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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K (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, 1999
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-29038
TANISYS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
WYOMING 74-2675493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12201 TECHNOLOGY BLVD., SUITE 125 78727
AUSTIN, TEXAS
(Address of principal executive offices) (Zip Code)
(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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of January 31, 2000 was approximately $10 million based upon
the closing sale price of the Common Stock as reported on the Nasdaq OTC
Bulletin Board. 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.
Indicated below is the number of shares outstanding of the registrant's
only class of common stock at January 31, 2000:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
Common Stock, no par value 33,987,387
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TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
1999 ANNUAL REPORT ON FORM 10-K
INDEX
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PART I
ITEM 1. BUSINESS......................................................................4
ITEM 2. PROPERTIES....................................................................10
ITEM 3. LEGAL PROCEEDINGS.............................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........11
ITEM 6. SELECTED FINANCIAL DATA ......................................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS ........................................................14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................................52
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY...............................51
ITEM 11. EXECUTIVE COMPENSATION........................................................54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................64
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .............65
SIGNATURES..................................................................................70
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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
THEIR 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, 1999, 1998 OR 1997, 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 designs, manufactures and markets production level
automated test equipment for a wide variety of memory technologies. Operating
under the Tanisys Technology name since 1994, the Company has developed into
an independent manufacturer of standard and custom semiconductor memory
module test systems for a variety of semiconductor manufacturers, computer
and electronics OEMs and independent memory module manufacturers. The Company
markets the DarkHorse line of memory module test systems and licenses its
proprietary Tanisys Touch technology. The Company's customers currently
include Celestica Corp., Dataram, Inc., Fox Electronics, MCMS, Micron
Technology, Inc., PNY Technologies, Inc., Solectron Corporation and Viking
Components.
During fiscal 1999, 1998 and 1997, a significant portion of the
Company's revenues were derived from the manufacturing and sale of
semiconductor memory modules. Memory module sales accounted for 80.3%, 83.9%
and 88.9% of total net sales for fiscal 1999, 1998 and 1997, respectively. In
December of 1999, the Company sold certain assets and liabilities related to
the memory module manufacturing business and exited the memory module
manufacturing business. Included in the sale was all the stock of Tanisys
(Europe) Ltd., a
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wholly owned subsidiary of the Company. A shortage of computer memory chips
in the fourth fiscal quarter of 1999 and a rapid increase in memory prices
during the same period severely disrupted the Company's memory module
manufacturing business. After dropping by approximately 95% from 1996 to
mid-1999, memory chip prices escalated rapidly in August and September 1999,
before leveling off in October 1999. The Company had great difficulties
obtaining DRAM inventory and lost several key orders. Further, the memory
module manufacturing business in Scotland dropped off completely at the end
of the fourth fiscal quarter due to the loss of the Company's major U.K.
customer, who was acquired by another semiconductor manufacturer and ceased
doing business with the Company.
The December 9, 1999, Asset Purchase Agreement is subject to
stockholder approval. The sale of the memory module manufacturing business
has significantly reduced the Company's revenues. The Company will
concentrate all its resources on the memory module test systems business,
which has become a growing profitable portion of the Company's revenues as
new technologies such as higher speed synchronous DRAM, Rambus-Registered
Trademark- and Double Data Rate synchronous DRAM memory become prevalent
requirements of computing systems.
INDUSTRY BACKGROUND
The demand for semiconductor memory modules in digital electronic
systems has grown significantly over the last several years, and according to
Dataquest, will continue for the foreseeable future. This demand results from
the increased importance of memory in determining system performance. An
increasing demand for greater system performance requires that electronics
manufacturers increase the amount of semiconductor 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 PCs,
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 designed for application specific uses.
The growing variety of memory components drives the increasing
demand for DarkHorse type cost-effective production memory module test
systems to test each of these categories of memory modules.
MEMORY MODULE MARKET
Since the memory module market influences the memory module test
systems market, the Company feels it is appropriate to comment briefly about
the memory module market. Semiconductor memory modules ("modules") are small
printed circuit board assemblies containing semiconductor memory devices and
support components. Many computer and electronic systems use modules to
permit OEMs to more easily upgrade their systems and to increase flexibility
by permitting different types of modules to configure one base system for
multiple price or performance targets. Semiconductor memory modules are
nearly always attached to a main system board in a daughter card fashion
rather than directly to a computer system board, for reasons of
upgradeability and flexibility. Memory modules permit OEMs to manufacture
systems on a build-to-order (BTO) basis by configuring the system after the
customer's order is placed. The benefits of BTO for OEMs are faster
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announcement of new systems, increased customer satisfaction, reduced
inventory risk and reduced costs, all of which require cost effective, high
speed, high quality and flexible memory module test systems capability.
Modules typically are manufactured by leading semiconductor memory
component companies and independent third party suppliers. Semiconductor
manufacturers sell modules almost exclusively to OEMs. Third party
manufacturers of 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 modules. Third party suppliers to the reseller channel
typically offer standard DRAM modules as an upgrade product sold through
computer distributors and retail channels. Both semiconductor memory
suppliers and independent third party module manufacturers are customers for
memory module test systems.
MEMORY MODULE TEST SYSTEMS MARKET
Memory module test systems are important to assure that
semiconductor memory modules meet the necessary specifications of
performance. The memory module test systems market typically is segmented
into memory semiconductor manufacturing and third party memory module
manufacturers for PC OEMs and the aftermarket. System OEMs typically require
the manufacturer of their memory modules to test their completed modules
under demands similar to actual use. Most module manufacturers perform
"at-speed" testing of all modules with accurate test systems. The Company
believes that module test system buyers typically evaluate reliability,
productivity, accuracy, advanced automation, software flexibility, service,
customer support and price as purchase criteria. Significant new purchases of
capital equipment for test capacity are likely, due to changing memory
architectures and strong growth in memory demand.
The actual test sequence for a memory module is unique to its design
in terms of architecture, pinout, speed rating, voltage, organization and
size and 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 module types. This makes test development a
potentially costly and labor intensive task. The ability of a test system
manufacturer to provide support for the development of low cost, accurate
tests is a significant consideration in the buying decision.
Memory module testing requirements for the memory module aftermarket
typically are less robust. Memory additions to systems in use typically are
already tested in accordance with the needs of system manufacturers and often
may 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 often needs less rigorous test capabilities but
higher portability and lower cost than does module testing at the time of
system manufacture.
PRODUCTS AND SERVICES OF THE COMPANY
The Company designs, manufactures and markets memory module test
systems. The Company's memory module test systems are oriented for both
memory module assembly and memory module aftermarket purposes and include a
broad line of test fixtures, test algorithm suites and test services.
MEMORY MODULE TEST SYSTEMS PRODUCTS
The Company's memory module test systems are marketed under the
DarkHorse brand name to utilize existing brand awareness. The current product
line includes the SIGMA-3, the SIGMA-2 and the SIGMA-LC/ SYNC-LC series.
The SIGMA-3 test system is sold to module manufacturers who build leading
edge SDRAM modules for the latest PC100/PC133 specification and who require
high quality, maximum throughput and cost effectiveness in their production
test systems. Most recently the Company has introduced its Rambus-Registered
Trademark- version
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of the SIGMA-3. This system is targeted at the newest emerging memory
technology and operates at frequencies of over 800 MHz. As the
Rambus-Registered Trademark- technology matures in the marketplace, the
Company will be able to offer this system for its customers' expanding test
capabilities. The Company is also developing a version of the SIGMA-3 memory
module test system with capabilities to test Double Data Rate SDRAM (DDR).
Another major feature of the SIGMA-3 is its backward compatibility to test
older memory technologies such as EDO and Fast Page mode memory.
The Company's product development plans also include testing
capabilities for Flash memory test systems. The growth rate for Flash memory
devices is expected to reach over 50% per year in bit growth over the next
few years. If achieved, there will be a market for a high quality, production
level, cost effective test system.
The SIGMA-2 tester is designed for module manufacturers who need to
perform "at-speed" tests of older synchronous and asynchronous DRAM, SRAM,
Flash memory and VRAM modules. These systems are aggressively priced relative
to systems offered by major competitors. The SIGMA-3 and SIGMA-2 are 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 capabilities of these systems. The
types of customers for these testers include module manufacturers, module
retailers, large retail chains using them for PC service purposes, and
distributors.
The Company differentiates its memory module test systems by
targeting its systems' features specifically for the purpose of cost
effective, high quality, production level testing of memory products. The
Company's memory module test systems are designed for comparable performance
at lower prices relative to the general-purpose test systems offered by
competitors.
CUSTOMERS, SALES AND MARKETING
In North America and Europe a majority of the Company's memory
module test systems are sold directly to semiconductor and independent memory
module manufacturers. In Asia, the Company also sells its test systems
through distribution partners and independent sales representative
organizations. In fiscal 1999 and 1998, the Company's ten largest customers
accounted for 90.6% and 52.2% of net memory module test system sales,
respectively. During fiscal 1999, the Company had three customers which
accounted for 43.8%, 13.8% and 12.2% of the Company's net memory module test
system sales, respectively. In fiscal 1998 and 1997, one customer accounted
for 11.3% and 10.3% of the Company's net test system sales, respectively.
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 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 of memory module test systems was approximately $258,000 and
$370,000 at fiscal 1999 and 1998 year end, respectively.
COMPETITION
The memory module and memory test equipment industries are intensely
competitive. These markets include a large number of competitive companies,
several of which have achieved a substantial market share. Certain of the
Company's competitors in these markets have substantially greater financial,
marketing, technical, distribution and other resources, greater name
recognition, and larger customer bases than the Company. In the memory module
test systems market, the Company competes primarily with companies supplying
automatic test
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equipment. 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, improve quality levels, offer
flexible delivery schedules, deliver finished products on a reliable basis,
reduce manufacturing 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.
RESEARCH AND DEVELOPMENT
The Company's management believes that the timely development of new
memory module test systems 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 memory
module testing technology and continual improvement in its memory test
products. 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 memory module test systems that address the requirements of
semiconductor companies, OEMs and independent memory module manufacturers.
The Company's research and development expenses were $1,602,131 in
fiscal 1999, $1,692,059 in fiscal 1998 and $1,589,103 in fiscal 1997. A
portion of the research and development expense is focused on creating a
patent portfolio to protect the Company's intellectual property and to create
a competitive edge over competitors.
INTELLECTUAL PROPERTY
The Company has filed the following applications with the U.S.
Patent and Trademark Office for patents to protect its intellectual property
rights in products and technology that have been developed or are under
development:
NESTED LOOP METHOD OF IDENTIFYING SYNCHRONOUS MEMORIES. Issued as
U.S. Patent 5,812,472 on September 22, 1998. The patent describes how to
automatically identify a synchronous memory module configuration using a
table-based method with nested loops.
PARAMETRIC TEST SYSTEM AND METHOD. Issued as U.S. Patent 6,008,664
on December 28, 1999. This patent application describes a method for
performing a leakage test more quickly.
CONTACT TEST METHOD AND SYSTEM FOR MEMORY TESTERS. Issued as U.S.
Patent 5,956,280 on September 21, 1999. This patent application describes a
contact test for determining pin-to-pin and ground shorts, as well as opens
for memory modules.
SYNCHRONOUS MEMORY TESTER. Issued as U.S. Patent 5,914,902 on June
22, 1999. This patent describes the operation of the synchronous memory
tester.
SYNCHRONOUS MEMORY TEST METHOD. Issued as U.S. Patent 5,912,852 on
June 15, 1999. This patent describes the method of operation of the
synchronous memory tester.
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METHOD AND SYSTEM FOR IDENTIFYING A MEMORY MODULE CONFIGURATION.
Issued as U.S. Patent 5,999,468 on December 7, 1999. This patent application
describes a speedier approach for identifying memory modules.
SYNCHRONOUS MEMORY TEST SYSTEM. Issued U.S. Patent Number 5,995,424
on November 30, 1999. This patent describes the operation of the SYNC-LC
memory tester.
CAPACITANCE SENSITIVE SWITCH AND SWITCH ARRAY. Issued as U.S. Patent
5,508,700 on April 16, 1998. The patent describes a broad range of
applications for capacitance sensitive touch technology covering hardware,
firmware, software and methods of operations.
CAPACITIVE SENSITIVE SWITCH METHOD AND SYSTEM. Issued as U.S. Patent
5,933,102 on August 3, 1999. This patent deals with simultaneous measurement
of multiple touch sensors.
SYNCHRONOUS MEMORY IDENTIFICATION SYSTEM. Serial Number 08/895,550
filed July 1997. This patent application describes additional applications
for the use of table-based method with nested loops to automatically identify
a synchronous memory module configuration.
MICROSEQUENCER FOR MEMORY TEST SYSTEMS. Serial Number 09/033,363
filed March 1998. This patent application discusses the sequencer function in
the SIGMA-3 tester with emphasis on exception handling and timing set
compression through use of VLIW instructions.
PROGRAMMABLE PULSE GENERATOR. Serial Number 09/032,968 filed March
1998. This patent application describes the PPG operation in the SIGMA-3
tester.
TESTER SYSTEMS. Serial Number 09/033,364 filed March 1998. This
patent application describes the code generation for the SIGMA-3 tester.
METHOD AND SYSTEM FOR TESTING RAMBUS MEMORY MODULES. This patent
application, which will replace the provisional application with Serial
Number 60/097,894, describes a low cost method of testing Rambus memory
modules.
METHOD AND SYSTEM FOR TIMING CONTROL IN THE TESTING OF RAMBUS MEMORY
MODULES. This patent application with Serial Number 09/359,173 describes the
method of performing timing measurements for Rambus Memory Modules.
There can be no assurance that the 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, copyrights, trademarks 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 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
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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 and local 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, 1999, the Company had 206 employees. There were 184
employees in Austin including 23 engineering and product development
employees, 23 finance and administration employees, 33 employees in the
sales, marketing technical and customer support areas, 105 manufacturing
employees and 22 employees in Scotland.
Between September 30, 1999 and the completion of the sale of the
memory module manufacturing business in December 1999, 5 Austin employees
were terminated for performance problems and 27 Austin employees and 1
Scotland employee left voluntarily to seek other employment. In addition, the
positions of 20 Austin employees and 4 Scotland employees were eliminated on
October 21, 1999 to reduce costs and attract capital infusion.
The sale of the memory module manufacturing business resulted in
42 Austin employees and 17 Scotland employees being offered positions with
the buyer of that business. The positions of 47 Austin employees were
eliminated as a result of that sale.
After completion of the sale of the memory module manufacturing
business in December 1999, the Company had 43 full-time employees. These
employees included 24 engineering, product development, manufacturing and
technical support employees, 11 finance and administration employees and 8
employees in the sales and marketing areas.
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, engineering, 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.
ITEM 2. PROPERTIES
At February 1, 2000, the Company has leased 39,176 square feet of
space for its corporate offices at 12201 Technology Boulevard, Suite 125,
Austin, Texas, pursuant to a lease, which under agreement with the landlord,
will be terminated on March 17, 2000. The lease has certain expansion
options, renewal options and rights of first refusal. The Company currently
is paying annual rental of approximately $308,000, plus a pro rata charge for
property taxes, common area maintenance and insurance.
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The Company has subleased 24,330 square feet of this space, until
March 17, 2000, to the buyer of its memory module manufacturing business. The
sublessee is paying annual rental of approximately $197,000, plus 75% of the
operating expenses which the Company is obligated to pay under its lease.
Effective March 18, 2000, the Company will lease 14,846 square feet at
$67,550 for the last 6.5 months of fiscal year 2000, and $151,430 annually
until March 31, 2003, plus a pro rata charge for property taxes, common area
maintenance and insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit filed by one of its
customers for alleged breach of contract. The suit asks for actual damages,
including all related expenses in the amount of $77,838. The Company believes
the suit is without merit and is vigorously defending its position. The
Company believes it is unlikely that the final outcome of this or any other
unknown claims to which the Company becomes a party would have a material
adverse effect on the Company's financial position or results from
operations; however, due to the inherent uncertainty of litigation, there can
be no assurance that the resolution of any particular claim or proceeding
would not have a material adverse effect on the Company's results of
operations for the fiscal period in which such resolution occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
On July 28, 1999, the Company's stock began trading under the "TNSU"
symbol on the Nasdaq OTC Bulletin Board, which was established for securities
that do not meet the Nasdaq SmallCap Market's listing requirements.
Consequently, selling the Company's common stock could be more difficult
because of the smaller quantities of shares that could be bought and sold,
transactions could be delayed, and security analysts' and news media's
coverage of the Company stock could be reduced. These factors could result in
lower prices and larger spreads in the bid and ask prices for shares of the
Company's common stock. From May 22, 1997 to July 27, 1999, the Company
traded on the Nasdaq SmallCap Market under the symbol "TNSU." From March 20,
1995 to June 6, 1997, the Common Stock was traded on the Vancouver Stock
Exchange ("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.
The table below sets forth the high and low closing prices of the
Common Stock from October 1, 1997 through July 27, 1999, as reported on the
Nasdaq SmallCap Market and from July 28, 1999 through January 31, 2000, as
reported on the Nasdaq OTC Bulletin Board. These price quotations reflect
interdealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
11
<PAGE>
<TABLE>
<CAPTION>
Common Stock
------------
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
FISCAL 1998:
December 31, 1997 $4.13 $2.00
March 31, 1998 4.50 2.38
June 30, 1998 3.16 2.25
September 30, 1998 2.56 1.50
FISCAL 1999:
December 31, 1998 $2.19 $1.41
March 31, 1999 2.50 1.25
June 30, 1999 1.88 1.00
September 30, 1999 1.31 0.47
FISCAL 2000:
December 31, 1999 0.79 0.24
THROUGH FEBRUARY 18, 2000 $1.62 $0.26
</TABLE>
STOCKHOLDERS
On September 30, 1999, there were 24,390,404 shares of Common Stock
outstanding held by 314 holders of record. The last reported sales price on
the Common Stock on January 31, 2000, was $0.42 (rounded) per share.
DIVIDENDS
During the fiscal years ended September 30, 1999 and 1998, the
Company declared and issued dividends of 109,734 and 40,000 shares,
respectively, of Common Stock to the holders of record of its 5% Series A
Convertible Preferred Stock. 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.
PRIVATE PLACEMENTS
On June 30, 1998, the Company entered into a Convertible Stock
Purchase Agreement with an accredited investment group. The Company issued
400 shares of its 5% Series A Convertible Preferred Stock, par value $1.00
per share ("Series A Stock"), for $10,000 per share, with offering costs of
approximately $460,000. The Series A Stock is convertible into the Company's
no par value common stock ("Common Stock") at the option of the holder
beginning 90 days after the June 30, 1998 closing date. The conversion price
is the lesser of the fixed conversion price of $2.31 per share or a variable
conversion price. The Series A Stock also provides certain mandatory
redemption rights which are triggered upon the occurrence of certain events.
Attached to the Series A Stock were warrants to purchase 199,999 shares of
Common Stock at $3.00 per share. The warrants are currently exercisable and
have a term of four years. The Company believes that the sale of the Series A
Stock was exempt from registration under the Securities Act by reason of
Section 4(2) of the Securities Act. The underlying Common Stock was
registered under the Securities and Exchange Commission Form S-3 effective
August 13, 1998; however, upon delisting of the Company's stock from the
Nasdaq Smallcap Market on July 27, 1999, the Company became ineligible to
file or maintain registration statements. The net proceeds from this offering
were used as working capital for the Company. These uses of net offering
proceeds were made in the form of direct or
12
<PAGE>
indirect payments to others. Upon delisting of the Company's stock from the
Nasdaq SmallCap Market on July 27, 1999, the Company became unable to file or
maintain registration statements.
During the year ended September 30, 1999, the preferred stockholders
converted 175 shares of Series A Stock for 1,535, 198 shares of Common Stock.
After September 30, 1999, the preferred stockholders converted 50 shares of
Series A Stock for 2,740,426 shares of Common Stock.
On July 27, 1999, the Company's common stock was delisted from
trading on the Nasdaq SmallCap Market, but is currently traded on the Nasdaq
OTC Bulletin Board. The delisting was a triggering event under the
Convertible Stock Purchase Agreement; however, the holder has not informed
the Company of any intent to exercise its redemption rights.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are derived
from the consolidated financial statements of the Company, which for the
fiscal year ended September 30, 1999 have been audited by Brown, Graham and
Company, PC independent certified public accountants and for the fiscal years
ended September 30, 1998 and 1997 were audited by Arthur Andersen LLP,
independent certified public accountants, to the extent indicated in their
reports 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 in their entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements.
<TABLE>
<CAPTION>
(In Thousands, except per share data) FISCAL YEARS ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $10,145 $5,349 $5,294 $1,717 $359
Net income (loss) from
continuing operations 1,043 (2,484) (3,942) (880) (2,445)
Net income (loss) from
discontinued operations (10,010) (6,064) (6,171) (2,804) (2,445)
Goodwill Amortization Expense - (2,092) (3,585) (1,494) N/A
Net income (loss) applicable to common
stock per share:
Continuing operations - (.15) (.22) (.07) -
Discontinued operations (.43) (.44) (.58) (.24) (.29)
Total assets 16,814 15,913 17,232 17,463 1,613
Long term debt 2,757 755 81 123 -
Mandatorily redeemable convertible
preferred stock 1,831 2,390 - - -
</TABLE>
13
<PAGE>
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, 1999, 1998 and 1997. 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 quote
"Business - Forward Looking Statement - Cautionary Statements.)
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 approximately $2,300,000, the
proceeds of which were used to reduce short-term debt and provide working
capital for 1st Tech.
The Company's consolidated operations have been unprofitable since the
merger with 1st Tech and DarkHorse in May 1996. Although the Company was able to
develop increasing revenues from its memory module manufacturing business, it
was not able to generate gross margins at the requisite sales volumes in order
to make the business profitable. A number of factors contributed to the
Company's inability to establish adequate profit margins. The Company failed to
achieve the projected revenues that were required to produce sufficient margin
to meet the Company's ongoing fixed costs. The Company also failed to win, and
on occasion lost, the business of several large customers due to the Company's
weak financial condition, which caused potential customers to be concerned about
the Company's ability to deliver. Additionally, the Company often faced an
unpredictable cost structure due to uncertainties regarding inventory costs. The
market for DRAM chips, the principal component in memory modules, became highly
volatile at various times over the last three years in terms of pricing and
inventory availability. Many of the Company's competitors had greater financial
resources and were able to obtain more advantageous prices, as well as secure
allocations of DRAM during high demand periods. The Company would, at times, be
forced to pay top market prices to procure DRAM, which in turn caused margin
problems. Further, the Company's customers generally were on a single-order
basis with no long term commitments or ability to adjust pricing as to
outstanding orders.
A shortage of computer memory chips in the fourth fiscal quarter of
fiscal 1999 and a rapid increase in memory chip prices during the same period
severely disrupted the Company's business, resulting in major shortfalls of
revenue. After dropping by approximately 95% from 1996 to mid-1999, memory chip
prices escalated rapidly in August and September 1999, quadrupling between July
and September 1999, before leveling off in October 1999. The Company had great
difficulty in obtaining DRAM inventory during this period and lost several key
orders. Additionally, one of the Company's largest customers (comprising
approximately 20.5% of Company sales in fiscal 1999) was acquired, in April
1999, by another semiconductor manufacturer and ceased doing business with the
Company.
14
<PAGE>
In July 1999, the Company's stock was delisted from the Nasdaq SmallCap
Market for failure to meet the $2,000,000 net tangible assets requirement.
Delisting of the Company's stock placed the Company in default under the Stock
Purchase Agreement entered into with KA Investments LLC ("KA") dated June 30,
1998, pursuant to which KA purchased 400 shares of 5% Series A Convertible
Preferred Stock ("Series A Stock") of the Company for $4,000,000. Under the
terms of the Stock Purchase Agreement, the Series A Stock was convertible into
common stock based on a formula set forth in the Agreement and quarterly
dividends were payable in common stock or cash. The shares of common stock
issuable under the Stock Purchase Agreement were registered under a Registration
Statement on Form S-3. Upon delisting of the Company's stock from the Nasdaq
SmallCap Market on July 27, 1999, the Company's S-3 was no longer effective.
Delisting also constituted a triggering event for redemption of the
Series A stock. As of the date hereof, the holder of the Series A Stock has not
informed the Company if or when it may exercise any redemption right. As of
February 1, 2000 the aggregate redemption price, including a stipulated
redemption premium, was approximately $2,200,000. The Company does not currently
have sufficient funds to pay the redemption price and the obligation would
therefore be subject to accrual of interest at 15% per annum under the Stock
Purchase Agreement. The Stock Purchase Agreement also restricts transfers of
intellectual property rights unless in connection with the sale of all or
substantially all assets, and further provides that sale of substantially all
assets also constitutes a triggering event for redemption.
On October 15, 1999, the Company hired an investment bank to assist it
in addressing alternatives to improve the overall posture of the Company and
bolster stockholder value. The September 1999 financial results for the Company
and excessive losses in its memory module manufacturing business made the
Company's ability to attract financing unlikely. In consultation with the
investment bank, the Company evaluated selling the memory module manufacturing
business and retaining its other operations.
In October 1999, the Company also engaged a law firm that specialized
in bankruptcy to evaluate alternatives, including a liquidation analysis for the
Company as a whole. This analysis projected a 6-14% return to unsecured
creditors upon liquidation, with the common stockholders receiving nothing.
Management estimated that the cost to shut down its memory module manufacturing
business would exceed $5,000,000. Other factors diminishing the potential return
included the following: the senior lender had a lien on all inventory and
receivables, capital leases encumbered a large portion of fixed assets, and a
substantial portion of the assets are located in Scotland and subject to a
differing priority scheme. The law firm indicated that in its opinion in order
to file a successful reorganization proceeding under Chapter 11 of the U.S.
Bankruptcy Code, the Company needed more cash than was available. Absent a
steady funding source, a successful reorganization proceeding was considered
unlikely.
The investment bank and the Company contacted over fifteen potential
buyers for the memory module manufacturing business. Of the fifteen contacted,
six signed confidentiality agreements with only three giving an indication of
interest in a possible transaction. Two of the inquiries related to the
acquisition of tangible assets only, at a distressed price and without assuming
any liabilities. The third, All Components, Inc. ("ACI"), indicated it would be
willing to consider an acquisition of the memory module manufacturing business,
if structured as an asset sale in which an entity controlled by it would assume
only certain liabilities of the Company.
Although a number of alternatives, including Chapter 7 liquidation,
were considered by the Board of Directors, the best alternative was considered
to be ACI's expression of interest in acquiring the memory module manufacturing
business. On November 12, 1999, the Company and ACI executed a non-binding
letter of intent. The Company agreed not to solicit or negotiate another
acquisition offer (other than for the memory module test systems business) until
December 31, 1999. From November 12, 1999 until December 9, 1999, ACI conducted
continuing due diligence and simultaneously the parties and their counsel
negotiated a definitive asset purchase agreement (the "Asset Purchase
Agreement"). The Asset Purchase Agreement related to the sale of certain assets
15
<PAGE>
and business comprising the Company's memory module manufacturing business to an
affiliate of ACI, Tanisys Operation, LP, as well as the sale of the stock of the
Company's wholly owned subsidiary, Tanisys (Europe) Ltd., (the "Sale
Transaction"). In addition, the Company entered into a covenant not to compete
for ten years after the closing of the sale transaction as further described
below.
In connection with the sale transaction, the Company incurred a loss of
$3,319,147. The components of the loss include the following: total
consideration from the Buyer totaled $2,264,907, which included $360,000 in cash
proceeds and $1,904,907 in assumed liabilities. The Company sold assets with a
book value of $2,786,344, which included fixed assets of $666,164, accounts
receivable of $1,077,104 and inventory of $1,043,076. Additionally, in
connection with and as a condition to closing the Sale Transaction, the Company
was able to negotiate a reduction in the aggregate amount payable to the
Company's creditors by $1,677,678. The loss on the sale transaction was
effectively reduced by this debt forgiveness. The stock of the Company's wholly
owned subsidiary, Tanisys (Europe), Ltd., was sold to the buyer, which carried a
book value of $1,214,187.
The Company incurred additional expenses which have been paid in
connection with the Sale Transaction including the following: fixed assets of
the memory module manufacturing business totaling $1,136,869 were written off,
stock and warrants valued at $98,091 were issued to creditors in satisfaction of
amounts owed, expenses to terminate various lease obligations in the amount of
$109,000 were incurred, $327,364 in inventory and $64,710 in deferred financing
costs were written off, $128,604 was paid to the Company's principal lender to
terminate its line of credit, professional fees were paid in the amount of
$85,572, and a variety of additional miscellaneous costs totaling $71,091 were
paid.
The Company also expects to pay future costs in addition to those
detailed above in connection with the Sale Transaction for the following: lease
termination costs for capital equipment of $835,669, professional fees of
$158,460, proxy costs of $100,000, warranty expenses totaling $51,535, and
additional expenses for litigation totaling $141,540. These costs have been
accrued by the Company and are included on the Consolidated Balance Sheet with
liabilities of discontinued operations.
Since consummating the sale transaction in December 1999, the Company
has refocused its efforts on its memory module test systems business. Following
the sale of its memory module manufacturing business, the Company also retained
its proprietary Tanisys Touch technology, available for licensing to third
parties. Although not currently under license, this technology provides an
imbedded switching mechanism alternative to mechanical and other switch
technologies. In fiscal 1999, the Company derived $118,000 in revenue from this
technology. After closing of the Sale Transaction, the Company has the same
directors and retains its officers associated with the memory module test
systems business, including Charles T. Comiso as the Company's Chief Executive
Officer.
Although there can be no assurance that the Sale Transaction will have
the intended effect on the company's financial condition and continuing
operations, management believes that the Company's retained memory module test
systems business will be able to succeed on its own, generate a positive cash
flow, and yield net profits for the Company.
The results of the memory module manufacturing business have been
classified as discontinued operations and prior periods have been restated to
reflect the sale. The loss on the sale, as well as the costs associated with the
disposition of the memory module manufacturing business, have been recorded in
the consolidated financial statements as of September 30, 1999.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data of
the Company expressed as a percentage of net sales for the years ended September
30, 1999, 1998 and 1997:
16
<PAGE>
<TABLE>
<CAPTION>
Continuing Operations: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 44.5 55.3 65.5
--------- -------- --------
Gross profit 55.5 44.7 34.5
--------- -------- --------
Operating expenses:
Research and development 15.8 31.7 30.0
Sales and marketing 15.2 24.1 22.5
General and administrative 6.9 12.5 11.4
Depreciation and amortization 1.5 16.8 26.3
Bad debt expense 2.3 2.5 14.7
--------- -------- --------
Total operating expenses 41.7 87.6 104.9
--------- -------- --------
Operating income (loss) 13.8 (42.9) (70.4)
Other expense, net (3.5) (3.5) (4.1)
--------- -------- --------
Net income (loss) from
continuing operations 10.3% (46.4) (74.5)
Net loss from discontinued operations (98.7%) (113.4) (116.6)
--------- -------- --------
--------- -------- --------
Net income (loss) (88.4)% (159.8%) (191.1%)
--------- -------- --------
--------- -------- --------
</TABLE>
NET SALES
Net sales consist of memory module test system solutions, less returns
and discounts. Net sales increased to $10,145,108 in fiscal 1999 from $5,349,285
in fiscal 1998, an increase of 90%. The increase in fiscal 1999 is due to market
acceptance of the SIGMA-3 test systems in the Company's memory module test
systems product line.
Net sales of $5,349,285 increased in fiscal 1998 from $5,294,000 in
fiscal 1997, an increase of 1%. Sales in fiscal 1997 and 1998 were fairly
constant with shipments of SIGMA-2 and LC/Sync LC testers prior to introduction
of the SIGMA-3 test systems.
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 increased to $5,632,506 in
fiscal 1999 from $2,389,630 in fiscal 1998. Gross profit margin increased to
55.5% in fiscal 1999 from 44.7% in fiscal 1998. The increase in gross profit, as
well as the increase in gross profit margin, was due primarily to the increased
sales of SIGMA-3 memory module tests systems and associated manufacturing cost
efficiencies.
In fiscal 1998, gross profit increased to $2,389,630 from $1,828,108 in
fiscal 1997. Gross profit margin increased to 44.7% in fiscal 1998 from 34.5% in
fiscal 1997. The increase in gross profit, as well as the increase in gross
profit margin, was due to increased manufacturing efficiencies and reduced
component costs.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the costs associated with
the design and testing of new technologies and products. These relate primarily
to the costs of materials, personnel, management and employee compensation and
engineering design consulting fees. Research and development expenses decreased
to $1,602,131 in fiscal 1999 from $1,692,059 in fiscal 1998, representing a
decrease of 5.3%. Research and development expenses are expected to increase
with expenditures for development of test systems for new technologies and to
decrease as a percentage of revenues as growth in revenues occurs.
17
<PAGE>
Research and development expenses increased to $1,692,059 in fiscal
1998 from $1,589,103 in fiscal 1997, representing an increase of 6.5%. The
increase was primarily due to the development of new test system 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 $1,537,717 in fiscal 1999 from $1,287,903 in 1998. Sales and
marketing expenses expressed as a percentage of revenues in fiscal 1999 and 1998
were 15.2% and 24.1%, respectively. The increase in sales and marketing expenses
is attributable to additional expenses focused on introducing the SIGMAo 3 test
system. The decrease in expenses expressed as a percentage of revenues relate
directly to increased revenues in fiscal 1999. Sales and marketing expenses are
expected to increase in terms of absolute dollars and to decrease as a
percentage of revenues in future periods as growth in revenue occurs.
Sales and marketing expenses increased to $1,287,903 in fiscal 1998
from $1,188,754 in 1997. Sales and marketing expenses expressed as a percentage
of revenues in fiscal 1998 and 1997 were 24.1% and 22.5%, respectively. The
small increase in sales and marketing expenses and the small increase in
expenses expressed as a percentage of revenues relate directly to consistent
revenues in 1997 and 1998.
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 1999 and 1998, general and administrative
expenses increased to $703,900 from $665,420, a 5.8% increase. General and
administrative expenses expressed as a percentage of revenues were 6.9% and
12.5% in fiscal years 1999 and 1998, respectively. The increase in actual funds
expended in fiscal 1999 is due primarily to normal increases in costs. The
absolute dollar expenses associated with the general and administrative area are
expected to increase at a much slower pace than revenues in future periods with
the anticipated continued growth in business activity. The general and
administrative expenses are expected to decline in future periods when expressed
as a percentage of sales.
In fiscal years 1998 and 1997, general and administrative expenses
increased to $665,420 from $602,783, a 10.4% increase. General and
administrative expenses expressed as a percentage of revenues were 12.5% and
11.4% in fiscal 1998 and 1997, respectively. The increase in actual funds
expended in fiscal 1998 was due primarily to the additional expenditures related
to the Company's rent and personnel costs.
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 to 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 1999, the amount charged to bad
debt expense was $233,196 compared to $136,139 for fiscal 1998.
For fiscal 1998, the amount charged to bad debt expense was $136,139
compared to $780,785 for fiscal 1997.
18
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes the depreciation for all fixed
assets and the amortization of intangibles, including goodwill incurred in the
May 1996 acquisitions of 1st Tech and DarkHorse. Depreciation and amortization
decreased to $155,466 in fiscal 1999 from $902,064 in fiscal 1998. The decrease
is due primarily to the completion of amortization in April 1998 of goodwill
relating to the acquisitions of 1st Tech and DarkHorse. Depreciation and
amortization is expected to increase slightly in terms of absolute dollars and
decrease significantly as a percentage of revenues as growth in revenues occurs.
Depreciation and amortization decreased to $902,064 in fiscal 1998 from
$1,393,880 in fiscal 1997. The decrease was due primarily to the completion of
amortization in April 1998 of goodwill relating to 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 was attributable to borrowings from a
revolving credit note. Substantially all of the interest expense related to
credit line draws made for short-term inventory requirements and to fund
accounts receivable. Interest income relates to investment of available cash in
short-term interest bearing accounts and cash equivalent securities. The Company
incurs net interest expense in order to maintain balances of inventories and
accounts receivable. Other income (expense) increased to $356,774 of expense in
fiscal 1999 from $189,809 of expense in fiscal 1998. The increase in other
income (expense) is primarily due to an increase in short-term borrowings on the
revolving credit note. The Company expects to continue to require borrowings to
fund growth in accounts receivable and inventory in the future and therefore
expects net interest expense to increase.
Other income (expense) decreased to $189,809 of expense in fiscal 1998
from $215,499 of expense in fiscal 1997. The decrease in other income (expense)
is primarily due to a decrease in short-term borrowings on the revolving credit
note.
PROVISION FOR INCOME TAXES
For the years ended September 30, 1999, 1998 and 1997, the Company
incurred consolidated net operating losses for U.S. income tax purposes of
approximately $4,229,000, $5,252,000 and $6,023,000 and for non-U.S. income tax
purposes of approximately $817,000 and $369,000 and $-0-, respectively. The loss
carryforwards of approximately $22,886,000 at September 30, 1999 begin to expire
in 2011. At September 30, 1999 and 1998, the Company had temporary differences
resulting in future tax deductions of approximately $4,791,766 and $756,000,
respectively, principally representing differences in accounting and tax basis
in accrued liabilities and reserves and anticipated loss from discontinued
operations. Deferred income tax assets from the loss carryforwards and asset
basis differences aggregate approximately $8,456,000 and $6,888,000, at
September 30, 1999, and 1998, respectively.
For financial reporting purposes, a valuation allowance of $8,456,000
and $6,888,000 at September 30, 1999 and 1998, respectively, has 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 carryforwards and future tax
deductions to reduce taxable income is subject to various limitations under the
Internal Revenue Code of 1986, as amended (the "Code"), in the event of an
ownership change as defined in Section 382 of the Code. The Company may lose the
benefit of such net operating loss carryforwards due to Internal Revenue Service
("IRS") Code Section 382 limitations. This section states that after
reorganization or other change in corporate ownership, the use of certain
19
<PAGE>
carryforwards may be limited or prohibited. The Company believes that the IRS
Code Section 382 limitation did not exist as of September 30, 1999, and if
triggered, the consequence is expected to have no material impact on the
Company's consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has utilized the funds acquired in equity
financings of its Common Stock, exercise of warrants, exercise of stock options,
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 1999, the Company generated
$3,846,201 in net cash from financing activities versus $3,568,696 in fiscal
1998. The $3,846,201 in fiscal 1999 consisted of $558,750 from Common Stock
sales, proceeds from stockholders notes of $2,000,000 and $1,287,451 on
revolving credit and capital lease obligations. At September 30, 1999, the
Company had $684,949 of cash, $290,511 restricted cash and a negative working
capital of $6,619,275. The negative working capital is primarily attributable to
approximately $6,580,928 of short-term liabilities related to discontinued
operations. 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 November 2, 1998, the Company completed a private placement of
$2,000,000 of debt with warrants. On January 31, 2000, certain holders of the
debt elected to convert an aggregate amount of $1,800,000 into 7,200,000 shares
of the Company's common stock pursuant to an offer made by the Company. Interest
was accrued on the notes through January 31, 2000 and was converted into an
aggregate of 42,629 shares of the Company's common stock in accordance with the
terms of the loan agreements.
Capital expenditures totaled $192,156 and $759,752 in fiscal 1999 and
1998, respectively. These capital expenditures were primarily for the purchase
of test equipment, expansion of manufacturing facilities and upgrades to
enterprise information systems.
The Company believes that its existing funds, anticipated cash flows
from operations, amounts available from future vendor credits, bank borrowings,
capital and operating leases and equity financings will be sufficient to meet
its working capital and capital expenditure needs for the next twelve months at
the projected level of operations. However, should there be a significant
increase in sales above projected levels which requires additional investments
in equipment, inventory and accounts receivable, the Company may be required to
obtain additional funding through debt or rely upon a future equity offering or
offerings for such funding. There is no assurance that the Company would be able
to locate debt funding or that it would be successful in its attempts to raise a
sufficient amount of funds in an equity offering or offerings. The Company's
potential inability to raise needed funds to meet its projected level of
operations or increase above current projections could have a material adverse
effect on the Company.
INTERNATIONAL SALES
International sales accounted for 31.9% and 31.3% of net sales in
fiscal 1999 and 1998, respectively. The Company anticipates that international
sales will increase in future periods and will account for an increasing portion
of net sales. The Company is 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 U.S. or other countries. Because
sales of the Company's products have been denominated to date 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. Some of the Company's customer purchase orders
and agreements are governed by foreign laws, which may differ significantly from
U.S.
20
<PAGE>
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.
SIGNIFICANT CUSTOMER CONCENTRATION
In North America and Europe a majority of the Company's memory module
test systems are sold directly to semiconductor and independent memory module
manufacturers. In Asia, the Company also sells its test systems through
distribution partners and independent sales representative organizations. In
fiscal 1999 and 1998, the Company's ten largest customers accounted for 90.6%
and 52.2% of net memory module test system sales, respectively. During fiscal
1999, the Company had three customers which accounted for 43.8%, 13.8% and 12.2%
of the Company's net memory module test system sales, respectively. In fiscal
1998 and 1997, one customer accounted for 11.3% and 10.3% of the Company's net
test system sales, respectively.
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 customers' 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.
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. 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 rescheduling 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.
PRODUCT CONCENTRATION; DEPENDENCE ON MEMORY MARKET
The market for semiconductor memory module test systems 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 overcapacity. During fiscal 1999, there
were significant declines as well as increases in DRAM and SRAM semiconductor
prices. Since the Company's test systems are sold into the semiconductor and
memory module market, future price changes could have a material adverse effect
on the Company's business, financial condition and results of operations.
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. 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. Other factors that may affect the Company's results of
operations in the future include fluctuating market demand for and changes in
the selling prices of the
21
<PAGE>
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 rescheduling
of orders due to customer financial difficulties or other events; inventory
obsolescence, including the reduction in value of the Company's inventories due
to unexpected price declines and unexpected product returns; the timing of
expenditures in anticipation of increased sales; cyclicality in the Company's
targeted markets; and expenses associated with acquisitions.
Sales of the Company's individual products and product lines toward the
end of a product's life cycle typically are 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, return of
products 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 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 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.
DEPENDENCE ON SEMICONDUCTOR, COMPUTER, TELECOMMUNICATIONS AND NETWORKING
INDUSTRIES
Demand for the Company's line of memory module test systems is driven
by the increased demand for higher level memory module technology in
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. 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.
HISTORY OF LOSSES; UNCERTAIN PROFITABILITY
The Company has experienced operating losses since inception. At
September 30, 1999, the Company had an accumulated deficit of approximately
$39,359,910.
There can be no assurance that the Company will not continue to incur
losses or that the Company will be able to raise cash as necessary to fund
operations.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE
22
<PAGE>
The Company's capital requirements will depend on numerous factors,
including market acceptance and demand for its products; the resources the
Company devotes to the development, manufacture and marketing of its
products; the progress of the Company's product development programs; the
resources required to protect the Company's intellectual property; the
resources expended, if any, to acquire complementary businesses, products and
technologies; and other factors. The timing and amount of such capital
requirements cannot be accurately predicted. Funds also may be used for the
acquisition of businesses, products and technologies that are complementary
to those marketed by the Company. Consequently, although the Company believes
that its revenues and other sources of liquidity will provide adequate
funding for its capital requirements through at least 2000, the Company may
be required to raise additional funds through public or private financings,
collaborative relationships or other arrangements. There can be no assurance
that the Company will not require additional funding or that such additional
funding, if needed, will be available on terms attractive to the Company or
at all. Any additional equity financings may be dilutive to stockholders, and
debt financing, if available, may involve restrictive covenants. In addition,
the number of shares of Common Stock issuable upon the conversion of the
Series A Stock is subject to adjustment upon the occurrence of certain
events. Such adjustments may be dilutive to stockholders and may inhibit the
Company's ability to consummate additional equity financings.
MANAGEMENT OF GROWTH; EXPANSION OF OPERATIONS
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 research and development, 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. In order to
achieve anticipated sales levels and profitability, the Company will continue
to be required to manage its assets and operations efficiently.
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 transitioned from fast page mode and
EDO memory to SDRAM over the past three years. Other transitions from SDRAM
to Rambus-Registered Trademark- and DDR SDRAM are occurring in 2000. 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;
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 delayed
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 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, and in some cases
custom components in the Company's
23
<PAGE>
memory module test systems. 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.
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in a 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. 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.
DEPENDENCE ON AVAILABILITY, RECRUITMENT AND RETENTION OF TECHNICAL PERSONNEL
The Company depends upon its ability to attract, hire and retain
technical personnel who possess the skills and experience necessary to meet
the Company's own personnel needs and the technical requirements of its
clients. Competition for individuals with proven technical skills is intense.
The computer industry in general experiences a high rate of attrition of such
personnel. The Company competes for such individuals with competitors,
providers of outsourcing services, temporary personnel agencies, computer
systems consultants, customers and potential customers. Many large
competitors have announced extensive campaigns to hire additional technical
personnel. Failure to attract and retain sufficient technical personnel would
have a material adverse effect on the Company's business, operating results
and financial condition.
LIMITED OPERATING HISTORY
Although the Company has been in existence since 1984, its current
operations have been in place only since its acquisition of DarkHorse in
1996. Accordingly, the Company is still in many respects subject to certain
risks and uncertainties inherent in a new enterprise, including limited
capital and other resources, reliance on key personnel, operating in a highly
competitive environment, inability to develop long-term relationships with
its customers, suppliers and lenders, lack of name recognition, higher
overhead costs, and difficulty in addressing unanticipated problems, delays
and expenses.
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 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 third parties will not in
24
<PAGE>
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 and copyrights.
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 the Company can otherwise meaningfully protect its
intellectual property rights.
EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET; LACK OF LIQUIDITY OF LOW
PRICED STOCKS
In July 1999, the Company's stock was delisted from trading on the
Nasdaq SmallCap Market, and on July 28, 1999, the Company's stock began
trading on the Nasdaq OTC Bulletin Board, which was established for
securities that do not meet the Nasdaq SmallCap Market's listing
requirements. Consequently, buying or selling the Company's common stock
could be more difficult because of the smaller quantities of shares that
could be bought and sold, transactions could be delayed, and security
analysts' and news media's coverage of the Company stock could be reduced.
These factors could result in lower prices and larger spreads in the bid and
ask prices for shares of the Company's common stock.
In addition to delisting, with the trading price of the Common Stock
below $5.00 per share, trading in the Common Stock also is subject to the
requirements of certain rules promulgated under the Exchange Act, which
require additional disclosures by broker-dealers in connection with any
trades involving a stock defined as a penny stock (generally, any non-Nasdaq
or other national equity security that has a market price of less than $5.00
per share, subject to certain exceptions). Such rules require the delivery,
prior to any penny stock transaction, of a disclosure schedule explaining the
penny stock market and the risks associated therewith, and impose various
sales practice requirements on broker-dealers who sell penny stock to persons
other than established customers and accredited investors (which are
generally institutions). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchase and have
received the purchaser's written consent to the transaction prior to the
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in Common Stock,
which could severely limit the market liquidity of the Common Stock and the
ability of stockholders to sell their shares of Common Stock in the secondary
market.
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
25
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments, which
would require disclosure under this item.
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>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 1999 AND 1998 AND
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997:
Reports of Independent Public Accountants..........................................27
Consolidated Balance Sheets at September 30, 1999 and 1998.........................29
Consolidated Statements of Operations for the Years Ended September 30, 1999,
1998 and 1997.....................................................................30
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997.................................................31
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998 and 1997...............................................................32
Notes to the Consolidated Financial Statements.....................................33
</TABLE>
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tanisys Technology, Inc.:
We have audited the accompanying consolidated balance sheet of Tanisys
Technology, Inc. (a Wyoming corporation), and subsidiaries as of September
30, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. The consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tanisys
Technology, Inc., and subsidiaries as of September 30, 1999, and the results
of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company has incurred net losses of
$8,996,728, $8,547,796 and $10,113,828 for the years ended September 30,
1999, 1998, and 1997, respectively. Current liabilities exceed current assets
by $6,619,275 and total liabilities exceed total assets by $3,872,620 at
September 30, 1999. These factors, and others discussed in Note 1, raise
substantial doubt about Tanisys Technology, Inc.'s ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
/s/ Brown, Graham and Company P.C.
Austin, Texas
February 14, 2000
27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tanisys Technology, Inc.:
We have audited the accompanying consolidated balance sheet of Tanisys
Technology, Inc. (a Wyoming corporation), and subsidiaries as of September
30, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended September 30, 1998. 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 audits 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, 1998, and the results of their
operations and their cash flows for each of the two years in the period ended
September 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Austin, Texas
October 30, 1998
28
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $684,949 $239,446
Restricted cash (Note 6) 290,511 154,271
Trade accounts receivable, net of allowance of $333,703 and
$406,157, respectively 1,977,390 1,219,422
Inventory (Note 3) 540,458 923,942
Prepaid expenses and other 205,974 124,792
Net current assets of discontinued operations (Note 2) 7,610,991 5,820,493
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 11,310,273 8,482,366
Property and equipment, net of accumulated depreciation and amortization of
$747,988 and $351,995 respectively (Note 4) 496,391 676,457
Other noncurrent assets 60,680 73,514
Net noncurrent assets of discontinued operations (Note 2) 4,946,235 6,680,963
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $16,813,579 $15,913,300
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,199,200 $1,829,111
Accrued liabilities (Note 5) 529,087 436,340
Revolving credit note (Note 6) 1,978,403 639,765
Current portion of obligations under capital lease (Note 8) 30,939 59,112
Net current liabilities of discontinued operations (Note 2) 14,191,919 8,389,518
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 17,929,548 11,353,846
Long-term debt to shareholders, net of discounts (Note 7) 1,722,749 -
Long-term portion of obligations under capital lease (Note 8) 9,920 32,934
Net noncurrent liabilities of discontinued operations (Note 2) 1,023,982 721,817
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 20,686,199 12,108,597
- -----------------------------------------------------------------------------------------------------------------------------
Mandatorily redeemable convertible preferred stock:
5% Series A Convertible Preferred Stock, $1 par value, 400 shares
authorized, 225 and 400 shares issued and outstanding, respectively (Note 9) 1,831,483 2,390,475
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (Note 10):
Common stock, no par value, 50,000,000 shares authorized,
24,390,404 and 20,799,714 shares issued and outstanding, respectively 31,968,495 29,114,774
Additional paid-in capital 1,687,312 1,687,312
Accumulated other comprehensive loss - (2,625)
Accumulated deficit (39,359,910) (29,385,233)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (5,704,103) 1,414,228
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity (Deficit) $16,813,579 $15,913,300
=============================================================================================================================
</TABLE>
29
<PAGE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $10,145,108 $5,349,285 $5,294,000
Cost of goods sold 4,512,602 2,959,655 3,465,892
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 5,632,506 2,389,630 1,828,108
- -----------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 1,602,131 1,692,059 1,589,103
Sales and marketing 1,537,717 1,287,903 1,188,754
General and administrative 703,900 665,420 602,783
Depreciation and amortization 155,466 902,064 1,393,880
Bad debt expense 233,196 136,139 780,785
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,232,410 4,683,585 5,555,305
- -----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,400,096 (2,293,955) (3,727,197)
Other income (expense):
Interest income 13,675 23,808 15,981
Interest expense (371,514) (213,617) (231,480)
Other income 1,065 - -
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 1,043,322 (2,483,764) (3,942,696)
- -----------------------------------------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes:
Loss from discontinued operations, net of income taxes (6,690,903) (6,064,032) (6,171,132)
of $-0-
Estimated loss on disposal of memory module
manufacturing business (3,319,147) - -
- -----------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations (10,010,050) (6,064,032) (6,171,132)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss $(8,966,728) $(8,547,796) $(10,113,828)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $1,043,322 $(2,483,764) $(3,942,696)
Preferred stock dividend and amortization of the
value of the beneficial conversion feature on
the preferred stock (1,007,949) (588,016) -
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations
applicable to common stockholders 35,373 (3,071,780) (3,942,696)
Loss from discontinued operations (10,010,050) (6,064,032) (6,171,132)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders $(9,974,677) $(9,135,812) $(10,113,828)
- -----------------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share:
Income (loss) from continuing operations
applicable to common stockholders $ - $(0.15) $(0.22)
Loss from discontinued operations (0.43) (0.29) (0.35)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(0.43) $(0.44) $(0.58)
- -----------------------------------------------------------------------------------------------------------------------------
Diluted income (loss) per common share:
Income (loss) from continuing operations
applicable to common stockholders $.01 $(0.15) $(0.22)
30
<PAGE>
Loss from discontinued operations (0.33) (0.29) (0.35)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders $(0.32) $(0.44) $(0.58)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN TOTAL
COMMON STOCK PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
-----------------------
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 15,978,537 $20,469,136 $ - $ - $(10,119,093) $10,350,043
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - (10,113,828) (10,113,828)
Sale of stock 2,280,000 5,600,000 - - - 5,600,000
Exercise of stock warrants and options 2,076,177 2,530,388 - - - 2,530,388
Other - - - - (16,500) (16,500)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 20,334,714 28,599,524 - - (20,249,421) 8,350,103
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - (8,547,796) (8,547,796)
Exercise of stock warrants and options 275,000 130,250 - - - 130,250
Sale of stock 100,000 150,000 - - - 150,000
Stock issued for services 50,000 62,000 - - - 62,000
Stock options issued for services - 123,000 - - - 123,000
Stock warrants issued in connection
with issuance of mandatorily
redeemable
convertible preferred stock - - 283,803 - - 283,803
Beneficial conversion feature associated
with mandatorily redeemable
convertible preferred stock - - 1,403,509 - - 1,403,509
Amortization of beneficial
conversion feature - - - - (538,016) (538,016)
Stock dividend paid on mandatorily
redeemable convertible preferred 40,000 50,000 - - (50,000) -
stock
Foreign translation adjustment - - - (2,625) - (2,625)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 20,799,714 29,114,774 1,687,312 (2,625) (29,385,233) 1,414,228
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - (8,966,728) (8,966,728)
Exercise of stock warrants and options 1,815,000 558,750 - - - 558,750
Stock issued for services 30,000 30,000 - - - 30,000
Stock issued for interest on shareholder 100,758 133,333 - - - 133,333
debt
Stock warrants issued for debt financing - 75,000 - - - 75,000
costs
Stock warrants issued for operating lease - 56,284 - - - 56,284
Stock warrants issued in connection with
issuance of debt to stockholders - 461,538 - - - 461,538
Conversion of mandatorily redeemable
convertible preferred stock to
common stock 1,535,198 1,424,485 - - - 1,424,485
Amortization of beneficial conversion - - - - (865,493) (865,493)
feature
Stock dividend paid on mandatorily
redeemable convertible preferred 109,734 114,331 - - (142,456) (28,125)
stock
Foreign translation adjustment - - - 2,625 - 2,625
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 24,390,404 $31,968,495 $ 1,687,312 $ - $(39,359,910) $(5,704,103)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
31
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) ($8,966,728) ($8,547,796) (10,113,828)
Deduct: Net loss from discontinued operations (10,010,050) (6,064,032) (6,171,132)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income (loss) from continuing operations 1,043,322 (2,483,764) (3,942,696)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 455,923 1,135,969 1,545,001
Amortization of warrant cost issued for debt 184,287 - -
Stock issued for interest - -
Stock compensation for services 133,333 185,000 -
30,000
(Increase) decrease in restricted cash (136,240) 1,385,177 (1,539,448)
(Increase) decrease in accounts receivable, net (757,968) (362,254) 104,613
(Increase) decrease in inventory 383,484 (23,892) (133,592)
Increase in prepaid expenses and other (81,182) (25,808) (46,414)
Increase (decrease) in accounts payable and accrued liabilities (565,289) 149,433 779,964
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities of continuing operations 689,670 (40,139) (3,232,572)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of fixed assets (192,156) (759,752) (151,121)
Other assets 12,834 64,550 (52,703)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities of continuing operations (179,322) (695,202) (203,824)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of debt to shareholders 2,000,000 - -
Proceeds from issuance of common stock - 150,000 5,600,000
Net proceeds from issuance of preferred stock and warrants - 3,665,000 -
Draws (payments) on revolving credit note, net 1,034,906 (362,009) 163,400
Payments on capital lease obligations (51,187) (14,545) -
Proceeds from exercise of stock options - 128,250 42,420
Proceeds from exercise of stock warrants 558,750 2,000 2,487,968
Other - - (16,500)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities of continuing operations 3,542,469 3,568,696 8,277,288
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from discontinued operations (3,607,314) (4,583,926) (5,540,444)
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 445,503 (1,750,571) (699,552)
Cash and cash equivalents, beginning of year 239,446 1,990,017 2,689,569
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 684,949 $ 239,446 $ 1,990,017
- -------------------------------------------------------------------------------------------------------------------------------
32
<PAGE>
Supplemental disclosure of cash flow information:
Interest paid $ 941,408 $ 610,334 $ 661,368
Non-cash investing and financing activities:
Stock and stock options issued for services 30,000 185,000 -
Preferred stock dividend accrued 28,125 - -
Preferred stock dividend paid in common stock 114,331 50,000 -
Amortization of beneficial conversion feature on preferred stock 865,493 538,016 -
Capital lease additions 1,094,039 1,000,631 73,527
Accrued fixed asset additions - 3,114,855 -
Issuance of stock warrants in connection with issuance of debt to
Shareholders 461,538 - -
Conversion of preferred stock to common stock 1,424,485 - -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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"), Rosetta
Marketing and Sales Inc., and Tanisys (Europe) Ltd., which is located in
Scotland, (collectively, 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.
The Company designs, manufacturers and markets memory module test
systems and provides design services in conjunction with the licensing of its
touch sensor products.
On December 9, 1999, the Company sold its memory module manufacturing
business, including all of the common stock of Tanisys (Europe), Ltd. The assets
and liabilities and the loss from the sale of the memory module manufacturing
business have been included in the accompanying consolidated financial
statements as discontinued operations. (See Note 2 for discontinued operations)
GOING CONCERN
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. Numerous factors could affect
the Company's operating results, including, but not limited to, general economic
conditions, competition, and changing technologies. 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 was able to generate $1,043,322
in income before discontinued operations, however, the Company has sustained
substantial operating losses in recent years. In addition, the Company's working
capital position has deteriorated due to the ongoing losses from operations. At
September 30, 1999, current liabilities exceed current assets by $6,619,275, and
total liabilities exceed total assets by $3,872,620.
33
<PAGE>
In view of these matters, realization of a major portion of the assets
in the accompanying consolidated balance sheet is dependent upon continued
operations of the Company, which in turn may be dependent upon the success of
its future operations. Management believes that the sale of certain assets and
the assumption of certain liabilities by the buyer of its memory module
manufacturing business in December 1999, including all the stock of Tanisys
(Europe) Ltd., plus anticipated cash flows from operations will provide the
opportunity for the Company to continue as a going concern.
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.
34
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORY
Inventory is stated at the lower of cost or market value. In the second
quarter of fiscal 1999, the Company changed its method of accounting for
inventories from a weighted-average cost basis to a standard cost method. The
change did not have a significant effect on results of operations for 1997, 1998
or 1999, 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.
(See Note 3)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives, which range from three to seven years. Leasehold
improvements and assets subject to capital lease are amortized using the
straight-line method over the shorter of the term of the lease or life of the
asset. Maintenance and repairs are expensed as incurred.
GOODWILL
Goodwill has been amortized against earnings over two years. For the
years ended September 30, 1998, and 1997, amortization expense of approximately
$2,092,000 and $3,585,000, respectively, has been reflected in operating
expenses in continuing and discontinued operations in the accompanying
consolidated statements of operations. (See Note 2)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The mandatorily redeemable convertible preferred stock was issued
during fiscal 1998. The preferred stock contains a beneficial conversion feature
which has been charged to accumulated deficit and is reflected as an increase in
preferred stock up to the earliest date the preferred stock can be converted to
Common Stock. (See Note 9)
FOREIGN CURRENCY
The Scotland subsidiary uses the Pound Sterling as its functional
currency. The Company's Scotland assets and liabilities are translated into U.S.
Dollars at the exchange rate at the balance sheet date. Income and expense items
are translated at the average exchange rate prevailing during the period. The
aggregate transaction gains and losses included in the determination of net loss
are not material for any period presented. (See Note 2)
35
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
Revenue from sales is recognized when the related products are shipped,
typically freight on board shipping point or at the time the services are
rendered. The Company warrants products against defects, has a policy concerning
the return of products and accrues the cost of warranting these products as the
items are shipped.
RESEARCH AND DEVELOPMENT
Research and development expenses relate primarily to the technological
development and enhancement of the Company's products. Research and development
costs are charged to expense as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. This statement is effective for the
Company in fiscal 1999. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from contributions by stockholders.
There was no impact to the Company as a result of the adoption of SFAS No. 130,
as there were no differences between net loss and comprehensive loss available
to common stockholders for the year ended September 30, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operating decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the consolidated financial statements is also to be provided. SFAS
No. 131 is effective for the Company in fiscal year 1999. The Company has
adopted this statement, but due to the sale of the memory module manufacturing
business the company does not have operating segments.
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.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
fiscal 1999 presentation. (See Note 2)
36
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
2. DISCONTINUED OPERATIONS
On December 9, 1999, the Company sold certain assets of its memory
module manufacturing business, including all the stock of Tanisys (Europe) Ltd.,
a wholly owned subsidiary of the Company located in Scotland. The sale also
included the assumption of certain liabilities by the buyer. The results of the
memory module manufacturing operations have been classified as discontinued
operations in all fiscal periods presented.
Revenue of the discontinued operations was $42,364,464, $27,796,729 and
$42,379,950 in fiscal 1999, 1998 and 1997, respectively.
The loss on the sale, as well as the costs associated with the
disposition of the memory module manufacturing business, has been recorded in
the consolidated financial statements as of September 30, 1999. Included in the
loss is an accrual of $1,327,502, which represents the Company's best estimate
of the remaining costs associated with the disposition of the discontinued
operations.
Assets and liabilities of the memory module manufacturing business
consisted of the following:
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Cash $ 220,103 $ 13,661
Trade accounts receivable 5,013,731 2,987,497
Inventory (net) 1,952,251 2,300,729
Prepaid expenses 424,906 518,606
----------- ----------
Net current assets $ 7,610,991 $5,820,493
----------- ----------
----------- ----------
Property and equipment (net) $ 4,319,960 $6,075,342
Other assets 626,275 605,621
----------- ----------
Net noncurrent assets $ 4,946,235 $6,680,963
----------- ----------
----------- ----------
Accrued liabilities $ 5,375,894 $3,740,946
Accounts payable 3,253,199 2,819,018
Revolving credit line 4,242,743 1,626,495
Capital leases, current 1,320,083 203,059
----------- ----------
Net current liabilities $14,191,919 $8,389,518
----------- ----------
----------- ----------
Capital leases net of current $ 1,023,982 $ 721,817
----------- ----------
----------- ----------
</TABLE>
Net assets disposed of have been separately classified in the
accompanying consolidated balance sheet at September 30, 1999. The September 30,
1998 consolidated balance sheet has been restated to conform with the current
year's presentation.
37
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
2. DISCONTINUED OPERATIONS (CONTINUED)
Included in the discontinued liabilities are leases for certain
equipment. Future minimum lease payments under these leases at September 30,
1999 were as follows:
<TABLE>
<CAPTION>
Capital Leases
--------------
<S> <C>
2000 $ 1,492,070
2001 619,140
2002 539,599
2003 24,808
-----------
Total minimum lease payments 2,675,617
Amounts representing interest (331,552)
-----------
Present value of minimum capital lease payments 2,344,065
Less: current portion (1,320,083)
-----------
Long-term capital lease obligation $ 1,023,982
-----------
-----------
</TABLE>
The Company had a letter of credit totaling $434,562 and $506,988 at
September 30, 1999 and 1998, as collateral for an operating lease for
manufacturing equipment. As of September 30, 1999, the Company has cash in an
escrow account with a financial institution which is pledged against the letter
of credit. This amount has been included in net noncurrent assets of
discontinued operations in the accompanying consolidated financial statements.
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
September 30,
------------------------
1999 1998
------------------------
<S> <C> <C>
Raw materials $297,252 $648,060
Work-in-process 21,648 77,047
Finished goods 221,558 198,835
-------- --------
$540,458 $923,942
-------- --------
-------- --------
</TABLE>
38
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Equipment $ 967,780 $ 755,911
Furniture and fixtures 207,240 207,240
Leasehold improvements 69,359 65,301
---------- ----------
1,244,379 1,028,452
Less accumulated
depreciation and amortization (747,988) (351,995)
---------- ----------
$ 496,391 $ 676,457
---------- ----------
---------- ----------
</TABLE>
Included in the amounts above is approximately $40,861 and $92,046 of
property and equipment acquired under capital leases at September 30, 1999 and
1998, respectively. The accumulated amortization related to these assets totaled
approximately $5,105 and $80,734 at September 30, 1999 and 1998, respectively.
Depreciation and amortization expense includes depreciation and
amortization of property and equipment and amortization of goodwill.
Depreciation and amortization expense as reflected in the accompanying
consolidated statements of operations is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Cost of goods sold $300,457 $ 233,905 $ 151,121
Operating expenses 155,466 902,064 1,393,880
-------- ---------- ----------
$455,923 $1,135,969 $1,545,001
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
39
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Unearned revenue $ - $ 83,333
Warranty 52,652 155,850
Salaries, wages and commissions 35,280 28,408
Franchise, sales and property taxes 15,258 31,758
Dividends payable 28,125 -
Interest payable 51,111 -
Professional fees 20,510 54,817
Service fees 140,000 -
Engineering fees 150,000 -
Other liabilities 36,151 82,174
-------- --------
$529,087 $436,340
-------- --------
-------- --------
</TABLE>
6. REVOLVING CREDIT NOTE
The Company obtained an $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 plus 2% (10.25% at September 30, 1999).
The Company also issued to the lender stock purchase warrants to
purchase 65,000 shares of Common Stock at a price of $5.38 per share, which
was 5% over the market closing price on the date the note agreement was
executed. These stock purchase warrants expire on July 24, 2002. (See Note 10)
The revolving credit note has a maturity date of July 24, 2000, and
it is secured by all of the Company's assets. The maturity 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 60 days
prior to the maturity date.
Borrowings are based upon 85% of eligible accounts receivable and
eligible inventory amounts as defined in the borrowing agreement. The amounts
outstanding at September 30, 1999 and 1998 were $6,221,146 and $2,266,260,
respectively. Additional amounts that were available at September 30, 1999
and 1998 was $871 and $0, respectively. 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 reflected as restricted cash in the accompanying consolidated
balance sheets. Included in discontinued operations for September 30, 1999
and 1998 were $4,242,743 and $1,626,495, respectively, of the credit line.
(See Note 2)
40
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
7. LONG-TERM DEBT
In November 1998, the Company issued $2,000,000 in debt with
attached stock warrants to certain stockholders of the Company. The debt is
due in two years and carries an interest rate of 10 percent per annum. The
interest is due quarterly and payable in either unregistered shares of common
stock or cash, at the option of the Company. One stock warrant was issued for
each dollar of debt, resulting in the issuance of 2 million stock warrants.
Each warrant is exercisable into one share of common stock beginning on
December 1, 1998, at an exercise price of $0.25 per share. The exercise price
increases to $0.50 per share after August 1, 1999 and $1.00 per share after
October 1, 2000. The warrants expire on November 1, 2001. During the year
ended September 30, 1999, the Noteholders were issued 1,600,000 shares of
common stock upon the exercise of certain warrants.
The Company determined the fair value of the warrants to be
approximately $461,538, and has reflected this value as a discount on the
debt. The debt discount is being amortized as interest expense over the life
of the related debt. Long-term debt to shareholders consists of the following
at September 30, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
<S> <C>
Notes payable $2,000,000
Less - unamortized discount (277,251)
- -----------------------------------------------------------------------------
Long-term debt owed to shareholders, net of discount $1,722,749
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
In connection with the placement and issuance of this debt, the
Company incurred costs of $21,350 and issued 100,000 stock warrants to the
Company's chairman of the board and 25,000 stock warrants to its legal
counsel. Each warrant is exercisable into one share of common stock at $0.01
per share beginning on December 1, 1998, and the warrants expire on November
1, 2001. As of September 30, 1999, all of these warrants had been exercised
for 125,000 shares of common stock. The Company valued the warrants at $0.60
per share, or $75,000. The total debt issuance costs of $96,350 have been
reflected in other noncurrent assets in the accompanying consolidated balance
sheet and are being amortized on the straight line method over the life of
the related debt.
8. LEASE COMMITMENTS
The Company leases certain equipment and office space under
noncancellable leases with expiration dates ranging from 1999 through 2013.
41
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
8. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments under all leases at September 30, 1999
were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
2000 $38,921 $272,672
2001 12,270 4,713
2002 - 4,713
2003 - 1,446
Thereafter - 11,567
--------- ----------
Total minimum lease payments 51,191 $295,111
----------
----------
Amounts representing interest 10,332
---------
Present value of minimum capital lease payments 40,859
Less: current portion (30,939)
---------
Long-term capital lease obligation $9,920
---------
---------
</TABLE>
Rent expense recorded under all operating leases was $405,228,
$258,689 and $262,437, for the years ended September 30, 1999, 1998 and 1997,
respectively. Interest rates on the capital leases range from 7.0% to 42.4%.
9. PREFERRED STOCK
Pursuant to a Convertible Stock Purchase Agreement (the "Stock
Purchase Agreement"), on June 30, 1998 the Company issued 400 shares of its
5% Series A Convertible Preferred Stock, par value $1 per share ("Series A
Stock"), for $4,000,000.
The Series A Stock is convertible into the Company's no par value
common stock ("Common Stock") at the option of the holder. The conversion
price is the lesser of the fixed conversion price of $2.31 per share or a
variable conversion price. The Company has valued this beneficial conversion
feature at $1,403,509 and has reflected this amount in additional paid-in
capital and as a charge to the accumulated deficit as a dividend in the
amount of $865,493 and $538,016 for the years ended September 30, 1999 and
1998, respectively.
The Series A Stock carries mandatory redemption rights that can be
exercised by the holder if certain triggering events occur. On July 27, 1999,
the Company's common stock was delisted from trading on the NASDAQ SmallCap
Market, but is currently traded on the NASDAQ OTC Bulletin Board. The
delisting was a triggering event under the Stock Purchase Agreement; however,
the holder has not informed the Company of any intent to exercise its
redemption rights. At September 30, 1999, the aggregate redemption price,
including a stipulated redemption premium, was approximately, $2,475,000.
42
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
9. PREFERRED STOCK (CONTINUED)
Dividends are payable quarterly in either cash or registered shares
of Common Stock, but must be paid in cash upon the occurrence of certain
events. For the years ended September 30, 1999 and September 30, 1998, the
Company paid dividends of $114,331 and $50,000 by issuing 109,734 shares and
40,000 shares of Common Stock, respectively, at the market value.
Attached to the Series A Stock were warrants to purchase 199,999
shares of Common Stock at $3.00 per share. The warrants currently are
exercisable and have a term of four years from June 30, 1998. The Company has
valued the warrants at $283,803 and has reflected this amount in additional
paid-in capital during the year ended September 30, 1998.
During the year ended September 30, 1999, the preferred stockholders
converted 175 shares of Series A Stock for 1,535,198 shares of Common Stock.
At September 30, 1999 and 1998, the carrying value of the Series A
Stock consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Balance, October 1 $ 2,390,475 $ -
Issuance of Series A Stock - 4,000,000
Offering costs - (460,229)
Value of beneficial conversion feature - (1,403,509)
Value of attached warrants - (283,803)
Amortization of beneficial conversion feature 865,493 538,016
Conversion of perferred stock for common stock (1,424,485) -
---------------------------
Balance, September 30 $ 1,831,483 $ 2,390,475
---------------------------
</TABLE>
43
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
10. STOCKHOLDERS' EQUITY
WARRANTS
During the years ended September 30, 1999, 1998, and 1997, the Company
issued warrants to various individuals or companies for services in connection
with debt. Each stock warrant entitles the holder to purchase one share of
Common Stock at a particular price, vesting period and expiration date specified
within each individual warrant agreement. The shares issued upon exercise of
these stock warrants are subject to resale restrictions. The following
summarizes the warrants issued by the Company:
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------------- ------------------------
Stock Warrant Stock Warrant Stock Warrant
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 289,998 $3.00 to $5.38 289,999 $.01 to $5.38 1,860,177 $1.70 to $2.30
Granted 2,200,000 $.01 to $.25 199,999 $3.00 489,999 $.01 to $5.38
Exercised (1,725,000) $.01 to $.25 (200,000) $.01 (2,060,177) $.01 to $1.15
Expired (4,999) $3.41 - - - -
--------- -------------- ----------------------------------------------------------
Outstanding end of year 759,999 $.25 to $5.38 289,998 $3.00 to $5.38 289,999 $.01 to $5.38
--------- -------------- ----------------------------------------------------------
--------- -------------- ----------------------------------------------------------
Exercisable end of year 753,331 $.01 to $5.38 276,665 $.01 to $5.38 - -
--------- -------------- ----------------------------------------------------------
--------- -------------- ----------------------------------------------------------
</TABLE>
STOCK OPTIONS
The Company has two stock option plans. All options granted under the
plans are exercisable for Common Stock as permitted by SFAS No. 123, "Accounting
for Stock-Based Compensation".
The 1993 Stock Option Plan permits grants to the Company's directors,
key employees and consultants. The 1997 Non-Employee Director Plan permits
grants to the Company's non-employee directors. The stock options granted under
each of these plans are granted at fair market value on the date of grant, vest
ratably over a predefined period and expire no more than ten years from the date
of grant. At September 30, 1999, the Company had reserved a total of 5,890,000
shares of Common Stock for the plans.
44
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
10. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options
outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------------
Weighted
Average Weighted-
Remaining Weighted-
Range of Exercise Contractual Life Average Weighted Average
Prices Shares (Years) Exercise Price Shares Exercise Price
- ------------------ --------- --------------- ------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$0.50 - $0.99 1,082,200 6.96 $0.56 -
$1.00 - $1.75 1,636,417 4.13 1.70 1,063,909 $1.71
$1.76 - $2.00 2,435,500 5.21 1.97 696,375 1.93
Over $2.00 82,500 0.15 2.95 82,500 2.94
--------- ---------
5,236,617 1,842,784
--------- ---------
--------- ---------
A summary of the activity of the Company's stock option plans is
presented below:
September 30,
-----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
Weighted Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- ---------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 4,396,917 $1.91 2,387,317 $3.24 1,804,100 $2.81
Granted 1,410,700 $0.84 2,478,400 1.95 882,500 4.20
Cancelled or expired (481,000) $2.00 (393,800) 3.72 (283,283) 3.51
Exercised (90,000) $1.75 (75,000) 1.71 (16,000) 2.65
---------- ---------- ----------
Outstanding, end of year 5,236,617 4,396,917 1.91 2,387,317 3.24
---------- ---------- ----------
---------- ---------- ----------
Options exercisable, end of year 1,842,784 $1.72 1,226,492 1.91 1,083,700 2.50
Weighted average fair value of
options granted during
the year $0.46 $1.54 $2.23
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 1999, 1998 and 1997:
<TABLE>
<CAPTION>
For the Year Ended September 30,
----------------------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Dividend yield - - -
Expected volatility 50.3% 82.0% 79.0%
Risk-free interest rate 4.5% 5.6% 6.5%
Expected life (years) 7 5 5
</TABLE>
45
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
10. STOCKHOLDERS' EQUITY (CONTINUED)
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for grants under the stock option plans since the exercise price of the options
equals the fair market value of the Common Stock on the date of grant.
Had compensation cost for all stock option grants been determined based
on their fair market value at the grant dates consistent with the fair value
method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------------------
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C> <C>
Net loss As reported $(8,966,728) $(8,547,796) $(10,113,828)
Pro forma (9,622,699) (9,808,987) (10,988,476)
Net loss applicable
to Common Stock As reported (9,974,677) (9,135,812) (10,113,828)
Pro forma (10,630,648) (10,397,003) (10,988,476)
Net loss applicable
to Common Stock
per share As reported (0.43) (0.44) (0.58)
Pro forma (0.46) (0.50) (0.63)
</TABLE>
11. INCOME TAXES
For the years ended September 30, 1999, 1998 and 1997, the Company
incurred consolidated net operating losses for U.S. income tax purposes of
approximately $4,229,000, $5,252,000 and $6,023,000 and for non-U.S. income tax
purposes of approximately $817,000 and $369,000 and $-0-, respectively. The loss
carryforwards of approximately $22,886,000 at September 30, 1999 begin to expire
in 2011. At September 30, 1999 and 1998, the Company had temporary differences
resulting in future tax deductions of approximately $4,791,766 and $756,000,
respectively, principally representing differences in accounting and tax basis
in accrued liabilities and reserves and anticipated loss from discontinued
operations. Deferred income tax assets from the loss carryforwards and asset
basis differences aggregate approximately $8,456,000 and $6,888,000, at
September 30, 1999, and 1998, respectively.
For financial reporting purposes, a valuation allowance of $8,456,000
and $6,888,000 at September 30, 1999 and 1998, respectively, has 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 carryforwards and future tax
deductions to reduce taxable income is subject to various limitations under the
Internal Revenue Code of 1986, as amended (the "Code"), in the event of an
ownership change as defined in Section 382 of the Code. The Company may lose the
benefit of such net operating loss carryforwards due to Internal Revenue Service
("IRS") Code Section 382 limitations. this section states that after
reorganization or other change in corporate ownership, the use of certain
carryforwards may be limited or prohibited. The Company believes that the IRS
Code Section 382 limitation did not exist as of September 30, 1999 and if
triggered the consequence is expected to have no material impact on the
Company's consolidated financial position or results of operations.
46
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
12. EARNINGS PER SHARE
Basic income or loss per common share is computed based on the weighted
average number of common shares outstanding during each period. For the year
ended September 30, 1999, diluted income or loss per common share are computed
based on the weighted average number of common shares outstanding, after giving
effect to the potential issuance of common stock on the exercise of options and
warrants and the conversion of convertible preferred stock and the impact of
assumed conversions. For the years ended September 30 ,1998 and 1997,
potentially dilutive securities have not been included in the diluted loss per
common share calculation as they would have been antidilutive. The following
table provides a reconciliation between basic and diluted shares outstanding:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Weighted average number of
common shares used in basic
earnings per share 23,044,153 20,609,782 17,537,914
Effect of dilutive securities
Stock Options 1,842,784 - -
Warrants 753,331 - -
Preferred Stock 4,691,573 - -
---------- ---------- -----------
Weighted average number of
common shares and dilutive
potential common stock used
in diluted earnings per share 30,331,841 20,609,782 17,537,914
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The following data shows the amount used in computing diluted earnings per share
and the effect on income:
<TABLE>
<CAPTION>
1999
-------------
<S> <C>
Diluted earnings per share:
Income from continuing operations applicable
to common stockholders $35,373
Income impact of assumed conversions:
Preferred stock dividends 142,456
-------------
Income from continuing operations after
assumed conversions of dilutive securities 177,829
-------------
Loss from discontinued operations (10,010,050)
-------------
Net loss applicable to common stockholders
after assumed conversion of dilutive securities ($9,832,221)
-------------
-------------
</TABLE>
47
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
13. RELATED PARTY TRANSACTIONS
In accordance with the terms of his employment agreement, the chief
executive officer purchased 100,000 shares of unregistered Common Stock for a
total purchase price of $150,000 in fiscal 1998. The Company believes the
purchase price represented the fair value of unregistered Common Stock on the
dates of purchase.
In accordance with the terms of two separation agreements with senior
officers of the Company, the exercise periods of previously granted stock
options for the purchase of a total of 660,000 shares of Common Stock were
extended, resulting in a charge of $123,000 in fiscal 1998 in the accompanying
consolidated statements of operations.
General and administrative expense includes consulting fees and
expenses in the amount of $43,693, $52,415 and $112,089 paid with common stock ,
stock options or cash to the Company's directors for the fiscal years ended
September 30, 1999, 1998 and 1997, respectively.
In July 1997, the Company entered into a contract with a director for
consulting services in connection with a private placement of restricted common
stock in return for 200,000 warrants with an exercise price of $0.01 per share.
Those warrants were exercised in their entirety in February 1998.
General and administrative expense includes professional fees in the
amount of $105,000, $62,000, and $197,623 paid to two stockholders of the
Company for legal and other services provided for the years ended September 30,
1999, 1998 and 1997, respectively. Of these amounts, $105,000, $62,000,and
$100,000, respectively, were paid with common stock or warrants.
During fiscal 1997, two former stockholders of DarkHorse were paid
$37,809 each. A third stockholder's debt to the Company was reduced by $5,500
from $17,691 to $12,191. This debt was paid in full in April 1998. Prior to the
acquisition, DarkHorse was an S-Corporation. These obligations 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 who was also one of three
principal stockholders of DarkHorse became the 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 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.
48
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
13. RELATED PARTY TRANSACTIONS (CONTINUED)
To take advantage of an inventory purchase opportunity, the Company
requested that all outstanding stock purchase warrant holders exercise their
warrants by March 31, 1997, which was substantially prior to the scheduled
expiration dates of the warrants. As an inducement for the early exercise, the
exercise price was discounted 50%. An additional incentive was offered to stock
purchase warrant holders 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 warrant holders who funded
upon notice of such request.
On January 12, 2000, the Company issued 1,150,000 shares of Common
Stock to two officers, legal counsel and consultants in connection with the sale
of the memory module manufacturing business. The common stock was valued at
$223,300 based on the market value at the date of issue and has been included in
the estimated loss on disposal of the memory module manufacturing business in
the accompanying consolidated financial statements.
14. SIGNIFICANT CUSTOMERS
Following are the Company's customers with more than 10% of total net
sales during the years ended September 30, 1999, 1998 and 1997, and customers
from which the Company had accounts receivable that exceeded 10% of total
accounts receivable at September 30, 1999, 1998 and 1997. Amounts less than 10%
are reflected as a dash.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Customers A B C D
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended September 30, 1999
Net Sales 43.8% 13.8% 12.2% -
Accounts Receivable 36.3% - 46.8% -
Year Ended September 30, 1998
Net Sales 11.3% - - -
Accounts Receivable 25.7% - - -
Year Ended September 30, 1997
Net Sales 10.3% - - -
Accounts Receivable 10.2% - 12.1% 20.5%
</TABLE>
49
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
15. EMPLOYEE BENEFITS
The Company sponsors The Tanisys Technology Inc., 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. Generally, all employees of the
Company who are 18 years of age are eligible for participation in the 401(k)
Plan on the first day of the month following their dates of hire.
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 1999,
1998 or 1997.
16. SUBSEQUENT EVENTS
On December 17, 1999, the Company entered into an agreement with
Silicon Valley Bank under an Accounts Receivable Purchase Agreement to sell its
receivables for a percentage of the face amount, not to exceed $2,000,000. The
Company must repurchase a receivable if it is more than 90 days old or if the
debtor files for bankruptcy.
Subsequent to September 30, 1999, the Company has issued 2,262,900
stock options to employees, directors and consultants.
During the year ended September 30, 1999, the preferred stockholders
converted 175 shares of Series A Stock for 1,535,198 shares of Common Stock.
After September 30, 1999, the preferred stockholders converted 60 shares of
Series A Stock for 2,740,426 shares of Common Stock.
On January 31, 2000, holders of the Company's long term debt elected
to convert an aggregate amount of $1,800,000 into 7,200,000 shares of the
Company's common stock pursuant to an offer made by the Company. Interest was
accrued on the notes through January 31, 2000 and was converted into an
aggregate of 42,629 shares of the Company's common stock in accordance with the
terms of the loan agreements.
17. CONTINGENCIES
The Company is a defendant in a lawsuit filed by one of its customers
for alleged breach of contract. The suit asks for actual damages, including all
related expenses in the amount of $77,838. The Company believes the suit is
without merit and is vigorously defending its position.
Under the terms of a preferred stock purchase agreement with certain
investors, the Company is required, among other items, to be in compliance with
the listing and maintenance requirements of the stock exchange on which the
common stock is listed. As a result of non-compliance, the investors have the
right to redeem the outstanding amount of preferred stock. In July 1999, NASDAQ
ruled that the Company failed to meet the exchange's requirements for listing.
Currently, the investors have taken no action. (See Note 9)
Under the terms of the Asset Purchase Agreement for the sale of the
memory module manufacturing business in December 1999, the Company is not in
compliance with the date that requires shareholders ratification of the sale by
proxy. Under the terms of the agreement, if the Company is not in compliance
with the covenants, the buyer could invalidate the transaction.
50
<PAGE>
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
Under the terms of a lease agreement between Tanisys (Europe), Ltd.and
Akeler Limited, the Company guaranteed the payment of rent in the amount of
approximately $200,000 per year. At the present time, Tanisys (Europe), Ltd. is
in compliance with the lease agreement, but if Tanisys Technology, Inc. should
become liable, the Company would have recourse against the purchaser of the
memory module manufacturing business.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE.
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 January 27, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
Charles T. Comiso 62 President, Chief Executive Officer and Director
John R. Bennett 39 Vice President of Sales and Marketing
Richard R. Giandana 57 Vice President of Administration and Human Resources
Terry W. Reynolds 43 Vice President of Finance
Joseph C. Klein 43 Vice President of Engineering and Manufacturing
W. Audie Long 56 Corporate Secretary
Parris H. Holmes, Jr. 56 Chairman of the Board (1)(2)(3)
Gordon H. Matthews 62 Director (1)
Theodore W. Van Duyn 50 Director (2)(3)
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Committee.
The following are biographies of the Company's executive officers,
directors and key employees for the past five years.
CHARLES T. COMISO joined the Company as Chief Executive Officer,
President 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 Wyse Technology, Inc., 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 36
years of technology industry experience and also has held positions with
Hewlett-Packard Company, Texas Instruments, IT&T Labs and Bendix Corporation.
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'
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.
52
<PAGE>
RICHARD R. GIANDANA, Vice President of Human Resources, joined the
Company in May 1998 with many years' experience in domestic and international HR
and education management, including experience in Europe, Australia, and Latin
America. He has worked in high-tech manufacturing with IBM, Xerox and Tandem
Computers. Mr. Giandana was formerly a member of the faculties at the Rochester
(NY) Institute of Technology and Cabrillo (CA) College. He was also President of
the Center for Training and Communication in Scotts Valley, CA and has provided
consulting services and training to high-tech firms in California and Texas,
including his SELLING IDEAS TO DECISION-MAKERS seminar.
JOSEPH C. KLEIN, Ph.D., Vice President of Engineering, joined the
Company in November 1997. Prior to joining the Company, Mr. Klein was Vice
President of Research and Development for PNY Technologies, Inc. from November
1994 to November 1997 and was WorldWide Memory Manager for IBM PC Company from
November 1984 to November 1994.
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 Concepts Corp., a third-party billing clearinghouse
and information management services business, since May 1996. Mr. Holmes served
as Chairman of the Board and Chief Executive Officer of USLD Communications
Corp. from September 1986 until August 1996 and continued as Chairman of the
Board of USLD Communications Corp. until June 1997.
W. AUDIE LONG has served as Senior Vice President, General Counsel and
Corporate Secretary of Billing Concepts Corp. since February 1998. Mr. Long was
Senior Vice President-Legal and Regulatory Affairs and General Counsel of USLD
Communications Corp. ("USLD") from February 1991 to January 1998 and was
Corporate Secretary of USLD from August 1993 to January 1998.
GORDON H. MATTHEWS has served as a Director of the Company since 1994.
Mr. Matthews is a named inventor in over 40 US and foreign patents, and is the
acknowledged inventor of voice mail. Mr. Matthews is currently Chairman of the
Board of PremiseNET, Inc., a company that he founded in 1996. PremiseNET
produces a CPE system called MAXX that brings voice mail, automated attendant
and other Call Processing functions to the home and small business. He is also a
member of the Board of Vtel, the leader in teleconferencing services and
equipment. He was recognized as the Inventor of the Year by the Texas Bar
Association and was nominated for induction into the National Inventor's Hall of
Fame. Prior to founding PremiseNET, Mr. Matthews owned and operated a consulting
service that taught companies the methodology of creating meaningful patent
portfolios.
TERRY W. REYNOLDS, CPA, joined the Company as Vice President of Finance
in January 2000. Prior to joining the Company, Mr. Reynolds served from October
of 1998 to December of 1999 as Chief Financial Officer of Doyle Wilson
Homebuilder. From September of 1996 to October of 1998, Mr. Reynolds was the
Chief Financial Officer for Windsport, and prior to that he worked for the
public accounting firms of Charles Douthitt & Co. and Arthur Andersen LLP. He
has over 20 years of experience in financial management, and has also held
positions with Chrysler Technologies Corporation and First Financial
Corporation.
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.
53
<PAGE>
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 Board of Directors may fill the vacancy so
arising 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 a Compensation and Stock
Option Committee and an Audit Committee. The Board of Directors does not
currently utilize a nominating committee or committee performing similar
functions.
COMPENSATION AND STOCK OPTION COMMITTEE
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.
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 and Matthews.
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."
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
six other most highly compensated executive officers of the Company whose base
salary and bonus exceeded $100,000 for fiscal year 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
54
<PAGE>
Annual Compensation Compensation Awards
------------------------- -----------------------
Fiscal Securities Under
Options/
Name and Principal Position Year Salary ($) Bonus SARs Granted (#)
- --------------------------- -------- ------------ ---------- -----------------------
<S> <C> <C> <C> <C>
CHARLES T. COMISO 1999 212,154 (1) 0 200,000
PRESIDENT, CHIEF EXECUTIVE 1998 172,500 (2) 0 1,000,000
OFFICER AND DIRECTOR 1997 N/A N/A N/A
RAYMOND F. LEBLANC 1999 110,232 (3) 0 300,000
VICE PRESIDENT, WORLDWIDE SALES 1998 N/A N/A N/A
1997 N/A N/A N/A
JOHN R. BENNETT 1999 184,147 0 25,000
VICE PRESIDENT OF SALES 1998 155,050 0 105,000 (4)
1997 109,032 (5) 25,000 50,000
JOSEPH C. KLEIN 1999 120,000 0 60,000
VICE PRESIDENT OF ENGINEERING 1998 104,538 (6) 0 130,000
1997 N/A N/A N/A
JOE O. DAVIS 1999 105,417 (7) 0 0
SENIOR VICE PRESIDENT, 1998 115,000 0 180,000 (8)
CHIEF FINANCIAL OFFICER AND 1997 115,000 0 30,000
CORPORATE SECRETARY
CHRIS EFSTATHIOU 1999 120,000 0 60,000
SENIOR VICE PRESIDENT OF 1998 120,000 0 180,000 (9)
OPERATIONS AND GENERAL 1997 116,884 0 60,000
MANAGER
KIRK A. HARTSTEIN 1999 100,262 0 35,000
VICE PRESIDENT OF MANUFACTURING 1998 N/A (10) 0 51,000 (11)
- AUSTIN 1997 N/A (10) 0 0
</TABLE>
(1) The amount shown includes reimbursement for costs associated with Mr.
Comiso's relocation from Los Altos Hills, CA to Austin, TX.
(2) The amount shown reflects Mr. Comiso's salary from October 21, 1997, the
beginning date of his employment with the Company, through the end of fiscal
1998.
(3) The amount shown reflects Mr. LeBlanc's salary from January 7, 1999, the
beginning date of his employment with the Company, through the end of fiscal
1999.
(4) The amount shown includes 50,000 stock options issued in previous years
that were re-priced on September 24, 1998 to $1.75 per share.
(5) Mr. Bennett was elected Vice President of Sales 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.
55
<PAGE>
(6) The amount shown reflects Dr. Klein's salary from November 10, 1997, the
beginning date of his employment with the Company, through the end of fiscal
1998.
(7) The amount shown reflects Mr. Davis' salary through August 31, 1999, his
last day of his employment with the Company.
(8) The amount shown includes 150,000 stock options issued in previous years
that were re-priced on September 24, 1998 to $1.75 per share.
(9) The amount shown includes 120,000 stock options issued in previous years
that were re-priced on September 24, 1998 to $1.75 per share.
(10) Mr. Hartstein's salary did not exceed $100,000 in either 1998 or 1997.
(11) The amount shown includes 6,000 stock options issued in previous years
that were re-priced on September 24, 1998 to $1.75 per share
STOCK OPTION GRANTS
The following table provides information related to stock options granted to the
named executive officers during fiscal 1999:
<TABLE>
<CAPTION>
Individual Grants
------------------------------- Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Exercise Price Appreciation for
Underlying Employees or Base Option Term (2)
Options In Fiscal Price Expiration -----------------------
Name Granted (#)(1) 1999 ($/Sh) Date 5%($) 10%($)
- ---- -------------- ----------- ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Charles T. Comiso 200,000 16.5% $.56 9/14/06 45,595 106,256
Chris Efstathiou 60,000 4.9% $.56 9/14/06 13,679 31,877
John R. Bennett 25,000 2.1% $.56 9/14/06 5,699 13,282
Joseph C. Klein 60,000 4.9% $.56 9/14/06 13,679 31,877
Raymond F. LeBlanc 250,000 20.6% $1.91 1/26/06 194,390 453,012
Raymond F. LeBlanc 50,000 4.1% $.56 9/14/06 11,399 26,564
Richard R. Giandana 35,000 2.9% $.56 9/14/06 7,979 18,595
Kirk A. Hartstein 35,000 2.9% $.56 9/14/06 7,979 18,595
Donald R. Turner 50,000 4.1% $.56 9/14/06 11,399 26,564
</TABLE>
- --------------------
(1) For each named executive officer, the option listed represents a grant
under the Company's 1993 Stock Option Plan. See "Executive Compensation
- Employee Benefit Plans--1993 Stock Option Plan." The options granted
in fiscal 1999 are exercisable one-fourth on each of the four
anniversaries following the date of grant.
(2) Calculation based on stock option exercise price over period of option
assuming annual compounding. The columns present estimates of potential
values based on certain mathematical assumptions. The actual value, if
any, that an executive officer may realize is dependent upon the market
price on the date of option exercise.
56
<PAGE>
AGGREGATED STOCK OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR END OPTION
VALUES
The following table provides information related to stock options
exercised by the named executive officers during the 1999 fiscal year and the
number and value of options held at fiscal year end. The Company does not have
any outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Individual Grants
-----------------
Shares Number of Securities Value(1) of Unexercised
Acquired Underlying Unexercised In-the-Money
Upon Options at FY End(#) Options at FY End($)
Name Option Value ------------------------------- ------------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
(#)
------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles T. Comiso 0 N/A 100,000 1,100,000 $ 0 $ 0
Joe O. Davis 0 N/A 140,000 40,000 0 0
Chris Efstathiou 0 N/A 115,000 65,000 0 0
Donald R. Turner 0 N/A 94,833 71,167 0 0
Donald G. McCord 0 N/A 53,750 61,250 0 0
John R. Bennett 0 N/A 42,083 87,917 0 0
Joseph C. Klein 0 N/A 32,500 157,500 0 0
Richard Giandana 0 N/A 12,500 72,500 0 0
Kirk A. Hartstein 0 N/A 12,750 73,250 0 0
Raymond LeBlanc 0 N/A 0 300,000 0 0
W. Audie Long 0 N/A 6,250 18,750 0 0
</TABLE>
(1) Market value of the underlying securities at September 30, 1999 ($.49),
minus the exercise price.
REPRICING OF OPTIONS
REPORT OF COMPENSATION AND STOCK OPTION COMMITTEE
The Compensation and Stock Option Committee of the Board of Directors of
the Company has furnished the following report regarding the repricing of
options during fiscal 1998. All options repriced during fiscal 1998 resulted
from an exchange of options under the 1993 Option Plan for new options with a
lower exercise price under the same plan.
The Committee believes that the value of the Company to its stockholders is
necessarily dependent upon the Company's ability to attract and retain qualified
and competent employees. The 1993 Option Plan was expressly established to
provide an additional incentive to such individuals to continue in the service
of the Company. In September of 1998, the Committee believed that the value of
certain options previously granted to key employees under the 1993 Option Plan
had eroded to such an extent that the intended incentive to such employees had
failed, and that as a result, it was in the best interests of the Company and
its stockholders to reprice such options. The Committee believes that by
repricing the options previously granted under the 1993 Stock Option Plan, the
Company restored the incentive for such employees. The options granted in
replacemnet of previously granted options were made with an exercise price equal
to the fair market price of the underlying Common Stock on the date of the
repricing. The number of shares subject to exercise and the vesting periods
remain unchanged.
57
<PAGE>
TEN-YEAR OPTION REPRICINGS
The following table provides information related to each option repricing
held by any executive officer of the Company during the last ten completed
fiscal years.
<TABLE>
<CAPTION>
Number of Market Price
Securities of Stock at Exercise Price Length of Original
Underlying Time of at Time of New Option
Options Repricing Repricing Exercise Term Remaining at
Name and Principal Repriced or Amendments Amendments Price (2) Date of Repricing
Position Date Amended (#) ($) ($) ($) Amendment
- --------------------- -------- ----------- ------------- -------------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
John R. Bennett 10/10/96 20,000 $1.75 $4.09 $1.75 25 Months
VP - Sales 5/15/97 30,000 $1.75 $3.41 $1.75 32 Months
Joe O. Davis 8/23/96 120,000 $1.75 $3.13 $1.75 23 Months
CFO 10/10/96 30,000 $1.75 $4.09 $1.75 25 Months
Chris Efstathiou, Jr. 5/9/96 60,000 $1.75 $3.69 $1.75 20 Months
General Manager 10/10/96 60,000 $1.75 $4.09 $1.75 25 Months
Richard R. Giandana 3/22/98 40,000 $1.75 $2.69 $1.75 42 Months
VP - Human Resouces
Mark Holliday 11/25/94 110,000 $1.75 $2.94 $1.75 18 Months
Director 3/27/96 100,000 $1.75 $3.62 $1.75 18 Months
Donald G. McCord 9/11/97 100,000 $1.75 $4.63 $1.75 36 Months
VP - Marketing
Gary Pankonien 5/9/96 150,000 $1.75 $3.69 $1.75 18 Months
Director 8/19/97 100,000 $1.75 $4.50 $1.75 18 Months
Donald R. Turner 5/9/96 60,000 $1.75 $3.69 $1.75 18 Months
Controller 10/10/96 50,000 $1.75 $4.09 $1.75 25 Months
</TABLE>
EMPLOYEE BENEFIT PLANS
401(k) RETIREMENT PLAN
On May 21, 1996, the effective date of the Company's acquisition of
1st Tech, the Company adopted the 1st Tech 401(k) Plan (the "401(k) Plan").
Participation in the 401(k) Plan is offered to eligible employees of the
Company (collectively, the "Participants"). Generally, all employees of the
Company who are 18 years of age are eligible for participation in the 401(k)
Plan on the first day of the month following their dates of hire.
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. The
company is the trustee of its 401(k) Plan.
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 two members of the Board of
58
<PAGE>
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
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 defined as the closing price of
the Common Stock as reported for that day on the Nasdaq OTC Bulletin Board.
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, 5,000,000 shares of Common Stock
have been reserved for the granting of options. At September 30, 1999,
options to purchase 4,582,517 shares had been granted under the 1993 Option
Plan, leaving 417,483 shares available for future grants under the 1993
Option Plan.
59
<PAGE>
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 four eligible individuals at November 30, 1999) 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. 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.
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 expire no more than seven 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 Fee Option (other than
upon exercise or conversion) or its underlying Common Stock.
Common stock issued under the Director Plan may be newly issued or
treasury shares. Already owned Common Stock may be used as payment for the
exercise price of options if approved by the Board of Directors at the time
of exercise. if any option granted under the Director Plan terminates,
expires or is surrendered, new options may thereafter be granted covering
such shares.
60
<PAGE>
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. At September 30,
1999, 677,500 options had been granted under the Director 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. The employment term covers one year and
will continue thereafter unless terminated by either party with 120 days'
notice. Mr. Comiso's salary is $180,000 per annum until such time as the
Company reports positive cash flow from operations for all three months of a
fiscal quarter, then his salary will be $240,000 per annum. Under the terms
of the employment agreement, the Company granted Mr. Comiso a seven-year
option under the 1993 Option Plan to purchase 1,000,000 shares of its common
stock at an exercise price of $2.00. The option vests as to 100,000 and
150,000 shares on the first and second anniversaries of his employment
agreement, respectively, and 250,000 shares on each of the third, fourth and
fifth anniversaries of his employment 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 its common stock under the 1993 Option
Plan at an exercise price equal to the closing price of the Company's Common
Stock as reported on the Nasdaq Stock Market's OTC Bulletin Board 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
agreement, Mr. Comiso purchased $150,000 of the Company's stock at a maximum
price of $1.50 per share.
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 was $115,000 and he
was granted a stock option under the 1993 Option Plan, exercisable over a
five-year period, for the purchase of an aggregate of 120,000 shares of
Common Stock at $1.75 per share. The shares underlying the option vest
one-third on each of the first three anniversaries of the grant date. Mr.
Davis provided 120 days' notice in late April 1999 and left the Company
effective August 31, 1999.
Effective October 31, 1996, the Company entered into an employment
agreement with Kirk A. Hartstein 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. Hartstein's annual base salary was
$87,500 at that time and he was granted a stock option under the 1993 Option
Plan, vesting in equal installments over four years and exercisable over a
seven-year period, for the purchase of an aggregate of 45,000 shares of
Common Stock at $1.75 per share. Mr. Hartstein's employment with Tanisys
terminated effective December 31, 1999.
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 notices provided therein. Pursuant to
the terms of the employment agreement, Mr. McCord's annual base salary was
$100,000 and he was granted a stock option under the 1993 Option Plan,
vesting in equal installments over four years and exercisable over a
seven-year period, for
61
<PAGE>
the purchase of an aggregate of 100,000 shares of Common Stock at $1.75 per
share. Mr. McCord provided 120 days' notice in late May 1999 and left the
Company effective September 30, 1999.
Effective November 10, 1997, the Company entered into an employment
agreement with Joseph C. Klein, Ph.D. with a term of two years. Pursuant to
the terms of the employment agreement, Dr. Klein's annual base salary is
$120,000 and he was granted a stock option under the 1993 Option Plan,
vesting in equal installments over four years and exercisable over a
seven-year period, for the purchase of an aggregate of 100,000 shares of
Common Stock at $2.00 per share and an additional incentive of 50,000 stock
option shares upon the Company's reporting a profitable quarter and the
beginning of customer shipments of Tanisys' SIGMA-3 tester system. Dr.
Klein's employment agreement expired November 9, 1999, however, he remains
the Vice President of Engineering and Manufacturing.
Effective January 7, 1999, the Company entered into an employment
agreement with Raymond F. LeBlanc for a term of one year. Pursuant to the
terms of the employment agreement, Mr. LeBlanc's annual base salary was
$150,000 and he was granted a stock option under the 1993 Option plan,
vesting in equal installments over four years and exercisable over a
seven-year period, for the purchase of an aggregate of 250,000 shares of
Common Stock at $1.91 per share. As part of the agreement, Mr. LeBlanc agreed
to purchase a minimum of 30,000 shares of common stock at a maximum price of
$1.75 per share prior to February 15, 1999. Mr. LeBlanc's employment with
Tanisys terminated effective December 31, 1999.
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 January 31,
2000. A total of 33,987,387 shares of the Company's Common Stock were issued
or uncertificated at January 31, 2000.
<TABLE>
<CAPTION>
NO. OF SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OF CLASS (2)
------------------------------------ ----------------- ------------
<S> <C> <C>
Parris H. Holmes, Jr. 1,811,360 (3) 5.3%
7411 John Smith Drive, Suite 200
San Antonio, Texas 78229
</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 and
stock warrants, exercisable within 60 days for each individual and
33,987,387 shares of Common Stock issued and outstanding at January 31,
2000.
(3) Includes 185,000 shares that Mr. Holmes has the right to acquire upon
exercise of stock options, exercisable within 60 days.
62
<PAGE>
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock at January
31, 2000 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 33,987,387 shares of the Company's Common
Stock were issued and outstanding at January 31, 2000.
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
5% BENEFICIAL OWNERS, DIRECTORS NUMBER
AND NAMED EXECUTIVE OFFICERS OF SHARES(1) PERCENT(2)
------------------------------- ------------ ----------
<S> <C> <C>
John R. Bennett 81,150 (3) *
Charles T. Comiso 1,460,966 (4) 4.3%
Richard R. Giandana 24,500 (6) *
Parris H. Holmes Jr. 1,816,360 (5) 5.3%
Joseph C. Klein 63,500 (7) *
W. Audie Long 937,023 (8) 2.8%
Gordon H. Matthews 157,500 (9) *
Terry W. Reynolds 0 *
Theodore W. Van Duyn 290,000 (10) *
All executive officers and directors as a group
(9 persons, including the executive officers
and directors listed above) 4,825,999 (11) 14.2%
</TABLE>
- ---------------
*Represents less than one percent (1%) of the issued and outstanding shares of
Common Stock.
(1) Unless otherwise noted, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) The percentages indicated are based on outstanding stock options and
stock warrants exercisable within 60 days for each individual and
33,987,387 shares of Common Stock issued and outstanding at January 31,
2000.
(3) Includes 60,000 shares that Mr. Bennett has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(4) Includes 500,000 shares that Mr. Comiso has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(5) Includes 185,000 shares that Mr. Holmes has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(6) Includes 22,500 shares that Mr. Giandana has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(7) Includes 57,500 shares that Mr. Klein has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(8) Includes 12,500 shares that Mr. Long has the right to acquire upon
exercise of stock options, exercisable within 60 days.
63
<PAGE>
(9) Includes 107,500 shares that Mr. Matthews has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(10) Includes 25,000 shares that Mr. Van Duyn has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(11) Includes 970,000 shares that 9 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, 1999, Parris H. Holmes, Jr.,
Chairman of the Board of Directors billed the Company $51,821 for expenses
incurred in connection with issues involving corporate finance, business
operations and business opportunities.
During the fiscal year ended September 30, 1999, the Company paid the
outside legal counsel to the Company, $30,000 of stock for professional services
relating to legal issues.
On November 2, 1998, the Company completed a private placement of
$2,000,000 of debt with warrants to purchase 2 million shares of Common Stock.
Certain investors who participated in the private placement included Parris H.
Holmes, Jr., Chairman of the Board and Charles T. Comiso, the Chief Executive
Officer of the Company. The Company also issued warrants to purchase 125,000
shares of Common Stock for $.01 per share to Parris H. Holmes, Jr., Chairman of
the Board of Directors, in payment of expenses and professional fees incurred in
connection with the private placement.
In connection with the sale of the Company's memory module
manufacturing business, the Company issued an aggregate of 1,150,000 shares of
the Company's Common Stock valued at $223,300 to the Company's chairman,
president and legal counsel.
64
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) Documents filed with this report:
1) Financial Statements:
The consolidated financial statements of the Company and report of the
Company's independent public accountants thereon have been filed under
Item 8 hereof.
2) The following consolidated financial statement schedule of Tanisys
Technology, Inc. is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts and Allowances
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or information
required is included in the consolidated financial statements and, therefore,
have been omitted.
(b) 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 Incorporation of Tanisys Technology, Inc., as
amended (Exhibit 3.1 to Form S-3 filed August 13, 1998)
3.2 Restated Bylaws of the Company (Exhibit 3.5 to General Form
for Registration of Securities on Form 10, filed November 27,
1996)
4.1 Form of Common Stock Certificate (Exhibit 4.6 to Form 10
Registration Statement filed November 27, 1996)
4.2 Form of Class S Warrant Certificate (Exhibit 4.2 to December
31, 1997 to Form 10-Q)
4.3 Registration Rights Agreement dated June 30, 1998 between
Tanisys Technology, Inc. and KA Investments LDC (Exhibit 4.1
to Form S-3 Registration Statement filed August 13, 1998)
10.1 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)
10.2 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)
65
<PAGE>
10.3 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)
10.4 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)
10.5 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)
10.6 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)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
10.11 Form of Stock Option Agreement (Exhibit 10.18 to General Form
for Registration of Securities on Form 10, filed November 27,
1996)
10.12 401(k) Plan (Exhibit 10.19 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.13 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)
10.14 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)
10.15 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)
10.16 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)
10.17 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)
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<PAGE>
10.18 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)
10.19 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)
10.20 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 (Exhibit 10.32 to Form 10-K)
10.21 Memory Module Corporate Purchase Agreement, dated July 22,
1997, by and between Tanisys Technology, Inc. and Compaq
Computer Corporation (Exhibit 10.33 to September 30, 1997 Form
10-K)
10.22 Employment Agreement, dated as of September 11, 1997, by and
between Tanisys Technology, Inc. and Don McCord (Exhibit 10.34
to September 30, 1997 Form 10-K)
10.23 Employment Agreement, dated as of October 20, 1997, by and
between Tanisys Technology, Inc. and Charles T. Comiso
(Exhibit 10.34 to September 30, 1997 Form 10-K)
10.24 Employment Agreement, dated as of November 10, 1997, by and
between Tanisys Technology, Inc. and Joseph C. Klein, Ph.D.
(Exhibit 10.34 to September 30, 1997 Form 10-K)
10.25 Manufacturing Service Agreement dated February 2, 1998 by and
between the Company and LG Semicon American, Inc. (Exhibit
10.37 to March 31, 1998 Form 10-Q)
10.26 Manufacturing Service Agreement dated March 1, 1998 by and
between the Company and Toshiba America Electronic Components,
Inc. (Exhibit 10.37 to March 31, 1998 Form 10-Q)
10.27 Convertible Preferred Stock Purchase Agreement dated June 30,
1998 between Tanisys Technology, Inc. and KA Investments LDC
(Exhibit 10.1 to Form S-3 Registration Statement filed August
13, 1998)
10.28 Form of Warrant to purchase Common Stock granted by Tanisys
Technology, Inc. to each of KA Investments LDC, Midori Capital
Corporation, Hoth Incorporated and Randy Stein (Exhibit 10.2
to Form S-3 Registration Statement filed August 13, 1998)
10.29 Form of Promissory Note issued by Tanisys Technology, Inc. in
connection with $2 million debt closed November 2, 1998
(Exhibit 10.1 to December 21, 1998 Form 10-Q)
10.30 Form of Warrant Agreement entered into between Tanisys
Technology, Inc. and subscribers to the $2 million debt
offering closed November 2, 1998, and form of attached Stock
Purchase Warrant issued thereunder (Exhibit 10.2 to December
31, 1998 for 10-Q).
10.31 Asset Purchase Agreement entered into between Tanisys
Technology, Inc. and Tanisys Operations, LP, on December 9,
1999 (filed herewith).
10.32 Term Promissory Note for $911,339 issued by Tanisys
Technology, Inc. to Tanisys Operations, LP on December 9, 1999
(filed herewith)
10.33 Term Promissory Note for $85,000 issued by Tanisys Technology,
Inc. to Tanisys Operations, LP on December 9, 1999 (filed
herewith)
67
<PAGE>
10.34 Agreement Relating to Noncompetition entered into between
Tanisys Technology, Inc. and Tanisys Operations, LP dated
December 7, 1999 (filed herewith)
10.35 Settlement Agreement entered into between Tanisys Technology,
Inc. and Boston Financial & Equity Corporation dated December
9, 1999 (filed herewith)
10.36 Contract for Sale of Equipment entered into between Tanisys
Operations, LP and Boston Financial & Equity Corporation dated
December 9, 1999, to complete release of the Master Equipment
Lease between Tanisys Technology, Inc. and Boston Financial &
Equity Corporation. (filed herewith)
10.37 Bill of Sale conveying equipment covered by the Master Lease
Agreement between Tanisys Technology, Inc. and Boston
Financial & Equity Corporation to Tanisys Operations, LP dated
December 9, 1999. (filed herewith)
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of Arthur Andersen LLP (Exhibit 23.1 to September 30,
1998 Form 10-K)
27.1 Financial Data Schedule (filed herewith)
</TABLE>
(c) Reports on 8-K.
Form 8K dated January 12, 2000, and filed January 20, 2000, reporting a
change in the Company's independent auditors.
(d) Schedules.
68
<PAGE>
SCHEDULE II
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES
FISCAL YEARS ENDED 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
Balance at
Beginning of Charge to Cost Balance at End of
Description Year and Expenses Deductions Year
----------- ------------ -------------- ---------- -----------------
<S> <C> <C> <C> <C>
1999 Allowance for uncollectible
accounts receivable $406,157 $ 233,196 $ 160,742 $333,703
1998 Allowance for uncollectible
accounts receivable 180,157 136,139 362,139 406,157
1997 Allowance for uncollectible
accounts receivable 74,557 780,785 886,385 180,157
1999 Allowance for excess and
obsolete inventory 380,333 258,411 136,546 502,198
1998 Allowance for excess and
obsolete inventory 317,023 1,122,799 1,059,489 380,333
1997 Allowance for excess and
obsolete inventory $117,513 $ 239,495 $ 39,985 $317,023
</TABLE>
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF TANISYS TECHNOLOGY, INC.
AND SUBSIDIARIES ARE AN INTERGRAL PART OF THIS SCHEDULE.
69
<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.
TANISYS TECHNOLOGY, INC.
Date: February 23, 2000 By: /s/CHARLES T. COMISO
-----------------------------------------
Charles T. Comiso
CHIEF EXECUTIVE OFFICER
PRESIDENT AND DIRECTOR
Date: February 23, 2000 By: /s/TERRY W. REYNOLDS
-----------------------------------------
Terry W. Reynolds
VICE PRESIDENT OF FINANCE
(Duly authorized and Principal Accounting Officer)
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 1st day of February 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ CHARLES T. COMISO Chief Executive Officer
- --------------------------- President and Director
Charles T. Comiso
/s/ PARRIS H. HOLMES, JR. Chairman of the Board
- ---------------------------
Parris H. Holmes, Jr.
/s/ W. AUDIE LONG Corporate Secretary
- ---------------------------
W. Audie Long
/s/ GORDON H. MATTHEWS Director
- ---------------------------
Gordon H. Matthews
/s/ THEODORE W. VAN DUYN Director
- ---------------------------
Theodore W. Van Duyn
</TABLE>
70
<PAGE>
This ASSET PURCHASE AGREEMENT dated as of December 9, 1999, is by
and between Tanisys Operations, LP, a Texas limited partnership ("BUYER"), and
Tanisys Technology, Inc. a Wyoming corporation ("SELLER").
RECITALS:
WHEREAS, Seller wishes to sell, and Buyer wishes to purchase,
certain of the tangible and intangible properties and assets that constitute
Seller's worldwide memory module distribution and manufacturing business
(collectively, the "BUSINESS") currently conducted by Seller at or through the
manufacturing, converting, distribution, research and development,
administrative and other facilities set forth on SCHEDULE A (the "FACILITIES"),
all upon the terms and subject to the conditions hereinafter set forth; and
WHEREAS, capitalized terms used but not defined herein have the
meanings specified in APPENDIX A.
NOW, THEREFORE, in consideration of the mutual premises and the
covenants and other agreements set forth herein, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, each intending to be
contractually bound, hereby agree as follows:
1. SALE OF ASSETS
1.1 ASSETS TO BE SOLD. Except as otherwise provided in SECTION 1.2,
upon the terms and subject to the conditions herein set forth, at the Closing,
Seller will sell, assign, transfer, convey and deliver to Buyer all right, title
and interest of Seller related to the Business in and to:
(i) certain fixed assets and Equipment with respect to the
Business, as set forth on SCHEDULE 1.1(i) attached hereto, specifically
excepting the fixed assets and Equipment encumbered by lease obligations
included on SCHEDULE 1.2;
(ii) all Inventory;
(iii) all Records;
(iv) all site plans, surveys, soil and substratus studies,
architectural plans, as-built drawings, appraisals and electrical
and mechanical plans and studies relating to the Facilities
located on the Real Property;
(v) all Intellectual Property except as set forth on SCHEDULE
5.23(d);
(vi) all sales, promotion, marketing and advertising rights and
materials, customer lists, supplier lists, mailing lists and other data
with respect to the Business;
(vii) all Permits, to the extent such Permits are transferable,
and all non-governmental licenses, franchises, authorizations and
approvals, in each case relating to the Business;
<PAGE>
(viii) all products sold or leased by Seller in connection with
the Business (including products hereafter returned or repossessed and
unpaid sellers' rights of rescission, replevin, reclamation and rights to
stoppage in transit);
(ix) all guaranties, representations, warranties, indemnities
and similar rights in favor of Seller in connection with the Business;
(x) any and all goodwill and going concern value of the
Business;
(xi) the product lines set forth on SCHEDULE 1.1(xiv);
(xii) all Accounts Receivable;
(xiii) insurance policies;
(xiv) prepaid expenses;
(xv) employee advances;
(xvi) all deposits and retentions held by third parties, if any,
under all contracts assumed or entered into by Buyer; AND
(xvii) to the extent not otherwise included in the assets
described in this SECTION 1.1, all other assets of every kind and
description owned or held by Seller with respect to the Business as the
same shall exist on the Closing Date, other than the Retained Assets.
All the foregoing rights, properties and assets to be sold, assigned,
transferred, conveyed and delivered to Buyer hereunder are hereinafter
collectively referred to as the "ASSETS." At the Closing, Buyer will purchase
the Assets for the consideration set forth in SECTION 3.1 upon the terms and
subject to the conditions set forth in this Agreement.
1.2 RETAINED ASSETS. Anything in SECTION 1.1 to the contrary
notwithstanding, the following rights, properties and assets, as the same shall
exist on the Closing Date, will be excluded from the Assets to be sold,
assigned, transferred, conveyed and delivered to Buyer hereunder and will not be
included within the meaning of the term "Assets" (all of such excluded assets
being hereinafter collectively referred to as the "RETAINED ASSETS"):
(i) all of the tangible and intangible properties and assets
that constitute Seller's worldwide Dark Horse test systems and Tanisys
Touch businesses;
(ii) the consideration delivered to Seller pursuant to this
Agreement for the Assets;
(iii) all accounts owing between and among Seller and its
Affiliates;
2
<PAGE>
(iv) all assets and rights of Seller under any benefit plans or
benefit arrangements, including the Benefit Plans and the Benefit
Arrangements; and
(v) all cash, negotiable securities, certificates of deposit
and other cash equivalents;
(vi) all contracts, licenses, leases (including Real Property
Leases), sales orders, purchase orders and other agreements with respect
to the Business; and
(vii) Equipment encumbered by leases listed on SCHEDULE 1.2.
1.3 TRANSFER OF ASSETS IN SCOTLAND. Notwithstanding anything herein
to the contrary, if Buyer cannot reach an agreement in principal by December 31,
1999 with the Scottish Government regarding the transfer of the Assets located
in Scotland to Buyer that is acceptable to Buyer in its sole discretion, the
transfer of Seller's Assets relating to its Business in Scotland shall be deemed
null and void and such assets shall be deemed to be Retained Assets for purposes
of this Agreement.
1.4 NONASSIGNABLE PERMITS. To the extent any Permit is not assignable,
either by its terms or as a matter of Law, Buyer will prepare and submit, and
Seller will cooperate with and assist Buyer in preparing and submitting, any
information, applications or filings required in connection with the reissuance
to Buyer of such Permit.
2. ASSUMPTION OF LIABILITIES
2.1 LIABILITIES ASSUMED BY BUYER Except as otherwise limited in this
Agreement, Buyer will assume, upon the terms and subject to the conditions set
forth herein, at the Closing, and will perform or satisfy (or cause to be
performed or satisfied) thereafter, but only to the extent related to the
Business, only the following liabilities and obligations:
(i) all Current Liabilities;
(ii) except as otherwise provided in this Agreement, all
obligations, claims, demands and causes of action arising from and
accruing with respect to the functioning, use and operation of the Assets
by Buyer on and after the Closing Date; and
(iii) all liabilities or obligations with respect to Taxes for
which Buyer is liable pursuant to SECTION 7.19.
All of the foregoing liabilities and obligations of Seller to be assumed by
Buyer hereunder are hereinafter collectively referred to as the "ASSUMED
LIABILITIES."
2.2 RETAINED LIABILITIES. Anything in SECTION 2.1 to the contrary
notwithstanding, Buyer will not assume or in any way be liable or responsible
for: (x) any liabilities or obligations of Seller relating to the Assets or the
Business or any claims in respect thereof, other
3
<PAGE>
than Assumed Liabilities, or (y) any liabilities, obligations or claims,
other than Assumed Liabilities, which may be asserted against or imposed upon
Buyer by reason of its being a successor to or transferee of Seller or an
acquiror of the Assets or the Business, or otherwise, including, but not
limited to, the following:
(i) all liabilities associated with Seller's worldwide Dark
Horse test systems and Tanisys Touch businesses;
(ii) any liabilities not included in the Creditor's Plan;
(iii) any liability or obligation with respect to Taxes for which
Seller is liable pursuant to SECTION 7.19;
(iv) any liability or obligation of Seller based upon or arising
under this Agreement;
(v) any liability or obligation with respect to any present,
former or prospective employees of the Business arising out of or in
connection with their employment or possible employment with Seller at
any time, or any liability or obligation with respect to any present,
former or prospective contract employee, independent sales representative
or other independent contractor of the Business arising out of or in
connection with their relationship or possible relationship with Seller
at any time, including any liability arising out of:
(A) any benefit plans or benefit arrangements, including
but not limited to the Benefit Plans and Benefit Arrangements;
(B) any collective bargaining agreements;
(C) any shut-down agreements;
(D) any charges, complaints and/or grievances concerning
Seller's termination of its employees, contract employees,
independent sales representatives or other independent
contractors;
(E) any violations or alleged violations of any federal,
state, provincial, local or foreign labor and employment laws by
Seller;
(F) any tort or contract claims, or claims relating to
affirmative action compliance, compensation, health and welfare
benefits, vacation pay, unemployment insurance benefits, deferred
compensation, pension and retirement benefits, severance benefits,
disability benefits, other fringe benefits, rights arising under a
collective bargaining agreement, or rights or benefits under the
Consolidated Omnibus Budget Reconciliation Act, as amended, Title
VII of the Civil Rights Act of 1964, as amended, the Age
Discrimination in Employment
4
<PAGE>
Act, as amended, the Americans with Disabilities Act, the
Occupational Safety Hazard Act, the Worker Adjustment Retraining
and Notification Act, ERISA, or any other federal, state,
provincial, local or foreign employment Law;
(G) any claims asserted by Seller's present or former
employees or independent contractors for workers' compensation,
unemployment compensation or comparable benefits; or
(H) the termination or refusal to employ by Seller of
any of its present, former or prospective employees, or the
termination or refusal to utilize by Seller of any of its present,
former or prospective contract employees, independent sales
representatives or other independent contractors;
(vi) any environmental conditions or liabilities, actual,
contingent or otherwise, including but not limited to On-Site
Environmental Liabilities and Off-Site Environmental Liabilities;
(vii) any liability arising out of the violation by Seller of any
Law;
(viii) any liability or obligation of Seller relating to the
Retained Assets;
(ix) any liability or obligation of Seller arising out of any
indebtedness with respect to any period ending on or prior to the Closing
Date;
(x) any liability or obligation of Seller with respect to any
claim, action, suit, proceeding or arbitration by any Person, or arising
out of any inspection, investigation or audit or any other action by any
Governmental Entity;
(xi) any product liability with respect to any and all products
(including Inventory) sold or manufactured by Seller;
(iiii) any audit, legal, financial adviser, broker or finder fees
and commissions payable by Seller; and
(xii) all liabilities and obligations of Seller under its
contracts, licenses, leases (including Real Property Leases), sales
orders, purchase orders and other agreements with respect to the
Business.
All of the foregoing liabilities, obligations or claims will be the
responsibility of Seller are not being assumed by Buyer hereunder or otherwise,
and are hereinafter collectively referred to as the "RETAINED LIABILITIES."
2.3 BANK OF AMERICA DEBT. Seller is currently party to that certain
_____________________ dated ______________ with Bank of America (the "BA Note").
There is currently an outstanding balance of $________ under the BA Note. Of
that amount,
5
<PAGE>
$______ constitutes an Assumed Liability. The remaining $_________ of debt
(the "Remainder" shall be purchased by Purchaser from Bank of America on the
date hereof, resulting in Purchaser becoming a secured creditor of Seller for
the Remainder.
3. PURCHASE PRICE AND ALLOCATION
3.1 PURCHASE PRICE. Buyer will pay to Seller, as consideration for
the Assets, the sum of $350,000 (the "PURCHASE PRICE"), payable as set forth in
SECTION 3.2. The Purchase Price will be increased or decreased, as the case may
be, after the Closing pursuant to SECTION 3.3.
3.2 PAYMENT OF PURCHASE PRICE. (a) At the Closing, Buyer will deliver
to Seller the amount of $350,000, which shall consist of $250,000 for the Assets
and $100,000 for Seller agreeing to be bound by the provisions of SECTION 7.15.
Contemporaneously with the execution of this Agreement, Purchaser is loaning
Seller the sum of $85,000 to be used by Seller to pay Bank of America's
pre-payment fees in connection with the transactions described in SECTION
2.3. Seller agrees that Purchaser shall retain $85,000 of the Purchase Price
as collateral for the loan described in the preceding sentence..
(b) Buyer shall pay Seller six monthly "EARN OUT PAYMENTS" following
the Closing Date. The Earn Out Payment shall be an amount equal to 50% of the
gross profit generated (net sales less cost of goods sold on a fully-burdened
basis in accordance with GAAP) from sales to customers listed on the customer
list constituting part of the Assets, such customer list being set forth on
SCHEDULE 3.1(b). One-half of each Earn Out Payment shall be payable on or
before the twentieth day following the month as to which the Earn Out Payment is
being calculated. The remaining 50% of the Earn Out Payments for the six-month
period shall be paid on or before the twentieth day following the sixth month
following the Closing Date.
(c) As of the date hereof, Buyer and Seller have agreed upon the amount
which Buyer is willing to pay to retire Seller's unsecured indebtedness relating
to the Business (the "SETTLEMENT AMOUNT"). If the amount of the Creditor's Plan
is less than the Settlement Amount, at the Closing, Buyer will pay to Seller an
amount equal to the Settlement Amount less the Creditor's Plan. If the
Creditor's Plan exceeds the Settlement Amount, Buyer shall reduce the Earn Out
Payments by such amount.
(d) For a period of up to six months following the Closing Date, Buyer
shall have the right to require that Seller assist in the transition of the
Business. As consideration for such services, Seller shall be paid a monthly
fee of $15,000 (based upon 160 hours of service, such amount to be prorated for
the amount of the service actually provided by Seller) (the "Consulting
Payments"). Any Consulting Payments due hereunder shall be payable on the last
Business Day of each month in which the services are provided hereunder. Buyer
shall have no obligation to request that Seller provide services hereunder.
3.3 ADJUSTMENT OF PURCHASE PRICE. (a) INTENTIONALLY LEFT BLANK
6
<PAGE>
(b) If any claims or liabilities are asserted against Buyer or its
Affiliates after the Closing Date, and if such claims or liabilities are
determined in good faith by Buyer to be valid and if Buyer pays such claims or
liabilities after consultation with the Seller, Buyer shall have the right to
offset the amount of such payments against the Earn Out Payment and/or the
Consulting Payment (at the sole option of Buyer).
(c) If it is determined that any of Seller's Accounts Receivable or
Inventory acquired by Buyer are not collectible or useable within 90 days of the
Closing Date, Buyer shall have the right to assign back to Seller the
uncollectible Accounts Receivable and unusable Inventory and offset (at Seller's
book value) the amount assigned back against the Earn Out Payment and/or the
Consulting Payment (in Buyer's sole discretion). For purposes of this SECTION
3.3(c), the term "book value" shall mean the normal and customary method of
valuing Inventory and Accounts Receivable used by Seller so long as such method
is in accordance with GAAP. Should such methods deviate from GAAP, Buyer will
be entitled to use GAAP accounting principles to determine the book value of the
uncollectible Accounts Receivable or unusable Inventory, as applicable.
(d) With respect to SECTIONS 3.3(b) AND (c), no offset shall be taken
unless the aggregate offset amount exceeds a minimum threshold of $25,000. If
such minimum threshold is exceeded, the offset shall be determined on a dollar
for dollar basis from the first dollar of offset.
(e) The Purchase Price, as adjusted after the Closing pursuant to this
SECTION 3.3, is hereinafter referred to as the "ADJUSTED PURCHASE PRICE."
4. CLOSING. The closing of the sale and purchase of the Assets and the
transactions contemplated hereby (the "CLOSING") will take place immediately
following the execution of this Agreement at the offices of Locke Liddell & Sapp
LLP, 2200 Ross Avenue, Suite 2200, Dallas, Texas 75201. The "CLOSING DATE" will
be deemed to be 12:01 a.m. on the date upon which the Closing occurs.
5. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants
to Buyer as follows:
5.1 DUE ORGANIZATION AND AUTHORITY. Seller is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
Wyoming and has full power and authority to own, lease and operate its assets,
properties and business and to carry on its business as currently conducted.
5.2 QUALIFICATION. Seller is duly qualified, licensed or otherwise
authorized as a foreign corporation to transact business and is in good standing
in each jurisdiction where the character of the properties owned or leased or
the nature of the business conducted by it makes such qualification, licensing
or authorization necessary.
7
<PAGE>
5.3 AUTHORITY TO EXECUTE AND PERFORM AGREEMENT. Seller has all
requisite power and authority to enter into, execute and deliver this Agreement
and each of the Seller Documents, and to perform fully its obligations hereunder
and thereunder, and no other act or proceeding on the part of Seller is
necessary to authorize the same. This Agreement has been, and each of the
Seller Documents will be, duly authorized, executed and delivered by Seller,
and, assuming the due authorization, execution and delivery of this Agreement
and each of the Buyer Documents by Buyer and the validity and binding effect
hereof and thereof on Buyer, each is, or upon execution will be, a valid and
binding obligation of Seller enforceable against Seller in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws affecting the enforcement of creditors' rights and remedies generally or
general principles of equity (regardless of whether considered and applied in a
proceeding at law or in equity).
5.4 NO MATERIAL ADVERSE CHANGE. Except as set forth on SCHEDULE 5.4,
since the close of business on October 31, 1999, there has been no material
adverse change in the Condition of the Business, and Seller has no Knowledge
after due inquiry of any such change which is threatened or reasonably likely;
and there has not been any material damage, destruction or loss to any of the
properties or assets of the Business since such date.
5.5 COMPLIANCE WITH LAWS; PERMITS. (a) Except as set forth on
SCHEDULE 5.5, the Business is currently being conducted, and has at all times
since May 21, 1996 been conducted, in compliance with all applicable Laws, and
there is no pending or, to Seller's Knowledge after due inquiry, any threatened
investigation by any Governmental Entity with respect to actual or alleged
violations of any applicable Laws, including Environmental Laws and Laws
relating to the safe conduct of business, employment and employment practices,
handicapped accessibility, antitrust, Taxes, consumer protection, product
safety, currency exchange, customs, tariffs, equal opportunity, health,
sanitation, fire, zoning, building, pension, securities and Intellectual
Property.
(b) Seller has all licenses, permits, registrations, orders and
approvals required by all applicable Laws or Governmental Entities (including
those relating to Environmental Laws) in order for Seller to carry on the
Business as currently conducted, and to own and operate the properties and
assets of the Business, and such licenses, permits, registrations, orders and
approvals (collectively, "PERMITS") are listed on SCHEDULE 5.5. Except as set
forth on SCHEDULE 5.5, (i) all such Permits are in full force and effect, and
are assignable without the consent of any Person; (ii) Seller is in compliance
with all, and has not violated in any respect, such Permits; and (iii) there are
no proceedings pending or, to Seller's Knowledge after due inquiry, threatened
that could reasonably be expected to result in the revocation, cancellation or
suspension thereof.
5.6 NO BREACH. The execution, delivery and performance of this
Agreement and each of the Seller Documents, and the consummation of the
transactions contemplated hereby and thereby, will not (i) violate or result in
the breach of any provision of the articles of incorporation, by-laws, or other
constituent documents of Seller; (ii) assuming the receipt of the
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Required Consents, violate, result in the breach of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a
default) under, any material contract to which Seller is a party or by which
Seller or any of the Assets may be bound; (iii) result in the creation or
imposition of any Lien upon the Business or the Assets; (iv) violate any
order, writ, judgment, injunction, consent, award or decree of any
Governmental Entity against Seller or affecting the Business or the Assets;
or (v) violate any Law applicable to any of Seller, the Business or the
Assets.
5.7 ACTIONS AND PROCEEDINGS. Except as set forth on SCHEDULE 5.7,
there are no outstanding orders, writs, judgments, injunctions, consents, awards
or decrees of any Governmental Entity against Seller relating to or affecting
the Business or the Assets, and there is no action, litigation, claim, suit or
other legal, administrative, investigative or arbitral proceeding of any type
whatsoever pending or, to Seller's Knowledge after due inquiry, threatened
against Seller or its officers, directors, employees or agents relating to or
affecting the Business or the Assets.
5.8 CONSENTS, APPROVALS AND FILINGS. Except for the "REQUIRED
CONSENTS," the execution and delivery by Seller of this Agreement and the Seller
Documents, and the performance by Seller of its obligations hereunder and
thereunder, do not require Seller to obtain any consent, approval or other
action of, or make any filing with or give any notice to, any Governmental
Entity or any other Person. All Required Consents are described on SCHEDULE
5.8.
5.9 REAL PROPERTY (a) SCHEDULE 5.9(a) sets forth a true and complete
list of all leases, subleases, licenses, easements, rights of way and other
similar agreements under which Seller with respect to the Business, uses or
occupies or has the right to use or occupy, now or in the future, any real
property, and all amendments and modifications thereto (collectively, the "REAL
PROPERTY LEASES;" and the land, buildings, structures and other improvements
covered by the Real Property Leases are hereinafter collectively referred to as
the "LEASED REAL PROPERTY"). Except as set forth on SCHEDULE 5.9(a), (i) Seller
has good and valid title to the leasehold estate created under each Real
Property Lease free and clear of all Liens, and Seller has the right to quiet
enjoyment of all Leased Real Property for the full term of each such Real
Property Lease, (ii) Seller is not in default under any Real Property Lease and
no written claim of any default thereunder has been received by Seller which has
not been cured; and (iii) all rent and other sums and charges currently due or
payable by Seller under each of the Real Property Leases have been paid in full
when due and were not, and will not be, subject to any withholding or similar
Taxes; and (iv) each Real Property Lease is assignable without the consent of
any Person (including the lessor thereunder). Except as set forth in SCHEDULE
5.9(a), each of the Real Property Leases has not been amended and is in full
force and effect. Complete and correct copies of all documents relating to
Leased Real Property have been delivered to Buyer.
(b) Except as set forth on SCHEDULE 5.9(b), (i) all the land,
buildings, structures and other improvements used by Seller in connection with
the Business is included in the Owned Real Property or the Leased Real Property
(such Owned Real Property and Leased Real Property
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are hereinafter collectively referred to as the "REAL PROPERTY"); and
(ii) Seller does not own or hold, and is not obligated under or a party to,
any option, right of first refusal or other contractual right to purchase,
acquire, sell or dispose of any real property with respect to the Business.
(c) Except as set forth on SCHEDULE 5.9(c), there are no Liens or
other agreements granting to any Person any right to the possession, use,
occupancy or enjoyment of the Real Property, or any part thereof, and there are
currently no tenants or other Persons (other than Seller) in possession of the
Real Property.
(d) There is neither any condemnation proceeding nor any sale or other
disposition in lieu of condemnation pending and, to Seller's Knowledge after due
inquiry, threatened or contemplated, with respect to the Real Property, or any
part thereof.
(e) All public utilities, including, water, sewer, gas, electric,
telephone and drainage facilities, provide adequate service to the Real Property
to support current and proposed uses and operations, and the Real Property has
direct access to and from publicly-dedicated streets or the right to use private
roadways to obtain access to such publicly-dedicated streets.
5.10 TITLE TO TANGIBLE ASSETS. (a) Except as set forth on SCHEDULE
5.10, Seller has good, valid and marketable title to all tangible assets and
property of the Business reflected in the Interim Balance Sheet or thereafter
acquired by Seller except for (i) inventory sold; and (ii) accounts receivable
collected, in each case in the ordinary course of business consistent with past
practice. Such Assets are free and clear of any Lien, except for Permitted
Liens.
(b) At the Closing, Seller will deliver to Buyer good, valid and
marketable title to all the tangible Assets, free and clear of all Liens, other
than Permitted Liens.
5.11 EMPLOYEE BENEFIT PLANS. (a) SCHEDULE 5.11 sets forth a true and
complete list of all Benefit Plans and Benefit Arrangements relating to the
Business and maintained by Seller for the benefit of the Employees.
(b) No Benefit Plan is a "multi-employer plan," as defined in Section
4001(a)(3) of ERISA, or a plan subject to Title IV of ERISA, and neither Seller
nor the Controlled Group has made any contributions to or participated in any
"multi-employer plan" or plan subject to Title IV of ERISA.
(c) Each Benefit Plan which is intended to qualify under Section
401(a) of the Code has received a favorable determination letter from the IRS,
and no event has occurred which would cause any such plan to cease being so
qualified. Except as set forth on SCHEDULE 5.11, each Benefit Plan complies in
all material respects with the requirements of ERISA and the Code. Seller has
complied in all material respects with the health care continuation requirements
of Section 601, ET SEQ., of ERISA with respect to all employees of the Business
and their spouses, former spouses and dependents.
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(d) Seller has made available to Buyer, with respect to each
Benefit Plan and Benefit Arrangement, correct and complete copies of (i) all
plan documents and amendments, trust agreements, letter agreements and
insurance contracts; (ii) the most recent IRS determination letter; (iii) the
most recent Annual Report (Form 5500 Series) and accompanying schedules as
filed; (iv) the current and, to the extent available, prior summary plan
descriptions, summaries of material modifications, plan booklets or
brochures, employee manuals and personnel policy manuals; (v) the most recent
financial statements; and (vi) the most recent actuarial report.
(e) None of the Benefit Plans subject to Title IV of ERISA has
terminated, no proceeding has been initiated to terminate any such plan, and
there has been no "reportable event" (within the meaning of Section 4043(c)
of ERISA) with respect to any such plan. None of the Benefit Plans which is
a defined benefit plan subject to section 412 of the Code has incurred any
"accumulated funding deficiency" (within the meaning of Section 412 of the
Code), whether or not waived. Assuming that each Benefit Plan subject to
Title IV of ERISA was terminated as of the Closing Date, Seller would have no
liability under Title IV of ERISA as a result of such termination. Except as
set forth on SCHEDULE 5.11, Seller has no obligations under any Benefit Plan
or otherwise to provide health benefits to former employees of the Business,
except as specifically required by Law.
(f) Neither Seller nor to Seller's Knowledge after due inquiry, any
other "disqualified person" (within the meaning of Section 4975 of the Code)
or any "party in interest" (within the meaning of Section 3(14) of ERISA) has
engaged in any "prohibited transaction" (within the meaning of Section 4975
of the Code or Section 406 of ERISA) with respect to any Benefit Plan which
could subject any such plan (or its related trust), Seller, the Controlled
Group, or any officer, director or employee of Seller or the Controlled Group
to the penalty or tax under Section 502(i) or Section 502(l) of ERISA or
Section 4975 of the Code.
(g) There is no pending or, to Seller's Knowledge after due
inquiry, threatened claim which alleges any violation of ERISA or any other
Law (i) by or on behalf of any Benefit Plan or Benefit Arrangement, or (ii)
by any employee of Seller or any Business Affiliate or any plan participant,
beneficiary, administrator, contract employee, independent sales
representative or other independent contractor with respect to any such
Benefit Plan or Benefit Arrangement.
5.12 LABOR MATTERS. Except as set forth on SCHEDULE 5.12, (i) there
is no organizing effort, strike, picketing, charge of unfair labor practices,
petition, demand for recognition, boycott activity, grievance, collective
bargaining negotiation, OSHA citation, slowdown or work stoppage pending or,
to Seller's Knowledge after due inquiry, threatened against it with respect
to the Business; (ii) since January 1, 1994 Seller has not experienced any
work stoppages or been a party to any arbitration proceeding arising out of
or under any collective bargaining agreements; (iii) none of the employees of
Seller with respect to the Business are, or have since January 1, 1994, been
represented by any labor union, and there are no collective bargaining
agreements otherwise in effect with respect to such employees; (iv) there are
no discrimination or unfair employment charges or complaints pending with any
Governmental Entity against Seller in
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connection with the Business; and (v) there are no actual or pending consent
decrees, conciliation agreements, settlement agreements, agreements with
Governmental Entities or court orders which may impose employment or labor
related obligations on Seller in connection with the Business.
5.13 INSURANCE. SCHEDULE 5.13 sets forth a complete and accurate
list of all insurance policies currently maintained with respect to (or, in
the case of any comprehensive general liability insurance policies, would
have applicability to) the Business and the Assets including policies
relating to fire, theft, business interruption, employee fidelity, general
liability, fiduciary liability, workers' compensation, products liability and
vehicular insurance. All such policies are in full force and effect and no
notice of cancellation, termination or non-renewal has been received with
respect to any such policy. All premiums that have become due with respect
to such policies for any period ending on or prior to the Closing Date have
been or will be paid when due by Seller prior to the Closing. Such policies
provide Seller with adequate insurance coverage against the risks covered by
such policies in accordance with the highest applicable industry standards
and, in the reasonable opinion of Seller, such coverage is customary and
reasonable with respect to the Business and the Assets.
5.14 TAXES. (a) Except as set forth in SCHEDULE 5.14, (i) Seller
has timely and properly filed, or will file when due, all federal, state,
provincial, local, foreign and other Tax Returns (including relating to their
respective properties, franchises, payroll, excise, stamp, occupation,
customs, duties, AD VALOREM, transfer, sales and use) required to be filed in
respect of the Business, the Assets and the Assumed Liabilities, and all
Taxes, interest, penalties, additions to Tax, and other charges due and
payable as shown on such Tax Returns, or claimed to be due with respect to
taxable periods covered by such Tax Returns, have been paid; (ii) such Tax
Returns were when filed (or when filed will be) true, correct and complete,
and disclosed (or will disclose) all Taxes required to be paid in respect of
the Business, the Assets and the Assumed Liabilities for the periods covered
thereby; (iii) all Taxes (whether or not shown on any Tax Return) owed by
Seller in respect of the Business, the Assets and the Assumed Liabilities
have been timely paid; (iv) all such Tax Returns have been examined by the
relevant taxing authorities or the period for assessment of the Taxes in
respect of which such Tax Returns were required to be filed has expired; (v)
there is no examination, action, suit, investigation, audit, claim or
assessment or proceeding pending, proposed or threatened by any Governmental
Entity relating to the determination, assessment or collection of, or any
delinquencies in filing relating to, any Taxes owing by Seller with respect
to the Assets, the Business or the Assumed Liabilities, and to Seller's
Knowledge after due inquiry, no basis exists therefor; (vi) Seller has not
waived or been requested to waive any statute of limitations in respect of
Taxes associated with the Business, the Assets or the Assumed Liabilities
which waiver is currently in effect; (vii) all monies required to be withheld
by Seller (including from employees of the Business for income Taxes, social
security Taxes and other payroll Taxes) have been collected or withheld, and
paid to the respective taxing authorities; (viii) none of the Assets is
properly treated as owned by any Person
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other than Seller for income Tax purposes; and (ix) none of the Assets is
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
(b) No payment or other benefit, and no acceleration of the vesting
of any options, payments or other benefits, will be, as a direct or indirect
result of the transactions contemplated by this Agreement, an "excess
parachute payment" to a "disqualified individual" as those terms are defined
in Section 280G of the Code and Treasury Regulations. Except as set forth on
SCHEDULE 5.14, no payment or other benefit, and no acceleration of the
vesting of any options, payments or other benefits, will be, as a direct or
indirect result of the transactions contemplated by this Agreement (or under
Section 280G of the Code and the Treasury Regulations thereunder) be presumed
to be a "parachute payment" to a "disqualified individual" as those terms are
defined in Section 280G of the Code and the Treasury Regulations thereunder,
without regard to whether such payment or acceleration is reasonable
compensation for personal services performed or to be performed in the future.
(c) No transaction contemplated by this Agreement is subject to
withholding under Section 1445 of the Code and, except as set forth on
SCHEDULE 5.14, no sales, use, real estate transfer, registration, inventory,
stamp or other similar federal, state, provincial, local or foreign Taxes
will be imposed on the sale and transfer of the Assets or the assumption of
the Assumed Liabilities pursuant to this Agreement.
5.15 CERTAIN ENVIRONMENTAL CONDITIONS (a) Except as set forth on
SCHEDULE 5.15(a), there is no pending, or, to Seller's Knowledge after due
inquiry, threatened litigation, suit, complaint, investigation or
administrative action or claim of any type whatsoever alleging that (i) the
Real Property, or Seller in connection with its operations of the Business,
is in violation of any Environmental Laws; or (ii) the Real Property, or
Seller in connection with the operation of the Business, is responsible for
remediation of a Contaminant with respect to the Real Property or with
respect to any off-site facility or location, including, any waste disposal
site whether or not located on the Real Property.
(b) All reports, studies, audits, notices and correspondence,
whether generated by Seller, any Governmental Entity or any other Person, and
all tests, analyses and other documents, in the possession or control of
Seller and which relate to compliance by the Business or the Real Property
with Environmental Laws have been made available to Buyer.
(c) Except as set forth on SCHEDULE 5.15(c), Seller has complied,
and is currently complying, with all Environmental Laws applicable to Seller
with respect to the Business and the Real Property, and all Permits required
thereunder.
(d) Except as set forth on SCHEDULE 5.15(d), no Contaminant is or
has been present or released on, in, under, about or above the Real Property
in an amount or condition that could give rise to an Environmental Claim.
All releases of Contaminants that have occurred on the Real
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Property, if any, have been reported to the appropriate Governmental Entity
pursuant to applicable Environmental Laws.
(e) Except as set forth on SCHEDULE 5.15(e), no Notice with respect
to the Business' compliance with Environmental Laws or the environmental
condition of any of the Real Property is outstanding, nor has any such Notice
been issued by any Governmental Entity or other Person which has not been
responded to fully and in a timely fashion.
(f) Except as set forth on SCHEDULE 5.15(f), no underground storage
tank used by Seller or any other Person in connection with the Business is,
and, to Seller's Knowledge after due inquiry, no underground storage tank has
at any time been, located on any of the Real Property that has not been
removed in compliance with applicable Environmental Laws. The locations on
the Real Property of all current or previous underground storage tanks that
are or were used Seller or, to Seller's knowledge after due inquiry, any
other Person, are described on SCHEDULE 5.15(f).
(g) Except as set forth on SCHEDULE 5.15(g), neither Seller nor any
other Person has leased, operated or owned any facilities or property in
connection with the Business or the Real Property with respect to which
Seller is subject to any pending or, to Seller's Knowledge after due inquiry,
potential proceeding under any Environmental Law.
(h) Except as set forth on SCHEDULE 5.15(h), neither Seller nor any
other Person (i) has, in connection with the Business or the Real Property,
sent, or arranged for the shipment of, Contaminants to any facility or site
for reuse, recycling, reclamation, treatment, storage or disposal; or (ii) is
subject to any pending or, to Seller's Knowledge after due inquiry, potential
proceeding under any Environmental Law with respect to any such facilities or
sites.
(i) There are no Contaminants in any inactive, closed or abandoned
storage or disposal areas or facilities on property which has been leased,
operated or owned by Seller in connection with the Business or the Real
Property. Except as set forth on SCHEDULE 5.15(i), such areas and facilities
are not subject to actual or, to Seller's Knowledge after due inquiry,
potential proceedings, investigations or Notices by officials of any
Governmental Entity or by any private litigant as a result of any previous
on-site management, treatment, storage or disposal of Contaminants.
5.16 FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES (a) Attached as
SCHEDULE 5.16(a) are the audited (unaudited to fiscal 1999) balance sheets of
Seller as of September 30, 1996, September 30, 1997, September 30, 1998 and
September 30, 1999, and the related audited (unaudited as to fiscal 1999)
statements of income, shareholder's equity and cash flow of Seller for the
fiscal years then ended, together with the notes to such financial statements
(collectively, the "ANNUAL FINANCIAL STATEMENTS"). The Annual Financial
Statements (i) were prepared in accordance with the books and records of
Seller and with GAAP; (ii) fairly present the combined financial position of
Seller as of the dates set forth therein and the results of operations and
cash
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flows for the periods set forth therein; and (iii) reflect accurately in
all material respects the costs and expenses of Seller for the periods set
forth therein.
(b) Attached as SCHEDULE 5.16(b) are the unaudited balance sheet of
the Seller as of October 31, 1999 (the "INTERIM BALANCE SHEET"), and the
related unaudited statement of income of the Seller for the one-month period
then ended (the "INTERIM FINANCIAL STATEMENTS"). The Interim Financial
Statements (i) were prepared in accordance with the books and records of
Seller and with GAAP (and on a basis consistent with the principles used in
preparation of the Annual Financial Statements), except as otherwise noted
therein; (ii) fairly present (subject to normal year-end adjustments) the
financial position of the Seller as of October 31, 1999 and the results of
operations of the Seller for the one-month period then ended; and (iii)
reflect accurately in all material respects the costs and expenses of the
Seller for the one-month period then ended.
(c) There are no liabilities, debts, claims or obligations with
respect to the Seller (whether accrued, absolute, contingent, unasserted or
otherwise and whether or not of a nature required by GAAP to be reflected,
disclosed or otherwise provided for in a balance sheet of the Seller or in
the notes thereto) which, individually or in the aggregate, could have a
material adverse effect on the Condition of the Business, except (i) those
reflected or otherwise provided for in the Interim Balance Sheet (or
described in the notes thereto); (ii) for liabilities and obligations
occurred in the ordinary course of business consistent with past practice
since the date of the Interim Balance Sheet; (iii) those specifically
described on SCHEDULE 5.16(b); and (iv) Retained Liabilities.
5.17 CONDITION OF ASSETS. The Equipment constituting Assets is to
be conveyed in its present condition, with no express or implied warranty by
the Seller.
5.18 OPERATIONS. Except as disclosed on SCHEDULE 5.18, since
October 31, 1999, Seller has operated the Business only in the ordinary
course of business consistent with past practice, and, without limiting the
generality of the foregoing, Seller or any Business Affiliate has not:
(i) changed in any material respect the character, operation or
Condition of the Business;
(ii) (A) sold, abandoned or made any other disposition of any
properties or assets of the Business except in the ordinary course of
business consistent with past practice; (B) granted or suffered any Lien
on any of the properties or assets of the Business; or (C) amended any
contract or entered into or amended any other contract material to the
operations of the Business which is in force and effect as of the date
hereof;
(iii) except in the ordinary course of business consistent with
past practice, incurred or assumed any debt, obligation or liability
(whether absolute, contingent or otherwise, and whether or not currently
due and payable);
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(iv) suffered any material destruction, damage or loss (other
than ordinary wear and tear), whether or not covered by insurance,
relating to any of the properties or assets of the Business, including
the Assets;
(v) waived, canceled, sold or otherwise disposed of for less
than the fair value thereof any claim or right which Seller had against
any other Person, except for routine settlements or resolutions of
disputed customer or supplier accounts in the ordinary course of business
consistent with past practice;
(vi) entered into, adopted, amended, paid, agreed to pay or
incurred any obligation for any payment or contribution to, or with
respect to, any benefit plan, or any collective bargaining or severance
agreement, or paid or promised to pay any bonus to, or granted an
increase in compensation or benefits to, any Employee, except for normal
accruals under benefit plans and normal compensation adjustments in
accordance with past practice;
(vii) received any notice that any supplier, distributor,
independent sales or manufacturer representative, customer or contractor
of the Business has terminated or is terminating its relationship with,
or is threatening any legal or similar action against, Seller;
(viii) made any forward purchase commitments, except for purchase
commitments in the ordinary course of business consistent with past
practice;
(ix) entered into any material transaction, whether or not in
the ordinary course of business consistent with past practice; or
(x) prepared or filed any Tax Return inconsistent with past
practice or, on any such Tax Return, taken any position, made any
election, or adopted any method that is inconsistent with positions
taken, elections made or methods used in preparing or filing similar Tax
Returns in prior periods (including positions, elections or methods which
would have the effect of deferring income to periods for which Buyer is
liable pursuant to SECTION 7.19 or accelerating deductions to periods for
which Seller is liable pursuant to SECTION 7.19).
5.19 CONTRACTS. Except as set forth on SCHEDULE 5.19, there is no
arrangement, understanding, agreement or contract to which Seller is a party
with respect to the Business: (i) with any current or former Employee,
independent contractor or temporary employment agency; (ii) with any labor union
or collective bargaining association representing any Employee; (iii) for the
sale, transfer or lease of any asset or group of related assets of the Business
having a fair market value in excess of $25,000; (iv) for the purchase of any
asset or group of related assets for a purchase price in excess of $25,000; (v)
that involves an obligation to pay or render, or an entitlement to receive,
monies or services with a fair market value in excess of $5,000; or (vi) that is
otherwise material to the Business. Except as set forth on SCHEDULE 5.19, (x)
each Real
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Property Lease and contract relating to the Business is in full force and
effect and is enforceable by Seller against the other party or parties
thereto in accordance with its terms, and there have been no terminations or
cancellations thereunder; (y) Seller has delivered to Buyer a true, correct
and complete copy of the Real Property Leases and the contracts relating to
the Business, together with all amendments, modifications and supplements
thereto and (z) none of the Real Property Leases and any contracts relating
to the Business will be in breach or default, terminate or be terminable by
virtue of the transactions contemplated hereby. Neither Seller nor, to
Seller's Knowledge after due inquiry, any other person has breached its
obligations or defaulted under any Real Property Lease or any contract
relating to the Business, and there has occurred no event or condition which,
with the giving of notice or passage of time or both, would constitute such a
breach or default on the part of Seller or, to Seller's Knowledge after due
inquiry, any other person.
5.20 INVENTORY; ACCOUNTS RECEIVABLE. Except as set forth on SCHEDULE
5.20, (a) the Inventory of the Business as the same shall exist on the Closing
Date shall consist of substantially the same types of Inventory as that
reflected on the Interim Balance Sheet and the amount of such Inventory shall be
sufficient to carry on the Business and shall vary from that reflected on the
Interim Balance Sheet only by variances typical in the ordinary course of
business. The Inventory of the Business as reflected on the Interim Balance
Sheet, and the Inventory as the same shall exist on the Closing Date, consisted,
and will consist, of items substantially all of which were and will be of the
usual quality and quantity necessary for the normal conduct of the Business and
expected to be usable or saleable within a reasonable period of time in the
ordinary course of business. With respect to Inventory to be purchased by Buyer
and in the hands of suppliers for which Seller is committed as of the date
hereof or the Closing Date, such Inventory is expected to be usable or saleable
in the ordinary course of business as presently being conducted.
(b) Except as set forth on SCHEDULE 5.20, the Accounts Receivable of the
Business, whether reflected on the Interim Balance Sheet or accrued since the
date thereof, represent sales actually made in the ordinary course of business,
are not subject to any defense or offset, and are current and collectible net of
any reserves shown on the Interim Balance Sheet (which reserves are adequate and
were calculated in accordance with GAAP and consistent with past practice).
5.21 ASSETS SUFFICIENT FOR BUSINESS. Immediately prior to the Closing,
Seller will own or have legal rights to use as currently used in the Business,
and Seller will convey to Buyer, pursuant to this Agreement, those assets, both
tangible and intangible, which are necessary and sufficient to conduct the
Business as currently conducted or, to Seller's Knowledge, proposed to be
conducted by the Buyer, except for the fixed assets included on SCHEDULE 1.2.
5.22 PRODUCT RECALLS; WARRANTIES. (a) Except as set forth on SCHEDULE
5.22(a), Seller has no Knowledge of any facts, events or conditions (i) which
could furnish a basis for the recall, withdrawal or suspension by any
Governmental Entity of, or an injunction from or an award of damages with
respect to, any product manufactured, distributed or sold by the Business; or
(ii)
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which would otherwise reasonably be expected to cause the Business to
withdraw, recall or suspend or have enjoined any product from any market or
to terminate or suspend testing of any such product. SCHEDULE 5.22(a)
contains an accurate and complete list of (x) all products manufactured or
distributed by the Business that have been recalled at any time since January
1, 1994, and (y) all proceedings (whether completed or pending) at any time
since May 21, 1996 seeking the recall, withdrawal, suspension or seizure of
any such product.
(b) Except as set forth in SCHEDULE 5.22(b), there is no claim
against or liability of Seller with respect to any products manufactured,
distributed or sold by the Business which are alleged to be defective or
unsafe, and, to Seller's Knowledge after due inquiry, there is no basis for
any such claim.
5.23 INTELLECTUAL PROPERTY. (a) Seller owns all right, title and
interest in, or possess adequate licenses or other valid rights to use
(without the making of any payment to others or the obligation to grant
rights to others in exchange), free and clear of all Liens, all Intellectual
Property used in connection with the operation of the Business as currently
conducted or, to the knowledge of Seller, proposed to be conducted. Each
item of Intellectual Property owned or used by Seller immediately prior to
the Closing will be owned or available for use by the Buyer on identical
terms and conditions immediately subsequent to the Closing hereunder. Seller
has taken all necessary and desirable action to maintain and protect each
item of Intellectual Property that Seller owns or uses.
(b) Seller has not interfered with, infringed upon, misappropriated
or otherwise come into conflict with any Intellectual Property rights of any
other Person, and none of the directors and officers (and employees with
responsibility for Intellectual Property matters) of Seller has ever received
any charge, complaint, claim, demand or notice from any Governmental Entity
or other Person alleging any such interference, infringement,
misappropriation or conflict (including any claim that Seller must license or
refrain from using any Intellectual Property rights of any other Person). To
Seller's Knowledge after due inquiry, no Person has interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
Intellectual Property rights of Seller.
(c) SCHEDULE 5.23(c) identifies (i) each patent or patent
registration which has been issued to Seller in the United States and all
jurisdictions worldwide with respect to any item of Intellectual Property
used in connection with the Business; and (ii) each pending patent
application or application for patent registration which Seller has filed
with respect to any item of Intellectual Property anywhere in the world
(together with any exceptions) which relates to the Business. Seller has
delivered to Buyer correct and complete copies of all such patents,
registrations and applications (as amended to date) and has made available to
Buyer correct and complete copies of all other written documentation
evidencing ownership and prosecution (if applicable) of each such item of
Intellectual Property.
(d) SCHEDULE 5.23(d) identifies (i) each trademark or trademark
registration which has been issued to Seller in the United States and all
jurisdictions worldwide with respect to any item
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of Intellectual Property used in connection with the Business; and (ii) each
pending trademark application or application for trademark registration which
Seller has filed with respect to any item of Intellectual Property anywhere
in the world (together with any exceptions). Seller has delivered to Buyer
correct and complete copies of all such trademarks, registrations and
applications (as amended to date), and has made available to Buyer correct
and complete copies of all other written documentation evidencing ownership
and prosecution (if applicable) of each such item of Intellectual Property.
SCHEDULE 5.23(d) also identifies each trade name or unregistered trademark
used by Seller in connection with the Business.
(e) SCHEDULE 5.23(e) identifies (i) each copyright or copyright
registration which has been issued to Seller in the United States and all
jurisdictions worldwide with respect to any item of Intellectual Property
used in connection with the Business; and (ii) each pending copyright
application or application for copyright registration which Seller has filed
with respect to any item of Intellectual Property (together with any
exceptions) used in connection with the Business. Seller has delivered to
Buyer correct and complete copies of all such copyrights, registrations and
applications (as amended to date), and has made available to Buyer correct
and complete copies of all other written documentation evidencing ownership
and prosecution (if applicable) of each such item of Intellectual Property.
(f) SCHEDULE 5.23(f) identifies each license, agreement or other
permission which Seller has granted to any other Person with respect to any
item of Intellectual Property used in connection with the Business in the
United States and any jurisdictions worldwide. Seller has delivered to Buyer
correct and complete copies of all such licenses, agreements and other
permissions (as amended to date) and has made available to Buyer correct and
complete copies of all written documentation evidencing the legality,
validity and enforceability of each such license, agreement and other
permission (if applicable). With respect to each item of Intellectual
Property required to be identified on SCHEDULE 5.23(f):
(i) Seller owns all right, title and interest in and to such
item, free and clear of any Lien;
(ii) such item is not subject to any outstanding injunction,
judgment, order, decree, ruling or charge;
(iii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to Seller's Knowledge
after due inquiry, threatened which challenges the legality, validity,
enforceability, use or ownership of such item;
(iv) Seller has not agreed to indemnify any Person for or against
any interference, infringement, misappropriation or other conflict with
respect to such item;
(v) all licenses, agreements and other permissions pertaining to
such item and all other rights to which Seller is entitled with respect
thereto are in compliance in all
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respects with all applicable Laws in all jurisdictions worldwide,
including those pertaining to remittance of foreign exchange and
Taxes; and
(vi) Seller has not made a previous assignment, sale, transfer or
agreement constituting a present or future assignment, sale or transfer
of, or granted any Lien on, such item other than licenses granted in the
ordinary course of business consistent with past practice (and each such
license has been identified on SCHEDULE 5.23(f)); nor has Seller granted
any release, covenant not to sue or other non-assertion assurance to any
Person with respect to such item which could reasonably be expected to
have an adverse effect on the aggregate value of the Intellectual
Property.
(g) SCHEDULE 5.23(g) identifies each item of Intellectual Property
used in connection with the Business that any Person (other than Seller) owns
and that Seller uses pursuant to any license, sublicense, agreement or
permission. Seller has delivered to Buyer correct and complete copies of all
such licenses, sublicenses, agreements and other permissions (as amended to
date). With respect to each item of Intellectual Property required to be
identified on SCHEDULE 5.23(g):
(i) the license, sublicense, agreement or other permission
covering such item is legal, valid, binding, enforceable and in full
force and effect;
(ii) such license, sublicense, agreement or other permission will
continue to be legal, valid, binding, enforceable and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby;
(iii) no party to such license, sublicense, agreement or other
permission is in breach or default thereof, and no event has occurred
which with the giving of notice or the lapse of time or both would
constitute such a breach or default thereof or permit termination,
modification or acceleration thereunder;
(iv) no party to such license, sublicense, agreement or other
permission has repudiated any provision thereof;
(v) with respect to each such sublicense, the representations and
warranties set forth in clauses (i) through (iv) above are true and
correct with respect to the underlying license;
(vi) the underlying item of Intellectual Property is not subject
to any outstanding injunction, judgment, order, decree, ruling or charge;
(vii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand is pending or, to Seller's Knowledge
after due inquiry, threatened which challenges the legality, validity or
enforceability of the underlying item of Intellectual Property; and
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(viii) Seller has not granted any sublicense or similar right
with respect to the underlying license, sublicense, agreement or other
permission.
(h) To Seller's Knowledge after due inquiry, the continued
operation of the Business as currently conducted, and as proposed to be
conducted, does not and will not interfere with, infringe upon,
misappropriate or otherwise come into conflict with, any Intellectual
Property rights of any Person.
(i) Seller has no Knowledge after due inquiry of any new products,
inventions, procedures, or methods of manufacturing or processing that any
competitors or other Persons have developed which reasonably could be
expected to supersede or make obsolete any product or process of Seller with
respect to the Business.
5.24 NO BUSINESS AFFILIATES. No Affiliate of Seller is engaged,
either directly or indirectly, in the manufacturing, distribution or sale of
products or owns, leases or operates any assets in connection with the
Business.
5.25 FACILITIES. No manufacturing, converting, distribution,
research and development, administrative or other facility of Seller or any
of its Affiliates (other than the Facilities) is owned, leased or operated by
Seller or any such Affiliate in connection with the Business.
5.26 BOOKS AND RECORDS. Seller maintains its books, records and
accounts (including, but not limited to, those kept for financial reporting
and Tax purposes) in accordance with good business practice and in sufficient
detail to reflect accurately and fairly the transactions and the Condition of
the Business.
5.27 SUPPLIERS AND CUSTOMERS. Set forth on SCHEDULE 5.27 is a list
of the names, addresses and current relationship status of the 10 largest
customers and the 10 largest suppliers (measured, in each case, by dollar
volume) of the Business and the percentage of the Business which each such
customer or supplier represented since November 1, 1998 (since January 1,
1999 as to suppliers).
5.28 YEAR 2000 COMPLIANCE. Seller is, as of the date hereof, and
will, on the Closing Date, continue to be, Year 2000 Compliant with respect
to its Information Technology. To the best of Seller's knowledge, after due
inquiry, all customers of and suppliers to the Business, and all other third
parties who exchange computerized information with Seller's Information
Technology, are, as of the date hereof, and will, on the Closing Date,
continue to be, Year 2000 Compliant with respect to their respective
Information Technology.
5.29 REPRESENTATIONS NOT WAIVED. The representations and warranties
of Seller contained herein will not be affected or deemed waived by reason of
any investigation made by or on behalf of Buyer and/or its representatives or
agents or by reason of the fact that Buyer
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and/or its representatives or agents knew or should have known that any such
representation or warranty is or might be inaccurate in any respect.
5.30 DISCLOSURE. None of (i) the representations or warranties of
Seller contained herein; (ii) the information contained in the Schedules
referred to in this ARTICLE V; and (iii) the other information or documents
furnished to Buyer or any of its representatives or agents by Seller or its
representatives or agents pursuant to the terms of this Agreement is or will
be false or misleading in any material respect or omits or will omit to state
a fact herein or therein required to be stated or necessary to make the
statements herein or therein not misleading in any material respect. There
is no fact which adversely affects or in the future is likely to adversely
affect the Assets or the Business in any material respect which has not been
disclosed in this Agreement or the Schedules hereto.
5.31 CREDITOR PLAN. Seller has negotiated a pay-out plan with
substantially all of its unsecured creditors of the Business (which creditors
are listed on SCHEDULE 2.1) (the "Creditor's Plan"), except for certain
unsecured creditors whose claims aggregate $40,000 or less and those
creditors listed on SCHEDULE 5.31. Each of the unsecured creditors that has
agreed to the Creditor's Plan has executed a settlement agreement and release
in the form supplied to the Seller by Buyer. Seller has delivered copies of
each such agreement to Buyer.
6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
warrants to Seller as follows:
6.1 DUE ORGANIZATION AND AUTHORITY. Buyer is a limited partnership
duly organized, validly existing and in good standing under the Laws the
State of Texas, and has, or will have on the Closing Date, all requisite
power and authority to own, lease and operate its assets, properties and
business and to carry on its business as currently conducted.
6.2 AUTHORITY TO EXECUTE AND PERFORM AGREEMENT. Buyer has all
requisite power and authority to enter into, execute and deliver this
Agreement and each of the Buyer Documents, and to perform fully its
obligations hereunder and thereunder, and no other act or proceeding on the
part of the Buyer is, or will be on the Closing Date, necessary to authorize
same. This Agreement has been, and each of the Buyer Documents to be
delivered by Buyer at the Closing will be, duly authorized, executed and
delivered by Buyer and, assuming the due authorization, execution and
delivery of this Agreement and each of the Seller Documents by Seller, and
the validity and binding effect hereof and thereof on Seller, each is, or
upon execution will be, a valid and binding obligation of Buyer, enforceable
against Buyer in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws affecting the enforcement of
creditors' rights and remedies generally or general principles of equity
(regardless of whether considered and applied in a proceeding at law or in
equity).
6.3 NO BREACH. The execution, delivery and performance by Buyer of
this Agreement and each of the Buyer Documents to which it is party, and the
consummation of the transactions
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contemplated hereby and thereby, will not (i) violate or result in the breach
of any provision of the restated certificate of incorporation, by-laws or
other constituent documents of Buyer; (ii) violate, result in the breach of,
or constitute a default (or an event which, with the giving of notice or the
lapse of time or both, would constitute a default) under, any material
contract to which Buyer is party or by which Buyer or any of its assets may
be bound; (iii) violate any order, writ, judgment, injunction, award or
decree of any arbitrator or Governmental Entity against Buyer or affecting
any of its assets or properties; or (iv) violate any applicable Law, which
violation, individually or in the aggregate, would reasonably be expected to
have a material adverse effect on the ability of Buyer to consummate the
transactions contemplated hereby.
6.4 ACTIONS AND PROCEEDINGS. There are no outstanding orders,
writs, judgments, injunctions, awards or decrees of any Governmental Entity
against Buyer, and there are no actions, litigations or suits or other legal,
administrative, investigative or arbitral proceedings of any type whatsoever
pending, or to Buyer's Knowledge, threatened, against or involving Buyer
which, individually or in the aggregate, would reasonably be expected to have
a material adverse effect on the ability of the Buyer to consummate the
transactions contemplated hereby.
6.5 CONSENTS AND APPROVALS. Except for any required approvals from
appropriate Governmental Entities for the issuance or transfer of the
Permits, the execution and delivery by Buyer of this Agreement and the Buyer
Documents, and the performance by Buyer of its obligations hereunder and
thereunder, do not require Buyer to obtain any consent, approval, or other
action of, or make any filing with or give any notice to, any Governmental
Entity or other Person.
7. COVENANTS AND AGREEMENTS. The parties hereto covenant and agree as
follows:
7.1 DUE DILIGENCE. Prior to the Meeting Date, Seller will provide
Buyer, and Buyer's counsel, accountants and other representatives, during
normal business hours, full access to all of the properties, personnel,
books, contracts, records, Tax Returns and files of or relating to the
Business and the Assets. Seller will also furnish to Buyer and such
representatives all such additional documents and financial, operational,
environmental, legal and other information concerning the Business and the
Assets as Buyer may from time to time reasonably request. Seller will
instruct its employees, agents and representatives to cooperate in all
reasonable respects with Buyer in its investigation of the Business and the
Assets.
7.2 INTENTIONALLY LEFT BLANK
7.3 CONSENTS, APPROVALS AND FILINGS. As soon as practicable after
the execution of this Agreement, Seller and Buyer will cooperate with each
other with respect to, and will make or cause to be made, all requests,
filings and submissions to any Governmental Entity or other Person that are
required to be made in connection with the transactions contemplated hereby,
including: (i) the obtaining of all necessary actions or non-actions,
waivers, consents and approvals from all Governmental Entities, including the
making of all necessary registrations and
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filings with, and the taking of all other reasonable steps as may be
necessary to obtain an approval or waiver from, or to avoid any action or
proceeding by, any such Governmental Entities (including any in connection
with the transfer or reissuance of the Permits); (ii) the obtaining of all
necessary consents, approvals or waivers from Persons other than Governmental
Entities; and (iii) the defending of any lawsuits or other legal proceedings,
whether judicial or administrative, challenging this Agreement or the
consummation of the transactions contemplated hereby, including any attempt
to have any stay or temporary restraining order entered by any arbitrator or
Governmental Entity vacated or reversed. Notwithstanding the foregoing,
neither Buyer nor any of its Affiliates will be required to divest or hold
separate or otherwise take or commit to take any action that limits its
freedom of action with respect to, or its ability to retain, the Business,
the Assets or any other property or assets, or any material portions thereof.
Seller will furnish to Buyer, and Buyer will, furnish to Seller such
information and assistance as may reasonably be requested in connection with
the preparation of any requests, filings, submissions or other
communications. Each party hereto agrees to provide to the other party
copies of any notifications that it or its representatives or Affiliates
receive from any Governmental Entity in connection with the foregoing
matters.
7.4 EXPENSES. Each party to this Agreement will bear its own
expenses incurred in connection with the preparation, execution and
performance of this Agreement, including all fees and expenses of agents,
representatives, counsel and accountants. Seller also will bear (i) the costs
associated with any sales, use, registration, inventory, stamp, transfer, or
similar Taxes (including, real property transfer or documentary stamp taxes);
(ii) any recording or registration costs payable by either party as a result
of the transactions contemplated hereby; and (iii) all costs in connection
with any filings made with any Governmental Entity.
7.5 INDEMNIFICATION FOR BROKERAGE COMMISSIONS. Except for the fee
due and owing to Harris Webb & Garrison, Inc., Seller represents and warrants
to Buyer that (i) no broker, finder, agent or similar intermediary has acted
on behalf of Seller in connection with this Agreement; and (ii) there are no
brokerage commissions, finders' fees or similar fees or commissions payable
in connection herewith on account of Seller's actions. Seller agrees to
indemnify and keep Buyer harmless from any claim or demand for commission or
other compensation by any broker, finder, agent or similar intermediary
claiming to have been employed or retained by or on behalf of Seller, and to
bear the cost of any legal expenses incurred by Buyer in defending against
any such claim. Buyer represents and warrants to Seller that (x) no broker,
finder, agent or similar intermediary has acted on behalf of Buyer in
connection with this Agreement, and (y) there are no brokerage commissions,
finders' fees or similar fees or commissions payable in connection herewith
on account of Buyer's actions. Buyer agrees to indemnify and keep Seller
harmless from any claim or demand for commission or other compensation by any
broker, finder, agent or similar intermediary claiming to have been employed
or retained by or on behalf of Buyer, and to bear the cost of any legal
expenses incurred by Seller in defending against any such claim.
7.6 INSURANCE. After the Closing, Seller will maintain or cause to
be maintained in force (including necessary renewals thereof) products
liability insurance policies against risks
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and liabilities to the extent and in the manner heretofore maintained by
Seller with respect to the Business and the Assets.
7.7 LITIGATION. After the Closing, Seller will promptly notify
Buyer of any lawsuits, investigations or other proceedings that are
threatened or commenced against Seller (or any current or former director,
officer or employee thereof) which may relate to, or affect, the Business,
the Assets, the Assumed Liabilities, this Agreement or the transactions
contemplated hereby.
7.8 ACCESS; RECORDS; OPERATIONS MANUALS. (a) After the Closing,
Buyer and Seller will afford to each other and their respective
representatives the opportunity, upon reasonable request, to examine and make
copies of their respective books and records relating to the Business and the
Assets, and to consult with their respective officers, employees, accountants
and other representatives in connection with any reasonable business purpose,
including the preparation of Tax Returns and financial reports and the
conducting of any audits with respect thereto, the administration of Buyer's
benefit plans and benefit arrangements, the review of any materials, books,
records or circumstances relating to either party's ongoing obligations under
this Agreement or any Operative Document or for any other reasonable business
purpose.
(b) On the Closing Date, Seller will make available for delivery to
Buyer the following:
(i) all Records, subject to the following:
(A) Buyer recognizes that certain Records may not relate
to the Business or may relate primarily to Retained Assets or
Retained Liabilities, in which case Seller may retain such Records
but will provide copies of the portions thereof relating to the
Business to Buyer;
(B) Seller may retain any Tax Returns and any files and
records relating thereto (including payroll records and paid
invoices); PROVIDED, that Buyer will be provided with copies of
such Tax Returns, files and records to the extent that they relate
to the Business, the Assets or Buyer's obligations under this
Agreement; PROVIDED, FURTHER, that Seller will not dispose of or
destroy such records without first offering to turn over
possession thereof (to the extent relating to the Business, the
Assets or Buyer's obligations under this Agreement) to Buyer (at
Buyer's expense) by written notice to Buyer at least 30 days prior
to the proposed date of such disposition or destruction;
(C) Seller may retain its corporate record books and
stock records containing its articles of incorporation, bylaws,
minutes of meetings of the boards of directors, stockholders,
managers and management committees, and similar governance
documents; and
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(D) Seller may retain all records exclusively relating
to, or that constitute Retained Assets; PROVIDED, that Seller will
not, dispose of or destroy such records without first offering to
turn over possession thereof (to the extent relating to Buyer's
obligations under this Agreement) to Buyer (at Buyer's expense) by
written notice to Buyer at least 30 days prior to the proposed
date of such disposition or destruction;
(ii) operations and maintenance manuals setting forth in
reasonable detail all procedures necessary to operate the Assets in a
safe and reliable manner, which procedures will (A) incorporate
manufacturers' recommended guidelines and sound industry practices; (B)
include specific preventative maintenance procedures, including an annual
maintenance schedule; (C) include adequate safety measures and procedures
for the safe operation and maintenance of the Equipment, including
measures and procedures for fire prevention; (D) include adequate
security measures and procedures; and (E) integrate vendor and
manufacturer recommendations to the extent Seller, in consultation with
Buyer, deems such recommendations necessary or desirable in connection
with the efficient operation and maintenance of the Assets or the
protection of warranties.
7.9 FIRPTA AFFIDAVIT. Upon request of Buyer, Seller will furnish to
Buyer an affidavit, in form and substance reasonably satisfactory to Buyer,
stating under penalty of perjury Seller's United States taxpayer
identification number and that Seller is not a foreign Person pursuant to
Section 1445(b)(2) of the Code.
7.10 BULK SALES. Seller agrees to indemnify and save Buyer harmless
from any losses actually suffered by Buyer as a result of any noncompliance
by Seller with the provisions of any bulk sales law or any similar statute of
any jurisdiction as they may be applicable to the transactions contemplated
by this Agreement.
7.11 FURTHER ASSURANCES. Each party hereto will, and will cause its
respective Affiliates to, execute such agreements, documents, instruments and
other papers and take such further actions, at any time and from time to
time, after the Closing Date, as may be reasonably requested by the other
party to carry out the provisions hereof and the transactions contemplated
hereby.
7.12 MAIL OR OTHER COMMUNICATIONS RECEIVED AFTER CLOSING. On and
after the Closing Date, Buyer may receive and open all mail or other
communications addressed to Seller and deal with the contents thereof in its
discretion to the extent that such mail or other communications and the
contents thereof relate to the Business, the Assets or any of the Assumed
Liabilities. Buyer agrees to keep and cause to be kept confidential the
contents of, and to deliver or cause to be delivered promptly to Seller, all
other mail or communications (including any mail or communications that
relate to the Retained Assets or the Retained Liabilities) received by Buyer
which are addressed to Seller. In the event that Seller receives mail or
other communications which relate to the Business, the Assets or any of the
Assumed Liabilities on or after the Closing Date, Seller will deliver or
cause to be delivered immediately to Buyer such mail or other
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communications. Seller agrees to keep and cause to be kept confidential the
contents of such mail or other communications.
7.13 ANCILLARY AGREEMENTS. INTENTIONALLY LEFT BLANK.
7.14 CONDUCT OF BUSINESS. Except as set forth on SCHEDULE 7.14 or
as otherwise expressly permitted by the terms of this Agreement, from the
date hereof to the Meeting Date, Seller will use its best efforts to: (a)
conduct its business in the ordinary course in substantially the same manner
as currently conducted; (b) use its best efforts to preserve and maintain the
condition of the business, including relationships with customers, suppliers,
distributors and others with whom Seller deals in connection with the
business, and all associated goodwill; (c) comply with all applicable Laws
with respect to its business; and (d) pay, perform and discharge, when due,
in the ordinary course of business consistent with past practice, all
obligations of Seller. In addition, except as set forth on SCHEDULE 7.14 or
as otherwise expressly permitted by the terms of this Agreement, Seller will
not do any of the following without the prior written consent of Buyer:
(i) institute any changes in the business other than in the
ordinary course of business consistent with past practice;
(ii) engage in any trade or distributor loading of finished goods
of the business;
(iii) sell, lease, dispose of or encumber, or agree to sell,
lease, dispose of or encumber, any properties or assets of the business,
except sales of inventory in the ordinary course of business consistent
with past practice;
(iv) enter into any contract, lease, commitment, arrangement or
transaction relating to its business or any properties or assets of the
Business other than in the ordinary course of business consistent with
past practice;
(v) enter into any new employment agreement or increase or
modify, in any material respect, the terms of any Benefit Plan or Benefit
Arrangement (including but not limited to any commitment to pay
retirement or other benefits or any modification of benefits or personnel
policies and practices);
(vi) increase or modify the salary, commissions or other wages
payable to, or which will become payable to, any Employee, except in the
ordinary course of business consistent with past practice;
(vii) perform any act or omit to perform any act which, if taken
or omitted prior to the date hereof, would constitute, result in or cause
a breach of or default under any contracts relating to its business;
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(viii) enter into any purchase orders for amounts in excess of
$5,000, except for purchase orders for (A) raw materials ordered in the
ordinary course of business consistent with past practice and
(B) services under existing contracts;
(ix) prepare or file any Tax Return inconsistent with past
practice or, on any such Tax Return, take any position, make any election
or adopt any method that is inconsistent with positions taken, elections
made or methods used in preparing or filing similar Tax Returns in prior
periods (including positions, elections or methods which would have the
effect of deferring income to periods for which Buyer is liable pursuant
to SECTION 7.19 or accelerating deductions to periods for which Seller is
liable pursuant to SECTION 7.19);
(x) institute any suit or other proceeding which involves the
Business or the Assets; or
(xi) agree, whether in writing or otherwise, to do any of the
foregoing.
Seller will not take any action or agree to take any action that results in
any of the representations and warranties of Seller set forth in this
Agreement becoming untrue or misleading.
7.15 COVENANT NOT TO COMPETE. (a) As a material inducement to
Buyer to enter into this Agreement and to consummate the transactions
contemplated hereby, Seller agrees to the covenants and agreements set forth
in this SECTION 7.15 for the benefit of Buyer and its Affiliates.
(b) Neither Seller nor any of its Affiliates will, at any time from
and after the Closing Date and through the tenth anniversary thereof, without
the prior written consent of Buyer, (i) directly or indirectly engage in, or
(ii) acquire control of or more than a two percent (2%) interest in, or
assist or render services (whether or not for compensation, or as an agent,
advisor, consultant or lender) to or for, any business more than ten percent
(10%) of the consolidated revenues of which are derived from the development,
manufacture, sale or provision of memory modules and board design in North
America, South America, Europe and Asia.
(c) The covenant set forth in SECTION 7.15(b) will be construed as
a separate and independent covenant for each of the separate countries listed
in SECTION 7.15(b). To the extent that such covenant is declared to be
invalid or unenforceable in any country, state, province, territory or
possession, or in any other jurisdiction, or with respect to any Person, such
covenant will be deemed to be deleted herefrom with respect to, and only with
respect to, the operation of such covenant in the particular jurisdiction or
with respect to such Person in which or against whom such declaration was
made, and such declaration will not affect the enforceability of such
covenant with respect to any other country, state, province, territory or
possession, or any other jurisdiction or Person; PROVIDED, that to the extent
such covenant may be valid and enforceable in such jurisdiction or against
such Person by limitations on the scope of the activities, geographical area,
time period covered or otherwise, Seller and Buyer agree that such covenant
instead will be deemed to be limited to the extent, and only to the extent,
necessary to make such covenant
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enforceable to the fullest extent permissible under the laws and public
policies applied in such jurisdiction.
(d) Seller agrees that it will not (and will not permit any of its
Affiliates to), at any time from and after the Closing Date and through the
tenth anniversary thereof, directly or indirectly through the actions of any
other Person, whether for its own benefit or for that of another Person: (i)
solicit, divert or take away, or attempt to solicit, divert or take away, any
individual who is, as of the Closing Date or at any time thereafter, an
officer, director or managerial, marketing, research and development or other
key employee of Buyer or any of its Affiliates with respect to the Business,
or induce or attempt to induce any such individual to terminate his or her
employment with Buyer or any of its Affiliates; or (ii) take any action, or
advise or assist any Person in taking any action, that would impair the
goodwill of the Business, including but not limited to, actions that could
interfere with or damage the relationships between the Business and its
employees, customers, distributors, manufacturer representatives and
suppliers.
7.16 NOTICE OF CERTAIN EVENTS. Each party hereto will promptly
notify the other party of any event, occurrence, condition or circumstance of
which it becomes aware from the date hereof that would constitute a violation
or breach of any representation, warranty, covenant or agreement made by it
in this Agreement.
7.17 REASONABLE BEST EFFORTS. INTENTIONALLY LEFT BLANK
7.18 NEGOTIATIONS. From and after the date hereof, Seller agrees
that Seller and its Affiliates will deal exclusively and in good faith with
Buyer and its Affiliates with respect to any transaction involving the sale,
transfer or other disposition of the Assets or the Business, and none of
Seller, its Affiliates nor their respective officers, directors, employees,
lenders, investment banking firms, advisors or other agents, nor any Person
acting on their behalf, will solicit any inquiries or proposals by, or engage
in any discussions or negotiations with, or furnish any non-public
information to, or enter into any agreement with, any Person other than Buyer
and its Affiliates concerning the sale or other disposition of the Assets or
the Business or a merger, consolidation, sale of securities or other
transaction involving Seller or its Affiliates, if such merger,
consolidation, sale or other transaction would be inconsistent, in any
respect, with the transactions contemplated by this Agreement, and will
promptly notify Buyer of the substance of any inquiry or proposal concerning
any such transaction that may be received by Seller or its Affiliates.
7.19 TAXES. (a) Seller will be liable for and will pay, and will
indemnify, defend and hold harmless Buyer and its Affiliates (and directors,
officers, employees, stockholders, successors, assigns, representatives and
agents) from and against, all Taxes (whether assessed or unassessed), and
will be responsible for the preparation and filing of all Tax Returns,
applicable to the Business, the Assets and the Assumed Liabilities, in each
case attributable to taxable years or periods ending on or prior to the close
of the day on which the Closing occurs and, with
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respect to any Straddle Period, the portion of such Straddle Period ending on
and including the close of the day on which the Closing occurs.
(b) Buyer will be liable for and will pay, and will indemnify,
defend and hold harmless Seller and its Affiliates (and their respective
directors, officers, employees, stockholders, successors, assigns,
representatives and agents) from and against, all Taxes (whether assessed or
unassessed), and will be responsible for the preparation and filing of all
Tax Returns, applicable to the Business, the Assets and the Assumed
Liabilities that are attributable to taxable years or periods beginning on
the day immediately following the day on which the Closing occurs and, with
respect to any Straddle Period, the portion of such Straddle Period beginning
on the day immediately following the day on which the Closing occurs;
PROVIDED, that Buyer will not be liable for or pay, and will not indemnify,
defend or hold harmless, Seller and its Affiliates (and their respective
directors, officers, employees, stockholders, successors, assigns,
representatives and agents) from and against, any Taxes for which Seller is
liable under this Agreement, including, pursuant to the preceding sentence or
SECTION 5.14 (which Taxes will be the liability of Seller).
(c) Seller, on the one hand, or Buyer, on the other hand, as the
case may be, will provide reimbursement for any Tax paid by one party or its
Affiliates, all or a portion of which is the responsibility of the other
party in accordance with the terms of this SECTION 7.19. Not later than 14
days prior to the payment of any such Tax, the party paying such Tax will
give notice to the other party of the Tax payable and the portion which is
the liability of the other party, although failure to do so will not relieve
the other party from its liability hereunder.
(d) After the Closing Date, Seller and Buyer will, and will cause
their respective Affiliates to: (i) assist in all reasonable respects the
other party in preparing any Tax Returns which such other party is
responsible for preparing and filing; (ii) cooperate in all reasonable
respects in preparing for any audits of, or disputes with taxing authorities
regarding, any Tax Returns concerning the Business, the Assets or the Assumed
Liabilities; (iii) make available to the other party and to any taxing
authority as reasonably requested by the other party all information,
records, and documents relating to Taxes concerning the Business, the Assets
or the Assumed Liabilities; (iv) provide timely notice to the other party in
writing of any pending or threatened Tax audits or assessments relating to
Taxes concerning the Business, the Assets or the Assumed Liabilities for
taxable periods for which the other party may have a liability under this
SECTION 7.19; and (v) furnish the other party with copies of all
correspondence received from any taxing authority in connection with any Tax
audit or information request with respect to any such taxable period.
(e) Notwithstanding anything to the contrary in this Agreement, the
obligations of the parties set forth in this SECTION 7.19 will be
unconditional and absolute and will remain in effect without limitation as to
time or amount.
7.20 SHAREHOLDER CONSENT. Immediately following the Closing, Seller
shall promptly have prepared and distributed to its shareholders, a proxy
statement and proxy requesting that the
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shareholders ratify the sale of the Assets to Buyer. The meeting of
shareholders to vote on the ratification shall be held on or before February
16, 2000.
7.21 NEGOTIATIONS. In negotiating with the Scottish Government,
Buyer will request that Seller be released from its obligations to the
Scottish Government.
77.22 SALE OF TESTERS. If Buyer sells any of the sigma three test
systems that constitute Assets within six months from the Closing Date,
Seller shall extend the Seller's warranty on such products for six months
from the sale of such products by Buyer.
8. EMPLOYMENT AND EMPLOYEE BENEFITS ARRANGEMENTS
8.1 EMPLOYEES. As of the Closing Date, Seller will terminate the
employment of all Employees employed by Seller in connection with the
Business (other than those Employees to whom Buyer decides, in its sole
discretion, not to offer employment and whom Seller desires to retain).
Seller will retain and assume all liabilities, and carry out all obligations
accrued on or before the Closing Date, with respect to each such terminated
Employee's compensation, benefits and other entitlements resulting from such
termination. Buyer will, immediately following the Closing Date, offer to
employ Seller's employees who work in the Business, on terms and conditions
to be established by Buyer. Seller will make available to Buyer the personnel
records for each Employee. Seller will not make any representations or
assurances to the Employees that all or any of them will be hired by Buyer or
what their wages, hours, or terms and conditions of employment would be were
they employed by Buyer. Buyer will not solicit or hire Employees without the
consent of Seller.
8.2 BENEFIT PLANS. Without limiting the generality of SECTION 2.2
hereof, and except as otherwise provided in this ARTICLE 8, Seller will
retain and be solely responsible for (i) all liabilities and obligations
under all Benefit Plans and Benefit Arrangements, including all liabilities
and obligations arising under the continuation coverage requirements of
Section 4980B of the Code and Part 6 of Title I of ERISA; (ii) any long-term
disability benefits provided under any Benefit Plan, including any claims
resulting from disabilities incurred but not reported as of the Closing Date;
(iii) any benefits provided to Persons who do not become Continuing
Employees; (iv) any expenses incurred under Seller's Benefit Plans and
Benefit Arrangements; and (v) any award of stock appreciation rights, stock
options, restricted stock, performance shares or units, or other incentive
compensation by Seller.
8.3 NO RIGHT TO BENEFITS. No provision contained in this Agreement
will create any third party beneficiary or other rights in any employee or
former employee of Seller (or any beneficiary or dependent thereof) in
respect of continued employment or resumed employment with any Buyer or the
Business, and no provision of this Agreement will create any such rights in
any such Person in respect of any benefits that may be provided under any
employee benefit plan or arrangement that may be established by any Buyer.
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8.4 EMPLOYEE AGREEMENTS. Seller hereby (i) assigns to Buyer all of
Seller's rights under all confidentiality and non-competition agreements that
exist with any Employees (other than those Employees, if any, retained by
Seller), and (ii) pursuant to SECTION 7.8(b), provides copies of all such
agreements to Buyer.
8.5 RIGHT TO CHANGE BENEFITS. Buyer will have the right, in the
good faith exercise of its managerial discretion, to make changes or cause
changes in the compensation, benefits (including retiree medical, pension,
thrift plan or other benefits), and other terms of employment for, and to
terminate the employment of, any Continuing Employee.
9. INTENTIONALLY LEFT BLANK
10. INTENTIONALLY LEFT BLANK
11. SURVIVAL
All covenants and agreements contained herein survive, without
limitation as to time (except as may be otherwise provided in such covenants
and agreements), the execution and delivery of this Agreement and the Closing
hereunder. All representations and warranties contained herein will
terminate and expire on the second anniversary of the Closing Date, except
with respect to (i) SECTIONS 5.3, 5.9 AND 5.10, for which the representations
and warranties contained therein will continue to survive indefinitely; (ii)
SECTION 5.15, for which the representations and warranties contained therein
will terminate and expire on the tenth anniversary of the Closing Date; and
(iii) SECTION 5.14, for which the representations and warranties contained
therein will terminate and expire 60 days after the expiration of the
applicable statute of limitations or any extensions thereof.
12. INDEMNIFICATION
12.1 OBLIGATION OF SELLER TO INDEMNIFY. Seller agrees to indemnify,
defend and hold harmless Buyer and its Affiliates (and their respective
directors, officers, employees, stockholders, successors, assigns,
representatives, counsel and agents) (collectively, the "BUYER INDEMNITIES")
from and against all claims, losses, liabilities, damages, deficiencies,
costs or expenses, including interest, penalties and attorneys' fees and
disbursements (collectively, "LOSSES"), actually incurred, suffered or paid,
directly or indirectly, by the Buyer Indemnities based upon, arising out of
or otherwise in respect of: (i) any breach or alleged breach of any
representation or warranty of Seller contained in this Agreement, the
Schedules hereto, or the Seller Documents; (ii) any breach or alleged breach
of any covenant or agreement of Seller contained in this Agreement or any
Seller Document; (iii) any Retained Liability; (iv) the failure by Buyer to
submit this Agreement and the transactions contemplated hereby to the
shareholders of the Buyer for their consideration and approval; (v) the
operation of the Assets or the Business prior to the Closing Date; (vi) the
sale and transfer of the Assets to Buyer; (vii) (A) any Environmental Claim
asserted against Buyer or for which Buyer otherwise becomes liable or must
investigate, or any actual or threatened violation of or non-compliance with,
or remediation
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obligation arising under, any Environmental Laws arising from any event,
condition, circumstance, activity, practice, incident, action or plan
relating in any way to the Assets; (B) the presence of any Materials of
Environmental Concern arising out of actions or events relating to or
involving Seller, the Business or the Assets prior to the Closing Date on,
in, under or affecting all or any portion of the Assets and/or any property
on which Seller has conducted business, and any release or threatened release
with respect to Materials of Environmental Concern; and (C) the storage,
disposal or treatment, or the transportation for storage, disposal or
treatment, of Materials of Environmental Concern (regardless of location)
arising out of actions or events involving or relating to Seller, the
Business or the Assets prior to the Closing Date; (viii) relating to product
liability claims which have arisen or may arise against Seller or Buyer or
the Assets for actions or events involving or relating to the Seller, the
Business or the Assets prior to the Closing Date; (ix) any employee related
claims arising out of events that occurred prior to the Closing Date; or (x)
the operation of Tanisys Europe Ltd. (including, but not limited to, relating
to the Section 7 Industrial Development Act of 1982 Grant from the Scottish
Government).
12.2 OBLIGATION OF BUYER TO INDEMNIFY. Buyer agrees to indemnify,
defend and hold harmless Seller and its Affiliates (and their respective
directors, officers, employees, stockholders, successors, assigns,
representative and agents) (collectively the "SELLER INDEMNITIES") from and
against any Losses actually incurred, suffered or paid, directly or
indirectly, by the Seller Indemnities based upon, arising out of or otherwise
in respect of: (i) any breach or alleged breach of any representation or
warranty of Buyer contained in this Agreement, or the Buyer Documents; (ii)
any breach or alleged breach of any covenant or agreement of Buyer contained
in this Agreement or any Buyer Document; or (iii) any Assumed Liability.
12.3 NOTICE AND OPPORTUNITY TO DEFEND. (a) NOTICE OF ASSERTED
LIABILITY. Promptly after receipt by any Person entitled to indemnification
under this ARTICLE 12 (the "INDEMNITEE") of notice of any demand, assertion
or other circumstance which could give rise to a claim or the commencement
(or threatened commencement) of any action, proceeding or investigation
(each, an "ASSERTED LIABILITY") that may result in a Loss, the Indemnitee
will give notice thereof (the "CLAIMS NOTICE") to the party obligated to
provide indemnification or payment pursuant to SECTION 12.1 or 12.2 (the
"INDEMNIFYING PARTY"), as the case may be, subject to the procedures
contained in this SECTION 12.3. The Claims Notice will describe the Asserted
Liability in reasonable detail and will, if possible, indicate the amount of
the Loss that has been or may be suffered by the Indemnitee. In no event
will the Indemnitee's failure to give a Claims Notice to the Indemnifying
Party relieve the Indemnifying Party of any liability under this ARTICLE 12,
except to the extent that such failure materially prejudices the Indemnifying
Party's ability to adequately defend such claim.
(b) OPPORTUNITY TO DEFEND. If the Indemnifying Party confirms in
writing that it is obligated hereunder to indemnify the Indemnitee with
respect to any Asserted Liability, the Indemnifying Party may elect to
compromise or defend, at its own expense and with counsel reasonably
satisfactory to the Indemnitee, such Asserted Liability; and if the
Indemnifying Party so elects to compromise or defend, the Indemnifying Party
will have the right to control the defense of such Asserted Liability. If
the Indemnifying Party elects to compromise or defend
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such Asserted Liability, it will within 15 days (or sooner, if the nature of
the Asserted Liability so requires) notify the Indemnitee of its intent to do
so, and the Indemnitee will cooperate with the Indemnifying Party in the
compromise of, or defense against, such Asserted Liability. If the
Indemnifying Party elects not to compromise or defend such Asserted
Liability, fails to notify the Indemnitee of its election as herein provided
or contests its obligation to indemnify under this Agreement, the Indemnitee
may pay, compromise or defend such Asserted Liability, and the Indemnitee
will have the right to control the compromise or defense of such Asserted
Liability; and in such case, the Indemnitee will retain the right to pursue
its rights to indemnification hereunder against the Indemnifying Party.
Notwithstanding the foregoing provisions of this SECTION 12.3(b), the
Indemnifying Party may settle or compromise any Asserted Liability; PROVIDED,
that (i) such settlement or compromise does not result in any liability to,
restriction on or admission by the Indemnitee; and (ii) such settlement or
compromise constitutes or includes a full release of the Indemnitee. In any
event, the Indemnitee may participate, at its own expense, in the defense of
any Asserted Liability. If the Indemnifying Party chooses to defend any
Asserted Liability, the Indemnitee will make available to the Indemnifying
Party any books, records or other documents within its control that are
necessary or appropriate for such defense.
12.4 INDEMNIFICATION PAYMENTS ON AFTER-TAX BASIS. Any
indemnification payment hereunder with respect to any Loss will be in an
amount which is sufficient to compensate the Indemnitee for the amount of
such Loss, after taking into account all increases in federal, state,
provincial, local, foreign or other Taxes payable by the Indemnitee because
of the receipt of such payment (by reason of such payment being included in
income, resulting in a reduction of tax basis or otherwise increasing such
Taxes payable by the Indemnitee at any time).
12.5 PAYMENT OF DAMAGES. Any Loss for which Indemnitee is entitled
to indemnification under this ARTICLE 12 shall be paid by the Indemnifying
Party to the Indemnitee as such Losses are incurred.
12.6 RIGHT OF OFFSET. Upon the determination by Buyer that it is
entitled to indemnification for Losses hereunder from Seller, Buyer may
offset any indemnification amounts or expense advances to which Buyer
believes it is entitled against the Earn Out Payment and/or any Consulting
Payment.
13. RESCISSION. If Seller does not obtain on or before February 16, 2000,
the requisite shareholder vote to ratify the transactions consummated under
this Agreement, Buyer shall have the right to rescind the transactions that
occurred hereunder by giving written notice to Seller.
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14. MISCELLANEOUS
14.1 PUBLICITY. Neither Seller nor Buyer will make any publicity
release or announcement concerning this Agreement or the transactions
contemplated hereby without the prior written approval thereof by Buyer or
Seller, as the case may be, except as required by applicable Law, in which
case the party issuing the release will so advise the other party in writing
and submit a copy of such release in advance of such issuance.
14.2 NOTICES. Any notice or other communication required or
permitted hereunder will be in writing and will be delivered personally, sent
by facsimile transmission or sent by certified, registered or express mail,
postage prepaid. Any such notice will be deemed given when delivered
personally, or sent by facsimile transmission (after receiving confirmation
of receipt) or, if mailed, five days after the date of deposit in the United
States mail or, if express mailed, one Business Day after delivery to a
reputable overnight express mail courier, as follows:
(i) If to Buyer, to:
TanisysOperations, LP
13717 Beta Road
Farmers Branch, Texas 75244
Attention: President of General Partner
Telecopy: (972) 851-1997
(ii) If to Seller, to:
Tanisys Technology, Inc.
12201 Technology Boulevard
Austin, TX 78727-6101
Attention: Charles T. Comiso
Telecopy: (512) 257-5350
with a copy to:
W. Audie Long
7411 John Smith Drive, Suite 200
San Antonio, TX 78229-4898
Telecopy: (210) 949-7024
Either party may by notice given in accordance with this SECTION 14.2
designate another address or Person for receipt of notices hereunder.
14.3 ENTIRE AGREEMENT. This Agreement (including the Schedules
hereto), the Buyer Documents and the Seller Documents contain the entire
understanding among the parties with respect to the purchase and sale of the
Assets and the Business and supersede all prior
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agreements, written or oral, with respect thereto, including, but not limited
to, the Letter Agreement.
14.4 AMENDMENTS AND WAIVERS; PRESERVATION OF REMEDIES. This
Agreement may be amended, superseded, canceled, renewed or extended, and the
terms hereof may be waived, in each case only by a written instrument signed
by Buyer and Seller or, in the case of a waiver, by the party waiving
compliance. No delay on the part of either party in exercising any right,
power or privilege hereunder will operate as a waiver thereof; nor will any
waiver on the part of either party of any such right, power or privilege, nor
any single or partial exercise of any such right, power or privilege,
preclude any further exercise thereof or the exercise of any other such
right, power or privilege.
14.5 GOVERNING LAW, JURISDICTION, FORUM SELECTION AND WAIVER OF JURY
TRIAL. This Agreement, and the rights and obligations of Buyer and Seller
hereunder, will be governed by, and construed and enforced in accordance
with, the laws of the State of Texas applicable to agreements made and to be
performed entirely within such State, without regard to principles of
conflict of laws. Buyer and Seller each agrees that any action or proceeding
based upon or relating to this Agreement will, to the fullest extent
permitted by applicable law, be brought and maintained exclusively in the
courts of the State of Texas or in the United States District Court for the
Northern District of Texas. Buyer and Seller each hereby irrevocably submits
to the jurisdiction of the courts of the State of Texas and of the United
States District Court for the Northern District of Texas for purposes of any
such action or proceeding, and irrevocably agrees to be bound by any judgment
rendered by any such court in connection with such action or proceeding.
Buyer and Seller each hereby irrevocably waives, to the fullest extent
permitted by law, any objection that it may have to the laying of venue of
any such action or proceeding brought in any such court and any claim that
any such action or proceeding has been brought in an inconvenient forum.
Buyer and Seller each hereby irrevocably waives any right it may have to a
trial by jury in respect of any claim based upon or arising out of this
Agreement or the transactions contemplated hereby.
14.6 BINDING EFFECT; NO ASSIGNMENT. This Agreement will be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. This Agreement may not be assigned by
either party hereto without the prior written consent of the other party;
PROVIDED, that Buyer may assign any or all of its rights hereunder to one or
more Affiliates of Buyer, but no such assignment will release Buyer from any
of its obligations hereunder.
14.7 VARIATIONS IN PRONOUNS. All pronouns and any variations
thereof refer to the masculine, feminine or neuter, singular or plural, as
the context may require.
14.8 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
will be an original, and all such counterparts will together constitute one
and the same instrument.
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14.9 SCHEDULES. The Schedules are an integral part of this
Agreement as if fully set forth herein. All references herein to Articles,
Sections and Schedules will be deemed references to such parts of this
Agreement, unless the context otherwise requires.
14.10 HEADINGS. The headings in this Agreement, in any Appendix,
Exhibit or Schedule hereto and in the table of contents are for reference
only and will not affect the meaning or interpretation of this Agreement.
14.11 SEVERABILITY OF PROVISIONS. Subject to the reformation
provision in SECTION 7.15, if any provision of this Agreement is held to be
illegal, invalid or unenforceable under any current or future law, and if the
rights or obligations of the parties under this Agreement would not be
materially and adversely affected thereby, such provision shall be fully
separable, and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part
thereof, the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance therefrom. In lieu of such
illegal, invalid or unenforceable provision, there shall be added
automatically as a part of this Agreement, a legal, valid and enforceable
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible, and the parties hereto request the court or any
arbitrator to whom disputes relating to this Agreement are submitted to
reform the otherwise illegal, invalid or unenforceable provision in
accordance with this SECTION 14.11.
14.12 NO THIRD-PARTY BENEFICIARIES. Nothing herein expressed or
implied is intended or shall be construed to confer upon or give to any
Person, other than the parties hereto and their respective successors and
permitted assigns, any rights or remedies under or by reason of this
Agreement; provided, however, All Components, Inc. be, and it hereby is,
deemed to be a third party beneficiary of this Agreement.
14.13 EQUITABLE RELIEF. Seller acknowledges and agrees that in view
of the uniqueness of the Business, damages at law would be an insufficient
remedy for a breach of any of its covenants in this Agreement. Accordingly,
Seller agrees that in the event of a breach or threatened breach by Seller of
any such provisions, Buyer will be entitled to, and Seller acknowledges and
covenants that it will not, and will cause its Affiliates not to, contest the
appropriateness and availability of, equitable relief in the form of an
injunction to prevent irreparable injury. Nothing herein will be construed
as prohibiting Buyer from pursuing any other remedies, including damages, for
a breach or threatened breach of this Agreement;
14.14 DENOMINATIONS. All dollar references in this Agreement will be
understood to refer to United States dollars.
14.15 OBLIGATIONS OF SELLER WITH RESPECT TO AFFILIATES. Each
obligation, covenant and undertaking of Seller set forth in each of this
Agreement and the Seller Documents will be deemed, as and to the extent
required by the context, to also include a corresponding obligation,
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covenant or undertaking of Seller to cause its Affiliates to perform or
satisfy such obligation, covenant or undertaking.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
TANISYSOPERATIONS, LP TANISYS TECHNOLOGY, INC
By: Tanisys Acquisition GP, Inc.
Its General Partner
/s/ Robert Cooper By: /s/ Charles T. Comiso
- ----------------------------------- ---------------------------------
Robert Cooper, President Name: Charles T. Comioso
-------------------------------
Title: Pres. & CEO
------------------------------
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APPENDIX A
DEFINITIONS AND RULES OF USAGE
RULES OF USAGE
The terms defined below shall have the respective meanings set forth
below for all purposes, and such meanings shall be equally applicable to both
the singular and plural forms of the terms defined. "Include," "includes" and
"including" shall be deemed to be followed by "without limitation." "Writing,"
"written" and comparable terms refer to printing, typing, lithography and other
means of reproducing words in a visible form. Any instrument or Law defined or
referred to below or in any instrument that recites it is to be construed in
accordance with this Appendix means such instrument or Law as from time to time
amended, modified or supplemented, including (in the case of instruments) by
waiver or consent and (in the case of Laws) by succession of comparable
successor Laws and includes (in the case of instruments) references to all
attachments thereto and instruments incorporated therein. References to any
Person are, unless the context otherwise requires, also to its successors and
assigns. "Hereof," "herein," "hereunder" and comparable terms refer to the
entire instrument in which such terms are used and not to any particular
article, section or other subdivision thereof or attachment thereto. References
to the singular include, unless the context otherwise requires, references to
the plural and vice versa. References in an instrument to "Article", "Section"
or another subdivision or to an attachment are, unless the context otherwise
requires, to an article, section or subdivision of or an attachment to such
instrument.
DEFINITIONS
"ACCOUNTS RECEIVABLE" means all trade accounts and notes
receivable of the Business (net of reserves and applicable allowances).
"ADJUSTED PURCHASE PRICE" has the meaning specified in SECTION
3.3.
"AEA" means the Atomic Energy Act of 1954 (42 U.S.C. Section 2011
ET SEQ.).
"AFFILIATE" means, with respect to any Person, any other Person
controlling, controlled by or under common control with, such Person.
"AGREEMENT" means the Asset Purchase Agreement dated as of
December 7, 1999, by and between Buyer and Seller, as may be amended, modified
or supplemented from time to time.
"ASSERTED LIABILITY" has the meaning specified in SECTION 12.3.
"ASSETS" has the meaning specified in SECTION 1.1.
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"ASSUMED LIABILITIES" has the meaning specified in SECTION 2.1.
"BENEFIT ARRANGEMENTS" means each and all retirement, savings,
bonus, commission, deferred compensation, incentive compensation, holiday,
vacation, severance pay, stock option, stock purchase, performance, sick pay,
sick leave, disability, tuition refund, service award, company car, scholarship,
relocation, patent award, fringe benefit or other employee benefit plans, and
contracts, policies, practices or arrangements of Seller providing employee or
executive compensation benefits to employees of the Business, other than the
Benefit Plans.
"BENEFIT PLANS" means each and all "employee benefit plans" as
defined in Section 3(3) of ERISA, currently or at any time during the past six
years maintained or contributed to by the Controlled Group, including (i) any
such plans that are "employee welfare benefit plans" as defined in Section 3(1)
of ERISA, and (ii) any such plans that are "employee pension benefit plans" as
defined in Section 3(2) of ERISA, regardless of whether such Benefit Plans are
excluded from ERISA coverage by Section 4 of ERISA.
"BUSINESS" has the meaning specified in the second introductory
paragraph of the Agreement.
"BUSINESS DAY" means, any day other than Saturday, Sunday or a
United States federal holiday on which federally chartered banking and financial
institutions are not open for the transaction of business.
"BUYER" has the meaning specified in the first introductory
paragraph of the Agreement.
"BUYER DOCUMENTS" means the documents to be delivered on or prior
to the Closing Date by Buyer pursuant to the Agreement or any mutually
satisfactory list of closing documents.
"BUYER INDEMNITIES" has the meaning specified in SECTION 12.1.
"CAA" means the Clean Air Act (42 U.S.C. Section 7401 ET SEQ.).
"CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (42 U.S.C. Section 9601 ET SEQ.).
"CLAIMS NOTICE" has the meaning specified in SECTION 12.3.
"CLOSING" has the meaning specified in SECTION 4.
"CLOSING DATE" has the meaning specified in SECTION 4.
"CODE" means the Internal Revenue Code of 1986, as amended.
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"CONDITION OF THE BUSINESS" means the business, operations,
assets, liabilities, properties, condition (financial or otherwise) or prospects
of the Business.
"CONSULTING PAYMENTS" has the meaning specified in SECTION 3.2(d).
"CONTAMINANT" means (i) those substances defined as "hazardous
substances," "pollutants" or "contaminants" in Section 101 of CERCLA, (ii) those
substances defined as "hazardous waste," "hazardous materials" or "regulated
substances" by RCRA, (iii) those substances designated as a "hazardous
substance" pursuant to Section 311 of CWA, (iv) those substances defined as
"hazardous materials" in Section 103 of HMTA, (v) those substances regulated as
a hazardous chemical substance or mixture or as an imminently hazardous chemical
substance or mixture pursuant to Section 6 or 7 of TCSA, (vi) those substances
regulated by OPA, (vii) those substances defined as a source, special nuclear or
by-product material by Section 11 of AEA, (viii) those substances defined as
"residual radioactive material" by Section 101 of UMTRCA, (ix) those substances
defined as "toxic materials" or "harmful physical agents" pursuant to Section 6
of OSHA, (x) those substances defined as hazardous wastes in 40 C.F.R. Part
261.3, (xi) those substances defined as hazardous waste constituents in 40
C.F.R. Part 260.10, specifically including Appendix VII and VIII of Subpart D of
40 C.F.R. Part 261, (xii) those substances designated as hazardous substances in
40 C.F.R. Parts 116.4 and 302.4, (xiii) those substances defined as hazardous
substances or hazardous materials in 49 C.F.R. Part 171.8, (xiv) those
substances regulated in the regulations adopted pursuant to such Laws (or any
amendments to such Laws), whether or not such regulations are specifically
referenced herein, and (xv) any other material, substance or waste that poses or
causes, or is alleged to pose or cause, any damage to property or personal
injury or threat to the environment.
"CONTINUING EMPLOYEE" means each Person employed by Seller in
connection with the Business, immediately prior to the Closing Date, who becomes
an employee of Buyer as of the Closing Date or within 60 days thereafter.
"CONTROLLED GROUP" means Seller, any Affiliate of Seller or any
other organization that together with Seller is treated as a single employer
under Section 414 of the Code.
"CREDITOR'S PLAN" has the meaning specified in SECTION 5.31.
"CURRENT LIABILITIES" means all liabilities listed on SCHEDULE
2.1.
"CWA" means the Federal Water Pollution Control Act (33 U.S.C.
Section 1251 ET SEQ.).
"EMPLOYEES" means all regular, full-time employees (excluding
those on lay-off or leave of absence, whether paid or unpaid, seasonal,
temporary and/or part-time employees) of the Business immediately prior to the
Closing Date.
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"ENVIRONMENTAL CLAIM" means any written accusation, allegation,
notice of violation, claim, demand, order, consent decree, directive, cost
recovery action or other cause of action by or on behalf of any Governmental
Entity or any other Person for damages, injunctive or equitable relief, personal
injury, remedial action costs, tangible or intangible property damage, natural
resource damage, nuisance, pollution or any adverse effect on the environment
caused by any Contaminant, or for fines, penalties or restrictions, resulting
from or based upon (i) the existence or continuation of a release of any
Contaminant, (ii) exposure to any Contaminant, (iii) the presence, use,
handling, transportation, storage, treatment or disposal of any Contaminant, or
(iv) the violation or alleged violation of any Environmental Law.
"ENVIRONMENTAL LAWS" means (i) CERCLA, (ii) CWA, (iii) RCRA, (iv)
AEA, (v) CAA, (vi) EPCRA, (vii) FIFRA, (viii) OPA, (ix) SDWA, (x) SMCRA, (xi)
TSCA, (xii) UMTRCA, (xiii) the Pollution Prevention Act of 1990 (42 U.S.C.
Section 13101 ET SEQ), (xiv) HMTA, (xv) NWPA, (xvi) the regulations adopted
pursuant to all such foregoing Laws, and (xvii) all other Laws concerning
Contaminants, pollution or the protection of air, water or land, but excluding
any such Laws concerning occupational health and safety (including OSHA and all
regulations thereunder).
"EPCRA" means the Emergency Planning and Community Right to Know
Act (42 U.S.C. Section 11001 ET SEQ.).
"EQUIPMENT" means the machinery, equipment, tools, furniture,
furnishings, automobiles, trucks, tractors, trailers, forklifts and other
vehicles and mobile equipment, computers, software, copiers, fax machines,
telephones and all related equipment, spare parts and all other tangible
personal property owned or held by Seller, wherever located, used or useful in
connection with the conduct of the Business.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"FACILITIES" has the meaning specified in the second introductory
paragraph of the Agreement.
"FIFRA" means the Federal Insecticide, Fungicide, and Rodenticide
Act (7 U.S.C. Section 136 ET SEQ.).
"GAAP" means United States generally accepted accounting
principles applied on a consistent basis throughout the periods involved.
"GOVERNMENTAL ENTITY" means any government or political
subdivision, whether federal, state, provincial, local or foreign, or any
administrative, regulatory or other agency, commission or instrumentality of
such government or political subdivision, or any arbitrator or arbitral
tribunal, including any court of law.
42
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"HMTA" means the Hazardous Materials Transportation Act (49 U.S.C.
App. Section 1801 ET SEQ.).
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"INDEMNIFYING PARTY" has the meaning specified in SECTION 12.3.
"INDEMNITEE" has the meaning specified in SECTION 12.3.
"INFORMATION TECHNOLOGY" means any computer software or hardware
(whether general or specific purpose) and any similar or related items of
automated, computerized or management information systems.
"INTELLECTUAL PROPERTY" means (i) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications and patent
disclosures, together with all reissues, continuations, continuations-in-part,
divisionals, revisions, utility models, extensions and reexaminations thereof;
(ii) all trademarks, service marks, trade dress, logos, trade names and
corporate names, together with all translations, adaptations, derivations and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations and renewals in connection therewith; (iii) all
copyrightable works, all copyrights and all applications, registrations,
renewals and derivatives in connection therewith; (iv) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, product certifications, designs (including board
designs), drawings, specifications, customer, prospect and supplier lists,
distribution and manufacturer's representative lists, pricing and cost
information, and business and marketing plans and proposals); (v) all computer
software (including data and related documentation); (vi) all other proprietary
rights; (vii) all copies and tangible embodiments thereof (in whatever form or
medium); and (viii) all licenses or agreements in connection with the foregoing,
in each case on a worldwide basis and used or useful in the Business.
"INTERIM BALANCE SHEET" has the meaning specified in SECTION 5.16.
"INTERIM FINANCIAL STATEMENTS" has the meaning specified in
SECTION 5.16.
""INVENTORY" means all inventory (net reserves and allowances)
used or useful in the Business owned or held by Seller, wherever located,
including all raw materials, chemicals, packaging materials, supplies, work in
process and finished goods.
"IRS" means the Internal Revenue Service.
"KNOWLEDGE" means (a) with respect to Seller, (i) any knowledge
attributable to Seller or any Affiliate of Seller based on its files, books and
records, Tax Returns or any other
43
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written documentation; and (ii) the actual personal knowledge of any of the
employees, officers and directors of Seller or any Affiliate of Seller; and
(b) with respect to Buyer, (i) any knowledge attributable to Buyer or any
Affiliate of Buyer based on its files, books and records, Tax Returns or any
other written documentation; and (ii) the actual personal knowledge of any of
the employees, officers and directors of Buyer or any Affiliate of Buyer.
"LAWS" means all federal, state, provincial, local and foreign
laws, statutes, ordinances, rules, regulations, orders, judgments, decrees,
writs, arbitral orders, settlement agreements, conciliation agreements,
injunctions or other requirements of all applicable governmental, judicial,
legislative, executive, administrative and regulatory authorities.
"LEASED REAL PROPERTY" has the meaning specified in SECTION 5.9.
"LIENS" means all liens, pledges, mortgages, security interests,
claims, covenants, leases, subleases, charges, conditions, options, rights of
first refusal, licenses, easements, servitudes, rights of way, encumbrances or
any other restriction or limitation whatsoever.
"LOSSES" has the meaning specified in SECTION 12.1.
"MEETING DATE" means the date Seller's shareholders meet to vote
on a proposal to ratify the transactions consummated under this Agreement.
"NOTICES" means all notices of violation, Liens, complaints,
suits, orders, citations, fines, penalties or other notices.
"NWPA" means the Nuclear Waste Policy Act (42 U.S.C. Section 10101
ET SEQ.).
"OBSOLETE INVENTORY" means any Inventory that is obsolete or
otherwise unusable or unsalable in the ordinary course of business.
"OFF-SITE ENVIRONMENTAL LIABILITIES" means all liabilities,
obligations, claims, damages, costs and expenses, including capital expenditures
and natural resource damage claims (whether arising before, on or after the
Closing Date) incurred (i) as a result of any requirement or violation of any
Environmental Laws; or (ii) as a result of or in connection with any
investigation, inquiry, order, demand, claim, action, citation, fine or other
proceeding by any Governmental Entity or by any other Person, and that in either
case arises as a result of the off-site treatment, storage or disposal (or any
arrangement with respect thereto by Seller) of any Contaminant or other
materials generated or handled in connection with Seller's ownership or
operation of the Real Property, the Assets or the Business.
"ON-SITE ENVIRONMENTAL LIABILITIES" means all liabilities,
obligations, claims, damages, costs and expenses, including capital expenditures
and natural resource damage claims (whether arising before, on or after the
Closing Date) incurred (i) as a result of any requirement of or violation of any
Environmental Laws; or (ii) as a result of or in connection with any
44
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investigation, inquiry, order, demand, claim, action, citation, fine or other
proceeding by any Governmental Entity or by any other Person and that in either
case arises as a result of Seller's ownership, occupancy or use of the Real
Property, or operation of the Assets or the Business thereon, including the
migration of Contaminants originating from the Real Property in or by means of
soil, groundwater or surface water; PROVIDED, that On-Site Environmental
Liabilities will not include (x) any Off-Site Environmental Liabilities or (y)
any liabilities, obligations, claims, damages, costs and expenses resulting from
any failure by Seller (A) to obtain or comply with permits; (B) to file
required, complete or accurate reports, documents or other paperwork with
Governmental Entities or any other Person; (C) to retain reports, documents,
records or other paperwork for required periods of time; (D) to comply with any
consent orders, consent agreements or other settlement agreements with any
Governmental Entity or any other Person; (E) to perform or to document any
required employee training; (F) to report any release of any material required
to be reported to any Governmental Entity or any other Person; (G) to prepare or
implement plans, including any stormwater pollution prevention plan or spill
prevention and control plan, that meet the requirements of any Environmental
Law; (H) to comply with any emergency preparedness or waste minimization
requirement; (I) to comply with any above ground storage tank regulatory
requirement; or (J) to store material in compliance with Environmental Laws,
except to the extent that any such failure has resulted in the presence of a
Contaminant in or on the soil, groundwater or surface water at the Owned Real
Property.
"OPA" means the Oil Pollution Act of 1990 (33 U.S.C. Section 2701
ET SEQ.).
"OPERATIVE DOCUMENTS" means, collectively, the Agreement, the
Buyer Documents and the Seller Documents.
"OSHA" means the Occupational Safety and Health Act, 29 U.S.C.
Section 651 ET SEQ.) and the regulations thereunder.
"PERMITS" has the meaning specified in SECTION 5.5.
"PERMITTED LIENS" means (i) any Liens securing Taxes; or (ii) any
claims of materialmen, carriers, landlords and like Persons, in each case, which
are not yet due and payable or are being contested in good faith and which,
either individually or in the aggregate, would not interfere with Buyer's
ownership, use or operation of such Assets or conduct of the Business and would
not create the risk of imposition of criminal penalties on Buyer.
"PERSON" means any individual, corporation, partnership, limited
liability company, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, Governmental Entity or other entity.
"PURCHASE PRICE" has the meaning specified in SECTION 3.1.
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"RCRA" means the Resource Conservation and Recovery Act of 1976
(42 U.S.C. Section 6901 ET SEQ.).
"REAL PROPERTY" has the meaning specified in SECTION 5.9.
"REAL PROPERTY LEASES" has the meaning specified in SECTION 5.9.
"RECORDS" means all books and records of Seller relating to the
Business, including all original agreements, files, documents, records, computer
files and programs, operating data, drawings, specifications, environmental
studies, maintenance records, operational manuals and personnel records with
regard to the Continuing Employees.
"REQUIRED CONSENTS" has the meaning specified in SECTION 5.8.
"RETAINED ASSETS" has the meaning specified in SECTION 1.2.
"RETAINED LIABILITIES" has the meaning specified in SECTION 2.2.
"SDWA" means the Safe Drinking Water Act (42 U.S.C. Sections 300f
ET SEQ.).
"SELLER" has the meaning specified in the first introductory
paragraph of the Agreement.
"SELLER DOCUMENTS" means the documents to be delivered on or prior
to the Closing by Seller pursuant to this Agreement or any list of closing
documents satisfactory to Seller and Buyer.
"SELLER INDEMNITIES" has the meaning specified in SECTION 12.2.
"SETTLEMENT AMOUNT" has the meaning specified in SECTION 3,2(c).
The Settlement Agreement has been calculated by the parties with respect to the
Business as: Accounts Receivable plus Inventory less the amount of the secured
liability to Bank of America relating to the Business.
"SMCRA" means the Surface Mining Control and Reclamation Act of
1974 (30 U.S.C. Sections 1201 ET SEQ.).
"STRADDLE PERIOD" means a taxable year or period beginning before
and ending after the close of the day the Closing occurs, which will be treated
on a "closing of the books" basis as two partial periods, one ending on the
close of the day the Closing occurs and the other beginning on the day
immediately following the day on which the Closing occurs, except that Taxes
(such as property Taxes) imposed on a periodic basis will be allocated on a
daily basis.
"TAX" means (i) any federal, state, provincial, local or foreign
net income, gross income, gross receipts, windfall profits, severance,
production, property, sales, use, license,
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excise, franchise, employment, payroll, withholding, alternative or add-on
minimum, AD VALOREM, excise, value added, transfer, stamp, environmental,
registration or inventory tax, or any other tax, custom, duty, governmental
fee or other like assessment or charge of any kind whatsoever, together with
any interest or penalty, imposed by any Governmental Entity; and (ii) any
liability for the payment of amounts with respect to any tax, duty, fee,
assessment and charge described in clause (i) as a result of being a member
of an affiliated, consolidated, combined or unitary group, or as a result of
any obligation under any tax sharing arrangement or tax indemnity agreement.
"TAX RETURN" means any return, report or similar statement
required to be filed with respect to any federal, state, local, provincial or
foreign Taxes (including any attached schedules), including, any information
return, claim for refund, amended return or declaration of estimated Tax.
"TREASURY REGULATIONS" means the regulations of the United States
Department of Treasury promulgated thereunder.
"TSCA" means the Toxic Substances Control Act (15 U.S.C. Section
2601 ET SEQ.).
"UMTRCA" means the Uranium Mill Tailings Radiations Control Act of
1978 (42 U.S.C. Section 7901 ET SEQ.).
" ANNUAL FINANCIAL STATEMENTS" has the meaning specified in
Section 5.16.
"YEAR 2000 COMPLIANT" means that Information Technology is capable
of being used prior to, during and after the calendar year 2000 A.D., that such
Information Technology used during each such time period will accurately
receive, provide and process date/time data (including but not limited to
calculating, comparing and sequencing from, into and between the 20th and 21st
centuries, including the calendar years 1999 and 2000, and leap year
calculations), and that such Information Technology will not malfunction, cease
to function or provide invalid or incorrect results as a result of such
date/time data.
47
<PAGE>
TERM PROMISSORY NOTE
$911,339.00 Dallas, Texas December 9, 1999
this ("Note")
1. PROMISE TO PAY. FOR VALUE RECEIVED, the undersigned, TANISYS
TECHNOLOGY, INC., a Wyoming corporation, 1ST TECH CORPORATION, a Delaware
corporation, and DARKHORSE SYSTEMS, INC., a Delaware corporation
(collectively, "Maker"), hereby promise to pay to TANISYS OPERATIONS, L.P., a
Texas limited partnership (hereinafter, together with all subsequent holders
of this Note, "Payee"), at its address set forth in the Loan Agreement
referred to below, or order, in lawful money of the United States of America,
the principal sum of $911,339.00, on the dates and in the principal amounts
provided in the Loan Agreement, and to pay interest on the outstanding
principal amount of this Note at the rates per annum and on the dates
provided in the Loan Agreement.
2. PREPAYMENTS. This Note may be prepaid, in whole or in part at any
time without notice, premium, penalty or fee.
3. SECURITY FOR NOTE. This Note is secured by certain security
interests in assets of Maker granted to Lender, as described and granted in
that certain Loan and Security Agreement dated July 24, 1997 by and between
Maker, as "Borrower" and NationsCredit Commercial Corporation, through
NationsCredit Funding Division ("Original Lender"), as "Lender" (as such
agreement has been modified, supplemented, or amended, but not extinguished,
including, without limitation, the Modification Agreement dated of even date
herewith pursuant to which, among other things, Tanisys Operations, L.P. is
substituted for Original Lender, the "Loan Agreement") and the other Loan
Documents, the terms of which are incorporated herein by reference and to
which instrument reference is hereby made for a further statement of the
rights of Payee.
4. WAIVERS. Except as expressly provided in the Loan Agreement, the
Maker and any sureties, guarantors, endorsers and all other parties liable
for payment of this Note jointly and severally (i) waive demand, notice of
intent to demand, presentment, notice of nonpayment, notice of intent to
accelerate, notice of acceleration, diligence in collecting, grace, protest,
notice of protest, notice of dishonor, notice of application for or actual
appointment of a receiver for the Collateral or any other asset of Maker,
bringing of suit, right to demand a jury trial in any proceeding brought
hereunder, and diligence in taking any action to collect any sums owing
hereunder or in proceeding against any of the rights and properties securing
payment of the indebtedness evidenced by this Note, (ii) consent to all
extensions without notice for any period or periods of time and partial
payments, before or after maturity, without prejudice to the holder; (iii)
agree to any substitution, subordination, exchange or release of any such
security or the release of any party primarily or secondarily liable hereon;
(iv) agree that Payee shall not be required first to institute suit or
exhaust its remedies hereon against Maker or others liable or to become
liable hereon or to enforce its rights against them or any security herefor;
and (v) consent to any extension or postponement of time of payment of this
Note or to any other indulgence with respect hereto without notice to any of
them, and without in any way affecting the personal liability of any party
hereunder. If any efforts are made to collect or enforce this Note or any
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<PAGE>
installment due hereunder, the undersigned agrees to pay all collection costs
and fees, including reasonable attorneys' fees.
5. TERMINATION. This Note may not be terminated orally, but only by a
discharge in writing signed by the holder of this Note at the time such
discharge is sought.
6. APPLICABLE LAW. In the event the enforceability or validity of any
provision of this Note or of any document or instrument evidencing, securing
or otherwise related to the indebtedness represented by this Note is
challenged or questioned, such provision shall be governed by, and shall be
construed under the laws of the State of Texas. Venue for any action in
connection with this Note shall be exclusively in Dallas County, Texas.
7. MULTIPLE MAKERS AND ENDORSERS. Should this Note be signed or
endorsed by more than one person and/or entity, all of the obligations herein
contained shall be considered the joint and several obligations of each maker
and endorser hereof.
8. DEFINITIONS. Capitalized terms used but not defined herein shall
have the meaning given to such terms in the Loan Agreement.
IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and
year above first written.
MAKER:
TANISYS TECHNOLOGY, INC.,
a Wyoming corporation
By: /s/ Charles T. Comiso
-------------------------------------------
Name: Charles T. Comiso
------------------------------------------
Title: Pres. & CEO
-----------------------------------------
1st TECH CORPORATION,
a Delaware corporation
By: /s/ Charles T. Comiso
-------------------------------------------
Name: Charles T. Comiso
------------------------------------------
Title: Pres. & CEO
-----------------------------------------
DARKHORSE SYSTEMS, INC.,
a Delaware corporation
By: /s/ Charles T. Comiso
-------------------------------------------
Name: Charles T. Comiso
------------------------------------------
Title: Pres. & Ceo
-----------------------------------------
2
<PAGE>
TERM PROMISSORY NOTE
$85,000 Dallas, Texas December 9, 1999
this ("Note")
1. PROMISE TO PAY. FOR VALUE RECEIVED, the undersigned, TANISYS
TECHNOLOGY, INC., a Wyoming corporation, 1ST TECH CORPORATION, a Delaware
corporation, and DARKHORSE SYSTEMS, INC., a Delaware corporation
(collectively, "Maker"), hereby promise to pay to TANISYS OPERATIONS, L.P., a
Texas limited partnership (hereinafter, together with all subsequent holders
of this Note, "Payee"), at its address set forth in the Loan Agreement
referred to below, or order, in lawful money of the United States of America,
the principal sum of $85,000, together with interest from day to day at the
lesser of the highest rate permitted by law and (ii) a percentage equal to
the sum of the prime rate of interest charged from time to time by Bank of
America, N.A. in Dallas, Texas plus two percent (2%) per annum. Interest
shall be computed on the basis of a three hundred sixty (360) day year.
2. PAYMENTS. Payments of accrued but unpaid interest only shall be
due and payable on the first day of each month commencing January 1, 2000 and
continuing on the first day of each month thereafter until the Maturity Date
(hereinafter defined). This Note and all accrued but unpaid interest and all
outstanding principal shall finally become due and payable in its entirety on
March 31, 2000 (the "Maturity Date"). If any installment of principal or
interest on this Note shall become due on a Saturday, Sunday or any other day
on which Payee is not open for business, such payment shall be made on the
next succeeding day on which Payee is open for business; and such extension
of time shall in such case be included in computing interest in connection
with such payment.
4. PREPAYMENTS. This Note may be prepaid, in whole or in part at any
time without notice, premium, penalty or fee.
5. DEFAULT. If default is made in the payment of any installment of
principal or interest under this Note, then in any such event Payee may at
its option, without notice or demand, declare the entire unpaid principal
balance of and accrued but unpaid interest on the indebtedness evidenced by
this Note immediately due and payable without further notice or demand,
foreclose all liens and security interests securing the payment thereof or
any part thereof, all at the option of the holder of this Note. Failure to
exercise any such option shall not constitute a waiver of the right of any
holder hereof to exercise the same at any later time or in the event of any
subsequent default. The acceptance by Payee of any payment hereunder that is
less than payment in full of all amounts due and payable at the time of such
payment shall not constitute a waiver of the right to exercise any of the
foregoing options at that time, or at any subsequent time, or nullify any
prior exercise of any such option, without the express written consent of
Payee.
6. USURY LIMITATIONS. Maker and Payee intend to conform strictly to
the applicable usury laws. Notwithstanding anything to the contrary in this
Note or in any other agreement entered into in connection herewith or
securing the indebtedness evidenced hereby, whether now existing or hereafter
arising and whether written or oral, it is agreed that the aggregate of all
1
<PAGE>
interest and any other charges constituting interest, or adjudicated as
constituting interest, and contracted for, chargeable or receivable under
this Note or otherwise in connection with this loan transaction shall under
no circumstances exceed the maximum amount of interest permitted by
applicable law. In the event the maturity of this Note is accelerated by
reason of an election by the holder hereof resulting from a default hereunder
or under any other document executed as security herefor or in connection
herewith, or by voluntary prepayment by the Maker, or otherwise, then earned
interest may never include more than the maximum rate of interest permitted
by applicable law, computed from the dates of each advance of the loan
proceeds outstanding until payment. If from any circumstance any holder of
this Note shall ever receive interest or any other charges constituting
interest, or adjudicated as constituting interest, the amount, if any, which
would exceed the maximum rate of interest permitted by applicable law shall
be applied to the reduction of the principal amount owing on this Note or on
account of any other principal indebtedness of the Maker to the holder of
this Note, and not to the payment of interest; or if such excessive interest
exceeds the unpaid balance of principal hereof and such other indebtedness,
the amount of such excessive interest that exceeds the unpaid balance of
principal hereof and such other indebtedness shall be refunded to the Maker.
All sums paid or agreed to be paid to the holder of this Note for the use,
forbearance or detention of the indebtedness of the Maker to the holder of
this Note shall be amortized, prorated, allocated an spread throughout the
full term of such indebtedness until payment in full so that the actual rate
of interest on account of such indebtedness is uniform throughout the term
thereof, and, in conjunction therewith, if the loan evidenced by this Note
should ever be deemed to consist of two or more loans, then any sum paid or
agreed to be paid to the holder hereof for the use, forbearance or detention
of the indebtedness of the Maker to the holder of this Note which is deemed
to be excessive interest with respect to one or more such loans shall be
allocated to the loan(s) for which a maximum lawful rate of interest has not
been contracted for, charged or received or for which no maximum rate of
interest exists. The provisions of this paragraph shall control all existing
and future agreements between Maker and Payee.
7. WAIVERS. Except as expressly provided herein, the Maker and any
sureties, guarantors, endorsers and all other parties liable for payment of
this Note jointly and severally (i) waive demand, notice of intent to demand,
presentment, notice of nonpayment, notice of intent to accelerate, notice of
acceleration, diligence in collecting, grace, protest, notice of protest,
notice of dishonor, notice of application for or actual appointment of a
receiver for the Collateral or any other asset of Maker, bringing of suit,
right to demand a jury trial in any proceeding brought hereunder, and
diligence in taking any action to collect any sums owing hereunder or in
proceeding against any of the rights and properties securing payment of the
indebtedness evidenced by this Note, (ii) consent to all extensions without
notice for any period or periods of time and partial payments, before or
after maturity, without prejudice to the holder; (iii) agree to any
substitution, subordination, exchange or release of any such security or the
release of any party primarily or secondarily liable hereon; (iv) agree that
Payee shall not be required first to institute suit or exhaust its remedies
hereon against Maker or others liable or to become liable hereon or to
enforce its rights against them or any security herefor; and (v) consent to
any extension or postponement of time of payment of this Note or to any other
indulgence with respect hereto without notice to any of them, and without in
any way affecting the personal liability of any party hereunder. If any
efforts are made to collect or enforce this Note or any
2
<PAGE>
installment due hereunder, the undersigned agrees to pay all collection costs
and fees, including reasonable attorneys' fees.
8. TERMINATION. This Note may not be terminated orally, but only by a
discharge in writing signed by the holder of this Note at the time such
discharge is sought.
9. APPLICABLE LAW. In the event the enforceability or validity of any
provision of this Note or of any document or instrument evidencing, securing
or otherwise related to the indebtedness represented by this Note is
challenged or questioned, such provision shall be governed by, and shall be
construed under the laws of the State of Texas. Venue for any action in
connection with this Note shall be exclusively in Dallas County, Texas.
10. NOTICES. Every notice, demand or other communication (hereafter in
this paragraph referred to collectively as "notices" and referred to singly
as a "notice") which Maker or Payee is required or permitted to give to any
other party pursuant to this Note or at law shall be in writing and, unless
otherwise expressly required by law, shall be delivered personally, by
recognized overnight national courier service (such as Federal Express),
addressed as follows:
If to Maker: 12201 Technology Blvd.
Suite 130
Austin, Texas 78727
If to Payee: c/o All Components, Inc.
13717 Beta Road
Farmers Branch, Texas 75244
or at any other address designated by either party by notice to the other
party pursuant to this paragraph. Any notice delivered to a party's
designated address by (a) personal delivery or (b) recognized overnight
national courier service shall be deemed to have been received by such party
at the time the notice is delivered to such party's designated address.
7. MULTIPLE MAKERS AND ENDORSERS. Should this Note be signed or
endorsed by more than one person and/or entity, all of the obligations herein
contained shall be considered the joint and several obligations of each maker
and endorser hereof.
3
<PAGE>
IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and
year above first written.
MAKER:
TANISYS TECHNOLOGY, INC.,
a Wyoming corporation
By: /s/ Charles T. Comiso
--------------------------------------------
Name: Charles T. Comiso
------------------------------------------
Title: Pres. & CEO
-----------------------------------------
1st TECH CORPORATION,
a Delaware corporation
By: /s/ Charles T. Comiso
-------------------------------------------
Name: Charles T. Comiso
------------------------------------------
Title: Pres. & CEO
-----------------------------------------
DARKHORSE SYSTEMS, INC.,
a Delaware corporation
By: /s/ Charles T. Comiso
-------------------------------------------
Name: Charles T. Comiso
------------------------------------------
Title: Pres. & CEO
-----------------------------------------
4
<PAGE>
AGREEMENT RELATING TO NONCOMPETITION
The parties hereto are entering into this Agreement contemporaneously with
the execution of that certain Asset Purchase Agreement (the "Asset Purchase
Agreement") dated as of December 7, 1999, by and between Tanisys Operations,
LP, a Texas limited partnership ("Buyer") and Tanisys Technology, Inc., a
Wyoming corporation ("Buyer"), pursuant to which Buyer is purchasing
substantially all of the assets of Seller's worldwide memory components
distribution and manufacturing business. As an inducement for Buyer to
purchase the Assets and assume the Assumed Liabilities, Seller agrees not to
compete with Buyer or solicit customers or employees from Buyer or its
Affiliates as more particularly described in Section 7.15 of the Asset Purchase
Agreement. The parties agree that the allocation for tax purposes of $100,000
of the Purchase Price for such noncompetition agreement would be grossly
inadequate to compensate Buyer in the event Seller breaches the provisions of
Section 7.15 (a "Breach") of the Asset Purchase Agreement. Accordingly, the
parties agree that if Seller violates Section 7.15 of the Asset Purchase
Agreement, $1,500,000 of the Purchase Price shall be refunded in cash to Buyer
by Seller as the parties recognize that such violation necessarily means that
the value of the Asset Purchase Agreement was lower than otherwise contemplated
by the parties without such a Breach; therefore the parties have estimated and
assigned the stated sum as a proper reduction and refund amount. In addition
to the refund, Buyer shall be entitled to recover any additional actual damages
that may be proven or recovered at trial or in arbitration, as applicable.
The right of Buyer to receive a $1,500,000 refund hereunder may be invoked
as many times as it is proven or determined by a court or in arbitration that
Seller has violated Section 7.15 of the Asset Purchase Agreement in separate
instances; provided, however, that the amount of refunds hereunder may not
exceed the amount of the Purchase Price plus the Consulting Payments, the Earn
Out Payments and the amount of Assumed Liabilities.
This Agreement shall be governed by and construed in accordance with the
internal substantive laws of the State of Texas without regard to its
principles of conflict of laws. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. All initial capitalized
terms used herein and not otherwise defined herein shall have the same meanings
as in the Asset Purchase Agreement.
TANISYS OPERATIONS, LP TANISYS TECHNOLOGHY, INC.
By: TANISYS ACQUISITION GP, INC. By: /s/ Charles T. Comiso
Its General Partner -------------------------------
Name: Charles T. Comiso
-----------------------------
Title: President & CEO
----------------------------
/s/ Robert Cooper
- -------------------------------
Robert Cooper, President
<PAGE>
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT is entered into by and between Boston Financial &
Equity Corporation ("BFEC") and Tanisys Technology, Inc. ("TTI").
WHEREAS, BFEC and TTI entered into that certain Master Lease Agreement No.
1299 dated as of March 4, 1999, which Master Lease Agreement controlled the
leasing of equipment from BFEC to TTI and in connection therewith Schedule No. 1
was executed on March 25, 1999, and Schedule No. 2 was executed on August 12,
1999, each schedule listing equipment leased pursuant thereto under the terms of
the Master Lease Agreement (herein all such equipment is referred to as the
"Equipment" and the Master Lease Agreement and the two schedules are referred to
as the "Lease"); and
WHEREAS, TTI has defaulted under the terms of the Lease and has requested
that BFEC sell the Equipment to Tanisys Operations, LP ("Purchaser") pursuant to
a Contract for Sale of Equipment of even date herewith; and
WHEREAS, BFEC has agreed to do so subject to the terms and conditions of
this Settlement Agreement.
NOW, THEREFORE, for Ten Dollars ($10.00) and other good and valuable
consideration, the parties hereto agree as follows:
1. TTI agrees to pay $24,000.00 in cash to BFEC, which payment is to be
made by wire transfer per wiring instructions furnished by BFEC to TTI
as follows:
Bank Boston
Account No. 561-27775
ABA No. 011000390
and to execute a Promissory Note in the principal face amount of
$22,000.00 payable to BFEC in the form attached hereto as EXHIBIT A
and incorporated herein (the "Note").
2. TTI has requested and hereby requests that BFEC enter into the
Contract for Sale of Equipment with Purchaser and convey the Equipment
to Purchaser pursuant to the Contract for Sale of Equipment. TTI
agrees that the Lease has terminated and that all of its rights in or
to the Equipment have terminated as a result and agrees to execute any
and all documents necessary or appropriate to evidence the fact that
it no longer has any right, title, or interest in or to the Equipment
arising under or pursuant to the Lease or otherwise. TTI also agrees
to cooperate fully with Purchaser in turning over and locating the
Equipment and delivering and turning over the right to physical
possession of the Equipment to Purchaser and agrees to follow
Purchaser's instructions with respect thereto and agrees to execute
any documents that BFEC or Purchaser deem necessary or appropriate to
evidence its conveyance of the Equipment to Purchaser, including any
documents releasing or conveying any interest TTI might have in the
Equipment arising under or pursuant to the Lease or otherwise.
3. TTI, on behalf of itself, its successors and assigns and any person or
entity who might assert a claim by, through, or under it (collectively
herein the "TTI Releasors") agrees to release, acquit
1 of 3
<PAGE>
and forever discharge and by these presents does hereby release,
acquit, and forever discharge BFEC, its successors, assigns,
officers, servants, agents, employees, and representatives
(collectively herein the "BFEC Releasees"), of, from and for any
and all claims, liabilities, obligations, and causes of action
whatsoever, whether past, present, or future, fixed or contingent,
known or unknown, whether direct, indirect, or derivative, whether
arising by law, in equity, or otherwise which the TTI Releasors now
have, or hereafter can, shall, or may have, against the BFEC
Releasees, by reason of, or relating to any matter, cause, or thing
whatever, from the beginning of time through the date of this
Release including without limitation any such claims arising out of
or pursuant to the terms of the Lease, or relating to any actions
which BFEC has taken or failed to take under the Lease or with
respect to the Equipment, or with respect to TTI's default under
the Lease, or relating to the acceleration of rents by BFEC under
the Lease, and any negotiations or discussions concerning the Lease
or the Equipment. This Release is intended to be a broad general
release of all claims but it does not release the parties from any
liabilities or obligations arising under or pursuant to the terms
of this Agreement.
4. BFEC, on behalf of itself, its successors and assigns and any person
or entity who might assert a claim by, through, or under it
(collectively the "BFEC Releasors") agrees except as set forth in
Paragraph 5 hereof to release, acquit, and forever discharge and by
these presents hereby release, acquit, and forever discharge TTI, and
its successors, assigns, officers, servants, agents, employees, and
representatives (collectively the "TTI Releasees") of, from, and for
any and all claims, liabilities, obligations, and causes of action
whatsoever, whether past, present, or future, fixed or contingent,
known or unknown, whether direct, indirect, or derivative, whether
arising by law, in equity, or otherwise, which the BFEC Releasors now
have or hereafter can, shall, or may have against the TTI Releasees
relating to any matter, cause or thing whatever, from the beginning of
time through the date of this Release including without limitation any
claims arising out of or related to the Lease and the Equipment and
any negotiations or discussions concerning the Lease or the Equipment.
This Release is intended to be a broad general release of all claims
but it does not release the parties from any liabilities or
obligations arising under or pursuant to the terms of this Agreement.
However, the release by BFEC of TTI as set forth in this paragraph 4
shall not become effective unless and until TTI has paid the Note in
full. If TTI defaults under the terms of the Note, TTI understands
and agrees that the release set forth in this paragraph 4 shall be
null and void but the release of TTI of BFEC set forth in paragraph 3
hereof shall remain in full force and effect. However, BFEC agrees
not to assert or pursue any claims it might have against TTI unless
and until TTI defaults under the terms of the Note. TTI agrees to
waive any claim that the rights and claims of BFEC against it which
would be released when and if the release in paragraph 4 becomes
effective shall not be barred by limitations as a result of BFEC's
forebearance in asserting such claims pursuant hereto.
5. Notwithstanding anything contained in Paragraph 4 to the contrary,
BFEC and TTI understand and agree that the release set forth in
Paragraph 4 shall not release or otherwise affect the rights of BFEC
arising under and pursuant to that certain Stock Purchase Warrant
Agreement dated March 10, 1999, pursuant to which TTI has granted BFEC
the right to purchase 75,000 fully paid shares of common stock for
$1.61 per share and the parties agree that BFEC's rights under that
agreement and any other rights of BFEC with respect to the acquisition
of stock in TTI shall survive the release in Paragraph 4 and remain in
full force and effect.
2 of 3
<PAGE>
6. This Agreement and all the terms herein are binding upon, and inure to
the benefit of, the respective heirs, successors, assigns, and
personal representatives, as the case may be, of the parties hereto.
7. This Agreement shall be governed by, construed, and interpreted, and
the rights of the parties determined in accordance with, the laws of
the Commonwealth of Massachusetts.
8. This Agreement constitutes the full, complete, and final statement of
the agreement of the parties as to all terms, conditions, and
understandings relating to this Agreement and supersedes and preempts
any prior agreements, both oral and written.
9. This Agreement may be executed in counterparts, each of which shall
constitute an original but all of which, when taken together, shall
constitute a single agreement.
10. The effective date of this Agreement is December 9 , 1999.
Tanisys Technology, Inc. BOSTON FINANCIAL & EQUITY CORPORATION
By: /s/ Charles T. Comiso By: /s/ Adolf F. Monosson
------------------------- ---------------------------
Name: Charles T. Comiso Name: Adolf F. Monosson
------------------------- -------------------------
Title Pres. & CEO Title President
------------------------- --------------------------
3 of 3
<PAGE>
CONTRACT FOR SALE OF EQUIPMENT
This Contract for Sale of Equipment (the "Contract") is made and entered
into by and between Boston Financial & Equity Corporation ("Seller") and
Tanisys Operations, LP ("Purchaser") as of December 9, 1999 (the "Effective
Date").
WHEREAS, Seller entered into a certain Master Equipment Lease with Tanisys
Technology, Inc. ("TTI"). Pursuant to said Master Equipment Lease Seller
entered into Schedule 1 which was dated on March 25, 1999, and Schedule 2 dated
August 12, 1999, which schedules described the equipment covered by the Master
Equipment Lease (the equipment as described on the two Schedules is hereinafter
referred to as the "Equipment" and the Master Equipment Lease and the two
schedules are collectively referred to as the "Lease"); and
WHEREAS, TTI subsequently defaulted under the terms of the Lease and
simultaneously herewith is entering into a Settlement Agreement with Seller
and, as part of the Settlement Agreement, TTI has requested that Seller sell
the Equipment to Purchaser pursuant to the terms of this Contract; and
WHEREAS, Purchaser wishes to purchase the Equipment from Seller subject to
the terms, conditions, and agreements hereinafter set forth.
NOW, THEREFORE, in consideration of the agreements herein contained and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Seller and Purchaser agree as follows:
1. Seller hereby agrees to sell, assign, transfer and convey to
Purchaser all of Seller's rights in the Equipment and Purchaser agrees to
acquire and purchase from Seller all of Seller's rights in the Equipment,
subject to the terms and conditions of this Contract.
2. The purchase price for Seller's rights in the Equipment shall be
$975,000.00 to be paid by Purchaser to Seller by wire transfer per wiring
instructions as follows:
Bank Boston
Account No. 561-27775
ABA No. 011000390.
3. Upon receipt of the purchase price by Seller, Seller will fax an
executed Bill of Sale to Purchaser in the form attached hereto as EXHIBIT A and
incorporated herein and will Federal Express the original of the Bill of Sale
for next day delivery to Purchaser.
4. Purchaser understands and agrees that the Equipment was leased to TTI
and has been in TTI's possession and under its control.
5. Purchaser has conducted whatever inspections or investigations that
it deems necessary or appropriate with respect to the condition and location of
the Equipment and agrees that it shall acquire all of Seller's rights and
interest in the Equipment, in its current existing condition and its
1 of 2
<PAGE>
current location and that Seller is not making any warranties or
representations with respect to the Equipment, either expressed or implied, and
Purchaser hereby waives any representations or warranties with respect to the
Equipment, whether expressed or implied, including, without limiting the
generality of the foregoing, any implied warranty of merchantability or fitness
or adequacy for a particular purpose or use or of quality, quantity,
productiveness, or capacity.
6. Purchaser understands that it shall be responsible for obtaining
possession of the Equipment from TTI or whatever party has physical possession
of the Equipment and that Seller has no responsibility with respect thereto
other than to confirm to whoever has possession of any or all of the Equipment
that Seller has conveyed all of its rights and interests thereto to Purchaser.
7. In connection with the conveyance of its rights and interest in the
Equipment, Seller hereby agrees to release Purchaser of and from any claims,
causes of action or liability arising under or related to the Lease or any
claims, causes of action or liability which Seller has asserted or may assert
against TTI in connection with the Lease or the Equipment.
8. This Contract is being executed in conjunction with a Settlement
Agreement being entered into by and between Seller and TTI and Seller's
obligations to convey the Equipment are contingent upon the execution by TTI of
the Settlement Agreement, the execution of the Note called for thereunder, and
payment of the $24,000.00 in cash called for thereunder.
9. The parties agree that this Contract may be executed in several
counterparts, each of which shall be fully effective as an original and all of
which together shall constitute one and the same instrument.
10. This Contract shall be binding upon and inure to the benefit of the
Seller and Purchaser and their respective successors and assigns.
11. This Contract shall be governed by, construed, and interpreted, and
the rights of the parties determined in accordance with, the laws of the
Commonwealth of Massachusetts.
PURCHASER: SELLER:
Tanisys Operations, LP, a Texas BOSTON FINANCIAL & EQUITY CORPORATION
Limited Partnership By: /s/ Adolf F. Monosson
---------------------------------
Name: Adolf F. Monosson
------------------------------------
Title: President
------------------------------------
By: Tanisys Acquisition GP, Inc.,
a Texas Corporation, as general partner
By: /s/Robert Cooper
---------------------------
Name: Robert Cooper
---------------------------
Title: President
---------------------------
2 of 2
<PAGE>
BILL OF SALE
For valuable consideration, the receipt and sufficiency of which is
acknowledged, BOSTON FINANCIAL & EQUITY CORPORATION (hereinafter called
"SELLER"), hereby sells, transfers, and conveys all of its rights and
interests in and to the Equipment covered by the Master Lease Agreement
between Seller and Tanisys Technology, Inc., No. 1299 dated as of March 4,
1999, as described on Schedule No. 1 executed March 25, 1999, and Schedule
No. 2 executed August 12, 1999, copies of which schedules are attached hereto
as EXHIBIT A and incorporated herein (the "Equipment") to Tanisys Operations,
LP ("Buyer").
This Bill of Sale is executed pursuant to the terms of that certain
Contract for Sale of Equipment executed by and between Buyer and Seller of
even date herewith and is subject to all of the terms and provisions of that
Contract.
THE EQUIPMENT IS CONVEYED BY SELLER TO BUYER IN AN "AS IS," "WHERE
IS" CONDITION AND IS ACCEPTED BY BUYER AT ITS EXISTING LOCATIONS, WHEREVER
THAT MAY BE. BUYER ACKNOWLEDGES THAT IT IS FAMILIAR WITH THE EQUIPMENT AND IS
RELYING UPON THAT FAMILIARITY AND IS NOT RELYING ON ANY REPRESENTATION OR
WARRANTY OF ANY KIND WHATSOEVER MADE BY SELLER. BUYER UNDERSTANDS THAT SELLER
DOES NOT WARRANT THE EQUIPMENT IN ANY RESPECT, EITHER EXPRESSLY OR IMPLIEDLY,
AND BUYER HEREBY WAIVES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE
EQUIPMENT WHETHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF
FITNESS OR ADEQUACY FOR A PARTICULAR PURPOSE OR USE, OR OF QUALITY, QUANTITY,
PRODUCTIVENESS OR CAPACITY.
DATE: 12-9-99
----------------------------
BUYER: SELLER:
TANISYS OPERATIONS, LP, a BOSTON FINANCIAL & EQUITY CORPORATION
Texas limited partnership
By: /s/ Adolf F. Monosson
------------------------------
By: TANISYS ACQUISITION GP, INC., a
Texas corporation, as general partner Name: Adolf F. Monosson
------------------------------
Title: President
----------------------------
By: Robert Cooper
-------------------------
Name: Robert Cooper
-----------------------
Title: President
----------------------
1 of 1
<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)
<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 FIRST QUARTER ENDED DECEMBER 31, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 684,949
<SECURITIES> 0
<RECEIVABLES> 1,977,390
<ALLOWANCES> 333,703
<INVENTORY> 540,458
<CURRENT-ASSETS> 11,310,273
<PP&E> 496,391
<DEPRECIATION> 747,988
<TOTAL-ASSETS> 16,813,579
<CURRENT-LIABILITIES> 17,929,548
<BONDS> 0
1,831,483
1,831,483
<COMMON> 31,968,495
<OTHER-SE> (37,672,598)
<TOTAL-LIABILITY-AND-EQUITY> 16,813,579
<SALES> 10,145,108
<TOTAL-REVENUES> 10,145,108
<CGS> 4,512,602
<TOTAL-COSTS> 4,512,602
<OTHER-EXPENSES> 4,232,410
<LOSS-PROVISION> 233,196
<INTEREST-EXPENSE> 371,514
<INCOME-PRETAX> (8,966,728)
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,043,322
<DISCONTINUED> (10,010,050)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,966,728)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.32)
</TABLE>
