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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
(Mark One)
[ X ] Annual report to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended MARCH 30, 1997 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 0-20028
VALENCE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0214673
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
301 CONESTOGA WAY
HENDERSON, NEVADA 89015
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code is (702) 558-1000
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Name of Each Exchange on Which
Class Registered
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Common NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
$.001 par value
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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 proceeding 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. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K /X/
The aggregate market value of the Registrant's voting stock held by
non-affiliates on June 2, 1997 (based upon the NASDAQ/NMS closing price on such
date) was $154,572,413.
As of June 2, 1997, there were 21,892,543 shares of the Registrant's
Common Stock outstanding.
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PART I
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section as well as in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 1
Business
OVERVIEW
Valence is engaged in research and development to produce advanced rechargeable
batteries based upon lithium ion and polymer technologies. The Company's
objective is to become a leading provider of rechargeable batteries. The Company
announced in July 1995, that it had obtained a license to a plastic lithium
battery technology from Bell Communications Research, Inc. ("Bellcore"). Since
that time, the Company has been working to integrate the Bellcore technology
with its own lithium polymer battery technology. At the same time, the Company
has continued the redesign and modifications to its manufacturing equipment in
Northern Ireland to support the potential future commercial introduction of this
new battery design.
Widespread use of a variety of portable consumer electronics such as portable
computers, cellular telephones, camcorders and handheld power tools, as well as
continued demand from conventional applications such as automobiles, have
resulted in large markets for rechargeable batteries. These new and conventional
applications are placing growing demands on existing battery technologies to
deliver increasing amounts of electricity through smaller and lighter batteries.
In some cases, current battery capabilities are a major limitation to the
introduction of enhanced electronic products.
Valence is a development stage company and its current research prototype
batteries do not meet all of the exacting specifications demanded by the
marketplace. Except for insubstantial revenues from limited sales of prototype
lithium polymer batteries, substantially all of the Company's revenues to date
have been derived from a research and development contract with the Delphi
Automotive Systems Group of General Motors Corporation ("Delphi" - formerly
Delco-Remy Division), and the Company presently has no products available for
sale. Prior to commencing volume production, the Company does not expect to
receive any significant revenues from the sale of its products. To achieve
profitable operations, the Company must successfully develop, manufacture and
market its products. There can be no assurance that any products can be
developed or manufactured at an acceptable cost and with appropriate performance
characteristics, or that such products will be successfully marketed or achieve
market acceptance.
In the event that the Company's research and development activities lead to
commercially viable products, to accelerate the introduction of its batteries
into the portable consumer electronics and telecommunications markets, the
Company's strategy is to provide prototype batteries to a limited number of
potential OEM customers, with the expectation that, if the Company's prototype
batteries meet customer requirements, batteries incorporating this technology
will be incorporated into advance product designs. The Company expects that
customers will require an extensive qualification period once the customer
receives its first commercial product off a production line. In working with
OEMs, the Company will seek to obtain technical assistance in designing its
batteries for industry-specific applications. To date, the Company has only been
able to deliver small quantities of handmade prototype batteries to OEMs. These
prototype batteries do not meet all the requirements of these OEMs and are not
necessarily representative of the batteries that will be produced off the
Company's production equipment. There can be no assurance that the Company's
discussions with OEMs will result in any such relationships or, if such
relationships are initiated, that the relationships will achieve their goals.
The Company believes that these potential customers will continue to be
interested in advanced rechargeable batteries from the Company, should the
Company succeed in meeting their exacting requirements.
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THE BATTERY INDUSTRY
There are two types of batteries, primary and rechargeable. A primary battery is
used until discharged and then discarded. In contrast, after a rechargeable
battery is discharged, it can be recharged to near full capacity and used again.
Rechargeable batteries are generally usable in all primary battery applications
as well as other applications, such as portable computers, cellular telephones,
camcorders, automobiles and cordless tools and appliances.
In the rechargeable battery market, the principal competitive technologies are
NiCad, lead acid, nickel metal hydride, and liquid and solid electrolyte lithium
metal and liquid lithium ion batteries. NiCad batteries are currently the most
widely used batteries in portable electronics. Lead acid batteries are primarily
used in automobiles and, to a lesser degree, are also used in a sealed form in
certain portable electronic products. Nickel metal hydride batteries, which
offer certain performance and environmental improvements over NiCad batteries,
have been introduced into the market and compete directly with existing
applications for NiCad batteries. Sony and other Japanese manufacturers are
selling liquid electrolyte lithium ion batteries. Liquid electrolyte lithium ion
batteries offer significant advantages in energy density and cycle life over
conventional rechargeable battery technologies currently in use and are expected
by the Company to be the technology of choice for high value added applications.
Sony and other manufacturers are offering liquid electrolyte lithium ion
batteries in the marketplace and to OEMs in significant volumes. Bellcore has
licensed its plastic lithium ion battery technology to as many as eleven other
companies, in addition to the Company, although their identities have not been
announced. As OEMs frequently require extensive lead times to design new
batteries into their products, the availability of these liquid and solid
electrolyte lithium ion batteries from the Company's competitors could
materially adversely affect the demand for, and market acceptance and
penetration of the Company's products, if and when developed. Additionally, the
Company will have to compete with the other Bellcore licensees, who will have
access to essentially the same base technology as the Company.
THE COMPANY'S LITHIUM POLYMER BATTERY TECHNOLOGY
The Company's current research design is a hybrid of the Company's proprietary
battery technology and the licensed Bellcore technology. The Company's current
research design contains no metallic lithium, unlike earlier Company designs,
but rather moves lithium ions from an anode to a cathode on discharge, and from
the cathode to the anode on recharge. The lithium ions are stored in either the
cathode or anode, and do not form metallic lithium. This type of system is often
referred to as "rocking chair battery," because the lithium ions are "rocked"
back and forth between the cathode and anode, and "lithium ion" because the
lithium in the batteries is always in an ionic form rather than a metallic form.
The Company's research prototype battery is composed of flexible solid plastic
matrixes which are formed into an anode matrix layer, a separator matrix layer,
and a cathode matrix layer. The anode matrix layer contains a carbon material
capable of holding lithium ions. The separator matrix layer is composed
primarily of the plastic matrix. The cathode matrix layer contains metal oxide
material that stores lithium ions. After the matrix layers are formed and cut
into the desired shape, they are laminated together to form a cell. The cell is
interconnected to other like cells to form a battery. Plasticizer material in
the cell matrix layers is then extracted, leaving voids throughout the matrix
layers of the cells. Finally, liquid electrolyte is absorbed into the cell,
filling the voids left by the extracted filler material, activating the cells
and the battery.
In conventional liquid electrolyte batteries, the liquid electrolyte that
permeates the battery's components is sealed in a metal container to assure its
contact with all the internal components of the battery. The liquid electrolyte
in the Company's battery is contained within the solid polymer matrix that forms
the anode, separator and cathode matrix layers. Because the liquid electrolyte
is contained in the solid polymer matrix and is therefore in intimate contact
with anode and cathode materials, it does not need to be held under pressure,
and the battery can be packaged in a thin flexible plastic/foil packaging
material, instead of a metal container, which reduces weight and volume.
The Company believes that its lithium polymer battery technology may constitute
an advance over most rechargeable battery technologies currently available in
the market, although its program is still in the research and development phase
and therefore substantial uncertainties exist, including whether the Company
will be able to develop a commercial product. The Company believes that energy
density is the most important performance characteristic for comparing battery
technologies. The Company's research prototype lithium polymer batteries have
demonstrated energy density generally superior to most other rechargeable
technologies, except for some liquid electrolyte lithium ion batteries, although
the Company has experienced variability in energy density in its research
prototype designs.
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Greater energy density will permit the use of batteries for a given size or
weight with energy capacity significantly exceeding that of most batteries
currently in use. Alternatively, greater energy density will enable the use
of smaller and lighter batteries with energy capacity comparable to those
currently marketed.
In addition, form factor, or the shape of a battery, can affect the packaging
efficiency of batteries. For example, some battery technologies are best
suited to cylindrical shapes, but if cylinders must be stacked, approximately
22% loss in packaging efficiency results. Because the Company's research
prototype battery is produced as a thin laminate, it can be shaped into a
variety of form factors, including very thin batteries. The Company is
currently evaluating the performance effects of various battery shapes with
regard to energy density, recharge cycles and safety concerns.
In addition, battery technologies vary in relative safety as a result of
their differing chemical compositions. Most battery technologies incorporate
a liquid electrolyte which, if leaked, may be dangerous. In addition, in the
event of a short circuit or other physical damage to the battery, the liquid
electrolyte may be free to flow to the reaction site and produce a continuous
chemical reaction. This reaction may result in excess heat or a gas release
and, if not properly released, may be explosive. The Company's lithium
polymer battery technology appears to avoid these risks, because the liquid
electrolyte in the Company's current research prototypes is held in the solid
polymer matrix and should not be free to leak or freely flow to a reaction
site.
The Company has not completed safety testing and does not know whether the
advantages inherent in the Company's technology will make the battery as safe
or safer than other battery technology. As part of the Company's safety
testing program, prototype batteries of various sizes, designs, and chemical
formulations are subject to abuse testing, where the battery is subjected to
conditions outside the expected normal operating conditions of the battery.
While some prototype batteries have survived these tests, others have vented
gases, containing vaporized solvents from the electrolyte, which have caught
fire. Such results were generally expected and, until the testing is
completed, the Company cannot make a valid determination as to the safety
envelope in which the battery must be operated. Additionally, each new
battery design requires new safety testing. There can, therefore, be no
assurance that safety problems will not develop with respect to the Company's
battery technology, that would prevent commercial introduction.
The Company's products will incorporate materials containing lithium ions.
While these materials are less reactive than metallic lithium, which is known
in its metallic form to cause explosions and fires if not properly handled,
it is possible that special handling will be required. Although the Company
believes that its research prototype batteries designed for portable
electronics applications do not present safety risks substantially different
from those inherent in currently marketed non-lithium batteries or other
liquid electrolyte lithium ion batteries, there can be no assurance that
safety problems will not develop in the future. The Company is aware that if
the amounts of active materials in the anode and cathode are not properly
balanced and the charge / discharge regime is not properly managed, metallic
lithium may be plated within the battery packaging. The plating of lithium in
a lithium ion battery is a dangerous situation and other lithium ion battery
manufacturers include special safety circuitry within the battery to prevent
such a condition. The Company expects that such circuitry will have to be
used by its customers.
The Company is currently conducting research to determine whether its lithium
polymer battery technology poses increased risks when used in larger sized
batteries because of the greater amount of ionic lithium contained in the
battery, and the increased amount of energy stored in the battery.
The Company incorporates safety policies in its research and development
activities and will do so in its manufacturing processes, designed to
minimize safety risks, although there can be no assurance that an accident in
its facilities will not occur. Any accident, whether occasioned by the use of
a battery or in the Company's operations, could result in significant delays
or claims for damages resulting from injuries, which would adversely affect
the Company's operations and financial condition.
MARKETS AND APPLICATIONS
The Company believes that its battery technology, if it can lead to
commercial products, will potentially be usable in a number of applications,
including as a portable, rechargeable power source for portable electronics
products, automotive SLI, electric vehicles and military equipment. To
commercialize its products in the foregoing markets, the Company will be
dependent upon obtaining assistance from OEMs into whose products the
Company's future batteries will have to be incorporated. Other than certain
research and development commitments from Delphi and a joint
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research and development agreement with Eveready Battery Company
("Eveready"), to date the Company has not received any commitments either for
the development of its technology or for the purchase of its products. There
can be no assurance that the Company will succeed in establishing additional
relationships or that the Company's products and technology will ever receive
market acceptance.
THIRD PARTY RELATIONSHIPS
DELPHI
In 1991, to leverage its limited resources and accelerate the introduction of
its lithium polymer batteries, the Company entered into a research and
development agreement with Delphi to develop lithium polymer batteries for
the land, marine and air vehicular and load leveling markets. Under the
agreement, the Company obtained a multi-year funding commitment of
$20,000,000 and, if its batteries are successfully commercialized by Delphi,
will receive ongoing royalties. Upon completion of the 1991 agreement, the
Company and Delphi, in June 1994, extended the 1991 agreement until the end
of 1994, for an additional fee of $900,000. Both the 1991 agreement and the
June 1994 extension have been completed and the Company has received full
payment under those agreements.
In September 1994, the Company and Delphi entered into a new agreement for
Joint Research and Development for a five year period which began in
September 1994, with payments to Valence of a $50,000 monthly research and
development access fee, of which $600,000 was recognized during fiscal year
1997 as an offset to research and product development expenses. Under this
agreement the Company and Delphi agreed to co-locate their research and
development efforts at an unoccupied lithium battery manufacturing facility
located in Henderson, Nevada. As of June 1995, both parties had relocated to
the facility and begun joint research efforts. Under the agreement, Delphi,
in addition to the monthly research and development access fee, is paying a
majority of the operating expenses of the facility. As with any large
company, General Motors is constantly reviewing its research and development
programs and their associated costs, and there can be no assurance that
General Motors will not reduce the budget for this Delphi program, or
eliminate the program in its entirety. Such an occurrence could significantly
reduce or eliminate this source of funds to the Company, as well as their
research and development contribution.
Delphi is a leading manufacturer of SLI batteries in North America, producing
batteries for new General Motors Corporation vehicles and the replacement
market. Delphi is experienced in working with a number of currently-used
battery technologies and is a leader in the research and development of
innovative battery technologies. Under its agreements with the Company,
Delphi provides fundamental research assistance and manufacturing expertise.
The Company's work with Delphi has enhanced the Company's scientific and
technical understanding of its lithium polymer battery.
The Company has granted Delphi worldwide, exclusive licenses under the
Company's patents and technical information to manufacture, use and sell
lithium polymer batteries for commercial land, marine and air vehicles,
electric vehicles, and for electric utility load leveling, the storage of
energy produced at off peak periods for release during peak demand. Each
license converts to a non-exclusive license four years after the first
commercial sale of such a battery. Under the agreement, Delphi granted to the
Company an exclusive license under Delphi's patents and technical information
to manufacture, use and sell lithium polymer batteries, other than the
vehicular and load leveling batteries exclusively licensed to Delphi, and a
non-exclusive license under Delphi's patents and technical information to
manufacture vehicular and load leveling batteries after the termination of
Delphi's exclusive rights. The Company's exclusive license converts to a
non-exclusive license four years after the first commercial sale of a battery
by the Company. As additional compensation to the Company, Delphi agreed to
pay royalties to the Company on each battery manufactured under Delphi's
license until 2008. However, in procuring the right to sublicense Bellcore
technology to Delphi, the Company agreed to pass on to Bellcore substantially
all royalties received from Delphi. The Company hopes that its greatest
benefit from the Delphi license will be the cost leverage from Delphi's
potential substantial materials purchases from third party vendors. However,
should Delphi decide to use different materials in their products, than those
used by the Company, there would be less or no cost leverage from Delphi's
purchases. Additionally, if General Motors decided to significantly delay
commercialization or decided not to commercialize a product, then no such
cost leverage would be available.
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VALTRON TECHNOLOGY PTE. LTD.
In March 1994, the Company and Goldtron Ltd. ("Goldtron") signed an agreement
to establish a joint venture company in Singapore to manufacture, package and
distribute advanced rechargeable solid polymer electrolyte batteries
utilizing the Company's solid polymer technologies. Goldtron is a worldwide
developer, manufacturer and distributor of electronic and telecommunications
products, with extensive distribution channels in the Far East, as well as
worldwide distribution capabilities. In light of the Company's refocus on
research and development, the Company and Goldtron have put the Joint Venture
on hold, awaiting development of a viable battery technology that Valtron may
be able to manufacture. Since the joint venture was on hold, Goldtron has
licensed a liquid lithium-ion technology and is in the process of
commercializing that technology. There can be no assurance that when the
Company desires to reactivate the joint venture, that Goldtron will still be
interested in pursuing the Company's technology.
If the joint venture is reactivated, it is anticipated that the Company will
supply the new joint venture company with its proprietary laminates, from
which the new joint venture company will manufacture batteries for certain
agreed upon applications. The parties will evaluate potential products for
marketing by the new joint venture company, including uninterruptable power
supplies and personal lighting systems. Other battery applications may also
be proposed by the new joint venture company. It should be noted, however,
that selection of candidate product opportunities will be delayed by the
parties pending further research and development activities by Valence.
HANIL VALENCE CO., LTD.
In July 1996, the Company, through its Dutch subsidiary, and Hanil Telecom
Co., Ltd. ("Hanil Telecom") signed an agreement to establish a joint venture
company in Korea to manufacture, package and distribute advanced rechargeable
solid polymer electrolyte batteries utilizing the Company's solid polymer
technologies for the Korean markets. Hanil Telecom is a subsidiary of Hanil
Cement Mfg. Co., Ltd., a major conglomerate in Korea producing a wide variety
of products for the Korean market. Hanil Valence Co., Ltd. ("Hanil Valence
Co."), the joint venture company, will be located in a Korean facility and
has a capitalization of $10 million. All funds are to be provided to the
joint venture by Hanil Telecom. Hanil Telecom and the Company, through its
Dutch subsidiary, each hold a 50% stake of the company. Additionally, Hanil
Telecom will provide $40 million in loan guarantees to Hanil Valence Co. It
is anticipated that the Company will supply Hanil Valence Co. with its
proprietary laminates, from which Hanil Valence Co. will manufacture
batteries for the Korean market. Additionally, Valence will supply the
technology, initial equipment and product designs and technical support out
of its Northern Ireland facility. Hanil Telecom will market the joint
venture's initial products for a period of several years, depending on the
market. The Company has no experience in manufacturing in Korea or selling
into the Korean marketplace, and is dependent on its joint venture partner in
these areas.
ALLIANT / VALENCE, L.L.C.
The Company and Alliant Techsystems Inc. ("Alliant") signed an agreement in
October 1996, to establish a joint venture company utilizing the Company's
battery technology and technology obtained under the Company's Bellcore
license to develop and manufacture batteries for its U.S. military customers
as well as for foreign military sales activities. Alliant / Valence, L.L.C.
("Alliant / Valence"), the joint venture company, will operate a battery
fabrication facility at Alliant's Power Sources Center in Horsham,
Pennsylvania. The Company is expected to supply the electrode laminate
materials that are key to manufacturing high performance batteries. Alliant's
Power Sources Center is a major producer of military and aerospace batteries.
In January 1997, Alliant announced receipt of a $1.2 million contract award
from the U.S. Army Communications Electronics Command ("CECOM") to develop
and implement flexible manufacturing processes for lithium ion polymer
batteries to be used by the Army. The work will be performed by Alliant /
Valence.
EVEREADY BATTERY COMPANY
In May 1994, the Company signed a joint development and license agreement
with Eveready for cross-licensing of all background technology, and certain
foreground technology developed during a two-year period. Under the
cross-license, Valence has access to Eveready's extensive battery technology
portfolio to apply to Valence's advanced polymer batteries, including two
patents that Eveready believes cover the Company's use of a manganese oxide,
used in the Company's current research prototypes. Eveready has access to
Valence's battery technology portfolio, including its proprietary solid state
electrolyte, to make advanced polymer round cell batteries. Under certain
conditions, including commercialization of round cell batteries by Eveready
and meeting of certain requirements to purchase non-round cell
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batteries from Valence, Eveready may produce non-round cell batteries. In
addition, if Eveready commercializes batteries using Valence's background
technology, Valence will receive royalties.
In August 1994, Eveready, Delphi and Valence amended the Delphi / Valence
agreement and the Eveready / Valence agreement to form a joint three-way
steering committee for the parties' research and development efforts.
Additionally, Valence sublicensed certain proprietary rights, including
patents, trade secrets and technical know-how, it had received from each
party to the other party, to form a three-way cross-license arrangement.
In June 1995, when the Company took the license to the Bellcore technology,
the Company was prohibited from sharing information regarding this technology
to non-Bellcore licensees. To date, Eveready has not taken a license to the
Bellcore technology, and the Company was prohibited from working with
Eveready on certain of its research and development efforts. In May 1996, the
joint research and development program ended, although the agreement remains
in effect.
BELL COMMUNICATIONS RESEARCH, INC.
In June 1995, the Company entered into a non-exclusive license agreement with
Bellcore, to license Bellcore's plastic lithium battery technology. Under
this agreement, the Company received rights to patents, trade secrets and
know-how developed by Bellcore. The Company is in the process of integrating
the Bellcore technology with the Company's lithium polymer technology, and
believes that the Bellcore technology provides solutions to several technical
problems the Company was facing with regard to its technology. As part of the
agreement, which includes license fees and royalty payments, Bellcore
received a minority equity position in the Company of 1,500,000 shares of
common stock. Additionally, the Company secured the right to grant, and has
granted, to Delphi a sublicense to make, have made, use and sell batteries
for land, marine, and air vehicles, including electric vehicles, and utility
load-leveling applications.
RESEARCH AND PRODUCT DEVELOPMENT
The Company's research and product development expenses in fiscal years 1997,
1996 and 1995 were approximately, $11,259,000, $8,047,000 and $14,762,000,
respectively. During the same periods, the Company received reimbursements
for research and development activities and earned development contract
revenues of nil, nil and $4,150,000, respectively.
The Company's research personnel are divided into two groups: the battery
research and development group and the battery engineering group. The
Company's battery research and development group works on developing the
existing technology, materials and processing methods and developing the
Company's battery technology. The 14 people in this group have expertise in
chemical engineering, process control, safety, and anode, cathode and
electrolyte chemistry and physics, polymer chemistry and radiation chemistry,
thin film technologies, coating technologies, and anode, cathode and
electrolyte chemistry, formulation, analytical chemistry and material science.
The battery engineering group designs products for eventual sale to
customers. Its current objectives are to provide prototypes to prospective
customers and to improve current designs and manufacturing methods. The
principal objectives of this group also include making significant
improvements in battery design to increase energy densities and cycling
capabilities. The 14 people in this group have expertise in battery design,
failure analysis, packaging engineering, process development and
manufacturing engineering.
MANUFACTURING
The Company's research prototype battery is produced using thin film laminate
technology. The cathode and anode ("electrodes") matrix layers, and separator
matrix layer are manufactured utilizing coating techniques. These matrix
layers may be either cut or stamped out into various engineered
configurations, which are then laminated together to form cells. These cells
can then be stacked and connected to form a functional battery, which is
finally packaged and tested.
Even if the Company's current research and development activities result in
the design of batteries with commercially desirable characteristics, to be
successful, the Company will have to manufacture in commercial quantities
products with appropriate performance characteristics at competitive costs.
At present, the Company has, at its Henderson, Nevada facility, manual
coating, laminating, assembly and packaging lines that produce small
quantities of prototype
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batteries for internal testing and customer sampling. For coating the matrix
layers, the Company is adapting existing manufacturing technologies and
processes. However, further development of manufacturing technology may be
delayed pending further research and development activities by the Company
and the definition of manufacturable specifications with OEM customers.
In September 1993, the Company signed an agreement to open an automated
manufacturing plant in Mallusk, Northern Ireland. The Company currently
occupies 80,000 square feet, and may add 50,000 square feet at some point in
the future. The Company, with its equipment suppliers, has designed and
constructed a high volume, automated assembly and packaging lines for the
Northern Ireland facility. The Company's high volume manufacturing equipment
was specifically designed for use with the Company's prior metallic lithium
anode technology. The Company is working with its equipment suppliers to
redesign and modify this equipment to work with the Company's new battery
technology. The amount of redesign and modification that is required is
substantial and there can be no assurance that such redesign and
modifications will work or will be cost effective. If all or some of the
equipment in Northern Ireland cannot be effectively redesigned and modified,
the Company will have to procure new equipment at considerable expense and
loss of time.
The first automated assembly line has been delivered to the Northern Ireland
facility. De-bugging of the line has gone much slower than expected. The
line's reliability and yield are predictably low, although the Company
believes that it will eventually reach its production goals. The Company
expects this line to be qualified in the second half of calendar 1997, but
there can be no assurance as to the timing or even the success of this
qualification process. Upon qualification of the line, product samples are
expected to be sent to potential customers for evaluation. While this line is
initially slated to produce the Company's IMP36095 format cells (small
telecommunication size), the Company plans to convert this line to produce
its larger portable-computer cell format (approximately four inches by four
inches). The conversion of the first automated line from the IMP format cell
to the computer format cell will be coordinated with the expected summer 1997
delivery of the Company's first high-speed assembly line, which is also
tooled to produce the IMP format cells.
The Company has been unable to meet its prior schedules regarding delivery,
installation, de-bugging and qualification of the Northern Ireland production
equipment, due to unforeseen problems. As most of the production equipment is
being custom manufactured for the Company, it is possible that further
unforeseen problems will develop and cause delay in the Company's current
schedules. Many of the manufacturing processes that are being implemented in
this production equipment are being scaled up for the first time from the
Company's laboratory scale prototype work. It is likely that some of these
scaled up processes will require refinement, adjustment or redesign. Any of
these possibilities could cause substantial delay in the qualification and/or
production start-up of this equipment. Such delays could cause the Company to
miss significant sales and marketing opportunities, as potential lithium
polymer battery customers are forced to find other vendors to meet their
needs. Additionally, even if the Company is able to qualify production
equipment in this calendar year, the reliability and/or production yields may
not allow the Company to provide sufficient qualification samples to
potential customers.
From its discussion with potential customers, the Company expects that
customers will require an extensive qualification period once the customer
receives its first commercial product off a production line. To date, the
Company has not provided any such commercial product to any potential
customer, and therefore, has not started any product qualification period.
COMPETITION
Competition in the battery industry is intense. The industry consists of
major domestic and international companies, most of which have financial,
technical, marketing, sales, manufacturing, distribution and other resources
substantially greater than those of the Company. The Company believes that
its lithium polymer batteries will compete in most segments of the
rechargeable battery market.
In the rechargeable battery market, the principal competitive technologies
currently marketed are NiCad batteries, lead acid batteries, nickel metal
hydride batteries and liquid electrolyte lithium ion batteries. Eveready,
Sanyo Electric Co., Ltd., and Matsushita Industrial Co., Ltd., among others,
currently manufacture NiCad batteries. Major lead acid manufacturers include
Delphi, Johnson Controls, Exide Corp., Portable Energy Products, Inc., Hawker
Energy Products and Yuasa Battery Co., Ltd. Manufacturers of nickel metal
hydride batteries include Matsushita Industrial Co., Ltd., Toshiba, Eveready,
Sanyo Electric Co. and Sony. Duracell Inc. has announced that it intends to
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manufacture a nickel metal hydride battery. Sony produces a liquid
electrolyte lithium ion battery used in Sony's products, and sold to OEMs.
Toshiba has announced the formation of a joint venture with Asahi Chemical
Industry Company to manufacture liquid electrolyte lithium ion batteries.
Toshiba has also announced the availability of a notebook computer
incorporating a liquid electrolyte lithium ion battery. In addition, the
Company believes that Saft America Inc., Ray O Vac, Matsushita Industrial
Co., Ltd., Moli Energy and Sanyo Electric Co., Ltd. have developed liquid
electrolyte lithium ion batteries. The capabilities of many of these
competing technologies have improved over the past year, which has resulted
in a customer perception that the Company's lithium polymer technology may
not offer as many advantages as previously anticipated. Sony has consistently
been improving the energy density of its lithium ion battery over the last
several years.
Liquid electrolyte lithium ion batteries offer significant advantages in
energy density and cycle life over the principal rechargeable battery
technologies currently in use and are expected by the Company to be the
emerging technology most competitive to the Company's technology. Sony or
other manufacturers are offering liquid electrolyte lithium ion batteries in
the marketplace and to OEMs in substantial volumes prior to the Company's
commencement of volume production. As OEMs frequently require extensive lead
times to design new batteries into their products, the availability of liquid
electrolyte lithium ion batteries could materially adversely affect the
demand for, and market acceptance and penetration of, the Company's products.
In addition to currently marketed technologies, a number of companies are
undertaking research in rechargeable battery technologies, including work on
lithium polymer technology. Reportedly, as many as nine other companies have
taken licenses to Bellcore's battery technology, although their identity has
not been announced. Ultralife Batteries, Inc., which acquired Dowty Battery
Company in the United Kingdom in 1994, has announced shipment of prototype
lithium ion polymer batteries, and has announced plans to begin commercial
shipments in 1997. Hydro-Quebec in Canada has signed an agreement with Yuasa
Battery Co., Ltd. of Japan for technology transfer and the manufacture of
lithium ion polymer batteries. Recently, Hydro-Quebec and Yuasa have
announced the introduction of such a rechargeable lithium polymer battery.
The Company believes that other research and development activities on
lithium polymer batteries are taking place at W. R. Grace & Co., 3M, Alliant,
and Ray O Vac in the U.S. and at other companies in Japan. In May 1995,
Moltech Corp. announced that it expected to begin production shipments of its
lithium polymer batteries in mid-to-late 1996. In October 1992, the United
States Advanced Battery Consortium ("USABC") awarded the first $6,300,000 of
a three-year $24,500,000 contract to a group consisting of W. R. Grace & Co.,
Johnson Controls and affiliated laboratories to develop a thin-film lithium
polymer bipolar battery utilizing solid polymer electrolytes. At that time,
the USABC also awarded a three-year $17,300,000 contract to Saft America Inc.
to pursue a bipolar form of the lithium iron disulfide battery first
developed at the Argonne National Laboratory. In December 1993, the USABC
announced the grant of a two-year C$33,000,000 contract to a partnership
formed by 3M, Hydro-Quebec and Argonne for the development of lithium polymer
batteries for electric vehicles, for which a second phase was announced in
February 1996, for C$27,400,000. The Company also believes that research is
underway on zinc air, aluminum air, sodium sulphur, zinc bromine and nickel
zinc battery technologies. No assurance can be given that such companies are
not developing batteries similar or superior to the Company's lithium polymer
batteries.
PATENTS AND TRADE SECRETS
The Company's ability to compete effectively will depend in part on its
ability to maintain the proprietary nature of its technology and
manufacturing processes through a combination of patent and trade secret
protection, non-disclosure agreements and cross-licensing agreements.
As of March 30, 1997, the Company held 144 United States patents and had 71
patent applications pending in the United States. The Company was preparing
100 additional patent applications for filing in the United States. The
Company also actively pursues foreign patent protection in countries of
interest to the Company. As of March 30, 1997, the Company had been granted
15 foreign patents and had 85 patent applications pending in foreign
countries.
Patent applications in the United States are maintained in secrecy until
patents issue, and since publication of discoveries in the scientific or
patent literature tends to lag behind actual discoveries by several months,
the Company cannot be certain that it was the first creator of inventions
covered by pending patent applications or the first to file patent
applications on such inventions. There can be no assurance that the Company's
pending patent applications will result in issued patents or that any of its
issued patents will afford protection against a competitor. In addition,
patent applications filed in foreign countries are subject to laws, rules and
procedures which differ from those of the United States, and thus there can
be no assurance that foreign patent applications related to issued United
States patents will
-9-
issue. Furthermore, if these patent applications issue, some foreign
countries provide significantly less patent protection than the United States.
The status of patents involves complex legal and factual questions and the
breadth of claims allowed is uncertain. Accordingly, there can be no
assurance that patent applications filed by the Company will result in
patents being issued or that its patents, and any patents that may be issued
to it in the future, will afford protection against competitors with similar
technology. In addition, no assurances can be given that patents issued to
the Company will not be infringed upon or designed around by others or that
others will not obtain patents that the Company would need to license or
design around. If existing or future patents containing broad claims are
upheld by the courts, the holders of such patents could require companies to
obtain licenses. If the Company is found to be infringing third party
patents, there can be no assurance that licenses that might be required for
the Company's products would be available on reasonable terms, if at all.
In addition to potential patent protection, the Company relies on the laws of
unfair competition and trade secrets to protect its proprietary rights. The
Company attempts to protect its trade secrets and other proprietary
information through agreements with customers and suppliers, proprietary
information agreements with employees and consultants and other security
measures. Although the Company intends to protect its rights vigorously,
there can be no assurance that these measures will be successful.
REGULATION
Prior to the commercial introduction of the Company's batteries into a number
of markets, the Company may seek to obtain approval of its products by one or
more of the organizations engaged in testing product safety. Such approvals
could require significant time and resources from the Company's technical
staff and, if redesign were necessary, could result in a delay in the
introduction of the Company's products.
Pursuant to the regulations of the United States Department of Transportation
("DOT"), a permit is required to transport lithium across state lines. The
International Air Transport Association ("IATA") similarly regulates the
international shipment of lithium. At this time, lithium ion batteries,
because they contain no metallic lithium, are not subject to these
regulations and are being freely shipped. However, due to recent safety
incidents, including fires, with the shipment of lithium-ion batteries
produced by other manufacturers, the DOT has indicated that it is reviewing
this position, and there can be no assurance that DOT or IATA will not decide
to regulate the shipment of lithium ion batteries in the future. While, in
such an event, the Company believes that DOT has granted permits for, and
IATA has allowed, the transport of rechargeable lithium-based batteries in
the past, there can be no assurance that DOT and IATA would permit the
Company's batteries to be shipped or used by the general public, or that
changes in such regulations, or in their enforcement, will not impose costly
requirements or otherwise impede the transport of lithium. In addition, the
DOT and IATA approval processes would require significant time and resources
from the Company's technical staff and if redesign were necessary, could
delay the introduction of the Company's products.
The Nevada Occupational Safety and Health Administration and other regulatory
agencies have jurisdiction over the operation of the Company's Henderson,
Nevada manufacturing facilities, and similar regulatory agencies have
jurisdiction over the Company's Mallusk, Northern Ireland manufacturing
facilities. Because of the risks generally associated with the use of
lithium, the Company expects rigorous enforcement. No assurance can be given
that the Company will not encounter any difficulties in complying with
applicable health and safety regulations. Historically, lithium battery
manufacturers have suffered significant damage and losses to equipment,
facilities and production from fires and other industrial accidents. There
can be no assurance that the Company will not sustain such damage and losses.
Federal, state and local regulations impose various environmental controls on
the storage, use and disposal of certain chemicals and metals used in the
manufacture of lithium polymer batteries. Although the Company believes its
activities conform to current environmental regulations, there can be no
assurance that changes in such regulations will not impose costly equipment
or other requirements. Any failure by the Company to adequately control the
discharge of hazardous wastes could also subject it to future liabilities.
-10-
HUMAN RESOURCES
As of June 2, 1997, the Company had 91 full-time employees, of whom 13 held
Ph.D. degrees. Of these employees, 16 are fully subcontracted to Delphi, and
11 are shared with Delphi. Of the total, 14 employees were engaged in
research and development, 14 in battery engineering, 45 in operations and 18
in marketing, general and administrative functions. The Company's success
will depend in large part on its ability to attract and retain skilled and
experienced employees. None of the Company's employees are covered by a
collective bargaining agreement, and the Company considers its relations with
its employees to be good. In addition to the above employees, as of June 2,
1997, the Company's Dutch subsidiary had 46 employees located in Northern
Ireland.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 30, 1997,
are as follows:
Name Age Position
- -------------------------- --- -------------------------------------------------------------------------------
Calvin L. Reed 54 Chairman of the Board, President, Chief Executive Officer
William J. Masuda 48 Executive Vice President, Worldwide Operations
David P. Archibald 56 Vice President and Chief Financial Officer
Ralph J. Brodd 68 Vice President, Marketing
Robert J. Horning 54 Vice President, Engineering
Tibor Kalnoki-Kis 56 Vice President and Chief Technical Officer
James T. Larkin 48 Vice President, U.S. Operations
Bradley A. Perkins 39 Vice President, General Counsel and Secretary
Mr. Reed joined the Company as President and Chief Operating Officer in July
1991 and became a director of the Company in September 1991. In October 1993,
Mr. Reed was also appointed Chairman of the Board and Chief Executive
Officer. From April 1987 to June 1991, Mr. Reed was Vice President of
Operations at Seagate Technology, Inc. ("Seagate"), a disk drive
manufacturer, where he was responsible for the Singapore and the Scotts
Valley, California operations. From February 1982 to April 1987, Mr. Reed was
Corporate Vice President and General Manager of IMI/Corvus Systems, a disk
drive and computer peripheral manufacturer, where he was responsible for
manufacturing, engineering, management information systems and corporate
facilities operations. Mr. Reed currently serves as a director of one private
company.
Mr. Masuda joined the Company as Vice President, Operations in April 1992. In
August of 1994, Mr. Masuda was made Executive Vice President, Worldwide
Operations. From September 1993 to May 1994, Mr. Masuda was an employee and
General Manager of Valence Technology Cayman Island Inc., a subsidiary of the
Company. From September 1989 to April 1992, Mr. Masuda was President and
Chief Executive Officer of Eagleson Industries, Inc., a subcontract
manufacturer. During that same period, Mr. Masuda was also Vice President of
Operations for Computer Memory Disk, a disk manufacturer and subsidiary of
Furukawa Electric. From June 1985 to September 1989, Mr. Masuda was with KSI
Disc Products, Inc., a disk manufacturer, as the Vice President of Operations
from June 1985 to February 1988 and as President and Chief Operating Officer
from February 1988 to September 1989.
Mr. Archibald joined the Company as Director of Finance in June 1995 and
became Vice President and Chief Financial Officer in February 1996. From
February 1989 to May 1995, Mr. Archibald was Finance Director at Staveley
Industries plc, a manufacturer of high and low technology products. From June
1986 to December 1988, Mr. Archibald was controller for Handi-Kup, a division
of James River Corporation.
Dr. Brodd joined the Company as Consulting Staff Scientist and Director of
Marketing in April 1992. He briefly left the Company from November 1993 to
January 1994, to be Vice President of Technology at Bolder Technology, Inc.
In May 1995, he became Vice President, Marketing, in May 1996, he became Vice
President, Research and Development and in February 1997, he returned to his
previous position as Vice President, Marketing. Prior to joining the Company,
Dr. Brodd was Manager, Lithium Power Sources at Gould, Inc., since April
1986. Dr. Brodd holds a Ph.D. from the University of Texas.
Mr. Horning joined the Company as Director of Product Engineering in January
1993 and became Vice President, Engineering in September 1993. From April 1987
to January 1993, Mr. Horning was Manager of Engineering at Alliant Techsystems
Inc. (formerly a subsidiary of Honeywell Inc.), Power Sources Center, a
developer and
-11-
manufacturer of special purpose liquid electrolyte lithium batteries
unrelated to the Company's current lithium polymer battery technology. From
March 1984 to April 1987, Mr. Horning was Director of Product Engineering for
Duracell Inc., a battery manufacturer. Mr. Horning holds a B.S. in Chemical
Engineering and an M.B.A. from Drexel University.
Mr. Larkin joined the Company as Director of Manufacturing in September 1992.
He left the Company from September 1993 to November 1995, to be Vice
President, Operations at RasterOps, through November 1994, and to be an
independent consultant. In December 1995, he became Director of U.S.
Operations, and in April 1997 he became Vice President, U.S. Operations.
Prior to joining the Company, Mr. Larkin was Vice President, Operations at
Dastek, a thin film head manufacturer for disk drives, from January 1990 to
August 1992. Mr. Larkin joined Anacomp, a magnetic media products
manufacturer in August 1983 and was Vice President and General Manager of the
Data Disk Division from May 1987 to January 1990.
Dr. Kalnoki-Kis joined the Company as Vice President and Chief Technical
Officer in February 1997. From October 1978 to January 1997, Dr. Kalnoki-Kis
was employed by Gould Electronics, Inc., a wholly owned subsidiary of Japan
Energy, Inc. In 1995, he became President and General Manager of the Powerdex
Division at Gould. Dr. Kalnoki-Kis holds a Ph.D. from the University of Maine.
Mr. Perkins joined the Company as Associate General Counsel in November 1991,
and became Secretary in June 1993. In July 1993, Mr. Perkins was appointed
Vice President and General Counsel of the Company. From August 1988 to
November 1991, Mr. Perkins was Assistant General Counsel and Intellectual
Property Counsel with VLSI Technology, Inc., a semiconductor manufacturer.
From July 1987 to August 1988, Mr. Perkins was an intellectual property
attorney with Hewlett-Packard Company.
Each officer serves at the discretion of the Board of Directors. There are no
family relationships among any of the directors or officers of the Company.
Item 2
Properties
The Company's corporate offices and principal laboratories are in a facility
which it owns, with approximately 55,000 square feet, located in Henderson,
Nevada. The Company also has two facilities in San Jose, California, which it
no longer occupies, under a five-year lease commencing May 1, 1993 with Berg
& Berg Developers. Carl E. Berg, a director of the Company, is a general
partner of Berg & Berg Developers. The Company has sublet, through Berg &
Berg Developers, both facilities for the entire term remaining on the lease.
Additionally, the Company's Dutch subsidiary owns a manufacturing facility in
Mallusk, Northern Ireland, with approximately 80,000 square feet.
The Company believes that its existing facilities will be adequate to meet
the Company's needs for the foreseeable future. Should the Company need
additional space, management believes that the Company will be able to secure
it at reasonable rates.
Item 3
Legal Proceedings
In May 1994, a series of class action lawsuits was filed in the United States
District Court for the Northern District of California against the Company
and certain of its present and former officers and directors. These lawsuits
were consolidated, and in September 1994 the plaintiffs filed a consolidated
and amended class action complaint. Following the Court's Orders on motions
to dismiss the complaint, which were granted in part and denied in part, the
plaintiffs filed an amended complaint in October 1995 ("Complaint"). The
Complaint alleges violations of the federal securities laws against the
Company, certain of its present and former officers and directors, and the
underwriters of the Company's public stock offerings, claiming that the
defendants issued a series of false and misleading statements, including
filings with the Securities and Exchange Commission, with regard to the
Company's business and future prospects. The plaintiffs seek to represent a
class of persons who purchased the Company's common stock between May 7, 1992
and August 10, 1994. The Complaint seeks unspecified compensatory and
punitive damages, attorney's fees and costs.
-12-
On January 23, 1996, the Court dismissed, with prejudice, all claims against
the underwriters of the Company's public stock offerings, and one claim
against the Company and its present and former officers and directors. On
April 29, 1996, the Court dismissed with prejudice all remaining claims
against a present director and limited claims against a former officer and
director to the period when that person was an officer. In December 1996, the
Company and the individual defendants filed motions for summary judgment,
which the plaintiffs opposed. In January 1997, the Court appointed a Special
Master to hear the defendants' motions for summary judgment and submit
recommendations to the Court with respect to their disposition. In March
1997, the Special Master held a hearing on the defendants' motions for
summary judgment. To date, the Special Master is still considering the
motions. At the time the Special Master was appointed, the Court also set a
trial date in September, 1997. The plaintiffs have requested a jury trial and
are expected to ask for a substantial sum in damages. If the plaintiffs
prevail in their demands, damages awarded by the jury may exceed the assets
of the Company. The Company believes that it has meritorious defenses and is
defending the lawsuit vigorously.
Item 4
Submission of Matters to a Vote of Security Holders
An annual meeting of the stockholders of the Company was held on January 31,
1997.
Company's stockholders elected the Board's nominees as directors by the votes
indicated:
Nominee Votes For Votes Withheld
- ---------------------- ------------ --------------
Calvin L. Reed 18,048,277 1,286,457
Carl E. Berg 18,046,110 1,288,624
Alan F. Shugart 18,047,477 1,287,257
The selection of Coopers & Lybrand as the Company's independent auditors was
ratified with 18,976,410 votes in favor, 199,048 against and 159,276
abstentions.
The proposal to amend the 1990 Stock Option Plan to increase the aggregate
number of shares of common stock authorized for issuance by 750,000 shares
and to add provisions with respect to Section 162(m) of the Internal Revenue
Code of 1986, as amended was ratified with 16,598,945 votes in favor,
2,285,725 against and 206,014 abstentions.
The proposal to adopt the 1996 Non-Employee Directors' Stock Option Plan and
the issuance of 250,000 shares of common stock under the plan was ratified
with 15,021,733 votes in favor, 3,827,938 against and 241,013 abstentions.
-13-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
Item 5
Market for Registrant's Common Equity
and Related Stockholder Matters
Since May 7, 1992, Valence's common stock, par value $0.001, has been traded
on the National Association of Securities Dealers Automated Quotation
National Market Systems (NASDAQ/NMS) under the symbol "VLNC." The high and
low closing sales prices during each quarter for Valence common stock on
NASDAQ/NMS for fiscal years 1996 and 1997 were as follows:
High Low
--------- ---------
Fiscal 1996
Quarter ended June 25, 1995 $ 4 7/16 $ 1 3/4
Quarter ended September 24, 1995 6 1/2 3
Quarter ended December 24, 1995 6 1/4 3 3/4
Quarter ended March 31, 1996 5 7/8 3 3/4
Fiscal 1997
Quarter ended June 30, 1996 $ 7 5/16 $ 4 1/8
Quarter ended September 29, 1996 6 1/16 3 5/8
Quarter ended December 29, 1996 5 7/8 4 1/8
Quarter ended March 30, 1997 7 4 3/16
The approximate number of record holders of the Company's Common Stock as of
June 2, 1997, was 753.
Valence has not paid any cash dividends since its inception and does not
anticipate paying cash dividends in the foreseeable future.
In June 1995, the Company entered into a non-exclusive license agreement with
Bellcore, to license Bellcore's plastic lithium battery technology. Under
this agreement, the Company received rights to patents, trade secrets and
know-how developed by Bellcore. As part of the agreement, which includes
license fees and royalty payments, Bellcore received a minority equity
position in the Company of 1,500,000 shares of common stock. The Company
issued such shares in reliance on Rule 506 of the Securities Act.
-14-
Item 6
Selected Consolidated Financial Data
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(COMPANIES IN THE DEVELOPMENT STAGE)
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
---
Period from
March 3, 1989
(date of
inception) to
March 30, March 30, March 31, March 26, March 27, March 28,
1997 1997 1996 1995 1994 1993
------------- ----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenue:
Research and development contracts $ 21,605 $ - $ - $ 4,150 $ 7,295 $ 6,385
------------- ----------- ----------- ----------- ----------- -----------
Costs and expenses:
Research and development 69,483 11,259 8,047 14,762 21,465 10,262
Marketing 2,677 205 486 705 767 514
General and administrative 32,363 6,168 5,614 6,269 6,013 5,211
Write-off of in-process technology(1) 8,212 6,064
Investment in Danish subsidiary(2) 3,489
Special charges 18,872 18,872
------------- ----------- ----------- ----------- ----------- -----------
Total costs and expenses 135,096 17,632 20,211 40,608 28,245 15,987
------------- ----------- ----------- ----------- ----------- -----------
Operating loss (113,491) (17,632) (20,211) (36,458) (20,950) (9,602)
Interest income 13,727 2,558 3,549 3,606 2,547 1,435
Interest expense (3,762) (814) (931) (777) (250) (296)
Net loss $(103,526) $ (15,888) $ (17,593) $ (33,629) $ (18,653) $ (8,463)
------------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- -----------
Net loss per share - $ (0.73) $ (0.83) $ (1.68) $ (1.08) $ (0.63)
------------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- -----------
Shares used in computing net loss per share(3) - 21,684 21,261 20,059 17,259 13,502
------------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- -----------
March 30, March 31, March 26, March 27, March 28,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents $ 27,832 $ 24,569 $ 16,602 $ 26,188 $ 37,053
Restricted cash 1,875
Investments 9,556 32,282 57,869 71,312 31,779
Working capital 22,105 41,281 45,011 48,254 55,935
Total assets 55,526 70,247 92,007 121,036 77,236
Long-term debt 5,217 6,169 8,811 7,258 1,785
Accumulated deficit (103,526) (87,638) (70,045) (36,416) (17,763)
Total stockholders' equity 38,349 53,010 66,784 99,629 69,010
- ------------------------------
(1) See Note 11 of Notes to Consolidated Financial Statements
(2) See Note 12 of Notes to Consolidated Financial Statements
(3) See Note 2 of Notes to Consolidated Financial Statements
-15-
Item 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
The Company was founded in 1989 to develop and commercialize advanced
rechargeable batteries based on lithium and polymer technologies. Since its
inception, the Company has been a development stage company primarily engaged
in acquiring and developing its initial technology, manufacturing limited
quantities of prototype batteries, recruiting personnel, and acquiring
capital. To date, other than insubstantial revenues from limited sales of
prototype batteries, the Company has not received any significant revenues
from the sale of products. Substantially all revenues to date have been
derived from a research and development contract with the Delphi Automotive
Systems Group of General Motors Corporation ("Delphi" - formerly Delco-Remy
Division). The Company has incurred cumulative losses of $103,526,000 from
its inception to March 30, 1997.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section
as well as in the section entitled "Business."
The following discussion should be read in conjunction with the five-year
summary of selected financial data and the Company's consolidated financial
statements and the notes thereto. All references to years represent fiscal
years unless otherwise noted.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 30, 1997 (FISCAL 1997), MARCH 31, 1996 (FISCAL 1996)
AND MARCH 26, 1995 (FISCAL 1995)
During fiscal 1997, the Company continued development activities under a
research and development agreement with Delphi. That phase of a multi-year
agreement, which provided for the aggregate funding of up to $20,000,000, was
completed during the quarter ending September 25, 1994. Payments were
generally made in accordance with the achievement of certain milestones. No
revenues were recognized during fiscal 1997 and fiscal 1996. Revenues of
$4,150,000 were recognized during fiscal 1995 regarding the completed Delphi
agreement.
In September, 1994, the Company and Delphi signed a new five-year agreement
to combine efforts in developing the Company's rechargeable solid state
lithium polymer battery technology. Under the agreement, Delphi and the
Company combined their research and development activities in a new facility
in Henderson, Nevada. The new facility is owned by the Company, with Delphi
paying a fee of $50,000 per month over the five-year term of the new
agreement for access to the Company's research and development (of which
$600,000 was recognized during fiscal 1997 as an offset to research and
product development expenses). In addition, Delphi is paying a majority of
the facility's operating costs over the term of the new five-year agreement.
The Company is treating both of these payments as an offset to expenses.
In the first quarter of fiscal 1995, the Company announced its intent to
refocus its efforts on research and product development and to slowdown
completion of its volume manufacturing capacities. In the second quarter of
fiscal 1995, the Company also announced its intent to reduce its efforts
related to commercialization of a battery containing a lithium metal anode
and instead concentrate on the development of a lithium polymer battery
containing an alternate lithium anode. The Company produced significant cost
savings as a result of these activities.
Research and product development expenses were $11,259,000, $8,047,000 and
$14,762,000 during fiscal 1997, 1996 and 1995, respectively. The increase in
fiscal 1997 versus fiscal 1996 reflects the Company's increased efforts to
commercialize a product in fiscal 1998 or as soon thereafter as practicable.
The decrease between fiscal 1995 and fiscal 1996 was primarily due to cost
sharing with Delphi, reductions in personnel and related costs concurrent
with the Company's decision to slow completion of its volume manufacturing
capacities and refocus on other aspects of research and product development.
-16-
Marketing expenses were $205,000, $486,000 and $705,000 for fiscal 1997, 1996
and 1995, respectively. The comparative decrease from fiscal 1997 and 1996 to
1995 is the result of a decrease in payroll, travel and relocation expenses.
General and administrative expenses increased to $6,168,000 in fiscal 1997
from $5,614,000 in fiscal 1996 and is comparable to the $6,269,000 spent in
fiscal 1995. Fiscal 1997 increase over fiscal 1996 was due to increased legal
costs associated with the shareholder class action lawsuit. The fiscal 1995
to 1996 decrease reflects a reduction in spending consistent with the
research and development redirection as well as cost sharing with Delphi.
Associated with the fiscal 1995 refocus on research and development, special
charges in fiscal 1995 were $18,872,000 ($0.94 per share) for which no tax
benefit is currently available. Such charges were made primarily to
write-down equipment the Company had acquired, or is contractually committed
to acquire, and which was originally intended for use in manufacturing
batteries utilizing a lithium metal anode. An additional component of the
special charges was for facilities consolidation costs.
During fiscal 1996, the Company incurred a one-time charge to operations of
$6,064,000 ($0.28 per share) for the write-off of in-process technology
related to the Technology Transfer Agreement with Bellcore. Technological
feasibility of the in-process technology acquired had not been established
and there was no alternate future use.
Interest income was $2,558,000, $3,549,000 and $3,606,000 in fiscal 1997,
1996 and 1995, respectively. This decrease is a result of lower interest
rates and fewer funds available for investment during fiscal 1997 due to
ongoing losses.
Interest expense decreased to $814,000 from $931,000 and $777,000 during
fiscal 1997, 1996 and 1995, respectively. This decrease is a result of a
reduction in long-term debt associated with capital equipment leases. The
increase in fiscal 1996 versus fiscal 1995 is the result of additional
long-term debt acquired in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $9,971,000 net cash for operating activities during fiscal
1997, whereas it used $12,134,000 during fiscal 1996 and $18,836,000 during
fiscal 1995, a decrease between fiscal 1997 and fiscal 1996 of $2,163,000.
This net decrease primarily resulted from a reduction in losses and the
write-off of the Bellcore technology acquisition. Net cash used in fiscal
1996 decreased by $8,702,000 from fiscal 1995 as the result of special
charges in fiscal 1995 partially offset by acquisition of the Bellcore
technology in fiscal 1996.
During fiscal 1997, the Company provided $15,537,000 net cash from investing
activities compared to a net provision of $23,281,000 during fiscal 1996, and
$4,599,000 provided during fiscal 1995, a decrease of $7,744,000 between
fiscal 1997 and 1996. The decrease was a result of lower losses and
shortening of maturities to support fiscal 1998 capital expenditure budgets.
There were $18,916,000 net maturities during fiscal 1997, as compared to
$25,587,000 net maturities during fiscal 1996. In addition, capital
expenditures increased $1,000,000 during fiscal 1997, as compared to fiscal
1996.
The Company used $1,399,000 in fiscal 1997 as compared to $2,679,000 net cash
from financing activities during fiscal 1996, versus providing $4,520,000
during fiscal 1995. This decrease resulted from reductions in long-term debt.
In fiscal 1995 the Company provided funds by increasing its long-term
borrowings by $4,942,000.
As a result of the above, the Company had a net increase in cash and cash
equivalents of $3,263,000 during fiscal 1997 and $7,967,000 during fiscal
1996, whereas it had a net decrease of $9,586,000 during fiscal 1995.
The Company's $2,000,000 working capital line of credit is available through
March, 1998. The working capital line collateralizes outstanding letters of
credit, which reduce borrowings otherwise available under the line. As of
March 30, 1997, there was one outstanding letter of credit in the amount of
$25,000.
During fiscal 1994, the Company, through its Dutch subsidiary, signed an
agreement with the Northern Ireland Industrial Development Board (the "IDB")
to open an automated manufacturing plant in Northern Ireland in exchange for
capital and revenue grants from the IDB. The Company has also received offers
from the IDB to receive additional grants. The grants available under the
agreement and offers, for an aggregate of up to L27,555,000, generally become
-17-
available over a five-year period through October 31, 2001. As of March 30,
1997, the Company had received grants aggregating L4,035,000 reducing
remaining grants available to L23,520,000 (US$38,373,000 as of March 30,
1997).
As a condition to receiving funding from the IDB, the subsidiary must
maintain a minimum of L12,000,000 in debt or equity financing from the
Company. Aggregate funding under the grants is limited to L4,035,000 until
the Company has recognized $4,000,000 in aggregate revenue from the sale of
its batteries produced in Northern Ireland. Given that the Company has no
agreements to supply batteries using its current technology, there are no
assurances that the Company will be able to meet the agreement's revenue test.
The amount of the grants available under the agreement and offers is
primarily dependent on the level of capital expenditures made by the Company.
Substantially all of the funding received under the grants is repayable to
the IDB if the subsidiary is in default under the agreement and offers, which
includes the permanent cessation of business in Northern Ireland. Funding
received under the grants to offset capital expenditures is repayable if
related equipment is sold, transferred or otherwise disposed of during a four
year period after the date of grant. In addition, a portion of funding
received under the grants may also be repayable if the subsidiary fails to
maintain specified employment levels for the two year period immediately
after the end of the five year grant period. The Company has guaranteed the
subsidiary's obligations to the IDB under the agreement.
There can be no assurance that the Company will be able to meet the
requirements necessary for it to receive and retain grants under the IDB
agreement and offers.
The Company expects that its existing funds as of March 30, 1997, together
with the interest earned thereon, will be sufficient to fund the Company's
operations through calendar 1997. The Company anticipates that it may need
substantial additional funds in the future (possibly as early as the third or
fourth quarter of fiscal 1998) for capital expenditures, research and product
development, marketing and general and administrative expenses and to pursue
joint venture opportunities. The Company's cash requirements, however, may
vary materially from those now planned because of changes in the Company's
operations, including changes in OEM relationships or market conditions.
There can be no assurance that funds for these purposes, whether from equity
or debt financing agreements with strategic partners or other sources, will
be available on favorable terms, if at all.
Forward looking statements involve a number of risks and uncertainties
including, but not limited to, market acceptance, changing economic
conditions, risks in product and technology development, effect of the
Company's accounting policies and other risk factors detailed in the
Company's Securities and Exchange Commission filings.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128),
which specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS 128 supersedes Accounting Principles Board Opinion
No. 15 and is effective for financial statements issued for periods ending
after December 15, 1997. SFAS 128 requires restatement of all prior-period
earnings per share data presented after the effective date. SFAS 128 will not
have a material impact on the Company's financial position, results of
operations or cash flows.
Item 8
Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and notes thereto appear on
pages F-1 to F-18 of this Form 10-K Annual Report.
Item 9
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures
There have been no changes in, or disagreements with accountants, on
accounting and financial disclosures.
-18-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART III
Item 10
Directors of the Registrant
The names of the Company's directors and certain information about them are set
forth below; such information for executive officers of the Company is contained
in Part I, Item 1 of the report.
The directors of the Company and their ages as of June 2, 1997, are as follows:
Name Age Position held with the Company
- -------------------------- --- -------------------------------------------------------------------------------
Calvin L. Reed 54 Chairman of the Board, President, Chief Executive Officer
Carl E. Berg(1)(2) 59 Director
Alan F. Shugart(1)(2) 66 Director
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Reed joined the Company as President and Chief Operating Officer in July
1991 and became a director of the Company in September 1991. In October 1993,
Mr. Reed was also appointed Chairman of the Board and Chief Executive
Officer. From April 1987 to June 1991, Mr. Reed was Vice President of
Operations at Seagate Technology, Inc. ("Seagate"), a disk drive
manufacturer, where he was responsible for the Singapore and the Scotts
Valley, California operations. From February 1982 to April 1987, Mr. Reed was
Corporate Vice President and General Manager of IMI/Corvus Systems, a disk
drive and computer peripheral manufacturer, where he was responsible for
manufacturing, engineering, management information systems and corporate
facilities operations. Mr. Reed currently serves as a director of one private
company.
Mr. Berg helped found the Company and has served on the Board of Directors since
September 1991. For more than the past five years, Mr. Berg has been a major
Silicon Valley industrial real estate developer and a private venture capital
investor. Mr. Berg also serves as a director of Integrated Device Technology,
Inc., Videonics, Inc., and Systems Integrated Research.
Mr. Shugart joined the Company as a director in March 1992. Mr. Shugart has been
the Chief Executive Officer and a director of Seagate since its inception in
1979. Mr. Shugart also served as Seagate's President from 1979 to 1983 and from
September 1991 to the present. Additionally, Mr. Shugart served as Chairman of
the Board of Seagate from 1979 until September 1991, and from October 1992 to
the present. Mr. Shugart currently serves as a director of Sandisk Corporation.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended March 30, 1997, the Board of Directors held five
meetings. The Board has an Audit Committee, a Compensation Committee and a
Non-Officer Stock Option Administration Committee. The Board at large serves as
the Nominating Committee.
The Audit Committee meets with the Company's independent accountants to review
the results of the annual audit and discuss the financial statements; recommends
to the Board the independent accountants to be retained and receives and
considers the accountants' comments as to controls, adequacy of staff and
management performance and procedures in connection with audit and financial
controls. The Audit Committee did not meet during the 1997 fiscal year. It
currently is composed of two non-employee directors: Messrs. Berg and Shugart.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
the Company's stock option plans and otherwise determines compensation
-19-
levels and performs such other functions regarding compensation as the Board
may delegate. The Compensation Committee is composed of two non-employee
directors: Messrs. Berg and Shugart. It met three times during fiscal 1997.
The Non-Officer Stock Option Administration Committee administers the
Company's 1990 Stock Option Plan only for non-officer employees and makes
grants to such employees not in excess of 14,500 shares to any individual.
All option grants in excess of this limit and all grants to officers must be
approved by the Compensation Committee or the Board at large. The Non-Officer
Stock Option Committee is composed of Mr. Reed.
During the fiscal year ended March 30, 1997, each Board member attended 75%
or more of the aggregate of the meetings of the Board and of the committees
on which he served, held during the period for which he was a director or
committee member, respectively.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
directors and executive officers, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file with the
Commission initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Officers,
directors and greater than ten percent stockholders are required by
Commission regulation to furnish the Company with copies of all Section 16(a)
forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 30, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
Item 11
Executive Compensation
COMPENSATION OF DIRECTORS
The Company's non-employee directors receive no cash compensation, but are
eligible for reimbursement for their expenses incurred in connection with
attendance at Board meetings in accordance with Company policy. Directors who
are employees of the Company do not receive separate compensation for their
services as directors, but are eligible to receive stock options under the
Company's 1990 Stock Option Plan (the "1990 Plan").
Each non-employee director of the Company also receives stock option grants
pursuant to the 1996 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"). Only non-employee directors of the Company or an
affiliate of such directors (as defined in the Code) are eligible to receive
options under the Directors' Plan. The plan provides that new directors will
receive an initial stock option of 100,000 shares of common stock upon their
election to the Board. The exercise price for this initial option will be the
fair market value on the day it is granted. This initial option will vest
one-fifth on the first and second anniversaries of the grant of the option,
and quarterly over the next three years. On each anniversary of the
director's election to the Board, the director will receive an annual stock
option in the amount of 100,000 shares less the total amount of unvested
shares remaining in the initial option and any annual options previously
granted. The exercise price for this new option will be the fair market value
on the day it is granted. This annual option will vest quarterly over a three
year period. A director who had been granted an option prior to the adoption
of the Directors' Plan will start receiving annual grants on the anniversary
date of that director's prior grant. A director who had not received an
option upon becoming a director will receive an initial stock option of
100,000 shares on the date of the adoption of the plan, and then receive
annual options on the anniversary dates of that grant. No options granted
under the Directors' Plan may be exercised until the plan is approved by the
stockholders.
During the last fiscal year, the Company granted options covering 20,000
shares to Carl Berg, at an exercise price per share of $5.94, and 46,668
shares to Alan Shugart, at an exercise price per share of $6.75, non-employee
directors of the Company, under the Directors' Plan. The fair market value of
such Common Stock on the dates of grant was $5.94 and
-20-
$6.75, respectively, per share (based on the closing sales price reported in
the NASDAQ National Market for the date of grant). As of June 2, 1997, no
options had been exercised under the Directors' Plan.
EXECUTIVE COMPENSATION
Executive officers are eligible to receive stock options under the 1990 Plan.
In June 1996, the Compensation Committee of the Board passed a resolution
which provides for the automatic granting of stock options to the officers of
the Company. According to this resolution, each quarter, each officer
receives a grant of options under the 1990 plan in an amount necessary to
keep the amount of unvested options held by that officer at a predetermined
level. These levels are 360,000 shares for the CEO, 180,000 shares for an
executive vice president, and 120,000 shares for a vice president. The
resolution was effective when passed, and the Company's officers have been
receiving such grants since that time. The resolution further provided that
in the event the Company ever grants a bonus to any officer, that one half of
any such bonus would be held by the Company for use by the officer only for
exercising his or her stock options. To date, no bonuses have been granted to
any officer.
-21-
The following table shows for the fiscal years ended March 30, 1997, March
31, 1996 and March 26, 1995, certain compensation awarded or paid to, or
earned by the Company's Chief Executive Officer and its other four most
highly compensated executive officers at March 30, 1997 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
Long
Term
Annual Compensation
Compensation Awards
--------------- Other ------------ All Other
Fiscal Salary Bonus Annual Options(1) Compensation
Name and Principal Position Year ($) ($) ($) (#) ($)
- ---------------------------------------- ------ -------- ----- --------- ------------ ------------
Calvin L. Reed 1997 250,000 -- -- 297,630 7,540(2)
President and Chief 1996 250,000 -- -- 30,000 4,854(2,4)
Executive Officer 1995 252,115 -- -- 150,000 49,923(2,3)
William J. Masuda 1997 175,000 -- -- 136,550 --
Executive Vice President, 1996 175,000 -- -- -- 476(4)
Worldwide Operations 1995 165,084 -- -- 100,000 --
R. Joseph Horning 1997 145,600 -- -- 44,442 --
Vice President, 1996 145,600 -- 12,500(5) 10,000 48,531(3)
Engineering 1995 141,241 -- -- 136,000 --
Ralph J. Brodd 1997 134,834 -- 16,667(5) 59,017 2,084(4)
Vice President, 1996 127,404 -- 13,035(5) 80,000 28,331(3,4)
Marketing 1995 109,039 -- -- 15,000 --
Bradley A Perkins 1997 130,000 -- 13,520(5) 69,117 --
Vice President and 1996 130,000 -- 11,898(5) 10,000 7,679(3,4)
General Counsel 1995 128,269 -- -- 97,000 --
- ------------------------
(1) The Company has no stock appreciation rights ("SARs").
(2) Life insurance premium payments.
(3) Relocation expenses (moving expenses, tax gross-up payments related to sale
of home, meals, relocation payment, travel expenses, etc.) related to the
Company's move to Henderson, Nevada.
(4) Patent award payments. Patent awards are granted to employees of the Company
for inventions made by employees for which they have submitted invention
disclosures to the Company, for which the Company has filed a patent
application with the United States Patent and Trademark Office, or for which
a patent has been issued by the United States Patent and Trademark Office.
(5) Amounts forgiven under loans provided to the Named Executive Officer by the
Company.
-22-
STOCK OPTION GRANTS AND EXERCISES
The following tables show for the fiscal year ended March 30, 1997, certain
information regarding options granted to, exercised by, and held at year end
by the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable
---------------------------- Value
Percent of at Assumed Annual Rates
Total of Stock Price
Options Appreciation
Granted to for Option Term(3)
Options Employees Exercise ------------------------
Granted in Fiscal Price Expiration
Name (#)(1) Year(2) ($/Sh) Date 5% ($) 10% ($)
- -------------------------------------------------- --------- ----------------- ----------- ----------- ---------- ------------
Calvin L. Reed 232,500 20.7% 5.88 6/7/06 859,762 2,178,804
11,250 1.0% 5.00 7/1/06 35,376 89,648
25,782 2.3% 5.88 9/30/06 95,339 241,608
28,098 2.5% 4.19 12/30/06 74,041 187,633
William J. Masuda 96,250 8.6% 5.88 6/7/06 355,923 901,978
5,625 0.5% 5.00 7/1/06 17,688 44,824
16,641 1.5% 5.88 9/30/06 61,537 155,946
18,034 1.6% 4.19 12/30/06 47,521 120,427
R. Joseph Horning 21,600 1.9% 5.88 6/7/06 79,875 202,418
3,250 0.3% 5.00 7/1/06 10,220 25,898
9,400 0.8% 5.88 9/30/06 34,760 88,089
10,192 0.9% 4.19 12/30/06 26,857 68,060
Bradley A. Perkins 42,950 3.8% 5.88 6/7/06 158,825 402,493
3,250 0.3% 5.00 7/1/06 10,220 25,898
18,285 1.6% 5.88 9/30/06 67,616 171,352
4,632 0.4% 4.19 12/30/06 12,206 30,932
Ralph Brodd 36,000 3.2% 5.88 6/7/06 133,124 337,363
3,250 0.3% 5.00 7/1/06 10,220 25,898
9,000 0.8% 5.88 9/30/06 33,281 84,341
10,767 1.0% 4.19 12/30/06 28,372 71,900
- ------------------------
(1) Options granted in fiscal 1997 generally vest over four years, with 1/16 of
the shares vesting each quarter and with full vesting occurring on the
fourth anniversary date.
(2) Based on an aggregate of 1,125,558 options granted to employees, including
the Named Executive Officers, in fiscal year 1997.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant, 10 years, compounded annually. It is calculated by
assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price. No gain to the optionee is possible unless the
stock price increases over the option term, which will benefit all
stockholders.
-23-
The following table shows the number and value of the unexcercised options
held by each of the Named Executive Officers on March 30, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUES
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at FY-End (#) at FY-End ($)(1)
------------------------ ----------------------
Shares
Acquired on Value
Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------- --------------- ----------- ----------- ----------- --------- -----------
Calvin L. Reed 0 0 626,084 360,000 3,434,889 513,965
William J. Masuda 0 0 150,711 180,000 679,782 289,625
R. Joseph Horning 0 0 81,271 120,000 250,822 288,793
Bradley A. Perkins 0 0 90,539 120,000 342,134 228,873
Ralph Brodd 0 0 68,707 120,000 295,029 300,376
- ------------------------
(1) Based on the fair market value of the Company's Common Stock as of March 30,
1997 ($6.75) minus the exercise price of the options multiplied by the
number of shares underlying the option.
EMPLOYMENT AGREEMENTS
In May 1991, the Company entered into an agreement with Mr. Reed pursuant to
which Mr. Reed joined the Company as its President and Chief Operating Officer
for an annual salary of $250,000. The Company also granted Mr. Reed an option to
purchase 700,000 shares of common stock at an exercise price of $0.25 per share,
with 20% vested immediately and the remainder vesting over a four-year period.
In January 1993, the Company entered into an employment agreement with Mr.
Horning pursuant to which the Company retained Mr. Horning as its Director of
Product Engineering for an annual salary of $125,000. The Company granted Mr.
Horning an option to purchase 22,000 shares of common stock at an exercise price
of $22.75 per share, vesting over a five-year period. In addition, the Company
agreed to pay Mr. Horning's relocation expenses. The Company also loaned Mr.
Horning $45,000 pursuant to a loan agreement, in which the Company forgave the
loan at a rate of $15,000 per year of his employment. Mr. Horning became a Vice
President of the Company in September 1993.
In February 1997, the Company entered into an employment agreement with Dr.
Kalnoki-Kis pursuant to which the Company retained Dr. Kalnoki-Kis as its Vice
President and Chief Technical Officer at an annual salary of $175,000. The
Company granted Dr. Kalnoki-Kis an option to purchase 150,000 shares of common
stock at an exercise price of $5.88 per share, vesting over a four-year period.
In addition, the Company agreed to pay Dr. Kalnoki-Kis's relocation expenses.
The Company also loaned Dr. Kalnoki-Kis $200,000 pursuant to a loan agreement,
in which the Company will forgive the principle and interest over the first four
years of his employment.
-24-
OPTION REPRICING INFORMATION
The following table shows certain information concerning option repricings
received by any Named Officer during the last ten years.
TEN YEAR OPTION/SAR REPRICINGS
Number Length of
of Original
Options/ Market Price Option Term
SARs of Stock at Exercise Remaining at
Repriced Time of Price at Time New Date of
or Repricing or of Repricing Exercise Repricing or
Amended Amendment or Amendment Price Amendment
Name Date (#) ($) ($) ($) (years)
- ----------------------------------------------- --------- ----------- ------------- ------------- ----------- ---------------
R. Joseph Horning 01/18/93 22,000 11.50 22.75 11.50 4.75
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended March 30, 1997, the Compensation Committee
consisted of Messrs. Shugart and Berg.
In July 1990, Mr. Berg loaned the Company $520,000 for a seven year term at
an interest rate of 10% per annum and the Company issued a warrant
exercisable for an aggregate of 130,000 shares of common stock to Mr. Berg.
This warrant was exercised on March 31, 1992 at $4.40 per share by
cancellation of indebtedness under such loan. From July 1990 to March 1992
the Company issued additional warrants exercisable for an aggregate of
1,222,825 shares of common stock to Baccarat Electronics, Inc., an entity
affiliated with Mr. Berg, at an exercise price of $4.00 per share, in
consideration for a loan agreement in which such entity agreed to lend the
Company an aggregate of up to $5,000,000 (the "Loan Agreement"). Under the
terms of the Loan Agreement, the Company executed a promissory note payable
in full in July 1995 with 9% interest per annum through July 1993 and the
prime rate thereafter. In addition, to secure its obligations under the
promissory note, the Company granted to the entity a security interest in all
of the Company's assets. In August 1992, the Company entered into an
amendment to the Loan Agreement which allows the Company to borrow, prepay
and re-borrow up to the full $5,000,000 principal under the promissory note
on a revolving basis and provided that the lender will subordinate its
security interest to other lenders when the loan balance is at zero. In
September 1992, the Company paid in full all interest and principal
outstanding under the Loan Agreement. As of March 30, 1997, the Company had
no outstanding balance under the Loan Agreement.
The Company had two facilities in San Jose, California, which it no longer
occupies, under a five-year lease commencing May 1, 1993 with Berg & Berg
Developers. Carl E. Berg, a director of the Company, is a general partner of
Berg & Berg Developers. The Company has sublet, through Berg & Berg
Developers, both facilities for the entire term remaining on the lease,
thereby releasing the Company from any further obligation.
In September 1990, the Company issued an aggregate of 500,000 shares of
common stock to four stockholders affiliated with the then majority holder of
Innocell in exchange for payments aggregating $5,000. As partial
consideration for the settlement of the Company's disagreements with the
holders of the other 55% interest in Innocell and with the four stockholders,
in March 1992, Mr. Berg obtained for a cash payment of $131,250 irrevocable
options to repurchase an aggregate of 375,000 shares of common stock from the
four stockholders exercisable at $5.00 per share. Because of certain Danish
tax considerations, the four stockholders would not grant the options to the
Company. Mr. Berg agreed to hold such options for the benefit of the Company.
The Company exercised such options in October 1993 for an aggregate of
$1,875,000. The Company has reimbursed Mr. Berg for all of his costs
(including the $131,250 option payment) and indemnified him for any liability
incurred in connection with this transaction. In connection with the
acquisition of the options from the four stockholders, Mr. Berg obtained
letters of credit aggregating $1,875,000 to support the option exercise
price. The Company has paid $1,875,000 as substitute collateral for the
collateral made available by Mr. Berg.
-25-
In March 1992, in connection with the acquisition of the remaining interests
in its Danish subsidiary, the Company borrowed an additional $1,100,000 from
Mr. Berg at the prime rate plus 2%, payable on the earlier of September 30,
1992 or 10 days after the closing of an underwritten public offering. Such
amount plus interest was repaid in May 1992.
During fiscal year 1993, the Company purchased $134,000 of computer equipment
from Actrix Computers, Inc. During fiscal year 1994, the Company purchased an
additional $114,129 of computer equipment from Actrix Computers, Inc. Mr.
Berg is President and substantial owner of Actrix Computers, Inc. The Company
believes that the prices it has paid for the computer equipment are
comparable to prices generally available in the market.
Item 12
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the ownership of
the Company's common stock as of June 2, 1997 by: (i) each director and nominee
for director; (ii) each of the executive officers in the Summary Compensation
table; (iii) all executive officers and directors of the Company as a group; and
(iv) all those known by the Company to be beneficial owners of more than five
percent (5%) of its common stock.
BENEFICIAL OWNERSHIP (1)
Beneficial Owner Number of Shares Percent of Total
- ----------------------------------------------------------------------- ---------------- -----------------
Carl E. Berg(2) 4,069,489 17.59%
10050 Bandley Drive, Cupertino, CA 95014
Bell Communications Research, Inc. 1,500,000 6.85%
445 South Street, Morristown, NJ 07960
Calvin L. Reed(3) 658,507 2.92%
William J. Masuda(3) 171,422 *
Alan F. Shugart(3) 137,224 *
Bradley A. Perkins(3) 101,815 *
R. Joseph Horning(3) 92,979 *
Ralph Brodd(3) 80,518 *
All directors and executive officers as a group (10 persons)(4) 5,404,819 22.10%
- ------------------------
* Less than one percent (1%)
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13G filed with the Securities and
Exchange Commission (the "Commission"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting and
investment power with respect to the shares indicated as beneficially owned.
Applicable percentage ownership is based on 21,892,543 shares of common
stock outstanding on June 2, 1997, adjusted as required by rules promulgated
by the Commission.
(2) Includes 150,000 shares held by Mr. Berg; 21,667 shares issuable upon
exercise of options held by Mr. Berg that are exercisable within 60 days of
June 2, 1997; 1,222,825 shares issuable upon exercise of warrants held by
Baccarat Electronics, Inc., of which Mr. Berg is President and principal
stockholder; 2,499,997 shares held by Baccarat Development Partnership for
which Mr. Berg serves as the President of the corporate general partner;
105,000 shares held by Berg & Berg Enterprises, Inc. and 70,000 shares held
by Berg & Berg Profit Sharing Plan U/A 1/1/80 FBO Carl E. Berg Basic
Transfer Carl E. Berg, Trustee. Does not include 80,000 shares held in trust
for Mr. Berg's children. Mr. Berg is not a trustee of the trust and he
disclaims beneficial ownership of such shares.
(3) All shares are issuable upon exercise of options that are exercisable within
60 days of June 2, 1997.
(4) Includes 1,222,825 shares issuable upon exercise of warrants and 1,341,997
issuable upon exercise options.
-26-
Item 13
Certain Transactions
In July 1992, the Company entered into a relocation loan agreement with Mr.
Masuda, Executive Vice President, Worldwide Operations of the Company
pursuant to which the Company agreed to lend up to $100,000 at an annual
interest rate of 6% due and payable on December 31, 1992. Mr. Masuda repaid
the loan in July 1993.
See "Compensation Committee Interlocks and Insider Participation" for a
description of certain transactions between the Company and Mr. Berg.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and
other agents to the fullest extent permitted by Delaware law. The Company is
also empowered under its Bylaws to enter into indemnification contracts with
its directors and officers and to purchase insurance on behalf of any person
whom it is required or permitted to indemnify. Pursuant to this provision,
the Company has entered into indemnity agreements with each of its directors
and officers.
In addition, the Company's Second Restated Certificate of Incorporation
provides that to the fullest extent permitted by Delaware law, the Company's
directors will not be personally liable for monetary damages for breach of
the directors' fiduciary duty of care to the Company and its stockholders.
This provision in the Certificate of Incorporation does not eliminate the
duty of care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
Delaware law. Each director will continue to be subject to liability for
breach of the director's duty of loyalty to the Company, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for acts or omissions that the director believes to be
contrary to the best interests of the Company or its stockholders, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to
the Company or its stockholders when the director was aware or should have
been aware of a risk of serious injury to the Company or its stockholders,
for acts or omissions that constitute an unexecuted pattern of inattention
that amounts to an abdication of the director's duty to the Company or its
stockholders, for improper transactions between the director and the Company
and for improper distributions to stockholders and loans to directors and
officers. This provision also does not affect a director's responsibilities
under any other laws, such as the federal securities laws or state or federal
environmental laws.
The Company has obtained directors and officers liability insurance with
coverage of $2,000,000.
In May 1994, a series of class action lawsuits was filed in the United States
District Court for the Northern District of California against the Company
and certain of its present and former officers and directors. These lawsuits
were consolidated, and in September 1994 the plaintiffs filed a consolidated
and amended class action complaint. Following the Court's Orders on motions
to dismiss the complaint, which were granted in part and denied in part, the
plaintiffs filed an amended complaint in October 1995 ("Complaint"). The
Complaint alleges violations of the federal securities laws against the
Company, certain of its present and former officers and directors, and the
underwriters of the Company's public stock offerings, claiming that the
defendants issued a series of false and misleading statements, including
filings with the Securities and Exchange Commission, with regard to the
Company's business and future prospects. The plaintiffs seek to represent a
class of persons who purchased the Company's common stock between May 7, 1992
and August 10, 1994. The Complaint seeks unspecified compensatory and
punitive damages, attorney's fees and costs.
On January 23, 1996, the Court dismissed, with prejudice, all claims against
the underwriters of the Company s public stock offerings, and one claim
against the Company and its present and former officers and directors. On
April 29, 1996, the Court dismissed with prejudice all remaining claims
against a present director and limited claims against a former officer and
director to the period when that person was an officer. In December 1996, the
Company and the individual defendants filed motions for summary judgment,
which the plaintiffs opposed. In January 1997, the Court
-27-
appointed a Special Master to hear the defendants' motions for summary
judgment and submit recommendations to the Court with respect to their
disposition. In March 1997, the Special Master held a hearing on the
defendants' motions for summary judgment. To date, the Special Master is
still considering the motions. At the time the Special Master was appointed,
the Court also set a trial date in September, 1997. The plaintiffs have
requested a jury trial and are expected to ask for a substantial sum in
damages. If the plaintiffs prevail in their demands, damages awarded by the
jury may exceed the assets of the Company. The Company believes that it has
meritorious defenses and is defending the lawsuit vigorously.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company and its officers and directors have
been informed that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item 14
Exhibits, Financial Statements,
Financial Statement Schedules and Reports on Form 8-K
(a) (1) FINANCIAL STATEMENTS--See Index to Consolidated Financial Statements on page F-1
of this Form 10-K Annual Report.
(2) REPORT OF INDEPENDENT ACCOUNTANTS--See Index to Consolidated Financial Statements
on F-1 of this Form 10-K Annual Report.
(3) EXHIBITS--See Exhibit Index on pages 29 and 30 of this Form 10-K Annual Report.
(b) The Registrant filed no reports on Form 8-K during the fiscal year ended March 30,
1997.
(c) See Exhibit Index on pages 29 and 30 of this Form 10-K Annual Report.
-28-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT INDEX
EXHIBIT NO.
3.1 (1) Second Amended and Restated Certificate of Incorporation of the Registrant.
3.2 (1) Amended and Restated Bylaws of the Registrant.
10.1 (1) Form of Indemnification Agreement entered into between the Registrant and its Directors
and Officers.
10.2 (1)( ) 1990 Employee Stock Option Plan and related form of Incentive Stock Option Grant and
Supplemental Stock Option Grant.
10.3 (1) Lease Agreement between the Company and Berg & Berg Developers for the Premises at 6781
Via Del Oro, San Jose, California 95119.
10.4 (1) Stock Purchase Agreement between Mead and the Company, effective July 27, 1990.
10.5 (1) Stock Assignment and License Agreement between Mead and the Company, dated July 26,
1990.
10.6 (1) Amendment No. 1 to Assignment and License Agreement, dated December 6, 1991.
10.7 (1) Contribution Agreement between Mead and Devres MS Co., dated July 26, 1990.
10.8 (1) Agreement between the Company, Innocell and Delco Remy Division--General Motors, dated
March 1, 1991.
10.9 (1)( ) Employment Agreement with Dr. Dale R. Shackle, dated April 30, 1991.
10.10(1)( ) Relocation Loan Agreement with Dr. Dale R. Shackle, dated August 2, 1991.
10.11(1)( ) Employment Agreement with Mr. Calvin L. Reed, dated May 28, 1991.
10.12(1) Loan Agreement between the Company and Baccarat Electronics Inc., dated July 17, 1990.
10.13(1) Amendment No. 1 to Loan between the Company and Baccarat Electronics, dated March 15,
1991.
10.14(1) Amendment No. 2 to Loan between the Company and Baccarat Electronics, dated March 24,
1992.
10.15(1) Settlement Agreement and General Release by and among Jorgen S. Lundsgaard, H. Hope, S.
Hope, H&L, HII, Lithion, HTI, Devres and the Company, dated September 9, 1991.
10.16(1) Settlement Agreement by and among the Company, Ultracell (Cayman Islands), Innovision
A/S, ERL, Innocell and JL ApS, dated March 21, 1992.
10.17(1) Options to purchase an aggregate of 375,000 shares of the Common Stock of the Company
issued to Carl E. Berg by four individuals, dated March 21, 1992.
10.18(1) Option to purchase shares of Innocell ApS issued to Ultracell (Cayman Islands) by Jorgen
S. Lundsgaard, dated March 21, 1992.
10.19(1) Letter Agreement by and between the Company and Jorgen S. Lundsgaard, dated March 21,
1992.
10.20(1) Indemnification Agreement by and between the Company and Carl E. Berg, dated March 21,
1992.
10.21(1) Promissory Note for $1,100,000 in favor of Carl E. Berg, dated March 24, 1992.
10.22(1) Addendum to Promissory Note for $1,100,000, dated March 24, 1992.
10.23(2)( ) Employee Loan Agreement between the Company and William Masuda, dated July 1, 1992.
10.24(2) Amendment No. 3 to Loan Agreement and Promissory Note between the Company and Baccarat
Electronics, Inc., dated August 17, 1992.
10.25(4)(*) Agreement between Motorola, Inc., and the Company, effective November 30, 1992.
10.26(5)(*) Agreement between Hewlett-Packard Company, Valence Technology Cayman Islands Inc. and
the Company, dated as of January 18, 1994.
10.27(5)(*) Joint Venture Agreement between Goldtron Cayman Islands Inc. and Valence Technology
Cayman Islands Inc., dated as of March 15, 1994.
10.28(5)(*) License and Support Agreement between Goldtron Cayman Islands Inc. and Valence
Technology Cayman Islands Inc., dated as of March 15, 1994.
10.29(5)(*) Battery Laminate Supply Agreement between Goldtron Cayman Islands Inc. and Valence
Technology Cayman Islands Inc., dated as of March 16, 1994.
10.30(5)(*) Joint Development and License Agreement between Eveready Battery Company, Inc., the
Company and Valence Technology Cayman Islands Inc., dated as of May 20, 1994.
-29-
EXHIBIT NO.
10.31(5) Lease Agreement between the Company and Berg & Berg Developers for the Premises at 6781
Via Del Oro and 160 Great Oaks, San Jose, California 95119, dated as of May 1, 1993.
10.32(6) Purchase Agreement between the Company and Whittaker Technical Products, Inc. for the
Premises at 301 Conestoga Way, Henderson, Nevada 89015, dated as of September 21, 1994.
10.33(6)(*) Joint Research and Development Agreement between the Company and AC Delco Systems
Division of General Motors Corporation, dated as of September 15, 1994.
10.34(7)(*) Technology Transfer Agreement between the Company and Bell Communications Research,
Inc., dated as of June 29, 1995.
10.35(8)(*) Joint Venture Agreement between the Company, through its Dutch subsidiary, and Hanil
Telecom Co., Ltd., dated as of July 10, 1996.
10.36(8)(*) License and Support Agreement between the Company, through its Dutch subsidiary, and
Hanil Valence Co., Ltd.
10.37(8)(*) Battery Laminate Supply Agreement between the Company, through its Dutch subsidiary, and
Hanil Valence Co., Ltd.
10.38(8)(*) Letter Agreement from the Company, through its Dutch subsidiary, to Hanil Telecom Co.,
Ltd.
10.39(9)(*) Joint Venture Agreement between the Company and Alliant Techsystems.
10.40(9)(*) License and Support Agreement between the Company and Alliant / Valence, L.L.C.
10.41(9)(*) Battery Laminate Supply Agreement between the Company and Alliant / Valence, L.L.C.
11.1 Calculation of net loss per share.
21.1 List of subsidiaries of the Company.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule
- ------------------------
(1) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement on Form S-1 (File No. 33-46765), as amended.
(2) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement on Form S-1 (File No. 33-52888), as amended.
(3) Incorporated by reference to Exhibit 22.1 in the Company's Registration
Statement on Form S-1 (File No. 33-52888), as amended.
(4) Incorporated by reference to the indicated exhibit in the Company's Form
10-K filed for fiscal year ended March 28, 1993.
(5) Incorporated by reference to the indicated exhibit in the Company's Form
10-K filed for fiscal year ended March 27, 1994.
(6) Incorporated by reference to the indicated exhibit in the Company's Form
10-K filed for fiscal year ended March 26, 1995.
(7) Incorporated by reference to the indicated exhibit in the Company's Form 10Q
filed for fiscal quarter ended June 25, 1995.
(8) Incorporated by reference to the indicated exhibit in the Company's Form 10Q
filed for fiscal quarter ended June 30, 1996.
(9) Incorporated by reference to the indicated exhibit in the Company's Form 10Q
filed for fiscal quarter ended September 29, 1996.
( ) Executive Compensation Plans and Arrangements.
(*) Portions of the text have been omitted. A separate filing of such omitted
text has been made with the Commission as part of Registrant's application
for confidential treatment.
-30-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALENCE TECHNOLOGY, INC.
June 27, 1997 By: /s/ CALVIN L. REED
------------------------------------------
Calvin L. Reed
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
June 27, 1997 By: /s/ DAVID P. ARCHIBALD
------------------------------------------
David P. Archibald
Vice President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ CALVIN L. REED Chairman, President and
- ------------------------------ Chief June 27, 1997
Calvin L. Reed Executive Officer
/s/ CARL E. BERG
- ------------------------------ Director June 27, 1997
Carl E. Berg
/s/ ALAN F. SHUGART
- ------------------------------ Director June 27, 1997
Alan F. Shugart
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants.................................................................................. F-2
Consolidated Balance Sheets as of March 30, 1997 and March 31, 1996................................................ F-3
Consolidated Financial Statements for the period from
March 3, 1989 (date of inception) to March 30, 1997 and
for the years ending March 30, 1997, March 31, 1996 and
March 26, 1995:
Consolidated Statements of Operations.......................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)...................................................... F-5
Consolidated Statements of Cash Flows.......................................................................... F-6
Notes to Consolidated Financial Statements............................................................................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Valence Technology, Inc. and Subsidiaries
Henderson, Nevada
We have audited the accompanying consolidated financial statements of Valence
Technology, Inc. and subsidiaries (companies in the development stage) listed in
Item 14A of this Form 10-K. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Valence
Technology, Inc. and subsidiaries (companies in the development stage) as of
March 30, 1997 and March 31, 1996, and the consolidated results of their
operations and their cash flows for the period from March 3, 1989 (date of
inception) to March 30, 1997 and for each of the three years in the period ended
March 30, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
May 2, 1997
F-2
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
---
March 30, March 31,
1997 1996
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 27,832 $ 24,569
Short-term investments 5,556 26,492
Accounts receivable 431 545
Interest receivable 126 444
Prepaids and other current assets 120 299
----------- ----------
Total current assets 34,065 52,349
Investments 4,000 5,790
Property, plant and equipment, net 17,191 11,752
Other assets 270 356
----------- ----------
Total assets $ 55,526 $ 70,247
----------- ----------
----------- ----------
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 1,433 $ 2,277
Accounts payable 1,949 1,251
Accrued expenses 7,317 6,180
Accrued compensation 1,261 1,360
----------- ----------
Total current liabilities 11,960 11,068
Long-term debt, less current portion 5,217 6,169
----------- ----------
Total liabilities 17,177 17,237
----------- ----------
Commitments and Contingencies (Notes 7 and 11.)
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value:
Authorized: 10,000 shares; Issued and outstanding: none
Common stock, $0.001 par value:
Authorized: 50,000 shares; Issued and outstanding: 21,745 and 21,665 shares at March 30,
1997 and March 31, 1996, respectively 140,580 140,307
Deficit accumulated during the development stage (103,526) (87,638)
Cumulative translation adjustment 1,295 341
----------- ----------
Total stockholders' equity 38,349 53,010
----------- ----------
Total liabilities and stockholders' equity $ 55,526 $ 70,247
----------- ----------
----------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
---
Period from
March 3, 1989 Year Ended
(date of inception) ----------------------------------
to March 30, March 31, March 26,
March 30, 1997 1997 1996 1995
------------------- ---------- ---------- ----------
Revenue:
Research and development contracts $ 21,605 $ - $ - $ 4,150
---------- ---------- ---------- ----------
Costs and expenses:
Research and development 69,483 11,259 8,047 14,762
Marketing 2,677 205 486 705
General and administrative 32,363 6,168 5,614 6,269
Write-off of in-process technology 8,212 6,064
Investment in Danish subsidiary 3,489
Special charges 18,872 18,872
---------- ---------- ---------- ----------
Total costs and expenses 135,096 17,632 20,211 40,608
---------- ---------- ---------- ----------
Operating loss (113,491) (17,632) (20,211) (36,458)
Interest income 13,727 2,558 3,549 3,606
Interest expense (3,762) (814) (931) (777)
---------- ---------- ---------- ----------
Net loss $ (103,526) $ (15,888) $ (17,593) $ (33,629)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per share - $ (0.73) $ (0.83) $ (1.68)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing net loss per share - 21,684 21,261 20,059
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the cumulative period from March 3, 1989
(date of inception) to March 30, 1997
(in thousands, except per share amounts)
---
Common Stock, $0.001
Deficit
Par Value Per Share Options to Accumulated
Purchase During the Cumulative
---------------------- Treasury Development Translation
Shares Amount Stock Stage Adjustment
----------- --------- ----------- ------------ -----------
Issuance of common stock to founders:
March 1989 at $0.001 per share 4,500 $ 5
May 1989 at $0.01 per share 3,370 34
Net loss $ (394)
----------- --------- ------------
Balances, March 31, 1990 7,870 39 (394)
Issuance of common stock for cash in September 1990 at
$0.01 per share 500 5
Net loss (5,137)
----------- --------- ------------
Balances, March 31, 1991 8,370 44 (5,531)
Exercise of warrants 130 572
Options purchased $ (1,125)
Net loss (3,769)
----------- --------- ----------- ------------ -----------
Balances, March 31, 1992 8,500 616 (1,125) (9,300)
Issuance of common stock in public offerings, net of
offering costs:
May and June 1992 at $8.00 per share 4,140 30,155
November 1992 at $18.00 per share 3,380 57,031
Exercise of Stock Options: July 1992 through March 1993
at $0.01 to $0,25 per share 289 21
Compensation related to exercised stock options 75
Net loss (8,463)
----------- --------- ----------- ------------ -----------
Balances, March 28, 1993 16,309 87,898 (1,125) (17,763)
Issuance of common stock in public offering in December
1993 at $14.00 per share, net of offering costs 3,680 48,492
Exercise of stock options during year at $0.01 to $13.00
per share 410 481
Compensation related to exercised stock options 243
Exercise of options to purchase treasury stock and
retirement of shares (375) (1,125) 1,125
Net loss (18,653)
Translation adjustment $ 56
----------- --------- ----------- ------------ -----------
Balances, March 27, 1994 20,024 135,989 (36,416) 56
Exercise of stock options during year at $0.01 to $4.00
per share 83 33
Compensation related to exercised stock options 43
Net loss (33,629)
Translation adjustment 708
----------- --------- ----------- ------------ -----------
Balances, March 26, 1995 20,107 136,065 (70,045) 764
Exercise of stock options during year at $0.25 to $4.00
per share 58 179
Common stock issued to purchase Bellcore technology 1,500 4,063
Net loss (17,593)
Translation adjustment (423)
----------- --------- ----------- ------------ -----------
Balances, March 31, 1996 21,665 140,307 $ - (87,638) 341
Exercise of stock options during year at $1.88 to $4.31
per share 80 273
Net loss (15,888)
Translation adjustment 954
----------- --------- ----------- ------------ -----------
Balances, March 30, 1997 21,745 $ 140,580 $ - $ (103,526) $ 1,295
----------- --------- ----------- ------------ -----------
----------- --------- ----------- ------------ -----------
Totals
---------
Issuance of common stock to founders:
March 1989 at $0.001 per share $ 5
May 1989 at $0.01 per share 34
Net loss (394)
---------
Balances, March 31, 1990 (355)
Issuance of common stock for cash in September 1990 at
$0.01 per share 5
Net loss (5,137)
---------
Balances, March 31, 1991 (5,487)
Exercise of warrants 572
Options purchased (1,125)
Net loss (3,769)
---------
Balances, March 31, 1992 (9,809)
Issuance of common stock in public offerings, net of
offering costs:
May and June 1992 at $8.00 per share 30,155
November 1992 at $18.00 per share 57,031
Exercise of Stock Options: July 1992 through March 1993
at $0.01 to $0,25 per share 21
Compensation related to exercised stock options 75
Net loss (8,463)
---------
Balances, March 28, 1993 69,010
Issuance of common stock in public offering in December
1993 at $14.00 per share, net of offering costs 48,492
Exercise of stock options during year at $0.01 to $13.00
per share 481
Compensation related to exercised stock options 243
Exercise of options to purchase treasury stock and
retirement of shares -
Net loss (18,653)
Translation adjustment 56
---------
Balances, March 27, 1994 99,629
Exercise of stock options during year at $0.01 to $4.00
per share 33
Compensation related to exercised stock options 43
Net loss (33,629)
Translation adjustment 708
---------
Balances, March 26, 1995 66,784
Exercise of stock options during year at $0.25 to $4.00
per share 179
Common stock issued to purchase Bellcore technology 4,063
Net loss (17,593)
Translation adjustment (423)
---------
Balances, March 31, 1996 53,010
Exercise of stock options during year at $1.88 to $4.31
per share 273
Net loss (15,888)
Translation adjustment 954
---------
Balances, March 30, 1997 $ 38,345
---------
---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
---
Period from
March 3, 1989
(date of Twelve Months Ended
inception) -------------------------------------
to March 30, March 31, March 26,
March 30, 1997 1997 1996 1995
---------------- ----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (103,526) $ (15,888) $ (17,593) $ (33,629)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 19,845 3,536 5,199 4,482
Write-off of equipment 14,792 25 16,489
Write-off of in-process technology 6,211 4,064
Compensation related to stock options 1,421 273 278
Noncash charge related to acquisition of Danish subsidiary 2,245
Changes in assets and liabilities:
Accounts receivable 658 114 544
Interest receivable (117) 321 (220) 170
Notes receivable (144) (1) (143)
Prepaid expenses and other current assets (1,073) 185 212 (573)
Accounts payable 1,848 698 (1,166) (5,978)
Accrued liabilities 293 1,039 (3,304) 421
Deferred revenue (496)
---------------- ----------- ----------- -----------
Net cash used in operating activities (57,547) (9,971) (12,134) (18,836)
---------------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of long-term investments (478,228) (81,139) (146,371) (43,076)
Maturities in long-term investments 464,862 100,055 171,958 56,519
Capital expenditures (39,252) (3,379) (2,306) (8,794)
Other (222) (50)
---------------- ----------- ----------- -----------
Net cash provided by (used in) investing activities (52,840) 15,537 23,281 4,599
---------------- ----------- ----------- -----------
Cash flows from financing activities:
Property and equipment grants 4,419 125 356 2,449
Borrowings of long-term debt 15,502 4,942
Payments of long-term debt:
Product development loan (482) (482)
Shareholder and director (6,173)
Other long-term debt (10,536) (1,797) (3,214) (2,422)
Proceeds from issuance of common stock, net of issuance costs 136,784 273 179 33
---------------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 139,514 (1,399) (2,679) 4,520
---------------- ----------- ----------- -----------
Effect of foreign exchange rates on cash and cash equivalents (1,295) (904) (500) 131
---------------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 27,832 3,263 7,967 (9,586)
Cash and cash equivalents, beginning of period 0 24,569 16,602 26,188
---------------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 27,832 $ 27,832 $ 24,569 $ 16,602
---------------- ----------- ----------- -----------
---------------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES:
Acquisition of property, plant and equipment through grants and
long-term debt $ 7,957 $ 2,458
Acquisition of property and equipment through capitalized leases 1,459
Exercise of warrants in cancellation of indebtedness 572
Exercise of options to purchase treasury stock and retirement of
treasury stock 1,125
Interest paid 3,668 $ 814 $ 924 769
Return of equipment for extinguishment of debt 301 301
Exchange of common stock for in-process technology 4,063 4,063
Disposal of equipment fully reserved for in prior year 3,318 1,679 1,639
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
1. Organization and Business of the Company:
Valence Technology, Inc. (the "Company") is engaged in research and development
to produce advanced rechargeable batteries based on lithium and polymer
technologies. The Company's primary activities to date have been acquiring and
developing its initial technology, implementing a production line, manufacturing
limited quantities of prototype batteries, recruiting personnel and obtaining
capital; such activities have resulted in losses since inception.
The Company's current research prototype batteries do not meet all of the
specifications demanded by the marketplace, and the Company presently has no
products available for sale. To achieve profitable operations, the Company must
successfully develop, manufacture and market its products. There can be no
assurance that any products can be developed or manufactured at an acceptable
cost and with appropriate performance characteristics, or that such products
will be successfully marketed.
The Company uses a 52/53-week fiscal year, ending on the Sunday closest to March
31. All years presented are 52-week years except fiscal 1996 which is 53 weeks.
2. Summary of Significant Accounting Policies:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Primarily all cash and cash equivalents are held by three banks and three
major investment brokerage companies, and primarily comprise money market
funds and investment grade bank and commercial paper.
INVESTMENTS:
Because of the Company's intent and ability to hold certain investments
with original maturities greater than one year to maturity or until
called by the issuer, such securities have been classified as "held
to maturity" securities and reported at amortized cost. Realized gains and
losses on sales of all such investments are reported in earnings and
computed using the specific identification cost method. Held to maturity
securities with maturities less than one year from the balance sheet date
are classified as short-term and those with maturities greater than one
year from the balance sheet date are classified as long-term.
During fiscal year 1996, management classified certain short-term
investments as available-for-sale securities which are carried at market
value. Unrealized gains and losses, if material, are reported net of tax
as a separate component of stockholders' equity, until realized. The
difference between the cost basis and the market value of the Company's
investments was not material at March 31, 1996.
PROPERTY, PLANT AND EQUIPMENT GRANTS:
Grants relating to the acquisition of property, plant and equipment are
recorded upon satisfaction of the capital investment requirements
underlying the grant and the receipt of grant funds. Such grants are
deferred and amortized over the estimated useful lives of the related
assets as a reduction of depreciation expense.
F-7
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
DEPRECIATION AND AMORTIZATION:
Property and equipment are stated at cost and depreciated on the
straight-line method over their estimated useful lives, generally three to
five years. Building improvements are amortized over the lesser of their
estimated useful life, generally five years, or the remaining mortgage
term. The Company assesses its ability to recover the net book value of
its long-term assets. The carrying value of assets determined to be
impaired is written down to net realizable value.
LONG-LIVED ASSETS:
Effective April 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 (SFAS 121) "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires the Company to review for impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. In certain situations, an
impairment loss would be recognized. The adoption of SFAS 121 did not
have a material impact on the Company's financial condition or results
of operations.
CONTRACT REVENUES:
Research and development contract revenues are recognized over the
performance period in accordance with the contract terms. Payments related
to future performance are deferred and recorded as revenues as they are
earned over specified future performance periods.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
FOREIGN CURRENCY TRANSLATION:
Exchange adjustments resulting from foreign currency transactions are
generally recognized in operations, whereas adjustments resulting from the
translation of financial statements are reflected as a separate component
of stockholders' equity. Net foreign currency transaction gains or losses
are not material in any of the years presented.
INCOME TAXES:
The Company utilizes the liability method to account for income taxes
where deferred tax assets or liabilities are determined based on the
differences between the financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts
payable, and other accrued liabilities, approximate fair value due to
their short maturities. Based on borrowing rates currently available to
the Company for loans with similar terms, the carrying value of its debt
obligations approximates fair value. Estimated fair values for marketable
securities, which are separately disclosed elsewhere, are based on quoted
market prices for the same or similar instruments (see Investments above).
F-8
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
RECLASSIFICATIONS:
Certain amounts in the prior years' financial statements have been
reclassified to conform with fiscal 1997 presentation. These
reclassifications did not change previously reported capital,
stockholders' equity, loss from operations, or net loss.
NET LOSS PER SHARE:
Net loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding during the period; common
stock options and warrants have not been included since their inclusion
would be antidilutive.
STOCK COMPENSATION:
Effective April 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based
Compensation," which requires the Company to value stock-based
compensation and to either record the value in the financial statements or
to disclose the impact on the value and its impact of net income and
earnings per share in the footnotes to the financial statements. The
Company elected the disclosure alternative and continues to account for
stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees." Accordingly, the adoption of SFAS 123 did not have a material
impact on the Company's financial condition or results of operations.
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 amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
RECENT PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 supersedes Accounting
Principles Board Opinion No. 15 and is effective for financial statements
issued for periods ending after December 15, 1997. SFAS 128 requires
restatement of all prior-period earnings per share data presented after
the effective date. SFAS 128 will not have an impact on the
Company's financial position, results of operations or cash flows.
F-9
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
3. Investments:
The carrying and market values of investments are as follows at March 30, 1997
and March 31, 1996:
March 30, 1997
------------------------
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------- ----------- ----------- ---------
Held-to-Maturity
U.S. Government and Agency Obligations $ 2,510 $ $ (10) $ 2,500
Bank Paper 2,000 2,000
Collateralized Mortgage Obligations 3,046 1 (23) 3,024
Other 2,000 2,000
----------- ----------- ----------- ---------
Total Held-to Maturity Investments $ 9,556 $ 1 $ (33) $ 9,524
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
March 31, 1996
----------------------------
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------- --------------- ----------- ---------
Available-for-Sale
U.S. Government and Agency Obligations $ 4,996 $ 1 $ 4,997
--
----------- ----------- ---------
Total Available-for-Sale $ 4,996 $ 1 $ 4,997
--
--
----------- ----------- ---------
----------- ----------- ---------
March 31, 1996
--------------------------
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
--------- ------------- ----------- ---------
Held-to-Maturity
Commercial Paper $ 16,438 $ 47 $ (73) $ 16,412
Bank Paper 981 19 1,000
Collateralized Mortgage Obligations 9,586 25 (2) 9,609
Other 281 281
--------- --- ----------- ---------
Total Held-to Maturity Investments $ 27,286 $ 91 $ (75) $ 27,302
--------- --- ----------- ---------
--------- --- ----------- ---------
At March 30, 1997, scheduled maturities of investments are as follows:
Held-to-
Maturity
-----------
Within one year $ 5,556
After one year through five years 4,000
-----------
Total $ 9,556
-----------
-----------
F-10
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
4. Property, Plant and Equipment:
March 30, 1997 March 31, 1996
-------------- --------------
Building and land $ 8,447 $ 8,126
Leasehold improvements 1,297
Machinery and equipment 7,755 10,642
Office and computer equipment 820 607
Construction in progress 16,050 4,961
------- -------
Total cost 34,369 24,336
Less capital grants (3,962) (3,972)
------- -------
Total cost, net of capital grants 30,407 20,364
Less accumulated depreciation and amortization (13,216) (8,612)
------- -------
Total cost, net of capital grants, depreciation and amortization $ 17,191 $ 11,752
------- -------
------- -------
During fiscal 1995, the Company wrote down the carrying value of property, plant
and equipment to its net realizable value. This amount of $16,489 is included as
a special charge in the consolidated statements of operations (see Note 14).
5. Long-Term Debt:
March 30, 1997 March 31, 1996
-------------- --------------
Equipment term loans $ 1,091 $ 2,819
Facility loans 5,559 5,516
Capitalized leases 111
------- -------
6,650 8,446
Less amounts due within one year (1,433) (2,277)
------- -------
Long-term debt due after one year $ 5,217 $ 6,169
------- -------
------- -------
EQUIPMENT TERM LOANS
The Company has three equipment term loans outstanding with an
institutional lender in the amount of $1,091. The term loans bear interest
at the bank's prime rate (8.5% at March 30, 1997) plus 1/4% to 1-1/2% and
are collateralized by certain of the Company's property and equipment.
Principal and accrued interest are payable in monthly installments which
expire from July 1996 to December 1997. Under the loans, the Company is
required to maintain certain financial ratios and meet other covenants,
including restrictions on additional indebtedness and payments
of dividends. At March 30, 1997, the Company was in violation of a
covenant included in the equipment term loan agreements due to an
establishment of certain joint ventures, but obtained a waiver from the
institutional lender.
FACILITY LOANS:
During fiscal 1995, a bank provided the Company a $2,500 facility term
loan under which drawdowns were available for the purchase and improvement
of a facility in Henderson, Nevada. The facility term loan bears
interest at 10.4% and is collateralized by the related building. The
Company makes monthly principal and
F-11
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
interest payments of $14 monthly through November 2001, and a final
principal payment of $1,346 is due December 2001.
The Company also has a 15 year facility loan for the Northern Ireland
building payable in equal monthly principal payments of $25 plus accrued
interest. The facility term loan bears interest at an annually adjustable
published interest rate index (7.875% at March 30, 1997) on the
outstanding principal of $3,620 at March 30, 1997. The loan is
collateralized by the related building.
WORKING CAPITAL FACILITIES:
The Company has a $2,000 working capital line of credit agreement with a
bank which expires March 1998. The line of credit is collateralized by the
Company's assets. Under the working capital line of credit agreement: (i)
any borrowings from the Company's stockholder and director will be
subordinated to any borrowings from the bank; (ii) the Company will be
required to maintain certain specified financial ratios and meet other
performance criteria, and (iii) the Company will be restricted from paying
cash dividends. The line of credit has a variable interest rate which was
8.5% at March 30, 1997. During fiscal 1997, the Company did not have any
borrowings outstanding under this agreement.
Principal payments on long term debt at March 30, 1997 are due as follows:
Facility and
Fiscal Year Term Loans
- ------------------------------------------------------------------------- -------------
1998 1,433
1999 398
2000 410
2001 334
2002 1,607
Thereafter 2,468
------
$ 6,650
------
------
6. Grant Agreement and Offers:
During fiscal 1994, the Company, through its Dutch subsidiary, signed an
agreement with the Northern Ireland Industrial Development Board (the IDB) to
open an automated manufacturing plant in Northern Ireland in exchange for
capital and revenue grants from the IDB. The Company has also received offers
from the IDB to receive additional grants. The grants available under the
agreement and offers provide for an aggregate of up to L27,555 ($44,956 as of
March 30, 1997), to be available over a five-year period through October 31,
2001. As of March 30, 1997, the Company had received grants aggregating L4,035
($6,583) reducing remaining grants available to L23,520 ($38,373). The IDB
offers also provided a fully amortized 15-year mortgage to finance the purchase
of a manufacturing plant, which the Company has utilized (see Note 5).
As a condition to receiving funding from the IDB, the subsidiary must obtain a
minimum of L12,000,000 in debt or equity financing from the Company. Aggregate
funding under the grants is limited to L4,035,000 until the Company has
recognized $4,000,000 in aggregate revenue from the sale of its batteries
produced in Northern Ireland.
The amount of the grants available under the agreement and offers is primarily
dependent on the level of capital expenditures made by the Company.
Substantially all of the funding received under the grants is repayable to the
IDB if the subsidiary is in default under the agreement and offers, which
includes the cessation of business in Northern
F-12
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
Ireland; yet, the agreement does allow for a temporary cessation of
operations without penalty to the Company. During fiscal 1995, the Company
entered into such a temporary break in operations. Funding received under the
grants to offset capital expenditures is repayable if related equipment is
sold, transferred or otherwise disposed of during a four-year period after
the date of grant. In addition, a portion of funding received under the
grants may also be repayable if the subsidiary fails to maintain specified
employment levels for the two-year period immediately after the end of the
five-year grant period. As a result of the temporary cessation of Northern
Ireland business activity, specified employment levels have not been
maintained, but the IDB is not seeking repayment at this time. The Company
has guaranteed the subsidiary's obligations to the IDB under the agreement.
There can be no assurance that the Company will be able to meet the requirements
necessary for it to receive and retain grants under the IDB agreement and
offers.
7. Commitments and Contingencies:
LEASES:
The Company leased certain facilities under a noncancelable operating
lease which had an expiration date of April 1998. The facilities were
leased from a partnership whose general partner is a stockholder and
director of the Company. Under the terms of the lease, the Company was
responsible for utilities, taxes, insurance and maintenance. During fiscal
years 1995 and 1996, the Company vacated the facilities. At March 30,
1997, the facilities were fully sub-leased by the lessor and the Company
was released from any further obligation.
Total rent expense for the period from March 3, 1989 (date of inception)
to March 30, 1997 and for the years ended March 30, 1997, March 31, 1996
and March 26, 1995 were $1,390, $44, $52 and $522, respectively.
LITIGATION:
In May 1994, a series of class action lawsuits was filed in the United
States District Court for the Northern District of California against the
Company and certain of its present and former officers and directors.
These lawsuits were consolidated, and in September 1994 the plaintiffs
filed a consolidated and amended class action complaint. Following the
Court's Orders on motions to dismiss the complaint, which were granted in
part and denied in part, the plaintiffs filed an amended complaint in
October 1995 ("Complaint"). The Complaint alleges violations of the
federal securities laws against the Company, certain of its present and
former officers and directors, and the underwriters of the Company's
public stock offerings, claiming that the defendants issued a series of
false and misleading statements, including filings with the Securities and
Exchange Commission, with regard to the Company's business and future
prospects. The plaintiffs seek to represent a class of persons who
purchased the Company's common stock between May 7, 1992 and August 10,
1994. The Complaint seeks unspecified compensatory and punitive damages,
attorney's fees and costs.
On January 23, 1996, the Court dismissed, with prejudice, all claims
against the underwriters of the Company's public stock offerings, and one
claim against the Company and its present and former officers and
directors. On April 29, 1996, the Court dismissed with prejudice all
remaining claims against a present director and limited claims against a
former officer and director to the period when that person was an officer.
In December 1996, the Company and the individual defendants filed motions
for summary judgment, which the plaintiffs opposed. In January 1997, the
Court appointed a Special Master to hear the defendants' motions for
summary judgment and submit recommendations to the Court with respect to
their disposition. In March 1997, the Special Master held a hearing on the
defendants' motions for summary judgment. To date, the Special Master is
still considering the motions. At the time the Special Master was
appointed, the Court also set a trial date in September, 1997. The
plaintiffs have requested a jury trial and are expected to ask for a
F-13
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
substantial sum in damages. If the plaintiffs prevail in their
demands, damages awarded by the jury may exceed the assets of
the Company. The Company believes that it has meritorious
defenses and is defending the lawsuit vigorously.
The ultimate outcome of these actions cannot presently be
determined. Accordingly, no provision for any liability or
loss that may result from adjudication or settlement thereof
has been made in the accompanying consolidated financial statements.
In addition to the litigation noted above, the Company is from time to
time subject to routine litigation incidental to its business. The
Company believes that the results of this routine litigation will not
have a material adverse effect on the Company's financial condition.
8. Stockholders' Equity:
STOCK OPTIONS AND WARRANTS:
The Company has a stock option plan (the "1990 Plan") under which options
granted may be incentive stock options or supplemental stock options.
Options are to be granted at a price not less than fair value (incentive
options) or 85% of fair market value (supplemental options) on the date of
grant as determined by the Board of Directors. The options are exercisable
as determined by the Board of Directors and are generally exercisable over
a five-year period, with 20% becoming exercisable after the first year, an
additional 20% becoming exercisable after the second year, and an
additional 5% becoming exercisable every three months thereafter. During
1995, the Company issued options exercisable over a five-year period with
5% of the options becoming exercisable every three months through the
option vesting period. During 1996, the Company issued options exercisable
over a two-year period with 12.5% of the options becoming exercisable
every three months through the option vesting period. During 1996, the
Company issued options exercisable over a two-year period with 12.5% of
the options becoming exercisable every three months through the option
vesting period, and options exercisable over a three-year period with 8.3%
of the options becoming exercisable every three months through the option
vesting period. The options expire no later than ten years from the date
of grant. Unvested options are canceled and returned to the Plan upon an
employee's termination. Vested options, not exercised within 90 days of
termination, are also canceled and returned to the Plan. At March 30,
1997, the Company had 7 shares available for grant under the 1990 Plan.
In fiscal 1993, the Board of Directors authorized the issuance of 210
stock warrants, which have the same terms as stock options granted under
the 1990 Stock Option Plan, to employees of the Company's Danish
subsidiary.
Prior to adopting the 1990 Stock Option Plan, the Board of Directors had
granted options to three employees of the Company to purchase a total of
850 shares of common stock. Additionally, in fiscal 1992 the Company
granted options to purchase a total of 330 shares of common stock to
certain directors and employees. These options vest over five years with
20% becoming exercisable after the first year, with an additional 20%
becoming exercisable after the second year, and an additional 5% becoming
exercisable every three months thereafter. The options expire ten years
from the date of grant.
F-14
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
The fair value of each option grant is estimated at the date of grant
using the Black-Sholes pricing model with the following weighted average
assumptions for grants in 1997 and 1996:
1997 1996
----------- -----------
Risk-free Interest Rate 6.51% 5.82%
Expected Life 4.76 years 4.66 years
Volatility 78.00 80.71
Dividend Yield -- --
Aggregate option and warrant activity is as follows:
Outstanding Options and
Warrants
--------------------------
Weighted Avg.
Number of Exercise
Shares Price
----------- -------------
Balances, March 28, 1993 2,699 $ 2.54
Granted 536 $ 13.63
Exercised (410) $ 1.17
Canceled (398) $ 12.03
-----------
Balances, March 27, 1994 2,427 $ 3.67
Granted 1,758 $ 3.86
Exercised (83) $ 0.40
Canceled (1,400) $ 8.02
-----------
Balances, March 26, 1995 2,702 $ 1.64
Granted 498 $ 4.71
Exercised (58) $ 3.09
Canceled (140) $ 2.85
-----------
Balances, March 31, 1996 3,002 $ 2.06
Granted 1,126 $ 5.21
Exercised (80) $ 3.41
Canceled (20) $ 6.59
-----------
Balances, March 30, 1997 4,028 $ 3.14
-----------
-----------
At March 30, 1997 and March 31, 1996, vested options to purchase 1,950 and
1,528 shares, respectively, were unexercised. The weighted average fair
value per share of those options granted in 1997 and 1996 was $3.73 and
$2.67, respectively.
The following table summarizes information about fixed stock options
outstanding at March 30, 1997:
Options Outstanding Options Exercisable
-------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (years) Price Exercisable Price
- -------------- ------------- ----------------- ----------- ------------- -----------
$ 0.01--$0.25 1,052 3.94 $ 0.15 1,046 $ 0.15
$ 1.00--$3.75 723 7.25 2.77 407 2.55
$ 3.81--$5.81 1,096 8.54 4.33 402 4.19
$ 5.88--$7.12 851 9.49 5.98 95 5.88
F-15
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
At March 30, 1997, the Company has reserved 4,650 shares of common stock
for the exercise of stock options and warrants.
The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-based Compensation." Accordingly, no compensation expense has been
recognized for the Company's stock plans. Had compensation expense for the
stock plans been determined
based on the fair value at the grant date for options granted in 1997 and
1996 consistent with the provisions of SFAS 123, the pro forma net income
would have been reported as follows:
1997 1996
---------- ----------
Net loss--as reported $ (15,888) $ (17,593)
Net loss--pro forma (16,787) (17,650)
Net loss per share--as reported (0.73) (0.83)
Net loss per share--pro forma (0.78) (0.83)
In February 1996, the Board of Directors adopted a stock plan for outside
Directors (the "1996 Non-Employee Director's Stock Option Plan"). The
plan provides that new directors will receive an initial stock option of
100 shares of common stock upon their election to the Board. The exercise
price for this initial option will be the fair market value on the day it
is granted. This initial option will vest one-fifth on the first and
second anniversaries of the grant of the option, and quarterly over the
next three years. On the anniversary of the director's election to the
Board, the director will receive an annual stock option in the amount of
100 shares less the total amount of unvested shares remaining in the
initial option and any annual options previously granted. The exercise
price for this new option will be the fair market value on the day it is
granted. This annual option will vest quarterly over a three year period.
A director who had been granted an option prior to the adoption of the
1996 Non-Employee Director's Stock Option Plan will start receiving annual
grants on anniversary date of that director's prior grant. A director who
had not received an option upon becoming a director will receive an
initial stock option of 100 shares on the date of the adoption of the
plan, and then receive annual options on the anniversary dates of that
grant. As of March 30, 1997, a total of 247 options have been
granted to two directors under this plan.
OTHER WARRANTS:
In connection with certain borrowings from a stockholder and director, the
Company issued a total of 1,353 warrants for the purchase of common stock
with exercise prices of between $4.00 and $6.40 per share, subject to
certain adjustments. In fiscal 1992, a total of 130 warrants were
exercised at an exercise price of $4.40 per share payable through the
cancellation of $520 of indebtedness including accrued interest. The
warrants expire on the earlier of the effective date of a reorganization
of the Company, as defined, or July 31, 1997. The warrants were deemed to
have a nominal value at their date of issuance. At March 30, 1997, a total
of 1,223 warrants were outstanding with an exercise price of $4.00 per
share.
F-16
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
9. Income Taxes:
The components of the net deferred tax asset as of March 30, 1997 and March 31,
1996 were as follows:
March 30, 1997 March 31, 1996
-------------- --------------
Current assets:
Accrued liabilities $ 696 $ 1,094
Valuation allowance (696) (1,094)
------- -------
$ - $ -
------- -------
------- -------
Noncurrent assets:
Depreciation and amortization $ 3,250 $ 7,114
Research and development credit carryforwards 719 1,104
Net operating loss carryforwards 18,530 20,695
Valuation allowance (22,449) (28,913)
------- -------
$ - $ -
------- -------
------- -------
At March 30, 1997, the Company had federal operating loss carryforwards
available to reduce future taxable income of approximately $47,496.
The Company has additional tax net operating loss carryforwards of approximately
$11,117 arising from the exercise of employee stock options, which can be
utilized to reduce future taxable income. The tax benefit when realized will be
reflected in stockholders' equity.
The carryforwards expire between 2007 to 2012, if not used before such time to
offset future taxable income.
For federal and state tax purposes, the Company's net operating loss
carryforwards are subject to certain limitations on annual utilization because
of changes in ownership, as defined by federal tax law.
The deferred tax assets at March 31, 1996, includes assets relating to
California state taxes. As the Company no longer has a taxable presence in
the state of California, the deferred tax assets related to state income
taxes are no longer recoverable and have not been included in the deferred
tax inventory at March 30, 1997. Additionally, the change in net operating
loss carryforwards is due to a write-off of certain equipment in the
Company's foreign subsidiary.
10. Development Contract:
In March 1991, the Company, its Danish subsidiary, and Delphi Automotive Systems
Group of General Motors (Delphi, formerly known as Delco Remy Division) entered
into a development agreement whereby the Company and its Danish subsidiary (the
Contractors) agreed to carry out research and development on batteries with an
emphasis on vehicular and load leveling/peak sharing applications. The original
contract consisted of an aggregate value of $20,000. In early fiscal 1995, the
Company received a contract from Delphi to provide follow on research and
product development, including the delivery of specified material, for an
aggregate of $900. As of March 26, 1995, the Contractors had billed and received
the entire $20,900 from Delphi.
Payments under the contract are nonrefundable and the Contractors have granted
to Delphi a worldwide, exclusive license to sell and manufacture load
leveling/peak sharing and vehicular batteries for a certain period of time with
a non-exclusive license thereafter. Delphi shall pay a royalty on each unit
manufactured and sold under its license until the year 2008.
F-17
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
The contract also provides for the use and ownership of patents developed under
the contract, including termination provisions in the event of certain
circumstances.
In September 1994, the Company and Delphi signed a new five year agreement to
combine efforts in developing the Company's rechargeable solid state lithium
polymer battery technology. Under the agreement, Delphi and the Company combined
their research and development activities in a new facility in Henderson,
Nevada. The new facility is owned by the Company, with Delphi paying a fee of
$50 per month over the five year term of the new agreement for access to the
Company's research and development (of which $600 and $650 was recognized during
fiscal 1997 and 1996, as an offset to research and product development
expenses), as well as Delphi contributing to a majority of the facility's
operating costs over the term of the new five year agreement.
11. Purchase of Technology and License Agreement:
In July 1990, the Company entered into a stock purchase and license agreement
whereby the Company purchased all of the assets and certain technology and
patents from a third party. The Company has agreed to pay a royalty to the third
party on all sales of product manufactured and sold in a specified territory.
The third party agreed not to compete with the Company and the agreement expires
in 2006.
In June 1995, the Company entered into a non-exclusive license agreement with
Bell Communication Research, Inc. ("Bellcore") to license Bellcore's plastic
lithium battery technology. The Company acquired the technology for a total
purchase price of $6,064, which consisted of 1,500 shares of Valence stock plus
an initial payment of $2,000. In addition to royalty payments, the Company is
required to make a $1,000 payment to Bellcore on the earlier of June 1, 1997 or
when the Company recognizes $100 of revenue from royalty-bearing products.
Further annual payments are required if revenue milestones are not met after the
fourth year of the agreement.
The entire purchase price was allocated to in-process technology as the
technological feasibility of the in-process technology had not been established
and had no alternative use. Accordingly, the entire $6,064 has been charged to
operations in the second quarter of fiscal 1996.
12. Investment in Danish Subsidiary:
In August 1990, the Company acquired a 45% interest in a Danish company
organized to perform research and development activities within the field of
solid state batteries. Concurrent with this acquisition, the Company and this
affiliate entered into a license and technical agreement which, among other
things, provided for an exchange of technology between the affiliate, a
geographical distribution of manufacturing rights and an ongoing exchange of
technical assistance. The Company accounted for its initial 45% investment under
the equity method.
On March 30, 1992, the Company through its Cayman Islands Subsidiary and a
director and principal stockholder of the Company entered into a series of
transactions to acquire the remaining 55% interest in the affiliate and
repurchase shares of the Company's common stock (see Note 8). These transactions
were entered into in connection with the settlement of certain disputes between
the Company and the affiliate with respect to the affiliate's failure to enforce
its contracts with certain of its shareholders. As part of the settlement, the
parties also agreed to terminate certain technology development and license
agreements entered into in 1990 and 1991.
In fiscal 1996, the Company's Danish subsidiary was liquidated.
F-18
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---
13. Employee Benefit Plan:
The Company has a 401(k) plan (the Plan) as allowed under Section 401(k) of the
Internal Revenue Code, the Plan provides for the tax deferral of compensation by
all eligible employees. All United States employees meeting certain minimum age
and service requirements are eligible to participate under the Plan.
Under the Plan, participants may voluntarily defer up to 20% of their paid
compensation, subject to specified annual limitations. The Plan does not provide
for, and the Company has not made, contributions under the Plan.
14. Special Charges:
In the first quarter 1995, the Company announced its intent to refocus its
efforts on research and product development and slowdown completion of its
volume manufacturing capacities. The Company also announced in the second
quarter of fiscal 1995 its intent to reduce efforts related to commercialization
of a battery containing a lithium metal anode and instead concentrate on the
development of a lithium polymer battery containing an alternate lithium anode.
Consistent with the refocus, special charges of $18,872 were made in fiscal 1995
for which no tax benefit is currently available.
Special charges for the year ended March 26, 1995 consist of the following:
Year Ended
March 26,
1995
-----------
Write down of property, plant, and equipment $ 16,489
Provisions for vacated lease obligations 1,795
Provisions for employees separation costs 68
Other costs 520
-----------
$ 18,872
-----------
-----------
15. Joint Venture Agreements:
In July 1996, the Company, through its Dutch subsidiary, and Hanil Telecom
Co., Ltd. ("Hanil Telecom") signed an agreement to establish a joint venture
company in Korea. All funds are to be provided to the joint venture by Hanil
Telecom. Hanil Telecom and the Company, through its Dutch subsidiary, each
hold a 50% stake of the company. Valence will supply the technology, initial
equipment and product designs and technical support out of its Northern
Ireland facility. Hanil Telecom will market the joint venture's initial
products for a period of several years, depending on the market. The Company
will account for the joint venture using the equity method. At March 30,
1997, the joint venture had net assets and a loss from operations of
approximately $4,900 and $900, respectively. As the Company's investment in
the joint venture was nil, which is equal to the cost basis of the technology
contributed by the Company, the proportionate share of the joint venture's
losses were not recorded.
The Company and Alliant Techsystems Inc. ("Alliant") signed an agreement in
October 1996, to establish a joint venture company. The Company is expected
to supply the electrode laminate materials that are key to manufacturing high
performance batteries. The Company will account for the joint venture using
the equity method. At March 30, 1997, the Company's investment in the joint
venture was nil, which is equal to the cost basis of the technology
contributed by the Company. The net assets and operations of the joint
venture were not material.
F-19