Back to GetFilings.com
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
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
2
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
1999 ANNUAL REPORT ON FORM 10-K
INDEX
PAGE
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
3
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
4
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
5
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
6
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
7
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.
8
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
9
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.
10
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
Common Stock
------------
Quarter Ended High Low
------------- ---- ---
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
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
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.
(In Thousands, except per share data) FISCAL YEARS ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
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 - - -
13
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
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
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
Continuing Operations: 1999 1998 1997
---- ---- ----
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%)
--------- -------- --------
--------- -------- --------
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
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
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
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
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
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
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
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
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
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.
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
26
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
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
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
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
=============================================================================================================================
29
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
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
Loss from discontinued operations (0.33) (0.29) (0.35)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders $(0.32) $(0.44) $(0.58)
- -----------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL FOREIGN TOTAL
COMMON STOCK PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
-----------------------
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
-------------------------------------------------------------------------------------
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