in any material respect, (iii) any fact or circumstance which
Lender determines in good faith constitutes, or could constitute, a Default
or Event of Default or (iv) any other events or circumstances which Lender
determines in good faith make the establishment or revision of a Reserve
prudent. Without limiting the foregoing, Lender shall (x) in the case of
each Credit Accommodation issued for the purchase of Inventory (a) which
meets the criteria for Eligible Inventory set forth in clauses (i), (ii),
(iii), (v) and (vi) of the definition of Eligible Inventory, (b) which is or
will be in transit to one of the locations set forth in Section 9(d) of
Schedule A, (c) which is fully insured in a manner satisfactory to Lender and
(d) with respect to which Lender is in possession of all bills of lading and
all other documentation which Lender has requested, all in form and substance
satisfactory to Lender in its sole discretion, establish a Reserve equal to
the cost of such Inventory (plus all duties, freight, taxes, insurance, costs
and other charges and expenses relating to such Credit Accommodation or such
Eligible Inventory) multiplied by a percentage equal to 100% minus the
Inventory Advance Rate applicable to Eligible Inventory and (y) in the case
of any other Credit Accommodation issued for any purpose, establish a Reserve
equal to the full amount of such Credit
2
<PAGE>
NATIONS CREDIT COMMERCIAL FUNDING LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
Accommodation plus all costs and other charges and expenses relating to such
Credit Accommodation. In addition, (x) Lender shall establish a Permanent
Reserve in the amount set forth in Section 1(f) of Schedule A, and (y) if the
outstanding principal balance of the Term Loan advance with respect to
Eligible Equipment exceeds the percentage set forth in Section 2(a) of
Schedule A of the appraised value of such Eligible Equipment, Lender may
establish an additional Reserve in the amount of such excess. Lender may, in
its discretion, establish and revise Reserves by deducting them in
determining Availability or by reclassifying Eligible Accounts or Eligible
Inventory as ineligible. In no event shall the establishment of a Reserve in
respect of a particular actual or contingent liability obligate Lender to
make advances hereunder to pay such liability or otherwise obligate Lender
with respect thereto.
1.3 OTHER PROVISIONS APPLICABLE TO CREDIT ACCOMMODATIONS. Lender may,
in its sole discretion and on terms and conditions acceptable to Lender, make
Credit Accommodations available to Borrower either by issuing them, or by
causing other financial institutions to issue them supported by Lender's
guaranty or indemnification; PROVIDED, that after giving effect to each
Credit Accommodation, the Credit Accommodation Balance will not exceed the
Credit Accommodation Limit set forth in Section 1(e) of Schedule A. Any
amounts paid by Lender in respect of a Credit Accommodation will be treated
for all purposes as a Revolving Loan which shall be secured by the Collateral
and bear interest, and be payable, in the same manner as a Revolving Loan.
Borrower agrees to execute all documentation required by Lender or the issuer
of any Credit Accommodation in connection with any such Credit Accommodation.
1.4 REPAYMENT. Accrued interest on all monetary Obligations shall be
payable on the first day of each month. Principal of the Term Loan shall be
repaid as set forth in Section 2(b) of Schedule A. If at any time any of the
Loan Limits are exceeded, Borrower will immediately pay to Lender such
amounts (or provide cash collateral to Lender with respect to the Credit
Accommodation Balance in the manner set forth in Section 7.3), as shall cause
Borrower to be in full compliance with all of the Loan Limits.
Notwithstanding the foregoing, Lender may, in its sole discretion, make or
permit Revolving Loans, the Term Loan, any Credit Accommodations or any other
monetary Obligations to be in excess of any of the Loan Limits; PROVIDED,
that Borrower shall, upon Lender's demand, pay to Lender such amounts as
shall cause Borrower to be in full compliance with all of the Loan Limits.
All unpaid monetary Obligations shall be payable in full on the Maturity Date
(as defined in Section 7.1) or, if earlier, the date of any early termination
pursuant to Section 7.2.
1.5 MINIMUM BORROWING. Subject to the terms and conditions of this
Agreement, Borrower agrees to (i) borrow sufficient amounts to cause the
aggregate outstanding principal balance of the Loans and the aggregate
outstanding Credit Accommodations to equal or exceed, at all times prior to
the Maturity Date, the Minimum Loan Amount set forth in Section 4 of Schedule
A and (ii) use its best efforts to maintain Availability sufficient to enable
Borrower to do so. However, Lender shall not be obligated to loan Borrower
the Minimum Loan Amount other than in accordance with all of the terms and
conditions of this Agreement.
3
<PAGE>
NATIONS CREDIT COMMERCIAL FUNDING LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
2. INTEREST AND FEES.
2.1 INTEREST. All Loans and other monetary Obligations shall bear
interest at the Interest Rate(s) set forth in Section 3 of Schedule A, except
where expressly set forth to the contrary in this Agreement or another Loan
Document; PROVIDED, that after the occurrence of an Event of Default, all
Loans and other monetary Obligations shall, at Lender's option, bear interest
at a rate per annum equal to two percent (2%) in excess of the rate otherwise
applicable thereto (the "DEFAULT RATE") until paid in full (notwithstanding
the entry of any judgment against Borrower or the exercise of any other right
or remedy by Lender), and all such interest shall be payable on demand.
Changes in the Interest Rate shall be effective as of the date of any change
in the Prime Rate. No agreements, conditions, provisions or stipulations
contained in this Agreement or any other instrument, document or agreement
between Borrower and Lender or default of Borrower, or the exercise by Lender
of the right to accelerate the payment of the maturity of principal and
interest, or to exercise any option whatsoever contained in this Agreement or
any other Loan Documents, or the arising of any contingency whatsoever, shall
entitle Lender to contract for, charge, or receive, in any event, interest
exceeding the maximum rate of interest permitted by applicable state or
federal law in effect from time to time (hereinafter "MAXIMUM LEGAL RATE").
In no event shall Borrower be obligated to pay interest exceeding such
Maximum Legal Rate and all agreements, conditions or stipulations, if any,
which may in any event or contingency whatsoever operate to bind, obligate or
compel Borrower to pay a rate of interest exceeding the Maximum Legal Rate,
shall be without binding force or effect, at law or in equity, to the extent
only of the excess of interest over such Maximum Legal Rate. In the event
any interest is contracted for, charged or received in excess of the Maximum
Legal Rate ("EXCESS"), Borrower acknowledges and stipulates that any such
contract, charge, or receipt shall be the result of an accident and BONA FIDE
error, and that any Excess received by Lender shall be applied, first, to
reduce the principal then unpaid hereunder; second, to reduce the other
Obligations; and third, returned to Borrower, it being the intention of the
parties hereto not to enter at any time into a usurious or otherwise illegal
relationship. Borrower recognizes that, with fluctuations in the Prime Rate
and the Maximum Legal Rate, such a result could inadvertently occur. By the
execution of this Agreement, Borrower covenants that (i) the credit or return
of any Excess shall constitute the acceptance by Borrower of such Excess, and
(ii) Borrower shall not seek or pursue any other remedy, legal or equitable,
against Lender, based in whole or in part upon contracting for, charging or
receiving of any interest in excess of the maximum authorized or receiving of
any interest in excess of the maximum authorized by applicable law. For the
purpose of determining whether or not any Excess has been contracted for,
charged or received by Lender, all interest at any time contracted for,
charged or received by Lender in connection with this Agreement shall be
amortized, prorated, allocated and spread in equal parts during the entire
term of this Agreement.
2.2 FEES AND WARRANTS. Borrower shall pay Lender the following fees,
and issue the following warrants, which are in addition to all interest and
other sums payable by Borrower to Lender under this Agreement, and are not
refundable:
4
<PAGE>
NATIONS CREDIT COMMERCIAL FUNDING LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
(a) CLOSING FEE. A closing fee in the amount set forth in Section
6(a) of Schedule A, which shall be deemed to be fully earned as of, and
payable on, the date hereof.
(b) FACILITY FEES. A facility fee for the Initial Term in the
amount set forth in Section 6(b)(i) of Schedule A (which shall be fully
earned as of the date of this Agreement and shall be payable in two equal
installments of Eighty-Five Thousand Dollars ($85,000) each, due,
respectively, on the first and second anniversaries of the date of this
Agreement), and a facility fee for each Renewal Term in the amount set forth
in Section 6(b)(ii) of Schedule A (which shall be fully earned as of the
first day of such Renewal Term and shall be payable in equal installments
due, respectively, on the first day of such Renewal Term and on each
anniversary thereof during such Renewal Term).
(c) CREDIT ACCOMMODATION FEES. All of the fees relating to Credit
Accommodations set forth in Section 6(d) of Schedule A.
(d) WARRANTS. Warrants to acquire the capital stock of Tanisys,
as summarized in Section 6(e) of Schedule A and as more fully set forth in a
separate warrant executed by Tanisys contemporaneously with this Agreement.
(e) MINIMUM LOAN FEE. To be determined as set forth in Section
6(f) of Schedule A.
2.3 COMPUTATION OF INTEREST AND FEES. All interest and fees shall be
calculated daily on the closing balances in the Loan Account based on the
actual number of days elapsed in a year of 360 days. For purposes of
calculating interest and fees, if the outstanding daily principal balance of
the Revolving Loans is a credit balance, such balance shall be deemed to be
zero.
2.4 LOAN ACCOUNT; MONTHLY ACCOUNTINGS. Lender shall maintain a loan
account for Borrower reflecting all advances, charges, expenses and payments
made pursuant to this Agreement (the "LOAN ACCOUNT"), and shall provide
Borrower with a monthly accounting reflecting the activity in the Loan
Account. Each accounting shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Lender), unless
Borrower notifies Lender in writing to the contrary within sixty days after
such account is rendered, describing the nature of any alleged errors or
admissions. However, Lender's failure to maintain the Loan Account or to
provide any such accounting shall not affect the legality or binding nature
of any of the Obligations. Interest, fees and other monetary Obligations due
and owing under this Agreement (including fees and other amounts paid by
Lender to issuers of Credit Accommodations) may, in Lender's discretion, be
charged to the Loan Account, and will thereafter be deemed to be Revolving
Loans and will bear interest at the same rate as other Revolving Loans.
3. SECURITY INTEREST.
3.1 To secure the full payment and performance of all of the
Obligations, Borrower hereby grants to Lender a continuing security interest
in all of Borrower's property and interests in property, whether tangible or
intangible, now owned or in existence or hereafter acquired or arising,
wherever located, including Borrower's interest in all of the following,
5
<PAGE>
NATIONS CREDIT COMMERCIAL FUNDING LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
whether or not eligible for lending purposes: (i) all Accounts, Chattel
Paper, Instruments, Documents, Goods (including Inventory, Equipment, farm
products and consumer goods), Investment Property, General Intangibles,
Deposit Accounts and money, (ii) all proceeds and products of all of the
foregoing (including proceeds of any insurance policies, proceeds of proceeds
and claims against third parties for loss or any destruction of any of the
foregoing) and (iii) all books and records relating to any of the foregoing.
4. ADMINISTRATION.
4.1 LOCK BOXES AND BLOCKED ACCOUNTS. Borrower will, at its expense,
establish (and revise from time to time as Lender may require) collection
procedures acceptable to Lender, in Lender's sole discretion, for the
collection of checks, wire transfers and other proceeds of Accounts ("ACCOUNT
PROCEEDS"), which may include (i) directing all Account Debtors to send all
such proceeds directly to a post office box designated by Lender either in
the name of Borrower (but as to which Lender has exclusive access) or, at
Lender's option, in the name of Lender (a "LOCK BOX") or (ii) depositing all
Account Proceeds received by Borrower into one or more bank accounts
maintained in Lender's name (each, a "BLOCKED ACCOUNT"), under an arrangement
acceptable to Lender with a depository bank acceptable to Lender, pursuant to
which all funds deposited into each Blocked Account are to be transferred to
Lender in such manner, and with such frequency, as Lender shall specify or
(iii) a combination of the foregoing. Borrower agrees to execute, and to
cause its depository banks to execute, such Lock Box and Blocked Account
agreements and other documentation as Lender shall require from time to time
in connection with the foregoing.
4.2 REMITTANCE OF PROCEEDS. Except as provided in Section 4.1, all
proceeds arising from the sale or other disposition of any Collateral shall
be delivered, in kind, by Borrower to Lender in the original form in which
received by Borrower not later than the following Business Day after receipt
by Borrower. Until so delivered to Lender, Borrower shall hold such proceeds
separate and apart from Borrower's other funds and property in an express
trust for Lender. Nothing in this Section 4.2 shall limit the restrictions
on disposition of Collateral set forth elsewhere in this Agreement.
4.3 APPLICATION OF PAYMENTS. Lender may, in its sole discretion,
apply, reverse and re-apply all cash and non-cash proceeds of Collateral or
other payments received with respect to the Obligations, in such order and
manner as Lender shall determine, whether or not the Obligations are due, and
whether before or after the occurrence of a Default or an Event of Default.
For purposes of determining Availability, such amounts will be credited to
the Loan Account and the Collateral balances to which they relate upon
Lender's receipt of advice from Lender's Bank (set forth in Section 11 of
Schedule A) that such items have been credited to Lender's account at
Lender's Bank (or upon Lender's deposit thereof at Lender's Bank in the case
of payments received by Lender in kind), in each case subject to final
payment and collection. However, for purposes of computing interest on the
Obligations, such items shall be deemed applied by Lender two (2) Business
Days after Lender's receipt of advice of deposit thereof at Lender's Bank.
6
<PAGE>
NATIONS CREDIT COMMERCIAL FUNDING LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
4.4 NOTIFICATION; VERIFICATION. Lender or its designee may, from time
to time, whether or not a Default or Event of Default has occurred: (i)
verify directly with the Account Debtors the validity, amount and other
matters relating to the Accounts and Chattel Paper, by means of mail,
telephone or otherwise, either in the name of Borrower or Lender or such
other name as Lender may choose; (ii) notify Account Debtors that Lender has
a security interest in the Accounts and that payment thereof is to be made
directly to Lender; and (iii) demand, collect or enforce payment of any
Accounts and Chattel Paper (but without any duty to do so).
4.5 POWER OF ATTORNEY. Borrower hereby grants to Lender an irrevocable
power of attorney, coupled with an interest, authorizing and permitting
Lender (acting through any of its officers, employees, attorneys or agents),
at any time (whether or not a Default or Event of Default has occurred and is
continuing, except as expressly provided below), at Lender's option, but
without obligation, with or without notice to Borrower, and at Borrower's
expense, to do any or all of the following, in Borrower's name or otherwise:
(i) execute on behalf of Borrower any documents that Lender may, in its sole
discretion, deem advisable in order to perfect and maintain Lender's security
interests in the Collateral, to exercise a right of Borrower or Lender, or to
fully consummate all the transactions contemplated by this Agreement and the
other Loan Documents (including such financing statements and continuation
financing statements, and amendments thereto, as Lender shall deem necessary
or appropriate) and to file as a financing statement any copy of this
Agreement or any financing statement signed by Borrower; (ii) after the
occurrence of a Default or Event of Default, execute on behalf of Borrower
any document exercising, transferring or assigning any option to purchase,
sell or otherwise dispose of or lease (as lessor or lessee) any real or
personal property which is part of the Collateral or in which Lender has an
interest; (iii) execute on behalf of Borrower any invoices relating to any
Accounts, any draft against any Account Debtor, any proof of claim in
bankruptcy, any notice of Lien or claim, and any assignment or satisfaction
of mechanic's, materialman's or other Lien; (iv) execute on behalf of
Borrower any notice to any Account Debtor; (v) receive and otherwise take
control in any manner of any cash or non-cash items of payment or proceeds of
Collateral; (vi) endorse Borrower's name on all checks and other forms of
remittances received by Lender; (vii) pay, contest or settle any Lien,
charge, encumbrance, security interest and adverse claim in or to any of the
Collateral, or any judgment based thereon, or otherwise take any action to
terminate or discharge the same; (viii) after the occurrence of a Default or
Event of Default, grant extensions of time to pay, compromise claims relating
to, and settle Accounts, Chattel Paper and General Intangibles for less than
face value and execute all releases and other documents in connection
therewith; (ix) pay any sums required on account of Borrower's taxes or to
secure the release of any Liens therefor; (x) pay any amounts necessary to
obtain, or maintain in effect, any of the insurance described in Section
5.13; (xi) settle and adjust, and give releases of, any insurance claim that
relates to any of the Collateral and obtain payment therefor; (xii) instruct
any third party having custody or control of any Collateral or books or
records belonging to, or relating to, Borrower to give Lender the same rights
of access and other rights with respect thereto as Lender has under this
Agreement; and (xiii) after the occurrence of a Default or Event of Default,
change the address for delivery of Borrower's mail and receive and open all
mail addressed to Borrower. Any and all sums paid, and any and all costs,
expenses, liabilities, obligations and reasonable
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attorneys' fees incurred, by Lender with respect to the foregoing shall be
added to and become part of the Obligations, shall be payable on demand, and
shall bear interest at a rate equal to the highest interest rate applicable
to any of the Obligations. Borrower agrees that Lender's rights under the
foregoing power of attorney or any of Lender's other rights under this
Agreement or the other Loan Documents shall not be construed to indicate that
Lender is in control of the business, management or properties of Borrower.
4.6 DISPUTES. Borrower shall promptly notify Lender of all disputes or
claims relating to Accounts and Chattel Paper. Borrower will not, without
Lender's prior written consent, compromise or settle any Account or Chattel
Paper for less than the full amount thereof, grant any extension of time of
payment of any Account or Chattel Paper, release (in whole or in part) any
Account Debtor or other person liable for the payment of any Account or
Chattel Paper or grant any credits, discounts, allowances, deductions, return
authorizations or the like with respect to any Account or Chattel Paper;
except that prior to the occurrence of an Event of Default, Borrower may take
any of such actions in the ordinary course of its business, PROVIDED that
Borrower promptly reports the same to Lender.
4.7 INVOICES. At Lender's request, Borrower will cause all invoices
and statements which it sends to Account Debtors or other third parties to be
marked, in a manner satisfactory to Lender, to reflect Lender's security
interest therein.
4.8 INVENTORY.
(a) RETURNS. Provided that no Event of Default has occurred and
is continuing, if any Account Debtor returns any Inventory to Borrower in the
ordinary course of its business, Borrower will promptly determine the reason
for such return and promptly issue a credit memorandum to the Account Debtor
in the appropriate amount (sending a copy to Lender). After the occurrence
of an Event of Default, Borrower will not accept any return without Lender's
prior written consent. Regardless of whether an Event of Default has
occurred, Borrower will (i) hold the returned Inventory in trust for Lender;
(ii) segregate all returned Inventory from all of Borrower's other property;
(iii) conspicuously label the returned Inventory as Lender's property; and
(iv) immediately notify Lender of the return of such Inventory, specifying
the reason for such return, the location and condition of the returned
Inventory and, at Lender's request, deliver such returned Inventory to Lender
at an address specified by Lender.
(b) OTHER COVENANTS. Borrower will not, without Lender's prior
written consent, (i) store any Inventory with any warehouseman or other third
party other than as set forth in Section 9(d) of Schedule A or (ii) sell any
Inventory on a sale-or-return, guaranteed sale, consignment, or other
contingent basis. All of the Inventory has been produced only in accordance
with the Fair Labor Standards Act of 1938 and all rules, regulations and
orders promulgated thereunder.
4.9 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and
on one Business Day's notice, prior to the occurrence of a Default or an
Event of Default, and at any
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time and with or without notice after the occurrence of a Default or an Event
of Default, Lender or its agents shall have the right to inspect the
Collateral, and the right to examine and copy Borrower's books and records.
Lender shall take reasonable steps to keep confidential all information
obtained in any such inspection or examination, but Lender shall have the
right to disclose any such information to its auditors, regulatory agencies,
attorneys and participants, and pursuant to any subpoena or other legal
process. Borrower agrees to give Lender access to any or all of Borrower's
premises to enable Lender to conduct such inspections and examinations. Such
inspections and examinations shall be at Borrower's expense and the charge
therefor shall be $650 per person per day (or such higher amount as shall
represent Lender's then current standard charge), plus reasonable
out-of-pocket expenses. Lender may, at Borrower's expense, use Borrower's
personnel, computer and other equipment, programs, printed output and
computer readable media, supplies and premises for the collection, sale or
other disposition of Collateral to the extent Lender, in its sole discretion,
deems appropriate. Borrower hereby irrevocably authorizes all accountants
and third parties to disclose and deliver to Lender, at Borrower's expense,
all financial information, books and records, work papers, management reports
and other information in their possession regarding Borrower. Borrower will
not enter into any agreement with any accounting firm, service bureau or
third party to store Borrower's books or records at any location other than
Borrower's Address without first obtaining Lender's written consent (which
consent may be conditioned upon such accounting firm, service bureau or other
third party agreeing to give Lender the same rights with respect to access to
books and records and related rights as Lender has under this Agreement).
5. REPRESENTATIONS, WARRANTIES AND COVENANTS.
To induce Lender to enter into this Agreement, each Borrower represents,
warrants and covenants as follows (it being understood that (i) each such
representation and warranty will be deemed remade as of the date on which
each Loan is made and each Credit Accommodation is provided and shall not be
affected by any knowledge of, or any investigation by, Lender, and (ii) the
accuracy of each such representation, warranty and covenant will be a
condition to each Loan and Credit Accommodation):
5.1 EXISTENCE AND AUTHORITY. Borrower is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or formation. Borrower is qualified and licensed to do
business in all jurisdictions in which any failure to do so would have a
material adverse effect on Borrower. The execution, delivery and performance
by Borrower of this Agreement and all of the other Loan Documents have been
duly and validly authorized, do not violate Borrower's articles or
certificate of incorporation, by-laws or other organizational documents, or
any law or any agreement or instrument or any court order which is binding
upon Borrower or its property, do not constitute grounds for acceleration of
any indebtedness or obligation under any agreement or instrument which is
binding upon Borrower or its property, and do not require the consent of any
Person. This Agreement and such other Loan Documents have been duly executed
and delivered by, and are enforceable against, Borrower, and all other
Obligors who have signed them, in accordance with their respective terms.
Sections 9(g) and
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9(h) of Schedule A set forth the ownership of Borrower and the names and
ownership of Borrower's Subsidiaries as of the date of this Agreement.
5.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in
the heading to this Agreement is its correct and complete legal name as of
the date hereof. Listed in Sections 9(a), 9(b) and 9(c) of Schedule A are
all prior names of Borrower and all of Borrower's present and prior trade
names. Borrower shall give Lender at least 30 days' prior written notice
before changing its name or doing business under any other name. Borrower
has complied with all laws relating to the conduct of business under a
fictitious business name. Borrower represents and warrants that (i) each
trade name does not refer to another corporation or other legal entity; (ii)
all Accounts invoiced under any such trade names are owned exclusively by
Borrower and are subject to the security interest of Lender and the other
terms of this Agreement and (iii) all schedules of Accounts, including any
sales made or services rendered using any trade name shall show Borrower's
name as assignor.
5.3 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower has good and
marketable title to the Collateral. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Lender now has,
and will continue to have, a first-priority perfected and enforceable
security interest in all of the Collateral, subject only to the Permitted
Liens, and Borrower will at all times defend Lender and the Collateral
against all claims of others. None of the Collateral which is Equipment is
or will be affixed to any real property in such a manner, or with such
intent, as to become a fixture. Except for leases or subleases as to which
Borrower has delivered to Lender a landlord's waiver in form and substance
satisfactory to Lender, Borrower is not a lessee or sublessee under any real
property lease or sublease pursuant to which the lessor or sublessor may
obtain any rights in any of the Collateral, and no such lease or sublease now
prohibits, restrains, impairs or conditions, or will prohibit, restrain,
impair or condition, Borrower's right to remove any Collateral from the
premises. Whenever any Collateral is located upon premises in which any
third party has an interest (whether as owner, mortgagee, beneficiary under a
deed of trust, lien or otherwise), Borrower shall, whenever requested by
Lender, cause each such third party to execute and deliver to Lender, in form
acceptable to Lender, such waivers and subordinations as Lender shall
specify, so as to ensure that Lender's rights in the Collateral are, and will
continue to be, superior to the rights of any such third party. Borrower
will keep in full force and effect, and will comply with all the terms of,
any lease of real property where any of the Collateral now or in the future
may be located.
5.4 ACCOUNTS AND CHATTEL PAPER. As of each date reported by Borrower,
all Accounts which Borrower has reported to Lender as being Eligible Accounts
comply in all respects with the criteria for eligibility established by
Lender and in effect at such time. All Accounts and Chattel Paper are
genuine and in all respects what they purport to be, arise out of a
completed, bona fide and unconditional and non-contingent sale and delivery
of goods or rendition of services by Borrower in the ordinary course of its
business and in accordance with the terms and conditions of all purchase
orders, contracts or other documents relating thereto, each Account Debtor
thereunder had the capacity to contract at the time any contract or other
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document giving rise to such Accounts and Chattel Paper were executed, and
the transactions giving rise to such Accounts and Chattel Paper comply with
all applicable laws and governmental rules and regulations.
5.5 INVESTMENT PROPERTY. Borrower will take any and all actions
required or requested by Lender, from time to time, to (i) cause Lender to
obtain exclusive control of any Investment Property in a manner acceptable to
Lender and (ii) obtain from any issuers of Investment Property and such other
Persons as Lender shall specify, for the benefit of Lender, written
confirmation of Lender's exclusive control over such Investment Property and
take such other actions as Lender may request to perfect Lender's security
interest in such Investment Property. For purposes of this Section 5.5,
Lender shall have exclusive control of Investment Property if (A) such
Investment Property consists of certificated securities and Borrower delivers
such certificated securities to Lender (with appropriate endorsements if such
certificated securities are in registered form); (B) such Investment Property
consists of uncertificated securities and either (x) Borrower delivers such
uncertificated securities to Lender or (y) the issuer thereof agrees,
pursuant to documentation in form and substance satisfactory to Lender, that
it will comply with instructions originated by Lender without further consent
by Borrower, and (C) such Investment Property consists of security
entitlements and either (x) Lender becomes the entitlement holder thereof or
(y) the appropriate securities intermediary agrees, pursuant to documentation
in form and substance satisfactory to Lender, that it will comply with
entitlement orders originated by Lender without further consent by Borrower.
5.6 PLACE OF BUSINESS; LOCATION OF COLLATERAL. Borrower's Address is
Borrower's chief executive office and the location of its books and records.
In addition, except as provided in the immediately following sentence,
Borrower has places of business and Collateral located only at the locations
set forth on Sections 9(d) and 9(e) of Schedule A. Borrower will give Lender
at least 30 days' prior written notice before opening any additional place of
business, changing its chief executive office or the location of its books
and records, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth in Sections 9(d) and
9(e) of Schedule A, and will execute and deliver all financing statements and
other agreements, instruments and documents which Lender shall require as a
result thereof.
5.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial
statements delivered to Lender by or on behalf of Borrower have been prepared
in conformity with GAAP and completely and fairly reflect the financial
condition of Borrower, at the times and for the periods therein stated.
Between the last date covered by any such financial statement provided to
Lender and the date hereof (or, with respect to the remaking of this
representation in connection with the making of any Loan or the providing of
any Credit Accommodation, the date such Loan is made or such Credit
Accommodation is provided), there has been no material adverse change in the
financial condition or business of Borrower. Borrower is solvent and able to
pay its debts as they come due, and has sufficient capital to carry on its
business as now conducted and as proposed to be conducted. All schedules,
reports and other information and documentation delivered by Borrower to
Lender with respect to the Collateral are, or will be, when delivered, true,
correct and complete as of the date delivered or the date specified therein.
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5.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has
timely filed all tax returns and reports required by applicable law, has
timely paid all applicable taxes, assessments, deposits and contributions
owing by Borrower and will timely pay all such items in the future as they
became due and payable. Borrower may, however, defer payment of any
contested taxes; PROVIDED, that Borrower (i) in good faith contests
Borrower's obligation to pay such taxes by appropriate proceedings promptly
and diligently instituted and conducted; (ii) notifies Lender in writing of
the commencement of, and any material development in, the proceedings; (iii)
posts bonds or takes any other steps required to keep the contested taxes
from becoming a Lien upon any of the Collateral and (iv) maintains adequate
reserves therefor in conformity with GAAP. Borrower is unaware of any claims
or adjustments proposed for any of Borrower's prior tax years which could
result in additional taxes becoming due and payable by Borrower. Borrower
has paid, and shall continue to pay, all amounts necessary to fund all
present and future pension, profit sharing and deferred compensation plans in
accordance with their terms, and Borrower has not withdrawn from
participation in, permitted partial or complete termination of, or permitted
the occurrence of any other event with respect to, any such plan which could
result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or any other governmental agency.
5.9 COMPLIANCE WITH LAWS. Borrower has complied in all material
respects with all provisions of all applicable laws and regulations,
including those relating to Borrower's ownership of real or personal
property, the conduct and licensing of Borrower's business, the payment and
withholding of taxes, ERISA and other employee matters, safety and
environmental matters.
5.10 LITIGATION. Section 9(f) of Schedule A discloses all claims,
proceedings, litigation or investigations pending or (to the best of
Borrower's knowledge) threatened against Borrower. There is no claim, suit,
litigation, proceeding or investigation pending or (to the best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or
before any governmental agency (or any basis therefor known to Borrower)
which may result, either separately or in the aggregate, in any material
adverse change in the financial condition or business of Borrower, or in any
material impairment in the ability of Borrower to carry on its business in
substantially the same manner as it is now being conducted. Borrower will
promptly inform Lender in writing of any claim, proceeding, litigation or
investigation in the future threatened or instituted by or against Borrower.
5.11 USE OF PROCEEDS. All proceeds of all Loans will be used solely for
lawful business purposes.
5.12 INSURANCE. Borrower will at all times carry property, liability
and other insurance, with insurers acceptable to Lender, in such form and
amounts, and with such deductibles and other provisions, as Lender shall
require, and Borrower will provide evidence of such insurance to Lender, so
that Lender is satisfied that such insurance is, at all times, in full force
and effect. Each property insurance policy shall name Lender as loss payee
and shall
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contain a lender's loss payable endorsement in form acceptable to Lender,
each liability insurance policy shall name Lender as an additional insured,
and each business interruption insurance policy shall be collaterally
assigned to Lender, all in form and substance satisfactory to Lender. All
policies of insurance shall provide that they may not be cancelled or changed
without at least thirty days' prior written notice to Lender, shall contain
breach of warranty coverage, and shall otherwise be in form and substance
satisfactory to Lender. Upon receipt of the proceeds of any such insurance,
Lender shall apply such proceeds in reduction of the Obligations as Lender
shall determine in its sole discretion. Borrower will promptly deliver to
Lender copies of all reports made to insurance companies.
5.13 FINANCIAL AND COLLATERAL REPORTS. Borrower has kept and will keep
adequate records and books of account with respect to its business activities
and the Collateral in which proper entries are made in accordance with GAAP
reflecting all its financial transactions, and will cause to be prepared and
furnished to Lender the following (all to be prepared in accordance with
GAAP, unless Borrower's certified public accountants concur in any change
therein and such change is disclosed to Lender):
(a) COLLATERAL REPORTS. On or before the fifteenth day of each
month, an aging of Borrower's Accounts, Chattel Paper and notes receivable,
and weekly Inventory reports, all in such form, and together with such
additional certificates, schedules and other information with respect to the
Collateral or the business of Borrower or any Obligor, as Lender shall
request; PROVIDED, that Borrower's failure to execute and deliver the same
shall not affect or limit Lender's security interests and other rights in any
of the Accounts, nor shall Lender's failure to advance or lend against a
specific Account affect or limit Lender's security interest and other rights
therein. Together with each such schedule, Borrower shall furnish Lender
with copies (or, at Lender's request, originals) of all contracts, orders,
invoices, and other similar documents, and all original shipping
instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Accounts, and Borrower warrants the genuineness of all of the foregoing. In
addition, Borrower shall deliver to Lender the originals of all Instruments,
Chattel Paper, security agreements, guaranties and other documents and
property evidencing or securing any Accounts, immediately upon receipt
thereof and in the same form as received, with all necessary endorsements.
Lender may destroy or otherwise dispose of all documents, schedules and other
papers delivered to Lender pursuant to this Agreement (other than originals
of Instruments, Chattel Paper, security agreements, guaranties and other
documents and property evidencing or securing any Accounts) six months after
Lender receives them, unless Borrower requests their return in writing in
advance and arranges for their return to Borrower at Borrower's expense.
(b) ANNUAL STATEMENTS. Not later than 90 days after the close of
each fiscal year of Borrower, unqualified (except for a qualification for a
change in accounting principles with which the accountant concurs) audited
financial statements of Borrower and its Subsidiaries as of the end of such
year, on a consolidated and consolidating basis, certified by a firm of
independent certified public accountants of recognized standing selected by
Borrower but reasonably acceptable to Lender, together with a copy of any
management letter issued in
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connection therewith and a letter from such accountants acknowledging that
Lender is relying on such financial statements;
(c) INTERIM STATEMENTS. Not later than fifteen days after the end
of each month hereafter, including the last month of Borrower's fiscal year,
unaudited interim financial statements of Borrower and its Subsidiaries as of
the end of such month and of the portion of Borrower's fiscal year then
elapsed, on a consolidated and consolidating basis, certified by the
principal financial officer of Borrower as prepared in accordance with GAAP
and fairly presenting the consolidated financial position and results of
operations of Borrower and its Subsidiaries for such month and period subject
only to changes from audit and year-end adjustments and except that such
statements need not contain notes;
(d) PROJECTIONS, ETC. Such business projections, Availability
projections, business plans, budgets and cash flow statements for Borrower
and its Subsidiaries as Lender shall request from time to time;
(e) SHAREHOLDER REPORTS, ETC. Promptly after the sending or
filing thereof, as the case may be, copies of any proxy statements, financial
statements or reports which Borrower has made available to its shareholders
and copies of any regular, periodic and special reports or registration
statements which Borrower files with the Securities and Exchange Commission
or any governmental authority which may be substituted therefor, or any
national securities exchange;
(f) ERISA REPORTS. Upon request by Lender, copies of any annual
report to be filed pursuant to the requirements of ERISA in connection with
each plan subject thereto; and
(g) OTHER INFORMATION. Such other data and information (financial
and otherwise) as Lender, from time to time, may reasonably request, bearing
upon or related to the Collateral or Borrower's and each of its Subsidiary's
financial condition or results of operations.
5.14 LITIGATION COOPERATION. Should any third-party suit or proceeding
be instituted by or against Lender with respect to any Collateral or in any
manner relating to Borrower, Borrower shall, without expense to Lender, make
available Borrower and its officers, employees and agents, and Borrower's
books and records, without charge, to the extent that Lender may deem them
reasonably necessary in order to prosecute or defend any such suit or
proceeding.
5.15 MAINTENANCE OF COLLATERAL, ETC. Borrower will maintain all of its
Equipment in good working condition, ordinary wear and tear excepted, and
Borrower will not use the Collateral for any unlawful purpose. Borrower will
immediately advise Lender in writing of any material loss or damage to the
Collateral and of any investigation, action, suit, proceeding or claim
relating to the Collateral or which may result in an adverse impact upon
Borrower's business, assets or financial condition.
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5.16 NOTIFICATION OF CHANGES. Borrower will promptly notify Lender in
writing of any change in its officers or directors, the opening of any new
bank account or other deposit account, or any material adverse change in the
business or financial affairs of Borrower or the existence of any
circumstance which would make any representation or warranty of Borrower
untrue in any material respect or constitute a material breach of any
covenant of Borrower.
5.17 FURTHER ASSURANCES. Borrower agrees, at its expense, to take all
actions, and execute or cause to be executed and delivered to Lender all
promissory notes, security agreements, agreements with landlords, mortgagees
and processors and other bailees, subordination and intercreditor agreements
and other agreements, instruments and documents as Lender may request from
time to time, to perfect and maintain Lender's security interests in the
Collateral and to fully effectuate the transactions contemplated by this
Agreement.
5.18 NEGATIVE COVENANTS. Except as set forth in Section 13 of Schedule
A, Borrower will not, without Lender's prior written consent, (i) merge or
consolidate with another Person, form any new Subsidiary or acquire any
interest in any Person; (ii) acquire any assets except in the ordinary course
of business and as otherwise permitted by this Agreement and the other Loan
Documents; (iii) enter into any transaction outside the ordinary course of
business; (iv) sell or transfer any Collateral or other assets, except that
Borrower may sell finished goods Inventory in the ordinary course of its
business; (v) make any loans to, or investments in, any Affiliate or other
Person in the form of money or other assets; (vi) incur any debt outside the
ordinary course of business; (vii) guaranty or otherwise become liable with
respect to the obligations of another party or entity; (viii) pay or declare
any dividends or other distributions on Borrower's stock, if Borrower is a
corporation (except for dividends payable solely in capital stock of
Borrower) or with respect to any equity interests, if Borrower is not a
corporation; (ix) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of Borrower's capital stock or other equity interests; (x)
make any change in Borrower's capital structure; (xi) dissolve or elect to
dissolve; (xii) pay any principal or interest on any indebtedness owing to an
Affiliate, (xiii) enter into any transaction with an Affiliate other than on
arms-length terms; or (xiv) agree to do any of the foregoing.
5.19 FINANCIAL COVENANTS.
(a) CAPITAL EXPENDITURES. Borrower will not expend or commit to
expend, directly or indirectly, for capital expenditures (including capital
lease obligations) in excess of the amount set forth in Section 8(a) of
Schedule A as the Capital Expenditure Limitation in any fiscal year.
(b) NET WORTH. Borrower will at all times maintain a net worth of
at least the amount set forth in Section 8(b) of Schedule A.
(c) TANGIBLE NET WORTH. Borrower will at all times maintain a
minimum tangible net worth of at least the amount set forth in Section 8(c)
of Schedule A.
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(d) WORKING CAPITAL. Borrower will at all times maintain working
capital of at least the amount set forth in Section 8(d) of Schedule A.
(e) NET LOSSES. Borrower will not permit its cumulative net loss
to exceed the amount set forth in Section 8(e) of Schedule A.
(f) NET INCOME. Borrower will not permit its cumulative net
income to be less than the amount set forth in Section 8(f) of Schedule A.
(g) LEVERAGE. Borrower will not permit the ratio of its total
liabilities to its net worth to exceed, at any time, the ratio set forth in
Section 8(g) of Schedule A.
(h) OTHER FINANCIAL COVENANTS. Borrower will comply with any
additional financial covenants set forth in Section 8(j) of Schedule A.
6. RELEASE AND INDEMNITY.
6.1 RELEASE. Borrower hereby releases Lender and its Affiliates and
their respective directors, officers, employees, attorneys and agents and any
other Person affiliated with or representing Lender (the "RELEASED PARTIES")
from any and all liability arising from acts or omissions under or pursuant
to this Agreement, whether based on errors of judgment or mistake of law or
fact, except for those arising from gross negligence or willful misconduct.
However, in no circumstance will any of the Released Parties be liable for
lost profits or other special or consequential damages. Such release is made
on the date hereof and remade upon each request for a Loan or Credit
Accommodation by Borrower. Without limiting the foregoing:
(a) Lender shall not be liable for (i) any shortage or discrepancy
in, damage to, or loss or destruction of, any goods, the sale or other
disposition of which gave rise to an Account; (ii) any error, act, omission,
or delay of any kind occurring in the settlement, failure to settle,
collection or failure to collect any Account; (iii) settling any Account in
good faith for less than the full amount thereof; or (iv) any of Borrower's
obligations under any contract or agreement giving rise to an Account; and
(b) In connection with Credit Accommodations or any underlying
transaction, Lender shall not be responsible for the conformity of any goods
to the documents presented, the validity or genuineness of any documents,
delay, default or fraud by Borrower, shippers and/or any other Person.
Borrower agrees that any action taken by Lender, if taken in good faith, or
any action taken by an issuer of any Credit Accommodation, under or in
connection with any Credit Accommodation, shall be binding on Borrower and
shall not create any resulting liability to Lender. In furtherance thereof,
Lender shall have the full right and authority to clear and resolve any
questions of non-compliance of documents, to give any instructions as to
acceptance or rejection of any documents or goods, to execute for Borrower's
account any and all applications for steamship or airway guaranties,
indemnities or delivery orders, to grant any extensions of the maturity of,
time of payment for, or time of presentation of, any drafts, acceptances or
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documents, and to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of
any of the Credit Accommodations or applications and other documentation
pertaining thereto.
6.2 INDEMNITY. BORROWER HEREBY AGREES TO INDEMNIFY THE RELEASED
PARTIES AND HOLD THEM HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEBTS,
LIABILITIES, DEMANDS, OBLIGATIONS, ACTIONS, CAUSES OF ACTION, PENALTIES,
COSTS AND EXPENSES (INCLUDING ATTORNEYS' FEES), OF EVERY NATURE, CHARACTER
AND DESCRIPTION, WHICH THE RELEASED PARTIES MAY SUSTAIN OR INCUR BASED UPON
OR ARISING OUT OF ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR
THE OTHER LOAN DOCUMENTS OR ANY OF THE OBLIGATIONS, INCLUDING ANY
TRANSACTIONS OR OCCURRENCES RELATING TO THE ISSUANCE OF ANY CREDIT
ACCOMMODATION, THE COLLATERAL RELATING THERETO, ANY DRAFTS THEREUNDER AND ANY
ERRORS OR OMISSIONS RELATING THERETO (INCLUDING ANY LOSS OR CLAIM DUE TO ANY
ACTION OR INACTION TAKEN BY THE ISSUER OF ANY CREDIT ACCOMMODATION) (AND FOR
THIS PURPOSE ANY CHARGES TO LENDER BY ANY ISSUER OF CREDIT ACCOMMODATIONS
SHALL BE CONCLUSIVE AS TO THEIR APPROPRIATENESS AND MAY BE CHARGED TO THE
LOAN ACCOUNT), OR ANY OTHER MATTER, CAUSE OR THING WHATSOEVER OCCURRED, DONE,
OMITTED OR SUFFERED TO BE DONE BY LENDER RELATING TO BORROWER OR THE
OBLIGATIONS (EXCEPT ANY SUCH AMOUNTS SUSTAINED OR INCURRED AS THE RESULT OF
THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE RELEASED PARTIES).
NOTWITHSTANDING ANY PROVISION IN THIS AGREEMENT TO THE CONTRARY, THE
INDEMNITY AGREEMENT SET FORTH IN THIS SECTION SHALL SURVIVE ANY TERMINATION
OF THIS AGREEMENT.
7. TERM.
7.1 MATURITY DATE. Lender's obligation to make Loans and to provide
Credit Accommodations under this Agreement shall initially continue in effect
until the Initial Maturity Date set forth in Section 7 of Schedule A (the
"INITIAL TERM"); PROVIDED, that such date shall automatically be extended
(the Initial Maturity Date, as it may be so extended, being referred to as
the "MATURITY DATE") for successive additional terms of three years each
(each a "RENEWAL TERM"), unless one party gives written notice to the other,
not less than sixty days prior to the Maturity Date, that such party elects
not to extend the Maturity Date. This Agreement and the other Loan Documents
and Lender's security interests in and Liens upon the Collateral, and all
representations, warranties and covenants of Borrower contained herein and
therein, shall remain in full force and effect after the Maturity Date until
all of the monetary Obligations are indefeasibly paid in full.
7.2 EARLY TERMINATION. Lender's obligation to make Loans and to
provide Credit Accommodations under this Agreement may be terminated prior to
the Maturity Date as follows: (i) by Borrower, effective thirty business
days after written notice of termination is given to
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Lender or (ii) by Lender at any time after the occurrence of an Event of
Default, without notice, effective immediately; PROVIDED, that if any
Affiliate of Borrower is also a party to a financing arrangement with Lender,
no such early termination shall be effective unless such Affiliate
simultaneously terminates its financing arrangement with Lender. If so
terminated under this Section 7.2, Borrower shall pay to Lender (i) an early
termination fee (the "EARLY TERMINATION FEE") in the amount set forth in
Section 6(h) of Schedule A plus (ii) any earned but unpaid Facility Fee.
Such fee shall be due and payable on the effective date of termination and
thereafter shall bear interest at a rate equal to the highest rate applicable
to any of the Obligations. In addition, if Borrower so terminates and repays
the Obligations without having provided Lender with at least thirty days'
prior written notice thereof, an additional amount equal to thirty days of
interest at the applicable Interest Rate(s), based on the average outstanding
amount of the Obligations for the six month period immediately preceding the
date of termination.
7.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay in full all Obligations,
whether or not all or any part of such Obligations are otherwise then due and
payable. Without limiting the generality of the foregoing, if, on the
Maturity Date or on any earlier effective date of termination, there are any
outstanding Credit Accommodations, then on such date Borrower shall provide
to Lender cash collateral in an amount equal to 110% of the Credit
Accommodation Balance to secure all of the Obligations (including estimated
attorneys' fees and other expenses) relating to said Credit Accommodations or
such greater percentage or amount as Lender reasonably deems appropriate,
pursuant to a cash pledge agreement in form and substance satisfactory to
Lender.
7.4 EFFECT OF TERMINATION. No termination shall affect or impair any
right or remedy of Lender or relieve Borrower of any of the Obligations until
all of the monetary Obligations have been indefeasibly paid in full. Upon
indefeasible payment and performance in full of all of the monetary
Obligations (and the provision of cash collateral with respect to any Credit
Accommodation Balance as required by Section 7.3) and termination of this
Agreement, Lender shall promptly deliver to Borrower termination statements,
requests for reconveyances and such other documents as may be reasonably
required to terminate Lender's security interests in the Collateral.
8. EVENTS OF DEFAULT AND REMEDIES.
8.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "EVENT OF DEFAULT" under this Agreement, and Borrower
shall give Lender immediate written notice thereof: (i) if any warranty,
representation, statement, report or certificate made or delivered to Lender
by Borrower or any of Borrower's officers, employees or agents is untrue or
misleading; (ii) if Borrower fails to pay when due any principal or interest
on any Loan or any other monetary Obligation; (iii) if Borrower breaches any
covenant or obligation contained in this Agreement or any other Loan Document
or fails to perform any other non-monetary Obligation; (iv) if any levy,
assessment, attachment, seizure, lien or encumbrance (other than a Permitted
Lien) is made or permitted to exist on all or any part of the Collateral; (v)
if one or
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more judgments aggregating in excess of $100,000, or any injunction or
attachment, is obtained against Borrower or any Obligor or which remains
unstayed for more than ten days or is enforced; (vi) the occurrence of any
default under any financing agreement, security agreement or other agreement,
instrument or document executed and delivered by (A) Borrower with, or in
favor of, any Person other than Lender or (B) Borrower or any Affiliate of
Borrower with, or in favor of, Lender or any Affiliate of Lender; (vii) the
dissolution, death, termination of existence in good standing, insolvency or
business failure or suspension or cessation of business as usual of Borrower
or any Obligor (or of any general partner of Borrower or any Obligor if it is
a partnership) or the appointment of a receiver, trustee or custodian for all
or any part of the property of, or an assignment for the benefit of creditors
by Borrower or any Obligor, or the commencement of any proceeding by Borrower
or any Obligor under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect, or if Borrower makes or sends a
notice of a bulk transfer or calls a meeting of its creditors; (viii) the
commencement of any proceeding against Borrower or any Obligor under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; (ix) the actual or attempted revocation or termination of,
or limitation or denial of liability upon, any guaranty of the Obligations,
or any security document securing the Obligations, by any Obligor; (x) if
Borrower makes any payment on account of any indebtedness or obligation which
has been subordinated to the Obligations other than as permitted in the
applicable subordination agreement, or if any Person who has subordinated
such indebtedness or obligations attempts to limit or terminate its
subordination agreement; (xi) if there is any actual indictment of Borrower
or any Obligor under any criminal statute or commencement or threatened
commencement of criminal or civil proceedings against Borrower or any
Obligor, pursuant to which the potential penalties or remedies sought or
available include forfeiture of any property of Borrower or such Obligor;
(xii) if there is a change in the record or beneficial ownership of an
aggregate of more than 50% of the outstanding shares of stock of Borrower (or
partnership or membership interests if it is a partnership or limited
liability company), in one or more transactions, compared to the ownership of
outstanding shares of stock (or partnership or membership interests) of
Borrower as of the date hereof, without the prior written consent of Lender;
(xiii) if there is any change in the chief executive officer of Borrower;
(xiv) if an Event of Default occurs under any Loan and Security Agreement
between Lender and an Affiliate of Borrower; or (xv) if Lender determines in
good faith that the Collateral is insufficient to fully secure the
Obligations or that the prospect of payment of performance of the Obligations
is materially impaired.
8.2 REMEDIES. Upon the occurrence of any Default, and at any time
thereafter, Lender, at its option, may cease making Loans or otherwise
extending credit to Borrower under this Agreement or any other Loan Document.
Upon the occurrence of any Event of Default, and at any time thereafter,
Lender, at its option, and without notice or demand of any kind (all of which
are hereby expressly waived by Borrower), may do any one or more of the
following: (i) cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other Loan Document; (ii) accelerate and declare
all or any part of the Obligations to be immediately due, payable and
performable, notwithstanding any deferred or installment
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payments allowed by any instrument evidencing or relating to any of the
Obligations; (iii) take possession of any or all of the Collateral wherever
it may be found, and for that purpose Borrower hereby authorizes Lender,
without judicial process, to enter onto any of Borrower's premises without
interference to search for, take possession of, keep, store, or remove any of
the Collateral, and remain (or cause a custodian to remain) on the premises
in exclusive control thereof, without charge for so long as Lender deems it
reasonably necessary in order to complete the enforcement of its rights under
this Agreement or any other agreement; PROVIDED, that if Lender seeks to take
possession of any of the Collateral by court process, Borrower hereby
irrevocably waives (A) any bond and any surety or security relating thereto
required by law as an incident to such possession, (B) any demand for
possession prior to the commencement of any suit or action to recover
possession thereof and (C) any requirement that Lender retain possession of,
and not dispose of, any such Collateral until after trial or final judgment;
(iv) require Borrower to assemble any or all of the Collateral and make it
available to Lender at one or more places designated by Lender which are
reasonably convenient to Lender and Borrower, and to remove the Collateral to
such locations as Lender may deem advisable; (v) complete the processing,
manufacturing or repair of any Collateral prior to a disposition thereof and,
for such purpose and for the purpose of removal, Lender shall have the right
to use Borrower's premises, vehicles and other Equipment and all other
property without charge; (vi) sell, lease or otherwise dispose of any of the
Collateral, in its condition at the time Lender obtains possession of it or
after further manufacturing, processing or repair, at one or more public or
private sales, in lots or in bulk, for cash, exchange or other property, or
on credit (a "SALE"), and to adjourn any such Sale from time to time without
notice other than oral announcement at the time scheduled for Sale (and, in
connection therewith, (A) Lender shall have the right to conduct such Sale on
Borrower's premises without charge, for such times as Lender deems
reasonable, on Lender's premises, or elsewhere, and the Collateral need not
be located at the place of Sale; (B) Lender may directly or through any of
its Affiliates purchase or lease any of the Collateral at any such public
disposition, and if permissible under applicable law, at any private
disposition and (C) any Sale of Collateral shall not relieve Borrower of any
liability Borrower may have if any Collateral is defective as to title,
physical condition or otherwise at the time of sale); (vii) demand payment of
and collect any Accounts, Chattel Paper, Instruments and General Intangibles
included in the Collateral and, in connection therewith, Borrower irrevocably
authorizes Lender to endorse or sign Borrower's name on all collections,
receipts, Instruments and other documents, to take possession of and open
mail addressed to Borrower and remove therefrom payments made with respect to
any item of Collateral or proceeds thereof and, in Lender's sole discretion,
to grant extensions of time to pay, compromise claims and settle Accounts,
General Intangibles and the like for less than face value; and (viii) demand
and receive possession of any of Borrower's federal and state income tax
returns and the books and records utilized in the preparation thereof or
relating thereto. In addition to the foregoing remedies, upon the occurrence
of any Event of Default resulting from a breach of any of the financial
covenants set forth in Section 5.19, Lender may, at its option, upon not less
than ten days' prior notice to Borrower, reduce any or all of the Advance
Rates set forth in Section 1(b) of Schedule A to the extent Lender, in its
sole discretion, deems appropriate. In addition to the rights and remedies
set forth above, Lender shall have all the other rights and remedies accorded
a secured party after default under the UCC and under all other applicable
laws, and under any other Loan Document, and all of such rights and remedies
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are cumulative and non-exclusive. Exercise or partial exercise by Lender of
one or more of its rights or remedies shall not be deemed an election or bar
Lender from subsequent exercise or partial exercise of any other rights or
remedies. The failure or delay of Lender to exercise any rights or remedies
shall not operate as a waiver thereof, but all rights and remedies shall
continue in full force and effect until all of the Obligations have been
fully paid and performed. If notice of any sale or other disposition of
Collateral is required by law, notice at least seven days prior to the sale
designating the time and place of sale in the case of a public sale or the
time after which any private sale or other disposition is to be made shall be
deemed to be reasonable notice, and Borrower waives any other notice. If any
Collateral is sold or leased by Lender on credit terms or for future
delivery, the Obligations shall not be reduced as a result thereof until
payment is collected by Lender.
8.3 APPLICATION OF PROCEEDS. Subject to any application required by
law, all proceeds realized as the result of any Sale shall be applied by
Lender to the Obligations in such order as Lender shall determine in its sole
discretion. Any surplus shall be paid to Borrower or other persons legally
entitled thereto; but Borrower shall remain liable to Lender for any
deficiency. If Lender, in its sole discretion, directly or indirectly enters
into a deferred payment or other credit transaction with any purchaser at any
Sale, Lender shall have the option, exercisable at any time, in its sole
discretion, of either reducing the Obligations by the principal amount of the
purchase price or deferring the reduction of the Obligations until the actual
receipt by Lender of the cash therefor.
9. GENERAL PROVISIONS.
9.1 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally, by reputable private delivery
service, by regular first-class mail or certified mail return receipt
requested, addressed to Lender or Borrower at the address shown in the
heading to this Agreement, or by facsimile to the facsimile number shown in
Section 9(i) of Schedule A, or at any other address (or to any other
facsimile number) designated in writing by one party to the other party in
the manner prescribed in this Section 9.1. All notices shall be deemed to
have been given when received or when delivery is refused by the recipient.
9.2 SEVERABILITY. If any provision of this Agreement, or the
application thereof to any party or circumstance, is held to be void or
unenforceable by any court of competent jurisdiction, such defect shall not
affect the remainder of this Agreement, which shall continue in full force
and effect.
9.3 INTEGRATION. This Agreement and the other Loan Documents represent
the final, entire and complete agreement between Borrower and Lender and
supersede all prior and contemporaneous negotiations, oral representations
and agreements, all of which are merged and integrated into this Agreement.
THERE ARE NO ORAL UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE
PARTIES WHICH ARE NOT SET FORTH IN THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS.
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9.4 WAIVERS. The failure of Lender at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or
any other Loan Documents shall not waive or diminish any right of Lender
later to demand and receive strict compliance therewith. Any waiver of any
default shall not waive or affect any other default, whether prior or
subsequent, and whether or not similar. None of the provisions of this
Agreement or any other Loan Document shall be deemed to have been waived by
any act or knowledge of Lender or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Lender and
delivered to Borrower. Borrower waives demand, protest, notice of protest
and notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
Instrument, Account, General Intangible, Document, Chattel Paper, Investment
Property or guaranty at any time held by Lender on which Borrower is or may
in any way be liable, and notice of any action taken by Lender, unless
expressly required by this Agreement, and notice of acceptance hereof.
9.5 AMENDMENT. The terms and provisions of this Agreement may not be
amended or modified except in a writing executed by Borrower and a duly
authorized officer of Lender.
9.6 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement and the other Loan
Documents.
9.7 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Lender for all
reasonable attorneys' and paralegals' fees (including in-house attorneys and
paralegals employed by Lender) and all filing, recording, search, title
insurance, appraisal, audit, and other costs incurred by Lender, pursuant to,
in connection with, or relating to this Agreement, including all reasonable
attorneys' fees and costs Lender incurs to prepare and negotiate this
Agreement and the other Loan Documents; to obtain legal advice in connection
with this Agreement and the other Loan Documents or Borrower or any Obligor;
to administer this Agreement and the other Loan Documents (including the cost
of periodic financing statement, tax lien and other searches conducted by
Lender); to enforce, or seek to enforce, any of its rights; prosecute actions
against, or defend actions by, Account Debtors; to commence, intervene in, or
defend any action or proceeding; to initiate any complaint to be relieved of
the automatic stay in bankruptcy; to file or prosecute any probate claim,
bankruptcy claim, third-party claim, or other claim; to examine, audit, copy,
and inspect any of the Collateral or any of Borrower's books and records; to
protect, obtain possession of, lease, dispose of, or otherwise enforce
Lender's security interests in, the Collateral; and to otherwise represent
Lender in any litigation relating to Borrower. If either Lender or Borrower
files any lawsuit against the other predicated on a breach of this Agreement,
the prevailing party in such action shall be entitled to recover its
reasonable costs and attorneys' fees, including reasonable attorneys' fees
and costs incurred in the enforcement of, execution upon or defense of any
order, decree, award or judgment. All attorneys' fees and costs to which
Lender may be entitled pursuant to this Section shall immediately become part
of the Obligations, shall be due on demand, and shall bear interest at a rate
equal to the highest interest rate applicable to any of the Obligations.
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9.8 BENEFIT OF AGREEMENT; ASSIGNABILITY. The provisions of this
Agreement shall be binding upon and inure to the benefit of the respective
successors, assigns, heirs, beneficiaries and representatives of Borrower and
Lender; PROVIDED, that Borrower may not assign or transfer any of its rights
under this Agreement without the prior written consent of Lender, and any
prohibited assignment shall be void. No consent by Lender to any assignment
shall release Borrower from its liability for any of the Obligations. Lender
shall have the right to assign all or any of its rights and obligations under
the Loan Documents, and to sell participating interests therein, to one or more
other Persons, and Borrower agrees to execute all agreements, instruments and
documents requested by Lender in connection with each such assignment and
participation.
9.9 HEADINGS; CONSTRUCTION. Section and subsection headings are used in
this Agreement only for convenience. Borrower and Lender acknowledge that the
headings may not describe completely the subject matter of the applicable
Sections or subsections, and the headings shall not be used in any manner to
construe, limit, define or interpret any term or provision of this Agreement.
This Agreement has been fully reviewed and negotiated between the parties and
no uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against Lender or Borrower under any rule of construction or
otherwise.
9.10 GOVERNING LAW; CONSENT TO FORUM, ETC. THIS AGREEMENT HAS BEEN
NEGOTIATED, EXECUTED AND DELIVERED, AND SHALL BE DEEMED TO HAVE BEEN MADE, IN
NEW YORK, NEW YORK, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF SUCH STATE. BORROWER HEREBY CONSENTS AND AGREES THAT THE STATE AND
FEDERAL COURTS IN NEW YORK, NEW YORK OR THE STATE IN WHICH ANY OF THE
COLLATERAL IS LOCATED SHALL HAVE NON-EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS
AGREEMENT, ANY OTHER LOAN DOCUMENTS OR ANY MATTER ARISING OUT OF OR RELATED TO
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS. BORROWER EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. BORROWER ALSO
AGREES THAT ANY CLAIM OR DISPUTE BROUGHT BY BORROWER AGAINST LENDER PURSUANT TO
THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY MATTER ARISING OUT OF THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT EXCLUSIVELY IN THE STATE
AND FEDERAL COURTS OF NEW YORK. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE
SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND
AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE IN
THE MANNER AND SHALL BE DEEMED RECEIVED AS SET FORTH IN SECTION 9.1 FOR
NOTICES, TO THE EXTENT PERMITTED BY LAW. NOTHING IN THIS
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AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE
ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE
TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE THE SAME IN ANY OTHER
APPROPRIATE FORUM OR JURISDICTION.
9.11 WAIVER OF JURY TRIAL, ETC. BORROWER WAIVES (i) THE RIGHT TO TRIAL BY
JURY (WHICH LENDER ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM
OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE
OBLIGATIONS OR THE COLLATERAL OR ANY CONDUCT, ACTS OR OMISSIONS OF LENDER OR
BORROWER OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS
OR AGENTS OR ANY OTHER PERSONS AFFILIATED WITH LENDER OR BORROWER, WHETHER
SOUNDING IN CONTRACT, TORT OR OTHERWISE; (ii) THE RIGHT TO INTERPOSE ANY
CLAIMS, DEDUCTIONS, SETOFFS OR COUNTERCLAIMS OF ANY KIND IN ANY ACTION OR
PROCEEDING INSTITUTED BY LENDER WITH RESPECT TO THE LOAN DOCUMENTS OR ANY
MATTER RELATING THERETO, EXCEPT FOR COMPULSORY COUNTERCLAIMS; (iii) NOTICE
PRIOR TO LENDER'S TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR
SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO
EXERCISE ANY OF LENDER'S REMEDIES AND (iv) THE BENEFIT OF ALL VALUATION,
APPRAISEMENT AND EXEMPTION LAWS. BORROWER ACKNOWLEDGES THAT THE FOREGOING
WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND
THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH
BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING
WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS
JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
9.12 NONAPPLICABILITY OF ARTICLE 5069-15.01 ET SEQ. Borrower and Lender
hereby agree that, except for Section 15.10(b) thereof, the provisions of Tex.
Rev. Civ. Stat. Ann. art. 5069-15.01 ET SEQ. (Vernon 1987) (regulating certain
revolving credit loans and revolving tri-party accounts) shall not apply to
this Agreement or any of the other Loan Documents.
9.13 WAIVER OF CONSUMER RIGHTS. BORROWER HEREBY WAIVES ITS RIGHTS UNDER
THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41 ET. SEQ.
BUSINESS & COMMERCIAL CODE, A LAW THAT GIVE CONSUMERS SPECIAL RIGHTS AND
PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF THE BORROWER'S OWN
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SELECTION, THE BORROWER VOLUNTARILY CONSENTS TO THIS WAIVER. BORROWER
EXPRESSLY WARRANTS AND REPRESENTS THAT THE BORROWER (A) IS NOT IN A
SIGNIFICANTLY DISPARATE BARGAINING POSITION RELATIVE TO THE LENDER, AND (B) HAS
BE REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH THE TRANSACTIONS
CONTEMPLATED BY THE AGREEMENT.
BORROWER HAS READ AND UNDERSTANDS SECTION 9.13:
/s/ jod (INITIALS OF OFFICER OF TANISYS)
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/s/ jod (INITIALS OF OFFICER OF TECH)
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/s/ jod (INITIALS OF OFFICER OF DARKHORSE)
-----------------
9.14 ORAL AGREEMENTS. THE WRITTEN LOAN AGREEMENTS REPRESENT THE FINAL
AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Borrower and Lender have signed this Agreement as of
the date set forth in the heading.
BORROWER: LENDER:
TANISYS TECHNOLOGY, INC., NATIONSCREDIT COMMERCIAL
a Wyoming corporation CORPORATION, THROUGH ITS
NATIONSCREDIT COMMERCIAL
FUNDING DIVISION
By /s/ Joe O. Davis
------------------------------
Its Chief Financial Officer By /s/ Robert Bellish
------------------------------ -----------------------------------
Its Authorized Signatory
1ST TECH CORPORATION,
a Delaware corporation
By /s/ Joe O. Davis
------------------------------
Its Chief Financial Officer
DARKHORSE SYSTEMS, INC.,
a Delaware corporation
By /s/ Joe O. Davis
------------------------------
Its Chief Financial Officer
------------------------------
26
<PAGE>
SCHEDULE A
DESCRIPTION OF CERTAIN TERMS
This Schedule is an integral part of the Loan and Security Agreement by
and among TANISYS TECHNOLOGY, INC., 1ST TECH CORPORATION, DARKHORSE SYSTEMS,
INC. and NATIONSCREDIT COMMERCIAL CORPORATION, THROUGH ITS NATIONSCREDIT
COMMERCIAL FUNDING DIVISION (the "AGREEMENT").
1. Loan Limits for Revolving
Loans:
(a) Maximum Facility Amount: Eight Million Five Hundred Thousand
Dollars ($8,500,000)
(b) Advance Rates:
(i) Accounts Advance Rate: eighty-five percent (85%); PROVIDED,
that if the Dilution Percentage
exceeds five percent (5%), such
advance rate will be reduced by the
number of full or partial percentage
points of such excess
(ii) Inventory Advance Rate(s):
(A) Eligible Inventory
consisting of DRAMS and
SRAMs: sixty percent (60%)
(B) Eligible Inventory
consisting of printed
circuit boards (other
than DRAMs and SRAMs)
that a customer of
Borrower has a contractual
obligation to purchase
from Borrower if such
contract is terminated
or such printed circuit
boards become obsolete: fifty percent (50%)
(C) All other Eligible
Inventory: forty percent (40%)
(c) Accounts Sublimit: N/A
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(d) Inventory Sublimit: The lesser of: (i) Two Million
Dollars ($2,000,000), (ii) the sum
of (x) eighty percent (80%) of the
appraised orderly liquidation value
of Eligible Inventory consisting of
DRAMs and SRAMs, PLUS (y) seventy
percent (70%) of the orderly
liquidation value of Eligible
Inventory consisting of printed
circuit boards (other than DRAMs and
SRAMs) that a customer of Borrower
has a contractual obligation to
purchase from Borrower if such
contract is terminated or such
printed circuit boards become
obsolete, PLUS (z) sixty percent
(60%) of appraised orderly
liquidation value of all other
Eligible Inventory. Orderly
liquidation value shall be
determined by an independant
appraiser acceptable to Lender on
a semi-annual basis. The costs of
such appraisal shall be paid by
Borrower in accordance with the
terms hereof.
(e) Credit Accommodation Limit: One Million One Hundred Thousand
Dollars ($1,100,000)
(f) Permanent Reserve
Amount: N/A
(g) Overadvance Amount: N/A
2. Loan Limits for Term Loan:
(a) Principal Amount: Two Hundred Twenty-One Thousand
Dollars ($221,000)
(b) Repayment Schedule: The Term Loan shall be repaid in
equal consecutive monthly
installments amortized over sixty
(60) months payable on the first
day of each calendar month commencing
August 1, 1997, with the entire
unpaid balance due and payable on the
Maturity Date
3. Interest Rates:
(a) Revolving Loans: Two percent (2%) per annum in
excess of the Prime Rate
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<PAGE>
(b) Term Loan: Two percent (2%) per annum in excess
of the Prime Rate
4. Minimum Loan Amount: Four Million Dollars ($4,000,000)
5. Maximum days after original
INVOICE DATE for Eligible
Accounts: Ninety (90) days
6. Fees:
(a) Closing Fee: Eighty-Five Thousand Dollars
($85,000), Forty-Two Thousand Five
Hundred Dollars ($42,500) of which
was paid to Lender upon execution of
the commitment letter.
(b) Facility Fee:
(i) Initial Term: One Hundred Seventy Thousand Dollars
($170,000)
(ii) Renewal Term: Two Hundred Fifty-Five Thousand
Dollars ($255,000)
(c) Early Termination Fee: If terminated during the first year
of this Agreement, Fifty percent
(50%) of the average monthly interest
(in no event less than interest on
the Minimum Loan Amount) and fees
payable by Borrower to Lender for the
immediately preceding six (6) months
or from the date of the Agreement,
whichever is the shorter period,
multiplied by (i) the number of full
or partial months remaining prior to
the Maturity Date (if Borrower's
written notice of termination is
received by Lender or termination by
Lender is effective more than thirty
(30) days prior to the Maturity Date
or (ii) the number of full or partial
months remaining prior to the
Maturity Date plus twenty-four (24)
if Borrower's written notice of
termination is received by Lender or
termination by Lender is effective
thirty (30) days or less prior to the
Maturity Date. For purposes of
calculating the early termination
fee, in no event will the average
monthly interest be less than the
minimum
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<PAGE>
monthly interest payable pursuant to
Section 2.1 of the Agreement.
If terminated during the second year
of this Agreement, three percent (3%)
of the Maximum Facility Amount.
If terminated during the third year
of this Agreement, two percent (2%)
of the Maximum Facility Amount.
Notwithstanding the foregoing, if the
Borrower obtains replacement
financing from NationsBank of Texas,
N.A. for the facility provided for
herein after the first eighteen (18)
months of the term of this Agreement,
such Early Termination Fee shall not
apply.
(d) Fees for letters of credit Two percent (2%) per annum of the
and other Credit the face amount of each open
Accommodations (or Credit Accommodation, plus
guaranties thereof by all costs and fees charged by
Lender): the issuer.
(e) Warrants: Lender shall receive warrants to
purchase Sixty-Five Thousand (65,000)
shares of the common stock of
Tanisys. Such warrants shall be
exercisable by Lender at an exercise
price equal to one hundred five
percent (105%) of the value of the
common stock of Tanisys on the date
hereof. All such options shall be
exercisable for five (5) years.
(f) Minimum Loan Fee: Borrower shall pay to Lender monthly
a minimum loan fee at a rate equal to
two percent (2%) per annum in excess
of the Prime Rate calculated upon the
amount by which Four Million Dollars
($4,000,000) exceeds the average
monthly principal balance of the
outstanding Revolving Loans and
Credit Accomodations at the end of
the immediately preceding month (or
part thereof) while this Agreement
is in effect and for so long
thereafter as any of the Obligations
are outstanding, which fee shall be
payable on the first day of each
month in arrears.
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<PAGE>
7. Initial Maturity Date: July 24, 2000
8. Financial Covenants:
(a) Capital Expenditure N/A
Limitation:
(b) Minimum Net Worth N/A
Requirement:
(c) Minimum Tangible Net N/A
Worth:
(d) Minimum Working N/A
Capital:
(e) Maximum Cumulative Net N/A
Loss:
(f) Minimum Cumulative Net N/A
Income:
(g) Maximum Leverage Ratio: N/A
(h) Limitation on Purchase N/A
Money Security Interests:
(i) Limitation on Equipment N/A
Leases:
(j) Additional Financial N/A
Covenants:
9. Borrower Information:
(a) Prior Names of Borrower: See SCHEDULE 9 attached hereto
(b) Prior Trade Names of Borrower: See SCHEDULE 9 attached hereto
(c) Existing Trade Names of
Borrower: 1st Tech
Dark Horse
Rosetta Marketing and Sales
(d) Inventory Locations: See SCHEDULE 9 attached hereto
(e) Other Locations: See SCHEDULE 9 attached hereto
(f) Litigation: See SCHEDULE 9 attached hereto
(g) Ownership of Borrower: See SCHEDULE 9 attached hereto
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<PAGE>
(h) Subsidiaries (and See SCHEDULE 9 attached hereto
ownership thereof):
(i) Facsimile Numbers:
Borrower: (512) 257-5089
Lender: (212) 597-1666
10 Description of Real Property: None.
11 Lender's Bank: The First National Bank of
Chicago/NBD
12 Other Covenants: None.
13 Exceptions to Negative Covenants: None.
[Remainder of page intentionally left blank.]
A-6
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have signed this Schedule A as of
the date set forth in the heading to the Agreement.
BORROWER: LENDER:
TANISYS TECHNOLOGY, INC., NATIONSCREDIT COMMERCIAL CORPORATION,
a Wyoming corporation THROUGH ITS NATIONSCREDIT COMMERCIAL
FUNDING DIVISION
By /s/ Joe O. Davis By /s/ Robert Bellish
--------------------------- --------------------------------------
Its Chief Financial Officer Its Authorized Signatory
-----------------------
1ST TECH CORPORATION,
a Delaware corporation
By /s/ Joe O. Davis
----------------------------
Its Chief Financial Officer
------------------------
DARKHORSE SYSTEMS, INC.,
a Delaware corporation
By /s/ Joe O. Davis
----------------------------
Its Chief Financial Officer
------------------------
A-7
<PAGE>
SCHEDULE B
DEFINITIONS
This Schedule is an integral part of the Loan and Security Agreement by
and among TANISYS TECHNOLOGY, INC., 1ST TECH CORPORATION, DARKHORSE SYSTEMS,
INC. and NATIONSCREDIT COMMERCIAL CORPORATION, THROUGH ITS NATIONSCREDIT
COMMERCIAL FUNDING DIVISION (the "AGREEMENT").
As used in the Agreement, the following terms have the following meanings:
"ACCOUNT" means any right to payment for Goods sold or leased or for
services rendered which is not evidenced by an Instrument or Chattel Paper,
whether or not it has been earned by performance.
"ACCOUNT DEBTOR" means the obligor on an Account or Chattel Paper.
"ACCOUNT PROCEEDS" has the meaning set forth in Section 4.1.
"AFFILIATE" means, as to any specified Person, any other Person that,
directly or indirectly through one or more intermediaries or otherwise,
controls, is controlled by or is under common control with the specified
Person. As used in this definition, "control" means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
or policies of a Person (whether through ownership of capital stock of that
Person, by contract or otherwise).
"AGREEMENT" and "THIS AGREEMENT" mean the Loan and Security Agreement
of which this Schedule B is a part and the Schedules thereto.
"AVAILABILITY" has the meaning set forth in Section 1.1(a)
"BANKRUPTCY CODE" means the United States Bankruptcy Code (11 U.S.C.
Section 101 ET SEQ.).
"BLOCKED ACCOUNT" has the meaning set forth in Section 4.1.
"BORROWER" has the meaning set forth in the heading to the Agreement.
"BORROWER'S ADDRESS" has the meaning set forth in the heading to the
Agreement.
"BUSINESS DAY" means a day other than a Saturday or Sunday or any
other day on which Lender or banks in New York are authorized to close.
"CHATTEL PAPER" has the meaning set forth in the UCC.
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<PAGE>
"COLLATERAL" means all property and interests in property in or upon
which a security interest or other Lien is granted pursuant to this Agreement
or the other Loan Documents.
"CREDIT ACCOMMODATION" has the meaning set forth in Section 1.1(a).
"CREDIT ACCOMMODATION BALANCE" means the sum of (i) the aggregate
undrawn face amount of all outstanding Credit Accommodations and (ii) all
interest, fees and costs due or, in Lender's estimation, likely to become due
in connection therewith.
"DRAM" means Dynamic Random Access Memory semiconductor devices.
"DARKHORSE" has the meaning set forth in the heading to the
Agreement.
"DEFAULT" means any event which with notice or passage of time, or
both, would constitute an Event of Default.
"DEFAULT RATE" has the meaning set forth in Section 2.1.
"DEPOSIT ACCOUNT" has the meaning set forth in the UCC.
"DILUTION PERCENTAGE" means the gross amount of all returns,
allowances, discounts, credits, write-offs and similar items relating to
Borrower's Accounts computed as a percentage of Borrower's gross sales,
calculated on a ninety (90) day rolling average.
"DOCUMENT" has the meaning set forth in the UCC.
"EARLY TERMINATION FEE" has the meaning set forth in Section 7.2.
"ELIGIBLE ACCOUNT" means, at any time of determination, an Account
which satisfies the general criteria set forth below and which is otherwise
acceptable to Lender (PROVIDED, that Lender may, in its sole discretion, change
the general criteria for acceptability of Eligible Accounts upon at least
fifteen days' prior notice to Borrower). An Account shall be deemed to meet
the current general criteria if (i) neither the Account Debtor nor any of its
Affiliates is an Affiliate, creditor or supplier of Borrower; (ii) it does not
remain unpaid more than the earlier to occur of (A) the number of days after
the original INVOICE DATE set forth in Section 5(a) of Schedule A or (B) the
number of days after the original INVOICE DUE DATE set forth in Section 5(b) of
Schedule A; (iii) the Account Debtor or its Affiliates are not past due on
other Accounts owing to Borrower comprising more than 25% of all of the
Accounts owing to Borrower by such Account Debtor or its Affiliates; (iv) all
Accounts owing by the Account Debtor or its Affiliates do not represent more
than 20% of all otherwise Eligible Accounts (PROVIDED, that Accounts which are
deemed to be ineligible solely by reason of this clause (iv) shall be
considered Eligible Accounts to the extent of the amount thereof which does not
exceed 20% of all otherwise Eligible Accounts); (v) no covenant, representation
or warranty contained
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<PAGE>
in this Agreement with respect to such Account (including any of the
representations set forth in Section 5.4) has been breached; (vi) the Account
is not subject to any contra relationship, counterclaim, dispute or set-off
(PROVIDED, that Accounts which are deemed to be ineligible solely by reason
of this clause (vi) shall be considered Eligible Accounts to the extent of
the amount thereof which is not affected by such contra relationships,
counterclaims, disputes or set-offs); (vii) the Account Debtor's chief
executive office or principal place of business is located in the United
States or Provinces of Canada which have adopted the Personal Property
Security Act or a similar act, unless (A) the sale is fully backed by a
letter of credit, guaranty or acceptance acceptable to Lender in its sole
discretion, and if backed by a letter of credit, such letter of credit has
been issued or confirmed by a bank satisfactory to Lender, is sufficient to
cover such Account, and if required by Lender, the original of such letter of
credit has been delivered to Lender or Lender's agent and the issuer thereof
notified of the assignment of the proceeds of such letter of credit to Lender
or (B) such Account is subject to credit insurance payable to Lender issued
by an insurer and on terms and in an amount acceptable to Lender; (viii) it
is absolutely owing to Borrower and does not arise from a sale on a
bill-and-hold, guarantied sale, sale-or-return, sale-on-approval, consignment,
retainage or any other repurchase or return basis or consist of progress
billings; (ix) Lender shall have verified the Account in a manner satisfactory
to Lender; (x) the Account Debtor is not the United States of America or any
state or political subdivision (or any department, agency or instrumentality
thereof), unless Borrower has complied with the Assignment of Claims Act of
1940 (31 U.S.C. Section 203 et seq.) or other applicable similar state or
local law in a manner satisfactory to Lender; (xi) it is at all times subject
to Lender's duly perfected, first priority security interest and to no other
Lien that is not a Permitted Lien, and the goods giving rise to such Account
(A) were not, at the time of sale, subject to any Lien except Permitted Liens
and (B) have been delivered to and accepted by the Account Debtor, or the
services giving rise to such Account have been performed by Borrower and
accepted by the Account Debtor; (xii) the Account is not evidenced by Chattel
Paper or an Instrument of any kind and has not been reduced to judgment;
(xiii) the Account Debtor's total indebtedness to Borrower does not exceed
the amount of any credit limit established by Borrower or Lender and the
Account Debtor is otherwise deemed to be creditworthy by Lender (PROVIDED,
that Accounts which are deemed to be ineligible solely by reason of this
clause (xiii) shall be considered Eligible Accounts to the extent the amount
of such Accounts does not exceed the lower of such credit limits); (xiv)
there are no facts or circumstances existing, or which could reasonably be
anticipated to occur, which might result in any adverse change in the Account
Debtor's financial condition or impair or delay the collectibility of all or
any portion of such Account; (xv) Lender has been furnished with all
documents and other information pertaining to such Account which Lender has
requested, or which Borrower is obligated to deliver to Lender, pursuant to
this Agreement; (xvi) Borrower has not made an agreement with the Account
Debtor to extend the time of payment thereof beyond the time periods set
forth in clause (ii) above; and (xvii) Borrower has not posted a surety or
other bond in respect of the contract under which such Account arose.
"ELIGIBLE EQUIPMENT" means, at any time of determination, Equipment
owned by Borrower which Lender, in its sole discretion, deems to be eligible
for borrowing purposes.
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<PAGE>
"ELIGIBLE INVENTORY" means, at any time of determination, Inventory
(other than packaging materials and supplies) which satisfies the general
criteria set forth below and which is otherwise acceptable to Lender (PROVIDED,
that Lender may, in its sole discretion, change the general criteria for
acceptability of Eligible Inventory upon at least fifteen days' prior written
notice to Borrower). Inventory shall be deemed to meet the current general
criteria if (i) it consists of raw materials or finished goods, or
work-in-process that is readily marketable in its current form; (ii) it is in
good, new and saleable condition; (iii) it is not slow-moving, obsolete,
unmerchantable, returned or repossessed; (iv) it is not in the possession of a
processor, consignee or bailee, or located on premises leased or subleased to
Borrower, or on premises subject to a mortgage in favor of a Person other than
Lender, unless such processor, consignee, bailee or mortgagee or the lessor or
sublessor of such premises, as the case may be, has executed and delivered all
documentation which Lender shall require to evidence the subordination or other
limitation or extinguishment of such Person's rights with respect to such
Inventory and Lender's right to gain access thereto; (v) it meets all standards
imposed by any governmental agency or authority; (vi) it conforms in all
respects to any covenants, warranties and representations set forth in the
Agreement; (vii) it is at all times subject to Lender's duly perfected, first
priority security interest and no other Lien except a Permitted Lien; and
(viii) it is situated at an Inventory Location listed in Section 9(d) of
Schedule A or other location of which Lender has been notified as required by
Section 5.6.
"EQUIPMENT" means all Goods which are used or bought for use
primarily in business (including farming or a profession) or by a Person who is
a non-profit organization or governmental subdivision or agency and which are
not Inventory, farm products or consumer goods, including all machinery, molds,
machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dies and jigs, and all attachments,
accessories, accessions, replacements, substitutions, additions or improvements
to, or spare parts for, any of the foregoing.
"EQUIPMENT ADVANCE" has the meaning set forth in Section 1.1(b).
"ERISA" means the Employee Retirement Income Security Act of 1974 and
all rules, regulations and orders promulgated thereunder.
"EVENT OF DEFAULT" has the meaning set forth in Section 8.1.
"EXCESS" has the meaning set forth in Section 2.1.
"GAAP" means generally accepted accounting principles as in effect
from time to time, consistently applied.
"GENERAL INTANGIBLES" has the meaning set forth in the UCC, and
includes all books and records pertaining to the Collateral and other business
and financial records in the possession of Borrower or any other Person,
inventions, designs, drawings, blueprints, patents, patent applications,
trademarks, trademark applications (other than "intent to use" applications
until a verified statement of use is filed with respect to such applications)
and the goodwill of the
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business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, causes of action and other rights in all litigation presently
or hereafter pending for any cause or claim (whether in contract, tort or
otherwise), and all judgments now or hereafter arising therefrom, rights to
purchase or sell real or personal property, rights as a licensor or licensee
of any kind, royalties, telephone numbers, internet addresses, proprietary
information, purchase orders, and all insurance policies and claims
(including life insurance, key man insurance, credit insurance, liability
insurance, property insurance and other insurance), tax refunds and claims,
letters of credit, banker's acceptances and guaranties, computer programs,
discs, tapes and tape files in the possession of Borrower or any other
Person, claims under guaranties, security interests or other security held by
or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature.
"GOODS" means all things which are movable at the time the security
interest attaches or which are fixtures (other than money, Documents,
Instruments, Investment Property, Accounts, Chattel Paper, General Intangibles,
or minerals or the like (including oil and gas) before extraction), including
standing timber which is to be cut and removed under a conveyance or contract
for sale, the unborn young of animals, and growing crops.
"INITIAL TERM" has the meaning set forth in Section 7.1.
"INSTRUMENT" has the meaning set forth in the UCC.
"INVENTORY" means all Goods held for sale or lease or furnished or to
be furnished under contracts of service, including all raw materials, work in
process, finished goods, goods in transit and materials and supplies which are
or might be used or consumed in a business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such
Goods, and all products of the foregoing, and shall include interests in goods
represented by Accounts, returned, reclaimed or repossessed goods and rights as
an unpaid vendor.
"INVESTMENT PROPERTY" shall mean all of Borrower's securities,
whether certificated or uncertificated, securities entitlements, securities
accounts, commodity contracts and commodity accounts.
"LENDER" has the meaning set forth in the heading to the Agreement.
"LIEN" means any interest in property securing an obligation owed to,
or a claim by, a Person other than the owner of the property, whether such
interest is based on common law, statute or contract, including rights of
sellers under conditional sales contracts or title retention agreements and
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases and other title exceptions and encumbrances
affecting property. For the purpose of this Agreement, Borrower shall be
deemed to be the owner of any property which it has acquired or holds subject
to a conditional sale agreement or other arrangement pursuant to which title to
the property has been retained by or vested in some other Person for security
purposes.
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"LOAN ACCOUNT" has the meaning set forth in Section 2.4.
"LOAN DOCUMENTS" means the Agreement and all notes, guaranties,
security agreements, certificates, landlord's agreements, Lock Box and Blocked
Account agreements and all other agreements, documents and instruments now or
hereafter executed or delivered by Borrower or any Obligor in connection with,
or to evidence the transactions contemplated by, this Agreement.
"LOAN LIMITS" means, collectively, the Availability limits and all
other limits on the amount of Loans and Credit Accommodations set forth in this
Agreement.
"LOANS" means, collectively, the Revolving Loans and any Term Loan.
"LOCK BOX" has the meaning set forth in Section 4.1.
"MATURITY DATE" has the meaning set forth in Section 7.1.
"MAXIMUM LEGAL RATE" has the meaning set forth in Section 2.1.
"OBLIGATIONS" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Lender, whether evidenced by this Agreement or any
other Loan Document, whether arising from an extension of credit, opening of a
Credit Accommodation, guaranty, indemnification or otherwise (including all
fees, costs and other amounts which may be owing to issuers of Credit
Accommodations and all taxes, duties, freight, insurance, costs and other
expenses, costs or amounts payable in connection with Credit Accommodations or
the underlying goods), whether direct or indirect (including those acquired by
assignment and any participation by Lender in Borrower's indebtedness owing to
others), whether absolute or contingent, whether due or to become due, and
whether arising before or after the commencement of a proceeding under the
Bankruptcy Code or any similar statute, including all interest, charges,
expenses, fees, attorney's fees, expert witness fees, audit fees, letter of
credit fees, loan fees, Early Termination Fees, Minimum Borrowing Fees and any
other sums chargeable to Borrower under this Agreement or under any other Loan
Document.
"OBLIGOR" means any guarantor, endorser, acceptor, surety or other
person liable on, or with respect to, the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
"PERMITTED LIENS" means: (i) purchase money security interests in
specific items of Equipment in an aggregate amount not to exceed the limit set
forth in Section 8(h) of Schedule A; (ii) leases of specific items of Equipment
in an aggregate amount not to exceed the limit set forth in Section 8(i) of
Schedule A; (iii) Liens for taxes not yet due and payable; (iv) additional
Liens which are fully subordinate to the security interests of Lender and are
consented to in writing by Lender; (v) security interests being terminated
concurrently with the
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execution of this Agreement; (vi) Liens of materialmen, mechanics,
warehousemen or carriers arising in the ordinary course of business and
securing obligations which are not delinquent; (vii) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clause (i) or (ii) above; PROVIDED,
that any extension, renewal or replacement Lien is limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness
being extended, renewed or refinanced does not increase; (viii) Liens in
favor of customs and revenue authorities which secure payment of customs
duties in connection with the importation of goods; and (ix) security
deposits posted in connection with real property leases or subleases. Lender
will have the right to require, as a condition to its consent under clause
(iv) above, that the holder of the additional Lien sign an intercreditor
agreement in form and substance satisfactory to Lender, in its sole
discretion, acknowledging that the Lien is subordinate to the security
interests of Lender, and agreeing not to take any action to enforce its
subordinate Lien so long as any Obligations remain outstanding, and that
Borrower agree that any uncured default in any obligation secured by the
subordinate Lien shall also constitute an Event of Default under this
Agreement.
"PERSON" means any individual, sole proprietorship, partnership,
joint venture, limited liability company, trust, unincorporated organization,
association, corporation, government or any agency or political division
thereof, or any other entity.
"PRIME RATE" means, at any given time, the prime rate as quoted in
THE WALL STREET JOURNAL as the base rate on corporate loans posted as of such
time by at least 75% of the nation's 30 largest banks (which rate is not
necessarily the lowest rate offered by such banks).
"RELEASED PARTIES" has the meaning set forth in Section 6.1.
"RENEWAL TERM" has the meaning set forth in Section 7.1.
"RESERVES" has the meaning set forth in Section 1.2.
"REVOLVING LOANS" has the meaning set forth in Section 1.1(b).
"SRAM" means Static Random Access Memory semiconductor devices.
"SALE" has the meaning set forth in Section 8.2.
"SUBSIDIARY" means any corporation or other entity of which a Person
owns, directly or indirectly, through one or more intermediaries, more than 50%
of the capital stock or other equity interest at the time of determination.
"TANISYS" has the meaning set forth in the introduction to the
Agreement.
"TECH" has the meaning set forth in the introduction to the
Agreement.
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"TERM" means the period commencing on the date of this Agreement and
ending on the Maturity Date.
"TERM LOAN" has the meaning set forth in Section 1.1(b).
"UCC" means, at any given time, the Uniform Commercial Code as
adopted and in effect at such time in the State of New York.
All accounting terms used in this Agreement, unless otherwise indicated,
shall have the meanings given to such terms in accordance with GAAP. All other
terms contained in this Agreement, unless otherwise indicated, shall have the
meanings provided by the UCC, to the extent such terms are defined therein.
The term "INCLUDING," whenever used in this Agreement, shall mean "including
but not limited to." The singular form of any term shall include the plural
form, and vice versa, when the context so requires. References to Sections,
subsections and Schedules are to Sections and subsections of, and Schedules to,
this Agreement. All references to agreements and statutes shall include all
amendments thereto and successor statutes in the case of statutes.
IN WITNESS WHEREOF, Borrower and Lender have signed this Schedule B as of
the date set forth in the heading to the Agreement.
BORROWER: LENDER:
TANISYS TECHNOLOGY, INC., NATIONSCREDIT COMMERCIAL CORPORATION,
a Wyoming corporation THROUGH ITS NATIONSCREDIT COMMERCIAL
FUNDING DIVISION
By /s/ JOE O. DAVIS By /s/ ROBERT BELLISH
--------------------------- -------------------------------------
Its CHIEF FINANCIAL OFFICER Its Authorized Signatory
1ST TECH CORPORATION,
a Delaware corporation
By /s/ JOE O. DAVIS
---------------------------
Its CHIEF FINANCIAL OFFICER
-----------------------
B-8
<PAGE>
DARKHORSE SYSTEMS, INC.,
a Delaware corporation
By /s/ JOE O. DAVIS
---------------------------
Its CHIEF FINANCIAL OFFICER
-----------------------
B-9
<PAGE>
COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
COMPAQ COMPUTER CORPORATION &
TANISYS TECHNOLOGY, INC.
MEMORY MODULE CORPORATE PURCHASE AGREEMENT
This Memory Module Corporate Purchase Agreement (this "Agreement") is
made and entered into as of the 1st day of August, 1997 by Compaq Computer
Corporation, a Delaware corporation ("Compaq"), and by Tanisys Technology,
Inc., a Texas Corporation ("Tanisys") with its principal place of business as
12201 Technology Blvd, Austin, TX 78727-6101 and Subsidiaries as identified
in Exhibit A
WHEREAS, COMPAQ desires to purchase memory, memory modules, and memory kits
from Tanisys as defined herein;
WHEREAS, Compaq desires for Tanisys to assemble, kit and deliver high
quality, low cost memory modules and options to Compaq and to Compaq
customers for same day and next day delivery;
WHEREAS, Tanisys is willing to sell memory modules and memory kits to Compaq
and provide for assembly, kitting and delivery of memory kits, as defined
herein;
NOW THEREFORE, For good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Compaq and Tanisys hereby agree
as follows:
1. DEFINITIONS
1.1. In addition to terms defined elsewhere in this Agreement, capitalized
terms used in this Agreement shall have the meanings given thereto in Annex I
hereto.
2. PRODUCT PURCHASES
2.1. The terms and conditions contained in this Agreement shall govern the
purchase and sale of product (the "Product") listed in a product schedule
(the "Product Schedule") entered into from time to time by Compaq and
Tanisys, which schedule shall be substantially in the form of Exhibit B.
2.2. This Agreement is not a requirements contract and does not obligate
Compaq to purchase any minimum quantity of Product but only establishes the
terms and conditions for such purchases if, as and when Compaq submits orders
in accordance with this Agreement.
3. ORDERS
3.1. Upon execution of this Agreement, Tanisys agrees that it shall be fully
capable of processing all Orders through Compaq's system for Electronic Data
Interchange ("EDI").
3.2. Compaq may purchase Products by issuing to Tanisys written purchase
orders ("Written Orders") or purchase orders by electronic data interchange
("EDI Orders"); collectively, Written Orders and EDI Orders are referred to
herein as "Order" or "Orders". Orders shall set forth the following items:
quantity, price, ship to location, shipping date, delivery date, part number
and revision level. Tanisys shall accept any Order that materially conforms
with the terms of this Agreement.
3.3. If Compaq issues a Written Order, Tanisys shall use commercially
reasonable efforts to send written confirmation of such acceptance within two
(2) days after Tanisys' receipt of a Written Order from Compaq.
COMPAQ/TANISYS CONFIDENTIAL PAGE 1 7/8/97
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COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
3.4. If Compaq issues an EDI Order, Tanisys shall electronically acknowledge
receipt of the EDI Order which shall be confirmed by an Functional 997 issued
from Tanisys Technology's mailbox upon receipt of the EDI Order, or by an EDI
Order Verify signal sent no later than 3 hours after receipt of the EDI Order.
3.5. "Verify", or "Verification", as used herein shall mean Tanisys
Technology's determination of successful receipt, from electronic mailbox, of
all necessary Order information and requirements (e.g., quantity, price, ship
to location, shipping date, delivery dates, part number, and revision level),
and notification to Compaq, of both the receipt of the EDI Order from Compaq
and any discrepancies relating to the readability of such EDI Order. Tanisys
shall electronically verify receipt of an Order as per Table 1:Verify. EDI
Order issued on a non-Business Day shall be "verified" on the next Business
Day by 11:00AM.
Table 1: Verify
FUNCTIONAL 997 SENT BY TANISYS VERIFY REPORT SENT TO COMPAQ
MAILBOX BY
12:00AM to 8:00AM 11:00AM
8:01AM to 2:00PM 7:00PM
2:01PM to 11:59PM 11:00AM Next Business Day
3.6. Tanisys shall be conclusively presumed TO have accepted all EDI Orders
issued by Compaq that Tanisys has confirmed by a Functional 997, unless
Compaq is notified specifically, that Tanisys has not accepted a particular
EDI Order. Such notification by Tanisys must take place within fourteen (14)
hours from Tanisys Technology's Verification of Compaq's EDI Order
transmission.
3.7. All EDI Orders, Verifications, and EDI Acknowledgments (collectively,
"EDI Transmissions") and other related data electronically transmitted shall
(i) reference and be subject to the terms and conditions of this Agreement,
and (ii) contain information in a specified format in accordance with
Compaq's policies, specifications and procedures regarding electronic data
interchange information.
3.8. No additional or different provisions proposed by either party hereto
in any oral, written or electronic data interchange acceptance, Written
Order, EDI Order, confirmation, verification or acknowledgment shall apply
unless expressly agreed to in writing by the other party. Tanisys and Compaq
hereby give notice of their objection to any additional or different terms.
3.9. Tanisys agrees that all of Compaq's Affiliates, wherever located, shall
be entitled to make purchases under this Agreement.
4. TERM OF AGREEMENT
4.1. The term of this Agreement shall be three (3) years, commencing on the
date of this Agreement (the "Effective Date"). This Agreement will be
automatically renewed at the conclusion of the initial 3 year period for a 12
month period unless one of the parties notifies the other party not less than
180 days prior to the end of such 1 year period that it does not intend to
renew this Agreement. Such automatic renewal provision shall apply at the end
of each successive 12 month period unless either patty indicates, in
accordance with the 180 day notice provision described in the preceding
sentence, that renewal is not intended. This Agreement may terminate prior to
the aforementioned stated term under the circumstances set forth in Section
15. Notwithstanding the foregoing, this Agreement shall remain in full force
and effect and shall be applicable to any Order issued by Compaq and received
by Tanisys during the term of this Agreement until all obligations under such
Order have been fulfilled.
COMPAQ/TANISYS CONFIDENTIAL PAGE 2 7/8/97
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COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
5. PRICING
5.1. The prices for the Products, including memory components, memory module
assembly, kitting material and kitting services, shall be established from
time to time by the parties executing and delivering a pricing schedule in
the form set forth as Exhibit B (the "Pricing Schedule"). The Product prices
(the "Prices") set forth in any Pricing Schedule shall be fixed for the
period set forth therein.
5.2. Tanisys will use commercially reasonable efforts to purchase memory
components based on supplier share. Compaq will update the allocation matrix
on a monthly basis and/or as needed.
5.3. The Compaq Contract Price may be updated at any time that Compaq
negotiates a new contract price. The Compaq Contract Price and allocation
will be distributed to Tanisys as identified in Exhibit B.
5.4. The Prices shall include all inbound to Tanisys direct, indirect and
incidental charges relating to the sale of title Product to Compaq including,
without limitation, packaging and kitting, in-bound freight shipping charges,
forwarding agent and brokerage fees, insurance costs, document fees, and
duties, and any and all sales, use, excise and similar taxes: provided that
all such charges for semiconductor memory devices shall be included in the
Compaq Contract Price. All Product sold hereunder shall be shipped to Compaq
Ex-Works upon delivery to a common carrier.
5.5. Tanisys must receive written authorization from Compaq prior to all
spot market transactions that exceed the percentage of Spot Market purchases
outlined in Exhibit B. Spot market transactions by Tanisys will follow the
terms and conditions outlined within Exhibit B.
5.6. Tanisys is responsible for monitoring and determining the inventory
levels which will allow Tanisys to reach the On-Time-Delivery requirements of
this Agreement.
5.7. It shall be Tanisys Technology's responsibility to inform Compaq where
the supplier is unable to deliver to the commitments. Compaq will use
commercially reasonable efforts to ensure that the supplier can meet the
commitments. In the event that product can not be obtained to the allocation,
Tanisys shall use commercially reasonable efforts to obtain supply from the
other Compaq Contract Suppliers.
5.8. To the extent permitted by applicable law, Tanisys shall offer Compaq
the lowest prices and most favorable terms that Tanisys offers or intends to
offer its other customers purchasing similar quantities to those purchased or
expected to be purchased by Compaq hereunder during the same or similar
periods of time. This Section 5.8 shall apply to all Products purchased and
services provided by Compaq hereunder, including but not limited to all
memory modules, memory option kitting and DRAM's, as identified in Exhibit B.
5.9. Tanisys shall use its best efforts to maintain a vigorous cost
reduction program and to ensure that the Prices and terms set forth in this
Agreement and Exhibit B hereunder are aggressive and competitive at all
times. If Compaq does not consider the quoted pricing and terms to be
aggressive and competitive, Compaq shall have the right, at any time and from
time to time, to request an immediate meeting with Tanisys Technology, and
Tanisys shall use its best efforts to amend the quoted pricing and terms to
comply with this Section 5.9 by entering into a new Pricing Schedule (if
required).
6. EXCLUSIVITY AND MANUFACTURING RIGHTS
6.1. Compaq may, from time to time, engage Tanisys in the design and
manufacture of Compaq unique memory modules. Compaq unique memory modules
will be separately identified in Exhibit B Pricing), Exhibit C
(Specifications) and Exhibit D Memory Flex Model) of the Corporate Purchase
Agreement and
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COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
may include unique terms and conditions regarding their purchase. All unique
terms and conditions will be negotiated during Compaq's and Tanisys
Technology's regular negotiations sessions and incorporated into the
Exhibits. Compaq and Tanisys further agree that Compaq is hereby granted
exclusive use of Compaq unique memory module designs, whether created by
Compaq or Tanisys Technology, for all Products purchased by Compaq, as
defined in Exhibits B, C and D hereunder; provided that Compaq notifies
Tanisys in writing which modules it considers to be Compaq unique memory
modules prior to the design of such modules.
6.2. Tanisys hereby grants to Compaq manufacturing rights to produce and
manufacture and/or to have manufactured Product for Compaq in sufficient
quantities to meet demand. Compaq shall be prohibited from exercising such
manufacturing rights except where Compaq determines in good faith that
Tanisys lacks sufficient production capacity to meet Compaq's forecast
production requirements. Compaq and Tanisys agree that Tanisys Technology's
line manufacturing capacity model (Exhibit F - Tanisys Manufacturing Capacity
Model) shall be used to determine key process capacities including:
A. SURFACE MOUNT PICK AND PLACE CAPACITY
B. BOARD REFLOW CAPACITY
C. FUNCTIONAL AND PARAMETRIC MEMORY TEST CAPACITY
D. KIT ASSEMBLY & SHIPPING CAPACITY.
6.3. Factory loading of greater than 70% of the theoretical limits for more
thin thirty (30) days in any consecutive ninety (90) day period, shall be
defined as insufficient capacity. The theoretical manufacturing capacity
limit shall be established as three (3) eight hour shifts per day operating
seven (7) days per week in Tanisys's Compaq qualified manufacturing
operations.
6.4. If Compaq determines pursuant to Sections 6.2 and 6.3 that Tanisys
lacks sufficient production capacity to meet Compaq's forecast production
requirements, Tanisys shall provide Compaq the information required to
manufacture and/or to have manufactured the Product, including but not
limited to Tanisys Technology's then current drawings, bills of material,
Gerber files, and vendor lists, and Tanisys agrees to provide to Compaq the
support and information required by Compaq to manufacture or to have
manufactured such product, including authorization to purchase any necessary
proprietary components from Tanisys Technology's suppliers.
6.5. Upon Compaq's determination pursuant to Sections 6.2, 6.3 and 6.4,
Tanisys will also provide to Compaq, at Compaq's request and on a
commercially reasonable basis, telephone and on-site personnel support as
Compaq may request from Tanisys to assist and enable Compaq to manufacture or
to have manufactured such Product in commercial quantities.
6.6. Compaq is hereby granted a license under trade secrets and patents to
access and to use all of Tanisys Technology's drawings, bills of material,
and suppliers to make or to have made Products and to create improvements.
Compaq shall be prohibited from exercising such grant except in the event
that (i) Tanisys merges into or is acquired by any third party and materially
becomes unable to meet Compaq's demand for Product as required by this
Agreement, and/or (ii) Tanisys is acquired by a Compaq competitor, and/or
(iii) Tanisys enters into business proceedings including, going out of
business, filing for bankruptcy or reorganization, or going into
receivership. Tanisys agrees that the presentation of this Agreement by
Compaq to Tanisys Technology's successors and assigns shall be sufficient for
such successors and assigns to make Tanisys drawings, bills of material, and
vendor lists accessible to Compaq.
6.7. Tanisys agrees to provide actual capacity utilization for each section
as identified in Section 6.2 as identified in Exhibit J.
COMPAQ/TANISYS CONFIDENTIAL PAGE 4 7/8/97
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COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
7. SHIPMENT AND DELIVERY
7.1. Tanisys shall ship Product to Compaq, its Affiliates, and/or to
Compaq's authorized resellers on the date (the "On-dock Date") and to the
location (the "Specified Location") specified in the related Order. Tanisys
Shall ship all Orders complete, unless authorized by Compaq to ship a partial
order. Tanisys and Compaq agree to the terms in Table 3: On-Time Shipment
Metrics to establish Tanisys Technology's performance against this term.
Table 3: On-Time Shipment Metrics
Shipment Period ON-TIME SHIPMENT METRIC COMMENT:
July 1st, 1997 95% On-Time Performance Term
through term
7.2. Tanisys will use commercially reasonable efforts to ship Orders on a
First In First Out (FIFO) basis by part number. In the event that Tanisys
fails to ship an Order based on the On-Time Shipment Metrics, then that Order
should be shipped prior to shipping new Orders of the same part number.
7.3. The failure of Tanisys to meet the On-Time Shipment Metrics over a
calendar quarter, provided that the Orders received are in compliance with
the terms, conditions and lead times of this Agreement, shall constitute a
material breach of this Agreement. Tanisys shall notify Compaq in writing
immediately if Tanisys has knowledge of any event which is reasonably likely
to delay any agreed ship date or shipment plan.
7.4. Orders being delivered to a Compaq facility, shall have title pass to
Compaq on Compaq's receiving dock and will be delivered duty paid. Orders
being sent to a Compaq customer shall have title pass to Compaq on Tanisys's
shipping dock.
7.5. If Tanisys delivers Product more than two days in advance of the
On-dock Date therefor, Compaq may, at its option, either (i) return such
Product to Tanisys at Tanisys Technology's risk and expense, including but
not limited to any transportation, import, or export related expenses or
duties, (in which case Tanisys Technology, at its expense, shall redeliver
such Product to Compaq on the correct On-dock Date therefor) or (ii) retain
such Product and make payment on the date payment would have been due based
on the correct On dock Date therefore.
7.6. Changes to shipping and/or delivery dates may only be made by Compaq's
authorized purchasing representatives as designated in writing from time to
time. Compaq may, without cost or liability, issue change orders for Product
quantities and schedule dates in accordance with the flexibility agreement
attached as Exhibit D (the "Memory Flexibility Agreement"). If any change
Order is made orally, Compaq shall provide an Order confirming such change
within one (1) Business Day, and Tanisys shall provide written confirmation
of such change within one (1) Business Day of receiving Compaq's confirming
Order.
7.7. Compaq may measure Tanisys Technology's On Time Delivery performance
against commitments for the purpose of establishing Tanisys Technology's rate
of On Time Delivery, lead time and cycle time improvement against Compaq's
requirements. On Time Delivery shall mean delivery of scheduled Product no
more than two (2) days early and zero (0) days late as measured on Compaq's
and/or Compaq's reseller's receiving dock.
7.8. In addition, Compaq may measure Tanisys Technology's On-Time Order
Receipt to Shipment Cycle Time as a function of the elapsed time between
Tanisys Technology's receipt of Compaq's EDI 850 Order Release and Compaq's
receipt of Tanisys Technology's EDI 856 Ship Notification. On-Time Sipping
Performance Metrics are defined in Table 4:, Portables , Server Products.
Desktop, Portable and Server product are defined in Exhibit B Table B.2:
Memory Module Assembly Pricing.
COMPAQ/TANISYS CONFIDENTIAL PAGE 5 7/8/97
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COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
Table 4: Desktop/Portable/Server Products:
Compaq EDI 850 Order Compaq EDI 850 Order Tanisys EDI 856 Tanisys EDI 856
Transmit Transmit Date Ship Notice Ship Date
12:00AM to 8:00AM Business Day 0 11:59PM Business Day 1
8:01AM to 2:00PM Business Day 0 11:59PM Business Day 1
2:0 1PM to 11:59PM Business Day 0 11:59PM Business Day 2
7.9. Lead times for all Product ordered hereunder shall not exceed that
listed in the Exhibit D - Memory Flexibility Agreement. Tanisys shall provide
status reports identified in Exhibit J on Tanisys Technology's manufacturing
cycle times.
7.10. Within twelve (12) months of the date in which Compaq receives Product,
Compaq may request the return, at Compaq's expense, of unused standard
Product to Tanisys for credit. Product may be returned and credited at a then
negotiated price.
7.11. Tanisys shall use commercially reasonable efforts to ship on the same
day for Orders of Desktop Product received prior to 8:00AM.
8. PACKING, MARKING, AND SHIPPING INSTRUCTIONS
8.1. All products shall be prepared and packaged in accordance with Compaq's
memory packaging specifications and bills of materials. A sample memory
packaging specification and bill of material is included in Exhibit C.
Compaq, at its sole discretion, from time to time may alter packaging
specifications. If Compaq's alterations result in a material change in
Tanisys Technology's costs or in the time for performance, Tanisys and Compaq
shall negotiate in good faith such adjustments as the parties deem
appropriate to address such changes.
8.2. Tanisys shall mark, or cause to be marked, each shipping container to
adequately show Compaq's Order number, part number, revision level, lot
number, and quantity contained therein, and appropriate country of origin
marking. In addition, Tanisys will conform to Compaq's bar code specification
which will be provided to Tanisys Technology. A packing list showing the
Order number shall be included in each shipment. These data fields are
identified in Compaq's Bar Code Label Specification, Rev. K, in Exhibit C.
9. QUALITY
9.1. Tanisys commits to use commercially reasonable efforts to provide
defect free Product to Compaq. Tanisys shall ensure that all Products conform
to the specifications, drawings, samples, revision levels and other
descriptions designated in the Product Schedule for such Product (the
"Specifications"). The Specifications shall include any labeling requirements
imposed by applicable law.
9.2. Compaq's Approved Vendor List (AVL) shall only come from Compaq.
Tanisys may request an updated AVL at any time from Compaq. Tanisys shall use
Compaq's AVL for all Memory Components to be used for Compaq unless a
"written waiver is provided from Compaq. Tanisys shall use Compaq's AVL for
all Memory Modules to be used for Compaq unless a written waiver is provided
from Compaq.
COMPAQ/TANISYS CONFIDENTIAL PAGE 6 7/8/97
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COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
Example of Compaq AVL:
**COMPAQ CONFIDENTIAL**
Date of report: January 1 1997
Compatible Supplier Parts List for...
Compaq Part Number: XXXXXX Page: X
Part Description: DI MM, BUFF,XMxX,ECC,EDO,XOnS
Part Revision Level: X
Part Class Code: Xxxx
Part Project Number: XXXXX
Supplier Part #
ABCABC-6 ABC SUPPLIER APPROVED
DEFDEF-6 DEF SUPLLIER DISAPPROV
9.3. Tanisys and Compaq agree that a statistically significant 250 DPPM
threshold, measured at the module level at Tanisys, will be used to trigger
Supplier Corrective Action Requests (SCARS). Tanisys shall report the outgoing
module level DPPM as identified in Exhibit J to Compaq.
9.4. Tanisys shall establish and/or maintain a Quality Manual acceptable to
Compaq. Tanisys Technology's Quality Manual is attached to this Agreement as
Exhibit E (the "Quality Manual") and shall not be amended without written notice
to Compaq.
9.5. Upon reasonable notice, Compaq shall be entitled to visit and inspect
Tanisys Technology's facility sites during normal business hours and Tanisys
shall cooperate to facilitate such visits. Compaq's inspections shall in no way
relieve Tanisys of its obligation to deliver conforming Product or waive
Compaq's right of inspection and acceptance at the time the Products are
delivered.
9.6. At Compaq's request, Tanisys shall provide Compaq with relevant
inspection, quality, and reliability data.
9.7. Tanisys and Compaq agree to provide reports identified in Exhibit J.
10. CHANGE ORDERS
10. 1. Compaq may from time to time change the Specifications for the
Products, and Tanisys shall use its best efforts to ensure that all Product
complies therewith. If' Compaq's changes result in a material change in Tanisys
Technology's costs or in the time for performance, Tanisys and Compaq shall
negotiate in good faith such adjustments as the parties deem appropriate to
address such changes. Any request by Tanisys for any such adjustment must be
made in writing to Compaq within ten (10) days' of Tanisys Technology's receipt
of Compaq's notice of change in specifications.
10.2. Tanisys agrees to advise Compaq of any changes to process, materials,
or sources of supply and ensure that such changes do not compromise
specifications, quality, reliability or availability of Products ordered by
Compaq.
11. INSPECTION AND ACCEPTANCE
11.1. Products purchased or to be purchased pursuant to this Agreement shall
be subject to inspection and test by Compaq, its Affiliates, and its authorized
resellers including during the period of manufacture or development. Inspection
may occur at Compaq, its Affiliate, or reseller locations as well as at Tanisys
Technology's facilities and/or those of Tanisys Technology's subcontractors.
Unless otherwise specified in the Order, final inspection and
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COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
acceptance of Product by Compaq shall be at (i) Compaq's facilities and/or
(ii) those of Compaq's authorized resellers. Compaq reserves the right to
reject Product which does not conform to the Specifications or that contains
any defect in material, workmanship or Tanisys design (the "Defective
Product"). Compaq may in accordance with Section 11.2 return Defective Product
to Tanisys Technology, at Tanisys Technology's expense, for corrective action,
which corrective action shall include and be prioritized as follows: (i)
Tanisys shall first attempt to repair or replace said Defective Product, and
(ii) if repair or replacement is not possible and if Compaq has credited its
customer for said Defective Product pursuant to its warranty to said customer,
then Tanisys shall credit Compaq for its purchase price for said Defective
Product, (iii) exercise any other rights as Compaq may have at law or in
equity that are consistent with the other provisions of this Agreement.
Product required to be corrected or replaced shall be subject to the same
inspection and acceptance provisions of this Agreement as Product originally
delivered under any Order. Tanisys shall reimburse Compaq for the costs of any
reasonable inspection measures deemed necessary by Compaq.
11.2. If Compaq returns Defective Product to Tanisys for correction or
replacement, Tanisys shall repair or replace same within 5 days of receipt
thereof. Tanisys will issue a "Return Material Authorization" ("RMA") within
twenty four (24) hours of request to minimize field exposure associated with any
suspect material. Prior to shipping any defective Product back to Tanisys
Technology, Compaq shall use commercially reasonable efforts, including
performing testing to verify that said product is defective. Compaq will include
a statement with each lot returned explaining the basis and reason for said
Product's return and including the appropriate RMA number.
11.3. Tanisys agrees to provide failure analysis of Defective Product within
5 days after receipt thereof. Tanisys will also provide Compaq with a written
corrective action report addressing the steps that will be taken to eliminate
the recurrence of the problem, and will use commercially best efforts to
implement the actions addressed in such report.
11.4. If Product changes are necessary to correct Tanisys design, material
or workmanship defects, Tanisys shall bare the costs of correction. If Compaq
incurs any costs associated with such corrections arising out of Compaq stock,
reseller, and end user inventory purges and service costs, Tanisys will
reimburse Compaq for the costs incurred.
12. WARRANTY
12.1. Tanisys hereby warrants to Compaq that Product purchased hereunder
shall (i) vest in Compaq good and valid title to such Product free and clear
of all liens, encumbrances, security interests, burdens and other claims and
(ii) be free from infringements or violations described in Section 19.1. In
addition, for a period of three (3) years from the date of Compaq's acceptance
of Product delivered hereunder, Tanisys hereby warrants to Compaq that such
Product shall be free from defects in material, workmanship and Tanisys design
and be in conformity with the Specifications. The warranty for replaced or
repaired Product will be the same as the original Product, and the three (3)
year warranty period for replaced or repaired Product shall begin on the date
of acceptance of the replaced or repaired Product by Compaq. In the case of
Epidemic Failure as defined by a statistically significant Compaq line fallout
equal to 7,500 DPPM or a statistically significant Customer return rate equal
to 5,000 DPPM, Tanisys shall repair, replace or credit Compaq in accordance
with the provisions of Section 11. Upon discovery of a defect in material,
workmanship or Tanisys design in any Product or the discovery of a Product
that is not in compliance with the Specifications during the three 3 year
warranty period, Tanisys shall repair, replace or credit Compaq in accordance
with the provisions of Section 11.
12.2 Tanisys warrants that there are no claims of infringement or violation of
the type described in Section 18.1 with respect to the product.
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COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
13. OUT OF WARRANTY REPAIRS
13.1. Tanisys agrees to use commercially reasonable efforts to refurbish to
a "like new" condition any Memory Module no longer covered by the express
warranties set forth elsewhere in this Agreement (an "Out of Warranty Product").
Refurbishment prices shall be set at the time refurbishment is required and will
not exceed 1 .2X the then current material and conversion costs.
14. PAYMENT
14.1. Compaq shall make payment in full for the purchase price of all
Product purchased hereunder (other than items disputed by Compaq in good faith)
and received by Compaq on or before the 45th day after the date of Tanisys's
Technology's invoice; provided, Tanisys Technology's invoice shall not be dated
earlier than the shipment date of Product covered thereby. Payment of invoices
shall not constitute acceptance of the Product.
14.2. Payment shall be made in U.S. dollars.
15. TERMINATION
15.1. Either party (the "Non-Defaulting Party") may terminate this Agreement
and/or any Order issued hereunder at any time by written notice to the other
party (the "Defaulting Party") upon the occurrence of a Default by the
Defaulting Party. In addition, Compaq may terminate this Agreement and/or any
Order issued hereunder at any time for any reason upon giving 30 days written
notice of termination to Tanisys Technology. This Agreement shall terminate at
the end of the notice period.
15.2. Upon termination by Tanisys of this Agreement and/or any Order due to
Compaq's default or upon termination by Compaq for reasons other than Tanisys
Technology's Default, Compaq's entire liability shall be to purchase the
following, without duplication: (i) at the Order purchase price, all finished
goods, and at Tanisys Technology's cost all work in progress, and unique
materials that have been purchased within reasonable lead times as identified in
Exhibit B, and (ii) all Product that Compaq has received and had not previously
paid for.
15.3. Upon termination by Compaq of this Agreement and/or any Order due to
Tanisys Technology's Default, (i) Compaq shall have the option to purchase any
materials or work in progress which Tanisys may have purchased or processed for
the fulfillment of any Order at Tanisys Technology's cost, (ii) Compaq shall
have such additional remedies as may be available at law or in equity and that
are consistent with the terms of this Agreement and (iii) Compaq shall have no
obligation to Tanisys other than payment of any balance due for Products
delivered by Tanisys before termination.
16. FORCE MAJEURE
16.1. Neither party shall be liable for its failure to perform any of its
obligations hereunder during any period in which performance is delayed by fire,
flood, hurricane, tornado, earthquake, war, embargo, riot or an unforeseeable
intervention of any government authority that causes a complete interruption of
manufacturing operations, ("Force Majeure"), provided that the party suffering
such delay immediately notifies the other party of the delay.
16.2 If, however, either party's performance is delayed for reasons set forth
above for a cumulative period of 30 days or more, the other party,
notwithstanding any other provisions of this Agreement to the contrary, may
terminate this Agreement and/or any Order issued hereunder by notice to the
delayed party. In the event Tanisys claims delay due to Force Majeure and
Compaq elects to terminate this Agreement as provided herein, Compaq's sole
liability hereunder shall be for the payment to Tanisys of any balance due and
owing for Product previously delivered by Tanisys and accepted by Compaq. In the
event the parties do not terminate this Agreement and/or Order due to a Force
Majeure, the time for performance or cure will be extended for a period equal to
the duration
COMPAQ/TANISYS CONFIDENTIAL PAGE -9- 7/8/97
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COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
of the Force Majeure.
17. PRODUCT NOTICES
17.1. Any notice given under this Agreement shall be in writing and will be
effective (i) when delivered, if delivered in person, (ii) during the business
hour of receipt (or the next business hour if not received during a normal
business hour), if by telecopy or (iii) 3 days after depositing same in the U.S.
mail, postage prepaid and addressed to Tanisys at the address set forth below or
to such other address as Tanisys may specify to Compaq in accordance with this
Section 17.1 or to Compaq at the address set forth below or at such other
address as Compaq may specify to Tanisys in accordance with this Section 17.1:
IF to Compaq: If to Tanisys Technology:
COMPAQ COMPUTER CORPORATION TANISYS TECHNOLOGY, INC.
P.O. BOX 692000 12201 TECHNOLOGY BLVD.
20555 S.H. 249 AUSTIN, TX 78727-6101
HOUSTON, TEXAS 77269-2000 ATTN: PRESIDENT
ATTN.: DIRECTOR, CORPORATE MEMORY PROCUREMENT
WITH A COPY TO:
COMPAQ COMPUTER CORPORATION TANISYS TECHNOLOGY, INC.
P.O. BOX 692000 12201 TECHNOLOGY BLVD.
20555 S.H. 249 AUSTIN, TEXAS 78727-6101
HOUSTON, TX 77269-2000 ATTN: CFO
ATTN.: DIVISION COUNSEL - OPERATIONS
18. COMPLIANCE WITH LAWS
18.1. All Product supplied and work performed under this Agreement shall
comply with all applicable laws and regulations including, without limitation,
all laws governing Tanisys Technology's relationship with its employees, agents
or subcontractors. Upon request, Tanisys shall certify compliance with such
applicable laws and regulations, and provide such evidence of compliance as
Compaq may reasonably request.
19. INDEMNIFICATION; REMEDIES
19.1. Except as otherwise provided herein, Tanisys shall indemnify, defend
and hold harmless Compaq and its Affiliates and their respective directors,
officers, shareholders, employees and agents (collectively, the "Compaq
Indemnified Parties") from and against any and all claims, demands, suits,
actions, judgments, costs and liabilities (including reasonable attorneys' fees)
(each, an "Indemnified Loss") relating to or arising out of any allegation that
Products furnished under this Agreement infringe or violate any third party's
patent, copyright, trade secret, trade name, trade dress, mask work, mask
rights, trademark or any other proprietary right (each, an "IP Claim") and shall
pay all costs and damages awarded; provided, Tanisys shall have no obligation
whatsoever pursuant to this Agreement or otherwise (i) for or with respect to
any IP Claim relating to or arising out of designs, instructions specifications
or intellectual property furnished by Compaq, (ii) for or with respect to any IP
Claim relating to or arising out of the combination of the Products with any
hardware, products, equipment, materials, text, graphics, software or the like
supplied by a party other than Tanisys where such combination is beyond the
Products intended use, or (iii) for any settlement entered into without Tanisys
Technology's prior written consent. Compaq shall notify Tanisys of such claim,
cooperate and assist Tanisys with the defense of such claim, and permit Tanisys
to defend and compromise such claim; provided, Compaq's failure to so notify
Tanisys shall not diminish
COMPAQ/TANISYS CONFIDENTIAL PAGE -10- 7/8/97
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<PAGE>
COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
Tanisys Technology's indemnity obligations hereunder except to the extent any
Compaq delay in notifying Tanisys materially prejudices Tanisys Technology's
defense of such matter.
19.2. IF during the course of any IP Claim covered under Section 19.1 herein
the use of the allegedly infringing Product is finally enjoined, Tanisys shall,
at Tanisys Technology's OPTION AND EXPENSE, USE commercially reasonable efforts
to do one of the following (in addition to its obligations under Section 19.1
herein): (i) procure for Compaq the right to use or sell, as applicable, the
allegedly infringing Product, (ii) replace the allegedly infringing Product or
the affected part thereof with equivalent non-infringing technology, (iii)
modify the allegedly infringing Product or the affected part thereof to make it
non-infringing Product, (iv) refund to Compaq an amount equal to the price paid
by Compaq for said allegedly infringing Product less any discounts or credits
granted to Compaq. Compaq agrees to return allegedly infringing product to
Tanisys in the event of refund under (iv).
19.3. Tanisys shall indemnify, defend and hold harmless the Compaq
Indemnified Parties from and against any Indemnified Loss relating to or arising
out of any personal injury or death resulting from (i) the use of any Product or
(ii) Tanisys Technology's acts or omissions; provided, the foregoing indemnity
shall not apply to the extent any such claim is attributable solely to design
specifications furnished by Compaq to Tanisys Technology.
19.4. THIS SECTION 19 SHALL BE ENFORCEABLE TO THE EXTENT SET FORTH ABOVE
NOTWITHSTANDING THE SOLE, CONCURRENT, ACTIVE OR PASSIVE NEGLIGENCE OF ANY
OF THE COMPAQ INDEMNIFIED PARTIES.
19.5. Subject to Section 19.6, upon the occurrence of a Default by a party
hereto the other party shall be entitled to exercise such rights and remedies as
are available at law or in equity including the right to seek specific
performance upon Tanisys Technology's failure to deliver on a timely basis
unique products in conformity with the Specifications.
19.6. NEITHER PARTY SHALL BE LIABLE FOR ANY CONSEQUENTIAL DAMAGES
(INCLUDING, WITHOUT LIMITATION, LOST PROFITS AND UNLIQUIDATED INVENTORY),
INDIRECT, SPECIAL OR PUNITIVE DAMAGES EVEN IF THE OTHER PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES EXCEPT (I) IN CONNECTION WITH A
BREACH OF THE CONFIDENTIALITY PROVISIONS SET FORTH IN THIS AGREEMENT AND (II)
TO THE EXTENT ANY SUCH DAMAGES OF A THIRD PARTY ARE A PART OF AN
INDEMNIFIED LOSS AGAINST WHICH COMPAQ IS ENTITLED TO BE INDEMNIFIED
PURSUANT TO THE OTHER PROVISIONS OF THIS SECTION 19.
20 TRADEMARKS; LOGOS
20.1. Tanisys is authorized to use the Compaq logo and trademark only to the
extent necessary to meet the required specification for the Product. Tanisys is
authorized to use Compaq labels only as necessary to identify Product for sale
hereunder. No other rights with respect to Compaq's logos, labels, trademarks,
trade names or brand names are conferred, either expressly or by implication,
upon Tanisys Technology.
20.2. Tanisys shall maintain strict accountability for Compaq's security
labels. Compaq security labels identified in the kit bills of materials must be
maintained as a secure stock room item, kitted and issued for each module
assembly build, and managed under Tanisys Technology's daily cycle count process
for A-Item materials. Tanisys will provide Compaq with a monthly reconciliation
of module shipments and security label consumption in addition security labels
held in stock, work-in-process, and finished goods.
COMPAQ/TANISYS CONFIDENTIAL PAGE -11- 7/8/97
NEED TO KNOW ONLY INITIALS __ __
<PAGE>
COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
21. CAPACITY PLANNING
21.1. Tanisys agrees to review weekly forecasts of at least 6 months duration,
as provided by Compaq, and to advise Compaq if Tanisys anticipates that it will
be unable to achieve the requested volumes. Tanisys may from time to time
request Compaq to review Compaq's forecast and advise of any changes.
22. GRATUITIES
22.1. Each party represents that it has not offered nor given and will not (i)
offer nor give any employee, agent, or representative of the other party any
gratuity, or (ii) influence such person's normal job responsibilities in any way
with a view toward securing any business from the other party or influencing
such person with respect to the business between the parties.
23. INSURANCE.
23.1. Tanisys shall maintain such minimum insurance coverage as is described
in Exhibit H. All insurance policies maintained by Tanisys in accordance with
this Section 23 shall name Compaq as an additional insured and loss payee.
24. CONFIDENTIAL INFORMATION
24.1. Each party recognizes that it may have previously entered or will in the
future enter into various agreements with the other party which obligates it to
maintain as confidential certain information disclosed to it by the other party.
To the extent that such information or any further confidential information,
which might include but is not limited to business plans, forecasts, capacity,
pricing, inventory levels, etc., (collectively referred to hereinafter as
"Information") is disclosed in furtherance of this Agreement or any Order issued
hereunder, such Information shall be so disclosed pursuant to the minimum terms
and conditions listed below; provided, however, the minimum terms and conditions
listed below shall in no way relieve the parties from any obligation or modify
such obligations previously agreed to in other agreements. Both parties agree
that this Agreement and any other agreements regarding confidential information
shall hereafter be considered as coterminous, and shall expire no earlier than
the date of expiration or termination of this Agreement
24.2. Both parties agree that the party receiving Information will maintain
such Information in confidence for a period of three years from the date of
disclosure of such Information and will not use such information except for the
purposes contemplated hereby or in any other applicable agreements regarding
said information.
24.3. Each party shall protect the other party's Information to the same
extent that it protects its own confidential and proprietary information and
shall take all reasonable precautions to prevent unauthorized disclosure to
third parties.
24.4. The parties acknowledge that the unauthorized disclosure of such
Information will cause irreparable harm. Accordingly, the parties agree that
the injured party shall have the right to seek immediate injunctive relief
enjoining such unauthorized disclosure.
24.5. The provisions of this Section 24 shall not apply to information (i)
known to the receiving party at the time of receipt from the other party, (ii)
generally known or available to the public through no act or failure to act by
the receiving party; (iii) furnished to third parties by the disclosing party
without restriction on disclosure, (iv) furnished to the receiving party by a
third party as a matter of right and without restriction on disclosure or (v)
furnished as required by court order or similar governmental authority, or by
the imminent likelihood thereof or by applicable law.
COMPAQ/TANISYS CONFIDENTIAL PAGE -12- 7/8/97
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<PAGE>
COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
24.6. Immediately upon termination of this Agreement or at the request of the
other party, each of the parties shall promptly return all materials in its
possession containing Information of the other party.
25. COUNTRY OF ORIGIN
25.1. For each Product purchased under this Agreement, Tanisys shall furnish
Compaq with the manufacturer and date code, by quantity and part number
(Compaq's and Tanisys Technology's). Product shall be marked with the country of
origin as required by applicable law.
25.2. Tanisys agrees to provide necessary documents to facilitate the import
and export of Product. Tanisys's further agrees to assist Compaq's import and
export of Product as reasonably requested by Compaq.
26. MATERIAL FURNISHED BY COMPAQ
26.1. The parties anticipate that, from time to time, Compaq shall sell or
consign to Tanisys certain material to be used in manufacturing Product (the
"Compaq Furnished Material"). Tanisys agrees that each item of Compaq Furnished
Material shall be used solely for the purpose of manufacturing Product ordered
by Compaq under this Agreement.
26.2. Each item of material furnished by Compaq to Tanisys on a consignment
basis shall be identified on the books and records of Tanisys by the letter "CQ"
following such item's part number or by such other distinguishing mark as Compaq
and Tanisys may agree upon. Title to consigned material shall remain with Compaq
at all times.
26.3. Compaq shall issue an invoice and a debit memo with respect to the
purchase price of Compaq Furnished Material sold by Compaq to Tanisys
Technology, and Compaq immediately may apply such debit memo against any amounts
then owing by Compaq to Tanisys Technology. In the event any amount reflected in
an invoice has not been satisfied in full by means of applying the corresponding
debit memo against amounts owed by Compaq to Tanisys within 30 days following
the invoice date, Tanisys shall pay Compaq in US dollars (or such other currency
as Compaq and Tanisys may agree upon) the remaining balance of such invoice on
or before such 30 day period. To secure Tanisys Technology's payment obligations
hereunder, Tanisys hereby grants to Compaq a security interest and purchase
money security interest in all Compaq Furnished Material and all accounts
receivable and other proceeds thereof. Compaq may take any action (without
notice, presently, demand, protest, notice of protest or dishonor, notice of
acceleration or notice of intent to accelerate, all of which Tanisys hereby
waives) afforded a secured party under the Uniform Commercial Code upon the
occurrence of a Default by Tanisys Technology, and upon such occurrence, all
payment obligations of Tanisys to Compaq shall, upon notice by Compaq, become
immediately due and payable; provided, if the Default giving rise to the
foregoing remedies is attributable to Tanisys Technology's insolvency or any
bankruptcy related proceeding affecting Tanisys Technology, all obligations of
Tanisys to Compaq shall automatically become due and payable.
26.4. Tanisys shall not allow or permit to exist any lien, security interest
or other encumbrance to be placed on or otherwise affect the Compaq Furnished
Material other than security interests and other encumbrances granted to Compaq.
26.5. Tanisys agrees to sign financing statements, continuation statements,
notices to other creditors and such other instruments as Compaq may reasonably
request to maintain a first priority, perfected security interest in the Compaq
Furnished Material that Compaq sells to Tanisys from time to time. Tanisys
agrees that a copy of this Agreement shall be sufficient to serve as a financing
statement and may be filed or recorded by Compaq in any public records or
offices reasonably required by Compaq. In addition, with respect to consigned
materials, Tanisys agrees to make such filings and given notice to its creditors
to ensure that such consigned materials remain free from claims of Tanisys
Technology's creditors.
COMPAQ/TANISYS CONFIDENTIAL PAGE -13- 7/8/97
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<PAGE>
COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
26.6. Tanisys shall receive Compaq's consigned material per the Sub-Contract
Physical Inventory Process.
26.7. Compaq shall carry the insurance for all the Compaq's consigned
inventory and equipment while at Tanisys Technology's facility, with the
exception of the first $1,000,000 of any loss (per occurrence). Tanisys shall
reimburse Compaq for any loss up to and including $1,000,000. Compaq will insure
the losses above that point.
26.8. Compaq understands that a certain amount of material furnished to
Tanisys to assemble under consigned Orders will be subject to scrap. Component
material and finished assemblies will be considered in total scrap count. Over a
period of three (3) months the ratio of scrap dollars to delivered Product
dollars for which Compaq will accept liability up to twenty five hundredths of
one percent (0.25%) for SOJ packaged devices and up to forty five hundredths of
one percent (0.45) for TSOP packaged devices. Tanisys accepts liability for
scrap Product over and above these limits. At the end of three (3) month time
frame, Tanisys will provide Compaq an accounting of scrap versus delivered
Product and, if due, a credit memo will be issued to Compaq. . Reporting period
will commence within one month of execution of this Agreement.
26.9. Tanisys shall report and dispose of all the Compaq's consigned
material to either Compaq's facility or other site as requested by Compaq per
the Material Transfer process (Exhibit F).
26.10. All Compaq consigned material shall be acceptable and supplied to
Tanisys Technology's dock (i) if said material is to be used in desktop product,
forty-eight (48) hours prior to start of production for mutually agreed
production start schedule, and (ii) if said material is to be used in server or
portable products seventy-two (72) hours prior to start of production for a
mutually agreed production start schedule. Each shipment of Compaq consigned
material shall contain a packing list itemizing material contained within each
container. Tanisys shall have a reasonable amount of time not less than one (1)
Business Day to verify any discrepancies between said packing lists and the
Compaq consigned material actually delivered.
26.11. Any tools, drawings, specifications, or other materials furnished by
Compaq for use by Tanisys in its performance under this Agreement or any Order
issued hereunder shall be identified and shall remain the property of Compaq and
shall be used by Tanisys only in its performance hereunder. Such property shall
be delivered, upon request, to a destination specified by Compaq in good
condition, except for normal wear and tear.
27. GENERAL
27.1. Any obligations and duties which by their nature extend beyond the
expiration or earlier termination of this Agreement shall survive any such
expiration or termination and remain in effect.
27.2. If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, such provision shall be enforced to the
fullest extent permitted by applicable law and the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
27.3. Any waiver of any kind by a party of a breach of this Agreement must
be in writing, shall be effective only to the extent set forth in such writing
and shall not operate or be construed as a waiver of any subsequent breach. Any
delay or omission in exercising any right, power or remedy pursuant to a breach
or default by a party shall not impair any right, power or remedy which either
party may have with respect to a future breach or default.
COMPAQ/TANISYS CONFIDENTIAL PAGE -14- 7/8/97
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<PAGE>
COMPAQ COMPUTER CORPORATION/TANISYS TECHNOLOGY, INC. REV 1.0
CORPORATE PURCHASE AGREEMENT CONTRACT NO. 1838-080100
27.4 Tanisys shall not export, re-export or otherwise disclose, directly or
indirectly, technical data received from Compaq or the direct product of such
technical data to any person or destination when such export, re-export or
disclosure is prohibited by the laws of the United States or regulations of a
Department of the United States. Similarly, Compaq shall not export, re-export
or otherwise disclose, directly or indirectly, technical data received from
Tanisys or the direct product of such technical data to any person or
destination when such export, re-export or disclosure is prohibited by the laws
of the United States or regulations of a Department of the United States.
27.5. With respect to any payment, reimbursement or other amount owed by one
party (the "First Party") to the other (the "Second Party") under this
Agreement, the First Party may offset, with notice, any such amount owed against
any amount then owing (including amounts to be owed under future invoices) by
the Second Party to the First Party under this Agreement or any other agreement.
27.6. This Agreement is hereby identified as "Compaq and Tanisys
Confidential," and any additional confidentiality requirements between the
parties (now or in the future) applicable to material identified as such shall
apply to this Agreement.
27.7. Except to the extent the confidentiality provisions set forth in
Section 24 conflict with confidentiality provisions set forth in any other
confidentiality or non-disclosure agreement between the parties hereto, this
Agreement represents the entire agreement with respect to the subject matter
hereof and supersedes all prior discussions and agreements between the parties
relating to the subject matter hereof. This Agreement can be modified only by a
written amendment duly signed by persons authorized to sign agreements on behalf
of both parties, and shall not be supplemented or modified by any course of
dealing or trade usage. Variance from or addition to the terms and conditions of
this Agreement in any Order, or other written notification from either party
will be of no effect.
27.8. THE CONSTRUCTION, VALIDITY, AND PERFORMANCE OF THIS AGREEMENT AND
ANY ORDER ISSUED UNDER IT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
TEXAS, USA. THE PARTIES HEREBY WAIVE APPLICATION OF THE U.N. CONVENTION ON
CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS.
27.9. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT WARRANTIES EXPRESS
OR IMPLIED, STATUTORY OR OTHERWISE) OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE ARE HEREBY DISCLAIMED IN THEIR ENTIRETY.
IN WITNESS, THE AUTHORIZED REPRESENTATIVES OF THE PARTIES HAVE EXECUTED THIS
AGREEMENT AS OF THE DATE FIRST WRITTEN ABOVE.
For Compaq For Tanisys Technology
/s/ Bruce Riggs /s/ Mark C. Holliday
- ------------------------- ---------------------------
Signature Signature
Director 7/22/97 President & COO
COMPAQ/TANISYS CONFIDENTIAL PAGE -15- 7/8/97
NEED TO KNOW ONLY INITIALS __ __
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made effective the 11th day of September,
1997, 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 Don McCord, a resident of
Austin, Texas (hereinafter referred to as the "Employee").
WITNESSETH:
WHEREAS, the Employer desires to continue to employ the Employee, and the
Employee and Employer desire to enter into an agreement relating to such
continuance of 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:
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. TERM. Subject to the provisions hereof, the term of the Employee's
employment by the Employer under this Agreement shall expire September 11, 1998;
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 Employee's employment hereunder, including any
continuation of the original term, is hereinafter referred to as the "Employment
Period."
3. POSITION AND DUTIES. During the Employment Period, the Employee
shall serve as Vice President of Marketing of the Employer with such
assignments, powers and duties as are assigned or delegated to him by the CEO 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. The Employee agrees to devote all of his business time, skill,
attention and best efforts to the business
1.
<PAGE>
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.
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 $100,000 per year. The compensation is to be payable, subject to such
withholdings as are required by law.
B. The Employer will grant to the Employee an option to purchase
100,000 shares of its common stock at an option price that is set at the
discretion of the Board of Directors but at no event shall be less then fair
market value. The term "fair market value" on any day shall mean that which is
determined by the closing price of the Common Stock as reported for that day in
the Wall Street Journal and shall expire seven (7) years from the date of grant.
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.
6. FRINGE BENEFITS; VACATIONS. During the Employment Period, the
Employee shall be entitled to three weeks of vacation a year, and 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 form 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.
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
2.
<PAGE>
expenses upon the presentation by the Employee of an itemized account and
receipts satisfactory to the Employer.
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 8C below, shall terminate upon written notice from the
Employer to the Employee, but such termination 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 8B above, the Employee
will not be subject to the provisions of Section 10, COVENANT NOT TO COMPETE,
herein.
9. COVENANTS NOT TO DISCLOSE. The Employee covenants and agrees that
he will not, at any time during or after the termination of his employment by
the Employer, communicate or disclose to any person, or use for his own account,
or advise, discuss with, or in any way assist any other person or firm in
obtaining or learning about, without the prior written consent of the Employer,
or any secret or confidential information (including, without limitation, any
customer lists or trade secrets) concerning, the business and affairs of the
Employer or any of its Affiliates acquired by the Employee during the term of
his employment by the Employer. The Employee further covenants and agrees that
he shall retain all such knowledge and information concerning the foregoing in
trust for the sole benefit of the Employer and its Affiliates and their
respective successors and assigns.
3.
<PAGE>
10. COVENANT NOT TO COMPETE. The Employee covenants and agrees that,
during the Employment Period and for a period of one (1) year after the
voluntary resignation of the Employee or termination for cause as outlined in 8B
herein, he will not directly render services or advice to, or be engaged in a
business during such one-year period where said business' primary products or
services are in direct competition with the primary products or services of the
Employer except in the course of his employment hereunder or except upon the
written consent of the Employer.
11. ESSENTIAL NATURE OF COVENANTS. The covenants of the Employee
contained in Sections 9 and 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 Employee understands that
the covenants contained in Sections 9 and 10 are essential elements of the
transactions contemplated by this Agreement and, but for the agreement of the
Employee to Sections 9 and 10, the Employer would not have agreed to enter into
such transactions.
12. REMEDIES. In the event of a breach or threatened breach by the
Employee of Section 9 or 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.
13. 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.
14. 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. Insofar as the Employee is concerned,
this Agreement, being personal, cannot be assigned.
15. 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 so broad as to
be unenforceable, such provision shall be interpreted to be only so broad as is
enforceable.
4.
<PAGE>
16. 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.
17. 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.
18. 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 who resides in Austin, Texas, 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.
19. ENTIRE AGREEMENT. This Agreement 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.
5.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and date first above written.
TANISYS TECHNOLOGY, INC.
By: /s/ Mark Holliday
-----------------------------
Name: Mark Holliday
Title: Chief Executive Officer
/s/ Don Mccord
- -----------------------------
DON MCCORD
6.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made effective the 20th day of October, 1997,
by and between TANISYS TECHNOLOGY, INC., a Wyoming corporation, with principal
offices located at 12201 Technology Boulevard, Suite 130, Austin, Texas 78727
(hereinafter referred to as the "Employer"), and CHARLES T. COMISO, a resident
of Los Altos Hills, California (hereinafter referred to as the "Employee").
W I T N E S S E T H:
WHEREAS, the Employee and Employer desire to enter into an agreement
relating to the employment of Employee, 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:
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. TERM. Subject to the provisions hereof, the term of the Employee's
employment by the Employer under this Agreement shall be for a period of one (1)
year commencing on the date hereof; 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
Employee's employment hereunder, including any continuation of the original
term, is hereinafter referred to as the "Employment Period."
3. POSITION AND DUTIES. During the Employment Period, the Employee shall
serve as Chief Executive Officer of the Employer, with such assignments, powers
and duties as are assigned or delegated to him by the Board of Directors 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. The
<PAGE>
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.
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 One Hundred Eighty Thousand Dollars ($180,000) annually. At such time as the
Employer reports positive cash flow from operations for all three months of a
fiscal quarter, the Employee's salary will increase to Two Hundred Forty
Thousand Dollars ($240,000) annually. 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. The Employer will grant to the Employee a seven (7)-year option
to purchase 1,000,000 shares of its common stock under the Employer's 1993
Employee Stock Option Plan, as amended, at an exercise price to be determined
during the first sixty (60) days of the Employment Period, such exercise price
to be no more than $3.00 per share. The option shall vest as to 100,000 and
150,000 shares on the first and second anniversaries of the date of this
Agreement, respectively, and 250,000 shares on each of the third, fourth and
fifth anniversaries of the date of this Agreement.
C. At such time as the Employer reports positive cash flow from
operations for all three months of a fiscal quarter, the Employer will grant to
the Employee a seven (7)-year option to purchase 500,000 shares of its common
stock under the Employer's 1993 Employee Stock Option Plan, as amended, at an
exercise price equal to the closing price of the Employer's Common Stock as
reported on the Nasdaq Stock Market's SmallCap Market on the date of grant. The
option shall vest as to 125,000 shares on each of the second, third, fourth and
fifth anniversaries of the date of grant.
2
<PAGE>
D. The Employer will pay the Employee Fifty Thousand Dollars
($50,000) to cover the costs of moving his residence from Los Altos Hills,
California, to Austin, Texas, temporary living and storage expenses and travel
between Los Altos Hills, Califonria and Austin, Texas, such payment to
constitute the only obligation of the Employer in connection with such move.
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.
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. The Employee shall be entitled to
vacations with pay in accordance with the policies of the Employer in effect
from time to time.
7. EXPENSES. 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.
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
3
<PAGE>
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 8C below, shall terminate upon written notice from the
Employer to the Employee, but such termination 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 8B above, the Employee
will not be subject to the provisions of Section 10, COVENANT NOT TO COMPETE,
herein.
9. COVENANTS NOT TO DISCLOSE. The Employee covenants and agrees that he
will not, at any time during or after the termination of his employment by the
Employer, communicate or disclose to any person, or use for his own account, or
advise, discuss with, or in any way assist any other person or firm in obtaining
or learning about, without the prior written consent of the Employer,
information concerning any inventions, processes, programs, systems, flow charts
or equipment used in, or any secret or confidential information (including,
without limitation, any customer lists or trade secrets) concerning, the
business and affairs of the Employer or any of its Affiliates acquired by the
Employee during the term of his employment by the Employer. The Employee
further covenants and agrees that he shall retain all such knowledge and
information concerning the foregoing in trust for the sole benefit of the
Employer and its Affiliates and their respective successors and assigns.
10. COVENANT NOT TO COMPETE. The Employee covenants and agrees that,
during the Employment Period and for a period of one (1) year after the
voluntary resignation of the Employee or termination for any other reason, he
will not directly render services or advice to, or
4
<PAGE>
be engaged in a business in the State of Texas during such one-year period
which is in competition with the business of the Employer except in the
course of his employment hereunder or except upon the written consent of the
Employer.
11. ESSENTIAL NATURE OF COVENANTS. The covenants of the Employee
contained in Sections 9 and 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 Employee understands that
the covenants contained in Sections 9 and 10 are essential elements of the
transactions contemplated by this Agreement and, but for the agreement of the
Employee to Sections 9 and 10, the Employer would not have agreed to enter into
such transactions.
12. REMEDIES. In the event of a breach or threatened breach by the
Employee of Section 9 or 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.
13. 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.
14. AGREEMENT TO PURCHASE STOCK. The Employee agrees to purchase, during
the first sixty (60) days of the Employment Period, a minimum of Fifty Thousand
(50,000) shares of the Employer's Common Stock at a maximum price of $3.00 per
share.
15. 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. Insofar as the Employee is concerned,
this Agreement, being personal, cannot be assigned.
16. 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
5
<PAGE>
provision of this Agreement is so broad as to be unenforceable, such
provision shall be interpreted to be only so broad as is enforceable.
17. 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 constitute one and the same instrument.
18. 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.
19. NOTICE. All Notices which are required or may be given 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 27933 Briones Way, Los Altos Hills, California 94022, 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.
20. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, understandings
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/ PARRIS H. HOLMES, JR.
--------------------------------
Name: Parris H. Holmes, Jr. /s/ CHARLES T. COMISO
------------------------------ ------------------------------
Title: Chairman of the Board CHARLES T. COMISO
-----------------------------
6
<PAGE>
November 10, 1997
Joseph C. Klein, Ph.D. VIA FACSIMILE: 914-462-2709
14 Brooklands Farm Rd.
Poughkeepsie, New York 12601
Dear Joe:
This letter covers the various items we have discussed over the past number
of days.
I am extremely pleased to offer you a position with Tanisys Technology, Inc.
to join us as quickly as possible, preferably this month. This is an
exciting time in Tanisys' history and future which I hope you will
participate in as enthusiastically as we are here in Austin.
POSITION AND TITLE: Vice President Engineering, reporting to CEO
& President, Chuck Comiso
BASE SALARY: $120,000 annually ($10,000 per month)
At this time, the Company does NOT have a bonus program
for the reasons we discussed. I have communicated to
you my proposal to the Board of Directors, driven by
the Company's positive position on cash flow and
profitability.
STOCK OPTIONS: Upon acceptance by you, I will recommend, for approval
by the Board, a seven-year stock option grant for
100,000 shares of Tanisys Technology, Inc. incentive
stock options which will vest at the rate of 25% each
anniversary date of the grant (fully vested after four
(4) years, with up to seven (7) years from grant date
to exercise). Price to be Market Share price on date
of grant by the Board.
ADDITIONAL As further incentive, you will be recommended for an
INCENTIVE additional grant of 50,000 shares upon the Company's
STOCK quarterly performance of profitability, plus customer
shipments of Tanisys' Sigma III
OPTIONS: Tester System, both occurring in the same quarter.
These options will be at Market Share price on the date
of grant and vest 25% per year from that date, with
seven (7) years to exercise.
<PAGE>
Joseph C. Klein
Page 2
COMPANY BENEFITS: You will participate in the Company's standard medical,
dental, 401(k) and vacation plans.
RELOCATION AND The Company will reimburse you for up to $12,000 in
TRAVEL EXPENSE: relocation expense. Any business trip related travel
that could assist in relocation will be covered by
Tanisys.
PLANNED VACATION: You presently have a planned vacation trip to Colorado
scheduled for November 24-30, 1997, which Tanisys
agrees you should take.
SEVERANCE: You will be given a severance package of half a year's
salary which will be reduced by 50% at the first
anniversary date of your joining Tanisys, and reducing
to zero at the end of two (2) years.
Joe, I am anxious for you to join the Company. Please let me know your decision
as soon as possible.
Sincerely,
/s/ Charles T. Comiso
Charles T. Comiso
Chief Executive Officer and President
/lar
<PAGE>
EXHIBIT 11.1
TANISYS TECHNOLOGY, INC.
CALCULATION FOR WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
COMMON COMMON AVERAGE AVERAGE NUMBER
SHARE SHARES NUMBER OF OF SHARES
DATE DESCRIPTION ACTIVITY OUTSTANDING DAYS OUTSTANDING SHARES OUTSTANDING
- ------------------ -------------------------- --------- ----------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1996 Balance 15,978,537 36 1,575,965
November 5, 1996 Exercise of stock warrants 58,824 16,037,361 10 439,380
November 15, 1996 Exercise of stock warrants 29,412 16,066,773 4 176,074
November 19, 1996 Exercise of stock warrants 100,000 16,166,773 2 88,585
November 21, 1996 Exercise of stock options 4,000 16,170,773 14 620,249
December 5, 1996 Exercise of stock warrants 88,235 16,259,008 7 311,817
December 12, 1996 Exercise of stock warrants 29,412 16,288,420 4 178,503
December 16, 1996 Exercise of stock warrants 14,706 16,303,126 1 44,666
December 17, 1996 Exercise of stock warrants 323,529 16,626,655 34 1,548,784
January 20, 1997 Exercise of stock options 8,500 16,635,155 70 3,190,304
March 31, 1997 Exercise of stock warrants 1,216,059 17,851,214 92 4,499,484
July 1, 1997 Exercise of stock warrants 39,750 17,890,964 22 1,078,359
July 23, 1997 Exercise of stock warrants 9,471 17,900,435 8 392,338
2,280,000 20,180,435 5 276,444
July 31, 1997 Issuance of private
placement
August 5, 1997 Exercise of stock warrants 40,000 20,220,435 1 55,398
August 6, 1997 Exercise of stock warrants 42,000 20,262,435 7 388,595
August 13, 1997 Exercise of stock warrants 31,529 20,293,964 9 500,399
August 22, 1997 Exercise of stock warrants 37,250 20,331,214 19 1,058,337
September 10, 1997 Exercise of stock options 3,500 20,334,714 20 1,114,231
September 30, 1997 Balance 20,334,714 17,537,914
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF TANISYS TECHNOLOGY, INC.
1st Tech Corporation (a Delaware corporation)
DarkHorse Systems, Inc. (a Delaware corporation)
Rosetta Marketing and Sales, Inc. (a Texas corporation)
<PAGE>
EXHIBIT 23.1
[LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated October 24, 1997, included in
Registration Statement on Form 10/A, Amendment No. 5 (SEC File No. 0-29038).
It should be noted that we have not audited any financial statements of the
Company subsequent to September 30, 1997, or performed any audit procedures
subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
December 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR TANISYS TECHNOLOGY,
INC. AND SUBSIDIARIES AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE
NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,990,017
<SECURITIES> 0
<RECEIVABLES> 3,519,369
<ALLOWANCES> 180,157
<INVENTORY> 4,489,050
<CURRENT-ASSETS> 11,914,297
<PP&E> 2,539,324
<DEPRECIATION> 1,730,832
<TOTAL-ASSETS> 17,231,958
<CURRENT-LIABILITIES> 8,880,742
<BONDS> 0
0
0
<COMMON> 28,599,524
<OTHER-SE> (20,249,422)
<TOTAL-LIABILITY-AND-EQUITY> 17,231,958
<SALES> 47,673,950
<TOTAL-REVENUES> 47,673,950
<CGS> 41,479,865
<TOTAL-COSTS> 41,479,865
<OTHER-EXPENSES> 15,692,204
<LOSS-PROVISION> 2,230,808
<INTEREST-EXPENSE> 661,368
<INCOME-PRETAX> (10,113,828)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,113,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,113,828)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
