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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
or
[ ] TRANSACTION 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
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TANISYS TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in its Charter)
WYOMING 74-2675493
(State of Incorporation) (I.R.S. Employer
Identification Number)
12201 TECHNOLOGY BLVD., SUITE 130 78727
AUSTIN, TEXAS (Zip Code)
(Address of Principal Executive Office)
(512) 335-4440
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements in
Part III of this Form 10-K or any amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of November 30, 1997 was approximately $43.3 million based upon
the closing sale price of the Common Stock as reported on the Nasdaq Stock
Market's SmallCap Market (the "Nasdaq SmallCap Market"). Shares of Common Stock
held by each executive officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. There were 20,409,714
shares of the Registrant's Common Stock outstanding at November 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
1997 ANNUAL REPORT ON FORM 10-K
INDEX
PAGE
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PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings.............................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............................................ 10
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters......................... 11
Item 6. Selected Financial Data........................................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition & Results of Operations............ 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 24
Item 8. Financial Statements and Supplementary Data.................................................... 24
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........... 42
PART III
Item 10. Directors and Executive Officers of the Company................................................ 43
Item 11. Executive Compensation......................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 53
Item 13. Certain Relationships and Related Transactions................................................. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 55
SIGNATURES.................................................................................................. 58
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PART I.
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS--CAUTIONARY STATEMENTS
The following discussions contain trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
actual results of Tanisys Technology, Inc., and its wholly owned subsidiaries,
1st Tech Corporation ("1st Tech"), DarkHorse Systems, Inc. ("DarkHorse") and
Rosetta Marketing and Sales, Inc. ("Rosetta") (collectively, the "Company" or
"Tanisys"), could differ materially from its historical results of operations
and those discussed in the forward-looking statements. The forward-looking
statements are based on the beliefs of the Company's management as well as
assumptions made by and information currently available to the Company's
management. When used herein, the words "anticipate," "believe," "estimate,"
"expect" and "intend" and words or phrases of similar import, as they relate to
the Company or its subsidiaries or the Company's management, are intended to
identify forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors. Factors that could
cause actual results to differ materially include, but are not limited to,
business conditions and growth in the electronics industry and general
economies, both domestic and international; lower than expected customer orders;
customer relationships and financial condition; relationships with vendors; the
interest rate environment; governmental regulation and supervision; seasonality;
distribution networks; delays in receipt of orders or cancellation of orders;
competitive factors, including increased competition and new product offerings
by competitors and price pressures; the availability of parts and supplies at
reasonable prices; changing technologies; acceptance and inclusion of the
Company's technologies by original equipment manufacturers ("OEMs"); changes in
product mix; new product development; the negotiation of new contracts;
significant quarterly performance fluctuation due to the receipt of a
significant portion of customer orders and product shipments in the last month
of each quarter; product shipment interruptions due to manufacturing problems;
one-time events; and other factors described herein. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements. The forward-looking statements should be read in
light of these factors and the factors identified in "Item 1. Business" and in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations." All references to year periods refer to the Company's fiscal
years ended September 30, 1997, 1996 or 1995, and references to quarterly
periods refer to the Company's fiscal quarters ended December 31, March 31, June
30 and September 30.
GENERAL
The Company offers build-to-order services, designs and markets products
consisting of semiconductor memory modules, designs and builds memory module
testers and provides design services in conjunction with the licensing of its
Touch sensor products. Operating under the Tanisys Technology name since 1994,
the Company is rapidly growing into a prominent independent manufacturer of
standard and custom semiconductor memory modules for a variety of computer and
electronics OEMs. The Company also markets the DarkHorse line of memory testers
and licenses its proprietary Tanisys Touch technology. In 1997, the Company
changed its focus from selling off-the-shelf semiconductor memory modules to
specializing in services designed to provide OEM customers with build-to-order
board-level solutions. The Company has developed extensive design and
manufacturing expertise under its Comprehensive Logistics and Supply Solutions
("CLASS") Program to respond to its customers' rapidly changing requirements. To
this end, the Company maintains a design center as well as manufacturing
facilities in Austin, Texas. The Company's principal customers include
electronic OEMs, semiconductor manufacturers, computer distributors, value-added
resellers ("VARs") and system integrators. The Company's OEM customers include
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Siemans AG, Bay Networks Inc., Compaq Computer Corporation, Dell Computer
Corporation, Packard-Bell NEC Company and Solectron Corp.
The Company was organized under the laws of the Province of British
Columbia, Canada, on January 27, 1984, as Montebello Resources Ltd. to exploit
the mineral, oil and gas exploration business in British Columbia and Manitoba,
Canada. On October 7, 1992, the Company changed its name to First American
Capital Group Inc. The Company was unsuccessful in the oil and gas business, and
in 1992 deemed itself inactive pursuant to the rules and regulations of the
Vancouver Stock Exchange ("VSE"), where its common stock, no par value per share
(the "Common Stock"), had been traded. During the first two quarters of 1993,
the Company was reorganized in accordance with the rules of the VSE. As part of
this reorganization, the Company acquired certain computer game controller
technology, which was the forerunner of the Company's Tanisys Touch technology.
The Company changed its name to Rosetta Technologies Inc. on May 13, 1993. In
June 1993, Rosetta Marketing and Sales, Inc. was incorporated in the State of
Texas as a wholly owned subsidiary of the Company to provide marketing for the
Company's products. On June 30, 1993, the Company acquired all of the
outstanding capital shares of Timespan Communications Corp. ("Timespan") for the
issuance of Common Stock and the assumption of certain indebtedness. Also on
June 30, 1993, the Company filed Articles of Continuance with the Secretary of
State of the State of Wyoming and was issued a Certificate of Continuance, which
continued the corporation's charter under the Wyoming Business Corporation Act
as if it had been incorporated thereunder. On October 1, 1993, the Company
caused all of the software technology owned by Timespan to be transferred to the
Company, and Timespan subsequently has been liquidated. On July 11, 1994, the
Company changed its name to Tanisys Technology, Inc. The Company's Common Stock
has traded on the Nasdaq SmallCap Market under the symbol "TNSU" since May 22,
1997.
Effective May 21, 1996, the Company acquired, through mergers with its
wholly owned subsidiaries, all of the outstanding common stock of 1st Tech and
DarkHorse and began operations in Austin, Texas as a consolidated group of
companies providing custom design, engineering and manufacturing services, test
solutions and standard and custom module products to leading OEMs in the
computer networking and telecommunications industries.
INDUSTRY BACKGROUND
The demand for semiconductor memory modules in digital electronic systems
has grown significantly over the last several years, resulting in the increased
importance of memory in determining system performance. An increasing demand for
greater system performance requires that electronics manufacturers increase the
amount of memory incorporated into a system.
Factors contributing to the growing demand for memory include growing unit
sales of personal computers ("PCs") in the business and consumer market
segments; increasing use of PCs to perform memory-intensive graphics tasks;
increasingly faster microprocessors; the release of increasingly memory-
intensive software; and the increasing performance requirements of workstations,
servers and networking and telecommunications equipment.
Semiconductor memory products are segmented into three primary classes:
Dynamic Random Access Memory ("DRAM"), Static Random Access Memory ("SRAM") and
non-volatile memory, such as Flash memory. DRAM typically is the large "main"
memory of systems; SRAM provides higher performance; and Flash memory and other
non-volatile memory retain their contents when power is removed. In addition,
within each of these broad categories of memory products, semiconductor
manufacturers are offering an increasing variety of memory devices which are
designed for application specific uses.
The growing variety of memory components also drives demand for memory
tester systems to test each of these memory module types.
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MARKETS
THE DRAM MARKET
Of the three primary classes of semiconductor memory, DRAM is predominately
used in computers due to lower cost and increased performance. Market demand for
higher performance PCs and workstations and the increased focus on
high-throughput networking and telecommunications systems are creating a need
for higher volumes of DRAM memory in electronic systems. For example,
International Business Machines Corp ("IBM") has estimated that PCs use 70% of
all memory, and market researcher International Data Corporation ("IDC") expects
the average amount of memory used by each PC to grow from 19.6 megabytes in 1996
to 96 megabytes by 2001.
The Company believes the near-term DRAM market will fragment into increased
numbers of semiconductor memory module designs due to different architectures,
voltages and densities emerging for new systems while demand continues for
current and older designs. Popular among the architectures are Synchronous DRAM
("SDRAM"), Synchronous Graphics RAM ("SGRAM"), RAMBUS (a new proprietary memory
technology), Video RAM ("VRAM"), Fast Page Mode ("FPM") and Extended Data Out
("EDO"). DRAM integrated circuits are undergoing a shift to 64 megabits
("Mbits") and in operating voltages from 5.0 volts to 3.3 volts and less.
Therefore, the Company anticpates the combinations of module types are likely to
proliferate greatly over the next number of years.
THE SRAM MARKET
The market for SRAM typically is segmented into low power and high speed
segments. Low power SRAM devices are used primarily in computing or electronics
industry applications in which minimal power consumption is the top priority.
Popular uses of low power SRAM devices include portable computers that rely on
battery power.
The primary market demand for high speed SRAM devices is to "buffer" fast
system components from slower system components. In PCs, the most common use of
SRAM devices has been as "cache" memory, which increases a system's performance
and avoids having the increasingly faster microprocessor waiting on slower DRAM.
Access rates of DRAMs have not increased as fast as the speed of
microprocessors, and therefore, the demand for cache memory has increased. High
speed SRAMs also are seeing a rapid proliferation of configuration combinations
due to advances in speed, architecture, density and operating voltages. These
advances are needed primarily due to the increasing speed and complexity of
microprocessors such as the Pentium II, Pentium Pro, the PowerPC and the Alpha
microprocessor family. High speed SRAMs are achieving access times below 3
nanoseconds and are developing synchronous modes similar to SDRAMs to meet the
needs of these new microprocessors.
THE FLASH MEMORY MARKET
Flash memory is a specialized non-volatile memory that can be updated
similar to DRAM but retains its data after power has been turned off. The
ability to update the contents of Flash memory is the main benefit relative to
most other non-volatile memory devices, such as erasable programmable read only
memory ("EPROM") devices, that makes Flash memory useful for containing software
which is likely to need updating. Typical uses include Basic Input Output System
("BIOS") for PCs, control memory for the rapidly evolving market of thin
client/network computer/Windows terminals, control programs for routers and
other networking equipment and storage for portable computers, personal digital
assistants and digital cameras. Consequently, the market for Flash memory is
growing rapidly.
Flash memory is often packaged in removable modules to meet the needs of
portable applications. These modules vary widely for their target systems. There
are many Flash memory architectures available in the market today, which are
often offered in multiple modes and voltages. Therefore, Flash memory has many
configurations and the number of configurations has proliferated widely.
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MEMORY MODULE MARKET
Semiconductor memory modules are small printed circuit board assemblies
containing semiconductor memory devices and support circuitry. Many computer and
electronic systems use semiconductor memory modules as standard architectural
components. The modules permit OEMs to easily upgrade their systems and to
increase flexibility by permitting different types of modules to configure the
one base system for multiple price or performance targets. Semiconductor memory
modules often attach directly to a computer system board, eliminating or
reducing the need to include memory devices on the system board for space
reasons as well as flexibility of the base system. Semiconductor memory modules
also permit OEMs to manufacture systems on a build-to-order basis by permitting
the OEM to configure the system after the customer's order is placed. The
benefits of build-to-order for OEMs are faster availability, increased customer
satisfaction, reduced investment in inventories and reduced costs. Semico
Research Corporation estimates that the market size for semiconductor memory
modules in 1997 is $22.6 billion worldwide.
The memory module market is segmented into off-the-shelf and custom
components. Off-the-shelf modules often comply with industry standards and are
available from multiple vendors. These are usually popular, high volume designs
using DRAM memory which are used in desktop PCs, notebook computers, network
routers, disk drive controllers and printers. These modules typically are sold
directly to OEMs and to end users via computer resellers.
Custom semiconductor memory modules meet the unique needs of OEM computer
and electronic systems. The proliferation of memory device options has resulted
in specialized semiconductor memory modules that are ideal for the performance
of a particular system or a set of applications but are not available
off-the-shelf. These custom modules are typically contracted from a few
suppliers. The limited market for such modules often dictates build-to-order
manufacturing in order to limit inventory risks.
Computer and electronics manufacturers frequently choose to use memory
expert partners for the design and manufacture of semiconductor memory modules
due to the wide array of memory devices which can be considered for a target
system. Increasing speeds make the design and testing of modules more complex,
thus using memory partners permits system manufacturers to focus on
differentiating their product. OEMs outsource these services in a range of
levels, including build-to-print (manufacturing only), turnkey design and
manufacture, vendor specification and build-to-order.
The manufacturers of semiconductor memory modules consist of two subsets:
semiconductor manufacturers who build modules and independent third parties who
acquire memory devices and integrate them into modules. Although semiconductor
vendors dominate the business today, third party vendors are rapidly gaining
market share. The Company expects this trend to continue as it believes that
semiconductor manufacturers may not have a business model in place which is
suited to meet the needs of many large customers of custom semiconductor memory
modules, including support for build-to-order.
Independent third party manufacturers of semiconductor memory modules supply
product to two primary market segments: the OEM channel and the reseller
channel. Third party suppliers to the OEM channel typically offer custom
product, although some computer and peripheral OEMs use off-the-shelf
semiconductor memory modules. Third party suppliers to the reseller channel
typically offer standard DRAM semiconductor memory modules as an upgrade product
sold through computer distributors and retail channels. Semiconductor
manufacturers sell modules almost exclusively to OEMs. Both semiconductor memory
suppliers and independent third party module manufacturers are customers for
module testers, and as such, represent both potential customers and competitors
of the Company. The memory module tester market is described below under the
heading "Memory Module Tester Market."
MEMORY MODULE TESTER MARKET
Memory module testers are important to assure that semiconductor memory
modules meet the necessary specifications of performance. Memory module tester
use typically is segmented into system
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manufacture and system aftermarket. System manufacture typically involves the
manufacturer of the memory module being able to test its completed modules. This
usually requires "at speed" testing, where the module is exercised under the
same demands as actual use. Buyers generally evaluate reliability, productivity,
accuracy, advanced automation, software flexibility, service, customer support
and price. The Company believes that these purchase criteria are typical of
module tester buyers as well. Most manufacturers of semiconductor memory modules
perform "at speed" testing of all modules with exacting and accurate testers.
Significant expansion of test capacity is likely due to changing architectures
and strong growth of memory demand.
The actual test for a module is unique to its design in terms of
architecture, pinout, speed rating, voltage, organization and size which will
use any of several common test algorithms. Therefore, the number of potential
memory test configurations is much greater than the number of semiconductor
memory modules. This makes test development a potentially costly task. The
ability of a tester manufacturer to provide support for the development of low
cost, accurate tests is a significant consideration in the buying decision.
Module testing requirements for the system aftermarket are typically less
robust. Memory additions to systems in use typically are already tested in
accordance with the needs of the system manufacture segment and need only module
identification to assure the correct module is being installed. Servicing of
failed systems often requires limited testing of modules but typically does not
require "at speed" testing. As a result, aftermarket module testing usually has
higher sensitivity for portability and cost than does module testing at the time
of system manufacture.
TOUCH SENSOR MARKET
The touch sensor market is extremely broad since the sensor is capable of
being utilized in any application where a switch is needed. Any product which
benefits from a low profile, sealed, environmentally robust, highly durable, low
cost, simple or easily customized switch is a very good candidate for a touch
sensor switch.
PRODUCTS
The Company offers build-to-order services, designs and markets products
consisting of semiconductor memory modules, designs and builds memory module
testers and provides design services in conjunction with the licensing of its
Touch sensor products. The Company's semiconductor memory modules include DRAM,
SRAM and Flash memory. The Company offers custom semiconductor memory modules,
as well as standard semiconductor memory modules that comply with industry
standards established by the Joint Electronic Development Engineering Council
("JEDEC"). The Company's memory module testers are oriented for both system
assembly and aftermarket purposes and include a broad line of test fixtures and
test algorithems.
COMPREHENSIVE LOGISTICS AND SUPPLY SOLUTIONS
The Company offers build-to-order services for custom products under its
CLASS program. CLASS is oriented toward building alliances with semiconductor
suppliers and major computer and electronic manufacturers. The Company will
assist these customers in achieving fast time-to-market for new products as well
as rapid manufacturing cycle times. The Company will assist semiconductor
suppliers develop increased market share and help the computer and electronic
manufacturers to be faster to market, providing lower cost and more rapidly
satisfying the needs of their customers.
Specific functions of CLASS include design/development, quick-turn
prototyping, assembly, test development, documentation, supply chain management,
complete Electronic Data Interchange ("EDI") integration, support services and
security/disaster recovery plan. The Company offers design expertise in
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memory and other product areas and is unique in maintaining its own commercial
test equipment capabilities.
SEMICONDUCTOR MEMORY MODULES
DRAM. The Company offers a wide line of DRAM semiconductor memory modules,
including single in-line semiconductor memory modules ("SIMMs"), dual in-line
semiconductor memory modules ("DIMMs") and small outline dual in-line
semiconductor memory modules ("SO DIMMs"). The Company's DRAM modules are
available in various configurations of up to 168 pins and densities of up to 256
MBytes. These modules are available in FPM, EDO, SDRAM and SGRAM architectures,
with both 5.0 volt and 3.3 volt versions.
The following chart summarizes the Company's more than 550 off-the-shelf
DRAM module products:
PRODUCT DESCRIPTION TYPES MODES DENSITIES PRIMARY USAGE
- -------------------------------- ---------------- ------------ --------------- ------------------------------
168-pin Synchronous DIMM X64/x72ECC SDRAM 8MB-256MB Newest PCs, high-end
workstations
168-pin DIMMs (Unbuffered) X64/x72ECC FPM/EDO 8MB-256MB Newer PCs, servers,
workstations, routers
144-pin SO DIMM X64 FPM/EDO 8MB-64MB Newer notebooks, network PCs,
switches, routers
72-pin SO DIMM X32 FPM/EDO 4MB-32MB Legacy laptops, notebooks and
set-tops
72-pin SIMMs X32/x36/x40 FPM/EDO 4MB-128MB Legacy PC systems, servers,
routers
MEMORY MODULE TESTER PRODUCTS
The Company's memory module testers are marketed under the DarkHorse brand
name to utilize existing brand awareness. The tester line is oriented toward
both module manufacturers for system assembly and aftermarket purposes. The
SIGMA-2 tester is designed for module manufacturers who need to perform "at
speed" tests of synchronous and asynchronous DRAM, SRAM, Flash memory and VRAM
modules. It is aggressively priced relative to major competitors. The SIGMA-2 is
being used widely by leading module manufacturers throughout the world.
The Company also markets the portable SIGMA-LC and SYNC-LC testers for the
aftermarket segment. Customers in this segment value the ease-of-use and rapid
identification of module type. The types of customers for these testers include
module manufacturers, module retailers, large retail chains using them for PC
service purposes, and distributors. New tester development is ongoing, driven by
new memory industry developments.
The DarkHorse testers have standard or optional capabilities to support the
following types of products:
-- 30 and 72 pin SIMMs for PCs -- Buffered 168 pin DIMMs for PCs
-- Buffered 168 pin DIMMs for Apple Computer Inc. computers
-- Unbuffered 168 pin DIMMs for PCs
-- Unbuffered 168 pin SDRAM DIMMs for PCs
-- 144 pin SO DIMMs for certain proprietary notebook computers
-- 144 pin JEDEC SO DIMMs
-- SOJ normal DRAM components
-- SOJ SRAM components
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-- SOJ wide DRAM components
-- TSOP DRAM components
-- DIP SRAM components
-- Notebook docking adapters
-- 60, 68 and 88 pin credit card semiconductor memory modules
-- VRAM upgrades for Apple Computer Inc. computers
-- Modules for Sun Microsystems Inc. SPARC workstations
-- Modules for Silicon Graphics Inc. workstations
-- Modules for Dell Computer Corp. Servers
-- 80 pin JEDEC Flash memory
-- Modules for Intel Corp. "COAST" architecture
-- Prototype development of proprietary test fixtures
The Company differentiates its testers by targeting its tester features
specifically for the purpose of testing memory products. The products are
planned for comparable performance relative to general purpose testers from
Hewlett-Packard Company and Advantest at significantly lower prices.
TOUCH SENSOR PRODUCTS
Tanisys Touch is a proprietary technology which is protected by patents,
copyrights and trademarks and is an intellectual property asset available for
licensing to third parties for incorporation into their products. The Company
licenses Tanisys Touch to OEMs which embed it into various products as a robust
switching mechanism. The touch sensor market is primarily an alternative to a
variety of switch technologies such as mechanical switches, membrane switches
and bubble switches.
Some advantages of Tanisys Touch relative to alternative switch technologies
are no moving parts, high reliability, ability to work through most plastics,
easy customization, abiltiy to work on multiple materials and low cost. Relative
to other vendors' touch implementations, Tanisys Touch does not need reference
capacitors, analog to digital converters or multiple electrodes. Instead, the
Company's proprietary technology is designed to be a reliable, simple, low cost
touch implementation, and the Company intends to position these advantages
against alternative switch technologies.
CUSTOMERS, SALES AND MARKETING
The Company's primary customers include computer and electronics OEMs,
semiconductor manufacturers, distributors, corporate end users, VARs and systems
integrators. In fiscal 1997 and 1996, the Company's ten largest customers
accounted for approximately 53.2% and 45.3% of net sales, respectively. During
fiscal 1997, the Company had one customer, Tandy Corporation, that accounted for
12.0% of net sales. In fiscal 1996, no one customer accounted for more than 10%
of net sales.
The Company primarily sells its module products directly and through a
network of independent sales representative organizations to OEM customers
worldwide. The Company sells the majority of its tester products directly to
other module manufacturers and sells a portion through distribution partners and
independent sales representative organizations. Licensing of Tanisys Touch is
through licensing agreements direct to the customer.
The Company maintains relationships with leading global suppliers of memory
semiconductor devices and frequently works jointly with these suppliers in
quoting customer opportunities.
The Company's OEM marketing activities include advertising in trade and
business magazines, direct mail and solicitation via the Company's Internet web
site.
Sales generally are made against standard customer purchase orders. The
Company's backlog generally includes those customer orders for which it accepted
purchase orders and planned shipment dates within the next year. Backlog is not
an indicator of future sales, and orders in the backlog are subject
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to change in delivery terms or even cancellation. Accordingly, there is no
assurance that current backlog will lead to future sales. The Company's total
backlog was $2.4 million and $356 thousand at fiscal 1997 and 1996 year end,
respectively.
RESEARCH AND DEVELOPMENT
The Company's management believes that the timely development of new
products and technologies is essential to maintain the Company's competitive
position. In the electronics market, the Company's research and development
activities are focused primarily on new module products, the continual
improvement in memory test products and solutions and the ongoing improvement in
manufacturing processes and technologies. Additionally, the Company provides
research and development services for customers either as joint or contracted
development. The Company plans to continue to devote substantial research and
development efforts to the design of new module products which address the
requirements of OEM, corporate and retail customers.
The Company's management believes that its Tanisys Touch technology has been
developed to a viable commercial level and that the next step is introduction of
consumer products utilizing Tanisys Touch into the marketplace by OEMs. Support
continues to be provided to OEMs in the PC and appliance industries toward this
end. It is not anticipated that significant additional research and development
efforts will be required for this technology.
The Company's research and development expenses were $2.6 million in fiscal
1997, $1.1 million in fiscal 1996 and $410 thousand in fiscal 1995.
COMPETITION
The memory module and memory test equipment industries are intensely
competitive. Each of these markets includes a large number of competitive
companies, several of which have achieved a substantial market share. Certain of
the Company's competitors in each of these markets have substantially greater
financial, marketing, technical, distribution and other resources, greater name
recognition, lower cost structures and larger customer bases than the Company.
In the memory module market, the Company competes against semiconductor
manufacturers that maintain captive memory module production capabilities,
including Samsung Electronics Company Ltd. ("Samsung") and Micron Electronics,
Inc. (a subsidiary of Micron Technology, Inc.). The Company also competes with
independent memory module manufacturers, including Smart Modular Technologies,
Inc. and Kingston Technology, Inc. In the memory tester market, the Company
competes primarily with companies such as Hewlett-Packard, Inc. and Advantest,
Inc. Competition for the Company's CLASS business of manufacturing services
includes SCI Systems, Inc. and Avex Electronics, Inc. The Company faces
competition from current and prospective customers that evaluate the Company's
capabilities against the merits of manufacturing products internally. In some
cases the Company's tester customers represent direct competition to the
Company's memory module business. In addition, certain of the Company's
competitors, such as Samsung, are significant suppliers to the Company. These
suppliers may have the ability to manufacture competitive products at lower
costs than the Company as a result of their higher levels of integration. The
Company also faces competition from new and emerging companies that have
recently entered or may in the future enter the markets in which the Company
participates.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products. There can be no assurance that enhancements to or future
generations of competitive products will not be developed that offer better
prices or technical performance features than the Company's products. To remain
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, improve quality levels, offer flexible
8
delivery schedules, deliver finished products on a reliable basis, reduce
manufacturing and testing costs and compete favorably on the basis of price. In
addition, increased competitive pressure has led in the past, and may continue
to lead to, intensified price competition, resulting in lower prices and gross
margin, which could materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully in the future.
INTELLECTUAL PROPERTY
The Company has filed seven applications with the U.S. Patent and Trademark
Office for patents to protect its intellectual property rights for products and
technology that have been sold, licensed or are under development, as follows:
1. Application covering claims for hardware, firmware, software and
methods operations for a broad range of applications for its touch
technology. The patent was granted on April 16, 1996 under Registration No.
5,508,700. Corresponding international patent applications have been filed
in selected European, Asian and North American countries. Management of the
Company believes that if competitors decide to pursue the discrete touch
market, they could be in violation of the Company's patent. The Company has
no knowledge of any such infringement to date.
2. Application for "Computer Input Device for Use in Conjunction with a
Mouse Input Device." This pending application is targeted to protect the
Company's technology related to capacitive sensing used in a mouse pad or
other flush-mounted touch device.
3. Application for "Capacitive Sensitive Input Circuit with Common
Pad." This pending application is targeted to protect the Company's touch
technology which could be used in extreme or hostile environments and can
function to improve the reliability of touch sensor operation in such
environments.
4. Application for "Capacitive Sensitive Switch Method and System,"
This pending application relates generally to touch sensor switches, and
more particularly to an automated digital system for sensing the capacitance
of touch pads to determine when a physical object has come into contact with
a touch pad.
5. Application for "Synchronous Memory Identification System." This
application relates generally to memory test systems, and more particularly
to an automated method and system for identifying SDRAM and SGRAM memories.
6. Application for "Nested Loop Method of Identifying Synchronous
Memories." This application relates generally to memory test systems, and
more particularly to a nested loop method which may be used in a memory test
system to identify SDRAM and SGRAM memories.
7. Application for "Synchronous Memory Test System." This application
relates generally to memory test systems, and more particularly to a test
system for SDRAM and SGRAM memories.
There can be no assurance that these pending patent applications will be
approved or approved in the form requested. The Company expects to continue to
file patent applications where appropriate to protect its proprietary
technologies; however, the Company believes that its continued success depends
primarily on factors such as the technological skills and innovation of its
personnel rather than on patent protection. In addition, the Company attempts to
protect its intellectual property rights through trade secrets and a variety of
other measures, including non-disclosure agreements. There can be no assurance,
however, that such measures will provide adequate protection for the Company's
trade secrets or other proprietary information, that disputes with respect to
the ownership of its intellectual property rights will not arise, that the
Company's trade secrets or proprietary technology will not otherwise become
known or be independently developed by competitors or that its intellectual
property rights can otherwise be protected meaningfully. There can be no
assurance that patents will issue from pending or future applications or that if
patents are issued, they will not be challenged, invalidated or circumvented, or
that rights granted thereunder will provide meaningful protection or other
commercial advantage. Furthermore, there can be
9
no assurance that third parties will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company or that
third parties will not assert intellectual property infringement claims against
the Company. In addition, there can be no assurance that foreign intellectual
property laws will adequately protect the Company's intellectual property rights
abroad. The failure of the Company to protect its proprietary rights could have
a material adverse effect on its business, financial condition and results of
operations.
ENVIRONMENTAL REGULATION
The Company's operations and manufacturing processes are subject to certain
federal, state, local and foreign environmental protection laws and regulations.
Public attention has increasingly been focused on the environmental impact of
manufacturing operations that use hazardous materials or generate hazardous
wastes, and environmental laws and regulations may become more stringent over
time. There can be no assurance that failure to comply with either present or
future regulations, or to obtain all necessary permits required under such
regulations, would not subject the Company to significant compliance expenses,
production suspensions or delay, restrictions on expansion at its present or
future locations, the acquisition of costly equipment or other liabilities.
EMPLOYEES
At September 30, 1997, the Company had 143 full-time employees. Those
employees included 27 engineering and product development employees, 28 finance
and administration employees, 20 employees in the sales, marketing, technical
and customer support areas and 68 manufacturing employees.
Recruitment of personnel in the computer industry, particularly engineers,
is highly competitive. The Company believes that its future success will depend
in part on its ability to attract and retain highly skilled management,
engineers, sales, marketing, finance and technical personnel. There can be no
assurance of the Company's ability to recruit and retain the employees that it
may require.
FACTORS THAT AFFECT FUTURE RESULTS
The Company's business, financial condition and results of operations can be
impacted by a number of factors. See "Item 7. Management's Discussion And
Analysis Of Financial Condition And Results Of Operations--Factors That May
Affect Future Results."
ITEM 2. PROPERTIES
At November 30, 1997, the Company and its wholly owned subsidiaries, 1st
Tech and DarkHorse, leased and occupied approximately 33,000 square feet of
space for their production facility and corporate and administrative offices at
12201 Technology Boulevard, Suite 130, Austin, Texas, pursuant to a lease which
expires on August 15, 2000. The Company has the right to terminate the lease
anytime after August 31, 1998 upon sixty days' advance written notice . The
lease has certain expansion options, renewal options and rights of first
refusal. The Company currently is paying annual rental of $209,721, plus a pro
rata charge for property taxes, common area maintenance and insurance. The
Company believes that its current facilities are adequate to meet its current
needs.
ITEM 3. LEGAL PROCEEDINGS
At the date hereof, there is no pending, or to the best knowledge of the
Company, threatened litigation involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
PART II.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
On May 22, 1997, the Company began trading on the Nasdaq SmallCap Market
under the symbol "TNSU." From March 20, 1995 to June 6, 1997, the Common Stock
was traded on the VSE under the symbol "TNS.U," with prices quoted in U.S.
dollars. On June 6, 1997, the Company voluntarily delisted its stock on the VSE,
as a result of the change to Nasdaq. From July 11, 1994 to March 19, 1995, the
Common Stock was traded on the VSE under the symbol "TNS," with prices quoted in
Canadian dollars. From July 7, 1993 to July 10, 1994, the Common Stock was
traded under the symbol "RSG," with prices quoted in Canadian dollars.
The table below sets forth the high and low closing prices of the Common
Stock from October 1, 1994 through May 22, 1997, as reported by the VSE, and
from May 23, 1997 to September 30, 1997, as reported on the Nasdaq SmallCap
Market. These price quotations reflect interdealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
COMMON STOCK
--------------------
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
FISCAL 1996:
December 31, 1995............................................................ $ 3.00 $ 1.70
March 31, 1996............................................................... 4.90 2.45
June 30, 1996................................................................ 5.20 3.25
September 30, 1996........................................................... 4.20 2.50
FISCAL 1997:
December 31, 1996............................................................ $ 6.25 $ 3.50
March 31, 1997............................................................... 5.35 2.75
June 30, 1997................................................................ 4.50 2.87
September 30, 1997........................................................... 5.56 4.06
FISCAL 1998:
Through December 22, 1997.................................................... $ 4.15 $ 2.00
STOCKHOLDERS
On September 30, 1997, there were 20,334,714 shares of Common Stock
outstanding held by 299 holders of record. The last reported sales price on the
Common Stock on November 28, 1997 was $2.75 per share.
DIVIDENDS
To date, the Company has not declared or paid any dividends with respect to
the Common Stock, and the current policy of the Board of Directors is to retain
earnings, if any, to provide for the growth of the Company's business.
Consequently, no cash dividends are expected to be paid on the Common Stock in
the foreseeable future. Further, there can be no assurance that the proposed
operations of the Company will generate the revenue and cash flow needed to
declare a cash dividend or that the Company will have legally available funds to
pay dividends at any time in the future. In addition, at this time restrictions
in the Company's revolving credit facility prohibit the payment of cash
dividends.
11
PRIVATE PLACEMENT
In July 1997, the Company completed an equity financing of 2,240,000 shares
of Common Stock for cash at an offering price of $2.50 per share. The Company
believes that the transaction was exempt from registration under the Securities
Act by reason of Section 4(2) of the Securities Act. The shares were sold to a
limited number of persons, all of whom were accredited investors as defined by
Item 501 of Regulation D of the Securities and Exchange Commission, such persons
were provided access to all relevant information regarding the Company and/or
represented to the Company that they were "sophisticated" investors, and such
persons represented to the Company that the shares were purchased for investment
purposes only and with no view to distribution.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below are derived from
the Consolidated Financial Statements of the Company, which financial statements
have been audited by Arthur Andersen LLP, independent public accountants, to the
extent indicated in their report included elsewhere herein.
On May 21, 1996, the Company acquired 1st Tech Corporation and Darkhorse
Systems, Inc. The acquisitions were accounted for using the purchase method,
resulting in total goodwill of $7.2 million to be amortized over a two-year
period. The results of operations have been included in the consolidated
financial statements since the acquisition date.
The selected consolidated financial data set forth below are qualified
entirely by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and Notes thereto.
FISCAL YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................................... $ 47,674 $ 14,989 $ 359 $ 113 $ 0
Loss from continuing operations............................. (10,114) (3,684) (2,445) (1,972) (660)
Goodwill amortization expense............................... (3,585) (1,494) N/A N/A N/A
Loss per weighted average common share...................... (0.58) (0.31) (0.29) (0.30) (0.27)
Total assets................................................ 17,232 17,463 1,613 2,295 2,488
Long-term debt.............................................. 81 123 0 0 0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the fiscal years ended September 30,
1997, 1996 and 1995. It should be read in conjunction with the Consolidated
Financial Statements of the Company, the Notes thereto and other financial
information included elsewhere in this report. For purposes of the following
discussion, references to year periods refer to the Company's fiscal year ended
September 30, and references to quarterly periods refer to the Company's fiscal
quarters ended December 31, March 31, June 30 and September 30. (See
"Business--Forward Looking Statements--Cautionary Statements.")
The Company was organized under the laws of the Province of British
Columbia, Canada, on January 27, 1984, as Montebello Resources Ltd., and pursued
oil and gas exploration in British Columbia and Manitoba, Canada. In October
1992, the Company changed its name to First American Capital Group Inc.
Unsuccessful in the exploration business, the Company became dormant pursuant to
the rules and regulations of the VSE. During the first two quarters of 1993, the
Company was reorganized in accordance with the rules of the VSE. As part of this
reorganization, the Company acquired Timespan and its
12
computer game controller technology. Timespan, a wholly owned subsidiary of the
Company, was dissolved as of October 23, 1996. The Company changed its name to
Rosetta Technologies Inc. in May 1993 and to Tanisys Technology, Inc. in July
1994. Until May 21, 1996, the Company focused on research and development of
highly specialized applications of capacitive touch sensing technology.
Effective May 21, 1996, the Company acquired, through mergers with its
wholly owned subsidiaries, all of the outstanding common stock of 1st Tech
Corporation ("1st Tech") and DarkHorse Systems, Inc. ("DarkHorse") and began
operations in Austin, Texas as a consolidated group of companies providing
custom design, engineering and manufacturing services, test solutions and
standard and custom module products to leading original equipment manufacturers
("OEMs") in the computer networking and telecommunications industries. In
consideration for the acquisitions of 1st Tech and DarkHorse, the Company issued
2,950,000 and 1,200,000 shares, respectively, of Common Stock. Prior but subject
to the consummation of the acquisitions of 1st Tech and DarkHorse by the
Company, 1st Tech issued 1,150,000 shares of its common stock for $2.00 per
share in an equity financing, raising a total of $2.3 million, the proceeds of
which were used to reduce short-term debt and provide working capital for 1st
Tech.
The Company's net sales and gross profit increased dramatically in the
current fiscal year and the last two quarters of fiscal year 1996, due to the
acquisitions of 1st Tech and DarkHorse. In fiscal 1997, revenues were $47.7
million with gross profit of $6.2 million (13.0% of revenue) versus fiscal 1996
revenues of $15.0 million and gross profit of $2.3 million (15.5% of revenue).
This is an increase in revenues of $32.7 million, or 218.1%, and in gross profit
of $3.9 million, or 166.1%. The increase in revenues and gross profits are due
primarily to the acquisitions of 1st Tech and Darkhorse on May 21, 1996. Net
losses increased to $10.1 million in fiscal 1997, or 21.2% of revenues, from
$3.7 million in fiscal 1996, or 24.7% of revenues. The increases in revenues,
gross profit and net losses are due primarily to the acquisitions of 1st Tech
and DarkHorse on May 21, 1996.
Management believes that revenues and gross profits will fluctuate due to
the continuing oversupply of memory chips, which dramatically drives down the
prices of the Company's products, the continuing fluctuations in the cost of
memory and components and other factors, including changes in pricing by
suppliers and competitors and changes in the proportion of contract
manufacturing done--where the customer consigns the material--versus
manufacturing on a turnkey basis--where the Company purchases the necessary
materials.
13
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data of the
Company expressed as a percentage of net sales for the fiscal years ended
September 30, 1997, 1996 and 1995:
1997 1996 1995
------------ ------------ ------------
Net sales............................................... 100.0% 100.0% 100.0%
Cost of goods sold...................................... 87.0 84.5 30.7
------ ------ ------
Gross profit............................................ 13.0 15.5 69.3
------ ------ ------
Operating expenses:
Research and development.............................. 5.4 7.2 114.2
Sales and marketing................................... 6.4 7.9 378.6
General and administrative............................ 7.6 12.9 249.3
Depreciation and amortization......................... 8.8 11.7 19.8
Bad debt expense...................................... 4.7 0.3 5.3
------ ------ ------
Total operating expenses................................ 32.9 40.0 767.2
------ ------ ------
Operating loss.......................................... (19.9) (24.5) (697.9)
Other income (expense), net............................. (1.3) (0.2) 16.3
------ ------ ------
Net loss................................................ (21.2)% (24.7)% (681.6)%
------ ------ ------
------ ------ ------
NET SALES
Until the date of the acquisitions of 1st Tech and DarkHorse on May 21,
1996, net sales consisted of software sales, less returns and discounts, and
design engineering fees. After the acquisitions, net sales consist of custom
manufacturing services, custom semiconductor memory modules, standard
semiconductor memory modules, design engineering fees, memory module test
solutions and advanced technology services, less returns and discounts. Net
sales for fiscal 1997 increased to $47.7 million from $15.0 million in fiscal
1996. The increases in fiscal 1997 are primarily due to the acquisitions of 1st
Tech and DarkHorse and, to a lesser degree, to increases in sales volume in both
the memory and tester product lines. Net sales increased to $15.0 million in
fiscal 1996 from $359 thousand in fiscal 1995. This increase in sales was
primarily due to the acquisitions of 1st Tech and DarkHorse.
COST OF SALES AND GROSS PROFIT
Cost of sales includes the costs of all components and materials purchased
for the manufacture of products and the direct labor and overhead costs
associated with manufacturing. Gross profit for fiscal 1997 increased to $6.2
million from $2.3 million in fiscal 1996. Gross profit margin decreased to 13.0%
from 15.5% in 1997 versus 1996. The decrease in gross profit margin was
primarily due to the acquisitions of 1st Tech and DarkHorse and the dramatic
change in the types of products being sold by the Company before and after the
acquisitions.
Gross profit increased to $2.3 million in 1996 from $249 thousand in 1995,
an increase of 836.4%. Gross profit margin declined to 15.5% in 1996 from 69.3%
in 1995. The increase in gross profit and the decrease in gross profit margin
are primarily due to the change in concentration of product sales resulting from
the acquisitions of 1st Tech and DarkHorse.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the costs associated with the
timely development of new products and technologies. These relate primarily to
the costs of materials, personnel, management and employee compensation and
engineering design consulting fees. Research and development expenses
14
increased to $2.6 million in fiscal 1997 from $1.1 in fiscal 1996, representing
a 140.2% increase from year to year. The substantial increase is due to the
acquisitions of the additional product lines of 1st Tech and DarkHorse and the
related research and development expenditures, and the development of new memory
module products and new tester products.
Research and development expenses increased to $1.1 million in fiscal 1996
from $410 thousand in fiscal 1995, a 163.5% increase. The substantial increase
is due to the acquisitions of the additional product lines of 1st Tech and
DarkHorse and the related research and development expenditures, and the
development of new memory module products and new tester products.
SALES AND MARKETING
Sales and marketing expenses include all compensation of employees and
independent sales personnel as well as the costs of advertising, promotions,
trade shows, travel, direct support and overhead. Sales and marketing expenses
increased to $3.0 million in fiscal 1997 from $1.2 million in fiscal 1996, a
158.6% increase. In fiscal years 1997 and 1996, sales and marketing expenses
expressed as a percentage of revenues were 6.4% and 7.9%, respectively. The
increases in actual funds expended are connected with the acquisitions of the
product lines of 1st Tech and DarkHorse. The decreases in the expenses expressed
as a percentage of revenues are caused primarily by the significant increases in
revenues related to the acquisitions of 1st Tech and DarkHorse. Sales and
marketing expenses are expected to remain approximately the same or to grow
slightly when expressed as a percentage of revenue and to continue to increase
significantly in terms of absolute dollars in future periods as revenues
continue to grow.
Sales and marketing expenses decreased to $1.2 million in fiscal 1996 from
$1.4 million in fiscal 1995, a decrease of 13.3%. Expressed as a percentage of
revenues, sales and marketing expenses were 7.9% in 1996 and 378.6% in 1995. The
decrease in expenses expressed as a percentage of revenues is primarily caused
by the significant increase in revenues related to the acquisitions of 1st Tech
and DarkHorse. The decrease in actual expenditures is due in large part to the
decrease in commission expenses relating to software revenue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of personnel costs,
including employee compensation and benefits, and support costs including
utilities, insurance, professional fees and all costs associated with a
reporting company. In fiscal years 1997 and 1996, general and administrative
expenses increased to $3.6 million from $1.9 million, an 88.2% increase. General
and administrative expenses expressed as a percentage of revenues were 7.6% and
12.9% in fiscal years 1997 and 1996, respectively. The increase in actual funds
expended in fiscal 1997 is due primarily to the acquisitions of 1st Tech and
DarkHorse. The decrease in expenses expressed as a percentage of revenues is
primarily caused by the significant increase in revenues related to the
acquisitions of 1st Tech and DarkHorse and, to a lesser extent, to the
institution of cost controls on general and administrative expenses. The
absolute dollar expenses associated with the general and administrative area are
expected to increase significantly in future periods due to anticipated
continued growth in business activity and increased costs associated with being
a reporting company. The general and administrative expenses are not expected to
grow significantly in future periods when expressed as a percentage of sales.
General and administrative expenses increased to $1.9 million in fiscal 1996
from $894 thousand in fiscal 1995, representing an increase of 115.8%. General
and administrative expenses expressed as a percentage of revenues were 12.9% and
249.3% in fiscal years 1996 and 1995, respectively. The increase in general and
administrative expenses and the decrease as a percentage of revenue during this
time period were due to the acquisitions of 1st Tech and DarkHorse.
15
BAD DEBT EXPENSE
Bad debt expense consists of amounts charged to expense because of trade
accounts receivable becoming uncollectible. The Company's method of accounting
for bad debts is to use historical actual expenses to estimate the amount of
current sales which will be uncollectible and provide for them by creating an
allowance which is netted against the trade accounts receivable. The Company
writes off amounts related to specific accounts as the collection of these
accounts becomes questionable. For fiscal 1997, the amount charged to bad debt
expense was $2.2 million, compared to a total of $46 thousand for fiscal 1996.
The increase in fiscal 1997 bad debt expense is primarily due to a $1.7 million
bad debt expense for one customer and to increased sales in conjunction with the
acquisitions of 1st Tech and DarkHorse.
Bad debt expense increased to $46 thousand for fiscal 1996 from $19 thousand
for fiscal 1995, due primarily to the increase in sales relating to the
acquisitions of 1st Tech and DarkHorse.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes the depreciation for all fixed assets
and the amortization of intangibles, including goodwill incurred in the
acquisitions of 1st Tech and DarkHorse. In fiscal 1997, depreciation and
amortization increased to $4.2 million from $1.7 million in fiscal 1996. The
substantial increases are due primarily to the amortization of goodwill recorded
in conjunction with the acquisitions of 1st Tech and DarkHorse and to the
depreciation of the acquired assets of 1st Tech and DarkHorse.
Depreciation and amortization increased to $1.7 million in fiscal 1996 from
$71 thousand in fiscal 1995. The substantial increases are due primarily to the
amortization of goodwill recorded in conjunction with the acquisitions of 1st
Tech and DarkHorse.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income less
interest expense. Interest expense is primarily attributable to borrowings from
a revolving credit note. Substantially all of the interest expense relates to
credit line draws made for short-term inventory requirements and to fund trade
accounts receivable. Interest income relates to investment of available cash in
short-term interest bearing accounts and cash equivalent securities. Other
income (expense), increased to $616 thousand of expense in fiscal 1997 from $30
thousand of expense in fiscal 1996 and $59 thousand of income in fiscal 1995.
The Company had no debt and earned interest on its available cash until its May
21, 1996 acquisitions of 1st Tech and DarkHorse. Thereafter, the Company
incurred net interest expense due to the increased balances of inventories,
accounts receivable and borrowings. The Company expects to continue to require
borrowings to fund growth in inventories and accounts receivable in the future
and therefore expects to continue to reflect net interest expense.
PROVISION FOR INCOME TAXES
During 1997 and 1996, the Company incurred consolidated net operating losses
for U.S. income tax purposes of approximately $6.0 million and $1.8 million,
respectively. The loss carryforwards expire in 2012 and 2011, respectively.
During 1997 and 1996, the Company had temporary differences resulting in future
tax deductions of $513 thousand and $693 thousand, respectively, principally
representing tax basis in accrued liabilities and intangible assets. Deferred
income tax assets from the loss carryforwards and asset basis differences
aggregate $4.6 million and $2.2 million, respectively, at September 30, 1997.
For financial reporting purposes, valuation allowances of $4.6 million and
$2.2 million have been recorded to offset the deferred tax assets due to the
uncertainty as to whether the benefits will be realized.
The availability of the net operating loss carryforward and future tax
deductions to reduce taxable income is subject to various limitations under the
Internal Revenue Code of 1986, as amended (the "Code"), in the event of an
ownership change as defined in Section 382 of the Code. The Company may
16
lose the benefit of such net operating loss carryforwards due to Internal
Revenue Service ("IRS") Code Section 382 limitations. This section states that
after reorganization or other change in corporate ownership, the use of certain
carryforwards may be limited or prohibited. The Company does not believe that an
IRS Code Section 382 limitation exists as of September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has utilized the funds acquired in equity
financings of its Common Stock, in the exercise of warrants, exercise of stock
options, capital and operating leases, vendor credits, certain bank borrowings
and funds generated from operations to support its operations, carry on research
and development activities, acquire capital equipment, finance inventories and
accounts receivable and pay its general and administrative expenses. For fiscal
1997, the Company generated $9.2 million in net cash from financing activities
versus $3.3 million in fiscal 1996. The $9.2 million in fiscal 1997 consisted of
$2.5 million from the exercise of warrants and options, $1.1 million of net cash
draws on the Company's revolving credit note and $5.6 million in private
placements of Common Stock. At September 30, 1997, the Company had $2.0 million
of cash, $1.5 million of restricted cash and a working capital surplus of $3.1
million. Restricted cash represents customer payments deposited into the
Company's lockbox account but not yet transferred to pay down the Company's line
of credit.
On June 27, 1997, the Company received approval of an $8.5 million,
three-year revolving credit facility from a new financial institution. The
transaction was completed on July 24, 1997. Borrowings under the line of credit
are based on eligible accounts receivable, inventory and equipment and subject
to the terms and conditions of the credit agreement. The line of credit is
collateralized by all of the Company's assets. The interest rate on this line of
credit is prime plus 2%.
Capital expenditures totaled approximately $1.5 million and $404 thousand in
fiscal years 1997 and 1996, respectively. These capital expenditures were
primarily for the purchase of enterprise information systems, manufacturing
equipment, test equipment and the expansion of manufacturing facilities. The
Company expects to fund capital expenditures of approximately $625 thousand in
the first quarter of fiscal 1998 for additional manufacturing capacity, test
equipment and expansion of manufacturing facilities through working capital,
operating leases and capital leases.
The Company entered into a 60-month operating lease for equipment valued at
$1.5 million effective March 1, 1997. This lease required a letter of credit
equal to approximately 40% of the equipment cost for the first year of the
lease, with annual decreases in the letter of credit over the life of the lease.
During fiscal 1997, there were significant declines in DRAM and SRAM
semiconductor prices. Since the fiscal 1997 year end, there have been continued
declines in certain DRAM and SDRAM semiconductor prices. Because a substantial
portion of the Company's net sales are attributable to the resale of
semiconductor memory devices, future price declines could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business, financial condition and results of operations could
be impacted by a number of factors, including without limitation the following.
SIGNIFICANT CUSTOMER CONCENTRATION
A significant percentage of the Company's net sales are produced by a
relatively small number of customers. In fiscal 1997 and 1996, the ten largest
customers accounted for approximately 53.2% and 45.3% of net sales,
respectively. One customer, Tandy Corporation, accounted for 12.0% of total
sales in fiscal 1997, while no one customer accounted for more than 10% of total
sales in fiscal 1996. While the Company expects to continue to be dependent on a
relatively small number of customers for a significant
17
percentage of its net sales, there can be no assurance that any of the top ten
customers in fiscal 1997 will continue to utilize the Company's products or
services. Absent replacement or other sales growth, the loss of any significant
customer could materially and adversely affect the Company's result of
operations, business and financial condition. The actual customers producing the
sales are different between the two periods, and the Company expects this type
of variation in volume of purchases from a particular customer to continue.
The Company in general has no firm long-term volume commitments from its
customers and generally enters into individual purchase orders and agreements
with non-binding forecasts. Customer purchase orders and forecasts are subject
to change, cancellation or delay with little or no consequence to the customer.
Therefore, the Company has experienced such changes and cancellations and
expects to continue to do so in the future. The replacement of canceled, delayed
or reduced purchase orders with new business cannot be assured. The Company's
business, financial condition and results of operations will depend
significantly on its ability to obtain purchase orders from existing and new
customers, upon the financial condition and success of its customers, the
success of customer's products and the general economy. Factors affecting the
industries of the Company's major customers could have a material adverse effect
on the Company's business, financial condition and results of operations.
PRODUCT CONCENTRATION; DEPENDENCE ON MEMORY MARKET
A substantial majority of the Company's net sales is derived from memory
products. The market for memory products is characterized by frequent
transitions in which products rapidly incorporate new features and performance
standards. A failure to develop products with required feature sets or
performance standards or a delay as short as a few months in bringing a new
product to market could significantly reduce the Company's net sales for a
substantial period, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The market for semiconductor memory devices has been cyclical. The industry
has experienced significant economic downturns at various times, characterized
by diminished product demand, accelerated erosion of average selling prices and
production over capacity. During fiscal 1997, there were significant declines in
DRAM and SRAM semiconductor prices. Since the fiscal 1997 year end, there have
been continued declines in certain DRAM and SDRAM semiconductor prices. Because
a substantial portion of the Company's net sales are attributable to the resale
of semiconductor memory devices, future price declines could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON SEMICONDUCTOR, COMPUTER, TELECOMMUNICATIONS AND NETWORKING
INDUSTRIES
The Company may experience substantial period-to-period fluctuations in
future operating results due to factors affecting the semiconductor, computer,
telecommunications and networking industries. From time to time, each of these
industries has experienced downturns, often in connection with, or in
anticipation of, declines in general economic conditions. A decline or
significant shortfall in growth in any one of these industries could have a
material adverse impact on the demand for the Company's products and therefore a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, changes in end-user demand for the products
sold by any individual OEM customer can have a rapid and exaggerated effect on
demand for the Company's products from that customer in any given period,
particularly in the event that the OEM customer has accumulated excess
inventories of products purchased from the Company. There can be no assurance
that the Company's net sales and results of operations will not be materially
and adversely affected in the future due to changes in demand from individual
customers or cyclical changes in the semiconductor, computer,
telecommunications, networking or other industries utilizing the Company's
products.
18
INTENSE COMPETITION
The memory module and memory test equipment industries are intensely
competitive. Each of these markets includes a large number of competitive
companies, several of which have achieved a substantial market share. Certain of
the Company's competitors in each of these markets have substantially greater
financial, marketing, technical, distribution and other resources, greater name
recognition, lower cost structures and larger customer bases than the Company.
In the memory module market, the Company competes against semiconductor
manufacturers that maintain captive memory module production capabilities,
including Samsung Electronics Company Ltd. ("Samsung") and Micron Electronics,
Inc. (a subsidiary of Micron Technology, Inc.). The Company also competes with
independent memory module manufacturers, including Smart Modular Technologies,
Inc. and Kingston Technology, Inc. In the memory tester market, the Company
competes primarily with companies such as Hewlett-Packard, Inc. and Advantest,
Inc. Competition for the Company's CLASS business of manufacturing services
includes SCI Systems, Inc. and Avex Electronics, Inc. The Company faces
competition from current and prospective customers that evaluate the Company's
capabilities against the merits of manufacturing products internally. In some
cases the Company's tester customers represent direct competition to the
Company's memory module business. In addition, certain of the Company's
competitors, such as Samsung, are significant suppliers to the Company. These
suppliers may have the ability to manufacture competitive products at lower
costs than the Company as a result of their higher levels of integration. The
Company also faces competition from new and emerging companies that have
recently entered or may in the future enter the markets in which the Company
participates.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products. There can be no assurance that enhancements to or future
generations of competitive products will not be developed that offer better
prices or technical performance features than the Company's products. To remain
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, improve quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis, reduce
manufacturing and testing costs and compete favorably on the basis of price. In
addition, increased competitive pressure has led in the past and may continue to
lead to intensified price competition, resulting in lower prices and gross
margin, which could materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully in the future.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations and gross margin have fluctuated
significantly from period to period in the past and may in the future continue
to fluctuate significantly from period to period. Aside from fluctuations
typically resulting from the different products and customer mix associated with
acquisitions, the primary factors that have affected and may in the future
affect the Company's results of operations include the loss of a principal
customer or customers or the reduction in orders from a customer due to excess
product inventory accumulation by such customers, adverse changes in the mix of
products sold by the Company and the inability to procure required components.
Other factors that may affect the Company's results of operations in the future
include fluctuating market demand for and declines in the selling prices of the
Company's products, market acceptance of new products and enhanced versions of
the Company's products, delays in the introduction of new products and
enhancements to existing products, and manufacturing inefficiencies associated
with the startup of new product introductions. In addition, the Company's
operating results may be affected by the timing of new product announcements and
releases by the Company or its competitors, the timing of significant orders,
the ability to produce products in volume, delays, cancellations or
reschedulings of orders due to customer financial difficulties or other events,
inventory obsolescence, including the reduction in value of the Company's
19
inventories due to unexpected price declines, unexpected product returns, the
timing of expenditures in anticipation of increased sales, cyclicality in the
Company's targeted markets, and expenses associated with acquisitions. In
particular, declines in DRAM, SDRAM, and SRAM semiconductor prices could affect
the valuation of the Company's inventory which could result in adverse changes
in the Company's business, financial condition and results of operations. The
concentration of the Company's assets in its Austin, Texas facility could make
the Company's exposure to business disruptions greater than if the Company's
assets were more geographically dispersed.
The Company's net sales and gross margin have varied and will continue to
vary significantly based on a variety of factors, including the mix of products
sold and the manufacturing services provided, the channels through which the
Company's products are sold, changes in product selling prices and component
costs, the level of manufacturing efficiencies achieved and pricing by
competitors. The selling prices of the Company's existing products have declined
in the past, and the Company expects that prices will continue to decline in the
future. In particular, during fiscal 1997 and 1996, the selling prices of the
Company's existing products declined due to significant declines in DRAM, SDRAM
and SRAM semiconductor prices. Moreover, since the fiscal 1997 year end,
declines in the selling prices of certain of the Company's existing products
have continued due to further declines in certain DRAM and SDRAM semiconductor
prices. Because a substantial portion of the Company's turnkey sales are
attributable to the resale of semiconductor devices, continued decline in the
prices of these components could have a material adverse effect on the Company's
net sales. Accordingly, the Company's ability to maintain or increase net sales
will be highly dependent upon its ability to increase unit sales volumes of
existing products and to introduce and sell new products in quantities
sufficient to compensate for the anticipated declines in selling prices.
Declining product selling prices may also materially and adversely affect the
Company's gross margin unless the Company is able to reduce its cost per unit to
offset declines in product selling prices. There can be no assurance that the
Company will be able to increase unit sales volumes, introduce and sell new
products or reduce its cost per unit. In addition, the Company's business has in
the past been subject to seasonality. The Company expects that its business will
experience more significant seasonality as it expands its sales and marketing
efforts in Europe.
Sales of the Company's individual products and product lines toward the end
of a product's life cycle are typically characterized by steep declines in
sales, pricing and gross margin, the precise timing of which may be difficult to
predict. The Company could experience unexpected reductions in sales of products
as customers anticipate new product purchases. In addition, to the extent that
the Company manufactures products in anticipation of future demand that does not
materialize, or in the event a customer cancels outstanding orders during a
period of either declining product selling prices or decreasing demand, the
Company could experience an unanticipated decrease in sales of products. These
factors could give rise to charges for obsolete or excess inventory, returns of
products by distributors, or substantial price protection charges or discounts.
In the past, the Company has had to write-down and write-off excess or obsolete
inventory. To the extent that the Company is unsuccessful in managing product
transitions, its business, financial condition and results of operations could
be materially and adversely affected.
The need for continued significant expenditures for capital equipment
purchases, research and development and ongoing customer service and support,
among other factors, will make it difficult for the Company to reduce its
operating expenses in any particular period if the Company's expectations for
net sales for that period are not met. The Company has significantly increased
its expense levels to support its growth, and there can be no assurance that the
Company will maintain its current level of net sales or rate of growth for any
period in the future. The Company believes that period-to-period comparisons of
the Company's financial results are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to the foregoing factors,
it is likely that in some future period the Company's operating results will be
below the expectations of public market analysts or investors. In such event,
the market price of the Company's securities would be materially and adversely
affected.
20
DEPENDENCE ON SOLE OR LIMITED SOURCES OF SUPPLY
The Company is dependent on certain suppliers, including limited and sole
source suppliers, to provide key components used in the Company's products. In
particular, the Company is dependent in significant part upon certain limited or
sole source suppliers for critical components in the Company's memory module and
tester products. The electronics industry has experienced in the past, and may
experience in the future, shortages in semiconductor devices, including DRAM,
SDRAM and SRAM memory. The Company has experienced and may continue to
experience delays in component deliveries and quality problems with respect to
certain component deliveries which have caused and could in the future cause
delays in product shipments and have required and could in the future require
the redesign of certain products. The Company generally has no written
agreements with its suppliers. There can be no assurance that the Company will
receive adequate component supplies on a timely basis in the future. The
inability to continue to obtain sufficient supplies of components as required,
or to develop alternative sources if required, could cause delays, disruptions
or reductions in product shipments or require product redesigns which could
damage relationships with current or prospective customers, could increase costs
and/or prices and could have a material adverse effect on the Company's
business, financial condition and results of operations.
MANAGEMENT OF GROWTH; EXPANSION OF OPERATIONS
The Company has significantly expanded its operations over the last several
years. This growth has resulted in a significant increase in responsibility for
existing management which has placed, and may continue to place, a significant
strain on the Company's limited personnel and management, manufacturing and
other resources. The Company's ability to manage the recent and any possible
future growth will require a significant expansion of its manufacturing
capacity, accounting and other internal management systems and the
implementation of a variety of procedures and controls. There can be no
assurance that significant problems in these areas will not occur. Any failure
to expand these systems and implement such procedures and controls in an
efficient manner and at a pace consistent with the Company's business could have
a material adverse effect on the Company's business, financial condition and
results of operations.
In connection with the Company's acquisitions and growth, the Company's
operating expenses have increased significantly, and the Company anticipates
that operating expenses will continue to increase in absolute dollars in the
future. In particular, in order to continue to provide quality products and
customer service and to meet anticipated demands of its customers, the Company
will be required to continue to increase staffing and other expenses, including
expenditures on capital equipment, sales and marketing. Should the Company
increase its expenditures in anticipation of a future level of sales that does
not materialize, the Company's business, financial condition and results of
operations would be materially and adversely affected. Certain customers have
required and may continue to require rapid increases in production and
accelerated delivery schedules which have placed and may continue to place a
significant burden on the Company's resources. In order to achieve anticipated
sales levels and profitability, the Company will continue to be required to
manage its assets and operations efficiently. In addition, should the Company
continue to expand geographically, it may experience certain inefficiencies from
the management of geographically dispersed facilities.
The Company anticipates that future demand for its products will require
expansion of its current operations and the addition of new production lines in
the future. It also anticipates it will be required to move to a larger
facility. Should the Company's relocation to this facility be delayed or should
the Company experience any unexpected disruptions associated with this
transition, the Company's results of operations could be materially and
adversely affected. There can be no assurance that any such expansion will be
completed successfully.
21
RAPID TECHNOLOGICAL CHANGE
The semiconductor, computer, telecommunications and networking industries
are subject to rapid technological change, short product life cycles, frequent
new product introductions and enhancements, changes in end-user requirements and
evolving industry standards. The Company's ability to be competitive in these
markets will depend in significant part upon its ability to invest significant
amounts of resources for research and development efforts, to successfully
develop, introduce and sell new products and enhancements on a timely and
cost-effective basis and to respond to changing customer requirements that meet
evolving industry standards. For example, the semiconductor memory market is
currently transitioning from fast page mode and EDO memory to SDRAM. The success
of the Company in developing new and enhanced products will depend upon a
variety of factors, including integration of the various elements of its complex
technology, timely and efficient completion of product design, timely and
efficient implementation of manufacturing and assembly processes, availability
of production capacity, achievement of acceptable manufacturing yields and
product performance, quality and reliability. The Company has experienced, and
may in the future experience, delays from time to time in the development and
introduction of new products. Moreover, there can be no assurance that the
Company will be successful in selecting, developing, manufacturing and marketing
new products or enhancements. There can be no assurance that defects or errors
will not be found in the Company's products after commencement of commercial
shipments, which could result in the delay in market acceptance of such
products. The inability of the Company to introduce new products or enhancements
that contribute to sales could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. The Company's future operating
results also depend in significant part upon its ability to attract, train and
retain qualified management, manufacturing and quality assurance, engineering,
marketing, sales and support personnel. The Company is actively recruiting such
personnel. However, competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting, training or
retaining such personnel now or in the future. There may be only a limited
number of persons with the requisite skills to serve in these positions, and it
may be increasingly difficult for the Company to hire such persons over time.
The loss of any key employee, the failure of any key employee to perform in his
or her current position, the Company's inability to attract, train and retain
skilled employees as needed or the inability of the officers and key employees
of the Company to expand, train and manage the Company's employee base could
materially and adversely affect the Company's business, financial condition and
results of operations.
INTERNATIONAL SALES
International sales accounted for 3.5% and 2.7% of net sales in fiscal 1997
and 1996, respectively. The Company anticipates that international sales will
increase in future periods and will account for an increasing portion of net
sales. As a result, an increasing portion of the Company's sales will be subject
to certain risks, including changes in regulatory requirements, tariffs and
other barriers, timing and availability of export licenses, political and
economic instability, difficulties in accounts receivable collections, natural
disasters, difficulties in staffing and managing foreign subsidiary and branch
operations, difficulties in managing distributors, difficulties in obtaining
governmental approvals for telecommunications and other products, foreign
currency exchange fluctuations, the burden of complying with a wide variety of
complex foreign laws and treaties and potentially adverse tax consequences. The
Company is also subject to the risks associated with the imposition of
legislation and regulations relating to the import or export of high technology
products. The Company cannot predict whether quotas, duties, taxes or other
charges or restrictions upon the importation or exportation of the Company's
products will be implemented by the
22
U.S. or other countries. Because sales of the Company's products have been
denominated to date primarily in U.S. dollars, increases in the value of the
U.S. dollar could increase the price of the Company's products so that they
become relatively more expensive to customers in the local currency of a
particular country, leading to a reduction in sales and profitability in that
country. Future international activity may result in increased foreign currency
denominated sales. Gains and losses on the conversion to U.S. dollars of
accounts receivable, accounts payable and other monetary assets and liabilities
arising from international operations may contribute to fluctuations in the
Company's results of operations. Some of the Company's customer purchase orders
and agreements are governed by foreign laws, which may differ significantly from
U.S. laws. Therefore, the Company may be limited in its ability to enforce its
rights under such agreements and to collect damages, if awarded. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY
The Company expects that its customers will continue to establish demanding
specifications for quality, performance, reliability and delivery. In the past,
the Company has experienced quality problems resulting in product returns and
cancellations. To date, the Company's quality problems have not had a
significant effect on the Company's results of operations and the known quality
problems have been or are in the process of being remedied. There can be no
assurance that the problems will not occur in the future with respect to
quality, performance, reliability and delivery of the Company's products. If
such problems occur, the Company could experience increased costs, delays in or
cancellations or reschedulings of orders or shipments, delays in collecting
accounts receivable and increases in product returns and discounts, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS
In the semiconductor, computer, telecommunications and networking
industries, it is typical for companies to receive notices from time to time
alleging infringement of patents, copyrights or other intellectual property
rights of others. While there is currently no material pending intellectual
property litigation involving the Company, the Company may from time to time be
notified of claims that it may be infringing patents, copyrights or other
intellectual property rights owned by third parties. There can be no assurance
that these or other companies will not in the future pursue claims against the
Company with respect to the alleged infringement of patents, copyrights or other
intellectual property rights. In addition, litigation may be necessary to
protect the Company's intellectual property rights and trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against third party claims of invalidity. Any litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use or
ownership claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future. The failure to obtain a
license under a patent or intellectual property right from a third party for
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of the products utilizing the
intellectual property. In addition, should the Company decide to litigate such
claims, such litigation could be extremely expensive and time consuming and
could materially and adversely affect the Company's business, financial
condition and results of operations, regardless of the outcome of the
litigation.
The Company attempts to protect its intellectual property rights through a
variety of measures, including non-disclosure agreements, trademarks, trade
secrets and to a lesser extent, patents. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information, that disputes with respect to the
ownership of its intellectual
23
property rights will not arise, that the Company's trade secrets or proprietary
technology will not otherwise become known or be independently developed by
competitors or that the Company can otherwise meaningfully protect its
intellectual property rights.
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company expects to make acquisitions
of, or significant investments in, businesses that offer complementary products
and technologies. Any such future acquisitions or investments would expose the
Company to the risks commonly encountered in acquisitions of businesses. Such
risks include, among others, difficulty of assimilating the operations,
information systems and personnel of the acquired businesses, the potential
disruption of the Company's ongoing business, the inability of management to
maximize the financial and strategic position of the Company through the
successful incorporation of acquired employees and customers, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and customers as a result of any integration of new
management personnel. There can be no assurance that any potential acquisition
will be consummated or, if consummated, that it will not have a material adverse
effect on the Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICES
There has been a history of significant volatility in the market prices of
the common stock of technology companies, including the Common Stock of the
Company, and it is likely that the market price of the Company's Common Stock
will continue to be subject to significant fluctuations. Factors such as the
timing and market acceptance of new product introductions by the Company, demand
for products of the Company's customers, the introduction of new products by the
Company's competitors, variations in quarterly operating results, changes in
securities analysts' recommendations regarding the Company's Common Stock,
developments in the technology industry and general economic conditions may have
a significant impact on the market price of the Company's Common Stock. In
addition, the equity markets in recent years have experienced significant price
and volume fluctuations that have affected the market prices of technology
companies and that have often been unrelated to the operating performance of
such companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company and the related report
of the Company's independent public accountants thereon are included in this
report at the pages indicated.
ITEM PAGE
- ------------------------------------------------------------------------------------------------------------- -----
Report of Independent Public Accountants..................................................................... 25
Consolidated Balance Sheets at September 30, 1997 and 1996................................................... 26
Consolidated Statements of Operations for the Years Ended September 30, 1997, 1996 and 1995.................. 27
Consolidated Statements of Stockholders' Equity for for Years Ended September 30, 1997, 1996 and 1995........ 28
Consolidated Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995.................. 29
Notes to Consolidated Financial Statements................................................................... 30
24
[LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tanisys Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Tanisys
Technology, Inc. (a Wyoming corporation), and subsidiaries as of September 30,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tanisys Technology, Inc.,
and subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 24, 1997
25
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 1,990,017 $ 2,689,569
Restricted cash................................................................. 1,539,448 --
Trade accounts receivable, net of allowance of $180,157 and $84,557 in 1997 and
1996, respectively............................................................ 3,519,369 5,069,399
Accounts receivable from related parties........................................ 12,371 17,691
Inventory....................................................................... 4,489,050 1,804,458
Prepaid expense................................................................. 364,042 217,570
-------------- --------------
Total current assets.......................................................... 11,914,297 9,798,687
-------------- --------------
Property and equipment, net of accumulated depreciation of $1,732,524 and $906,589
in 1997 and 1996, respectively.................................................. 2,539,324 1,817,479
Organization costs, net........................................................... 512 1,024
Patents and trademarks, net....................................................... 80,327 84,337
Goodwill, net of accumulated amortization of $5,079,457 and $1,493,958 in 1997 and
1996, respectively.............................................................. 2,091,541 5,677,040
Other noncurrent assets........................................................... 605,957 84,000
-------------- --------------
Total Assets.................................................................. $ 17,231,958 $ 17,462,567
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 3,917,786 $ 2,920,530
Accounts payable to related parties............................................. 250 64,618
Accrued liabilities............................................................. 710,189 929,376
Revolving credit note........................................................... 4,172,516 3,075,000
-------------- --------------
Total current liabilities..................................................... 8,800,741 6,989,524
-------------- --------------
Obligations under capital lease................................................. 81,114 123,000
-------------- --------------
Total liabilities............................................................. 8,881,855 7,112,524
-------------- --------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, no par value, 50,000,000 shares authorized, 20,334,714 and
15,978,537 shares issued and outstanding, at September 30, 1997 and September
30, 1996, respectively.......................................................... 28,599,524 20,469,136
Accumulated deficit............................................................... (20,249,421) (10,119,093)
-------------- --------------
Total stockholders' equity...................................................... 8,350,103 10,350,043
-------------- --------------
Total Liabilities and Stockholders' Equity........................................ $ 17,231,958 $ 17,462,567
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these consolidated financial
statements.
26
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
-------------- ------------- -------------
Net sales.......................................................... $ 47,673,950 $ 14,988,946 $ 358,726
Cost of goods sold................................................. 41,479,865 12,660,900 110,097
-------------- ------------- -------------
Gross profit....................................................... 6,194,085 2,328,046 248,629
-------------- ------------- -------------
Operating expenses:
Research and development......................................... 2,593,866 1,079,927 409,805
Sales and marketing.............................................. 3,044,052 1,177,214 1,358,032
General and administrative....................................... 3,632,895 1,930,204 894,372
Depreciation and amortization.................................... 4,190,583 1,748,063 71,043
Bad debt expense................................................. 2,230,808 46,393 19,003
-------------- ------------- -------------
Total operating expenses....................................... 15,692,204 5,981,801 2,752,255
-------------- ------------- -------------
Operating loss..................................................... (9,498,119) (3,653,755) (2,503,626)
-------------- ------------- -------------
Other income (expense):
Interest income.................................................. 45,659 74,238 56,250
Interest expense................................................. (661,368) (108,332) --
Other income..................................................... -- 4,182 2,290
-------------- ------------- -------------
Net loss........................................................... $ (10,113,828) $ (3,683,667) $ (2,445,086)
-------------- ------------- -------------
Loss per weighted average common share............................. $ (0.58) $ (0.31) $ (0.29)
-------------- ------------- -------------
-------------- ------------- -------------
Weighted average number of common shares........................... 17,537,914 11,765,850 8,436,320
-------------- ------------- -------------
-------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
27
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OFSTOCKHOLDERS' EQUITY
COMMON STOCK TOTAL
--------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
------------ ------------- -------------- --------------
Balance, September 30, 1994......................... 7,995,325 $ 5,931,456 $ (3,990,340) $ 1,941,116
------------ ------------- -------------- --------------
Net loss............................................ -- -- (2,445,086) (2,445,086)
Private placements, net............................. 900,000 1,607,232 -- 1,607,232
Issued as payment of commission..................... 48,980 120,001 -- 120,001
Exercise of stock options........................... 6,000 12,724 -- 12,724
Issued for retirement of debt....................... 115,000 142,928 -- 142,928
------------ ------------- -------------- --------------
Balance, September 30, 1995......................... 9,065,305 $ 7,814,341 (6,435,426) 1,378,915
------------ ------------- -------------- --------------
Net loss............................................ -- -- (3,683,667) (3,683,667)
Acquisition of businesses, net (Note 2)............. 4,150,000 8,300,000 -- 8,300,000
Issued as payment of consulting bonus
(Note 2).......................................... 207,500 788,500 -- 788,500
Private placements, net (Note 9).................... 975,177 1,511,796 -- 1,511,796
Issued as payment of commission..................... 45,555 102,499 -- 102,499
Exercise of stock warrants.......................... 1,515,000 1,905,000 -- 1,905,000
Issued for retirement of debt....................... 20,000 47,000 -- 47,000
------------ ------------- -------------- --------------
Balance, September 30, 1996......................... 15,978,537 20,469,136 (10,119,093) $ 10,350,043
------------ ------------- -------------- --------------
Net loss............................................ -- -- (10,113,828) (10,113,828)
Private placements,