-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BuKBMUtPT3ZHjzTC7komvOMlXaLKLdRH1q0kTtbmz5tBm0ILseIrRucFgV42LeqP 7Plf9d3GiOs2txSO7oXDOg== 0000912057-00-008130.txt : 20000225 0000912057-00-008130.hdr.sgml : 20000225 ACCESSION NUMBER: 0000912057-00-008130 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANISYS TECHNOLOGY INC CENTRAL INDEX KEY: 0000929775 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 742675493 STATE OF INCORPORATION: WY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-29038 FILM NUMBER: 551833 BUSINESS ADDRESS: STREET 1: 12201 TECHNOLOGY BOULEVARD STREET 2: SUITE 125 CITY: AUSTIN STATE: TX ZIP: 78727-6101 BUSINESS PHONE: 5123354440 MAIL ADDRESS: STREET 1: 12201 TECHNOLOGY BLVD STREET 2: SUITE 130 CITY: AUSTIN STATE: TX ZIP: 78727-6101 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1999 or [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-29038 TANISYS TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) WYOMING 74-2675493 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 12201 TECHNOLOGY BLVD., SUITE 125 78727 AUSTIN, TEXAS (Address of principal executive offices) (Zip Code) (512) 335-4440 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE PER SHARE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 31, 2000 was approximately $10 million based upon the closing sale price of the Common Stock as reported on the Nasdaq OTC Bulletin Board. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Indicated below is the number of shares outstanding of the registrant's only class of common stock at January 31, 2000: NUMBER OF SHARES TITLE OF CLASS OUTSTANDING Common Stock, no par value 33,987,387 2 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES 1999 ANNUAL REPORT ON FORM 10-K INDEX
PAGE PART I ITEM 1. BUSINESS......................................................................4 ITEM 2. PROPERTIES....................................................................10 ITEM 3. LEGAL PROCEEDINGS.............................................................11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................11 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........11 ITEM 6. SELECTED FINANCIAL DATA ......................................................13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS ........................................................14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......................................................52 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY...............................51 ITEM 11. EXECUTIVE COMPENSATION........................................................54 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................62 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................64 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .............65 SIGNATURES..................................................................................70
3 PART I. ITEM 1. BUSINESS FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS THE FOLLOWING DISCUSSIONS CONTAIN TREND INFORMATION AND OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS OF TANISYS TECHNOLOGY, INC., AND ITS WHOLLY OWNED SUBSIDIARIES, 1ST TECH CORPORATION ("1ST TECH"), DARKHORSE SYSTEMS, INC. ("DARKHORSE") AND ROSETTA MARKETING AND SALES, INC. ("ROSETTA") (COLLECTIVELY, THE "COMPANY" OR "TANISYS"), COULD DIFFER MATERIALLY FROM THEIR HISTORICAL RESULTS OF OPERATIONS AND THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED HEREIN, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND "INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY OR ITS SUBSIDIARIES OR THE COMPANY'S MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN FACTORS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, BUSINESS CONDITIONS AND GROWTH IN THE ELECTRONICS INDUSTRY AND GENERAL ECONOMIES, BOTH DOMESTIC AND INTERNATIONAL; LOWER THAN EXPECTED CUSTOMER ORDERS; CUSTOMER RELATIONSHIPS AND FINANCIAL CONDITION; RELATIONSHIPS WITH VENDORS; THE INTEREST RATE ENVIRONMENT; GOVERNMENTAL REGULATION AND SUPERVISION; SEASONALITY; DISTRIBUTION NETWORKS; DELAYS IN RECEIPT OF ORDERS OR CANCELLATION OF ORDERS; COMPETITIVE FACTORS, INCLUDING INCREASED COMPETITION AND NEW PRODUCT OFFERINGS BY COMPETITORS AND PRICE PRESSURES; THE AVAILABILITY OF PARTS AND SUPPLIES AT REASONABLE PRICES; CHANGING TECHNOLOGIES; ACCEPTANCE AND INCLUSION OF THE COMPANY'S TECHNOLOGIES BY ORIGINAL EQUIPMENT MANUFACTURERS ("OEMS"); CHANGES IN PRODUCT MIX; NEW PRODUCT DEVELOPMENT; THE NEGOTIATION OF NEW CONTRACTS; SIGNIFICANT QUARTERLY PERFORMANCE FLUCTUATION DUE TO THE RECEIPT OF A SIGNIFICANT PORTION OF CUSTOMER ORDERS AND PRODUCT SHIPMENTS IN THE LAST MONTH OF EACH QUARTER; PRODUCT SHIPMENT INTERRUPTIONS DUE TO MANUFACTURING PROBLEMS; ONE-TIME EVENTS; AND OTHER FACTORS DESCRIBED HEREIN. BASED UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS SHOULD BE READ IN LIGHT OF THESE FACTORS AND THE FACTORS IDENTIFIED IN "ITEM 1. BUSINESS" AND IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." ALL REFERENCES TO YEAR PERIODS REFER TO THE COMPANY'S FISCAL YEARS ENDED SEPTEMBER 30, 1999, 1998 OR 1997, AND REFERENCES TO QUARTERLY PERIODS REFER TO THE COMPANY'S FISCAL QUARTERS ENDED DECEMBER 31, MARCH 31, JUNE 30 AND SEPTEMBER 30. GENERAL The Company designs, manufactures and markets production level automated test equipment for a wide variety of memory technologies. Operating under the Tanisys Technology name since 1994, the Company has developed into an independent manufacturer of standard and custom semiconductor memory module test systems for a variety of semiconductor manufacturers, computer and electronics OEMs and independent memory module manufacturers. The Company markets the DarkHorse line of memory module test systems and licenses its proprietary Tanisys Touch technology. The Company's customers currently include Celestica Corp., Dataram, Inc., Fox Electronics, MCMS, Micron Technology, Inc., PNY Technologies, Inc., Solectron Corporation and Viking Components. During fiscal 1999, 1998 and 1997, a significant portion of the Company's revenues were derived from the manufacturing and sale of semiconductor memory modules. Memory module sales accounted for 80.3%, 83.9% and 88.9% of total net sales for fiscal 1999, 1998 and 1997, respectively. In December of 1999, the Company sold certain assets and liabilities related to the memory module manufacturing business and exited the memory module manufacturing business. Included in the sale was all the stock of Tanisys (Europe) Ltd., a 4 wholly owned subsidiary of the Company. A shortage of computer memory chips in the fourth fiscal quarter of 1999 and a rapid increase in memory prices during the same period severely disrupted the Company's memory module manufacturing business. After dropping by approximately 95% from 1996 to mid-1999, memory chip prices escalated rapidly in August and September 1999, before leveling off in October 1999. The Company had great difficulties obtaining DRAM inventory and lost several key orders. Further, the memory module manufacturing business in Scotland dropped off completely at the end of the fourth fiscal quarter due to the loss of the Company's major U.K. customer, who was acquired by another semiconductor manufacturer and ceased doing business with the Company. The December 9, 1999, Asset Purchase Agreement is subject to stockholder approval. The sale of the memory module manufacturing business has significantly reduced the Company's revenues. The Company will concentrate all its resources on the memory module test systems business, which has become a growing profitable portion of the Company's revenues as new technologies such as higher speed synchronous DRAM, Rambus-Registered Trademark- and Double Data Rate synchronous DRAM memory become prevalent requirements of computing systems. INDUSTRY BACKGROUND The demand for semiconductor memory modules in digital electronic systems has grown significantly over the last several years, and according to Dataquest, will continue for the foreseeable future. This demand results from the increased importance of memory in determining system performance. An increasing demand for greater system performance requires that electronics manufacturers increase the amount of semiconductor memory incorporated into a system. Factors contributing to the growing demand for memory include growing unit sales of personal computers ("PCs") in the business and consumer market segments, increasing use of PCs to perform memory-intensive graphics tasks, increasingly faster microprocessors, the release of increasingly memory intensive software and the increasing performance requirements of PCs, workstations, servers and networking and telecommunications equipment. Semiconductor memory products are segmented into three primary classes: Dynamic Random Access Memory ("DRAM"), Static Random Access Memory ("SRAM") and non-volatile memory, such as Flash memory. DRAM typically is the large "main" memory of systems, SRAM provides higher performance, and Flash memory and other non-volatile memory retain their contents when power is removed. In addition, within each of these broad categories of memory products, semiconductor manufacturers are offering an increasing variety of memory devices designed for application specific uses. The growing variety of memory components drives the increasing demand for DarkHorse type cost-effective production memory module test systems to test each of these categories of memory modules. MEMORY MODULE MARKET Since the memory module market influences the memory module test systems market, the Company feels it is appropriate to comment briefly about the memory module market. Semiconductor memory modules ("modules") are small printed circuit board assemblies containing semiconductor memory devices and support components. Many computer and electronic systems use modules to permit OEMs to more easily upgrade their systems and to increase flexibility by permitting different types of modules to configure one base system for multiple price or performance targets. Semiconductor memory modules are nearly always attached to a main system board in a daughter card fashion rather than directly to a computer system board, for reasons of upgradeability and flexibility. Memory modules permit OEMs to manufacture systems on a build-to-order (BTO) basis by configuring the system after the customer's order is placed. The benefits of BTO for OEMs are faster 5 announcement of new systems, increased customer satisfaction, reduced inventory risk and reduced costs, all of which require cost effective, high speed, high quality and flexible memory module test systems capability. Modules typically are manufactured by leading semiconductor memory component companies and independent third party suppliers. Semiconductor manufacturers sell modules almost exclusively to OEMs. Third party manufacturers of modules supply product to two primary market segments: the OEM channel and the reseller channel. Third party suppliers to the OEM channel typically offer custom product, although some computer and peripheral OEMs use off-the-shelf modules. Third party suppliers to the reseller channel typically offer standard DRAM modules as an upgrade product sold through computer distributors and retail channels. Both semiconductor memory suppliers and independent third party module manufacturers are customers for memory module test systems. MEMORY MODULE TEST SYSTEMS MARKET Memory module test systems are important to assure that semiconductor memory modules meet the necessary specifications of performance. The memory module test systems market typically is segmented into memory semiconductor manufacturing and third party memory module manufacturers for PC OEMs and the aftermarket. System OEMs typically require the manufacturer of their memory modules to test their completed modules under demands similar to actual use. Most module manufacturers perform "at-speed" testing of all modules with accurate test systems. The Company believes that module test system buyers typically evaluate reliability, productivity, accuracy, advanced automation, software flexibility, service, customer support and price as purchase criteria. Significant new purchases of capital equipment for test capacity are likely, due to changing memory architectures and strong growth in memory demand. The actual test sequence for a memory module is unique to its design in terms of architecture, pinout, speed rating, voltage, organization and size and will use any of several common test algorithms. Therefore, the number of potential memory test configurations is much greater than the number of semiconductor memory module types. This makes test development a potentially costly and labor intensive task. The ability of a test system manufacturer to provide support for the development of low cost, accurate tests is a significant consideration in the buying decision. Memory module testing requirements for the memory module aftermarket typically are less robust. Memory additions to systems in use typically are already tested in accordance with the needs of system manufacturers and often may need only module identification to assure the correct module is being installed. Servicing of failed systems often requires limited testing of modules but typically does not require "at-speed" testing. As a result, aftermarket module testing often needs less rigorous test capabilities but higher portability and lower cost than does module testing at the time of system manufacture. PRODUCTS AND SERVICES OF THE COMPANY The Company designs, manufactures and markets memory module test systems. The Company's memory module test systems are oriented for both memory module assembly and memory module aftermarket purposes and include a broad line of test fixtures, test algorithm suites and test services. MEMORY MODULE TEST SYSTEMS PRODUCTS The Company's memory module test systems are marketed under the DarkHorse brand name to utilize existing brand awareness. The current product line includes the SIGMA-3, the SIGMA-2 and the SIGMA-LC/ SYNC-LC series. The SIGMA-3 test system is sold to module manufacturers who build leading edge SDRAM modules for the latest PC100/PC133 specification and who require high quality, maximum throughput and cost effectiveness in their production test systems. Most recently the Company has introduced its Rambus-Registered Trademark- version 6 of the SIGMA-3. This system is targeted at the newest emerging memory technology and operates at frequencies of over 800 MHz. As the Rambus-Registered Trademark- technology matures in the marketplace, the Company will be able to offer this system for its customers' expanding test capabilities. The Company is also developing a version of the SIGMA-3 memory module test system with capabilities to test Double Data Rate SDRAM (DDR). Another major feature of the SIGMA-3 is its backward compatibility to test older memory technologies such as EDO and Fast Page mode memory. The Company's product development plans also include testing capabilities for Flash memory test systems. The growth rate for Flash memory devices is expected to reach over 50% per year in bit growth over the next few years. If achieved, there will be a market for a high quality, production level, cost effective test system. The SIGMA-2 tester is designed for module manufacturers who need to perform "at-speed" tests of older synchronous and asynchronous DRAM, SRAM, Flash memory and VRAM modules. These systems are aggressively priced relative to systems offered by major competitors. The SIGMA-3 and SIGMA-2 are used widely by leading module manufacturers throughout the world. The Company also markets the portable SIGMA-LC and SYNC-LC testers for the aftermarket segment. Customers in this segment value the ease-of-use and rapid identification of module type capabilities of these systems. The types of customers for these testers include module manufacturers, module retailers, large retail chains using them for PC service purposes, and distributors. The Company differentiates its memory module test systems by targeting its systems' features specifically for the purpose of cost effective, high quality, production level testing of memory products. The Company's memory module test systems are designed for comparable performance at lower prices relative to the general-purpose test systems offered by competitors. CUSTOMERS, SALES AND MARKETING In North America and Europe a majority of the Company's memory module test systems are sold directly to semiconductor and independent memory module manufacturers. In Asia, the Company also sells its test systems through distribution partners and independent sales representative organizations. In fiscal 1999 and 1998, the Company's ten largest customers accounted for 90.6% and 52.2% of net memory module test system sales, respectively. During fiscal 1999, the Company had three customers which accounted for 43.8%, 13.8% and 12.2% of the Company's net memory module test system sales, respectively. In fiscal 1998 and 1997, one customer accounted for 11.3% and 10.3% of the Company's net test system sales, respectively. Sales generally are made against standard customer purchase orders. The Company's backlog generally includes those customer orders for which it accepted purchase orders and planned shipment dates within the next year. Backlog is not an indicator of future sales, and orders in the backlog are subject to change in delivery terms or even cancellation. Accordingly, there is no assurance that current backlog will lead to future sales. The Company's total backlog of memory module test systems was approximately $258,000 and $370,000 at fiscal 1999 and 1998 year end, respectively. COMPETITION The memory module and memory test equipment industries are intensely competitive. These markets include a large number of competitive companies, several of which have achieved a substantial market share. Certain of the Company's competitors in these markets have substantially greater financial, marketing, technical, distribution and other resources, greater name recognition, and larger customer bases than the Company. In the memory module test systems market, the Company competes primarily with companies supplying automatic test 7 equipment. The Company also faces competition from new and emerging companies that have recently entered or may in the future enter the markets in which the Company participates. The Company expects its competitors to continue to improve the performance of their current products, to reduce their current product sales prices and to introduce new products that may offer greater performance and improved pricing, any of which could cause a decline in sales or loss of market acceptance of the Company's products. There can be no assurance that enhancements to or future generations of competitive products will not be developed that offer better prices or technical performance features than the Company's products. To remain competitive, the Company must continue to provide technologically advanced products, improve quality levels, offer flexible delivery schedules, deliver finished products on a reliable basis, reduce manufacturing costs and compete favorably on the basis of price. In addition, increased competitive pressure has led in the past, and may continue to lead to, intensified price competition, resulting in lower prices and gross margin, which could materially adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete successfully in the future. RESEARCH AND DEVELOPMENT The Company's management believes that the timely development of new memory module test systems and technologies is essential to maintain the Company's competitive position. In the electronics market, the Company's research and development activities are focused primarily on new memory module testing technology and continual improvement in its memory test products. Additionally, the Company provides research and development services for customers either as joint or contracted development. The Company plans to continue to devote substantial research and development efforts to the design of new memory module test systems that address the requirements of semiconductor companies, OEMs and independent memory module manufacturers. The Company's research and development expenses were $1,602,131 in fiscal 1999, $1,692,059 in fiscal 1998 and $1,589,103 in fiscal 1997. A portion of the research and development expense is focused on creating a patent portfolio to protect the Company's intellectual property and to create a competitive edge over competitors. INTELLECTUAL PROPERTY The Company has filed the following applications with the U.S. Patent and Trademark Office for patents to protect its intellectual property rights in products and technology that have been developed or are under development: NESTED LOOP METHOD OF IDENTIFYING SYNCHRONOUS MEMORIES. Issued as U.S. Patent 5,812,472 on September 22, 1998. The patent describes how to automatically identify a synchronous memory module configuration using a table-based method with nested loops. PARAMETRIC TEST SYSTEM AND METHOD. Issued as U.S. Patent 6,008,664 on December 28, 1999. This patent application describes a method for performing a leakage test more quickly. CONTACT TEST METHOD AND SYSTEM FOR MEMORY TESTERS. Issued as U.S. Patent 5,956,280 on September 21, 1999. This patent application describes a contact test for determining pin-to-pin and ground shorts, as well as opens for memory modules. SYNCHRONOUS MEMORY TESTER. Issued as U.S. Patent 5,914,902 on June 22, 1999. This patent describes the operation of the synchronous memory tester. SYNCHRONOUS MEMORY TEST METHOD. Issued as U.S. Patent 5,912,852 on June 15, 1999. This patent describes the method of operation of the synchronous memory tester. 8 METHOD AND SYSTEM FOR IDENTIFYING A MEMORY MODULE CONFIGURATION. Issued as U.S. Patent 5,999,468 on December 7, 1999. This patent application describes a speedier approach for identifying memory modules. SYNCHRONOUS MEMORY TEST SYSTEM. Issued U.S. Patent Number 5,995,424 on November 30, 1999. This patent describes the operation of the SYNC-LC memory tester. CAPACITANCE SENSITIVE SWITCH AND SWITCH ARRAY. Issued as U.S. Patent 5,508,700 on April 16, 1998. The patent describes a broad range of applications for capacitance sensitive touch technology covering hardware, firmware, software and methods of operations. CAPACITIVE SENSITIVE SWITCH METHOD AND SYSTEM. Issued as U.S. Patent 5,933,102 on August 3, 1999. This patent deals with simultaneous measurement of multiple touch sensors. SYNCHRONOUS MEMORY IDENTIFICATION SYSTEM. Serial Number 08/895,550 filed July 1997. This patent application describes additional applications for the use of table-based method with nested loops to automatically identify a synchronous memory module configuration. MICROSEQUENCER FOR MEMORY TEST SYSTEMS. Serial Number 09/033,363 filed March 1998. This patent application discusses the sequencer function in the SIGMA-3 tester with emphasis on exception handling and timing set compression through use of VLIW instructions. PROGRAMMABLE PULSE GENERATOR. Serial Number 09/032,968 filed March 1998. This patent application describes the PPG operation in the SIGMA-3 tester. TESTER SYSTEMS. Serial Number 09/033,364 filed March 1998. This patent application describes the code generation for the SIGMA-3 tester. METHOD AND SYSTEM FOR TESTING RAMBUS MEMORY MODULES. This patent application, which will replace the provisional application with Serial Number 60/097,894, describes a low cost method of testing Rambus memory modules. METHOD AND SYSTEM FOR TIMING CONTROL IN THE TESTING OF RAMBUS MEMORY MODULES. This patent application with Serial Number 09/359,173 describes the method of performing timing measurements for Rambus Memory Modules. There can be no assurance that the pending patent applications will be approved or approved in the form requested. The Company expects to continue to file patent applications where appropriate to protect its proprietary technologies; however, the Company believes that its continued success depends primarily on factors such as the technological skills and innovation of its personnel rather than on patent protection. In addition, the Company attempts to protect its intellectual property rights through trade secrets, copyrights, trademarks and a variety of other measures, including non-disclosure agreements. There can be no assurance, however, that such measures will provide adequate protection for the Company's trade secrets or other proprietary information, that disputes with respect to the ownership of its intellectual property rights will not arise, that the Company's trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors or that its intellectual property rights can otherwise be protected meaningfully. There can be no assurance that patents will issue from pending or future applications or that if patents are issued, they will not be challenged, invalidated or circumvented, or that rights granted thereunder will provide meaningful protection or other commercial advantage. Furthermore, there can be no assurance that third parties will not develop similar products, duplicate the Company's products or design around the patents owned by the Company or that third 9 parties will not assert intellectual property infringement claims against the Company. In addition, there can be no assurance that foreign intellectual property laws will adequately protect the Company's intellectual property rights abroad. The failure of the Company to protect its proprietary rights could have a material adverse effect on its business, financial condition and results of operations. ENVIRONMENTAL REGULATION The Company's operations and manufacturing processes are subject to certain federal, state and local environmental protection laws and regulations. Public attention has increasingly been focused on the environmental impact of manufacturing operations that use hazardous materials or generate hazardous wastes, and environmental laws and regulations may become more stringent over time. There can be no assurance that failure to comply with either present or future regulations, or to obtain all necessary permits required under such regulations, would not subject the Company to significant compliance expenses, production suspensions or delay, restrictions on expansion at its present or future locations, the acquisition of costly equipment or other liabilities. EMPLOYEES At September 30, 1999, the Company had 206 employees. There were 184 employees in Austin including 23 engineering and product development employees, 23 finance and administration employees, 33 employees in the sales, marketing technical and customer support areas, 105 manufacturing employees and 22 employees in Scotland. Between September 30, 1999 and the completion of the sale of the memory module manufacturing business in December 1999, 5 Austin employees were terminated for performance problems and 27 Austin employees and 1 Scotland employee left voluntarily to seek other employment. In addition, the positions of 20 Austin employees and 4 Scotland employees were eliminated on October 21, 1999 to reduce costs and attract capital infusion. The sale of the memory module manufacturing business resulted in 42 Austin employees and 17 Scotland employees being offered positions with the buyer of that business. The positions of 47 Austin employees were eliminated as a result of that sale. After completion of the sale of the memory module manufacturing business in December 1999, the Company had 43 full-time employees. These employees included 24 engineering, product development, manufacturing and technical support employees, 11 finance and administration employees and 8 employees in the sales and marketing areas. Recruitment of personnel in the computer industry, particularly engineers, is highly competitive. The Company believes that its future success will depend in part on its ability to attract and retain highly skilled management, engineering, sales, marketing, finance and technical personnel. There can be no assurance of the Company's ability to recruit and retain the employees that it may require. ITEM 2. PROPERTIES At February 1, 2000, the Company has leased 39,176 square feet of space for its corporate offices at 12201 Technology Boulevard, Suite 125, Austin, Texas, pursuant to a lease, which under agreement with the landlord, will be terminated on March 17, 2000. The lease has certain expansion options, renewal options and rights of first refusal. The Company currently is paying annual rental of approximately $308,000, plus a pro rata charge for property taxes, common area maintenance and insurance. 10 The Company has subleased 24,330 square feet of this space, until March 17, 2000, to the buyer of its memory module manufacturing business. The sublessee is paying annual rental of approximately $197,000, plus 75% of the operating expenses which the Company is obligated to pay under its lease. Effective March 18, 2000, the Company will lease 14,846 square feet at $67,550 for the last 6.5 months of fiscal year 2000, and $151,430 annually until March 31, 2003, plus a pro rata charge for property taxes, common area maintenance and insurance. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in a lawsuit filed by one of its customers for alleged breach of contract. The suit asks for actual damages, including all related expenses in the amount of $77,838. The Company believes the suit is without merit and is vigorously defending its position. The Company believes it is unlikely that the final outcome of this or any other unknown claims to which the Company becomes a party would have a material adverse effect on the Company's financial position or results from operations; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company's results of operations for the fiscal period in which such resolution occurred. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II. ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION On July 28, 1999, the Company's stock began trading under the "TNSU" symbol on the Nasdaq OTC Bulletin Board, which was established for securities that do not meet the Nasdaq SmallCap Market's listing requirements. Consequently, selling the Company's common stock could be more difficult because of the smaller quantities of shares that could be bought and sold, transactions could be delayed, and security analysts' and news media's coverage of the Company stock could be reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of the Company's common stock. From May 22, 1997 to July 27, 1999, the Company traded on the Nasdaq SmallCap Market under the symbol "TNSU." From March 20, 1995 to June 6, 1997, the Common Stock was traded on the Vancouver Stock Exchange ("VSE") under the symbol "TNS.U," with prices quoted in U.S. dollars. On June 6, 1997, the Company voluntarily delisted its stock on the VSE, as a result of the change to Nasdaq. The table below sets forth the high and low closing prices of the Common Stock from October 1, 1997 through July 27, 1999, as reported on the Nasdaq SmallCap Market and from July 28, 1999 through January 31, 2000, as reported on the Nasdaq OTC Bulletin Board. These price quotations reflect interdealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. 11
Common Stock ------------ Quarter Ended High Low ------------- ---- --- FISCAL 1998: December 31, 1997 $4.13 $2.00 March 31, 1998 4.50 2.38 June 30, 1998 3.16 2.25 September 30, 1998 2.56 1.50 FISCAL 1999: December 31, 1998 $2.19 $1.41 March 31, 1999 2.50 1.25 June 30, 1999 1.88 1.00 September 30, 1999 1.31 0.47 FISCAL 2000: December 31, 1999 0.79 0.24 THROUGH FEBRUARY 18, 2000 $1.62 $0.26
STOCKHOLDERS On September 30, 1999, there were 24,390,404 shares of Common Stock outstanding held by 314 holders of record. The last reported sales price on the Common Stock on January 31, 2000, was $0.42 (rounded) per share. DIVIDENDS During the fiscal years ended September 30, 1999 and 1998, the Company declared and issued dividends of 109,734 and 40,000 shares, respectively, of Common Stock to the holders of record of its 5% Series A Convertible Preferred Stock. The Company has not declared or paid any dividends with respect to the Common Stock, and the current policy of the Board of Directors is to retain earnings, if any, to provide for the growth of the Company's business. Consequently, no cash dividends are expected to be paid on the Common Stock in the foreseeable future. Further, there can be no assurance that the proposed operations of the Company will generate the revenue and cash flow needed to declare a cash dividend or that the Company will have legally available funds to pay dividends at any time in the future. PRIVATE PLACEMENTS On June 30, 1998, the Company entered into a Convertible Stock Purchase Agreement with an accredited investment group. The Company issued 400 shares of its 5% Series A Convertible Preferred Stock, par value $1.00 per share ("Series A Stock"), for $10,000 per share, with offering costs of approximately $460,000. The Series A Stock is convertible into the Company's no par value common stock ("Common Stock") at the option of the holder beginning 90 days after the June 30, 1998 closing date. The conversion price is the lesser of the fixed conversion price of $2.31 per share or a variable conversion price. The Series A Stock also provides certain mandatory redemption rights which are triggered upon the occurrence of certain events. Attached to the Series A Stock were warrants to purchase 199,999 shares of Common Stock at $3.00 per share. The warrants are currently exercisable and have a term of four years. The Company believes that the sale of the Series A Stock was exempt from registration under the Securities Act by reason of Section 4(2) of the Securities Act. The underlying Common Stock was registered under the Securities and Exchange Commission Form S-3 effective August 13, 1998; however, upon delisting of the Company's stock from the Nasdaq Smallcap Market on July 27, 1999, the Company became ineligible to file or maintain registration statements. The net proceeds from this offering were used as working capital for the Company. These uses of net offering proceeds were made in the form of direct or 12 indirect payments to others. Upon delisting of the Company's stock from the Nasdaq SmallCap Market on July 27, 1999, the Company became unable to file or maintain registration statements. During the year ended September 30, 1999, the preferred stockholders converted 175 shares of Series A Stock for 1,535, 198 shares of Common Stock. After September 30, 1999, the preferred stockholders converted 50 shares of Series A Stock for 2,740,426 shares of Common Stock. On July 27, 1999, the Company's common stock was delisted from trading on the Nasdaq SmallCap Market, but is currently traded on the Nasdaq OTC Bulletin Board. The delisting was a triggering event under the Convertible Stock Purchase Agreement; however, the holder has not informed the Company of any intent to exercise its redemption rights. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below are derived from the consolidated financial statements of the Company, which for the fiscal year ended September 30, 1999 have been audited by Brown, Graham and Company, PC independent certified public accountants and for the fiscal years ended September 30, 1998 and 1997 were audited by Arthur Andersen LLP, independent certified public accountants, to the extent indicated in their reports included elsewhere herein. On May 21, 1996, the Company acquired 1st Tech Corporation and Darkhorse Systems, Inc. The acquisitions were accounted for using the purchase method, resulting in total goodwill of $7.2 million to be amortized over a two-year period. The results of operations have been included in the consolidated financial statements since the acquisition date. The selected consolidated financial data set forth below are qualified in their entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements.
(In Thousands, except per share data) FISCAL YEARS ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Net sales $10,145 $5,349 $5,294 $1,717 $359 Net income (loss) from continuing operations 1,043 (2,484) (3,942) (880) (2,445) Net income (loss) from discontinued operations (10,010) (6,064) (6,171) (2,804) (2,445) Goodwill Amortization Expense - (2,092) (3,585) (1,494) N/A Net income (loss) applicable to common stock per share: Continuing operations - (.15) (.22) (.07) - Discontinued operations (.43) (.44) (.58) (.24) (.29) Total assets 16,814 15,913 17,232 17,463 1,613 Long term debt 2,757 755 81 123 - Mandatorily redeemable convertible preferred stock 1,831 2,390 - - -
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The following is a discussion of the consolidated financial condition and results of operations of the Company for the fiscal years ended September 30, 1999, 1998 and 1997. It should be read in conjunction with the Consolidated Financial Statements of the Company, the Notes thereto and other financial information included elsewhere in this report. For purposes of the following discussion, references to year periods refer to the Company's fiscal year ended September 30 and references to quarterly periods refer to the Company's fiscal quarters ended December 31, March 31, June 30 and September 30. (See quote "Business - Forward Looking Statement - Cautionary Statements.) Effective May 21, 1996, the Company acquired, through mergers with its wholly owned subsidiaries, all of the outstanding common stock of 1st Tech Corporation ("1st Tech") and DarkHorse Systems, Inc. ("DarkHorse") and began operations in Austin, Texas as a consolidated group of companies providing custom design, engineering and manufacturing services, test solutions and standard and custom module products to leading original equipment manufacturers ("OEMs") in the computer networking and telecommunications industries. In consideration for the acquisitions of 1st Tech and DarkHorse, the Company issued 2,950,000 and 1,200,000 shares, respectively, of Common Stock. Prior but subject to the consummation of the acquisitions of 1st Tech and DarkHorse by the Company, 1st Tech issued 1,150,000 shares of its common stock for $2.00 per share in an equity financing, raising a total of approximately $2,300,000, the proceeds of which were used to reduce short-term debt and provide working capital for 1st Tech. The Company's consolidated operations have been unprofitable since the merger with 1st Tech and DarkHorse in May 1996. Although the Company was able to develop increasing revenues from its memory module manufacturing business, it was not able to generate gross margins at the requisite sales volumes in order to make the business profitable. A number of factors contributed to the Company's inability to establish adequate profit margins. The Company failed to achieve the projected revenues that were required to produce sufficient margin to meet the Company's ongoing fixed costs. The Company also failed to win, and on occasion lost, the business of several large customers due to the Company's weak financial condition, which caused potential customers to be concerned about the Company's ability to deliver. Additionally, the Company often faced an unpredictable cost structure due to uncertainties regarding inventory costs. The market for DRAM chips, the principal component in memory modules, became highly volatile at various times over the last three years in terms of pricing and inventory availability. Many of the Company's competitors had greater financial resources and were able to obtain more advantageous prices, as well as secure allocations of DRAM during high demand periods. The Company would, at times, be forced to pay top market prices to procure DRAM, which in turn caused margin problems. Further, the Company's customers generally were on a single-order basis with no long term commitments or ability to adjust pricing as to outstanding orders. A shortage of computer memory chips in the fourth fiscal quarter of fiscal 1999 and a rapid increase in memory chip prices during the same period severely disrupted the Company's business, resulting in major shortfalls of revenue. After dropping by approximately 95% from 1996 to mid-1999, memory chip prices escalated rapidly in August and September 1999, quadrupling between July and September 1999, before leveling off in October 1999. The Company had great difficulty in obtaining DRAM inventory during this period and lost several key orders. Additionally, one of the Company's largest customers (comprising approximately 20.5% of Company sales in fiscal 1999) was acquired, in April 1999, by another semiconductor manufacturer and ceased doing business with the Company. 14 In July 1999, the Company's stock was delisted from the Nasdaq SmallCap Market for failure to meet the $2,000,000 net tangible assets requirement. Delisting of the Company's stock placed the Company in default under the Stock Purchase Agreement entered into with KA Investments LLC ("KA") dated June 30, 1998, pursuant to which KA purchased 400 shares of 5% Series A Convertible Preferred Stock ("Series A Stock") of the Company for $4,000,000. Under the terms of the Stock Purchase Agreement, the Series A Stock was convertible into common stock based on a formula set forth in the Agreement and quarterly dividends were payable in common stock or cash. The shares of common stock issuable under the Stock Purchase Agreement were registered under a Registration Statement on Form S-3. Upon delisting of the Company's stock from the Nasdaq SmallCap Market on July 27, 1999, the Company's S-3 was no longer effective. Delisting also constituted a triggering event for redemption of the Series A stock. As of the date hereof, the holder of the Series A Stock has not informed the Company if or when it may exercise any redemption right. As of February 1, 2000 the aggregate redemption price, including a stipulated redemption premium, was approximately $2,200,000. The Company does not currently have sufficient funds to pay the redemption price and the obligation would therefore be subject to accrual of interest at 15% per annum under the Stock Purchase Agreement. The Stock Purchase Agreement also restricts transfers of intellectual property rights unless in connection with the sale of all or substantially all assets, and further provides that sale of substantially all assets also constitutes a triggering event for redemption. On October 15, 1999, the Company hired an investment bank to assist it in addressing alternatives to improve the overall posture of the Company and bolster stockholder value. The September 1999 financial results for the Company and excessive losses in its memory module manufacturing business made the Company's ability to attract financing unlikely. In consultation with the investment bank, the Company evaluated selling the memory module manufacturing business and retaining its other operations. In October 1999, the Company also engaged a law firm that specialized in bankruptcy to evaluate alternatives, including a liquidation analysis for the Company as a whole. This analysis projected a 6-14% return to unsecured creditors upon liquidation, with the common stockholders receiving nothing. Management estimated that the cost to shut down its memory module manufacturing business would exceed $5,000,000. Other factors diminishing the potential return included the following: the senior lender had a lien on all inventory and receivables, capital leases encumbered a large portion of fixed assets, and a substantial portion of the assets are located in Scotland and subject to a differing priority scheme. The law firm indicated that in its opinion in order to file a successful reorganization proceeding under Chapter 11 of the U.S. Bankruptcy Code, the Company needed more cash than was available. Absent a steady funding source, a successful reorganization proceeding was considered unlikely. The investment bank and the Company contacted over fifteen potential buyers for the memory module manufacturing business. Of the fifteen contacted, six signed confidentiality agreements with only three giving an indication of interest in a possible transaction. Two of the inquiries related to the acquisition of tangible assets only, at a distressed price and without assuming any liabilities. The third, All Components, Inc. ("ACI"), indicated it would be willing to consider an acquisition of the memory module manufacturing business, if structured as an asset sale in which an entity controlled by it would assume only certain liabilities of the Company. Although a number of alternatives, including Chapter 7 liquidation, were considered by the Board of Directors, the best alternative was considered to be ACI's expression of interest in acquiring the memory module manufacturing business. On November 12, 1999, the Company and ACI executed a non-binding letter of intent. The Company agreed not to solicit or negotiate another acquisition offer (other than for the memory module test systems business) until December 31, 1999. From November 12, 1999 until December 9, 1999, ACI conducted continuing due diligence and simultaneously the parties and their counsel negotiated a definitive asset purchase agreement (the "Asset Purchase Agreement"). The Asset Purchase Agreement related to the sale of certain assets 15 and business comprising the Company's memory module manufacturing business to an affiliate of ACI, Tanisys Operation, LP, as well as the sale of the stock of the Company's wholly owned subsidiary, Tanisys (Europe) Ltd., (the "Sale Transaction"). In addition, the Company entered into a covenant not to compete for ten years after the closing of the sale transaction as further described below. In connection with the sale transaction, the Company incurred a loss of $3,319,147. The components of the loss include the following: total consideration from the Buyer totaled $2,264,907, which included $360,000 in cash proceeds and $1,904,907 in assumed liabilities. The Company sold assets with a book value of $2,786,344, which included fixed assets of $666,164, accounts receivable of $1,077,104 and inventory of $1,043,076. Additionally, in connection with and as a condition to closing the Sale Transaction, the Company was able to negotiate a reduction in the aggregate amount payable to the Company's creditors by $1,677,678. The loss on the sale transaction was effectively reduced by this debt forgiveness. The stock of the Company's wholly owned subsidiary, Tanisys (Europe), Ltd., was sold to the buyer, which carried a book value of $1,214,187. The Company incurred additional expenses which have been paid in connection with the Sale Transaction including the following: fixed assets of the memory module manufacturing business totaling $1,136,869 were written off, stock and warrants valued at $98,091 were issued to creditors in satisfaction of amounts owed, expenses to terminate various lease obligations in the amount of $109,000 were incurred, $327,364 in inventory and $64,710 in deferred financing costs were written off, $128,604 was paid to the Company's principal lender to terminate its line of credit, professional fees were paid in the amount of $85,572, and a variety of additional miscellaneous costs totaling $71,091 were paid. The Company also expects to pay future costs in addition to those detailed above in connection with the Sale Transaction for the following: lease termination costs for capital equipment of $835,669, professional fees of $158,460, proxy costs of $100,000, warranty expenses totaling $51,535, and additional expenses for litigation totaling $141,540. These costs have been accrued by the Company and are included on the Consolidated Balance Sheet with liabilities of discontinued operations. Since consummating the sale transaction in December 1999, the Company has refocused its efforts on its memory module test systems business. Following the sale of its memory module manufacturing business, the Company also retained its proprietary Tanisys Touch technology, available for licensing to third parties. Although not currently under license, this technology provides an imbedded switching mechanism alternative to mechanical and other switch technologies. In fiscal 1999, the Company derived $118,000 in revenue from this technology. After closing of the Sale Transaction, the Company has the same directors and retains its officers associated with the memory module test systems business, including Charles T. Comiso as the Company's Chief Executive Officer. Although there can be no assurance that the Sale Transaction will have the intended effect on the company's financial condition and continuing operations, management believes that the Company's retained memory module test systems business will be able to succeed on its own, generate a positive cash flow, and yield net profits for the Company. The results of the memory module manufacturing business have been classified as discontinued operations and prior periods have been restated to reflect the sale. The loss on the sale, as well as the costs associated with the disposition of the memory module manufacturing business, have been recorded in the consolidated financial statements as of September 30, 1999. RESULTS OF OPERATIONS The following table sets forth certain consolidated financial data of the Company expressed as a percentage of net sales for the years ended September 30, 1999, 1998 and 1997: 16
Continuing Operations: 1999 1998 1997 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of goods sold 44.5 55.3 65.5 --------- -------- -------- Gross profit 55.5 44.7 34.5 --------- -------- -------- Operating expenses: Research and development 15.8 31.7 30.0 Sales and marketing 15.2 24.1 22.5 General and administrative 6.9 12.5 11.4 Depreciation and amortization 1.5 16.8 26.3 Bad debt expense 2.3 2.5 14.7 --------- -------- -------- Total operating expenses 41.7 87.6 104.9 --------- -------- -------- Operating income (loss) 13.8 (42.9) (70.4) Other expense, net (3.5) (3.5) (4.1) --------- -------- -------- Net income (loss) from continuing operations 10.3% (46.4) (74.5) Net loss from discontinued operations (98.7%) (113.4) (116.6) --------- -------- -------- --------- -------- -------- Net income (loss) (88.4)% (159.8%) (191.1%) --------- -------- -------- --------- -------- --------
NET SALES Net sales consist of memory module test system solutions, less returns and discounts. Net sales increased to $10,145,108 in fiscal 1999 from $5,349,285 in fiscal 1998, an increase of 90%. The increase in fiscal 1999 is due to market acceptance of the SIGMA-3 test systems in the Company's memory module test systems product line. Net sales of $5,349,285 increased in fiscal 1998 from $5,294,000 in fiscal 1997, an increase of 1%. Sales in fiscal 1997 and 1998 were fairly constant with shipments of SIGMA-2 and LC/Sync LC testers prior to introduction of the SIGMA-3 test systems. COST OF SALES AND GROSS PROFIT Cost of sales includes the costs of all components and materials purchased for the manufacture of products and the direct labor and overhead costs associated with manufacturing. Gross profit increased to $5,632,506 in fiscal 1999 from $2,389,630 in fiscal 1998. Gross profit margin increased to 55.5% in fiscal 1999 from 44.7% in fiscal 1998. The increase in gross profit, as well as the increase in gross profit margin, was due primarily to the increased sales of SIGMA-3 memory module tests systems and associated manufacturing cost efficiencies. In fiscal 1998, gross profit increased to $2,389,630 from $1,828,108 in fiscal 1997. Gross profit margin increased to 44.7% in fiscal 1998 from 34.5% in fiscal 1997. The increase in gross profit, as well as the increase in gross profit margin, was due to increased manufacturing efficiencies and reduced component costs. RESEARCH AND DEVELOPMENT Research and development expenses consist of the costs associated with the design and testing of new technologies and products. These relate primarily to the costs of materials, personnel, management and employee compensation and engineering design consulting fees. Research and development expenses decreased to $1,602,131 in fiscal 1999 from $1,692,059 in fiscal 1998, representing a decrease of 5.3%. Research and development expenses are expected to increase with expenditures for development of test systems for new technologies and to decrease as a percentage of revenues as growth in revenues occurs. 17 Research and development expenses increased to $1,692,059 in fiscal 1998 from $1,589,103 in fiscal 1997, representing an increase of 6.5%. The increase was primarily due to the development of new test system products. SALES AND MARKETING Sales and marketing expenses include all compensation of employees and independent sales personnel, as well as the costs of advertising, promotions, trade shows, travel, direct support and overhead. Sales and marketing expenses increased to $1,537,717 in fiscal 1999 from $1,287,903 in 1998. Sales and marketing expenses expressed as a percentage of revenues in fiscal 1999 and 1998 were 15.2% and 24.1%, respectively. The increase in sales and marketing expenses is attributable to additional expenses focused on introducing the SIGMAo 3 test system. The decrease in expenses expressed as a percentage of revenues relate directly to increased revenues in fiscal 1999. Sales and marketing expenses are expected to increase in terms of absolute dollars and to decrease as a percentage of revenues in future periods as growth in revenue occurs. Sales and marketing expenses increased to $1,287,903 in fiscal 1998 from $1,188,754 in 1997. Sales and marketing expenses expressed as a percentage of revenues in fiscal 1998 and 1997 were 24.1% and 22.5%, respectively. The small increase in sales and marketing expenses and the small increase in expenses expressed as a percentage of revenues relate directly to consistent revenues in 1997 and 1998. GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of personnel costs, including employee compensation and benefits, and support costs including utilities, insurance, professional fees and all costs associated with a reporting company. In fiscal years 1999 and 1998, general and administrative expenses increased to $703,900 from $665,420, a 5.8% increase. General and administrative expenses expressed as a percentage of revenues were 6.9% and 12.5% in fiscal years 1999 and 1998, respectively. The increase in actual funds expended in fiscal 1999 is due primarily to normal increases in costs. The absolute dollar expenses associated with the general and administrative area are expected to increase at a much slower pace than revenues in future periods with the anticipated continued growth in business activity. The general and administrative expenses are expected to decline in future periods when expressed as a percentage of sales. In fiscal years 1998 and 1997, general and administrative expenses increased to $665,420 from $602,783, a 10.4% increase. General and administrative expenses expressed as a percentage of revenues were 12.5% and 11.4% in fiscal 1998 and 1997, respectively. The increase in actual funds expended in fiscal 1998 was due primarily to the additional expenditures related to the Company's rent and personnel costs. BAD DEBT EXPENSE Bad debt expense consists of amounts charged to expense because of trade accounts receivable becoming uncollectible. The Company's method of accounting for bad debts is to use historical actual expenses to estimate the amount of current sales which will be uncollectible and to provide for them by creating an allowance which is netted against the trade accounts receivable. The Company writes off amounts related to specific accounts as the collection of these accounts becomes questionable. For fiscal 1999, the amount charged to bad debt expense was $233,196 compared to $136,139 for fiscal 1998. For fiscal 1998, the amount charged to bad debt expense was $136,139 compared to $780,785 for fiscal 1997. 18 DEPRECIATION AND AMORTIZATION Depreciation and amortization includes the depreciation for all fixed assets and the amortization of intangibles, including goodwill incurred in the May 1996 acquisitions of 1st Tech and DarkHorse. Depreciation and amortization decreased to $155,466 in fiscal 1999 from $902,064 in fiscal 1998. The decrease is due primarily to the completion of amortization in April 1998 of goodwill relating to the acquisitions of 1st Tech and DarkHorse. Depreciation and amortization is expected to increase slightly in terms of absolute dollars and decrease significantly as a percentage of revenues as growth in revenues occurs. Depreciation and amortization decreased to $902,064 in fiscal 1998 from $1,393,880 in fiscal 1997. The decrease was due primarily to the completion of amortization in April 1998 of goodwill relating to the acquisitions of 1st Tech and DarkHorse. OTHER INCOME (EXPENSE), NET Other income (expense), net consists primarily of interest income less interest expense. Interest expense was attributable to borrowings from a revolving credit note. Substantially all of the interest expense related to credit line draws made for short-term inventory requirements and to fund accounts receivable. Interest income relates to investment of available cash in short-term interest bearing accounts and cash equivalent securities. The Company incurs net interest expense in order to maintain balances of inventories and accounts receivable. Other income (expense) increased to $356,774 of expense in fiscal 1999 from $189,809 of expense in fiscal 1998. The increase in other income (expense) is primarily due to an increase in short-term borrowings on the revolving credit note. The Company expects to continue to require borrowings to fund growth in accounts receivable and inventory in the future and therefore expects net interest expense to increase. Other income (expense) decreased to $189,809 of expense in fiscal 1998 from $215,499 of expense in fiscal 1997. The decrease in other income (expense) is primarily due to a decrease in short-term borrowings on the revolving credit note. PROVISION FOR INCOME TAXES For the years ended September 30, 1999, 1998 and 1997, the Company incurred consolidated net operating losses for U.S. income tax purposes of approximately $4,229,000, $5,252,000 and $6,023,000 and for non-U.S. income tax purposes of approximately $817,000 and $369,000 and $-0-, respectively. The loss carryforwards of approximately $22,886,000 at September 30, 1999 begin to expire in 2011. At September 30, 1999 and 1998, the Company had temporary differences resulting in future tax deductions of approximately $4,791,766 and $756,000, respectively, principally representing differences in accounting and tax basis in accrued liabilities and reserves and anticipated loss from discontinued operations. Deferred income tax assets from the loss carryforwards and asset basis differences aggregate approximately $8,456,000 and $6,888,000, at September 30, 1999, and 1998, respectively. For financial reporting purposes, a valuation allowance of $8,456,000 and $6,888,000 at September 30, 1999 and 1998, respectively, has been recorded to offset the deferred tax assets due to the uncertainty as to whether the benefits will be realized. The availability of the net operating loss carryforwards and future tax deductions to reduce taxable income is subject to various limitations under the Internal Revenue Code of 1986, as amended (the "Code"), in the event of an ownership change as defined in Section 382 of the Code. The Company may lose the benefit of such net operating loss carryforwards due to Internal Revenue Service ("IRS") Code Section 382 limitations. This section states that after reorganization or other change in corporate ownership, the use of certain 19 carryforwards may be limited or prohibited. The Company believes that the IRS Code Section 382 limitation did not exist as of September 30, 1999, and if triggered, the consequence is expected to have no material impact on the Company's consolidated financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES Since inception the Company has utilized the funds acquired in equity financings of its Common Stock, exercise of warrants, exercise of stock options, vendor credits, certain bank borrowings and funds generated from operations to support its operations, carry on research and development activities, acquire capital equipment, finance inventories and accounts receivable and pay its general and administrative expenses. For fiscal 1999, the Company generated $3,846,201 in net cash from financing activities versus $3,568,696 in fiscal 1998. The $3,846,201 in fiscal 1999 consisted of $558,750 from Common Stock sales, proceeds from stockholders notes of $2,000,000 and $1,287,451 on revolving credit and capital lease obligations. At September 30, 1999, the Company had $684,949 of cash, $290,511 restricted cash and a negative working capital of $6,619,275. The negative working capital is primarily attributable to approximately $6,580,928 of short-term liabilities related to discontinued operations. Restricted cash represents customer payments deposited into the Company's lockbox account but not yet transferred to pay down the Company's line of credit. On November 2, 1998, the Company completed a private placement of $2,000,000 of debt with warrants. On January 31, 2000, certain holders of the debt elected to convert an aggregate amount of $1,800,000 into 7,200,000 shares of the Company's common stock pursuant to an offer made by the Company. Interest was accrued on the notes through January 31, 2000 and was converted into an aggregate of 42,629 shares of the Company's common stock in accordance with the terms of the loan agreements. Capital expenditures totaled $192,156 and $759,752 in fiscal 1999 and 1998, respectively. These capital expenditures were primarily for the purchase of test equipment, expansion of manufacturing facilities and upgrades to enterprise information systems. The Company believes that its existing funds, anticipated cash flows from operations, amounts available from future vendor credits, bank borrowings, capital and operating leases and equity financings will be sufficient to meet its working capital and capital expenditure needs for the next twelve months at the projected level of operations. However, should there be a significant increase in sales above projected levels which requires additional investments in equipment, inventory and accounts receivable, the Company may be required to obtain additional funding through debt or rely upon a future equity offering or offerings for such funding. There is no assurance that the Company would be able to locate debt funding or that it would be successful in its attempts to raise a sufficient amount of funds in an equity offering or offerings. The Company's potential inability to raise needed funds to meet its projected level of operations or increase above current projections could have a material adverse effect on the Company. INTERNATIONAL SALES International sales accounted for 31.9% and 31.3% of net sales in fiscal 1999 and 1998, respectively. The Company anticipates that international sales will increase in future periods and will account for an increasing portion of net sales. The Company is subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of the Company's products will be implemented by the U.S. or other countries. Because sales of the Company's products have been denominated to date in U.S. dollars, increases in the value of the U.S. dollar could increase the price of the Company's products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Some of the Company's customer purchase orders and agreements are governed by foreign laws, which may differ significantly from U.S. 20 laws. Therefore, the Company may be limited in its ability to enforce its rights under such agreements and to collect damages, if awarded. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. SIGNIFICANT CUSTOMER CONCENTRATION In North America and Europe a majority of the Company's memory module test systems are sold directly to semiconductor and independent memory module manufacturers. In Asia, the Company also sells its test systems through distribution partners and independent sales representative organizations. In fiscal 1999 and 1998, the Company's ten largest customers accounted for 90.6% and 52.2% of net memory module test system sales, respectively. During fiscal 1999, the Company had three customers which accounted for 43.8%, 13.8% and 12.2% of the Company's net memory module test system sales, respectively. In fiscal 1998 and 1997, one customer accounted for 11.3% and 10.3% of the Company's net test system sales, respectively. The Company, in general, has no firm long-term volume commitments from its customers and generally enters into individual purchase orders and agreements with non-binding forecasts. Customer purchase orders and forecasts are subject to change, cancellation or delay with little or no consequence to the customer. Therefore, the Company has experienced such changes and cancellations and expects to continue to do so in the future. The replacement of canceled, delayed or reduced purchase orders with new business cannot be assured. The Company's business, financial condition and results of operations will depend significantly on its ability to obtain purchase orders from existing and new customers, upon the financial condition and success of its customers, the success of customers' products and the general economy. Factors affecting the industries of the Company's major customers could have a material adverse effect on the Company's business, financial condition and results of operations. NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY The Company expects that its customers will continue to establish demanding specifications for quality, performance, reliability and delivery. To date, the Company's quality problems have not had a significant effect on the Company's results of operations and the known quality problems have been or are in the process of being remedied. There can be no assurance that the problems will not occur in the future with respect to quality, performance, reliability and delivery of the Company's products. If such problems occur, the Company could experience increased costs, delays in or cancellations or rescheduling of orders or shipments, delays in collecting accounts receivable and increases in product returns and discounts, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. PRODUCT CONCENTRATION; DEPENDENCE ON MEMORY MARKET The market for semiconductor memory module test systems has been cyclical. The industry has experienced significant economic downturns at various times, characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity. During fiscal 1999, there were significant declines as well as increases in DRAM and SRAM semiconductor prices. Since the Company's test systems are sold into the semiconductor and memory module market, future price changes could have a material adverse effect on the Company's business, financial condition and results of operations. FLUCTUATIONS IN OPERATING RESULTS The Company's results of operations and gross margin have fluctuated significantly from period to period in the past and may in the future continue to fluctuate significantly from period to period. The primary factors that have affected and may in the future affect the Company's results of operations include the loss of a principal customer or customers or the reduction in orders from a customer. Other factors that may affect the Company's results of operations in the future include fluctuating market demand for and changes in the selling prices of the 21 Company's products, market acceptance of new products and enhanced versions of the Company's products, delays in the introduction of new products and enhancements to existing products, and manufacturing inefficiencies associated with the startup of new product introductions. In addition, the Company's operating results may be affected by the timing of new product announcements and releases by the Company or its competitors; the timing of significant orders; the ability to produce products in volume; delays, cancellations or rescheduling of orders due to customer financial difficulties or other events; inventory obsolescence, including the reduction in value of the Company's inventories due to unexpected price declines and unexpected product returns; the timing of expenditures in anticipation of increased sales; cyclicality in the Company's targeted markets; and expenses associated with acquisitions. Sales of the Company's individual products and product lines toward the end of a product's life cycle typically are characterized by steep declines in sales, pricing and gross margin, the precise timing of which may be difficult to predict. The Company could experience unexpected reductions in sales of products as customers anticipate new product purchases. In addition, to the extent that the Company manufactures products in anticipation of future demand that does not materialize, or in the event a customer cancels outstanding orders during a period of either declining product selling prices or decreasing demand, the Company could experience an unanticipated decrease in sales of products. These factors could give rise to charges for obsolete or excess inventory, return of products or discounts. In the past, the Company has had to write-down and write-off excess or obsolete inventory. To the extent that the Company is unsuccessful in managing product transitions, its business, financial condition and results of operations could be materially and adversely affected. The need for continued significant expenditures for research and development and ongoing customer service and support, among other factors, will make it difficult for the Company to reduce its operating expenses in any particular period if the Company's expectations for net sales for that period are not met. The Company believes that period-to-period comparisons of the Company's financial results are not necessarily meaningful and should not be relied upon as indications of future performance. DEPENDENCE ON SEMICONDUCTOR, COMPUTER, TELECOMMUNICATIONS AND NETWORKING INDUSTRIES Demand for the Company's line of memory module test systems is driven by the increased demand for higher level memory module technology in semiconductor, computer, telecommunications and networking industries. The Company may experience substantial period-to-period fluctuations in future operating results due to factors affecting the semiconductor, computer, telecommunications and networking industries. From time to time, each of these industries has experienced downturns, often in connection with, or in anticipation of, declines in general economic conditions. A decline or significant shortfall in growth in any one of these industries could have a material adverse impact on the demand for the Company's products and therefore a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company's net sales and results of operations will not be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in the semiconductor, computer, telecommunications, networking or other industries utilizing the Company's products. HISTORY OF LOSSES; UNCERTAIN PROFITABILITY The Company has experienced operating losses since inception. At September 30, 1999, the Company had an accumulated deficit of approximately $39,359,910. There can be no assurance that the Company will not continue to incur losses or that the Company will be able to raise cash as necessary to fund operations. FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE 22 The Company's capital requirements will depend on numerous factors, including market acceptance and demand for its products; the resources the Company devotes to the development, manufacture and marketing of its products; the progress of the Company's product development programs; the resources required to protect the Company's intellectual property; the resources expended, if any, to acquire complementary businesses, products and technologies; and other factors. The timing and amount of such capital requirements cannot be accurately predicted. Funds also may be used for the acquisition of businesses, products and technologies that are complementary to those marketed by the Company. Consequently, although the Company believes that its revenues and other sources of liquidity will provide adequate funding for its capital requirements through at least 2000, the Company may be required to raise additional funds through public or private financings, collaborative relationships or other arrangements. There can be no assurance that the Company will not require additional funding or that such additional funding, if needed, will be available on terms attractive to the Company or at all. Any additional equity financings may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. In addition, the number of shares of Common Stock issuable upon the conversion of the Series A Stock is subject to adjustment upon the occurrence of certain events. Such adjustments may be dilutive to stockholders and may inhibit the Company's ability to consummate additional equity financings. MANAGEMENT OF GROWTH; EXPANSION OF OPERATIONS In order to continue to provide quality products and customer service and to meet anticipated demands of its customers, the Company will be required to continue to increase staffing and other expenses, including expenditures on research and development, sales and marketing. Should the Company increase its expenditures in anticipation of a future level of sales that does not materialize, the Company's business, financial condition and results of operations would be materially and adversely affected. In order to achieve anticipated sales levels and profitability, the Company will continue to be required to manage its assets and operations efficiently. RAPID TECHNOLOGICAL CHANGE The semiconductor, computer, telecommunications and networking industries are subject to rapid technological change, short product life cycles, frequent new product introductions and enhancements, changes in end-user requirements and evolving industry standards. The Company's ability to be competitive in these markets will depend in significant part upon its ability to invest significant amounts of resources for research and development efforts, to successfully develop, introduce and sell new products and enhancements on a timely and cost-effective basis and to respond to changing customer requirements that meet evolving industry standards. For example, the semiconductor memory market transitioned from fast page mode and EDO memory to SDRAM over the past three years. Other transitions from SDRAM to Rambus-Registered Trademark- and DDR SDRAM are occurring in 2000. The success of the Company in developing new and enhanced products will depend upon a variety of factors, including integration of the various elements of its complex technology; timely and efficient completion of product design; timely and efficient implementation of manufacturing and assembly processes; and product performance, quality and reliability. The Company has experienced, and may in the future experience, delays from time to time in the development and introduction of new products. Moreover, there can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or enhancements. There can be no assurance that defects or errors will not be found in the Company's products after commencement of commercial shipments, which could result in delayed market acceptance of such products. The inability of the Company to introduce new products or enhancements that contribute to sales could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON SOLE OR LIMITED SOURCES OF SUPPLY The Company is dependent on certain suppliers, including limited and sole source suppliers, to provide key components used in the Company's products. In particular, the Company is dependent in significant part upon certain limited or sole source suppliers for critical, and in some cases custom components in the Company's 23 memory module test systems. The Company has experienced and may continue to experience delays in component deliveries and quality problems with respect to certain component deliveries, which have caused and could in the future cause delays in product shipments and have required and could in the future require the redesign of certain products. The Company generally has no written agreements with its suppliers. There can be no assurance that the Company will receive adequate component supplies on a timely basis in the future. The inability to continue to obtain sufficient supplies of components as required, or to develop alternative sources if required, could cause delays, disruptions or reductions in product shipments or require product redesigns which could damage relationships with current or prospective customers, could increase costs and/or prices and could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The Company's future operating results depend in a significant part upon the continued contributions of its key technical and senior management personnel, many of whom would be difficult to replace. The Company's future operating results also depend in significant part upon its ability to attract, train and retain qualified management, manufacturing and quality assurance, engineering, marketing, sales and support personnel. However, competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, training or retaining such personnel now or in the future. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for the Company to hire such persons over time. The loss of any key employee, the failure of any key employee to perform in his or her current position, the Company's inability to attract, train and retain skilled employees as needed or the inability of the officers and key employees of the Company to expand, train and manage the Company's employee base could materially and adversely affect the Company's business, financial condition and results of operations. DEPENDENCE ON AVAILABILITY, RECRUITMENT AND RETENTION OF TECHNICAL PERSONNEL The Company depends upon its ability to attract, hire and retain technical personnel who possess the skills and experience necessary to meet the Company's own personnel needs and the technical requirements of its clients. Competition for individuals with proven technical skills is intense. The computer industry in general experiences a high rate of attrition of such personnel. The Company competes for such individuals with competitors, providers of outsourcing services, temporary personnel agencies, computer systems consultants, customers and potential customers. Many large competitors have announced extensive campaigns to hire additional technical personnel. Failure to attract and retain sufficient technical personnel would have a material adverse effect on the Company's business, operating results and financial condition. LIMITED OPERATING HISTORY Although the Company has been in existence since 1984, its current operations have been in place only since its acquisition of DarkHorse in 1996. Accordingly, the Company is still in many respects subject to certain risks and uncertainties inherent in a new enterprise, including limited capital and other resources, reliance on key personnel, operating in a highly competitive environment, inability to develop long-term relationships with its customers, suppliers and lenders, lack of name recognition, higher overhead costs, and difficulty in addressing unanticipated problems, delays and expenses. UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS In the semiconductor, computer, telecommunications and networking industries, it is typical for companies to receive notices from time to time alleging infringement of patents, copyrights or other intellectual property rights of others. While there is currently no pending intellectual property litigation involving the Company, the Company may from time to time be notified of claims that it may be infringing patents, copyrights or other intellectual property rights owned by third parties. There can be no assurance that third parties will not in 24 the future pursue claims against the Company with respect to the alleged infringement of patents, copyrights or other intellectual property rights. In addition, litigation may be necessary to protect the Company's intellectual property rights and trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against third party claims of invalidity. Any litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that infringement, invalidity, right to use or ownership claims by third parties or claims for indemnification resulting from infringement claims will not be asserted in the future. The failure to obtain a license under a patent or intellectual property right from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of the products utilizing the intellectual property. In addition, should the Company decide to litigate such claims, such litigation could be extremely expensive and time consuming and could materially and adversely affect the Company's business, financial condition and results of operations, regardless of the outcome of the litigation. The Company attempts to protect its intellectual property rights through a variety of measures, including non-disclosure agreements, trademarks, trade secrets and to a lesser extent, patents and copyrights. There can be no assurance, however, that such measures will provide adequate protection for the Company's trade secrets or other proprietary information, that disputes with respect to the ownership of its intellectual property rights will not arise, that the Company's trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors or that the Company can otherwise meaningfully protect its intellectual property rights. EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET; LACK OF LIQUIDITY OF LOW PRICED STOCKS In July 1999, the Company's stock was delisted from trading on the Nasdaq SmallCap Market, and on July 28, 1999, the Company's stock began trading on the Nasdaq OTC Bulletin Board, which was established for securities that do not meet the Nasdaq SmallCap Market's listing requirements. Consequently, buying or selling the Company's common stock could be more difficult because of the smaller quantities of shares that could be bought and sold, transactions could be delayed, and security analysts' and news media's coverage of the Company stock could be reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of the Company's common stock. In addition to delisting, with the trading price of the Common Stock below $5.00 per share, trading in the Common Stock also is subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosures by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq or other national equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors (which are generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchase and have received the purchaser's written consent to the transaction prior to the sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in Common Stock, which could severely limit the market liquidity of the Common Stock and the ability of stockholders to sell their shares of Common Stock in the secondary market. ENVIRONMENTAL REGULATION The Company's operations and manufacturing processes are subject to certain federal, state, local and foreign environmental protection laws and regulations. Public attention has increasingly been focused on the 25 environmental impact of manufacturing operations that use hazardous materials or generate hazardous wastes, and environmental laws and regulations may become more stringent over time. There can be no assurance that failure to comply with either present or future regulations, or to obtain all necessary permits required under such regulations, would not subject the Company to significant compliance expenses, production suspensions or delay, restrictions on expansion at its present or future locations, the acquisition of costly equipment or other liabilities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments, which would require disclosure under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of the Company and the related report of the Company's independent public accountants thereon are included in this report at the pages indicated. CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 1999 AND 1998 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997: Reports of Independent Public Accountants..........................................27 Consolidated Balance Sheets at September 30, 1999 and 1998.........................29 Consolidated Statements of Operations for the Years Ended September 30, 1999, 1998 and 1997.....................................................................30 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1999, 1998 and 1997.................................................31 Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and 1997...............................................................32 Notes to the Consolidated Financial Statements.....................................33
26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Tanisys Technology, Inc.: We have audited the accompanying consolidated balance sheet of Tanisys Technology, Inc. (a Wyoming corporation), and subsidiaries as of September 30, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. The consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tanisys Technology, Inc., and subsidiaries as of September 30, 1999, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements, the Company has incurred net losses of $8,996,728, $8,547,796 and $10,113,828 for the years ended September 30, 1999, 1998, and 1997, respectively. Current liabilities exceed current assets by $6,619,275 and total liabilities exceed total assets by $3,872,620 at September 30, 1999. These factors, and others discussed in Note 1, raise substantial doubt about Tanisys Technology, Inc.'s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. /s/ Brown, Graham and Company P.C. Austin, Texas February 14, 2000 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Tanisys Technology, Inc.: We have audited the accompanying consolidated balance sheet of Tanisys Technology, Inc. (a Wyoming corporation), and subsidiaries as of September 30, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended September 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tanisys Technology, Inc., and subsidiaries as of September 30, 1998, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Austin, Texas October 30, 1998 28 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $684,949 $239,446 Restricted cash (Note 6) 290,511 154,271 Trade accounts receivable, net of allowance of $333,703 and $406,157, respectively 1,977,390 1,219,422 Inventory (Note 3) 540,458 923,942 Prepaid expenses and other 205,974 124,792 Net current assets of discontinued operations (Note 2) 7,610,991 5,820,493 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 11,310,273 8,482,366 Property and equipment, net of accumulated depreciation and amortization of $747,988 and $351,995 respectively (Note 4) 496,391 676,457 Other noncurrent assets 60,680 73,514 Net noncurrent assets of discontinued operations (Note 2) 4,946,235 6,680,963 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $16,813,579 $15,913,300 ============================================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $1,199,200 $1,829,111 Accrued liabilities (Note 5) 529,087 436,340 Revolving credit note (Note 6) 1,978,403 639,765 Current portion of obligations under capital lease (Note 8) 30,939 59,112 Net current liabilities of discontinued operations (Note 2) 14,191,919 8,389,518 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 17,929,548 11,353,846 Long-term debt to shareholders, net of discounts (Note 7) 1,722,749 - Long-term portion of obligations under capital lease (Note 8) 9,920 32,934 Net noncurrent liabilities of discontinued operations (Note 2) 1,023,982 721,817 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 20,686,199 12,108,597 - ----------------------------------------------------------------------------------------------------------------------------- Mandatorily redeemable convertible preferred stock: 5% Series A Convertible Preferred Stock, $1 par value, 400 shares authorized, 225 and 400 shares issued and outstanding, respectively (Note 9) 1,831,483 2,390,475 - ----------------------------------------------------------------------------------------------------------------------------- Stockholders' equity (Note 10): Common stock, no par value, 50,000,000 shares authorized, 24,390,404 and 20,799,714 shares issued and outstanding, respectively 31,968,495 29,114,774 Additional paid-in capital 1,687,312 1,687,312 Accumulated other comprehensive loss - (2,625) Accumulated deficit (39,359,910) (29,385,233) - ----------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity (deficit) (5,704,103) 1,414,228 - ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity (Deficit) $16,813,579 $15,913,300 =============================================================================================================================
29 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, - ----------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Net sales $10,145,108 $5,349,285 $5,294,000 Cost of goods sold 4,512,602 2,959,655 3,465,892 - ----------------------------------------------------------------------------------------------------------------------------- Gross profit 5,632,506 2,389,630 1,828,108 - ----------------------------------------------------------------------------------------------------------------------------- Operating expenses: Research and development 1,602,131 1,692,059 1,589,103 Sales and marketing 1,537,717 1,287,903 1,188,754 General and administrative 703,900 665,420 602,783 Depreciation and amortization 155,466 902,064 1,393,880 Bad debt expense 233,196 136,139 780,785 - ----------------------------------------------------------------------------------------------------------------------------- Total operating expenses 4,232,410 4,683,585 5,555,305 - ----------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 1,400,096 (2,293,955) (3,727,197) Other income (expense): Interest income 13,675 23,808 15,981 Interest expense (371,514) (213,617) (231,480) Other income 1,065 - - - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 1,043,322 (2,483,764) (3,942,696) - ----------------------------------------------------------------------------------------------------------------------------- Discontinued operations, net of income taxes: Loss from discontinued operations, net of income taxes (6,690,903) (6,064,032) (6,171,132) of $-0- Estimated loss on disposal of memory module manufacturing business (3,319,147) - - - ----------------------------------------------------------------------------------------------------------------------------- Loss from discontinued operations (10,010,050) (6,064,032) (6,171,132) - ----------------------------------------------------------------------------------------------------------------------------- Net loss $(8,966,728) $(8,547,796) $(10,113,828) - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations $1,043,322 $(2,483,764) $(3,942,696) Preferred stock dividend and amortization of the value of the beneficial conversion feature on the preferred stock (1,007,949) (588,016) - - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) from continuing operations applicable to common stockholders 35,373 (3,071,780) (3,942,696) Loss from discontinued operations (10,010,050) (6,064,032) (6,171,132) - ----------------------------------------------------------------------------------------------------------------------------- Net loss applicable to common stockholders $(9,974,677) $(9,135,812) $(10,113,828) - ----------------------------------------------------------------------------------------------------------------------------- Basic income (loss) per common share: Income (loss) from continuing operations applicable to common stockholders $ - $(0.15) $(0.22) Loss from discontinued operations (0.43) (0.29) (0.35) - ----------------------------------------------------------------------------------------------------------------------------- Net loss applicable to common stock $(0.43) $(0.44) $(0.58) - ----------------------------------------------------------------------------------------------------------------------------- Diluted income (loss) per common share: Income (loss) from continuing operations applicable to common stockholders $.01 $(0.15) $(0.22) 30 Loss from discontinued operations (0.33) (0.29) (0.35) - ----------------------------------------------------------------------------------------------------------------------------- Net loss applicable to common stockholders $(0.32) $(0.44) $(0.58) - -----------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL FOREIGN TOTAL COMMON STOCK PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS' ----------------------- SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY ------------------------------------------------------------------------------------- Balance, September 30, 1996 15,978,537 $20,469,136 $ - $ - $(10,119,093) $10,350,043 - --------------------------------------------------------------------------------------------------------------------------------- Net loss - - - - (10,113,828) (10,113,828) Sale of stock 2,280,000 5,600,000 - - - 5,600,000 Exercise of stock warrants and options 2,076,177 2,530,388 - - - 2,530,388 Other - - - - (16,500) (16,500) - --------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1997 20,334,714 28,599,524 - - (20,249,421) 8,350,103 - --------------------------------------------------------------------------------------------------------------------------------- Net loss - - - - (8,547,796) (8,547,796) Exercise of stock warrants and options 275,000 130,250 - - - 130,250 Sale of stock 100,000 150,000 - - - 150,000 Stock issued for services 50,000 62,000 - - - 62,000 Stock options issued for services - 123,000 - - - 123,000 Stock warrants issued in connection with issuance of mandatorily redeemable convertible preferred stock - - 283,803 - - 283,803 Beneficial conversion feature associated with mandatorily redeemable convertible preferred stock - - 1,403,509 - - 1,403,509 Amortization of beneficial conversion feature - - - - (538,016) (538,016) Stock dividend paid on mandatorily redeemable convertible preferred 40,000 50,000 - - (50,000) - stock Foreign translation adjustment - - - (2,625) - (2,625) - --------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1998 20,799,714 29,114,774 1,687,312 (2,625) (29,385,233) 1,414,228 - --------------------------------------------------------------------------------------------------------------------------------- Net loss - - - - (8,966,728) (8,966,728) Exercise of stock warrants and options 1,815,000 558,750 - - - 558,750 Stock issued for services 30,000 30,000 - - - 30,000 Stock issued for interest on shareholder 100,758 133,333 - - - 133,333 debt Stock warrants issued for debt financing - 75,000 - - - 75,000 costs Stock warrants issued for operating lease - 56,284 - - - 56,284 Stock warrants issued in connection with issuance of debt to stockholders - 461,538 - - - 461,538 Conversion of mandatorily redeemable convertible preferred stock to common stock 1,535,198 1,424,485 - - - 1,424,485 Amortization of beneficial conversion - - - - (865,493) (865,493) feature Stock dividend paid on mandatorily redeemable convertible preferred 109,734 114,331 - - (142,456) (28,125) stock Foreign translation adjustment - - - 2,625 - 2,625 - --------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1999 24,390,404 $31,968,495 $ 1,687,312 $ - $(39,359,910) $(5,704,103) - ---------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 31 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, -------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Net income (loss) ($8,966,728) ($8,547,796) (10,113,828) Deduct: Net loss from discontinued operations (10,010,050) (6,064,032) (6,171,132) - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Income (loss) from continuing operations 1,043,322 (2,483,764) (3,942,696) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 455,923 1,135,969 1,545,001 Amortization of warrant cost issued for debt 184,287 - - Stock issued for interest - - Stock compensation for services 133,333 185,000 - 30,000 (Increase) decrease in restricted cash (136,240) 1,385,177 (1,539,448) (Increase) decrease in accounts receivable, net (757,968) (362,254) 104,613 (Increase) decrease in inventory 383,484 (23,892) (133,592) Increase in prepaid expenses and other (81,182) (25,808) (46,414) Increase (decrease) in accounts payable and accrued liabilities (565,289) 149,433 779,964 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities of continuing operations 689,670 (40,139) (3,232,572) - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of fixed assets (192,156) (759,752) (151,121) Other assets 12,834 64,550 (52,703) - ------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities of continuing operations (179,322) (695,202) (203,824) - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of debt to shareholders 2,000,000 - - Proceeds from issuance of common stock - 150,000 5,600,000 Net proceeds from issuance of preferred stock and warrants - 3,665,000 - Draws (payments) on revolving credit note, net 1,034,906 (362,009) 163,400 Payments on capital lease obligations (51,187) (14,545) - Proceeds from exercise of stock options - 128,250 42,420 Proceeds from exercise of stock warrants 558,750 2,000 2,487,968 Other - - (16,500) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities of continuing operations 3,542,469 3,568,696 8,277,288 - ------------------------------------------------------------------------------------------------------------------------------- Net cash from discontinued operations (3,607,314) (4,583,926) (5,540,444) - ------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 445,503 (1,750,571) (699,552) Cash and cash equivalents, beginning of year 239,446 1,990,017 2,689,569 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 684,949 $ 239,446 $ 1,990,017 - ------------------------------------------------------------------------------------------------------------------------------- 32 Supplemental disclosure of cash flow information: Interest paid $ 941,408 $ 610,334 $ 661,368 Non-cash investing and financing activities: Stock and stock options issued for services 30,000 185,000 - Preferred stock dividend accrued 28,125 - - Preferred stock dividend paid in common stock 114,331 50,000 - Amortization of beneficial conversion feature on preferred stock 865,493 538,016 - Capital lease additions 1,094,039 1,000,631 73,527 Accrued fixed asset additions - 3,114,855 - Issuance of stock warrants in connection with issuance of debt to Shareholders 461,538 - - Conversion of preferred stock to common stock 1,424,485 - -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Tanisys Technology, Inc. ("Tanisys") and its wholly owned subsidiaries, 1st Tech Corporation ("1st Tech"), DarkHorse Systems, Inc. ("DarkHorse"), Rosetta Marketing and Sales Inc., and Tanisys (Europe) Ltd., which is located in Scotland, (collectively, the "Company"). The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. All significant intercompany balances and transactions have been eliminated in consolidation. The Company designs, manufacturers and markets memory module test systems and provides design services in conjunction with the licensing of its touch sensor products. On December 9, 1999, the Company sold its memory module manufacturing business, including all of the common stock of Tanisys (Europe), Ltd. The assets and liabilities and the loss from the sale of the memory module manufacturing business have been included in the accompanying consolidated financial statements as discontinued operations. (See Note 2 for discontinued operations) GOING CONCERN The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. Numerous factors could affect the Company's operating results, including, but not limited to, general economic conditions, competition, and changing technologies. A change in any of these factors could have an adverse effect on the Company's consolidated financial position or results of operations. The Company was able to generate $1,043,322 in income before discontinued operations, however, the Company has sustained substantial operating losses in recent years. In addition, the Company's working capital position has deteriorated due to the ongoing losses from operations. At September 30, 1999, current liabilities exceed current assets by $6,619,275, and total liabilities exceed total assets by $3,872,620. 33 In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which in turn may be dependent upon the success of its future operations. Management believes that the sale of certain assets and the assumption of certain liabilities by the buyer of its memory module manufacturing business in December 1999, including all the stock of Tanisys (Europe) Ltd., plus anticipated cash flows from operations will provide the opportunity for the Company to continue as a going concern. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be classified as cash equivalents. Cash equivalents are carried at cost, which approximates market value. The Company places its cash investments in high credit quality instruments. 34 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORY Inventory is stated at the lower of cost or market value. In the second quarter of fiscal 1999, the Company changed its method of accounting for inventories from a weighted-average cost basis to a standard cost method. The change did not have a significant effect on results of operations for 1997, 1998 or 1999, nor is it anticipated that it will have a material effect on future periods. Prior to the change, the Company's inventory costs would not have differed significantly under the two methods. Inventory costs include direct materials, direct labor and certain indirect manufacturing overhead expenses. (See Note 3) PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives, which range from three to seven years. Leasehold improvements and assets subject to capital lease are amortized using the straight-line method over the shorter of the term of the lease or life of the asset. Maintenance and repairs are expensed as incurred. GOODWILL Goodwill has been amortized against earnings over two years. For the years ended September 30, 1998, and 1997, amortization expense of approximately $2,092,000 and $3,585,000, respectively, has been reflected in operating expenses in continuing and discontinued operations in the accompanying consolidated statements of operations. (See Note 2) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK The mandatorily redeemable convertible preferred stock was issued during fiscal 1998. The preferred stock contains a beneficial conversion feature which has been charged to accumulated deficit and is reflected as an increase in preferred stock up to the earliest date the preferred stock can be converted to Common Stock. (See Note 9) FOREIGN CURRENCY The Scotland subsidiary uses the Pound Sterling as its functional currency. The Company's Scotland assets and liabilities are translated into U.S. Dollars at the exchange rate at the balance sheet date. Income and expense items are translated at the average exchange rate prevailing during the period. The aggregate transaction gains and losses included in the determination of net loss are not material for any period presented. (See Note 2) 35 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenue from sales is recognized when the related products are shipped, typically freight on board shipping point or at the time the services are rendered. The Company warrants products against defects, has a policy concerning the return of products and accrues the cost of warranting these products as the items are shipped. RESEARCH AND DEVELOPMENT Research and development expenses relate primarily to the technological development and enhancement of the Company's products. Research and development costs are charged to expense as incurred. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. This statement is effective for the Company in fiscal 1999. Comprehensive income generally represents all changes in stockholders' equity except those resulting from contributions by stockholders. There was no impact to the Company as a result of the adoption of SFAS No. 130, as there were no differences between net loss and comprehensive loss available to common stockholders for the year ended September 30, 1999. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires publicly held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the consolidated financial statements is also to be provided. SFAS No. 131 is effective for the Company in fiscal year 1999. The Company has adopted this statement, but due to the sale of the memory module manufacturing business the company does not have operating segments. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to the fiscal 1999 presentation. (See Note 2) 36 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 2. DISCONTINUED OPERATIONS On December 9, 1999, the Company sold certain assets of its memory module manufacturing business, including all the stock of Tanisys (Europe) Ltd., a wholly owned subsidiary of the Company located in Scotland. The sale also included the assumption of certain liabilities by the buyer. The results of the memory module manufacturing operations have been classified as discontinued operations in all fiscal periods presented. Revenue of the discontinued operations was $42,364,464, $27,796,729 and $42,379,950 in fiscal 1999, 1998 and 1997, respectively. The loss on the sale, as well as the costs associated with the disposition of the memory module manufacturing business, has been recorded in the consolidated financial statements as of September 30, 1999. Included in the loss is an accrual of $1,327,502, which represents the Company's best estimate of the remaining costs associated with the disposition of the discontinued operations. Assets and liabilities of the memory module manufacturing business consisted of the following:
September 30, ------------------------------ 1999 1998 ------------------------------ Cash $ 220,103 $ 13,661 Trade accounts receivable 5,013,731 2,987,497 Inventory (net) 1,952,251 2,300,729 Prepaid expenses 424,906 518,606 ----------- ---------- Net current assets $ 7,610,991 $5,820,493 ----------- ---------- ----------- ---------- Property and equipment (net) $ 4,319,960 $6,075,342 Other assets 626,275 605,621 ----------- ---------- Net noncurrent assets $ 4,946,235 $6,680,963 ----------- ---------- ----------- ---------- Accrued liabilities $ 5,375,894 $3,740,946 Accounts payable 3,253,199 2,819,018 Revolving credit line 4,242,743 1,626,495 Capital leases, current 1,320,083 203,059 ----------- ---------- Net current liabilities $14,191,919 $8,389,518 ----------- ---------- ----------- ---------- Capital leases net of current $ 1,023,982 $ 721,817 ----------- ---------- ----------- ----------
Net assets disposed of have been separately classified in the accompanying consolidated balance sheet at September 30, 1999. The September 30, 1998 consolidated balance sheet has been restated to conform with the current year's presentation. 37 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 2. DISCONTINUED OPERATIONS (CONTINUED) Included in the discontinued liabilities are leases for certain equipment. Future minimum lease payments under these leases at September 30, 1999 were as follows:
Capital Leases -------------- 2000 $ 1,492,070 2001 619,140 2002 539,599 2003 24,808 ----------- Total minimum lease payments 2,675,617 Amounts representing interest (331,552) ----------- Present value of minimum capital lease payments 2,344,065 Less: current portion (1,320,083) ----------- Long-term capital lease obligation $ 1,023,982 ----------- -----------
The Company had a letter of credit totaling $434,562 and $506,988 at September 30, 1999 and 1998, as collateral for an operating lease for manufacturing equipment. As of September 30, 1999, the Company has cash in an escrow account with a financial institution which is pledged against the letter of credit. This amount has been included in net noncurrent assets of discontinued operations in the accompanying consolidated financial statements. 3. INVENTORY Inventory consists of the following:
September 30, ------------------------ 1999 1998 ------------------------ Raw materials $297,252 $648,060 Work-in-process 21,648 77,047 Finished goods 221,558 198,835 -------- -------- $540,458 $923,942 -------- -------- -------- --------
38 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
September 30, -------------------------- 1999 1998 -------------------------- Equipment $ 967,780 $ 755,911 Furniture and fixtures 207,240 207,240 Leasehold improvements 69,359 65,301 ---------- ---------- 1,244,379 1,028,452 Less accumulated depreciation and amortization (747,988) (351,995) ---------- ---------- $ 496,391 $ 676,457 ---------- ---------- ---------- ----------
Included in the amounts above is approximately $40,861 and $92,046 of property and equipment acquired under capital leases at September 30, 1999 and 1998, respectively. The accumulated amortization related to these assets totaled approximately $5,105 and $80,734 at September 30, 1999 and 1998, respectively. Depreciation and amortization expense includes depreciation and amortization of property and equipment and amortization of goodwill. Depreciation and amortization expense as reflected in the accompanying consolidated statements of operations is as follows:
Year Ended September 30, ----------------------------------------------- 1999 1998 1997 ----------------------------------------------- Cost of goods sold $300,457 $ 233,905 $ 151,121 Operating expenses 155,466 902,064 1,393,880 -------- ---------- ---------- $455,923 $1,135,969 $1,545,001 -------- ---------- ---------- -------- ---------- ----------
39 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 5. ACCRUED LIABILITIES Accrued liabilities consist of the following:
September 30, -------------------------- 1999 1998 -------------------------- Unearned revenue $ - $ 83,333 Warranty 52,652 155,850 Salaries, wages and commissions 35,280 28,408 Franchise, sales and property taxes 15,258 31,758 Dividends payable 28,125 - Interest payable 51,111 - Professional fees 20,510 54,817 Service fees 140,000 - Engineering fees 150,000 - Other liabilities 36,151 82,174 -------- -------- $529,087 $436,340 -------- -------- -------- --------
6. REVOLVING CREDIT NOTE The Company obtained an $8,500,000 revolving credit note effective July 24, 1997 with a financial institution. The revolving credit note contains an annual commitment fee of $85,000 and bears interest at the prime rate plus 2% (10.25% at September 30, 1999). The Company also issued to the lender stock purchase warrants to purchase 65,000 shares of Common Stock at a price of $5.38 per share, which was 5% over the market closing price on the date the note agreement was executed. These stock purchase warrants expire on July 24, 2002. (See Note 10) The revolving credit note has a maturity date of July 24, 2000, and it is secured by all of the Company's assets. The maturity date will automatically be extended for successive additional terms of three years each unless one party gives written notice to the other, not less than 60 days prior to the maturity date. Borrowings are based upon 85% of eligible accounts receivable and eligible inventory amounts as defined in the borrowing agreement. The amounts outstanding at September 30, 1999 and 1998 were $6,221,146 and $2,266,260, respectively. Additional amounts that were available at September 30, 1999 and 1998 was $871 and $0, respectively. In addition, the Company is required to maintain a lockbox account to be used for the collection of the Company's trade accounts receivable. All collections must be applied to reduce the outstanding balance of the revolving credit note. The balance of this lockbox account is reflected as restricted cash in the accompanying consolidated balance sheets. Included in discontinued operations for September 30, 1999 and 1998 were $4,242,743 and $1,626,495, respectively, of the credit line. (See Note 2) 40 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 7. LONG-TERM DEBT In November 1998, the Company issued $2,000,000 in debt with attached stock warrants to certain stockholders of the Company. The debt is due in two years and carries an interest rate of 10 percent per annum. The interest is due quarterly and payable in either unregistered shares of common stock or cash, at the option of the Company. One stock warrant was issued for each dollar of debt, resulting in the issuance of 2 million stock warrants. Each warrant is exercisable into one share of common stock beginning on December 1, 1998, at an exercise price of $0.25 per share. The exercise price increases to $0.50 per share after August 1, 1999 and $1.00 per share after October 1, 2000. The warrants expire on November 1, 2001. During the year ended September 30, 1999, the Noteholders were issued 1,600,000 shares of common stock upon the exercise of certain warrants. The Company determined the fair value of the warrants to be approximately $461,538, and has reflected this value as a discount on the debt. The debt discount is being amortized as interest expense over the life of the related debt. Long-term debt to shareholders consists of the following at September 30, 1999:
- ----------------------------------------------------------------------------- Notes payable $2,000,000 Less - unamortized discount (277,251) - ----------------------------------------------------------------------------- Long-term debt owed to shareholders, net of discount $1,722,749 - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
In connection with the placement and issuance of this debt, the Company incurred costs of $21,350 and issued 100,000 stock warrants to the Company's chairman of the board and 25,000 stock warrants to its legal counsel. Each warrant is exercisable into one share of common stock at $0.01 per share beginning on December 1, 1998, and the warrants expire on November 1, 2001. As of September 30, 1999, all of these warrants had been exercised for 125,000 shares of common stock. The Company valued the warrants at $0.60 per share, or $75,000. The total debt issuance costs of $96,350 have been reflected in other noncurrent assets in the accompanying consolidated balance sheet and are being amortized on the straight line method over the life of the related debt. 8. LEASE COMMITMENTS The Company leases certain equipment and office space under noncancellable leases with expiration dates ranging from 1999 through 2013. 41 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 8. LEASE COMMITMENTS (CONTINUED) Future minimum lease payments under all leases at September 30, 1999 were as follows:
Capital Operating Leases Leases ------- --------- 2000 $38,921 $272,672 2001 12,270 4,713 2002 - 4,713 2003 - 1,446 Thereafter - 11,567 --------- ---------- Total minimum lease payments 51,191 $295,111 ---------- ---------- Amounts representing interest 10,332 --------- Present value of minimum capital lease payments 40,859 Less: current portion (30,939) --------- Long-term capital lease obligation $9,920 --------- ---------
Rent expense recorded under all operating leases was $405,228, $258,689 and $262,437, for the years ended September 30, 1999, 1998 and 1997, respectively. Interest rates on the capital leases range from 7.0% to 42.4%. 9. PREFERRED STOCK Pursuant to a Convertible Stock Purchase Agreement (the "Stock Purchase Agreement"), on June 30, 1998 the Company issued 400 shares of its 5% Series A Convertible Preferred Stock, par value $1 per share ("Series A Stock"), for $4,000,000. The Series A Stock is convertible into the Company's no par value common stock ("Common Stock") at the option of the holder. The conversion price is the lesser of the fixed conversion price of $2.31 per share or a variable conversion price. The Company has valued this beneficial conversion feature at $1,403,509 and has reflected this amount in additional paid-in capital and as a charge to the accumulated deficit as a dividend in the amount of $865,493 and $538,016 for the years ended September 30, 1999 and 1998, respectively. The Series A Stock carries mandatory redemption rights that can be exercised by the holder if certain triggering events occur. On July 27, 1999, the Company's common stock was delisted from trading on the NASDAQ SmallCap Market, but is currently traded on the NASDAQ OTC Bulletin Board. The delisting was a triggering event under the Stock Purchase Agreement; however, the holder has not informed the Company of any intent to exercise its redemption rights. At September 30, 1999, the aggregate redemption price, including a stipulated redemption premium, was approximately, $2,475,000. 42 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 9. PREFERRED STOCK (CONTINUED) Dividends are payable quarterly in either cash or registered shares of Common Stock, but must be paid in cash upon the occurrence of certain events. For the years ended September 30, 1999 and September 30, 1998, the Company paid dividends of $114,331 and $50,000 by issuing 109,734 shares and 40,000 shares of Common Stock, respectively, at the market value. Attached to the Series A Stock were warrants to purchase 199,999 shares of Common Stock at $3.00 per share. The warrants currently are exercisable and have a term of four years from June 30, 1998. The Company has valued the warrants at $283,803 and has reflected this amount in additional paid-in capital during the year ended September 30, 1998. During the year ended September 30, 1999, the preferred stockholders converted 175 shares of Series A Stock for 1,535,198 shares of Common Stock. At September 30, 1999 and 1998, the carrying value of the Series A Stock consists of the following:
1999 1998 --------------------------- Balance, October 1 $ 2,390,475 $ - Issuance of Series A Stock - 4,000,000 Offering costs - (460,229) Value of beneficial conversion feature - (1,403,509) Value of attached warrants - (283,803) Amortization of beneficial conversion feature 865,493 538,016 Conversion of perferred stock for common stock (1,424,485) - --------------------------- Balance, September 30 $ 1,831,483 $ 2,390,475 ---------------------------
43 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 10. STOCKHOLDERS' EQUITY WARRANTS During the years ended September 30, 1999, 1998, and 1997, the Company issued warrants to various individuals or companies for services in connection with debt. Each stock warrant entitles the holder to purchase one share of Common Stock at a particular price, vesting period and expiration date specified within each individual warrant agreement. The shares issued upon exercise of these stock warrants are subject to resale restrictions. The following summarizes the warrants issued by the Company:
For the Year Ended September 30, -------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ------------------------- ------------------------ Stock Warrant Stock Warrant Stock Warrant Shares Exercise Price Shares Exercise Price Shares Exercise Price --------------------------- --------------------------- -------------------------- Outstanding beginning of year 289,998 $3.00 to $5.38 289,999 $.01 to $5.38 1,860,177 $1.70 to $2.30 Granted 2,200,000 $.01 to $.25 199,999 $3.00 489,999 $.01 to $5.38 Exercised (1,725,000) $.01 to $.25 (200,000) $.01 (2,060,177) $.01 to $1.15 Expired (4,999) $3.41 - - - - --------- -------------- ---------------------------------------------------------- Outstanding end of year 759,999 $.25 to $5.38 289,998 $3.00 to $5.38 289,999 $.01 to $5.38 --------- -------------- ---------------------------------------------------------- --------- -------------- ---------------------------------------------------------- Exercisable end of year 753,331 $.01 to $5.38 276,665 $.01 to $5.38 - - --------- -------------- ---------------------------------------------------------- --------- -------------- ----------------------------------------------------------
STOCK OPTIONS The Company has two stock option plans. All options granted under the plans are exercisable for Common Stock as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation". The 1993 Stock Option Plan permits grants to the Company's directors, key employees and consultants. The 1997 Non-Employee Director Plan permits grants to the Company's non-employee directors. The stock options granted under each of these plans are granted at fair market value on the date of grant, vest ratably over a predefined period and expire no more than ten years from the date of grant. At September 30, 1999, the Company had reserved a total of 5,890,000 shares of Common Stock for the plans. 44 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 10. STOCKHOLDERS' EQUITY (CONTINUED) The following table summarizes information about stock options outstanding at September 30, 1999:
Options Outstanding Options Exercisable -------------------------------------------------- ---------------------------------- Weighted Average Weighted- Remaining Weighted- Range of Exercise Contractual Life Average Weighted Average Prices Shares (Years) Exercise Price Shares Exercise Price - ------------------ --------- --------------- ------------- --------------------------------- $0.50 - $0.99 1,082,200 6.96 $0.56 - $1.00 - $1.75 1,636,417 4.13 1.70 1,063,909 $1.71 $1.76 - $2.00 2,435,500 5.21 1.97 696,375 1.93 Over $2.00 82,500 0.15 2.95 82,500 2.94 --------- --------- 5,236,617 1,842,784 --------- --------- --------- --------- A summary of the activity of the Company's stock option plans is presented below: September 30, ----------------------------------------------------------------------------------- 1999 1998 1997 -------------------------- -------------------------- -------------------------- Weighted Weighted- Weighted- Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price --------- -------------- ---------- -------------- -------- -------------- Outstanding, beginning of year 4,396,917 $1.91 2,387,317 $3.24 1,804,100 $2.81 Granted 1,410,700 $0.84 2,478,400 1.95 882,500 4.20 Cancelled or expired (481,000) $2.00 (393,800) 3.72 (283,283) 3.51 Exercised (90,000) $1.75 (75,000) 1.71 (16,000) 2.65 ---------- ---------- ---------- Outstanding, end of year 5,236,617 4,396,917 1.91 2,387,317 3.24 ---------- ---------- ---------- ---------- ---------- ---------- Options exercisable, end of year 1,842,784 $1.72 1,226,492 1.91 1,083,700 2.50 Weighted average fair value of options granted during the year $0.46 $1.54 $2.23
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal 1999, 1998 and 1997:
For the Year Ended September 30, ---------------------------------------------- 1999 1998 1997 ------- -------- -------- Dividend yield - - - Expected volatility 50.3% 82.0% 79.0% Risk-free interest rate 4.5% 5.6% 6.5% Expected life (years) 7 5 5
45 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 10. STOCKHOLDERS' EQUITY (CONTINUED) The Company applies Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for grants under the stock option plans since the exercise price of the options equals the fair market value of the Common Stock on the date of grant. Had compensation cost for all stock option grants been determined based on their fair market value at the grant dates consistent with the fair value method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below:
For the Year Ended September 30, -------------------------------------------------------- 1999 1998 1997 ------------- ------------ ------------- Net loss As reported $(8,966,728) $(8,547,796) $(10,113,828) Pro forma (9,622,699) (9,808,987) (10,988,476) Net loss applicable to Common Stock As reported (9,974,677) (9,135,812) (10,113,828) Pro forma (10,630,648) (10,397,003) (10,988,476) Net loss applicable to Common Stock per share As reported (0.43) (0.44) (0.58) Pro forma (0.46) (0.50) (0.63)
11. INCOME TAXES For the years ended September 30, 1999, 1998 and 1997, the Company incurred consolidated net operating losses for U.S. income tax purposes of approximately $4,229,000, $5,252,000 and $6,023,000 and for non-U.S. income tax purposes of approximately $817,000 and $369,000 and $-0-, respectively. The loss carryforwards of approximately $22,886,000 at September 30, 1999 begin to expire in 2011. At September 30, 1999 and 1998, the Company had temporary differences resulting in future tax deductions of approximately $4,791,766 and $756,000, respectively, principally representing differences in accounting and tax basis in accrued liabilities and reserves and anticipated loss from discontinued operations. Deferred income tax assets from the loss carryforwards and asset basis differences aggregate approximately $8,456,000 and $6,888,000, at September 30, 1999, and 1998, respectively. For financial reporting purposes, a valuation allowance of $8,456,000 and $6,888,000 at September 30, 1999 and 1998, respectively, has been recorded to offset the deferred tax assets due to the uncertainty as to whether the benefits will be realized. The availability of the net operating loss carryforwards and future tax deductions to reduce taxable income is subject to various limitations under the Internal Revenue Code of 1986, as amended (the "Code"), in the event of an ownership change as defined in Section 382 of the Code. The Company may lose the benefit of such net operating loss carryforwards due to Internal Revenue Service ("IRS") Code Section 382 limitations. this section states that after reorganization or other change in corporate ownership, the use of certain carryforwards may be limited or prohibited. The Company believes that the IRS Code Section 382 limitation did not exist as of September 30, 1999 and if triggered the consequence is expected to have no material impact on the Company's consolidated financial position or results of operations. 46 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 12. EARNINGS PER SHARE Basic income or loss per common share is computed based on the weighted average number of common shares outstanding during each period. For the year ended September 30, 1999, diluted income or loss per common share are computed based on the weighted average number of common shares outstanding, after giving effect to the potential issuance of common stock on the exercise of options and warrants and the conversion of convertible preferred stock and the impact of assumed conversions. For the years ended September 30 ,1998 and 1997, potentially dilutive securities have not been included in the diluted loss per common share calculation as they would have been antidilutive. The following table provides a reconciliation between basic and diluted shares outstanding:
1999 1998 1997 ---------- ---------- ----------- Weighted average number of common shares used in basic earnings per share 23,044,153 20,609,782 17,537,914 Effect of dilutive securities Stock Options 1,842,784 - - Warrants 753,331 - - Preferred Stock 4,691,573 - - ---------- ---------- ----------- Weighted average number of common shares and dilutive potential common stock used in diluted earnings per share 30,331,841 20,609,782 17,537,914 ---------- ---------- ----------- ---------- ---------- -----------
The following data shows the amount used in computing diluted earnings per share and the effect on income:
1999 ------------- Diluted earnings per share: Income from continuing operations applicable to common stockholders $35,373 Income impact of assumed conversions: Preferred stock dividends 142,456 ------------- Income from continuing operations after assumed conversions of dilutive securities 177,829 ------------- Loss from discontinued operations (10,010,050) ------------- Net loss applicable to common stockholders after assumed conversion of dilutive securities ($9,832,221) ------------- -------------
47 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 13. RELATED PARTY TRANSACTIONS In accordance with the terms of his employment agreement, the chief executive officer purchased 100,000 shares of unregistered Common Stock for a total purchase price of $150,000 in fiscal 1998. The Company believes the purchase price represented the fair value of unregistered Common Stock on the dates of purchase. In accordance with the terms of two separation agreements with senior officers of the Company, the exercise periods of previously granted stock options for the purchase of a total of 660,000 shares of Common Stock were extended, resulting in a charge of $123,000 in fiscal 1998 in the accompanying consolidated statements of operations. General and administrative expense includes consulting fees and expenses in the amount of $43,693, $52,415 and $112,089 paid with common stock , stock options or cash to the Company's directors for the fiscal years ended September 30, 1999, 1998 and 1997, respectively. In July 1997, the Company entered into a contract with a director for consulting services in connection with a private placement of restricted common stock in return for 200,000 warrants with an exercise price of $0.01 per share. Those warrants were exercised in their entirety in February 1998. General and administrative expense includes professional fees in the amount of $105,000, $62,000, and $197,623 paid to two stockholders of the Company for legal and other services provided for the years ended September 30, 1999, 1998 and 1997, respectively. Of these amounts, $105,000, $62,000,and $100,000, respectively, were paid with common stock or warrants. During fiscal 1997, two former stockholders of DarkHorse were paid $37,809 each. A third stockholder's debt to the Company was reduced by $5,500 from $17,691 to $12,191. This debt was paid in full in April 1998. Prior to the acquisition, DarkHorse was an S-Corporation. These obligations arose at the date of acquisition to cover the taxes on earnings passed on to the three stockholders for the period from January 1, 1996 to the date of acquisition. Upon the acquisitions of 1st Tech and DarkHorse by the Company on May 21, 1996, the principal stockholder of 1st Tech who was also one of three principal stockholders of DarkHorse became the chief operating officer of the Company until October 1997, and was issued an aggregate of 1,995,000 shares of Common Stock in exchange for shares of 1st Tech and DarkHorse owned by him. The 1,995,000 shares had a total value of $8,379,000 based on the closing price of the Common Stock on May 21, 1996. This stockholder also was granted a stock option under the Company's 1993 Stock Option Plan, exercisable over a five-year period, for the purchase of an aggregate of 150,000 shares of Common Stock at $3.69 per share. The shares underlying the option vest one-third on each of the first three anniversaries of the grant date. In connection with the acquisitions, this stockholder was granted the right to designate two individuals for appointment to the Company's Board of Directors and to name an advisory director. 48 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 13. RELATED PARTY TRANSACTIONS (CONTINUED) To take advantage of an inventory purchase opportunity, the Company requested that all outstanding stock purchase warrant holders exercise their warrants by March 31, 1997, which was substantially prior to the scheduled expiration dates of the warrants. As an inducement for the early exercise, the exercise price was discounted 50%. An additional incentive was offered to stock purchase warrant holders who funded their subscription immediately upon notice of such request. This inducement consisted of an offer of 200,000 warrants at an exercise price of $.01 per share, prorated among the warrant holders who funded upon notice of such request. On January 12, 2000, the Company issued 1,150,000 shares of Common Stock to two officers, legal counsel and consultants in connection with the sale of the memory module manufacturing business. The common stock was valued at $223,300 based on the market value at the date of issue and has been included in the estimated loss on disposal of the memory module manufacturing business in the accompanying consolidated financial statements. 14. SIGNIFICANT CUSTOMERS Following are the Company's customers with more than 10% of total net sales during the years ended September 30, 1999, 1998 and 1997, and customers from which the Company had accounts receivable that exceeded 10% of total accounts receivable at September 30, 1999, 1998 and 1997. Amounts less than 10% are reflected as a dash.
----------------------------------------------------------------------------------------- Customers A B C D ----------------------------------------------------------------------------------------- Year Ended September 30, 1999 Net Sales 43.8% 13.8% 12.2% - Accounts Receivable 36.3% - 46.8% - Year Ended September 30, 1998 Net Sales 11.3% - - - Accounts Receivable 25.7% - - - Year Ended September 30, 1997 Net Sales 10.3% - - - Accounts Receivable 10.2% - 12.1% 20.5%
49 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 15. EMPLOYEE BENEFITS The Company sponsors The Tanisys Technology Inc., 401(k) Plan (the "Plan") which qualifies under Section 401(k) of the IRS Code for eligible employees. Eligible employees may defer a portion of their annual compensation under the Plan subject to maximum limitations. Generally, all employees of the Company who are 18 years of age are eligible for participation in the 401(k) Plan on the first day of the month following their dates of hire. Under provisions of the Plan, the Company may elect to make discretionary matching contributions to the Plan for the benefit of the participants. No such discretionary contributions were made in fiscal 1999, 1998 or 1997. 16. SUBSEQUENT EVENTS On December 17, 1999, the Company entered into an agreement with Silicon Valley Bank under an Accounts Receivable Purchase Agreement to sell its receivables for a percentage of the face amount, not to exceed $2,000,000. The Company must repurchase a receivable if it is more than 90 days old or if the debtor files for bankruptcy. Subsequent to September 30, 1999, the Company has issued 2,262,900 stock options to employees, directors and consultants. During the year ended September 30, 1999, the preferred stockholders converted 175 shares of Series A Stock for 1,535,198 shares of Common Stock. After September 30, 1999, the preferred stockholders converted 60 shares of Series A Stock for 2,740,426 shares of Common Stock. On January 31, 2000, holders of the Company's long term debt elected to convert an aggregate amount of $1,800,000 into 7,200,000 shares of the Company's common stock pursuant to an offer made by the Company. Interest was accrued on the notes through January 31, 2000 and was converted into an aggregate of 42,629 shares of the Company's common stock in accordance with the terms of the loan agreements. 17. CONTINGENCIES The Company is a defendant in a lawsuit filed by one of its customers for alleged breach of contract. The suit asks for actual damages, including all related expenses in the amount of $77,838. The Company believes the suit is without merit and is vigorously defending its position. Under the terms of a preferred stock purchase agreement with certain investors, the Company is required, among other items, to be in compliance with the listing and maintenance requirements of the stock exchange on which the common stock is listed. As a result of non-compliance, the investors have the right to redeem the outstanding amount of preferred stock. In July 1999, NASDAQ ruled that the Company failed to meet the exchange's requirements for listing. Currently, the investors have taken no action. (See Note 9) Under the terms of the Asset Purchase Agreement for the sale of the memory module manufacturing business in December 1999, the Company is not in compliance with the date that requires shareholders ratification of the sale by proxy. Under the terms of the agreement, if the Company is not in compliance with the covenants, the buyer could invalidate the transaction. 50 TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999, 1998 AND 1997 Under the terms of a lease agreement between Tanisys (Europe), Ltd.and Akeler Limited, the Company guaranteed the payment of rent in the amount of approximately $200,000 per year. At the present time, Tanisys (Europe), Ltd. is in compliance with the lease agreement, but if Tanisys Technology, Inc. should become liable, the Company would have recourse against the purchaser of the memory module manufacturing business. 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. NONE. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. The Company's directors, executive officers and key employees and their respective ages and positions as of January 27, 2000 are as follows:
NAME AGE POSITION(S) Charles T. Comiso 62 President, Chief Executive Officer and Director John R. Bennett 39 Vice President of Sales and Marketing Richard R. Giandana 57 Vice President of Administration and Human Resources Terry W. Reynolds 43 Vice President of Finance Joseph C. Klein 43 Vice President of Engineering and Manufacturing W. Audie Long 56 Corporate Secretary Parris H. Holmes, Jr. 56 Chairman of the Board (1)(2)(3) Gordon H. Matthews 62 Director (1) Theodore W. Van Duyn 50 Director (2)(3)
- --------------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. (3) Member of the Stock Option Committee. The following are biographies of the Company's executive officers, directors and key employees for the past five years. CHARLES T. COMISO joined the Company as Chief Executive Officer, President and Director in October 1997. Prior to joining the Company, Mr. Comiso served as a Senior Officer of Wyse Technology, Inc. from 1984 to September 1997. From 1995 to September 1997, Mr. Comiso served as Senior Vice President of the Wyse Technology, Inc., and from 1990 to 1995 as President and Chief Executive Officer of Link Technologies, Inc., a wholly owned subsidiary of Wyse Technology, Inc. Mr. Comiso is an electrical engineer with more than 36 years of technology industry experience and also has held positions with Hewlett-Packard Company, Texas Instruments, IT&T Labs and Bendix Corporation. JOHN R. BENNETT, Vice President of Sales and Service, joined the Company in November 1996 with many years of sales and marketing experience in the electronics, computer and peripherals businesses. Prior to being promoted to his current position of Vice President, Sales and Customer Service in October 1997, Mr. Bennett most recently acted in the role as Director of Sales at Tanisys, with prior responsibilities for the sales management of Tanisys' DarkHorse line of memory test equipment. Other positions held by Mr. Bennett include Senior Consultant, IBM, from October 1995 to November 1996, Vice President, Marketing, CACTUS Inc., from August 1994 to October 1995 and National Marketing Manager and National Sales Manager, CalComp (Division of Lockheed), from July 1988 to August 1994. 52 RICHARD R. GIANDANA, Vice President of Human Resources, joined the Company in May 1998 with many years' experience in domestic and international HR and education management, including experience in Europe, Australia, and Latin America. He has worked in high-tech manufacturing with IBM, Xerox and Tandem Computers. Mr. Giandana was formerly a member of the faculties at the Rochester (NY) Institute of Technology and Cabrillo (CA) College. He was also President of the Center for Training and Communication in Scotts Valley, CA and has provided consulting services and training to high-tech firms in California and Texas, including his SELLING IDEAS TO DECISION-MAKERS seminar. JOSEPH C. KLEIN, Ph.D., Vice President of Engineering, joined the Company in November 1997. Prior to joining the Company, Mr. Klein was Vice President of Research and Development for PNY Technologies, Inc. from November 1994 to November 1997 and was WorldWide Memory Manager for IBM PC Company from November 1984 to November 1994. PARRIS H. HOLMES, JR. has served as Chairman of the Board since October 1997 and as Director of the Company since August 1993. Mr. Holmes also served as Chairman of the Board from August 1993 until March 1994, at which time he was elected Vice Chairman of the Board. Mr. Holmes has been Chairman and Chief Executive Officer of Billing Concepts Corp., a third-party billing clearinghouse and information management services business, since May 1996. Mr. Holmes served as Chairman of the Board and Chief Executive Officer of USLD Communications Corp. from September 1986 until August 1996 and continued as Chairman of the Board of USLD Communications Corp. until June 1997. W. AUDIE LONG has served as Senior Vice President, General Counsel and Corporate Secretary of Billing Concepts Corp. since February 1998. Mr. Long was Senior Vice President-Legal and Regulatory Affairs and General Counsel of USLD Communications Corp. ("USLD") from February 1991 to January 1998 and was Corporate Secretary of USLD from August 1993 to January 1998. GORDON H. MATTHEWS has served as a Director of the Company since 1994. Mr. Matthews is a named inventor in over 40 US and foreign patents, and is the acknowledged inventor of voice mail. Mr. Matthews is currently Chairman of the Board of PremiseNET, Inc., a company that he founded in 1996. PremiseNET produces a CPE system called MAXX that brings voice mail, automated attendant and other Call Processing functions to the home and small business. He is also a member of the Board of Vtel, the leader in teleconferencing services and equipment. He was recognized as the Inventor of the Year by the Texas Bar Association and was nominated for induction into the National Inventor's Hall of Fame. Prior to founding PremiseNET, Mr. Matthews owned and operated a consulting service that taught companies the methodology of creating meaningful patent portfolios. TERRY W. REYNOLDS, CPA, joined the Company as Vice President of Finance in January 2000. Prior to joining the Company, Mr. Reynolds served from October of 1998 to December of 1999 as Chief Financial Officer of Doyle Wilson Homebuilder. From September of 1996 to October of 1998, Mr. Reynolds was the Chief Financial Officer for Windsport, and prior to that he worked for the public accounting firms of Charles Douthitt & Co. and Arthur Andersen LLP. He has over 20 years of experience in financial management, and has also held positions with Chrysler Technologies Corporation and First Financial Corporation. THEODORE W. VAN DUYN has served as a Director since March 1994. Mr. Van Duyn has been Chief Technology Officer for BMC Software, Inc. since February 1993. Mr. Van Duyn joined BMC Software, Inc. in 1985 as Director of Research and served as Senior Vice President, Research and Development, from 1986 until assuming his current position. 53 All directors hold office for their elected term or until their successors are duly elected and qualified. If a director should be disqualified or unable to serve as a director, the Board of Directors may fill the vacancy so arising for the unexpired portion of his term. All officers serve at the discretion of the board of Directors. There are no family relationships between members of the Board of Directors or any executive officers of the Company. COMMITTEES AND BOARD COMPENSATION The Board of Directors conducts its business through meetings of the Board of Directors and through its committees. In accordance with the Bylaws of the Company, the Board of Directors has established a Compensation and Stock Option Committee and an Audit Committee. The Board of Directors does not currently utilize a nominating committee or committee performing similar functions. COMPENSATION AND STOCK OPTION COMMITTEE The Compensation Committee reviews and makes recommendations to the Board of Directors concerning major compensation policies and compensation of officers and executive employees including stock options. This committee is comprised of Directors Holmes and Van Duyn. AUDIT COMMITTEE The Audit Committee acts on behalf of the Board of Directors with respect to the Company's financial statements, record-keeping, auditing practices and matters relating to the Company's independent public accountants, including recommending to the Board of Directors the firm to be engaged as independent public accountants for the next fiscal year; reviewing with the Company's independent public accountants the scope and results of the audit and any related management letter; consulting with the independent public accountants and management with regard to the Company's accounting methods and the adequacy of its internal accounting controls; approving professional services by the independent public accountants; and reviewing the independence of the independent public accountants. The Audit Committee is comprised of Directors Holmes and Matthews. DIRECTORS' COMPENSATION Directors are not paid a fee for attending Board of Director or committee meetings, but are reimbursed for their travel expenses to and from the meetings. Outside directors were granted stock options under the Company's 1993 stock option plan at the time of their election or appointment to the board of directors from April 1994 until January 1997, when the board of directors approved the Company's 1997 non-employee director plan. See "Item 11, executive compensation--benefit plans--1997 non-employee director plan." ITEM 11. EXECUTIVE COMPENSATION. The following Summary Compensation Table sets forth information concerning compensation of the Company's Chief Executive Officer and each of the six other most highly compensated executive officers of the Company whose base salary and bonus exceeded $100,000 for fiscal year 1999.
SUMMARY COMPENSATION TABLE Long-Term 54 Annual Compensation Compensation Awards ------------------------- ----------------------- Fiscal Securities Under Options/ Name and Principal Position Year Salary ($) Bonus SARs Granted (#) - --------------------------- -------- ------------ ---------- ----------------------- CHARLES T. COMISO 1999 212,154 (1) 0 200,000 PRESIDENT, CHIEF EXECUTIVE 1998 172,500 (2) 0 1,000,000 OFFICER AND DIRECTOR 1997 N/A N/A N/A RAYMOND F. LEBLANC 1999 110,232 (3) 0 300,000 VICE PRESIDENT, WORLDWIDE SALES 1998 N/A N/A N/A 1997 N/A N/A N/A JOHN R. BENNETT 1999 184,147 0 25,000 VICE PRESIDENT OF SALES 1998 155,050 0 105,000 (4) 1997 109,032 (5) 25,000 50,000 JOSEPH C. KLEIN 1999 120,000 0 60,000 VICE PRESIDENT OF ENGINEERING 1998 104,538 (6) 0 130,000 1997 N/A N/A N/A JOE O. DAVIS 1999 105,417 (7) 0 0 SENIOR VICE PRESIDENT, 1998 115,000 0 180,000 (8) CHIEF FINANCIAL OFFICER AND 1997 115,000 0 30,000 CORPORATE SECRETARY CHRIS EFSTATHIOU 1999 120,000 0 60,000 SENIOR VICE PRESIDENT OF 1998 120,000 0 180,000 (9) OPERATIONS AND GENERAL 1997 116,884 0 60,000 MANAGER KIRK A. HARTSTEIN 1999 100,262 0 35,000 VICE PRESIDENT OF MANUFACTURING 1998 N/A (10) 0 51,000 (11) - AUSTIN 1997 N/A (10) 0 0
(1) The amount shown includes reimbursement for costs associated with Mr. Comiso's relocation from Los Altos Hills, CA to Austin, TX. (2) The amount shown reflects Mr. Comiso's salary from October 21, 1997, the beginning date of his employment with the Company, through the end of fiscal 1998. (3) The amount shown reflects Mr. LeBlanc's salary from January 7, 1999, the beginning date of his employment with the Company, through the end of fiscal 1999. (4) The amount shown includes 50,000 stock options issued in previous years that were re-priced on September 24, 1998 to $1.75 per share. (5) Mr. Bennett was elected Vice President of Sales on October 1, 1997 and previously served as Director of Sales of the Company. Amount shown reflects Mr. Bennett's salary from November 1, 1996, the beginning date of his employment with the Company, through the end of fiscal 1997. 55 (6) The amount shown reflects Dr. Klein's salary from November 10, 1997, the beginning date of his employment with the Company, through the end of fiscal 1998. (7) The amount shown reflects Mr. Davis' salary through August 31, 1999, his last day of his employment with the Company. (8) The amount shown includes 150,000 stock options issued in previous years that were re-priced on September 24, 1998 to $1.75 per share. (9) The amount shown includes 120,000 stock options issued in previous years that were re-priced on September 24, 1998 to $1.75 per share. (10) Mr. Hartstein's salary did not exceed $100,000 in either 1998 or 1997. (11) The amount shown includes 6,000 stock options issued in previous years that were re-priced on September 24, 1998 to $1.75 per share STOCK OPTION GRANTS The following table provides information related to stock options granted to the named executive officers during fiscal 1999:
Individual Grants ------------------------------- Potential Realizable % of Total Value at Assumed Number of Options Annual Rates of Stock Securities Granted to Exercise Price Appreciation for Underlying Employees or Base Option Term (2) Options In Fiscal Price Expiration ----------------------- Name Granted (#)(1) 1999 ($/Sh) Date 5%($) 10%($) - ---- -------------- ----------- ---------- ----------- --------- -------- Charles T. Comiso 200,000 16.5% $.56 9/14/06 45,595 106,256 Chris Efstathiou 60,000 4.9% $.56 9/14/06 13,679 31,877 John R. Bennett 25,000 2.1% $.56 9/14/06 5,699 13,282 Joseph C. Klein 60,000 4.9% $.56 9/14/06 13,679 31,877 Raymond F. LeBlanc 250,000 20.6% $1.91 1/26/06 194,390 453,012 Raymond F. LeBlanc 50,000 4.1% $.56 9/14/06 11,399 26,564 Richard R. Giandana 35,000 2.9% $.56 9/14/06 7,979 18,595 Kirk A. Hartstein 35,000 2.9% $.56 9/14/06 7,979 18,595 Donald R. Turner 50,000 4.1% $.56 9/14/06 11,399 26,564
- -------------------- (1) For each named executive officer, the option listed represents a grant under the Company's 1993 Stock Option Plan. See "Executive Compensation - Employee Benefit Plans--1993 Stock Option Plan." The options granted in fiscal 1999 are exercisable one-fourth on each of the four anniversaries following the date of grant. (2) Calculation based on stock option exercise price over period of option assuming annual compounding. The columns present estimates of potential values based on certain mathematical assumptions. The actual value, if any, that an executive officer may realize is dependent upon the market price on the date of option exercise. 56 AGGREGATED STOCK OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR END OPTION VALUES The following table provides information related to stock options exercised by the named executive officers during the 1999 fiscal year and the number and value of options held at fiscal year end. The Company does not have any outstanding stock appreciation rights.
Individual Grants ----------------- Shares Number of Securities Value(1) of Unexercised Acquired Underlying Unexercised In-the-Money Upon Options at FY End(#) Options at FY End($) Name Option Value ------------------------------- ------------------------------ Exercise Realized Exercisable Unexercisable Exercisable Unexercisable (#) ------------ -------- ----------- ------------- ----------- ------------- Charles T. Comiso 0 N/A 100,000 1,100,000 $ 0 $ 0 Joe O. Davis 0 N/A 140,000 40,000 0 0 Chris Efstathiou 0 N/A 115,000 65,000 0 0 Donald R. Turner 0 N/A 94,833 71,167 0 0 Donald G. McCord 0 N/A 53,750 61,250 0 0 John R. Bennett 0 N/A 42,083 87,917 0 0 Joseph C. Klein 0 N/A 32,500 157,500 0 0 Richard Giandana 0 N/A 12,500 72,500 0 0 Kirk A. Hartstein 0 N/A 12,750 73,250 0 0 Raymond LeBlanc 0 N/A 0 300,000 0 0 W. Audie Long 0 N/A 6,250 18,750 0 0
(1) Market value of the underlying securities at September 30, 1999 ($.49), minus the exercise price. REPRICING OF OPTIONS REPORT OF COMPENSATION AND STOCK OPTION COMMITTEE The Compensation and Stock Option Committee of the Board of Directors of the Company has furnished the following report regarding the repricing of options during fiscal 1998. All options repriced during fiscal 1998 resulted from an exchange of options under the 1993 Option Plan for new options with a lower exercise price under the same plan. The Committee believes that the value of the Company to its stockholders is necessarily dependent upon the Company's ability to attract and retain qualified and competent employees. The 1993 Option Plan was expressly established to provide an additional incentive to such individuals to continue in the service of the Company. In September of 1998, the Committee believed that the value of certain options previously granted to key employees under the 1993 Option Plan had eroded to such an extent that the intended incentive to such employees had failed, and that as a result, it was in the best interests of the Company and its stockholders to reprice such options. The Committee believes that by repricing the options previously granted under the 1993 Stock Option Plan, the Company restored the incentive for such employees. The options granted in replacemnet of previously granted options were made with an exercise price equal to the fair market price of the underlying Common Stock on the date of the repricing. The number of shares subject to exercise and the vesting periods remain unchanged. 57 TEN-YEAR OPTION REPRICINGS The following table provides information related to each option repricing held by any executive officer of the Company during the last ten completed fiscal years.
Number of Market Price Securities of Stock at Exercise Price Length of Original Underlying Time of at Time of New Option Options Repricing Repricing Exercise Term Remaining at Name and Principal Repriced or Amendments Amendments Price (2) Date of Repricing Position Date Amended (#) ($) ($) ($) Amendment - --------------------- -------- ----------- ------------- -------------- --------- ------------------ John R. Bennett 10/10/96 20,000 $1.75 $4.09 $1.75 25 Months VP - Sales 5/15/97 30,000 $1.75 $3.41 $1.75 32 Months Joe O. Davis 8/23/96 120,000 $1.75 $3.13 $1.75 23 Months CFO 10/10/96 30,000 $1.75 $4.09 $1.75 25 Months Chris Efstathiou, Jr. 5/9/96 60,000 $1.75 $3.69 $1.75 20 Months General Manager 10/10/96 60,000 $1.75 $4.09 $1.75 25 Months Richard R. Giandana 3/22/98 40,000 $1.75 $2.69 $1.75 42 Months VP - Human Resouces Mark Holliday 11/25/94 110,000 $1.75 $2.94 $1.75 18 Months Director 3/27/96 100,000 $1.75 $3.62 $1.75 18 Months Donald G. McCord 9/11/97 100,000 $1.75 $4.63 $1.75 36 Months VP - Marketing Gary Pankonien 5/9/96 150,000 $1.75 $3.69 $1.75 18 Months Director 8/19/97 100,000 $1.75 $4.50 $1.75 18 Months Donald R. Turner 5/9/96 60,000 $1.75 $3.69 $1.75 18 Months Controller 10/10/96 50,000 $1.75 $4.09 $1.75 25 Months
EMPLOYEE BENEFIT PLANS 401(k) RETIREMENT PLAN On May 21, 1996, the effective date of the Company's acquisition of 1st Tech, the Company adopted the 1st Tech 401(k) Plan (the "401(k) Plan"). Participation in the 401(k) Plan is offered to eligible employees of the Company (collectively, the "Participants"). Generally, all employees of the Company who are 18 years of age are eligible for participation in the 401(k) Plan on the first day of the month following their dates of hire. The 401(k) Plan is a form of defined contribution plan that provides that Participants generally may make voluntary salary deferral contributions, on a pre-tax basis, of between 1% and 15% of their base compensation in the form of voluntary payroll deductions up to a maximum amount as indexed for cost-of-living adjustments ("Voluntary Contributions"). Since its adoption of the 401(k) Plan, the Company has not made any matching contributions, but may elect in the future to make matching contributions of up to 100% of the first 6% of a Participant's compensation contributed as salary deferral. The company is the trustee of its 401(k) Plan. STOCK OPTION PLANS 1993 STOCK OPTION PLAN. The Company's 1993 Stock Option Plan (as thereafter amended, the "1993 Option Plan") is administered by a committee (the "Stock Option Committee") of two members of the Board of 58 Directors. The Stock Option Committee currently consists of two non-employee members of the Board of Directors, Parris H. Holmes, Jr. and Theodore W. Van Duyn. The 1993 Option Plan grants broad authority to the Stock Option Committee to grant options to key employees and consultants selected by the Stock Option Committee; to determine the number of shares subject to options; the exercise or purchase price per share, subject to SEC requirements; the appropriate periods and methods of exercise and requirements regarding the vesting of options; whether each option granted shall be an incentive stock option ("ISO") or a non-qualified stock option ("NQSO") and whether restrictions such as repurchase options are to be imposed on shares subject to options and the nature of such restrictions, if any. In making such determinations, the Stock Option Committee may take into account the nature and period of service of eligible participants, their level of compensation, their past, present and potential contributions to the Company and such other factors as the Stock Option Committee in its discretion deems relevant. The purposes of the 1993 Option Plan are to advance the best interests of the Company by providing its employees and consultants who have substantial responsibility for the Company's management, success and growth, with additional incentive and to increase their proprietary interest in the success of the Company, thereby encouraging them to remain in the Company employ or service. The 1993 Option Plan further directs the Stock Option Committee to set forth provisions in option agreements regarding the exercise and expiration of options according to stated criteria. The Stock Option Committee oversees the methods of exercise of options, with attention being given to compliance with appropriate securities laws and regulations. The options have certain anti-dilution provisions and are not assignable or transferable, other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order. During the lifetime of an optionee, the options granted under the 1993 Option Plan are exercisable only by the optionee or his or her guardian or legal representative. The Company or its subsidiaries may not make or guarantee loans to individuals to finance the exercise of options under the 1993 Option Plan. The duration of options granted under the 1993 Option Plan cannot exceed ten years (five years with respect to a holder of 10% or more of the Company's shares in the case of an ISO). The 1993 Option Plan provides for the grant of ISOs, under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and stock options that do not qualify under Section 422 of the Code ("NQSOs"). The option price for ISOs may not be less than 100% of the fair market value of the Common Stock on the date of grant, or 110% of fair market value with respect to any ISO issued to a holder of 10% or more of the Company's shares. The exercise price of NQSOs also is limited to the fair market value of the Common Stock on the date of grant. Common Stock issued under the 1993 Option Plan may be newly issued or treasury shares. The 1993 Option Plan does not permit the use of already owned Common Stock as payment for the exercise price of options. If any option granted under the 1993 Option Plan terminates, expires or is surrendered, new options may thereafter be granted covering such shares. Fair market value is defined as the closing price of the Common Stock as reported for that day on the Nasdaq OTC Bulletin Board. On March 31, 1994, the stockholders of the Company approved the 1993 Option Plan, which was adopted by the Board of Directors on October 25, 1993. Under the terms of the 1993 Option Plan, 5,000,000 shares of Common Stock have been reserved for the granting of options. At September 30, 1999, options to purchase 4,582,517 shares had been granted under the 1993 Option Plan, leaving 417,483 shares available for future grants under the 1993 Option Plan. 59 The 1993 Option Plan terminates on October 24, 2003. The Stock Option Committee is authorized to amend or terminate the 1993 Option Plan at any time, except that it is not authorized without stockholder approval (except with regard to adjustments resulting from changes in capitalization) to (i) increase the aggregate number of shares which may be issued under options pursuant to the provisions of the 1993 Option Plan; (ii) reduce the option price at which an ISO may be granted to an amount less than the fair market value per share at the time such option is granted; (iii) change the class of employees eligible to receive options; (iv) materially modify the requirements as to affiliate eligibility for participation in the 1993 Option Plan; (v) materially increase the benefits accruing to participants under the 1993 Option Plan; or (vi) effect an amendment that would cause ISOs issued pursuant to the 1993 Option Plan to fail to meet the requirements of "incentive stock options" as defined in Section 422 of the Code, provided, however, that the Stock Option Committee shall have the power to make such changes in the 1993 Option Plan and in the regulations and administrative provisions thereunder or in any outstanding option as in the opinion of counsel for the Company may be necessary or appropriate from time to time to enable any ISOs granted pursuant to the Plan to continue to qualify as "incentive stock options" under the Code and the regulations which may be issued thereunder as in existence from time to time. 1997 NON-EMPLOYEE DIRECTOR PLAN. The Company's 1997 Non-Employee Director Plan (the "Director Plan") is administered by the Board of Directors. The Director Plan authorizes the granting of nonqualified options to eligible persons. The Director Plan was adopted by the Company's Board of Directors on January 15, 1997. Prior to this date, non-employee directors were granted options under the 1993 Option Plan. The purpose of the plan is to advance the interests of the Company by providing an additional incentive to attract and retain qualified and competent directors, upon whose efforts and judgment the success of the Company is largely dependent, through the encouragement of stock ownership in the Company by such persons. The Director Plan authorizes the granting to non-employee directors (totaling four eligible individuals at November 30, 1999) of nonqualified options ("Director Options") exercisable for the purchase of 25,000 shares of Common Stock on the date they are elected or appointed to the Board of Directors, whether at the annual meeting of stockholders or otherwise, at an exercise price equal to the fair market value of the Common Stock on the date such non-employee director is elected or appointed. In addition, upon their re-election, each non-employee director receives, on the first business day after the date of each annual meeting of stockholders of the Company, commencing with the annual meeting of stockholders immediately following the full vesting of any previously granted Director Option, a Director Option to purchase an additional 25,000 shares of Common Stock at an exercise price per share equal to the fair market value of the Common Stock on the date of grant. Options granted from the inception of the 1993 Stock Option Plan through April 1997 vest one third on each of the first three anniversaries of the date of grant and are exercisable for five years after the date of the grant. Options granted after April 1997 vest one fourth on each of the first four anniversaries of the date of grant and are exercisable for seven years after the date of the grant. The Director Plan also provides for the granting of discretionary options ("Discretionary Options") from time to time by the Board of Directors to any non-employee director of the Company. The Discretionary Options will vest according to the vesting schedule determined by the Board of Directors and expire no more than seven years from the date of grant. At least six months must elapse from the date of the acquisition of the Discretionary Option to the date of disposition of the Discretionary Fee Option (other than upon exercise or conversion) or its underlying Common Stock. Common stock issued under the Director Plan may be newly issued or treasury shares. Already owned Common Stock may be used as payment for the exercise price of options if approved by the Board of Directors at the time of exercise. if any option granted under the Director Plan terminates, expires or is surrendered, new options may thereafter be granted covering such shares. 60 Under the terms of the Director Plan, 800,000 shares of Common Stock (subject to certain adjustments) have been reserved for issuance upon exercise of Director Options and Discretionary Options. At September 30, 1999, 677,500 options had been granted under the Director Plan. Options, once granted and to the extent vested and exercisable, will remain exercisable throughout their term, except that the unexercised portion of a Director Option will terminate 30 days after the date an optionee ceases to be a director for any reason other than death, in which case the Director Option will terminate one year after the optionee's death or six months after the optionee's death if the death occurs during the 30-day period referenced above. The Director Plan terminates on January 15, 2007, and any Director Option or Discretionary Option outstanding on such date will remain outstanding until it has either expired or been exercised. EMPLOYMENT AGREEMENTS The Company entered into an employment agreement with Charles T. Comiso effective October 21, 1997. The employment term covers one year and will continue thereafter unless terminated by either party with 120 days' notice. Mr. Comiso's salary is $180,000 per annum until such time as the Company reports positive cash flow from operations for all three months of a fiscal quarter, then his salary will be $240,000 per annum. Under the terms of the employment agreement, the Company granted Mr. Comiso a seven-year option under the 1993 Option Plan to purchase 1,000,000 shares of its common stock at an exercise price of $2.00. The option vests as to 100,000 and 150,000 shares on the first and second anniversaries of his employment agreement, respectively, and 250,000 shares on each of the third, fourth and fifth anniversaries of his employment agreement. Additionally, at such time as the Company reports positive cash flow from operations for all three months of a fiscal quarter, the Company will grant to Mr. Comiso a seven-year option to purchase 500,000 shares of its common stock under the 1993 Option Plan at an exercise price equal to the closing price of the Company's Common Stock as reported on the Nasdaq Stock Market's OTC Bulletin Board on the date of grant. The option shall vest as to 125,000 shares on each of the second, third, fourth and fifth anniversaries of the date of grant. As part of the agreement, Mr. Comiso purchased $150,000 of the Company's stock at a maximum price of $1.50 per share. Effective July 11, 1996, the Company entered into an employment agreement with Joe Davis with a term of one year, after which the agreement continues on a month-to-month basis until terminated by the Company or the employee upon 120 days' notice as provided therein. Pursuant to the terms of the employment agreement, Mr. Davis' annual base salary was $115,000 and he was granted a stock option under the 1993 Option Plan, exercisable over a five-year period, for the purchase of an aggregate of 120,000 shares of Common Stock at $1.75 per share. The shares underlying the option vest one-third on each of the first three anniversaries of the grant date. Mr. Davis provided 120 days' notice in late April 1999 and left the Company effective August 31, 1999. Effective October 31, 1996, the Company entered into an employment agreement with Kirk A. Hartstein with a term of one year, after which the agreement continues on a month-to-month basis until terminated by the Company or the employee upon 120 days' notice as provided therein. Pursuant to the terms of the employment agreement, Mr. Hartstein's annual base salary was $87,500 at that time and he was granted a stock option under the 1993 Option Plan, vesting in equal installments over four years and exercisable over a seven-year period, for the purchase of an aggregate of 45,000 shares of Common Stock at $1.75 per share. Mr. Hartstein's employment with Tanisys terminated effective December 31, 1999. Effective September 11, 1997, the Company entered into an employment agreement with Don McCord with a term of one year, after which the agreement continues on a month-to-month basis until terminated by the Company or the employee upon 120 days' prior written notices provided therein. Pursuant to the terms of the employment agreement, Mr. McCord's annual base salary was $100,000 and he was granted a stock option under the 1993 Option Plan, vesting in equal installments over four years and exercisable over a seven-year period, for 61 the purchase of an aggregate of 100,000 shares of Common Stock at $1.75 per share. Mr. McCord provided 120 days' notice in late May 1999 and left the Company effective September 30, 1999. Effective November 10, 1997, the Company entered into an employment agreement with Joseph C. Klein, Ph.D. with a term of two years. Pursuant to the terms of the employment agreement, Dr. Klein's annual base salary is $120,000 and he was granted a stock option under the 1993 Option Plan, vesting in equal installments over four years and exercisable over a seven-year period, for the purchase of an aggregate of 100,000 shares of Common Stock at $2.00 per share and an additional incentive of 50,000 stock option shares upon the Company's reporting a profitable quarter and the beginning of customer shipments of Tanisys' SIGMA-3 tester system. Dr. Klein's employment agreement expired November 9, 1999, however, he remains the Vice President of Engineering and Manufacturing. Effective January 7, 1999, the Company entered into an employment agreement with Raymond F. LeBlanc for a term of one year. Pursuant to the terms of the employment agreement, Mr. LeBlanc's annual base salary was $150,000 and he was granted a stock option under the 1993 Option plan, vesting in equal installments over four years and exercisable over a seven-year period, for the purchase of an aggregate of 250,000 shares of Common Stock at $1.91 per share. As part of the agreement, Mr. LeBlanc agreed to purchase a minimum of 30,000 shares of common stock at a maximum price of $1.75 per share prior to February 15, 1999. Mr. LeBlanc's employment with Tanisys terminated effective December 31, 1999. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information known by the Company regarding the beneficial ownership of Common Stock by persons owning beneficially more than 5% of the outstanding Common Stock at January 31, 2000. A total of 33,987,387 shares of the Company's Common Stock were issued or uncertificated at January 31, 2000.
NO. OF SHARES BENEFICIALLY PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OF CLASS (2) ------------------------------------ ----------------- ------------ Parris H. Holmes, Jr. 1,811,360 (3) 5.3% 7411 John Smith Drive, Suite 200 San Antonio, Texas 78229
- ------------------ (1) Unless otherwise noted, each of the persons named has sole voting and investment power with respect to the shares reported. (2) The percentages indicated are based on outstanding stock options and stock warrants, exercisable within 60 days for each individual and 33,987,387 shares of Common Stock issued and outstanding at January 31, 2000. (3) Includes 185,000 shares that Mr. Holmes has the right to acquire upon exercise of stock options, exercisable within 60 days. 62 The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company's Common Stock at January 31, 2000 by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) each named executive officer and (iv) all executive officers and directors as a group. A total of 33,987,387 shares of the Company's Common Stock were issued and outstanding at January 31, 2000.
COMMON STOCK --------------------------- 5% BENEFICIAL OWNERS, DIRECTORS NUMBER AND NAMED EXECUTIVE OFFICERS OF SHARES(1) PERCENT(2) ------------------------------- ------------ ---------- John R. Bennett 81,150 (3) * Charles T. Comiso 1,460,966 (4) 4.3% Richard R. Giandana 24,500 (6) * Parris H. Holmes Jr. 1,816,360 (5) 5.3% Joseph C. Klein 63,500 (7) * W. Audie Long 937,023 (8) 2.8% Gordon H. Matthews 157,500 (9) * Terry W. Reynolds 0 * Theodore W. Van Duyn 290,000 (10) * All executive officers and directors as a group (9 persons, including the executive officers and directors listed above) 4,825,999 (11) 14.2%
- --------------- *Represents less than one percent (1%) of the issued and outstanding shares of Common Stock. (1) Unless otherwise noted, each of the persons named has sole voting and investment power with respect to the shares reported. (2) The percentages indicated are based on outstanding stock options and stock warrants exercisable within 60 days for each individual and 33,987,387 shares of Common Stock issued and outstanding at January 31, 2000. (3) Includes 60,000 shares that Mr. Bennett has the right to acquire upon exercise of stock options, exercisable within 60 days. (4) Includes 500,000 shares that Mr. Comiso has the right to acquire upon exercise of stock options, exercisable within 60 days. (5) Includes 185,000 shares that Mr. Holmes has the right to acquire upon exercise of stock options, exercisable within 60 days. (6) Includes 22,500 shares that Mr. Giandana has the right to acquire upon exercise of stock options, exercisable within 60 days. (7) Includes 57,500 shares that Mr. Klein has the right to acquire upon exercise of stock options, exercisable within 60 days. (8) Includes 12,500 shares that Mr. Long has the right to acquire upon exercise of stock options, exercisable within 60 days. 63 (9) Includes 107,500 shares that Mr. Matthews has the right to acquire upon exercise of stock options, exercisable within 60 days. (10) Includes 25,000 shares that Mr. Van Duyn has the right to acquire upon exercise of stock options, exercisable within 60 days. (11) Includes 970,000 shares that 9 directors and executive officers have the right to acquire upon exercise of stock options, exercisable within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. For the fiscal year ended September 30, 1999, Parris H. Holmes, Jr., Chairman of the Board of Directors billed the Company $51,821 for expenses incurred in connection with issues involving corporate finance, business operations and business opportunities. During the fiscal year ended September 30, 1999, the Company paid the outside legal counsel to the Company, $30,000 of stock for professional services relating to legal issues. On November 2, 1998, the Company completed a private placement of $2,000,000 of debt with warrants to purchase 2 million shares of Common Stock. Certain investors who participated in the private placement included Parris H. Holmes, Jr., Chairman of the Board and Charles T. Comiso, the Chief Executive Officer of the Company. The Company also issued warrants to purchase 125,000 shares of Common Stock for $.01 per share to Parris H. Holmes, Jr., Chairman of the Board of Directors, in payment of expenses and professional fees incurred in connection with the private placement. In connection with the sale of the Company's memory module manufacturing business, the Company issued an aggregate of 1,150,000 shares of the Company's Common Stock valued at $223,300 to the Company's chairman, president and legal counsel. 64 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. a) Documents filed with this report: 1) Financial Statements: The consolidated financial statements of the Company and report of the Company's independent public accountants thereon have been filed under Item 8 hereof. 2) The following consolidated financial statement schedule of Tanisys Technology, Inc. is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts and Allowances All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or information required is included in the consolidated financial statements and, therefore, have been omitted. (b) Exhibits: THE EXHIBITS LISTED BELOW ARE FILED AS PART OF OR INCORPORATED BY REFERENCE IN THIS REPORT. WHERE SUCH FILING IS MADE BY INCORPORATION BY REFERENCE TO A PREVIOUSLY FILED DOCUMENT, SUCH DOCUMENT IS IDENTIFIED IN PARENTHESES.
EXHIBIT NUMBER DESCRIPTION 3.1 Articles of Incorporation of Tanisys Technology, Inc., as amended (Exhibit 3.1 to Form S-3 filed August 13, 1998) 3.2 Restated Bylaws of the Company (Exhibit 3.5 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 4.1 Form of Common Stock Certificate (Exhibit 4.6 to Form 10 Registration Statement filed November 27, 1996) 4.2 Form of Class S Warrant Certificate (Exhibit 4.2 to December 31, 1997 to Form 10-Q) 4.3 Registration Rights Agreement dated June 30, 1998 between Tanisys Technology, Inc. and KA Investments LDC (Exhibit 4.1 to Form S-3 Registration Statement filed August 13, 1998) 10.1 Agreement and Plan of Merger dated as of April 9, 1996, by and between Tanisys Technology, Inc., Tanisys Acquisition Corp., 1st Tech Corporation and Gary W. Pankonien ("1st Tech Merger Agreement") (Exhibit 10.3 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.2 Amendment No. 1 dated May 16, 1996, to 1st Tech Merger Agreement (Exhibit 10.4 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 65 10.3 Articles of Merger (Delaware) of 1st Tech with and into Tanisys Acquisition Corp., dated May 31, 1996 (Exhibit 10.5 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.4 Articles of Merger (Texas) of 1st Tech with and into Tanisys Acquisition Corp., dated May 31, 1996 (Exhibit 10.6 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.5 Agreement and Plan of Merger dated as of April 9, 1996, by and between Tanisys Technology, Inc., Tanisys Acquisition Corp. II, DarkHorse Systems, Inc., Jack Little, Archer Lawrence and Gary W. Pankonien ("DarkHorse Merger Agreement") (Exhibit 10.7 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.6 Amendment No. 1 dated May 16, 1996, to DarkHorse Merger Agreement (Exhibit 10.8 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.7 Articles of Merger (Delaware) of DarkHorse with and into Tanisys Acquisition Corp. II, dated May 31, 1996 (Exhibit 10.9 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.8 Articles of Merger (Texas) of DarkHorse with and into Tanisys Acquisition Corp. II, dated May 31, 1996 (Exhibit 10.10 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.9 Employment Agreement dated July 11, 1996 by and between the Company and Joe Davis (Exhibit 10.15 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.10 1993 Stock Option Plan, as amended through May 20, 1996 (Exhibit 10.17 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.11 Form of Stock Option Agreement (Exhibit 10.18 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.12 401(k) Plan (Exhibit 10.19 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.13 Lease Agreement dated May 18, 1993 by and between Tanisys Technology, Inc., assumptor of 1st Tech Corporation, and AEtna Life Insurance Company, as amended (Exhibit 10.20 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.14 Master Lease Agreement dated November 9, 1994 by and between 1st Tech and Copelco Capital Inc. (Exhibit 10.21 to General Form for Registration of Securities on Form 10, filed November 27, 1996) 10.15 Manufacturing Agreement dated as of November 1, 1996 by and between the Company and Siemens Components, Inc. (Exhibit 10.22 to Amendment No. 2 to General Form for Registration of Securities on Form 10, filed March 11, 1997) 10.16 Inventory Management Service Agreement dated as of November 1, 1996 by and between the Company and Siemens Components, Inc. (Exhibit 10.23 to Amendment No. 2 to General Form for Registration of Securities on Form 10, filed March 11, 1997) 10.17 1997 Non-Employee Director Plan of Tanisys Technology, Inc. (Exhibit 10.27 to Amendment No. 2 to General Form for Registration of Securities on Form 10, filed March 11, 1997) 66 10.18 Form of Non-Employee Director Stock Option Agreement (Exhibit 10.28 to Amendment No. 2 to General Form for Registration of Securities on Form 10, filed March 11, 1997) 10.19 Master Lease Agreement dated January 30, 1997 by and between the Company and Copelco Capital, Inc. (Exhibit 10.30 to March 31, 1997 Form 10-Q) 10.20 Loan and Security Agreement, dated as of July 24, 1997, by and between Tanisys Technology, Inc., 1st Tech Corporation, DarkHorse Systems, Inc., the Company and NationsCredit Commercial Corporation, through its NationsCredit Commercial Funding Division (Exhibit 10.32 to Form 10-K) 10.21 Memory Module Corporate Purchase Agreement, dated July 22, 1997, by and between Tanisys Technology, Inc. and Compaq Computer Corporation (Exhibit 10.33 to September 30, 1997 Form 10-K) 10.22 Employment Agreement, dated as of September 11, 1997, by and between Tanisys Technology, Inc. and Don McCord (Exhibit 10.34 to September 30, 1997 Form 10-K) 10.23 Employment Agreement, dated as of October 20, 1997, by and between Tanisys Technology, Inc. and Charles T. Comiso (Exhibit 10.34 to September 30, 1997 Form 10-K) 10.24 Employment Agreement, dated as of November 10, 1997, by and between Tanisys Technology, Inc. and Joseph C. Klein, Ph.D. (Exhibit 10.34 to September 30, 1997 Form 10-K) 10.25 Manufacturing Service Agreement dated February 2, 1998 by and between the Company and LG Semicon American, Inc. (Exhibit 10.37 to March 31, 1998 Form 10-Q) 10.26 Manufacturing Service Agreement dated March 1, 1998 by and between the Company and Toshiba America Electronic Components, Inc. (Exhibit 10.37 to March 31, 1998 Form 10-Q) 10.27 Convertible Preferred Stock Purchase Agreement dated June 30, 1998 between Tanisys Technology, Inc. and KA Investments LDC (Exhibit 10.1 to Form S-3 Registration Statement filed August 13, 1998) 10.28 Form of Warrant to purchase Common Stock granted by Tanisys Technology, Inc. to each of KA Investments LDC, Midori Capital Corporation, Hoth Incorporated and Randy Stein (Exhibit 10.2 to Form S-3 Registration Statement filed August 13, 1998) 10.29 Form of Promissory Note issued by Tanisys Technology, Inc. in connection with $2 million debt closed November 2, 1998 (Exhibit 10.1 to December 21, 1998 Form 10-Q) 10.30 Form of Warrant Agreement entered into between Tanisys Technology, Inc. and subscribers to the $2 million debt offering closed November 2, 1998, and form of attached Stock Purchase Warrant issued thereunder (Exhibit 10.2 to December 31, 1998 for 10-Q). 10.31 Asset Purchase Agreement entered into between Tanisys Technology, Inc. and Tanisys Operations, LP, on December 9, 1999 (filed herewith). 10.32 Term Promissory Note for $911,339 issued by Tanisys Technology, Inc. to Tanisys Operations, LP on December 9, 1999 (filed herewith) 10.33 Term Promissory Note for $85,000 issued by Tanisys Technology, Inc. to Tanisys Operations, LP on December 9, 1999 (filed herewith) 67 10.34 Agreement Relating to Noncompetition entered into between Tanisys Technology, Inc. and Tanisys Operations, LP dated December 7, 1999 (filed herewith) 10.35 Settlement Agreement entered into between Tanisys Technology, Inc. and Boston Financial & Equity Corporation dated December 9, 1999 (filed herewith) 10.36 Contract for Sale of Equipment entered into between Tanisys Operations, LP and Boston Financial & Equity Corporation dated December 9, 1999, to complete release of the Master Equipment Lease between Tanisys Technology, Inc. and Boston Financial & Equity Corporation. (filed herewith) 10.37 Bill of Sale conveying equipment covered by the Master Lease Agreement between Tanisys Technology, Inc. and Boston Financial & Equity Corporation to Tanisys Operations, LP dated December 9, 1999. (filed herewith) 21.1 Subsidiaries of the Company (filed herewith) 23.1 Consent of Arthur Andersen LLP (Exhibit 23.1 to September 30, 1998 Form 10-K) 27.1 Financial Data Schedule (filed herewith)
(c) Reports on 8-K. Form 8K dated January 12, 2000, and filed January 20, 2000, reporting a change in the Company's independent auditors. (d) Schedules. 68 SCHEDULE II TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES FISCAL YEARS ENDED 1999, 1998 AND 1997 (In thousands)
Balance at Beginning of Charge to Cost Balance at End of Description Year and Expenses Deductions Year ----------- ------------ -------------- ---------- ----------------- 1999 Allowance for uncollectible accounts receivable $406,157 $ 233,196 $ 160,742 $333,703 1998 Allowance for uncollectible accounts receivable 180,157 136,139 362,139 406,157 1997 Allowance for uncollectible accounts receivable 74,557 780,785 886,385 180,157 1999 Allowance for excess and obsolete inventory 380,333 258,411 136,546 502,198 1998 Allowance for excess and obsolete inventory 317,023 1,122,799 1,059,489 380,333 1997 Allowance for excess and obsolete inventory $117,513 $ 239,495 $ 39,985 $317,023
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES ARE AN INTERGRAL PART OF THIS SCHEDULE. 69 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TANISYS TECHNOLOGY, INC. Date: February 23, 2000 By: /s/CHARLES T. COMISO ----------------------------------------- Charles T. Comiso CHIEF EXECUTIVE OFFICER PRESIDENT AND DIRECTOR Date: February 23, 2000 By: /s/TERRY W. REYNOLDS ----------------------------------------- Terry W. Reynolds VICE PRESIDENT OF FINANCE (Duly authorized and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 1st day of February 2000.
SIGNATURE TITLE - --------- ----- /s/ CHARLES T. COMISO Chief Executive Officer - --------------------------- President and Director Charles T. Comiso /s/ PARRIS H. HOLMES, JR. Chairman of the Board - --------------------------- Parris H. Holmes, Jr. /s/ W. AUDIE LONG Corporate Secretary - --------------------------- W. Audie Long /s/ GORDON H. MATTHEWS Director - --------------------------- Gordon H. Matthews /s/ THEODORE W. VAN DUYN Director - --------------------------- Theodore W. Van Duyn
70 EX-10.31 2 EXHIBIT 10.31 This ASSET PURCHASE AGREEMENT dated as of December 9, 1999, is by and between Tanisys Operations, LP, a Texas limited partnership ("BUYER"), and Tanisys Technology, Inc. a Wyoming corporation ("SELLER"). RECITALS: WHEREAS, Seller wishes to sell, and Buyer wishes to purchase, certain of the tangible and intangible properties and assets that constitute Seller's worldwide memory module distribution and manufacturing business (collectively, the "BUSINESS") currently conducted by Seller at or through the manufacturing, converting, distribution, research and development, administrative and other facilities set forth on SCHEDULE A (the "FACILITIES"), all upon the terms and subject to the conditions hereinafter set forth; and WHEREAS, capitalized terms used but not defined herein have the meanings specified in APPENDIX A. NOW, THEREFORE, in consideration of the mutual premises and the covenants and other agreements set forth herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, each intending to be contractually bound, hereby agree as follows: 1. SALE OF ASSETS 1.1 ASSETS TO BE SOLD. Except as otherwise provided in SECTION 1.2, upon the terms and subject to the conditions herein set forth, at the Closing, Seller will sell, assign, transfer, convey and deliver to Buyer all right, title and interest of Seller related to the Business in and to: (i) certain fixed assets and Equipment with respect to the Business, as set forth on SCHEDULE 1.1(i) attached hereto, specifically excepting the fixed assets and Equipment encumbered by lease obligations included on SCHEDULE 1.2; (ii) all Inventory; (iii) all Records; (iv) all site plans, surveys, soil and substratus studies, architectural plans, as-built drawings, appraisals and electrical and mechanical plans and studies relating to the Facilities located on the Real Property; (v) all Intellectual Property except as set forth on SCHEDULE 5.23(d); (vi) all sales, promotion, marketing and advertising rights and materials, customer lists, supplier lists, mailing lists and other data with respect to the Business; (vii) all Permits, to the extent such Permits are transferable, and all non-governmental licenses, franchises, authorizations and approvals, in each case relating to the Business; (viii) all products sold or leased by Seller in connection with the Business (including products hereafter returned or repossessed and unpaid sellers' rights of rescission, replevin, reclamation and rights to stoppage in transit); (ix) all guaranties, representations, warranties, indemnities and similar rights in favor of Seller in connection with the Business; (x) any and all goodwill and going concern value of the Business; (xi) the product lines set forth on SCHEDULE 1.1(xiv); (xii) all Accounts Receivable; (xiii) insurance policies; (xiv) prepaid expenses; (xv) employee advances; (xvi) all deposits and retentions held by third parties, if any, under all contracts assumed or entered into by Buyer; AND (xvii) to the extent not otherwise included in the assets described in this SECTION 1.1, all other assets of every kind and description owned or held by Seller with respect to the Business as the same shall exist on the Closing Date, other than the Retained Assets. All the foregoing rights, properties and assets to be sold, assigned, transferred, conveyed and delivered to Buyer hereunder are hereinafter collectively referred to as the "ASSETS." At the Closing, Buyer will purchase the Assets for the consideration set forth in SECTION 3.1 upon the terms and subject to the conditions set forth in this Agreement. 1.2 RETAINED ASSETS. Anything in SECTION 1.1 to the contrary notwithstanding, the following rights, properties and assets, as the same shall exist on the Closing Date, will be excluded from the Assets to be sold, assigned, transferred, conveyed and delivered to Buyer hereunder and will not be included within the meaning of the term "Assets" (all of such excluded assets being hereinafter collectively referred to as the "RETAINED ASSETS"): (i) all of the tangible and intangible properties and assets that constitute Seller's worldwide Dark Horse test systems and Tanisys Touch businesses; (ii) the consideration delivered to Seller pursuant to this Agreement for the Assets; (iii) all accounts owing between and among Seller and its Affiliates; 2 (iv) all assets and rights of Seller under any benefit plans or benefit arrangements, including the Benefit Plans and the Benefit Arrangements; and (v) all cash, negotiable securities, certificates of deposit and other cash equivalents; (vi) all contracts, licenses, leases (including Real Property Leases), sales orders, purchase orders and other agreements with respect to the Business; and (vii) Equipment encumbered by leases listed on SCHEDULE 1.2. 1.3 TRANSFER OF ASSETS IN SCOTLAND. Notwithstanding anything herein to the contrary, if Buyer cannot reach an agreement in principal by December 31, 1999 with the Scottish Government regarding the transfer of the Assets located in Scotland to Buyer that is acceptable to Buyer in its sole discretion, the transfer of Seller's Assets relating to its Business in Scotland shall be deemed null and void and such assets shall be deemed to be Retained Assets for purposes of this Agreement. 1.4 NONASSIGNABLE PERMITS. To the extent any Permit is not assignable, either by its terms or as a matter of Law, Buyer will prepare and submit, and Seller will cooperate with and assist Buyer in preparing and submitting, any information, applications or filings required in connection with the reissuance to Buyer of such Permit. 2. ASSUMPTION OF LIABILITIES 2.1 LIABILITIES ASSUMED BY BUYER Except as otherwise limited in this Agreement, Buyer will assume, upon the terms and subject to the conditions set forth herein, at the Closing, and will perform or satisfy (or cause to be performed or satisfied) thereafter, but only to the extent related to the Business, only the following liabilities and obligations: (i) all Current Liabilities; (ii) except as otherwise provided in this Agreement, all obligations, claims, demands and causes of action arising from and accruing with respect to the functioning, use and operation of the Assets by Buyer on and after the Closing Date; and (iii) all liabilities or obligations with respect to Taxes for which Buyer is liable pursuant to SECTION 7.19. All of the foregoing liabilities and obligations of Seller to be assumed by Buyer hereunder are hereinafter collectively referred to as the "ASSUMED LIABILITIES." 2.2 RETAINED LIABILITIES. Anything in SECTION 2.1 to the contrary notwithstanding, Buyer will not assume or in any way be liable or responsible for: (x) any liabilities or obligations of Seller relating to the Assets or the Business or any claims in respect thereof, other 3 than Assumed Liabilities, or (y) any liabilities, obligations or claims, other than Assumed Liabilities, which may be asserted against or imposed upon Buyer by reason of its being a successor to or transferee of Seller or an acquiror of the Assets or the Business, or otherwise, including, but not limited to, the following: (i) all liabilities associated with Seller's worldwide Dark Horse test systems and Tanisys Touch businesses; (ii) any liabilities not included in the Creditor's Plan; (iii) any liability or obligation with respect to Taxes for which Seller is liable pursuant to SECTION 7.19; (iv) any liability or obligation of Seller based upon or arising under this Agreement; (v) any liability or obligation with respect to any present, former or prospective employees of the Business arising out of or in connection with their employment or possible employment with Seller at any time, or any liability or obligation with respect to any present, former or prospective contract employee, independent sales representative or other independent contractor of the Business arising out of or in connection with their relationship or possible relationship with Seller at any time, including any liability arising out of: (A) any benefit plans or benefit arrangements, including but not limited to the Benefit Plans and Benefit Arrangements; (B) any collective bargaining agreements; (C) any shut-down agreements; (D) any charges, complaints and/or grievances concerning Seller's termination of its employees, contract employees, independent sales representatives or other independent contractors; (E) any violations or alleged violations of any federal, state, provincial, local or foreign labor and employment laws by Seller; (F) any tort or contract claims, or claims relating to affirmative action compliance, compensation, health and welfare benefits, vacation pay, unemployment insurance benefits, deferred compensation, pension and retirement benefits, severance benefits, disability benefits, other fringe benefits, rights arising under a collective bargaining agreement, or rights or benefits under the Consolidated Omnibus Budget Reconciliation Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment 4 Act, as amended, the Americans with Disabilities Act, the Occupational Safety Hazard Act, the Worker Adjustment Retraining and Notification Act, ERISA, or any other federal, state, provincial, local or foreign employment Law; (G) any claims asserted by Seller's present or former employees or independent contractors for workers' compensation, unemployment compensation or comparable benefits; or (H) the termination or refusal to employ by Seller of any of its present, former or prospective employees, or the termination or refusal to utilize by Seller of any of its present, former or prospective contract employees, independent sales representatives or other independent contractors; (vi) any environmental conditions or liabilities, actual, contingent or otherwise, including but not limited to On-Site Environmental Liabilities and Off-Site Environmental Liabilities; (vii) any liability arising out of the violation by Seller of any Law; (viii) any liability or obligation of Seller relating to the Retained Assets; (ix) any liability or obligation of Seller arising out of any indebtedness with respect to any period ending on or prior to the Closing Date; (x) any liability or obligation of Seller with respect to any claim, action, suit, proceeding or arbitration by any Person, or arising out of any inspection, investigation or audit or any other action by any Governmental Entity; (xi) any product liability with respect to any and all products (including Inventory) sold or manufactured by Seller; (iiii) any audit, legal, financial adviser, broker or finder fees and commissions payable by Seller; and (xii) all liabilities and obligations of Seller under its contracts, licenses, leases (including Real Property Leases), sales orders, purchase orders and other agreements with respect to the Business. All of the foregoing liabilities, obligations or claims will be the responsibility of Seller are not being assumed by Buyer hereunder or otherwise, and are hereinafter collectively referred to as the "RETAINED LIABILITIES." 2.3 BANK OF AMERICA DEBT. Seller is currently party to that certain _____________________ dated ______________ with Bank of America (the "BA Note"). There is currently an outstanding balance of $________ under the BA Note. Of that amount, 5 $______ constitutes an Assumed Liability. The remaining $_________ of debt (the "Remainder" shall be purchased by Purchaser from Bank of America on the date hereof, resulting in Purchaser becoming a secured creditor of Seller for the Remainder. 3. PURCHASE PRICE AND ALLOCATION 3.1 PURCHASE PRICE. Buyer will pay to Seller, as consideration for the Assets, the sum of $350,000 (the "PURCHASE PRICE"), payable as set forth in SECTION 3.2. The Purchase Price will be increased or decreased, as the case may be, after the Closing pursuant to SECTION 3.3. 3.2 PAYMENT OF PURCHASE PRICE. (a) At the Closing, Buyer will deliver to Seller the amount of $350,000, which shall consist of $250,000 for the Assets and $100,000 for Seller agreeing to be bound by the provisions of SECTION 7.15. Contemporaneously with the execution of this Agreement, Purchaser is loaning Seller the sum of $85,000 to be used by Seller to pay Bank of America's pre-payment fees in connection with the transactions described in SECTION 2.3. Seller agrees that Purchaser shall retain $85,000 of the Purchase Price as collateral for the loan described in the preceding sentence.. (b) Buyer shall pay Seller six monthly "EARN OUT PAYMENTS" following the Closing Date. The Earn Out Payment shall be an amount equal to 50% of the gross profit generated (net sales less cost of goods sold on a fully-burdened basis in accordance with GAAP) from sales to customers listed on the customer list constituting part of the Assets, such customer list being set forth on SCHEDULE 3.1(b). One-half of each Earn Out Payment shall be payable on or before the twentieth day following the month as to which the Earn Out Payment is being calculated. The remaining 50% of the Earn Out Payments for the six-month period shall be paid on or before the twentieth day following the sixth month following the Closing Date. (c) As of the date hereof, Buyer and Seller have agreed upon the amount which Buyer is willing to pay to retire Seller's unsecured indebtedness relating to the Business (the "SETTLEMENT AMOUNT"). If the amount of the Creditor's Plan is less than the Settlement Amount, at the Closing, Buyer will pay to Seller an amount equal to the Settlement Amount less the Creditor's Plan. If the Creditor's Plan exceeds the Settlement Amount, Buyer shall reduce the Earn Out Payments by such amount. (d) For a period of up to six months following the Closing Date, Buyer shall have the right to require that Seller assist in the transition of the Business. As consideration for such services, Seller shall be paid a monthly fee of $15,000 (based upon 160 hours of service, such amount to be prorated for the amount of the service actually provided by Seller) (the "Consulting Payments"). Any Consulting Payments due hereunder shall be payable on the last Business Day of each month in which the services are provided hereunder. Buyer shall have no obligation to request that Seller provide services hereunder. 3.3 ADJUSTMENT OF PURCHASE PRICE. (a) INTENTIONALLY LEFT BLANK 6 (b) If any claims or liabilities are asserted against Buyer or its Affiliates after the Closing Date, and if such claims or liabilities are determined in good faith by Buyer to be valid and if Buyer pays such claims or liabilities after consultation with the Seller, Buyer shall have the right to offset the amount of such payments against the Earn Out Payment and/or the Consulting Payment (at the sole option of Buyer). (c) If it is determined that any of Seller's Accounts Receivable or Inventory acquired by Buyer are not collectible or useable within 90 days of the Closing Date, Buyer shall have the right to assign back to Seller the uncollectible Accounts Receivable and unusable Inventory and offset (at Seller's book value) the amount assigned back against the Earn Out Payment and/or the Consulting Payment (in Buyer's sole discretion). For purposes of this SECTION 3.3(c), the term "book value" shall mean the normal and customary method of valuing Inventory and Accounts Receivable used by Seller so long as such method is in accordance with GAAP. Should such methods deviate from GAAP, Buyer will be entitled to use GAAP accounting principles to determine the book value of the uncollectible Accounts Receivable or unusable Inventory, as applicable. (d) With respect to SECTIONS 3.3(b) AND (c), no offset shall be taken unless the aggregate offset amount exceeds a minimum threshold of $25,000. If such minimum threshold is exceeded, the offset shall be determined on a dollar for dollar basis from the first dollar of offset. (e) The Purchase Price, as adjusted after the Closing pursuant to this SECTION 3.3, is hereinafter referred to as the "ADJUSTED PURCHASE PRICE." 4. CLOSING. The closing of the sale and purchase of the Assets and the transactions contemplated hereby (the "CLOSING") will take place immediately following the execution of this Agreement at the offices of Locke Liddell & Sapp LLP, 2200 Ross Avenue, Suite 2200, Dallas, Texas 75201. The "CLOSING DATE" will be deemed to be 12:01 a.m. on the date upon which the Closing occurs. 5. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants to Buyer as follows: 5.1 DUE ORGANIZATION AND AUTHORITY. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the State of Wyoming and has full power and authority to own, lease and operate its assets, properties and business and to carry on its business as currently conducted. 5.2 QUALIFICATION. Seller is duly qualified, licensed or otherwise authorized as a foreign corporation to transact business and is in good standing in each jurisdiction where the character of the properties owned or leased or the nature of the business conducted by it makes such qualification, licensing or authorization necessary. 7 5.3 AUTHORITY TO EXECUTE AND PERFORM AGREEMENT. Seller has all requisite power and authority to enter into, execute and deliver this Agreement and each of the Seller Documents, and to perform fully its obligations hereunder and thereunder, and no other act or proceeding on the part of Seller is necessary to authorize the same. This Agreement has been, and each of the Seller Documents will be, duly authorized, executed and delivered by Seller, and, assuming the due authorization, execution and delivery of this Agreement and each of the Buyer Documents by Buyer and the validity and binding effect hereof and thereof on Buyer, each is, or upon execution will be, a valid and binding obligation of Seller enforceable against Seller in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights and remedies generally or general principles of equity (regardless of whether considered and applied in a proceeding at law or in equity). 5.4 NO MATERIAL ADVERSE CHANGE. Except as set forth on SCHEDULE 5.4, since the close of business on October 31, 1999, there has been no material adverse change in the Condition of the Business, and Seller has no Knowledge after due inquiry of any such change which is threatened or reasonably likely; and there has not been any material damage, destruction or loss to any of the properties or assets of the Business since such date. 5.5 COMPLIANCE WITH LAWS; PERMITS. (a) Except as set forth on SCHEDULE 5.5, the Business is currently being conducted, and has at all times since May 21, 1996 been conducted, in compliance with all applicable Laws, and there is no pending or, to Seller's Knowledge after due inquiry, any threatened investigation by any Governmental Entity with respect to actual or alleged violations of any applicable Laws, including Environmental Laws and Laws relating to the safe conduct of business, employment and employment practices, handicapped accessibility, antitrust, Taxes, consumer protection, product safety, currency exchange, customs, tariffs, equal opportunity, health, sanitation, fire, zoning, building, pension, securities and Intellectual Property. (b) Seller has all licenses, permits, registrations, orders and approvals required by all applicable Laws or Governmental Entities (including those relating to Environmental Laws) in order for Seller to carry on the Business as currently conducted, and to own and operate the properties and assets of the Business, and such licenses, permits, registrations, orders and approvals (collectively, "PERMITS") are listed on SCHEDULE 5.5. Except as set forth on SCHEDULE 5.5, (i) all such Permits are in full force and effect, and are assignable without the consent of any Person; (ii) Seller is in compliance with all, and has not violated in any respect, such Permits; and (iii) there are no proceedings pending or, to Seller's Knowledge after due inquiry, threatened that could reasonably be expected to result in the revocation, cancellation or suspension thereof. 5.6 NO BREACH. The execution, delivery and performance of this Agreement and each of the Seller Documents, and the consummation of the transactions contemplated hereby and thereby, will not (i) violate or result in the breach of any provision of the articles of incorporation, by-laws, or other constituent documents of Seller; (ii) assuming the receipt of the 8 Required Consents, violate, result in the breach of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, any material contract to which Seller is a party or by which Seller or any of the Assets may be bound; (iii) result in the creation or imposition of any Lien upon the Business or the Assets; (iv) violate any order, writ, judgment, injunction, consent, award or decree of any Governmental Entity against Seller or affecting the Business or the Assets; or (v) violate any Law applicable to any of Seller, the Business or the Assets. 5.7 ACTIONS AND PROCEEDINGS. Except as set forth on SCHEDULE 5.7, there are no outstanding orders, writs, judgments, injunctions, consents, awards or decrees of any Governmental Entity against Seller relating to or affecting the Business or the Assets, and there is no action, litigation, claim, suit or other legal, administrative, investigative or arbitral proceeding of any type whatsoever pending or, to Seller's Knowledge after due inquiry, threatened against Seller or its officers, directors, employees or agents relating to or affecting the Business or the Assets. 5.8 CONSENTS, APPROVALS AND FILINGS. Except for the "REQUIRED CONSENTS," the execution and delivery by Seller of this Agreement and the Seller Documents, and the performance by Seller of its obligations hereunder and thereunder, do not require Seller to obtain any consent, approval or other action of, or make any filing with or give any notice to, any Governmental Entity or any other Person. All Required Consents are described on SCHEDULE 5.8. 5.9 REAL PROPERTY (a) SCHEDULE 5.9(a) sets forth a true and complete list of all leases, subleases, licenses, easements, rights of way and other similar agreements under which Seller with respect to the Business, uses or occupies or has the right to use or occupy, now or in the future, any real property, and all amendments and modifications thereto (collectively, the "REAL PROPERTY LEASES;" and the land, buildings, structures and other improvements covered by the Real Property Leases are hereinafter collectively referred to as the "LEASED REAL PROPERTY"). Except as set forth on SCHEDULE 5.9(a), (i) Seller has good and valid title to the leasehold estate created under each Real Property Lease free and clear of all Liens, and Seller has the right to quiet enjoyment of all Leased Real Property for the full term of each such Real Property Lease, (ii) Seller is not in default under any Real Property Lease and no written claim of any default thereunder has been received by Seller which has not been cured; and (iii) all rent and other sums and charges currently due or payable by Seller under each of the Real Property Leases have been paid in full when due and were not, and will not be, subject to any withholding or similar Taxes; and (iv) each Real Property Lease is assignable without the consent of any Person (including the lessor thereunder). Except as set forth in SCHEDULE 5.9(a), each of the Real Property Leases has not been amended and is in full force and effect. Complete and correct copies of all documents relating to Leased Real Property have been delivered to Buyer. (b) Except as set forth on SCHEDULE 5.9(b), (i) all the land, buildings, structures and other improvements used by Seller in connection with the Business is included in the Owned Real Property or the Leased Real Property (such Owned Real Property and Leased Real Property 9 are hereinafter collectively referred to as the "REAL PROPERTY"); and (ii) Seller does not own or hold, and is not obligated under or a party to, any option, right of first refusal or other contractual right to purchase, acquire, sell or dispose of any real property with respect to the Business. (c) Except as set forth on SCHEDULE 5.9(c), there are no Liens or other agreements granting to any Person any right to the possession, use, occupancy or enjoyment of the Real Property, or any part thereof, and there are currently no tenants or other Persons (other than Seller) in possession of the Real Property. (d) There is neither any condemnation proceeding nor any sale or other disposition in lieu of condemnation pending and, to Seller's Knowledge after due inquiry, threatened or contemplated, with respect to the Real Property, or any part thereof. (e) All public utilities, including, water, sewer, gas, electric, telephone and drainage facilities, provide adequate service to the Real Property to support current and proposed uses and operations, and the Real Property has direct access to and from publicly-dedicated streets or the right to use private roadways to obtain access to such publicly-dedicated streets. 5.10 TITLE TO TANGIBLE ASSETS. (a) Except as set forth on SCHEDULE 5.10, Seller has good, valid and marketable title to all tangible assets and property of the Business reflected in the Interim Balance Sheet or thereafter acquired by Seller except for (i) inventory sold; and (ii) accounts receivable collected, in each case in the ordinary course of business consistent with past practice. Such Assets are free and clear of any Lien, except for Permitted Liens. (b) At the Closing, Seller will deliver to Buyer good, valid and marketable title to all the tangible Assets, free and clear of all Liens, other than Permitted Liens. 5.11 EMPLOYEE BENEFIT PLANS. (a) SCHEDULE 5.11 sets forth a true and complete list of all Benefit Plans and Benefit Arrangements relating to the Business and maintained by Seller for the benefit of the Employees. (b) No Benefit Plan is a "multi-employer plan," as defined in Section 4001(a)(3) of ERISA, or a plan subject to Title IV of ERISA, and neither Seller nor the Controlled Group has made any contributions to or participated in any "multi-employer plan" or plan subject to Title IV of ERISA. (c) Each Benefit Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS, and no event has occurred which would cause any such plan to cease being so qualified. Except as set forth on SCHEDULE 5.11, each Benefit Plan complies in all material respects with the requirements of ERISA and the Code. Seller has complied in all material respects with the health care continuation requirements of Section 601, ET SEQ., of ERISA with respect to all employees of the Business and their spouses, former spouses and dependents. 10 (d) Seller has made available to Buyer, with respect to each Benefit Plan and Benefit Arrangement, correct and complete copies of (i) all plan documents and amendments, trust agreements, letter agreements and insurance contracts; (ii) the most recent IRS determination letter; (iii) the most recent Annual Report (Form 5500 Series) and accompanying schedules as filed; (iv) the current and, to the extent available, prior summary plan descriptions, summaries of material modifications, plan booklets or brochures, employee manuals and personnel policy manuals; (v) the most recent financial statements; and (vi) the most recent actuarial report. (e) None of the Benefit Plans subject to Title IV of ERISA has terminated, no proceeding has been initiated to terminate any such plan, and there has been no "reportable event" (within the meaning of Section 4043(c) of ERISA) with respect to any such plan. None of the Benefit Plans which is a defined benefit plan subject to section 412 of the Code has incurred any "accumulated funding deficiency" (within the meaning of Section 412 of the Code), whether or not waived. Assuming that each Benefit Plan subject to Title IV of ERISA was terminated as of the Closing Date, Seller would have no liability under Title IV of ERISA as a result of such termination. Except as set forth on SCHEDULE 5.11, Seller has no obligations under any Benefit Plan or otherwise to provide health benefits to former employees of the Business, except as specifically required by Law. (f) Neither Seller nor to Seller's Knowledge after due inquiry, any other "disqualified person" (within the meaning of Section 4975 of the Code) or any "party in interest" (within the meaning of Section 3(14) of ERISA) has engaged in any "prohibited transaction" (within the meaning of Section 4975 of the Code or Section 406 of ERISA) with respect to any Benefit Plan which could subject any such plan (or its related trust), Seller, the Controlled Group, or any officer, director or employee of Seller or the Controlled Group to the penalty or tax under Section 502(i) or Section 502(l) of ERISA or Section 4975 of the Code. (g) There is no pending or, to Seller's Knowledge after due inquiry, threatened claim which alleges any violation of ERISA or any other Law (i) by or on behalf of any Benefit Plan or Benefit Arrangement, or (ii) by any employee of Seller or any Business Affiliate or any plan participant, beneficiary, administrator, contract employee, independent sales representative or other independent contractor with respect to any such Benefit Plan or Benefit Arrangement. 5.12 LABOR MATTERS. Except as set forth on SCHEDULE 5.12, (i) there is no organizing effort, strike, picketing, charge of unfair labor practices, petition, demand for recognition, boycott activity, grievance, collective bargaining negotiation, OSHA citation, slowdown or work stoppage pending or, to Seller's Knowledge after due inquiry, threatened against it with respect to the Business; (ii) since January 1, 1994 Seller has not experienced any work stoppages or been a party to any arbitration proceeding arising out of or under any collective bargaining agreements; (iii) none of the employees of Seller with respect to the Business are, or have since January 1, 1994, been represented by any labor union, and there are no collective bargaining agreements otherwise in effect with respect to such employees; (iv) there are no discrimination or unfair employment charges or complaints pending with any Governmental Entity against Seller in 11 connection with the Business; and (v) there are no actual or pending consent decrees, conciliation agreements, settlement agreements, agreements with Governmental Entities or court orders which may impose employment or labor related obligations on Seller in connection with the Business. 5.13 INSURANCE. SCHEDULE 5.13 sets forth a complete and accurate list of all insurance policies currently maintained with respect to (or, in the case of any comprehensive general liability insurance policies, would have applicability to) the Business and the Assets including policies relating to fire, theft, business interruption, employee fidelity, general liability, fiduciary liability, workers' compensation, products liability and vehicular insurance. All such policies are in full force and effect and no notice of cancellation, termination or non-renewal has been received with respect to any such policy. All premiums that have become due with respect to such policies for any period ending on or prior to the Closing Date have been or will be paid when due by Seller prior to the Closing. Such policies provide Seller with adequate insurance coverage against the risks covered by such policies in accordance with the highest applicable industry standards and, in the reasonable opinion of Seller, such coverage is customary and reasonable with respect to the Business and the Assets. 5.14 TAXES. (a) Except as set forth in SCHEDULE 5.14, (i) Seller has timely and properly filed, or will file when due, all federal, state, provincial, local, foreign and other Tax Returns (including relating to their respective properties, franchises, payroll, excise, stamp, occupation, customs, duties, AD VALOREM, transfer, sales and use) required to be filed in respect of the Business, the Assets and the Assumed Liabilities, and all Taxes, interest, penalties, additions to Tax, and other charges due and payable as shown on such Tax Returns, or claimed to be due with respect to taxable periods covered by such Tax Returns, have been paid; (ii) such Tax Returns were when filed (or when filed will be) true, correct and complete, and disclosed (or will disclose) all Taxes required to be paid in respect of the Business, the Assets and the Assumed Liabilities for the periods covered thereby; (iii) all Taxes (whether or not shown on any Tax Return) owed by Seller in respect of the Business, the Assets and the Assumed Liabilities have been timely paid; (iv) all such Tax Returns have been examined by the relevant taxing authorities or the period for assessment of the Taxes in respect of which such Tax Returns were required to be filed has expired; (v) there is no examination, action, suit, investigation, audit, claim or assessment or proceeding pending, proposed or threatened by any Governmental Entity relating to the determination, assessment or collection of, or any delinquencies in filing relating to, any Taxes owing by Seller with respect to the Assets, the Business or the Assumed Liabilities, and to Seller's Knowledge after due inquiry, no basis exists therefor; (vi) Seller has not waived or been requested to waive any statute of limitations in respect of Taxes associated with the Business, the Assets or the Assumed Liabilities which waiver is currently in effect; (vii) all monies required to be withheld by Seller (including from employees of the Business for income Taxes, social security Taxes and other payroll Taxes) have been collected or withheld, and paid to the respective taxing authorities; (viii) none of the Assets is properly treated as owned by any Person 12 other than Seller for income Tax purposes; and (ix) none of the Assets is "tax-exempt use property" within the meaning of Section 168(h) of the Code. (b) No payment or other benefit, and no acceleration of the vesting of any options, payments or other benefits, will be, as a direct or indirect result of the transactions contemplated by this Agreement, an "excess parachute payment" to a "disqualified individual" as those terms are defined in Section 280G of the Code and Treasury Regulations. Except as set forth on SCHEDULE 5.14, no payment or other benefit, and no acceleration of the vesting of any options, payments or other benefits, will be, as a direct or indirect result of the transactions contemplated by this Agreement (or under Section 280G of the Code and the Treasury Regulations thereunder) be presumed to be a "parachute payment" to a "disqualified individual" as those terms are defined in Section 280G of the Code and the Treasury Regulations thereunder, without regard to whether such payment or acceleration is reasonable compensation for personal services performed or to be performed in the future. (c) No transaction contemplated by this Agreement is subject to withholding under Section 1445 of the Code and, except as set forth on SCHEDULE 5.14, no sales, use, real estate transfer, registration, inventory, stamp or other similar federal, state, provincial, local or foreign Taxes will be imposed on the sale and transfer of the Assets or the assumption of the Assumed Liabilities pursuant to this Agreement. 5.15 CERTAIN ENVIRONMENTAL CONDITIONS (a) Except as set forth on SCHEDULE 5.15(a), there is no pending, or, to Seller's Knowledge after due inquiry, threatened litigation, suit, complaint, investigation or administrative action or claim of any type whatsoever alleging that (i) the Real Property, or Seller in connection with its operations of the Business, is in violation of any Environmental Laws; or (ii) the Real Property, or Seller in connection with the operation of the Business, is responsible for remediation of a Contaminant with respect to the Real Property or with respect to any off-site facility or location, including, any waste disposal site whether or not located on the Real Property. (b) All reports, studies, audits, notices and correspondence, whether generated by Seller, any Governmental Entity or any other Person, and all tests, analyses and other documents, in the possession or control of Seller and which relate to compliance by the Business or the Real Property with Environmental Laws have been made available to Buyer. (c) Except as set forth on SCHEDULE 5.15(c), Seller has complied, and is currently complying, with all Environmental Laws applicable to Seller with respect to the Business and the Real Property, and all Permits required thereunder. (d) Except as set forth on SCHEDULE 5.15(d), no Contaminant is or has been present or released on, in, under, about or above the Real Property in an amount or condition that could give rise to an Environmental Claim. All releases of Contaminants that have occurred on the Real 13 Property, if any, have been reported to the appropriate Governmental Entity pursuant to applicable Environmental Laws. (e) Except as set forth on SCHEDULE 5.15(e), no Notice with respect to the Business' compliance with Environmental Laws or the environmental condition of any of the Real Property is outstanding, nor has any such Notice been issued by any Governmental Entity or other Person which has not been responded to fully and in a timely fashion. (f) Except as set forth on SCHEDULE 5.15(f), no underground storage tank used by Seller or any other Person in connection with the Business is, and, to Seller's Knowledge after due inquiry, no underground storage tank has at any time been, located on any of the Real Property that has not been removed in compliance with applicable Environmental Laws. The locations on the Real Property of all current or previous underground storage tanks that are or were used Seller or, to Seller's knowledge after due inquiry, any other Person, are described on SCHEDULE 5.15(f). (g) Except as set forth on SCHEDULE 5.15(g), neither Seller nor any other Person has leased, operated or owned any facilities or property in connection with the Business or the Real Property with respect to which Seller is subject to any pending or, to Seller's Knowledge after due inquiry, potential proceeding under any Environmental Law. (h) Except as set forth on SCHEDULE 5.15(h), neither Seller nor any other Person (i) has, in connection with the Business or the Real Property, sent, or arranged for the shipment of, Contaminants to any facility or site for reuse, recycling, reclamation, treatment, storage or disposal; or (ii) is subject to any pending or, to Seller's Knowledge after due inquiry, potential proceeding under any Environmental Law with respect to any such facilities or sites. (i) There are no Contaminants in any inactive, closed or abandoned storage or disposal areas or facilities on property which has been leased, operated or owned by Seller in connection with the Business or the Real Property. Except as set forth on SCHEDULE 5.15(i), such areas and facilities are not subject to actual or, to Seller's Knowledge after due inquiry, potential proceedings, investigations or Notices by officials of any Governmental Entity or by any private litigant as a result of any previous on-site management, treatment, storage or disposal of Contaminants. 5.16 FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES (a) Attached as SCHEDULE 5.16(a) are the audited (unaudited to fiscal 1999) balance sheets of Seller as of September 30, 1996, September 30, 1997, September 30, 1998 and September 30, 1999, and the related audited (unaudited as to fiscal 1999) statements of income, shareholder's equity and cash flow of Seller for the fiscal years then ended, together with the notes to such financial statements (collectively, the "ANNUAL FINANCIAL STATEMENTS"). The Annual Financial Statements (i) were prepared in accordance with the books and records of Seller and with GAAP; (ii) fairly present the combined financial position of Seller as of the dates set forth therein and the results of operations and cash 14 flows for the periods set forth therein; and (iii) reflect accurately in all material respects the costs and expenses of Seller for the periods set forth therein. (b) Attached as SCHEDULE 5.16(b) are the unaudited balance sheet of the Seller as of October 31, 1999 (the "INTERIM BALANCE SHEET"), and the related unaudited statement of income of the Seller for the one-month period then ended (the "INTERIM FINANCIAL STATEMENTS"). The Interim Financial Statements (i) were prepared in accordance with the books and records of Seller and with GAAP (and on a basis consistent with the principles used in preparation of the Annual Financial Statements), except as otherwise noted therein; (ii) fairly present (subject to normal year-end adjustments) the financial position of the Seller as of October 31, 1999 and the results of operations of the Seller for the one-month period then ended; and (iii) reflect accurately in all material respects the costs and expenses of the Seller for the one-month period then ended. (c) There are no liabilities, debts, claims or obligations with respect to the Seller (whether accrued, absolute, contingent, unasserted or otherwise and whether or not of a nature required by GAAP to be reflected, disclosed or otherwise provided for in a balance sheet of the Seller or in the notes thereto) which, individually or in the aggregate, could have a material adverse effect on the Condition of the Business, except (i) those reflected or otherwise provided for in the Interim Balance Sheet (or described in the notes thereto); (ii) for liabilities and obligations occurred in the ordinary course of business consistent with past practice since the date of the Interim Balance Sheet; (iii) those specifically described on SCHEDULE 5.16(b); and (iv) Retained Liabilities. 5.17 CONDITION OF ASSETS. The Equipment constituting Assets is to be conveyed in its present condition, with no express or implied warranty by the Seller. 5.18 OPERATIONS. Except as disclosed on SCHEDULE 5.18, since October 31, 1999, Seller has operated the Business only in the ordinary course of business consistent with past practice, and, without limiting the generality of the foregoing, Seller or any Business Affiliate has not: (i) changed in any material respect the character, operation or Condition of the Business; (ii) (A) sold, abandoned or made any other disposition of any properties or assets of the Business except in the ordinary course of business consistent with past practice; (B) granted or suffered any Lien on any of the properties or assets of the Business; or (C) amended any contract or entered into or amended any other contract material to the operations of the Business which is in force and effect as of the date hereof; (iii) except in the ordinary course of business consistent with past practice, incurred or assumed any debt, obligation or liability (whether absolute, contingent or otherwise, and whether or not currently due and payable); 15 (iv) suffered any material destruction, damage or loss (other than ordinary wear and tear), whether or not covered by insurance, relating to any of the properties or assets of the Business, including the Assets; (v) waived, canceled, sold or otherwise disposed of for less than the fair value thereof any claim or right which Seller had against any other Person, except for routine settlements or resolutions of disputed customer or supplier accounts in the ordinary course of business consistent with past practice; (vi) entered into, adopted, amended, paid, agreed to pay or incurred any obligation for any payment or contribution to, or with respect to, any benefit plan, or any collective bargaining or severance agreement, or paid or promised to pay any bonus to, or granted an increase in compensation or benefits to, any Employee, except for normal accruals under benefit plans and normal compensation adjustments in accordance with past practice; (vii) received any notice that any supplier, distributor, independent sales or manufacturer representative, customer or contractor of the Business has terminated or is terminating its relationship with, or is threatening any legal or similar action against, Seller; (viii) made any forward purchase commitments, except for purchase commitments in the ordinary course of business consistent with past practice; (ix) entered into any material transaction, whether or not in the ordinary course of business consistent with past practice; or (x) prepared or filed any Tax Return inconsistent with past practice or, on any such Tax Return, taken any position, made any election, or adopted any method that is inconsistent with positions taken, elections made or methods used in preparing or filing similar Tax Returns in prior periods (including positions, elections or methods which would have the effect of deferring income to periods for which Buyer is liable pursuant to SECTION 7.19 or accelerating deductions to periods for which Seller is liable pursuant to SECTION 7.19). 5.19 CONTRACTS. Except as set forth on SCHEDULE 5.19, there is no arrangement, understanding, agreement or contract to which Seller is a party with respect to the Business: (i) with any current or former Employee, independent contractor or temporary employment agency; (ii) with any labor union or collective bargaining association representing any Employee; (iii) for the sale, transfer or lease of any asset or group of related assets of the Business having a fair market value in excess of $25,000; (iv) for the purchase of any asset or group of related assets for a purchase price in excess of $25,000; (v) that involves an obligation to pay or render, or an entitlement to receive, monies or services with a fair market value in excess of $5,000; or (vi) that is otherwise material to the Business. Except as set forth on SCHEDULE 5.19, (x) each Real 16 Property Lease and contract relating to the Business is in full force and effect and is enforceable by Seller against the other party or parties thereto in accordance with its terms, and there have been no terminations or cancellations thereunder; (y) Seller has delivered to Buyer a true, correct and complete copy of the Real Property Leases and the contracts relating to the Business, together with all amendments, modifications and supplements thereto and (z) none of the Real Property Leases and any contracts relating to the Business will be in breach or default, terminate or be terminable by virtue of the transactions contemplated hereby. Neither Seller nor, to Seller's Knowledge after due inquiry, any other person has breached its obligations or defaulted under any Real Property Lease or any contract relating to the Business, and there has occurred no event or condition which, with the giving of notice or passage of time or both, would constitute such a breach or default on the part of Seller or, to Seller's Knowledge after due inquiry, any other person. 5.20 INVENTORY; ACCOUNTS RECEIVABLE. Except as set forth on SCHEDULE 5.20, (a) the Inventory of the Business as the same shall exist on the Closing Date shall consist of substantially the same types of Inventory as that reflected on the Interim Balance Sheet and the amount of such Inventory shall be sufficient to carry on the Business and shall vary from that reflected on the Interim Balance Sheet only by variances typical in the ordinary course of business. The Inventory of the Business as reflected on the Interim Balance Sheet, and the Inventory as the same shall exist on the Closing Date, consisted, and will consist, of items substantially all of which were and will be of the usual quality and quantity necessary for the normal conduct of the Business and expected to be usable or saleable within a reasonable period of time in the ordinary course of business. With respect to Inventory to be purchased by Buyer and in the hands of suppliers for which Seller is committed as of the date hereof or the Closing Date, such Inventory is expected to be usable or saleable in the ordinary course of business as presently being conducted. (b) Except as set forth on SCHEDULE 5.20, the Accounts Receivable of the Business, whether reflected on the Interim Balance Sheet or accrued since the date thereof, represent sales actually made in the ordinary course of business, are not subject to any defense or offset, and are current and collectible net of any reserves shown on the Interim Balance Sheet (which reserves are adequate and were calculated in accordance with GAAP and consistent with past practice). 5.21 ASSETS SUFFICIENT FOR BUSINESS. Immediately prior to the Closing, Seller will own or have legal rights to use as currently used in the Business, and Seller will convey to Buyer, pursuant to this Agreement, those assets, both tangible and intangible, which are necessary and sufficient to conduct the Business as currently conducted or, to Seller's Knowledge, proposed to be conducted by the Buyer, except for the fixed assets included on SCHEDULE 1.2. 5.22 PRODUCT RECALLS; WARRANTIES. (a) Except as set forth on SCHEDULE 5.22(a), Seller has no Knowledge of any facts, events or conditions (i) which could furnish a basis for the recall, withdrawal or suspension by any Governmental Entity of, or an injunction from or an award of damages with respect to, any product manufactured, distributed or sold by the Business; or (ii) 17 which would otherwise reasonably be expected to cause the Business to withdraw, recall or suspend or have enjoined any product from any market or to terminate or suspend testing of any such product. SCHEDULE 5.22(a) contains an accurate and complete list of (x) all products manufactured or distributed by the Business that have been recalled at any time since January 1, 1994, and (y) all proceedings (whether completed or pending) at any time since May 21, 1996 seeking the recall, withdrawal, suspension or seizure of any such product. (b) Except as set forth in SCHEDULE 5.22(b), there is no claim against or liability of Seller with respect to any products manufactured, distributed or sold by the Business which are alleged to be defective or unsafe, and, to Seller's Knowledge after due inquiry, there is no basis for any such claim. 5.23 INTELLECTUAL PROPERTY. (a) Seller owns all right, title and interest in, or possess adequate licenses or other valid rights to use (without the making of any payment to others or the obligation to grant rights to others in exchange), free and clear of all Liens, all Intellectual Property used in connection with the operation of the Business as currently conducted or, to the knowledge of Seller, proposed to be conducted. Each item of Intellectual Property owned or used by Seller immediately prior to the Closing will be owned or available for use by the Buyer on identical terms and conditions immediately subsequent to the Closing hereunder. Seller has taken all necessary and desirable action to maintain and protect each item of Intellectual Property that Seller owns or uses. (b) Seller has not interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of any other Person, and none of the directors and officers (and employees with responsibility for Intellectual Property matters) of Seller has ever received any charge, complaint, claim, demand or notice from any Governmental Entity or other Person alleging any such interference, infringement, misappropriation or conflict (including any claim that Seller must license or refrain from using any Intellectual Property rights of any other Person). To Seller's Knowledge after due inquiry, no Person has interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of Seller. (c) SCHEDULE 5.23(c) identifies (i) each patent or patent registration which has been issued to Seller in the United States and all jurisdictions worldwide with respect to any item of Intellectual Property used in connection with the Business; and (ii) each pending patent application or application for patent registration which Seller has filed with respect to any item of Intellectual Property anywhere in the world (together with any exceptions) which relates to the Business. Seller has delivered to Buyer correct and complete copies of all such patents, registrations and applications (as amended to date) and has made available to Buyer correct and complete copies of all other written documentation evidencing ownership and prosecution (if applicable) of each such item of Intellectual Property. (d) SCHEDULE 5.23(d) identifies (i) each trademark or trademark registration which has been issued to Seller in the United States and all jurisdictions worldwide with respect to any item 18 of Intellectual Property used in connection with the Business; and (ii) each pending trademark application or application for trademark registration which Seller has filed with respect to any item of Intellectual Property anywhere in the world (together with any exceptions). Seller has delivered to Buyer correct and complete copies of all such trademarks, registrations and applications (as amended to date), and has made available to Buyer correct and complete copies of all other written documentation evidencing ownership and prosecution (if applicable) of each such item of Intellectual Property. SCHEDULE 5.23(d) also identifies each trade name or unregistered trademark used by Seller in connection with the Business. (e) SCHEDULE 5.23(e) identifies (i) each copyright or copyright registration which has been issued to Seller in the United States and all jurisdictions worldwide with respect to any item of Intellectual Property used in connection with the Business; and (ii) each pending copyright application or application for copyright registration which Seller has filed with respect to any item of Intellectual Property (together with any exceptions) used in connection with the Business. Seller has delivered to Buyer correct and complete copies of all such copyrights, registrations and applications (as amended to date), and has made available to Buyer correct and complete copies of all other written documentation evidencing ownership and prosecution (if applicable) of each such item of Intellectual Property. (f) SCHEDULE 5.23(f) identifies each license, agreement or other permission which Seller has granted to any other Person with respect to any item of Intellectual Property used in connection with the Business in the United States and any jurisdictions worldwide. Seller has delivered to Buyer correct and complete copies of all such licenses, agreements and other permissions (as amended to date) and has made available to Buyer correct and complete copies of all written documentation evidencing the legality, validity and enforceability of each such license, agreement and other permission (if applicable). With respect to each item of Intellectual Property required to be identified on SCHEDULE 5.23(f): (i) Seller owns all right, title and interest in and to such item, free and clear of any Lien; (ii) such item is not subject to any outstanding injunction, judgment, order, decree, ruling or charge; (iii) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to Seller's Knowledge after due inquiry, threatened which challenges the legality, validity, enforceability, use or ownership of such item; (iv) Seller has not agreed to indemnify any Person for or against any interference, infringement, misappropriation or other conflict with respect to such item; (v) all licenses, agreements and other permissions pertaining to such item and all other rights to which Seller is entitled with respect thereto are in compliance in all 19 respects with all applicable Laws in all jurisdictions worldwide, including those pertaining to remittance of foreign exchange and Taxes; and (vi) Seller has not made a previous assignment, sale, transfer or agreement constituting a present or future assignment, sale or transfer of, or granted any Lien on, such item other than licenses granted in the ordinary course of business consistent with past practice (and each such license has been identified on SCHEDULE 5.23(f)); nor has Seller granted any release, covenant not to sue or other non-assertion assurance to any Person with respect to such item which could reasonably be expected to have an adverse effect on the aggregate value of the Intellectual Property. (g) SCHEDULE 5.23(g) identifies each item of Intellectual Property used in connection with the Business that any Person (other than Seller) owns and that Seller uses pursuant to any license, sublicense, agreement or permission. Seller has delivered to Buyer correct and complete copies of all such licenses, sublicenses, agreements and other permissions (as amended to date). With respect to each item of Intellectual Property required to be identified on SCHEDULE 5.23(g): (i) the license, sublicense, agreement or other permission covering such item is legal, valid, binding, enforceable and in full force and effect; (ii) such license, sublicense, agreement or other permission will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (iii) no party to such license, sublicense, agreement or other permission is in breach or default thereof, and no event has occurred which with the giving of notice or the lapse of time or both would constitute such a breach or default thereof or permit termination, modification or acceleration thereunder; (iv) no party to such license, sublicense, agreement or other permission has repudiated any provision thereof; (v) with respect to each such sublicense, the representations and warranties set forth in clauses (i) through (iv) above are true and correct with respect to the underlying license; (vi) the underlying item of Intellectual Property is not subject to any outstanding injunction, judgment, order, decree, ruling or charge; (vii) no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to Seller's Knowledge after due inquiry, threatened which challenges the legality, validity or enforceability of the underlying item of Intellectual Property; and 20 (viii) Seller has not granted any sublicense or similar right with respect to the underlying license, sublicense, agreement or other permission. (h) To Seller's Knowledge after due inquiry, the continued operation of the Business as currently conducted, and as proposed to be conducted, does not and will not interfere with, infringe upon, misappropriate or otherwise come into conflict with, any Intellectual Property rights of any Person. (i) Seller has no Knowledge after due inquiry of any new products, inventions, procedures, or methods of manufacturing or processing that any competitors or other Persons have developed which reasonably could be expected to supersede or make obsolete any product or process of Seller with respect to the Business. 5.24 NO BUSINESS AFFILIATES. No Affiliate of Seller is engaged, either directly or indirectly, in the manufacturing, distribution or sale of products or owns, leases or operates any assets in connection with the Business. 5.25 FACILITIES. No manufacturing, converting, distribution, research and development, administrative or other facility of Seller or any of its Affiliates (other than the Facilities) is owned, leased or operated by Seller or any such Affiliate in connection with the Business. 5.26 BOOKS AND RECORDS. Seller maintains its books, records and accounts (including, but not limited to, those kept for financial reporting and Tax purposes) in accordance with good business practice and in sufficient detail to reflect accurately and fairly the transactions and the Condition of the Business. 5.27 SUPPLIERS AND CUSTOMERS. Set forth on SCHEDULE 5.27 is a list of the names, addresses and current relationship status of the 10 largest customers and the 10 largest suppliers (measured, in each case, by dollar volume) of the Business and the percentage of the Business which each such customer or supplier represented since November 1, 1998 (since January 1, 1999 as to suppliers). 5.28 YEAR 2000 COMPLIANCE. Seller is, as of the date hereof, and will, on the Closing Date, continue to be, Year 2000 Compliant with respect to its Information Technology. To the best of Seller's knowledge, after due inquiry, all customers of and suppliers to the Business, and all other third parties who exchange computerized information with Seller's Information Technology, are, as of the date hereof, and will, on the Closing Date, continue to be, Year 2000 Compliant with respect to their respective Information Technology. 5.29 REPRESENTATIONS NOT WAIVED. The representations and warranties of Seller contained herein will not be affected or deemed waived by reason of any investigation made by or on behalf of Buyer and/or its representatives or agents or by reason of the fact that Buyer 21 and/or its representatives or agents knew or should have known that any such representation or warranty is or might be inaccurate in any respect. 5.30 DISCLOSURE. None of (i) the representations or warranties of Seller contained herein; (ii) the information contained in the Schedules referred to in this ARTICLE V; and (iii) the other information or documents furnished to Buyer or any of its representatives or agents by Seller or its representatives or agents pursuant to the terms of this Agreement is or will be false or misleading in any material respect or omits or will omit to state a fact herein or therein required to be stated or necessary to make the statements herein or therein not misleading in any material respect. There is no fact which adversely affects or in the future is likely to adversely affect the Assets or the Business in any material respect which has not been disclosed in this Agreement or the Schedules hereto. 5.31 CREDITOR PLAN. Seller has negotiated a pay-out plan with substantially all of its unsecured creditors of the Business (which creditors are listed on SCHEDULE 2.1) (the "Creditor's Plan"), except for certain unsecured creditors whose claims aggregate $40,000 or less and those creditors listed on SCHEDULE 5.31. Each of the unsecured creditors that has agreed to the Creditor's Plan has executed a settlement agreement and release in the form supplied to the Seller by Buyer. Seller has delivered copies of each such agreement to Buyer. 6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants to Seller as follows: 6.1 DUE ORGANIZATION AND AUTHORITY. Buyer is a limited partnership duly organized, validly existing and in good standing under the Laws the State of Texas, and has, or will have on the Closing Date, all requisite power and authority to own, lease and operate its assets, properties and business and to carry on its business as currently conducted. 6.2 AUTHORITY TO EXECUTE AND PERFORM AGREEMENT. Buyer has all requisite power and authority to enter into, execute and deliver this Agreement and each of the Buyer Documents, and to perform fully its obligations hereunder and thereunder, and no other act or proceeding on the part of the Buyer is, or will be on the Closing Date, necessary to authorize same. This Agreement has been, and each of the Buyer Documents to be delivered by Buyer at the Closing will be, duly authorized, executed and delivered by Buyer and, assuming the due authorization, execution and delivery of this Agreement and each of the Seller Documents by Seller, and the validity and binding effect hereof and thereof on Seller, each is, or upon execution will be, a valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights and remedies generally or general principles of equity (regardless of whether considered and applied in a proceeding at law or in equity). 6.3 NO BREACH. The execution, delivery and performance by Buyer of this Agreement and each of the Buyer Documents to which it is party, and the consummation of the transactions 22 contemplated hereby and thereby, will not (i) violate or result in the breach of any provision of the restated certificate of incorporation, by-laws or other constituent documents of Buyer; (ii) violate, result in the breach of, or constitute a default (or an event which, with the giving of notice or the lapse of time or both, would constitute a default) under, any material contract to which Buyer is party or by which Buyer or any of its assets may be bound; (iii) violate any order, writ, judgment, injunction, award or decree of any arbitrator or Governmental Entity against Buyer or affecting any of its assets or properties; or (iv) violate any applicable Law, which violation, individually or in the aggregate, would reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. 6.4 ACTIONS AND PROCEEDINGS. There are no outstanding orders, writs, judgments, injunctions, awards or decrees of any Governmental Entity against Buyer, and there are no actions, litigations or suits or other legal, administrative, investigative or arbitral proceedings of any type whatsoever pending, or to Buyer's Knowledge, threatened, against or involving Buyer which, individually or in the aggregate, would reasonably be expected to have a material adverse effect on the ability of the Buyer to consummate the transactions contemplated hereby. 6.5 CONSENTS AND APPROVALS. Except for any required approvals from appropriate Governmental Entities for the issuance or transfer of the Permits, the execution and delivery by Buyer of this Agreement and the Buyer Documents, and the performance by Buyer of its obligations hereunder and thereunder, do not require Buyer to obtain any consent, approval, or other action of, or make any filing with or give any notice to, any Governmental Entity or other Person. 7. COVENANTS AND AGREEMENTS. The parties hereto covenant and agree as follows: 7.1 DUE DILIGENCE. Prior to the Meeting Date, Seller will provide Buyer, and Buyer's counsel, accountants and other representatives, during normal business hours, full access to all of the properties, personnel, books, contracts, records, Tax Returns and files of or relating to the Business and the Assets. Seller will also furnish to Buyer and such representatives all such additional documents and financial, operational, environmental, legal and other information concerning the Business and the Assets as Buyer may from time to time reasonably request. Seller will instruct its employees, agents and representatives to cooperate in all reasonable respects with Buyer in its investigation of the Business and the Assets. 7.2 INTENTIONALLY LEFT BLANK 7.3 CONSENTS, APPROVALS AND FILINGS. As soon as practicable after the execution of this Agreement, Seller and Buyer will cooperate with each other with respect to, and will make or cause to be made, all requests, filings and submissions to any Governmental Entity or other Person that are required to be made in connection with the transactions contemplated hereby, including: (i) the obtaining of all necessary actions or non-actions, waivers, consents and approvals from all Governmental Entities, including the making of all necessary registrations and 23 filings with, and the taking of all other reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid any action or proceeding by, any such Governmental Entities (including any in connection with the transfer or reissuance of the Permits); (ii) the obtaining of all necessary consents, approvals or waivers from Persons other than Governmental Entities; and (iii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including any attempt to have any stay or temporary restraining order entered by any arbitrator or Governmental Entity vacated or reversed. Notwithstanding the foregoing, neither Buyer nor any of its Affiliates will be required to divest or hold separate or otherwise take or commit to take any action that limits its freedom of action with respect to, or its ability to retain, the Business, the Assets or any other property or assets, or any material portions thereof. Seller will furnish to Buyer, and Buyer will, furnish to Seller such information and assistance as may reasonably be requested in connection with the preparation of any requests, filings, submissions or other communications. Each party hereto agrees to provide to the other party copies of any notifications that it or its representatives or Affiliates receive from any Governmental Entity in connection with the foregoing matters. 7.4 EXPENSES. Each party to this Agreement will bear its own expenses incurred in connection with the preparation, execution and performance of this Agreement, including all fees and expenses of agents, representatives, counsel and accountants. Seller also will bear (i) the costs associated with any sales, use, registration, inventory, stamp, transfer, or similar Taxes (including, real property transfer or documentary stamp taxes); (ii) any recording or registration costs payable by either party as a result of the transactions contemplated hereby; and (iii) all costs in connection with any filings made with any Governmental Entity. 7.5 INDEMNIFICATION FOR BROKERAGE COMMISSIONS. Except for the fee due and owing to Harris Webb & Garrison, Inc., Seller represents and warrants to Buyer that (i) no broker, finder, agent or similar intermediary has acted on behalf of Seller in connection with this Agreement; and (ii) there are no brokerage commissions, finders' fees or similar fees or commissions payable in connection herewith on account of Seller's actions. Seller agrees to indemnify and keep Buyer harmless from any claim or demand for commission or other compensation by any broker, finder, agent or similar intermediary claiming to have been employed or retained by or on behalf of Seller, and to bear the cost of any legal expenses incurred by Buyer in defending against any such claim. Buyer represents and warrants to Seller that (x) no broker, finder, agent or similar intermediary has acted on behalf of Buyer in connection with this Agreement, and (y) there are no brokerage commissions, finders' fees or similar fees or commissions payable in connection herewith on account of Buyer's actions. Buyer agrees to indemnify and keep Seller harmless from any claim or demand for commission or other compensation by any broker, finder, agent or similar intermediary claiming to have been employed or retained by or on behalf of Buyer, and to bear the cost of any legal expenses incurred by Seller in defending against any such claim. 7.6 INSURANCE. After the Closing, Seller will maintain or cause to be maintained in force (including necessary renewals thereof) products liability insurance policies against risks 24 and liabilities to the extent and in the manner heretofore maintained by Seller with respect to the Business and the Assets. 7.7 LITIGATION. After the Closing, Seller will promptly notify Buyer of any lawsuits, investigations or other proceedings that are threatened or commenced against Seller (or any current or former director, officer or employee thereof) which may relate to, or affect, the Business, the Assets, the Assumed Liabilities, this Agreement or the transactions contemplated hereby. 7.8 ACCESS; RECORDS; OPERATIONS MANUALS. (a) After the Closing, Buyer and Seller will afford to each other and their respective representatives the opportunity, upon reasonable request, to examine and make copies of their respective books and records relating to the Business and the Assets, and to consult with their respective officers, employees, accountants and other representatives in connection with any reasonable business purpose, including the preparation of Tax Returns and financial reports and the conducting of any audits with respect thereto, the administration of Buyer's benefit plans and benefit arrangements, the review of any materials, books, records or circumstances relating to either party's ongoing obligations under this Agreement or any Operative Document or for any other reasonable business purpose. (b) On the Closing Date, Seller will make available for delivery to Buyer the following: (i) all Records, subject to the following: (A) Buyer recognizes that certain Records may not relate to the Business or may relate primarily to Retained Assets or Retained Liabilities, in which case Seller may retain such Records but will provide copies of the portions thereof relating to the Business to Buyer; (B) Seller may retain any Tax Returns and any files and records relating thereto (including payroll records and paid invoices); PROVIDED, that Buyer will be provided with copies of such Tax Returns, files and records to the extent that they relate to the Business, the Assets or Buyer's obligations under this Agreement; PROVIDED, FURTHER, that Seller will not dispose of or destroy such records without first offering to turn over possession thereof (to the extent relating to the Business, the Assets or Buyer's obligations under this Agreement) to Buyer (at Buyer's expense) by written notice to Buyer at least 30 days prior to the proposed date of such disposition or destruction; (C) Seller may retain its corporate record books and stock records containing its articles of incorporation, bylaws, minutes of meetings of the boards of directors, stockholders, managers and management committees, and similar governance documents; and 25 (D) Seller may retain all records exclusively relating to, or that constitute Retained Assets; PROVIDED, that Seller will not, dispose of or destroy such records without first offering to turn over possession thereof (to the extent relating to Buyer's obligations under this Agreement) to Buyer (at Buyer's expense) by written notice to Buyer at least 30 days prior to the proposed date of such disposition or destruction; (ii) operations and maintenance manuals setting forth in reasonable detail all procedures necessary to operate the Assets in a safe and reliable manner, which procedures will (A) incorporate manufacturers' recommended guidelines and sound industry practices; (B) include specific preventative maintenance procedures, including an annual maintenance schedule; (C) include adequate safety measures and procedures for the safe operation and maintenance of the Equipment, including measures and procedures for fire prevention; (D) include adequate security measures and procedures; and (E) integrate vendor and manufacturer recommendations to the extent Seller, in consultation with Buyer, deems such recommendations necessary or desirable in connection with the efficient operation and maintenance of the Assets or the protection of warranties. 7.9 FIRPTA AFFIDAVIT. Upon request of Buyer, Seller will furnish to Buyer an affidavit, in form and substance reasonably satisfactory to Buyer, stating under penalty of perjury Seller's United States taxpayer identification number and that Seller is not a foreign Person pursuant to Section 1445(b)(2) of the Code. 7.10 BULK SALES. Seller agrees to indemnify and save Buyer harmless from any losses actually suffered by Buyer as a result of any noncompliance by Seller with the provisions of any bulk sales law or any similar statute of any jurisdiction as they may be applicable to the transactions contemplated by this Agreement. 7.11 FURTHER ASSURANCES. Each party hereto will, and will cause its respective Affiliates to, execute such agreements, documents, instruments and other papers and take such further actions, at any time and from time to time, after the Closing Date, as may be reasonably requested by the other party to carry out the provisions hereof and the transactions contemplated hereby. 7.12 MAIL OR OTHER COMMUNICATIONS RECEIVED AFTER CLOSING. On and after the Closing Date, Buyer may receive and open all mail or other communications addressed to Seller and deal with the contents thereof in its discretion to the extent that such mail or other communications and the contents thereof relate to the Business, the Assets or any of the Assumed Liabilities. Buyer agrees to keep and cause to be kept confidential the contents of, and to deliver or cause to be delivered promptly to Seller, all other mail or communications (including any mail or communications that relate to the Retained Assets or the Retained Liabilities) received by Buyer which are addressed to Seller. In the event that Seller receives mail or other communications which relate to the Business, the Assets or any of the Assumed Liabilities on or after the Closing Date, Seller will deliver or cause to be delivered immediately to Buyer such mail or other 26 communications. Seller agrees to keep and cause to be kept confidential the contents of such mail or other communications. 7.13 ANCILLARY AGREEMENTS. INTENTIONALLY LEFT BLANK. 7.14 CONDUCT OF BUSINESS. Except as set forth on SCHEDULE 7.14 or as otherwise expressly permitted by the terms of this Agreement, from the date hereof to the Meeting Date, Seller will use its best efforts to: (a) conduct its business in the ordinary course in substantially the same manner as currently conducted; (b) use its best efforts to preserve and maintain the condition of the business, including relationships with customers, suppliers, distributors and others with whom Seller deals in connection with the business, and all associated goodwill; (c) comply with all applicable Laws with respect to its business; and (d) pay, perform and discharge, when due, in the ordinary course of business consistent with past practice, all obligations of Seller. In addition, except as set forth on SCHEDULE 7.14 or as otherwise expressly permitted by the terms of this Agreement, Seller will not do any of the following without the prior written consent of Buyer: (i) institute any changes in the business other than in the ordinary course of business consistent with past practice; (ii) engage in any trade or distributor loading of finished goods of the business; (iii) sell, lease, dispose of or encumber, or agree to sell, lease, dispose of or encumber, any properties or assets of the business, except sales of inventory in the ordinary course of business consistent with past practice; (iv) enter into any contract, lease, commitment, arrangement or transaction relating to its business or any properties or assets of the Business other than in the ordinary course of business consistent with past practice; (v) enter into any new employment agreement or increase or modify, in any material respect, the terms of any Benefit Plan or Benefit Arrangement (including but not limited to any commitment to pay retirement or other benefits or any modification of benefits or personnel policies and practices); (vi) increase or modify the salary, commissions or other wages payable to, or which will become payable to, any Employee, except in the ordinary course of business consistent with past practice; (vii) perform any act or omit to perform any act which, if taken or omitted prior to the date hereof, would constitute, result in or cause a breach of or default under any contracts relating to its business; 27 (viii) enter into any purchase orders for amounts in excess of $5,000, except for purchase orders for (A) raw materials ordered in the ordinary course of business consistent with past practice and (B) services under existing contracts; (ix) prepare or file any Tax Return inconsistent with past practice or, on any such Tax Return, take any position, make any election or adopt any method that is inconsistent with positions taken, elections made or methods used in preparing or filing similar Tax Returns in prior periods (including positions, elections or methods which would have the effect of deferring income to periods for which Buyer is liable pursuant to SECTION 7.19 or accelerating deductions to periods for which Seller is liable pursuant to SECTION 7.19); (x) institute any suit or other proceeding which involves the Business or the Assets; or (xi) agree, whether in writing or otherwise, to do any of the foregoing. Seller will not take any action or agree to take any action that results in any of the representations and warranties of Seller set forth in this Agreement becoming untrue or misleading. 7.15 COVENANT NOT TO COMPETE. (a) As a material inducement to Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, Seller agrees to the covenants and agreements set forth in this SECTION 7.15 for the benefit of Buyer and its Affiliates. (b) Neither Seller nor any of its Affiliates will, at any time from and after the Closing Date and through the tenth anniversary thereof, without the prior written consent of Buyer, (i) directly or indirectly engage in, or (ii) acquire control of or more than a two percent (2%) interest in, or assist or render services (whether or not for compensation, or as an agent, advisor, consultant or lender) to or for, any business more than ten percent (10%) of the consolidated revenues of which are derived from the development, manufacture, sale or provision of memory modules and board design in North America, South America, Europe and Asia. (c) The covenant set forth in SECTION 7.15(b) will be construed as a separate and independent covenant for each of the separate countries listed in SECTION 7.15(b). To the extent that such covenant is declared to be invalid or unenforceable in any country, state, province, territory or possession, or in any other jurisdiction, or with respect to any Person, such covenant will be deemed to be deleted herefrom with respect to, and only with respect to, the operation of such covenant in the particular jurisdiction or with respect to such Person in which or against whom such declaration was made, and such declaration will not affect the enforceability of such covenant with respect to any other country, state, province, territory or possession, or any other jurisdiction or Person; PROVIDED, that to the extent such covenant may be valid and enforceable in such jurisdiction or against such Person by limitations on the scope of the activities, geographical area, time period covered or otherwise, Seller and Buyer agree that such covenant instead will be deemed to be limited to the extent, and only to the extent, necessary to make such covenant 28 enforceable to the fullest extent permissible under the laws and public policies applied in such jurisdiction. (d) Seller agrees that it will not (and will not permit any of its Affiliates to), at any time from and after the Closing Date and through the tenth anniversary thereof, directly or indirectly through the actions of any other Person, whether for its own benefit or for that of another Person: (i) solicit, divert or take away, or attempt to solicit, divert or take away, any individual who is, as of the Closing Date or at any time thereafter, an officer, director or managerial, marketing, research and development or other key employee of Buyer or any of its Affiliates with respect to the Business, or induce or attempt to induce any such individual to terminate his or her employment with Buyer or any of its Affiliates; or (ii) take any action, or advise or assist any Person in taking any action, that would impair the goodwill of the Business, including but not limited to, actions that could interfere with or damage the relationships between the Business and its employees, customers, distributors, manufacturer representatives and suppliers. 7.16 NOTICE OF CERTAIN EVENTS. Each party hereto will promptly notify the other party of any event, occurrence, condition or circumstance of which it becomes aware from the date hereof that would constitute a violation or breach of any representation, warranty, covenant or agreement made by it in this Agreement. 7.17 REASONABLE BEST EFFORTS. INTENTIONALLY LEFT BLANK 7.18 NEGOTIATIONS. From and after the date hereof, Seller agrees that Seller and its Affiliates will deal exclusively and in good faith with Buyer and its Affiliates with respect to any transaction involving the sale, transfer or other disposition of the Assets or the Business, and none of Seller, its Affiliates nor their respective officers, directors, employees, lenders, investment banking firms, advisors or other agents, nor any Person acting on their behalf, will solicit any inquiries or proposals by, or engage in any discussions or negotiations with, or furnish any non-public information to, or enter into any agreement with, any Person other than Buyer and its Affiliates concerning the sale or other disposition of the Assets or the Business or a merger, consolidation, sale of securities or other transaction involving Seller or its Affiliates, if such merger, consolidation, sale or other transaction would be inconsistent, in any respect, with the transactions contemplated by this Agreement, and will promptly notify Buyer of the substance of any inquiry or proposal concerning any such transaction that may be received by Seller or its Affiliates. 7.19 TAXES. (a) Seller will be liable for and will pay, and will indemnify, defend and hold harmless Buyer and its Affiliates (and directors, officers, employees, stockholders, successors, assigns, representatives and agents) from and against, all Taxes (whether assessed or unassessed), and will be responsible for the preparation and filing of all Tax Returns, applicable to the Business, the Assets and the Assumed Liabilities, in each case attributable to taxable years or periods ending on or prior to the close of the day on which the Closing occurs and, with 29 respect to any Straddle Period, the portion of such Straddle Period ending on and including the close of the day on which the Closing occurs. (b) Buyer will be liable for and will pay, and will indemnify, defend and hold harmless Seller and its Affiliates (and their respective directors, officers, employees, stockholders, successors, assigns, representatives and agents) from and against, all Taxes (whether assessed or unassessed), and will be responsible for the preparation and filing of all Tax Returns, applicable to the Business, the Assets and the Assumed Liabilities that are attributable to taxable years or periods beginning on the day immediately following the day on which the Closing occurs and, with respect to any Straddle Period, the portion of such Straddle Period beginning on the day immediately following the day on which the Closing occurs; PROVIDED, that Buyer will not be liable for or pay, and will not indemnify, defend or hold harmless, Seller and its Affiliates (and their respective directors, officers, employees, stockholders, successors, assigns, representatives and agents) from and against, any Taxes for which Seller is liable under this Agreement, including, pursuant to the preceding sentence or SECTION 5.14 (which Taxes will be the liability of Seller). (c) Seller, on the one hand, or Buyer, on the other hand, as the case may be, will provide reimbursement for any Tax paid by one party or its Affiliates, all or a portion of which is the responsibility of the other party in accordance with the terms of this SECTION 7.19. Not later than 14 days prior to the payment of any such Tax, the party paying such Tax will give notice to the other party of the Tax payable and the portion which is the liability of the other party, although failure to do so will not relieve the other party from its liability hereunder. (d) After the Closing Date, Seller and Buyer will, and will cause their respective Affiliates to: (i) assist in all reasonable respects the other party in preparing any Tax Returns which such other party is responsible for preparing and filing; (ii) cooperate in all reasonable respects in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns concerning the Business, the Assets or the Assumed Liabilities; (iii) make available to the other party and to any taxing authority as reasonably requested by the other party all information, records, and documents relating to Taxes concerning the Business, the Assets or the Assumed Liabilities; (iv) provide timely notice to the other party in writing of any pending or threatened Tax audits or assessments relating to Taxes concerning the Business, the Assets or the Assumed Liabilities for taxable periods for which the other party may have a liability under this SECTION 7.19; and (v) furnish the other party with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period. (e) Notwithstanding anything to the contrary in this Agreement, the obligations of the parties set forth in this SECTION 7.19 will be unconditional and absolute and will remain in effect without limitation as to time or amount. 7.20 SHAREHOLDER CONSENT. Immediately following the Closing, Seller shall promptly have prepared and distributed to its shareholders, a proxy statement and proxy requesting that the 30 shareholders ratify the sale of the Assets to Buyer. The meeting of shareholders to vote on the ratification shall be held on or before February 16, 2000. 7.21 NEGOTIATIONS. In negotiating with the Scottish Government, Buyer will request that Seller be released from its obligations to the Scottish Government. 77.22 SALE OF TESTERS. If Buyer sells any of the sigma three test systems that constitute Assets within six months from the Closing Date, Seller shall extend the Seller's warranty on such products for six months from the sale of such products by Buyer. 8. EMPLOYMENT AND EMPLOYEE BENEFITS ARRANGEMENTS 8.1 EMPLOYEES. As of the Closing Date, Seller will terminate the employment of all Employees employed by Seller in connection with the Business (other than those Employees to whom Buyer decides, in its sole discretion, not to offer employment and whom Seller desires to retain). Seller will retain and assume all liabilities, and carry out all obligations accrued on or before the Closing Date, with respect to each such terminated Employee's compensation, benefits and other entitlements resulting from such termination. Buyer will, immediately following the Closing Date, offer to employ Seller's employees who work in the Business, on terms and conditions to be established by Buyer. Seller will make available to Buyer the personnel records for each Employee. Seller will not make any representations or assurances to the Employees that all or any of them will be hired by Buyer or what their wages, hours, or terms and conditions of employment would be were they employed by Buyer. Buyer will not solicit or hire Employees without the consent of Seller. 8.2 BENEFIT PLANS. Without limiting the generality of SECTION 2.2 hereof, and except as otherwise provided in this ARTICLE 8, Seller will retain and be solely responsible for (i) all liabilities and obligations under all Benefit Plans and Benefit Arrangements, including all liabilities and obligations arising under the continuation coverage requirements of Section 4980B of the Code and Part 6 of Title I of ERISA; (ii) any long-term disability benefits provided under any Benefit Plan, including any claims resulting from disabilities incurred but not reported as of the Closing Date; (iii) any benefits provided to Persons who do not become Continuing Employees; (iv) any expenses incurred under Seller's Benefit Plans and Benefit Arrangements; and (v) any award of stock appreciation rights, stock options, restricted stock, performance shares or units, or other incentive compensation by Seller. 8.3 NO RIGHT TO BENEFITS. No provision contained in this Agreement will create any third party beneficiary or other rights in any employee or former employee of Seller (or any beneficiary or dependent thereof) in respect of continued employment or resumed employment with any Buyer or the Business, and no provision of this Agreement will create any such rights in any such Person in respect of any benefits that may be provided under any employee benefit plan or arrangement that may be established by any Buyer. 31 8.4 EMPLOYEE AGREEMENTS. Seller hereby (i) assigns to Buyer all of Seller's rights under all confidentiality and non-competition agreements that exist with any Employees (other than those Employees, if any, retained by Seller), and (ii) pursuant to SECTION 7.8(b), provides copies of all such agreements to Buyer. 8.5 RIGHT TO CHANGE BENEFITS. Buyer will have the right, in the good faith exercise of its managerial discretion, to make changes or cause changes in the compensation, benefits (including retiree medical, pension, thrift plan or other benefits), and other terms of employment for, and to terminate the employment of, any Continuing Employee. 9. INTENTIONALLY LEFT BLANK 10. INTENTIONALLY LEFT BLANK 11. SURVIVAL All covenants and agreements contained herein survive, without limitation as to time (except as may be otherwise provided in such covenants and agreements), the execution and delivery of this Agreement and the Closing hereunder. All representations and warranties contained herein will terminate and expire on the second anniversary of the Closing Date, except with respect to (i) SECTIONS 5.3, 5.9 AND 5.10, for which the representations and warranties contained therein will continue to survive indefinitely; (ii) SECTION 5.15, for which the representations and warranties contained therein will terminate and expire on the tenth anniversary of the Closing Date; and (iii) SECTION 5.14, for which the representations and warranties contained therein will terminate and expire 60 days after the expiration of the applicable statute of limitations or any extensions thereof. 12. INDEMNIFICATION 12.1 OBLIGATION OF SELLER TO INDEMNIFY. Seller agrees to indemnify, defend and hold harmless Buyer and its Affiliates (and their respective directors, officers, employees, stockholders, successors, assigns, representatives, counsel and agents) (collectively, the "BUYER INDEMNITIES") from and against all claims, losses, liabilities, damages, deficiencies, costs or expenses, including interest, penalties and attorneys' fees and disbursements (collectively, "LOSSES"), actually incurred, suffered or paid, directly or indirectly, by the Buyer Indemnities based upon, arising out of or otherwise in respect of: (i) any breach or alleged breach of any representation or warranty of Seller contained in this Agreement, the Schedules hereto, or the Seller Documents; (ii) any breach or alleged breach of any covenant or agreement of Seller contained in this Agreement or any Seller Document; (iii) any Retained Liability; (iv) the failure by Buyer to submit this Agreement and the transactions contemplated hereby to the shareholders of the Buyer for their consideration and approval; (v) the operation of the Assets or the Business prior to the Closing Date; (vi) the sale and transfer of the Assets to Buyer; (vii) (A) any Environmental Claim asserted against Buyer or for which Buyer otherwise becomes liable or must investigate, or any actual or threatened violation of or non-compliance with, or remediation 32 obligation arising under, any Environmental Laws arising from any event, condition, circumstance, activity, practice, incident, action or plan relating in any way to the Assets; (B) the presence of any Materials of Environmental Concern arising out of actions or events relating to or involving Seller, the Business or the Assets prior to the Closing Date on, in, under or affecting all or any portion of the Assets and/or any property on which Seller has conducted business, and any release or threatened release with respect to Materials of Environmental Concern; and (C) the storage, disposal or treatment, or the transportation for storage, disposal or treatment, of Materials of Environmental Concern (regardless of location) arising out of actions or events involving or relating to Seller, the Business or the Assets prior to the Closing Date; (viii) relating to product liability claims which have arisen or may arise against Seller or Buyer or the Assets for actions or events involving or relating to the Seller, the Business or the Assets prior to the Closing Date; (ix) any employee related claims arising out of events that occurred prior to the Closing Date; or (x) the operation of Tanisys Europe Ltd. (including, but not limited to, relating to the Section 7 Industrial Development Act of 1982 Grant from the Scottish Government). 12.2 OBLIGATION OF BUYER TO INDEMNIFY. Buyer agrees to indemnify, defend and hold harmless Seller and its Affiliates (and their respective directors, officers, employees, stockholders, successors, assigns, representative and agents) (collectively the "SELLER INDEMNITIES") from and against any Losses actually incurred, suffered or paid, directly or indirectly, by the Seller Indemnities based upon, arising out of or otherwise in respect of: (i) any breach or alleged breach of any representation or warranty of Buyer contained in this Agreement, or the Buyer Documents; (ii) any breach or alleged breach of any covenant or agreement of Buyer contained in this Agreement or any Buyer Document; or (iii) any Assumed Liability. 12.3 NOTICE AND OPPORTUNITY TO DEFEND. (a) NOTICE OF ASSERTED LIABILITY. Promptly after receipt by any Person entitled to indemnification under this ARTICLE 12 (the "INDEMNITEE") of notice of any demand, assertion or other circumstance which could give rise to a claim or the commencement (or threatened commencement) of any action, proceeding or investigation (each, an "ASSERTED LIABILITY") that may result in a Loss, the Indemnitee will give notice thereof (the "CLAIMS NOTICE") to the party obligated to provide indemnification or payment pursuant to SECTION 12.1 or 12.2 (the "INDEMNIFYING PARTY"), as the case may be, subject to the procedures contained in this SECTION 12.3. The Claims Notice will describe the Asserted Liability in reasonable detail and will, if possible, indicate the amount of the Loss that has been or may be suffered by the Indemnitee. In no event will the Indemnitee's failure to give a Claims Notice to the Indemnifying Party relieve the Indemnifying Party of any liability under this ARTICLE 12, except to the extent that such failure materially prejudices the Indemnifying Party's ability to adequately defend such claim. (b) OPPORTUNITY TO DEFEND. If the Indemnifying Party confirms in writing that it is obligated hereunder to indemnify the Indemnitee with respect to any Asserted Liability, the Indemnifying Party may elect to compromise or defend, at its own expense and with counsel reasonably satisfactory to the Indemnitee, such Asserted Liability; and if the Indemnifying Party so elects to compromise or defend, the Indemnifying Party will have the right to control the defense of such Asserted Liability. If the Indemnifying Party elects to compromise or defend 33 such Asserted Liability, it will within 15 days (or sooner, if the nature of the Asserted Liability so requires) notify the Indemnitee of its intent to do so, and the Indemnitee will cooperate with the Indemnifying Party in the compromise of, or defense against, such Asserted Liability. If the Indemnifying Party elects not to compromise or defend such Asserted Liability, fails to notify the Indemnitee of its election as herein provided or contests its obligation to indemnify under this Agreement, the Indemnitee may pay, compromise or defend such Asserted Liability, and the Indemnitee will have the right to control the compromise or defense of such Asserted Liability; and in such case, the Indemnitee will retain the right to pursue its rights to indemnification hereunder against the Indemnifying Party. Notwithstanding the foregoing provisions of this SECTION 12.3(b), the Indemnifying Party may settle or compromise any Asserted Liability; PROVIDED, that (i) such settlement or compromise does not result in any liability to, restriction on or admission by the Indemnitee; and (ii) such settlement or compromise constitutes or includes a full release of the Indemnitee. In any event, the Indemnitee may participate, at its own expense, in the defense of any Asserted Liability. If the Indemnifying Party chooses to defend any Asserted Liability, the Indemnitee will make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense. 12.4 INDEMNIFICATION PAYMENTS ON AFTER-TAX BASIS. Any indemnification payment hereunder with respect to any Loss will be in an amount which is sufficient to compensate the Indemnitee for the amount of such Loss, after taking into account all increases in federal, state, provincial, local, foreign or other Taxes payable by the Indemnitee because of the receipt of such payment (by reason of such payment being included in income, resulting in a reduction of tax basis or otherwise increasing such Taxes payable by the Indemnitee at any time). 12.5 PAYMENT OF DAMAGES. Any Loss for which Indemnitee is entitled to indemnification under this ARTICLE 12 shall be paid by the Indemnifying Party to the Indemnitee as such Losses are incurred. 12.6 RIGHT OF OFFSET. Upon the determination by Buyer that it is entitled to indemnification for Losses hereunder from Seller, Buyer may offset any indemnification amounts or expense advances to which Buyer believes it is entitled against the Earn Out Payment and/or any Consulting Payment. 13. RESCISSION. If Seller does not obtain on or before February 16, 2000, the requisite shareholder vote to ratify the transactions consummated under this Agreement, Buyer shall have the right to rescind the transactions that occurred hereunder by giving written notice to Seller. 34 14. MISCELLANEOUS 14.1 PUBLICITY. Neither Seller nor Buyer will make any publicity release or announcement concerning this Agreement or the transactions contemplated hereby without the prior written approval thereof by Buyer or Seller, as the case may be, except as required by applicable Law, in which case the party issuing the release will so advise the other party in writing and submit a copy of such release in advance of such issuance. 14.2 NOTICES. Any notice or other communication required or permitted hereunder will be in writing and will be delivered personally, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice will be deemed given when delivered personally, or sent by facsimile transmission (after receiving confirmation of receipt) or, if mailed, five days after the date of deposit in the United States mail or, if express mailed, one Business Day after delivery to a reputable overnight express mail courier, as follows: (i) If to Buyer, to: TanisysOperations, LP 13717 Beta Road Farmers Branch, Texas 75244 Attention: President of General Partner Telecopy: (972) 851-1997 (ii) If to Seller, to: Tanisys Technology, Inc. 12201 Technology Boulevard Austin, TX 78727-6101 Attention: Charles T. Comiso Telecopy: (512) 257-5350 with a copy to: W. Audie Long 7411 John Smith Drive, Suite 200 San Antonio, TX 78229-4898 Telecopy: (210) 949-7024 Either party may by notice given in accordance with this SECTION 14.2 designate another address or Person for receipt of notices hereunder. 14.3 ENTIRE AGREEMENT. This Agreement (including the Schedules hereto), the Buyer Documents and the Seller Documents contain the entire understanding among the parties with respect to the purchase and sale of the Assets and the Business and supersede all prior 35 agreements, written or oral, with respect thereto, including, but not limited to, the Letter Agreement. 14.4 AMENDMENTS AND WAIVERS; PRESERVATION OF REMEDIES. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, in each case only by a written instrument signed by Buyer and Seller or, in the case of a waiver, by the party waiving compliance. No delay on the part of either party in exercising any right, power or privilege hereunder will operate as a waiver thereof; nor will any waiver on the part of either party of any such right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. 14.5 GOVERNING LAW, JURISDICTION, FORUM SELECTION AND WAIVER OF JURY TRIAL. This Agreement, and the rights and obligations of Buyer and Seller hereunder, will be governed by, and construed and enforced in accordance with, the laws of the State of Texas applicable to agreements made and to be performed entirely within such State, without regard to principles of conflict of laws. Buyer and Seller each agrees that any action or proceeding based upon or relating to this Agreement will, to the fullest extent permitted by applicable law, be brought and maintained exclusively in the courts of the State of Texas or in the United States District Court for the Northern District of Texas. Buyer and Seller each hereby irrevocably submits to the jurisdiction of the courts of the State of Texas and of the United States District Court for the Northern District of Texas for purposes of any such action or proceeding, and irrevocably agrees to be bound by any judgment rendered by any such court in connection with such action or proceeding. Buyer and Seller each hereby irrevocably waives, to the fullest extent permitted by law, any objection that it may have to the laying of venue of any such action or proceeding brought in any such court and any claim that any such action or proceeding has been brought in an inconvenient forum. Buyer and Seller each hereby irrevocably waives any right it may have to a trial by jury in respect of any claim based upon or arising out of this Agreement or the transactions contemplated hereby. 14.6 BINDING EFFECT; NO ASSIGNMENT. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement may not be assigned by either party hereto without the prior written consent of the other party; PROVIDED, that Buyer may assign any or all of its rights hereunder to one or more Affiliates of Buyer, but no such assignment will release Buyer from any of its obligations hereunder. 14.7 VARIATIONS IN PRONOUNS. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. 14.8 COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered will be an original, and all such counterparts will together constitute one and the same instrument. 36 14.9 SCHEDULES. The Schedules are an integral part of this Agreement as if fully set forth herein. All references herein to Articles, Sections and Schedules will be deemed references to such parts of this Agreement, unless the context otherwise requires. 14.10 HEADINGS. The headings in this Agreement, in any Appendix, Exhibit or Schedule hereto and in the table of contents are for reference only and will not affect the meaning or interpretation of this Agreement. 14.11 SEVERABILITY OF PROVISIONS. Subject to the reformation provision in SECTION 7.15, if any provision of this Agreement is held to be illegal, invalid or unenforceable under any current or future law, and if the rights or obligations of the parties under this Agreement would not be materially and adversely affected thereby, such provision shall be fully separable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof, the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom. In lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Agreement, a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible, and the parties hereto request the court or any arbitrator to whom disputes relating to this Agreement are submitted to reform the otherwise illegal, invalid or unenforceable provision in accordance with this SECTION 14.11. 14.12 NO THIRD-PARTY BENEFICIARIES. Nothing herein expressed or implied is intended or shall be construed to confer upon or give to any Person, other than the parties hereto and their respective successors and permitted assigns, any rights or remedies under or by reason of this Agreement; provided, however, All Components, Inc. be, and it hereby is, deemed to be a third party beneficiary of this Agreement. 14.13 EQUITABLE RELIEF. Seller acknowledges and agrees that in view of the uniqueness of the Business, damages at law would be an insufficient remedy for a breach of any of its covenants in this Agreement. Accordingly, Seller agrees that in the event of a breach or threatened breach by Seller of any such provisions, Buyer will be entitled to, and Seller acknowledges and covenants that it will not, and will cause its Affiliates not to, contest the appropriateness and availability of, equitable relief in the form of an injunction to prevent irreparable injury. Nothing herein will be construed as prohibiting Buyer from pursuing any other remedies, including damages, for a breach or threatened breach of this Agreement; 14.14 DENOMINATIONS. All dollar references in this Agreement will be understood to refer to United States dollars. 14.15 OBLIGATIONS OF SELLER WITH RESPECT TO AFFILIATES. Each obligation, covenant and undertaking of Seller set forth in each of this Agreement and the Seller Documents will be deemed, as and to the extent required by the context, to also include a corresponding obligation, 37 covenant or undertaking of Seller to cause its Affiliates to perform or satisfy such obligation, covenant or undertaking. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. TANISYSOPERATIONS, LP TANISYS TECHNOLOGY, INC By: Tanisys Acquisition GP, Inc. Its General Partner /s/ Robert Cooper By: /s/ Charles T. Comiso - ----------------------------------- --------------------------------- Robert Cooper, President Name: Charles T. Comioso ------------------------------- Title: Pres. & CEO ------------------------------ 38 APPENDIX A DEFINITIONS AND RULES OF USAGE RULES OF USAGE The terms defined below shall have the respective meanings set forth below for all purposes, and such meanings shall be equally applicable to both the singular and plural forms of the terms defined. "Include," "includes" and "including" shall be deemed to be followed by "without limitation." "Writing," "written" and comparable terms refer to printing, typing, lithography and other means of reproducing words in a visible form. Any instrument or Law defined or referred to below or in any instrument that recites it is to be construed in accordance with this Appendix means such instrument or Law as from time to time amended, modified or supplemented, including (in the case of instruments) by waiver or consent and (in the case of Laws) by succession of comparable successor Laws and includes (in the case of instruments) references to all attachments thereto and instruments incorporated therein. References to any Person are, unless the context otherwise requires, also to its successors and assigns. "Hereof," "herein," "hereunder" and comparable terms refer to the entire instrument in which such terms are used and not to any particular article, section or other subdivision thereof or attachment thereto. References to the singular include, unless the context otherwise requires, references to the plural and vice versa. References in an instrument to "Article", "Section" or another subdivision or to an attachment are, unless the context otherwise requires, to an article, section or subdivision of or an attachment to such instrument. DEFINITIONS "ACCOUNTS RECEIVABLE" means all trade accounts and notes receivable of the Business (net of reserves and applicable allowances). "ADJUSTED PURCHASE PRICE" has the meaning specified in SECTION 3.3. "AEA" means the Atomic Energy Act of 1954 (42 U.S.C. Section 2011 ET SEQ.). "AFFILIATE" means, with respect to any Person, any other Person controlling, controlled by or under common control with, such Person. "AGREEMENT" means the Asset Purchase Agreement dated as of December 7, 1999, by and between Buyer and Seller, as may be amended, modified or supplemented from time to time. "ASSERTED LIABILITY" has the meaning specified in SECTION 12.3. "ASSETS" has the meaning specified in SECTION 1.1. 39 "ASSUMED LIABILITIES" has the meaning specified in SECTION 2.1. "BENEFIT ARRANGEMENTS" means each and all retirement, savings, bonus, commission, deferred compensation, incentive compensation, holiday, vacation, severance pay, stock option, stock purchase, performance, sick pay, sick leave, disability, tuition refund, service award, company car, scholarship, relocation, patent award, fringe benefit or other employee benefit plans, and contracts, policies, practices or arrangements of Seller providing employee or executive compensation benefits to employees of the Business, other than the Benefit Plans. "BENEFIT PLANS" means each and all "employee benefit plans" as defined in Section 3(3) of ERISA, currently or at any time during the past six years maintained or contributed to by the Controlled Group, including (i) any such plans that are "employee welfare benefit plans" as defined in Section 3(1) of ERISA, and (ii) any such plans that are "employee pension benefit plans" as defined in Section 3(2) of ERISA, regardless of whether such Benefit Plans are excluded from ERISA coverage by Section 4 of ERISA. "BUSINESS" has the meaning specified in the second introductory paragraph of the Agreement. "BUSINESS DAY" means, any day other than Saturday, Sunday or a United States federal holiday on which federally chartered banking and financial institutions are not open for the transaction of business. "BUYER" has the meaning specified in the first introductory paragraph of the Agreement. "BUYER DOCUMENTS" means the documents to be delivered on or prior to the Closing Date by Buyer pursuant to the Agreement or any mutually satisfactory list of closing documents. "BUYER INDEMNITIES" has the meaning specified in SECTION 12.1. "CAA" means the Clean Air Act (42 U.S.C. Section 7401 ET SEQ.). "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. Section 9601 ET SEQ.). "CLAIMS NOTICE" has the meaning specified in SECTION 12.3. "CLOSING" has the meaning specified in SECTION 4. "CLOSING DATE" has the meaning specified in SECTION 4. "CODE" means the Internal Revenue Code of 1986, as amended. 40 "CONDITION OF THE BUSINESS" means the business, operations, assets, liabilities, properties, condition (financial or otherwise) or prospects of the Business. "CONSULTING PAYMENTS" has the meaning specified in SECTION 3.2(d). "CONTAMINANT" means (i) those substances defined as "hazardous substances," "pollutants" or "contaminants" in Section 101 of CERCLA, (ii) those substances defined as "hazardous waste," "hazardous materials" or "regulated substances" by RCRA, (iii) those substances designated as a "hazardous substance" pursuant to Section 311 of CWA, (iv) those substances defined as "hazardous materials" in Section 103 of HMTA, (v) those substances regulated as a hazardous chemical substance or mixture or as an imminently hazardous chemical substance or mixture pursuant to Section 6 or 7 of TCSA, (vi) those substances regulated by OPA, (vii) those substances defined as a source, special nuclear or by-product material by Section 11 of AEA, (viii) those substances defined as "residual radioactive material" by Section 101 of UMTRCA, (ix) those substances defined as "toxic materials" or "harmful physical agents" pursuant to Section 6 of OSHA, (x) those substances defined as hazardous wastes in 40 C.F.R. Part 261.3, (xi) those substances defined as hazardous waste constituents in 40 C.F.R. Part 260.10, specifically including Appendix VII and VIII of Subpart D of 40 C.F.R. Part 261, (xii) those substances designated as hazardous substances in 40 C.F.R. Parts 116.4 and 302.4, (xiii) those substances defined as hazardous substances or hazardous materials in 49 C.F.R. Part 171.8, (xiv) those substances regulated in the regulations adopted pursuant to such Laws (or any amendments to such Laws), whether or not such regulations are specifically referenced herein, and (xv) any other material, substance or waste that poses or causes, or is alleged to pose or cause, any damage to property or personal injury or threat to the environment. "CONTINUING EMPLOYEE" means each Person employed by Seller in connection with the Business, immediately prior to the Closing Date, who becomes an employee of Buyer as of the Closing Date or within 60 days thereafter. "CONTROLLED GROUP" means Seller, any Affiliate of Seller or any other organization that together with Seller is treated as a single employer under Section 414 of the Code. "CREDITOR'S PLAN" has the meaning specified in SECTION 5.31. "CURRENT LIABILITIES" means all liabilities listed on SCHEDULE 2.1. "CWA" means the Federal Water Pollution Control Act (33 U.S.C. Section 1251 ET SEQ.). "EMPLOYEES" means all regular, full-time employees (excluding those on lay-off or leave of absence, whether paid or unpaid, seasonal, temporary and/or part-time employees) of the Business immediately prior to the Closing Date. 41 "ENVIRONMENTAL CLAIM" means any written accusation, allegation, notice of violation, claim, demand, order, consent decree, directive, cost recovery action or other cause of action by or on behalf of any Governmental Entity or any other Person for damages, injunctive or equitable relief, personal injury, remedial action costs, tangible or intangible property damage, natural resource damage, nuisance, pollution or any adverse effect on the environment caused by any Contaminant, or for fines, penalties or restrictions, resulting from or based upon (i) the existence or continuation of a release of any Contaminant, (ii) exposure to any Contaminant, (iii) the presence, use, handling, transportation, storage, treatment or disposal of any Contaminant, or (iv) the violation or alleged violation of any Environmental Law. "ENVIRONMENTAL LAWS" means (i) CERCLA, (ii) CWA, (iii) RCRA, (iv) AEA, (v) CAA, (vi) EPCRA, (vii) FIFRA, (viii) OPA, (ix) SDWA, (x) SMCRA, (xi) TSCA, (xii) UMTRCA, (xiii) the Pollution Prevention Act of 1990 (42 U.S.C. Section 13101 ET SEQ), (xiv) HMTA, (xv) NWPA, (xvi) the regulations adopted pursuant to all such foregoing Laws, and (xvii) all other Laws concerning Contaminants, pollution or the protection of air, water or land, but excluding any such Laws concerning occupational health and safety (including OSHA and all regulations thereunder). "EPCRA" means the Emergency Planning and Community Right to Know Act (42 U.S.C. Section 11001 ET SEQ.). "EQUIPMENT" means the machinery, equipment, tools, furniture, furnishings, automobiles, trucks, tractors, trailers, forklifts and other vehicles and mobile equipment, computers, software, copiers, fax machines, telephones and all related equipment, spare parts and all other tangible personal property owned or held by Seller, wherever located, used or useful in connection with the conduct of the Business. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "FACILITIES" has the meaning specified in the second introductory paragraph of the Agreement. "FIFRA" means the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 ET SEQ.). "GAAP" means United States generally accepted accounting principles applied on a consistent basis throughout the periods involved. "GOVERNMENTAL ENTITY" means any government or political subdivision, whether federal, state, provincial, local or foreign, or any administrative, regulatory or other agency, commission or instrumentality of such government or political subdivision, or any arbitrator or arbitral tribunal, including any court of law. 42 "HMTA" means the Hazardous Materials Transportation Act (49 U.S.C. App. Section 1801 ET SEQ.). "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "INDEMNIFYING PARTY" has the meaning specified in SECTION 12.3. "INDEMNITEE" has the meaning specified in SECTION 12.3. "INFORMATION TECHNOLOGY" means any computer software or hardware (whether general or specific purpose) and any similar or related items of automated, computerized or management information systems. "INTELLECTUAL PROPERTY" means (i) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications and patent disclosures, together with all reissues, continuations, continuations-in-part, divisionals, revisions, utility models, extensions and reexaminations thereof; (ii) all trademarks, service marks, trade dress, logos, trade names and corporate names, together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith; (iii) all copyrightable works, all copyrights and all applications, registrations, renewals and derivatives in connection therewith; (iv) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, product certifications, designs (including board designs), drawings, specifications, customer, prospect and supplier lists, distribution and manufacturer's representative lists, pricing and cost information, and business and marketing plans and proposals); (v) all computer software (including data and related documentation); (vi) all other proprietary rights; (vii) all copies and tangible embodiments thereof (in whatever form or medium); and (viii) all licenses or agreements in connection with the foregoing, in each case on a worldwide basis and used or useful in the Business. "INTERIM BALANCE SHEET" has the meaning specified in SECTION 5.16. "INTERIM FINANCIAL STATEMENTS" has the meaning specified in SECTION 5.16. ""INVENTORY" means all inventory (net reserves and allowances) used or useful in the Business owned or held by Seller, wherever located, including all raw materials, chemicals, packaging materials, supplies, work in process and finished goods. "IRS" means the Internal Revenue Service. "KNOWLEDGE" means (a) with respect to Seller, (i) any knowledge attributable to Seller or any Affiliate of Seller based on its files, books and records, Tax Returns or any other 43 written documentation; and (ii) the actual personal knowledge of any of the employees, officers and directors of Seller or any Affiliate of Seller; and (b) with respect to Buyer, (i) any knowledge attributable to Buyer or any Affiliate of Buyer based on its files, books and records, Tax Returns or any other written documentation; and (ii) the actual personal knowledge of any of the employees, officers and directors of Buyer or any Affiliate of Buyer. "LAWS" means all federal, state, provincial, local and foreign laws, statutes, ordinances, rules, regulations, orders, judgments, decrees, writs, arbitral orders, settlement agreements, conciliation agreements, injunctions or other requirements of all applicable governmental, judicial, legislative, executive, administrative and regulatory authorities. "LEASED REAL PROPERTY" has the meaning specified in SECTION 5.9. "LIENS" means all liens, pledges, mortgages, security interests, claims, covenants, leases, subleases, charges, conditions, options, rights of first refusal, licenses, easements, servitudes, rights of way, encumbrances or any other restriction or limitation whatsoever. "LOSSES" has the meaning specified in SECTION 12.1. "MEETING DATE" means the date Seller's shareholders meet to vote on a proposal to ratify the transactions consummated under this Agreement. "NOTICES" means all notices of violation, Liens, complaints, suits, orders, citations, fines, penalties or other notices. "NWPA" means the Nuclear Waste Policy Act (42 U.S.C. Section 10101 ET SEQ.). "OBSOLETE INVENTORY" means any Inventory that is obsolete or otherwise unusable or unsalable in the ordinary course of business. "OFF-SITE ENVIRONMENTAL LIABILITIES" means all liabilities, obligations, claims, damages, costs and expenses, including capital expenditures and natural resource damage claims (whether arising before, on or after the Closing Date) incurred (i) as a result of any requirement or violation of any Environmental Laws; or (ii) as a result of or in connection with any investigation, inquiry, order, demand, claim, action, citation, fine or other proceeding by any Governmental Entity or by any other Person, and that in either case arises as a result of the off-site treatment, storage or disposal (or any arrangement with respect thereto by Seller) of any Contaminant or other materials generated or handled in connection with Seller's ownership or operation of the Real Property, the Assets or the Business. "ON-SITE ENVIRONMENTAL LIABILITIES" means all liabilities, obligations, claims, damages, costs and expenses, including capital expenditures and natural resource damage claims (whether arising before, on or after the Closing Date) incurred (i) as a result of any requirement of or violation of any Environmental Laws; or (ii) as a result of or in connection with any 44 investigation, inquiry, order, demand, claim, action, citation, fine or other proceeding by any Governmental Entity or by any other Person and that in either case arises as a result of Seller's ownership, occupancy or use of the Real Property, or operation of the Assets or the Business thereon, including the migration of Contaminants originating from the Real Property in or by means of soil, groundwater or surface water; PROVIDED, that On-Site Environmental Liabilities will not include (x) any Off-Site Environmental Liabilities or (y) any liabilities, obligations, claims, damages, costs and expenses resulting from any failure by Seller (A) to obtain or comply with permits; (B) to file required, complete or accurate reports, documents or other paperwork with Governmental Entities or any other Person; (C) to retain reports, documents, records or other paperwork for required periods of time; (D) to comply with any consent orders, consent agreements or other settlement agreements with any Governmental Entity or any other Person; (E) to perform or to document any required employee training; (F) to report any release of any material required to be reported to any Governmental Entity or any other Person; (G) to prepare or implement plans, including any stormwater pollution prevention plan or spill prevention and control plan, that meet the requirements of any Environmental Law; (H) to comply with any emergency preparedness or waste minimization requirement; (I) to comply with any above ground storage tank regulatory requirement; or (J) to store material in compliance with Environmental Laws, except to the extent that any such failure has resulted in the presence of a Contaminant in or on the soil, groundwater or surface water at the Owned Real Property. "OPA" means the Oil Pollution Act of 1990 (33 U.S.C. Section 2701 ET SEQ.). "OPERATIVE DOCUMENTS" means, collectively, the Agreement, the Buyer Documents and the Seller Documents. "OSHA" means the Occupational Safety and Health Act, 29 U.S.C. Section 651 ET SEQ.) and the regulations thereunder. "PERMITS" has the meaning specified in SECTION 5.5. "PERMITTED LIENS" means (i) any Liens securing Taxes; or (ii) any claims of materialmen, carriers, landlords and like Persons, in each case, which are not yet due and payable or are being contested in good faith and which, either individually or in the aggregate, would not interfere with Buyer's ownership, use or operation of such Assets or conduct of the Business and would not create the risk of imposition of criminal penalties on Buyer. "PERSON" means any individual, corporation, partnership, limited liability company, firm, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Entity or other entity. "PURCHASE PRICE" has the meaning specified in SECTION 3.1. 45 "RCRA" means the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 ET SEQ.). "REAL PROPERTY" has the meaning specified in SECTION 5.9. "REAL PROPERTY LEASES" has the meaning specified in SECTION 5.9. "RECORDS" means all books and records of Seller relating to the Business, including all original agreements, files, documents, records, computer files and programs, operating data, drawings, specifications, environmental studies, maintenance records, operational manuals and personnel records with regard to the Continuing Employees. "REQUIRED CONSENTS" has the meaning specified in SECTION 5.8. "RETAINED ASSETS" has the meaning specified in SECTION 1.2. "RETAINED LIABILITIES" has the meaning specified in SECTION 2.2. "SDWA" means the Safe Drinking Water Act (42 U.S.C. Sections 300f ET SEQ.). "SELLER" has the meaning specified in the first introductory paragraph of the Agreement. "SELLER DOCUMENTS" means the documents to be delivered on or prior to the Closing by Seller pursuant to this Agreement or any list of closing documents satisfactory to Seller and Buyer. "SELLER INDEMNITIES" has the meaning specified in SECTION 12.2. "SETTLEMENT AMOUNT" has the meaning specified in SECTION 3,2(c). The Settlement Agreement has been calculated by the parties with respect to the Business as: Accounts Receivable plus Inventory less the amount of the secured liability to Bank of America relating to the Business. "SMCRA" means the Surface Mining Control and Reclamation Act of 1974 (30 U.S.C. Sections 1201 ET SEQ.). "STRADDLE PERIOD" means a taxable year or period beginning before and ending after the close of the day the Closing occurs, which will be treated on a "closing of the books" basis as two partial periods, one ending on the close of the day the Closing occurs and the other beginning on the day immediately following the day on which the Closing occurs, except that Taxes (such as property Taxes) imposed on a periodic basis will be allocated on a daily basis. "TAX" means (i) any federal, state, provincial, local or foreign net income, gross income, gross receipts, windfall profits, severance, production, property, sales, use, license, 46 excise, franchise, employment, payroll, withholding, alternative or add-on minimum, AD VALOREM, excise, value added, transfer, stamp, environmental, registration or inventory tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, imposed by any Governmental Entity; and (ii) any liability for the payment of amounts with respect to any tax, duty, fee, assessment and charge described in clause (i) as a result of being a member of an affiliated, consolidated, combined or unitary group, or as a result of any obligation under any tax sharing arrangement or tax indemnity agreement. "TAX RETURN" means any return, report or similar statement required to be filed with respect to any federal, state, local, provincial or foreign Taxes (including any attached schedules), including, any information return, claim for refund, amended return or declaration of estimated Tax. "TREASURY REGULATIONS" means the regulations of the United States Department of Treasury promulgated thereunder. "TSCA" means the Toxic Substances Control Act (15 U.S.C. Section 2601 ET SEQ.). "UMTRCA" means the Uranium Mill Tailings Radiations Control Act of 1978 (42 U.S.C. Section 7901 ET SEQ.). " ANNUAL FINANCIAL STATEMENTS" has the meaning specified in Section 5.16. "YEAR 2000 COMPLIANT" means that Information Technology is capable of being used prior to, during and after the calendar year 2000 A.D., that such Information Technology used during each such time period will accurately receive, provide and process date/time data (including but not limited to calculating, comparing and sequencing from, into and between the 20th and 21st centuries, including the calendar years 1999 and 2000, and leap year calculations), and that such Information Technology will not malfunction, cease to function or provide invalid or incorrect results as a result of such date/time data. 47 EX-10.32 3 EXHIBIT 10.32 TERM PROMISSORY NOTE $911,339.00 Dallas, Texas December 9, 1999 this ("Note") 1. PROMISE TO PAY. FOR VALUE RECEIVED, the undersigned, TANISYS TECHNOLOGY, INC., a Wyoming corporation, 1ST TECH CORPORATION, a Delaware corporation, and DARKHORSE SYSTEMS, INC., a Delaware corporation (collectively, "Maker"), hereby promise to pay to TANISYS OPERATIONS, L.P., a Texas limited partnership (hereinafter, together with all subsequent holders of this Note, "Payee"), at its address set forth in the Loan Agreement referred to below, or order, in lawful money of the United States of America, the principal sum of $911,339.00, on the dates and in the principal amounts provided in the Loan Agreement, and to pay interest on the outstanding principal amount of this Note at the rates per annum and on the dates provided in the Loan Agreement. 2. PREPAYMENTS. This Note may be prepaid, in whole or in part at any time without notice, premium, penalty or fee. 3. SECURITY FOR NOTE. This Note is secured by certain security interests in assets of Maker granted to Lender, as described and granted in that certain Loan and Security Agreement dated July 24, 1997 by and between Maker, as "Borrower" and NationsCredit Commercial Corporation, through NationsCredit Funding Division ("Original Lender"), as "Lender" (as such agreement has been modified, supplemented, or amended, but not extinguished, including, without limitation, the Modification Agreement dated of even date herewith pursuant to which, among other things, Tanisys Operations, L.P. is substituted for Original Lender, the "Loan Agreement") and the other Loan Documents, the terms of which are incorporated herein by reference and to which instrument reference is hereby made for a further statement of the rights of Payee. 4. WAIVERS. Except as expressly provided in the Loan Agreement, the Maker and any sureties, guarantors, endorsers and all other parties liable for payment of this Note jointly and severally (i) waive demand, notice of intent to demand, presentment, notice of nonpayment, notice of intent to accelerate, notice of acceleration, diligence in collecting, grace, protest, notice of protest, notice of dishonor, notice of application for or actual appointment of a receiver for the Collateral or any other asset of Maker, bringing of suit, right to demand a jury trial in any proceeding brought hereunder, and diligence in taking any action to collect any sums owing hereunder or in proceeding against any of the rights and properties securing payment of the indebtedness evidenced by this Note, (ii) consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, without prejudice to the holder; (iii) agree to any substitution, subordination, exchange or release of any such security or the release of any party primarily or secondarily liable hereon; (iv) agree that Payee shall not be required first to institute suit or exhaust its remedies hereon against Maker or others liable or to become liable hereon or to enforce its rights against them or any security herefor; and (v) consent to any extension or postponement of time of payment of this Note or to any other indulgence with respect hereto without notice to any of them, and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect or enforce this Note or any 1 installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable attorneys' fees. 5. TERMINATION. This Note may not be terminated orally, but only by a discharge in writing signed by the holder of this Note at the time such discharge is sought. 6. APPLICABLE LAW. In the event the enforceability or validity of any provision of this Note or of any document or instrument evidencing, securing or otherwise related to the indebtedness represented by this Note is challenged or questioned, such provision shall be governed by, and shall be construed under the laws of the State of Texas. Venue for any action in connection with this Note shall be exclusively in Dallas County, Texas. 7. MULTIPLE MAKERS AND ENDORSERS. Should this Note be signed or endorsed by more than one person and/or entity, all of the obligations herein contained shall be considered the joint and several obligations of each maker and endorser hereof. 8. DEFINITIONS. Capitalized terms used but not defined herein shall have the meaning given to such terms in the Loan Agreement. IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and year above first written. MAKER: TANISYS TECHNOLOGY, INC., a Wyoming corporation By: /s/ Charles T. Comiso ------------------------------------------- Name: Charles T. Comiso ------------------------------------------ Title: Pres. & CEO ----------------------------------------- 1st TECH CORPORATION, a Delaware corporation By: /s/ Charles T. Comiso ------------------------------------------- Name: Charles T. Comiso ------------------------------------------ Title: Pres. & CEO ----------------------------------------- DARKHORSE SYSTEMS, INC., a Delaware corporation By: /s/ Charles T. Comiso ------------------------------------------- Name: Charles T. Comiso ------------------------------------------ Title: Pres. & Ceo ----------------------------------------- 2 EX-10.33 4 EXHIBIT 10.33 TERM PROMISSORY NOTE $85,000 Dallas, Texas December 9, 1999 this ("Note") 1. PROMISE TO PAY. FOR VALUE RECEIVED, the undersigned, TANISYS TECHNOLOGY, INC., a Wyoming corporation, 1ST TECH CORPORATION, a Delaware corporation, and DARKHORSE SYSTEMS, INC., a Delaware corporation (collectively, "Maker"), hereby promise to pay to TANISYS OPERATIONS, L.P., a Texas limited partnership (hereinafter, together with all subsequent holders of this Note, "Payee"), at its address set forth in the Loan Agreement referred to below, or order, in lawful money of the United States of America, the principal sum of $85,000, together with interest from day to day at the lesser of the highest rate permitted by law and (ii) a percentage equal to the sum of the prime rate of interest charged from time to time by Bank of America, N.A. in Dallas, Texas plus two percent (2%) per annum. Interest shall be computed on the basis of a three hundred sixty (360) day year. 2. PAYMENTS. Payments of accrued but unpaid interest only shall be due and payable on the first day of each month commencing January 1, 2000 and continuing on the first day of each month thereafter until the Maturity Date (hereinafter defined). This Note and all accrued but unpaid interest and all outstanding principal shall finally become due and payable in its entirety on March 31, 2000 (the "Maturity Date"). If any installment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which Payee is not open for business, such payment shall be made on the next succeeding day on which Payee is open for business; and such extension of time shall in such case be included in computing interest in connection with such payment. 4. PREPAYMENTS. This Note may be prepaid, in whole or in part at any time without notice, premium, penalty or fee. 5. DEFAULT. If default is made in the payment of any installment of principal or interest under this Note, then in any such event Payee may at its option, without notice or demand, declare the entire unpaid principal balance of and accrued but unpaid interest on the indebtedness evidenced by this Note immediately due and payable without further notice or demand, foreclose all liens and security interests securing the payment thereof or any part thereof, all at the option of the holder of this Note. Failure to exercise any such option shall not constitute a waiver of the right of any holder hereof to exercise the same at any later time or in the event of any subsequent default. The acceptance by Payee of any payment hereunder that is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing options at that time, or at any subsequent time, or nullify any prior exercise of any such option, without the express written consent of Payee. 6. USURY LIMITATIONS. Maker and Payee intend to conform strictly to the applicable usury laws. Notwithstanding anything to the contrary in this Note or in any other agreement entered into in connection herewith or securing the indebtedness evidenced hereby, whether now existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all 1 interest and any other charges constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under this Note or otherwise in connection with this loan transaction shall under no circumstances exceed the maximum amount of interest permitted by applicable law. In the event the maturity of this Note is accelerated by reason of an election by the holder hereof resulting from a default hereunder or under any other document executed as security herefor or in connection herewith, or by voluntary prepayment by the Maker, or otherwise, then earned interest may never include more than the maximum rate of interest permitted by applicable law, computed from the dates of each advance of the loan proceeds outstanding until payment. If from any circumstance any holder of this Note shall ever receive interest or any other charges constituting interest, or adjudicated as constituting interest, the amount, if any, which would exceed the maximum rate of interest permitted by applicable law shall be applied to the reduction of the principal amount owing on this Note or on account of any other principal indebtedness of the Maker to the holder of this Note, and not to the payment of interest; or if such excessive interest exceeds the unpaid balance of principal hereof and such other indebtedness, the amount of such excessive interest that exceeds the unpaid balance of principal hereof and such other indebtedness shall be refunded to the Maker. All sums paid or agreed to be paid to the holder of this Note for the use, forbearance or detention of the indebtedness of the Maker to the holder of this Note shall be amortized, prorated, allocated an spread throughout the full term of such indebtedness until payment in full so that the actual rate of interest on account of such indebtedness is uniform throughout the term thereof, and, in conjunction therewith, if the loan evidenced by this Note should ever be deemed to consist of two or more loans, then any sum paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the indebtedness of the Maker to the holder of this Note which is deemed to be excessive interest with respect to one or more such loans shall be allocated to the loan(s) for which a maximum lawful rate of interest has not been contracted for, charged or received or for which no maximum rate of interest exists. The provisions of this paragraph shall control all existing and future agreements between Maker and Payee. 7. WAIVERS. Except as expressly provided herein, the Maker and any sureties, guarantors, endorsers and all other parties liable for payment of this Note jointly and severally (i) waive demand, notice of intent to demand, presentment, notice of nonpayment, notice of intent to accelerate, notice of acceleration, diligence in collecting, grace, protest, notice of protest, notice of dishonor, notice of application for or actual appointment of a receiver for the Collateral or any other asset of Maker, bringing of suit, right to demand a jury trial in any proceeding brought hereunder, and diligence in taking any action to collect any sums owing hereunder or in proceeding against any of the rights and properties securing payment of the indebtedness evidenced by this Note, (ii) consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, without prejudice to the holder; (iii) agree to any substitution, subordination, exchange or release of any such security or the release of any party primarily or secondarily liable hereon; (iv) agree that Payee shall not be required first to institute suit or exhaust its remedies hereon against Maker or others liable or to become liable hereon or to enforce its rights against them or any security herefor; and (v) consent to any extension or postponement of time of payment of this Note or to any other indulgence with respect hereto without notice to any of them, and without in any way affecting the personal liability of any party hereunder. If any efforts are made to collect or enforce this Note or any 2 installment due hereunder, the undersigned agrees to pay all collection costs and fees, including reasonable attorneys' fees. 8. TERMINATION. This Note may not be terminated orally, but only by a discharge in writing signed by the holder of this Note at the time such discharge is sought. 9. APPLICABLE LAW. In the event the enforceability or validity of any provision of this Note or of any document or instrument evidencing, securing or otherwise related to the indebtedness represented by this Note is challenged or questioned, such provision shall be governed by, and shall be construed under the laws of the State of Texas. Venue for any action in connection with this Note shall be exclusively in Dallas County, Texas. 10. NOTICES. Every notice, demand or other communication (hereafter in this paragraph referred to collectively as "notices" and referred to singly as a "notice") which Maker or Payee is required or permitted to give to any other party pursuant to this Note or at law shall be in writing and, unless otherwise expressly required by law, shall be delivered personally, by recognized overnight national courier service (such as Federal Express), addressed as follows: If to Maker: 12201 Technology Blvd. Suite 130 Austin, Texas 78727 If to Payee: c/o All Components, Inc. 13717 Beta Road Farmers Branch, Texas 75244 or at any other address designated by either party by notice to the other party pursuant to this paragraph. Any notice delivered to a party's designated address by (a) personal delivery or (b) recognized overnight national courier service shall be deemed to have been received by such party at the time the notice is delivered to such party's designated address. 7. MULTIPLE MAKERS AND ENDORSERS. Should this Note be signed or endorsed by more than one person and/or entity, all of the obligations herein contained shall be considered the joint and several obligations of each maker and endorser hereof. 3 IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and year above first written. MAKER: TANISYS TECHNOLOGY, INC., a Wyoming corporation By: /s/ Charles T. Comiso -------------------------------------------- Name: Charles T. Comiso ------------------------------------------ Title: Pres. & CEO ----------------------------------------- 1st TECH CORPORATION, a Delaware corporation By: /s/ Charles T. Comiso ------------------------------------------- Name: Charles T. Comiso ------------------------------------------ Title: Pres. & CEO ----------------------------------------- DARKHORSE SYSTEMS, INC., a Delaware corporation By: /s/ Charles T. Comiso ------------------------------------------- Name: Charles T. Comiso ------------------------------------------ Title: Pres. & CEO ----------------------------------------- 4 EX-10.34 5 EXHIBIT 10.34 AGREEMENT RELATING TO NONCOMPETITION The parties hereto are entering into this Agreement contemporaneously with the execution of that certain Asset Purchase Agreement (the "Asset Purchase Agreement") dated as of December 7, 1999, by and between Tanisys Operations, LP, a Texas limited partnership ("Buyer") and Tanisys Technology, Inc., a Wyoming corporation ("Buyer"), pursuant to which Buyer is purchasing substantially all of the assets of Seller's worldwide memory components distribution and manufacturing business. As an inducement for Buyer to purchase the Assets and assume the Assumed Liabilities, Seller agrees not to compete with Buyer or solicit customers or employees from Buyer or its Affiliates as more particularly described in Section 7.15 of the Asset Purchase Agreement. The parties agree that the allocation for tax purposes of $100,000 of the Purchase Price for such noncompetition agreement would be grossly inadequate to compensate Buyer in the event Seller breaches the provisions of Section 7.15 (a "Breach") of the Asset Purchase Agreement. Accordingly, the parties agree that if Seller violates Section 7.15 of the Asset Purchase Agreement, $1,500,000 of the Purchase Price shall be refunded in cash to Buyer by Seller as the parties recognize that such violation necessarily means that the value of the Asset Purchase Agreement was lower than otherwise contemplated by the parties without such a Breach; therefore the parties have estimated and assigned the stated sum as a proper reduction and refund amount. In addition to the refund, Buyer shall be entitled to recover any additional actual damages that may be proven or recovered at trial or in arbitration, as applicable. The right of Buyer to receive a $1,500,000 refund hereunder may be invoked as many times as it is proven or determined by a court or in arbitration that Seller has violated Section 7.15 of the Asset Purchase Agreement in separate instances; provided, however, that the amount of refunds hereunder may not exceed the amount of the Purchase Price plus the Consulting Payments, the Earn Out Payments and the amount of Assumed Liabilities. This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of Texas without regard to its principles of conflict of laws. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. All initial capitalized terms used herein and not otherwise defined herein shall have the same meanings as in the Asset Purchase Agreement. TANISYS OPERATIONS, LP TANISYS TECHNOLOGHY, INC. By: TANISYS ACQUISITION GP, INC. By: /s/ Charles T. Comiso Its General Partner ------------------------------- Name: Charles T. Comiso ----------------------------- Title: President & CEO ---------------------------- /s/ Robert Cooper - ------------------------------- Robert Cooper, President EX-10.35 6 EXHIBIT 10.35 SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT is entered into by and between Boston Financial & Equity Corporation ("BFEC") and Tanisys Technology, Inc. ("TTI"). WHEREAS, BFEC and TTI entered into that certain Master Lease Agreement No. 1299 dated as of March 4, 1999, which Master Lease Agreement controlled the leasing of equipment from BFEC to TTI and in connection therewith Schedule No. 1 was executed on March 25, 1999, and Schedule No. 2 was executed on August 12, 1999, each schedule listing equipment leased pursuant thereto under the terms of the Master Lease Agreement (herein all such equipment is referred to as the "Equipment" and the Master Lease Agreement and the two schedules are referred to as the "Lease"); and WHEREAS, TTI has defaulted under the terms of the Lease and has requested that BFEC sell the Equipment to Tanisys Operations, LP ("Purchaser") pursuant to a Contract for Sale of Equipment of even date herewith; and WHEREAS, BFEC has agreed to do so subject to the terms and conditions of this Settlement Agreement. NOW, THEREFORE, for Ten Dollars ($10.00) and other good and valuable consideration, the parties hereto agree as follows: 1. TTI agrees to pay $24,000.00 in cash to BFEC, which payment is to be made by wire transfer per wiring instructions furnished by BFEC to TTI as follows: Bank Boston Account No. 561-27775 ABA No. 011000390 and to execute a Promissory Note in the principal face amount of $22,000.00 payable to BFEC in the form attached hereto as EXHIBIT A and incorporated herein (the "Note"). 2. TTI has requested and hereby requests that BFEC enter into the Contract for Sale of Equipment with Purchaser and convey the Equipment to Purchaser pursuant to the Contract for Sale of Equipment. TTI agrees that the Lease has terminated and that all of its rights in or to the Equipment have terminated as a result and agrees to execute any and all documents necessary or appropriate to evidence the fact that it no longer has any right, title, or interest in or to the Equipment arising under or pursuant to the Lease or otherwise. TTI also agrees to cooperate fully with Purchaser in turning over and locating the Equipment and delivering and turning over the right to physical possession of the Equipment to Purchaser and agrees to follow Purchaser's instructions with respect thereto and agrees to execute any documents that BFEC or Purchaser deem necessary or appropriate to evidence its conveyance of the Equipment to Purchaser, including any documents releasing or conveying any interest TTI might have in the Equipment arising under or pursuant to the Lease or otherwise. 3. TTI, on behalf of itself, its successors and assigns and any person or entity who might assert a claim by, through, or under it (collectively herein the "TTI Releasors") agrees to release, acquit 1 of 3 and forever discharge and by these presents does hereby release, acquit, and forever discharge BFEC, its successors, assigns, officers, servants, agents, employees, and representatives (collectively herein the "BFEC Releasees"), of, from and for any and all claims, liabilities, obligations, and causes of action whatsoever, whether past, present, or future, fixed or contingent, known or unknown, whether direct, indirect, or derivative, whether arising by law, in equity, or otherwise which the TTI Releasors now have, or hereafter can, shall, or may have, against the BFEC Releasees, by reason of, or relating to any matter, cause, or thing whatever, from the beginning of time through the date of this Release including without limitation any such claims arising out of or pursuant to the terms of the Lease, or relating to any actions which BFEC has taken or failed to take under the Lease or with respect to the Equipment, or with respect to TTI's default under the Lease, or relating to the acceleration of rents by BFEC under the Lease, and any negotiations or discussions concerning the Lease or the Equipment. This Release is intended to be a broad general release of all claims but it does not release the parties from any liabilities or obligations arising under or pursuant to the terms of this Agreement. 4. BFEC, on behalf of itself, its successors and assigns and any person or entity who might assert a claim by, through, or under it (collectively the "BFEC Releasors") agrees except as set forth in Paragraph 5 hereof to release, acquit, and forever discharge and by these presents hereby release, acquit, and forever discharge TTI, and its successors, assigns, officers, servants, agents, employees, and representatives (collectively the "TTI Releasees") of, from, and for any and all claims, liabilities, obligations, and causes of action whatsoever, whether past, present, or future, fixed or contingent, known or unknown, whether direct, indirect, or derivative, whether arising by law, in equity, or otherwise, which the BFEC Releasors now have or hereafter can, shall, or may have against the TTI Releasees relating to any matter, cause or thing whatever, from the beginning of time through the date of this Release including without limitation any claims arising out of or related to the Lease and the Equipment and any negotiations or discussions concerning the Lease or the Equipment. This Release is intended to be a broad general release of all claims but it does not release the parties from any liabilities or obligations arising under or pursuant to the terms of this Agreement. However, the release by BFEC of TTI as set forth in this paragraph 4 shall not become effective unless and until TTI has paid the Note in full. If TTI defaults under the terms of the Note, TTI understands and agrees that the release set forth in this paragraph 4 shall be null and void but the release of TTI of BFEC set forth in paragraph 3 hereof shall remain in full force and effect. However, BFEC agrees not to assert or pursue any claims it might have against TTI unless and until TTI defaults under the terms of the Note. TTI agrees to waive any claim that the rights and claims of BFEC against it which would be released when and if the release in paragraph 4 becomes effective shall not be barred by limitations as a result of BFEC's forebearance in asserting such claims pursuant hereto. 5. Notwithstanding anything contained in Paragraph 4 to the contrary, BFEC and TTI understand and agree that the release set forth in Paragraph 4 shall not release or otherwise affect the rights of BFEC arising under and pursuant to that certain Stock Purchase Warrant Agreement dated March 10, 1999, pursuant to which TTI has granted BFEC the right to purchase 75,000 fully paid shares of common stock for $1.61 per share and the parties agree that BFEC's rights under that agreement and any other rights of BFEC with respect to the acquisition of stock in TTI shall survive the release in Paragraph 4 and remain in full force and effect. 2 of 3 6. This Agreement and all the terms herein are binding upon, and inure to the benefit of, the respective heirs, successors, assigns, and personal representatives, as the case may be, of the parties hereto. 7. This Agreement shall be governed by, construed, and interpreted, and the rights of the parties determined in accordance with, the laws of the Commonwealth of Massachusetts. 8. This Agreement constitutes the full, complete, and final statement of the agreement of the parties as to all terms, conditions, and understandings relating to this Agreement and supersedes and preempts any prior agreements, both oral and written. 9. This Agreement may be executed in counterparts, each of which shall constitute an original but all of which, when taken together, shall constitute a single agreement. 10. The effective date of this Agreement is December 9 , 1999. Tanisys Technology, Inc. BOSTON FINANCIAL & EQUITY CORPORATION By: /s/ Charles T. Comiso By: /s/ Adolf F. Monosson ------------------------- --------------------------- Name: Charles T. Comiso Name: Adolf F. Monosson ------------------------- ------------------------- Title Pres. & CEO Title President ------------------------- -------------------------- 3 of 3 EX-10.36 7 EXHIBIT 10.36 CONTRACT FOR SALE OF EQUIPMENT This Contract for Sale of Equipment (the "Contract") is made and entered into by and between Boston Financial & Equity Corporation ("Seller") and Tanisys Operations, LP ("Purchaser") as of December 9, 1999 (the "Effective Date"). WHEREAS, Seller entered into a certain Master Equipment Lease with Tanisys Technology, Inc. ("TTI"). Pursuant to said Master Equipment Lease Seller entered into Schedule 1 which was dated on March 25, 1999, and Schedule 2 dated August 12, 1999, which schedules described the equipment covered by the Master Equipment Lease (the equipment as described on the two Schedules is hereinafter referred to as the "Equipment" and the Master Equipment Lease and the two schedules are collectively referred to as the "Lease"); and WHEREAS, TTI subsequently defaulted under the terms of the Lease and simultaneously herewith is entering into a Settlement Agreement with Seller and, as part of the Settlement Agreement, TTI has requested that Seller sell the Equipment to Purchaser pursuant to the terms of this Contract; and WHEREAS, Purchaser wishes to purchase the Equipment from Seller subject to the terms, conditions, and agreements hereinafter set forth. NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser agree as follows: 1. Seller hereby agrees to sell, assign, transfer and convey to Purchaser all of Seller's rights in the Equipment and Purchaser agrees to acquire and purchase from Seller all of Seller's rights in the Equipment, subject to the terms and conditions of this Contract. 2. The purchase price for Seller's rights in the Equipment shall be $975,000.00 to be paid by Purchaser to Seller by wire transfer per wiring instructions as follows: Bank Boston Account No. 561-27775 ABA No. 011000390. 3. Upon receipt of the purchase price by Seller, Seller will fax an executed Bill of Sale to Purchaser in the form attached hereto as EXHIBIT A and incorporated herein and will Federal Express the original of the Bill of Sale for next day delivery to Purchaser. 4. Purchaser understands and agrees that the Equipment was leased to TTI and has been in TTI's possession and under its control. 5. Purchaser has conducted whatever inspections or investigations that it deems necessary or appropriate with respect to the condition and location of the Equipment and agrees that it shall acquire all of Seller's rights and interest in the Equipment, in its current existing condition and its 1 of 2 current location and that Seller is not making any warranties or representations with respect to the Equipment, either expressed or implied, and Purchaser hereby waives any representations or warranties with respect to the Equipment, whether expressed or implied, including, without limiting the generality of the foregoing, any implied warranty of merchantability or fitness or adequacy for a particular purpose or use or of quality, quantity, productiveness, or capacity. 6. Purchaser understands that it shall be responsible for obtaining possession of the Equipment from TTI or whatever party has physical possession of the Equipment and that Seller has no responsibility with respect thereto other than to confirm to whoever has possession of any or all of the Equipment that Seller has conveyed all of its rights and interests thereto to Purchaser. 7. In connection with the conveyance of its rights and interest in the Equipment, Seller hereby agrees to release Purchaser of and from any claims, causes of action or liability arising under or related to the Lease or any claims, causes of action or liability which Seller has asserted or may assert against TTI in connection with the Lease or the Equipment. 8. This Contract is being executed in conjunction with a Settlement Agreement being entered into by and between Seller and TTI and Seller's obligations to convey the Equipment are contingent upon the execution by TTI of the Settlement Agreement, the execution of the Note called for thereunder, and payment of the $24,000.00 in cash called for thereunder. 9. The parties agree that this Contract may be executed in several counterparts, each of which shall be fully effective as an original and all of which together shall constitute one and the same instrument. 10. This Contract shall be binding upon and inure to the benefit of the Seller and Purchaser and their respective successors and assigns. 11. This Contract shall be governed by, construed, and interpreted, and the rights of the parties determined in accordance with, the laws of the Commonwealth of Massachusetts. PURCHASER: SELLER: Tanisys Operations, LP, a Texas BOSTON FINANCIAL & EQUITY CORPORATION Limited Partnership By: /s/ Adolf F. Monosson --------------------------------- Name: Adolf F. Monosson ------------------------------------ Title: President ------------------------------------ By: Tanisys Acquisition GP, Inc., a Texas Corporation, as general partner By: /s/Robert Cooper --------------------------- Name: Robert Cooper --------------------------- Title: President --------------------------- 2 of 2 EX-10.37 8 EXHIBIT 10.37 BILL OF SALE For valuable consideration, the receipt and sufficiency of which is acknowledged, BOSTON FINANCIAL & EQUITY CORPORATION (hereinafter called "SELLER"), hereby sells, transfers, and conveys all of its rights and interests in and to the Equipment covered by the Master Lease Agreement between Seller and Tanisys Technology, Inc., No. 1299 dated as of March 4, 1999, as described on Schedule No. 1 executed March 25, 1999, and Schedule No. 2 executed August 12, 1999, copies of which schedules are attached hereto as EXHIBIT A and incorporated herein (the "Equipment") to Tanisys Operations, LP ("Buyer"). This Bill of Sale is executed pursuant to the terms of that certain Contract for Sale of Equipment executed by and between Buyer and Seller of even date herewith and is subject to all of the terms and provisions of that Contract. THE EQUIPMENT IS CONVEYED BY SELLER TO BUYER IN AN "AS IS," "WHERE IS" CONDITION AND IS ACCEPTED BY BUYER AT ITS EXISTING LOCATIONS, WHEREVER THAT MAY BE. BUYER ACKNOWLEDGES THAT IT IS FAMILIAR WITH THE EQUIPMENT AND IS RELYING UPON THAT FAMILIARITY AND IS NOT RELYING ON ANY REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER MADE BY SELLER. BUYER UNDERSTANDS THAT SELLER DOES NOT WARRANT THE EQUIPMENT IN ANY RESPECT, EITHER EXPRESSLY OR IMPLIEDLY, AND BUYER HEREBY WAIVES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE EQUIPMENT WHETHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS OR ADEQUACY FOR A PARTICULAR PURPOSE OR USE, OR OF QUALITY, QUANTITY, PRODUCTIVENESS OR CAPACITY. DATE: 12-9-99 ---------------------------- BUYER: SELLER: TANISYS OPERATIONS, LP, a BOSTON FINANCIAL & EQUITY CORPORATION Texas limited partnership By: /s/ Adolf F. Monosson ------------------------------ By: TANISYS ACQUISITION GP, INC., a Texas corporation, as general partner Name: Adolf F. Monosson ------------------------------ Title: President ---------------------------- By: Robert Cooper ------------------------- Name: Robert Cooper ----------------------- Title: President ---------------------- 1 of 1 EX-21.1 9 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF TANISYS TECHNOLOGY, INC. 1st Tech Corporation (a Delaware corporation) DarkHorse Systems, Inc. (a Delaware corporation) Rosetta Marketing and Sales, Inc. (a Texas Corporation) EX-27.1 10 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES AS OF AND FOR THE FIRST QUARTER ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. OTHER SEP-30-1999 OCT-01-1998 SEP-30-1999 684,949 0 1,977,390 333,703 540,458 11,310,273 496,391 747,988 16,813,579 17,929,548 0 1,831,483 1,831,483 31,968,495 (37,672,598) 16,813,579 10,145,108 10,145,108 4,512,602 4,512,602 4,232,410 233,196 371,514 (8,966,728) 0 1,043,322 (10,010,050) 0 0 (8,966,728) (0.43) (0.32)
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