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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
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 (I.R.S. Employer
of Incorporation or Organization) Identification Number)
301 CONESTOGA WAY
HENDERSON, NEVADA 89015
(Address of Principal Executive Offices) (Zip Code)
(702) 558-1000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ---------------------
None None
Securities Registered Under Section 12(G) of the Act:
----------------------------------------------------
Common Stock, $.001 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers, pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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. []
The aggregate market value of the Registrant's voting stock held by
non-affiliates on May 31, 2000 was $448,921,205.*
As of May 31, 2000, there were 36,848,808 shares of common stock
outstanding.
*Excludes approximately 6,153,341 shares of common stock held by Directors,
Officers and holders of 5% or more of the Registrant's outstanding Common Stock
at May 31, 2000. Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, direct or indirect, to direct
or cause the direction of the management or policies of the Registrant, or that
such person is controlled by or under common control with the Registrant.
Page 2
FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K (THIS "FORM 10-K" OR THIS "REPORT") CONTAINS
STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 21E OF THE EXCHANGE ACT AND SECTION 27A OF THE SECURITIES ACT. THE WORDS
"EXPECT", "ESTIMATE", "ANTICIPATE", "PREDICT", "BELIEVE" AND SIMILAR EXPRESSIONS
AND VARIATIONS THEREOF ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS FILING AND INCLUDE STATEMENTS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF VALENCE TECHNOLOGY, INC.
(THE "COMPANY," "VALENCE," "WE," OR "US"), ITS DIRECTORS OR OFFICERS WITH
RESPECT TO, AMONG OTHER THINGS (A) TRENDS AFFECTING THE FINANCIAL CONDITION OR
RESULTS OF OPERATIONS OF VALENCE, (B) OUR PRODUCT DEVELOPMENT STRATEGIES, TRENDS
AFFECTING OUR MANUFACTURING CAPABILITIES AND TRENDS AFFECTING THE COMMERCIAL
ACCEPTIBILITY OF OUR PRODUCTS, AND (C) THE BUSINESS AND GROWTH STRATEGIES OF
VALENCE. THE STOCKHOLDERS OF VALENCE ARE CAUTIONED NOT TO PUT UNDUE RELIANCE ON
SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THIS REPORT, FOR THE
REASONS, AMONG OTHERS, DISCUSSED IN THE SECTIONS -- "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", AND "RISK FACTORS".
VALENCE UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING
STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE AFTER THE DATE HEREOF.
PART I
ITEM 1. BUSINESS
OVERVIEW
We design, develop, manufacture and market rechargeable lithium polymer
batteries for portable communication devices, also known as mobile communication
products, including notebook computers, personal digital assistants or PDAs,
handheld personal computers, or HPCs, and cellular telephones. We believe that
our proprietary battery technology offers distinct technological advantages over
competing technologies. We believe our batteries are thinner, lighter and
generally achieve longer operating times than many competing rechargeable
batteries currently in the market. Unlike competing liquid lithium ion batteries
that often require a metal casing to hold their liquid electrolyte, our lithium
polymer batteries are manufactured with a foil casing, which makes them less
bulky and less costly to produce.
Widespread and growing use of a variety of portable communication devices has
resulted in large markets for rechargeable batteries. Both new and conventional
applications are placing growing demands on existing battery technologies to
deliver an increasing amount of energy through smaller and lighter batteries.
Current battery capabilities can be a significant impediment to the introduction
of enhanced mobile communication products.
To date, we have focused on the acquisition and development of our battery
technology, including the implementation of a production line, the manufacture
of prototype batteries for evaluation by potential customers, and the
development of an operating infrastructure. We received our first purchase order
for commercial grade lithium polymer batteries in November 1999 and currently
have purchase orders for approximately $17 million of batteries. We completed
the installation and qualification of our first automated, high volume
production line in 1999 and began commercial shipments of our batteries in
February 2000. We currently are installing additional automated manufacturing
equipment at our facilities in Mallusk, Northern Ireland. We anticipate our
production facility to be fully operational by the third calendar quarter of
2001, which will provide us the capacity to manufacture and ship batteries in
high volumes. Until that time, our ability to sell and ship product is
significantly limited.
INDUSTRY BACKGROUND
The growth in the mobile communications industry has led to increased demand for
rechargeable batteries. Frost & Sullivan estimates that the rechargeable battery
market for mobile communications devices will consist of more than 1.89 billion
unit shipments by 2005, up from 1.17 billion units in 1999. Portable
communication devices require rechargeable batteries to operate efficiently and
in a manner that will satisfy the demands for more sophisticated wireless data
and communications products from today's increasingly mobile workforce. As
mobile communication products evolve, rechargeable batteries must make the
corresponding evolution and be able to satisfy increasing power requirements,
varied form factors, lighter weight requirements and more stringent safety and
environmental requirements.
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KEY FACTORS DRIVING THE GROWTH OF THE MARKET FOR RECHARGEABLE BATTERIES
USED IN PORTABLE COMMUNICATION DEVICES.
GROWTH OF MOBILE COMMUNICATIONS
Significant advancements in technology relating to miniaturization, visual
displays, longer-lasting, thinner and lighter batteries and portable
communications have led to the introduction of many innovative new mobile voice
communication devices. These portable voice communication devices allow users to
work and communicate as they travel and have fueled the significant growth of
mobile communications. These devices have become more widely available and
affordable for both the business and mass consumer markets due to advances in
technology, regulatory changes, the introduction of new service providers and
price reductions. According to IDC, the number of subscribers to cellular and
PCS services worldwide is expected to grow from 426.8 million in 1999 to 1.08
billion in 2003, a compound annual growth rate of approximately 26% per year.
Frost & Sullivan estimates that the total mobile telecommunications market, in
terms of world unit shipments, will grow from 248.1 million units in 1998 to
437.3 million units in 2005.
An increasing number of people carry battery-powered wireless devices for data
communications, rather than solely for voice communications. The most recently
introduced wireless communications devices in the United States, including PDAs,
notebook computers, and cellular telephones with data capacity, are smaller,
less expensive, and have longer battery life and more features than earlier
devices. According to Dataquest, the number of wireless data subscribers will
grow from 14 million subscribers in 1998 to 102 million subscribers in 2003, an
estimated growth rate of about 49% per year.
An increased reliance on the Internet, intranets and extranets and the emergence
of a workforce that is increasingly reliant on battery-powered devices for
extended mobility drives the market for wireless data applications. IDC
forecasts that the remote and mobile workforce in the United States will grow
from 35.7 million individuals at the end of 1999 to 47.1 million at the end of
2003. Frost & Sullivan estimates that the world mobile communication device
market will increase from 21.9 million units in 1998 to 71.6 million units in
2005, a compound annual growth rate of over 18%. Workers and consumers today
demand access to the same information and applications available on their
personal computers when away from their office or home.
BATTERIES: THE POWER SOURCE BEHIND MOBILE PRODUCTS
Batteries are manufactured in two basic shapes, prismatic or cylindrical.
Cylindrical batteries are made in some cylinder form, such as AA or AAA sizes.
Prismatic batteries are usually made in rectangular shape. Batteries generally
are available in two types. Primary batteries are charged with energy by the
manufacturer and are used by the consumer until exhausted and then discarded.
This category includes those types of batteries that are used in everyday
applications such as AAA, AA, C, D size, photo batteries and button cells for
watches and hearing aids. Typical primary battery chemistries include alkaline,
silver oxide and lithium. Ordinary flashlight batteries are examples of primary
batteries. Secondary or rechargeable batteries are designed to be charged and
discharged many times by the user. The secondary battery category includes
prismatic batteries and those batteries used for mobile communications that
require high performance chemistries.
A battery is composed of single or multiple cells, or electrochemical units,
combined to form one device that provides power in the form of voltage and
current through external terminals or connections. The battery consists of three
major components: anodes, cathodes and electrolytes. The anode is the battery's
negative electrode and loses electrons during the discharging process. The
cathode is the battery's positive electrode, and it gains electrons during the
discharging process. The electrolyte is a substance, usually a liquid that
allows ions to flow between electrodes during discharge, as well as during
charge, in a secondary battery.
Regardless of the particular technology that they may utilize, most rechargeable
batteries operate in a similar manner. Under charging conditions, electrons are
driven into the anode or negative electrode of the battery. Under discharge,
when the battery is active in the host device, the electrons flow from the anode
through the device and back into the cathode.
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[GRAPHIC OBJECT OMITTED]
Rechargeable batteries for consumer electronics products have been available for
over 40 years. Over this time several different technologies have been developed
to satisfy the demands of battery powered portable communication devices. One of
the earliest rechargeable battery models was the nickel cadmium, or NiCad. This
technology provided good cycle time, which refers to the time for a single
process of discharge and charge in a secondary battery, and adequate performance
but had the disadvantage of low voltage and relatively low energy capacity.
NiCad batteries also exhibit significant "memory effect," which refers to the
battery's ability to accept recharge if not fully discharged while in service.
Nickel Metal Hydride, or NiMH, batteries were the next advancement following
NiCad batteries. NiMH batteries provide increased energy capacity and exhibit
less memory effect than NiCad. In many instances, NiMH cells can directly
replace NiCad cells, as the two battery types have similar sizes and voltages.
Unlike other battery chemistries, NiMH has neither environmental nor safety
concerns. However, NiMH batteries have a high self-discharge rate and lose power
if not used and recharged over a relatively short period of time. NiMH batteries
were introduced into the market in the early 1990's and have become the dominant
battery chemistry for low-end laptop personal computers.
Liquid lithium ion batteries were introduced into the market in the early 1990's
to address the shortcomings of NiCad and NiMH batteries. This technology
represents a significant improvement over NiCad and NiMH technologies in terms
of voltage, energy density and cycle life, which is the number of cycles that a
rechargeable battery can complete before failure to achieve a defined level of
charge. Energy density is defined as the amount of energy that can be put into,
and retrieved from a battery for a given unit of battery volume or battery
weight. In addition, liquid lithium ion batteries have virtually no memory
effect and have a much improved self-discharge rate, which refers to the rate at
which a battery automatically loses its charge while standing idle. These
features make lithium ion batteries particularly suitable for use in camcorders
and other electronic devices that have high energy needs. In the past few years,
demand for liquid lithium ion batteries has increased due to the energy needs of
new portable and miniaturized electronic products. However, lithium ion
batteries are relatively heavy because of their chemical structure and necessary
safety devices, to reduce the chance of fire or explosion resulting from the
misuse or mishandling of the batteries. This increases their manufacturing
costs, and limits the use of liquid lithium ion batteries for applications
requiring batteries with lighter, thinner form factors.
KEY CHALLENGES FACING THE RECHARGEABLE BATTERY INDUSTRY
We believe that the rechargeable battery industry faces the following
significant challenges:
o INCREASING FUNCTIONALITY REQUIRES MORE POWER. Rechargeable batteries
must supply power for evolving products with constantly increasing
energy demands. As the capabilities and features of these products are
enhanced, the energy demands on the batteries for these products also
are increased. For example, cellular telephones and PDAs are now being
used for Internet access, in addition to their original uses. These
enhanced capability products require more powerful, longer lasting
batteries. New battery technologies must be developed or existing
technologies must be improved to support those increased energy
demands.
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o DEMAND FOR LIGHTER AND THINNER PRODUCTS. The marketplace continues to
demand lighter and thinner portable communication devices. As a result,
portable communication device manufactures require lighter, thinner
batteries for these new products. At the same time, these smaller
batteries must be powerful enough to serve the energy needs of the new
communication devices. Liquid lithium ion batteries, while containing a
high energy density, require a metal casing to hold the liquid
electrolyte. The casing adds weight and size to the overall battery
package, reduces the relative efficiency of the active material in the
container itself, and limits the battery's utility as a power source
for these lighter, thinner portable communication devices.
o NEED FOR SOPHISTICATED SAFETY DEVICES IN RECHARGEABLE BATTERIES. The
liquid lithium ion battery's cobalt-based cathode must contain almost
two times the amount of lithium required for its full charge and
discharge operation. This is because the lithium that is not used
electrically provides the molecular structure in the cathode needed for
battery stability and long cycle life. As a result, under abusive and
abnormal conditions, such as overcharge, lithium contained in the
cathode could become very reactive and, ultimately dangerous. If a
liquid lithium ion battery overcharges to a level above its rated
voltage cutoffs, certain thermal events may occur, including gassing,
heat generation, leakage and even fire or explosion. To moderate or
eliminate this potential hazard, all liquid lithium ion battery cells
contain not only multiple safety devices within the metal casings but
also external safety circuits, including thermal fuses, to cut off or
shut down the cell in the event of any potentially dangerous
conditions.
o LIMITATIONS ON PRODUCTION EFFICIENCY CONFLICT WITH THE RECHARGEABLE
BATTERY MANUFACTURER'S NEED TO MEET DIVERSE FORM REQUIREMENTS. The
metal casings utilized in a number of rechargeable batteries, such as
the liquid lithium ion model, hold the battery's electrolyte and
contain both multiple protection devices in the form of special vents
and mechanical current cutoff devices. These devices make the
rechargeable battery manufacturing process more costly and time
consuming. An additional limitation on rechargeable battery production
efficiency is the extended conditioning or formation cycle, which is
the period in which the battery is given its initial charge. For liquid
lithium batteries, this period takes between two to five weeks, and is
even longer for other types of rechargeable battery chemistries. As a
result, rechargeable battery manufacturers have difficulty maintaining
the flexible manufacturing capabilities necessary to serve effectively
the evolving demands of their customers for batteries with new and
diverse form requirements. Not only does the inherent structure of the
rechargeable battery production process make it difficult for
manufacturers to produce new shapes and sizes of batteries in a timely
fashion, but also satisfying their customers' varied form requirements
requires a substantial investment of capital and time, as new or
retooled manufacturing equipment is often required to accommodate
changes in customer specifications.
o ENVIRONMENTAL COMPLIANCE ISSUES. Rechargeable battery manufacturers, as
with all other industries, must comply with environmental regulations
set by various local, state and governmental agencies for the
manufacture and disposal of batteries that are incorporated into mobile
communication products. Continuous enhancements in battery technology
with a trend toward increased participation and cooperation between
vendors and battery manufacturers in the production process and the
formulation and implementation of the use of safer chemicals and
recycling programs all prompt the manufacture of more environmentally
friendly batteries. Laboratory analysis of ion batteries using EPA
testing procedures and criteria set by local and state authorities in
Nevada has resulted in a waste classification of non-hazardous. All
generators however are responsible for their own waste stream
classifications. These positive findings have increased consumer
awareness and have encouraged them to purchase more environmentally
friendly lithium ion batteries.
OUR SOLUTION
We believe that the next step in battery evolution is lithium polymer batteries.
Lithium polymer technology offers significantly improved performance over
existing technologies in a lighter, more flexible package. Lithium polymer
batteries can be manufactured to as thin a specification as 1 mm and in a large
"footprint" or size. For example, a flat large footprint lithium polymer battery
is ideal for use on the back of the screen of, or in the base of, a notebook
computer. Lithium polymer batteries are also being used in cellular telephones,
and we believe that there are other potential applications in PDAs and HPCs. The
opportunity for lithium polymer batteries in the cellular telephone market
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appears to be particularly attractive. Frost & Sullivan estimates that the
rechargeable battery market for cellular telephones will grow over 10% per year
between the years 1998 to 2005, and projects that the lithium ion component of
this market is estimated to increase from 216.1 million units shipped to 659
million units over this same period, an increase of over 17% per year. Frost &
Sullivan also estimates that lithium ion battery shipments for the cellular
telephone market will increase from 45% of all rechargeable battery shipments
for the cellular telephone market in 1998 to 70% in 2005.
KEY ATTRIBUTES OF OUR BATTERIES INCLUDE:
UNIQUE CHEMISTRIES AND PROCESSES. We make our lithium polymer batteries using
manganese, rather than cobalt as the cathode material. Not only does our use of
manganese make the battery safer by lessening the chance of overcharge or an
internal short, but also it provides us with a cost advantage over our
competitors who utilize cobalt as the cathode material. Manganese is
significantly less expensive than cobalt and is found in greater supply
throughout the world. Most importantly, we have protected our position in the
emerging lithium polymer market by developing and patenting a process for the
lithiation of manganese as a base material in the battery cathode.
SAFETY. Our use of manganese allows us to manufacture a battery that is less
reactive and safer than lithium polymer batteries that utilize cobalt in the
cathode. Manganese is the most chemically stable of the rechargeable battery
technologies as lithium manganese oxide, or LMO, batteries do not contain excess
lithium in their chemical structure. Under abusive and abnormal conditions such
as overcharge, lithium contained in the cathode could become very reactive and,
ultimately, dangerous. In addition, unlike many of the competing technologies,
including both nickel and cobalt, which contain a heavy metal toxicant that can
become hazardous upon ingestion, our battery technology is environmentally
friendly. Using EPA standards, our LMO chemistry was tested and classified as
non-hazardous and may be disposed of locally in land fills.
SUPERIOR PERFORMANCE. We believe our lithium polymer chemistry offers potential
performance advantages over the competing battery chemistries of nickel cadmium,
nickel metal-hydride and liquid lithium ion. Lithium is the metal element that
has the highest electrochemical potential. This means that lithium is able to
convert more energy than any other metal element by moving electrons back and
forth in a chemical reaction. Lithium's high electrochemical potential enables
us to produce batteries with greater energy density than batteries based upon
other chemistries such as nickel cadmium and nickel metal-hydride, and, in most
cases, with energy density equal to or greater than that of liquid lithium ion
batteries available on the market today. In addition, we believe our lithium
polymer batteries have a lower self-discharge rate and a higher voltage output
throughout the discharge cycle than competing technologies. We believe that our
batteries are able to provide the higher energy capacities necessary for the
enhanced capabilities of mobile communication products.
FORM FACTOR - THIN, LIGHTWEIGHT AND LARGE FOOTPRINT. The chemistry of our
lithium polymer batteries makes it possible for us to manufacture the thin,
lightweight batteries required for portable communication devices. Our lithium
polymer batteries utilize a foil, rather than a metal, casing to hold the
battery electrolyte and, as a result, can be manufactured to thinner and lighter
specifications. Our battery technology processors enable us to manufacture
batteries into large footprint sizes for applications such as notebook
computers. By contrast, our competitors must combine several batteries together
in manufacturing a power source for this application. We believe that our
ability to accommodate the shrinking sizes and changing shapes of today's mobile
communication products addresses the marketplace's continuing desire for
increased mobility and decreased storage needs.
SCALABLE AND FLEXIBLE MANUFACTURING PROCESSES. Mobile communication devices are
constantly changing as technology and market demands evolve. We believe that we
are well positioned to bring new products to commercial production quickly and
cost effectively both because we have invested substantial sums in developing
full scale production capability in Northern Ireland and due to our vertically
integrated, manufacturing processes. We are able to produce batteries in a wide
range of sizes and shapes, and our manufacturing process flexibility allows us
to custom manufacture product in a timely fashion to meet the specific needs of
our customers. We are able to meet customer requests for new battery designs
without the need for substantial investments of time and capital to redesign
existing production facilities or develop new facilities. Moreover, once we
commence commercial production of a product, our batteries can be
ready for shipment to customers after a period of as little as two to three
months. We believe that our manufacturing know-how, which has been acquired over
a period of years and is protected as proprietary information, gives us a
distinct competitive advantage in developing commercial production of new or
custom-designed products that other companies attempting to enter the lithium
polymer market do not have. Finally, our battery production processes are
vertically integrated. We produce our
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own films, which are the raw materials that will later be used in our in-house
lamination, assembly, extraction and packaging processes to produce our
batteries. By maintaining vertical integration in our production processes, we
gain important advantages over our competitors in terms of manufacturing
quality, design and technology control.
STRATEGY
Our objective is to become the leading developer of core technology and
manufacturer of lithium polymer rechargeable batteries to service the growing
mobile communications market. To achieve this objective, the key elements of our
strategy include the following:
o CAPITALIZE ON THE GROWTH IN THE PORTABLE COMMUNICATION DEVICE MARKET.
We intend to focus our efforts on the high growth areas in the
portable rechargeable battery market that have been driven by the
proliferation of portable communication devices, including cellular
telephones, notebook computers, HPCs and PDAs. Portability is vital to
increased end-user mobility. As our batteries offer significant
advantages in terms of form factor flexibility and improved safety, we
believe that we are well positioned to compete in the portable
communication device market.
o DEVELOP ADDITIONAL REVENUE STREAMS BY LICENSING OUR INTELLECTUAL
PROPERTY RIGHTS ASSOCIATED WITH OUR LITHIUM POLYMER CHEMISTRY. We have
an extensive intellectual property portfolio with numerous patents
issued or pending relating to our lithium polymer rechargeable battery
technology. We plan to license portions of our lithium polymer
technology in order to broaden or diversify our sources of revenue. We
believe that our strength in the research and development of LMO
chemistry for rechargeable lithium polymer batteries will increase the
value of our intellectual property portfolio by allowing us to license
improvements to the technology as they become available.
o DISTRIBUTE OUR BATTERIES THROUGH MULTIPLE CHANNELS. We expect to sell
our batteries primarily to original equipment manufacturers, or OEMs,
value added resellers, or VARs, and independent sales representatives.
We pursue multiple distribution channels in order to increase our
potential for sales and to further stimulate market acceptance of our
products. By distributing through these channels, we believe that we
can maximize our revenue potential while continuing to focus on our
core strengths of research, development and commercialization of the
manufacturing process.
o CONTINUE TO EXPAND OUR CAPABILITIES TO COMMERCIALLY PRODUCE OUR
LITHIUM POLYMER RECHARGEABLE BATTERIES. We recently began commercial
production of our batteries in our Northern Ireland facility, which
uses a newly engineered automated high volume production line. We
expect to continue to increase our production volume and improve our
manufacturing processes. Our ability to consistently manufacture
commercial quantities of our batteries through this line is essential
for both industry acceptance of our technology and our realization of
longer term licensing and alternative revenue streams.
o PROTECT AND ENHANCE OUR PROPRIETARY TECHNOLOGY BASE. We consider our
product and process technology to be one of our most valuable assets.
We believe our technology is applicable to a wide range of products,
and intend to exploit this technology by developing new innovative
products to meet market needs. To safeguard this technology base, we
have established a program for intellectual property documentation and
protection and intend to aggressively enforce our intellectual
property rights against actual or potential infringement.
PRODUCTS
We have developed five standard "footprints" or battery product designs, which
can be commercially produced through low cost, high volume manufacturing
processes. These products may be used in a number of applications, including as
a rechargeable power source for portable communication devices, such as notebook
computers, HPCs, PDAs and cellular telephones.
The table below describes our currently available products in terms of
functionality and key features:
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PRODUCT FAMILY AND TYPE SIZE RANGE/THICKNESS KEY APPLICATIONS
1
Model 25 Series (small Cell size is 25 mm x 110 mm, with thickness Used to fit in tight applications such as satellite and
footprint battery) up to 8.4 mm cellular telephones where light weight and high energy
capacity are required.
Model 43 Series (small Cells available in heights ranging from Designed for technically advanced applications including
footprint battery) 1.2 mm to 5.7 mm, with thickness ranging cellular telephones, where size, weight and thickness
from 1.1 mm to 5.6 mm are key considerations.
Model 65 Series (small Cells available in heights ranging from Applications in technically advanced power applications
footprint battery) 1.2 mm to 5.7 mm, with thickness ranging including pagers, cellular telephones, PDAs and HPCs,
from 1.2 mm to 5.7 mm where size, weight, thickness and energy
capacity are key considerations.
Model 44 Series (large Cell size measures 103 mm x 103 mm and has a Designed for PDAs, notebook computers and other high
footprint battery) thickness range of 1.2 mm to 5.7 mm performance applications where safety, weight, thickness
and energy capacity are key considerations.
Model 74 Series (large Cell size measures 70 mm x Designed for PDAs, notebook computers and other advanced
footprint battery) 140 mm and has a thickness ranging from 1.2 personal communication devices, where energy capacity is
mm to 5.7 mm a key consideration.
As a result of our flexible manufacturing processes, we require a relatively
short lead time to manufacture a variety of products. This flexibility increases
our ability to custom-manufacture batteries to meet the particular needs of our
customers.
SALES AND MARKETING
Since our incorporation in 1989, we have been a Development Stage company
focusing on research and development, but have recently begun production and
shipment of our batteries in commercial quantities and intend to expand our
sales and marketing capabilities. We sell our batteries primarily through
original equipment manufacturers, or OEMs, battery pack makers, or VARs, and
independent sales representatives. Currently, we have a technical marketing
staff of four persons and are in the process of enlarging this department. We
approach our customers with a technical team that focuses on developing our
unique manufacturing competencies and establishing relationships with original
equipment manufacturers and battery pack makers. Our marketing team develops
relationships with these customers and becomes familiar with their product
development cycle, providing us with valuable product development feedback. In
the marketing and sale of any new battery technology, or for any new battery
products developed, there is a standard, industry-accepted procedure for
establishing that a battery is acceptable for general application to a
customer's products. This process, which is called qualification, involves
providing sample batteries of the type to be ultimately sold to the OEM
customer, and allowing them to test and evaluate them for a period of between
thirty and ninety days.
MANUFACTURING
We manufacture all our products at a vertically integrated manufacturing plant
in Mallusk, Northern Ireland. The first fully automated assembly line was
installed in the Northern Ireland facility in the first quarter of 1999 as part
of the first phase of our facilities expansion. De-bugging and refinement of
this line and the rest of the manufacturing process has proceeded on an ongoing
basis since 1999. This first line produces smaller batteries for cellular
telephones and other small battery applications. We have purchase orders in
place for additional equipment to expand our manufacturing capabilities. We are
currently in the process of transferring our production of our Model 25 battery
onto one of our high-speed production lines at the Mallusk facility, so as to
rapidly ramp up production capacity to meet a follow-on order that we recently
received from an existing customer. We are in the process of moving into the
second phase of our expansion by mid-summer 2000, and our expansion plans in
this second phase include the addition of a second automated assembly line for
our smaller batteries and a new machine, the Flexible Automated
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Battery Assembly Line, or FABAL. The FABAL will produce the larger footprint
batteries for notebook computers and PDAs and can be easily adjusted to produce
different size batteries, with completion currently expected in the second half
of 2000. The incorporated changes from these initial two phases are anticipated
to greatly increase our operating capacity. Our third phase, which is scheduled
to begin in mid-summer 2001, will significantly increase our manufacturing
capacity for large batteries. By the completion of this third phase, we
anticipate that a third automated assembly line for large batteries will be
operational by the second half of 2001. All of the equipment necessary to
complete phase one of our plan has been delivered. However, significant capital
expenditures will be required to finalize phases two and three of our plan. In
addition, the new equipment requires extensive qualification and adjustment
before it will be operational, and this process is expected to take a number of
months. It is critical to our ability to fulfill existing and future orders that
we complete these three planned expansion phases.
We are entirely vertically integrated in our battery production processes. We
believe that this vertical integration provides us with a distinct competitive
advantage over most other companies who are attempting to manufacture lithium
polymer batteries. We begin the production process by mixing dry powders and
solvents together, carefully and in precise proportions to create a liquid
slurry or mixture for the anode, the cathode and the separator material, the
three major component parts of the battery. This slurry is then cast into films
on one of our 150 foot long coating lines. These films are the raw materials
that are later put together through the lamination, assembly and packaging
processes to become the battery. Most other producers of lithium batteries
purchase at least one of their films from outside suppliers who specialize in
coating.
Our ability to produce our own films is critical in the following three aspects:
o Quality control: We are able to carefully monitor and control all
aspects of the films' makeup to ensure that films meet quality
standards and specifications for performance. Many of the technical
characteristics of the final battery are directly determined by the
characteristics of the base film incorporated into the battery.
o Design control: We can custom design batteries in terms of desired
performance and physical characteristics through our manipulation of
the physical and chemical properties of the films.
o Technology control: Because we create our own films, we are the sole
benefactors of the improvements that are developed in the film
generation process. This enables us to avoid reliance on generic,
outsourced materials from suppliers who might serve a number of
manufacturers. This also allows us to keep our improvements
proprietary and continue to increase the value of our portfolio of
trade secrets.
After the film coating process is completed, we maintain total vertical
integration through the lamination, cell assembly, extraction and packaging
stages of production and have created proprietary processes in many of these
areas. By keeping the entire battery production process in-house, without the
necessity of third party raw material suppliers or manufacturers, we can
develop, enhance and make improvements to our products with a reduced risk of
trade secret disclosure or the divulging of other proprietary information to
third party manufacturers or vendors. In addition, this ability to totally
control the production process affords us the optimum capability in quality
control and production monitoring to assure product performance and consistency
to the end user.
RESEARCH AND PRODUCT DEVELOPMENT
We conduct research and development and pilot production at our Henderson,
Nevada headquarters, and conduct additional basic materials research and
development at our facility in Kirkland, Washington. We also develop our own
proprietary materials at our Kirkland research facility.
Our research personnel consist of two groups: the battery research and
development group and the battery engineering group. Our battery research and
development group develops and improves the existing technology, materials and
processing methods and develops the next generation of our battery technology.
Our areas of expertise include chemical engineering, process control, safety,
and anode, cathode and electrolyte chemistry and physics, polymer chemistry and
radiation chemistry, thin film technologies, coating technologies, and
analytical chemistry and material science.
Page 10
We intend to continuously improve our technology, and are currently focusing
on improving the energy density of our products. We are working to bring these
improved products to the point of production. We also are working with new
materials to make further improvements to the performance of our products.
Ongoing improvement in the performance of our batteries is necessary in order to
maintain our competitive advantage.
The battery engineering group designs and adapts our products for eventual sale
to customers, as well as working to integrate our batteries into customer
requirements. 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 significantly improving battery
design to increase energy densities and cycling capabilities.
COMPETITION
Competition in the battery industry is intense. In the rechargeable battery
market, the principal competitive technologies currently marketed are nickel
cadmium, nickel metal hydride and liquid lithium ion batteries. We believe that
our lithium polymer batteries will compete primarily in the high-end segments of
the rechargeable battery market, on the basis of high energy density, thinness,
weight and form factor.
The industry consists of major domestic and international companies, many of
which have financial, technical, marketing, sales, manufacturing, distribution
and other resources substantially greater than ours. Our primary competitors who
have announced availability of either lithium ion or lithium polymer based
rechargeable battery product include Electric Fuel Corp., Hitachi Maxell Ltd.,
Matsushita Battery Industrial Ltd. (Panasonic), SAFT America, Inc., Sanyo
Electric Co. Ltd, Toshiba Corp., Ultralife Batteries Inc. and Varta AG. Other
competitors who have announced the availability of products include Dooyoun
Corp., Lithium Technology Corp., NEC-Moli Energy Corp., Polystor Corporation,
Sony Corp. and Thomas & Betts Corp., through its wholly owned High Energy
Technologies, Inc. subsidiary, and Saehan Inc.
The capabilities of many of these competing technologies have improved. Sony, in
particular, has been consistently improving the energy density of its lithium
ion battery over the last several years. Other competitors have also developed
liquid ion battery technologies, which offer significant advantages in energy
density and cycle life over other types of principal rechargeable battery
technologies currently in use, and we expect this technology to be the
technology most competitive with ours. In addition, a number of companies are
undertaking research in other rechargeable battery technologies, including work
on lithium polymer technology. Nevertheless, we are continually evolving our
technology to meet these and other competitive threats.
We believe that we have important technological advantages over our competitors
in terms of our ability to compete in the lithium polymer battery market. We
make lithium polymer batteries using manganese as the cathode material. The
majority of other battery competitors are developing lithium polymer using
cobalt as the cathode material. We believe that certain technology advantages of
lithium polymer using lithium manganese oxide over lithium cobalt oxide will
allow us to compete in the lithium polymer market.
INTELLECTUAL PROPERTY
Our ability to compete effectively will depend in part on our ability to
maintain the proprietary nature of our technology and manufacturing processes
through a combination of patent and trade secret protection, non-disclosure
agreements and cross-licensing agreements.
We license certain technology patents pertaining to lithium ion battery
technology under a non-exclusive license with Telecordia Technologies (formerly
Bellcore). We have paid, and are obligated to pay in the future, license and
sublicense fees in both cash and our common stock and will pay royalties to the
licensor commencing on the date of our first shipment to, or the first use by, a
third party of a royalty-bearing product under this license agreement.
We rely on patent protection for certain designs and products. We hold
approximately 218 United States patents, which have a range of expiration dates
from 2003 through 2018 and have in excess of 160 patent applications pending in
the United States. We are preparing additional patent applications for filing in
the United States. We also actively pursue patent protection in certain foreign
countries.
Patent applications in the United States are maintained in secrecy until the
patents issue. Since publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries by several months, we cannot
Page 11
be certain that we were the first creator of inventions covered by pending
patent applications or the first to file patent applications on such inventions.
We can also not be certain that our pending patent applications will result in
issued patents or that any of our 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 we cannot be certain that foreign patent applications related
to issued United States patents will issue. Furthermore, if these patent
applications issue, some foreign countries provide significantly less patent
protection than does the United States.
The status of patents involves complex legal and factual questions and the
breadth of claims allowed is uncertain. Accordingly, we cannot be certain that
patent applications we file will result in patents being issued or that our
patents and any patents that may be issued to us in the future, will afford
protection against competitors with similar technology. In addition, no
assurances can be given that patents issued to us will not be infringed upon or
designed around by others or that others will not obtain patents that we 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 we are found to be infringing third party
patents, we cannot be certain that we could obtain the necessary licenses for
our products on reasonable terms, if at all.
In addition to potential patent protection, we rely on the laws of unfair
competition and trade secrets to protect our proprietary rights. We attempt to
protect our trade secrets and other proprietary information through agreements
with customers and suppliers, proprietary information agreements with employees
and consultants and other security measures. Although we intend to protect our
rights vigorously, we cannot be certain that these measures will be successful.
REGULATION
Before we commercially introduce our batteries into certain markets, we may be
required to, or may decide to, obtain approval of our products from one or more
of the organizations engaged in testing product safety. These approvals could
require significant time and resources from our technical staff and, if redesign
were necessary, could result in a delay in the introduction of our products in
those markets.
The United States Department of Transportation, or DOT, and the International
Air Transport Association, or IATA, regulate the shipment of hazardous
materials. Currently, lithium batteries, because they contain no metallic
lithium, are not addressed in the DOT hazardous materials regulations. The
United Nations Committee of Experts for the Transportation of Dangerous Goods
has adopted amendments to the international regulations for "lithium
equivalency" tests to determine the aggregate lithium content of lithium polymer
batteries. In addition, it has adopted special size limitations for applying
exemptions to these batteries. Under these two standards, our batteries
currently fall well below the level necessary to achieve an exempt status. The
revised United Nations recommendations are not U.S. law until such time as they
are incorporated into the DOT Hazardous Material Regulations. However, as a
result of an incident this past summer involving another supplier of lithium ion
batteries which mishandled batteries at Los Angeles International Airport, some
DOT staff members recently have expressed the preliminary view that, while the
equivalency standard should be adopted, the revised exemption limits should not
be incorporated in the United States. While we fall under the equivalency levels
and comply with all of its safety packaging requirements, future DOT or IATA
regulations or enforcement policies could impose costly transportation
requirements. In addition, compliance with any new DOT and IATA approval process
could require significant time and resources from our technical staff and if
redesign were necessary, could delay the introduction of our products in the
United States.
The Nevada Occupational Safety and Health Administration and other regulatory
agencies have jurisdiction over the operation of our Henderson, Nevada
manufacturing facility and similar regulatory agencies have jurisdiction over
our Mallusk, Northern Ireland manufacturing facilities. Because of the risks
generally associated with the use of flammable solvents and other hazardous
materials, we expect rigorous enforcement of applicable health and safety
regulations. In addition, we currently are regulated by the State Fire
Marshall's office and local Fire Departments. Frequent audits or changes in
their regulations may cause unforeseen delays and require significant time and
resources from our technical staff.
The Clark County Air Pollution Control District has jurisdiction over our
Henderson, Nevada facility and annual audits and changes in regulations could
impact current permits affecting production or time constraints placed upon
personnel.
Page 12
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 we believe that our
activities conform to current environmental regulations, any changes in these
regulations may impose costly equipment or other requirements. Our failure to
adequately control the discharge of hazardous wastes also may subject us to
future liabilities.
Recent analysis of our battery by Nevada Environmental Laboratories using the
criteria required by local landfills classified them as non-hazardous waste.
Other States and countries may have other criteria for their landfill
requirements, which could impact cost and handling issues for end product users.
THIRD PARTY RELATIONSHIPS
HANIL VALENCE CO., LTD.
Valence, through its Dutch subsidiary and Hanil Telecom Co., Ltd. signed an
agreement to establish a joint venture company in Korea to manufacture, package
and distribute rechargeable batteries for the Korean markets utilizing the
Company's lithium polymer technologies. Hanil Telecom and Valence, through its
Dutch subsidiary, each own 50% of Hanil Valence Co. All cash has been provided
to the joint venture by Hanil Telecom. We supply Hanil Valence Co. with its
proprietary laminates (film and laminate materials), from which Hanil Valence
Co. will manufacture batteries. We continue to ship laminate material for the
testing of production equipment and the manufacture of batteries to Hanil
Valence Co. In addition, we supply technology, product and equipment designs and
technical support for Hanil Valence Co. Currently, the Korean joint venture has
installed a single manufacturing assembly line and is working to make it
operational. We have no experience in manufacturing in Korea or selling into the
Korean marketplace, and are dependent on our joint venture partner in these
areas. In addition, the Korean marketplace has experienced turmoil in the last
several years and such activity may adversely and materially affect Hanil
Valence Co.
ALLIANT/VALENCE, L.L.C.
Valence and Alliant Techsystems Inc. have established a joint venture,
Alliant/Valence, L.L.C., to market our battery technology and technology
obtained under our Bellcore license and to develop and to manufacture batteries
for U.S. and foreign military customers. Alliant Power Sources Company, an
Alliant operating company, has ordered both laminate material and finished
battery cells from Valence to be used in the construction of several different
specialized batteries for military and aerospace applications. The order for
finished batteries is for our Model 44 (4"x4") batteries. We have also purchased
our FABAL machine from Alliant which is being installed in our Mallusk, Northern
Ireland factory.
HUMAN RESOURCES
As of May 31, 2000, we had 59 full-time employees in the United States at our
Henderson, Nevada headquarters and our Kirkland, Washington facility. We have 23
total employees in the areas of administration, legal, marketing, finance,
management information systems, purchasing, quality control and shipping &
receiving. We have 13 total employees in the areas of engineering, facilities
maintenance and environmental health & safety. We have 23 total employees in the
areas of research & development and product development; product development
includes mixing, coating and assembly. In addition, as of May 31, 2000, our
Dutch subsidiary had 183 permanent, full time employees and 120 temporary, full
time employees located in Northern Ireland. Our success will depend in large
part on our ability to attract and retain skilled and experienced employees.
None of our employees are covered by a collective bargaining agreement, and we
consider our relations with our employees to be good.
Page 13
ITEM 2. PROPERTIES
Our corporate offices and principal laboratories are located in a 55,000 square
foot facility that we own, located in Henderson, Nevada. We have a mortgage of
$1,438,830 on the facility as of March 31, 2000, which bears interest at 10.4%.
Our Dutch subsidiary owns a manufacturing facility in Mallusk, Northern Ireland,
with approximately 80,000 square feet, and we are in the process of expanding
this facility into an additional 75,000 square feet. The initial 50,000 square
foot addition will allow us to expand our production capacity as new assembly
equipment presently on order comes on line over the next 15 months. This added
space will allow us to improve product flow necessary to facilitate planned
increased production quantities. The additional 25,000 square feet under
construction will allow us to have a dedicated coating line for our anode,
cathode and separator. We have an option to purchase an adjacent facility of
approximately 50,000 square feet under a lease purchase agreement. The lease
purchase agreement provides for a two-year term that commenced on May 11, 1999.
We have the option to purchase this property for the purchase price of
$1,600,000, at any time until the termination of the lease. The rent for this
property is $320,000 per annum. Additionally, we lease a 4,200 square foot
facility in Kirkland, Washington, which we utilize for the purpose of advanced
materials research. This lease expires in October 2001.
We believe that our existing facilities will be adequate to meet the Company's
needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We recently reached a settlement in a lawsuit by a class of persons who
purchased our common stock between May 7, 1992 and August 10, 1994, alleging
that we violated federal securities laws and seeking unspecified compensatory
and punitive damages, attorneys' fees and costs for claimed misleading
statements between May 7, 1992 and August 10, 1994, including filings with the
Commission with regard to the Company's business and future prospects. The
complaint named us as a defendant as well as some of our present and former
officers and directors, asserting that Valence and those individuals violated
federal securities laws by misrepresenting and failing to disclose certain
information about our business during the class period. On February 3, 2000 we
entered into a settlement agreement, pursuant to which we delivered $1.3 million
in cash to a settlement fund. In addition, we issued 950,000 shares of common
stock to a wholly owned subsidiary, which pledged these shares to secure our
obligations under the settlement agreement. On May 8, 2000, the court approved
the parties' settlement agreement and entered an order formally dismissing the
case. Under the terms of the settlement, the plaintiffs' settlement counsel, or
their authorized agents, acting on behalf of the settlement class and subject to
the supervision and direction of the court, will administer and calculate the
claims submitted by the settlement class members and will oversee distribution
of the balance of the settlement fund to the authorized claimants as of the
effective date of the settlement. The settlement fund will be applied in the
following order: (a) to pay counsel to the representative plaintiffs attorneys'
fees the fee and expense award (as defined in the settlement and if and to the
extent allowed by the court); (b) to pay all costs and expenses reasonably and
actually incurred in connection with providing notice i.e. locating class
members; (c) to pay the taxes and tax expenses as described in the settlement
agreement; and (d) to distribute the balance of the settlement fund to
authorized claimants as allowed by the terms of the settlement, the court or the
Plan of Allocation (as defined in the settlement).
In September 1998, Klockner Bartelt/Medipak, Inc. d/b/a/ Klockner Medipak filed
suit against the Company in the United States District Court for the Middle
District of Florida (File No. 98-1844-Civ-7-24E) alleging breach of contract by
the Company with respect to an agreement for the supply of battery manufacturing
equipment, and claimed damages of approximately $2.5 million. On January 20,
1999, the Company filed a counterclaim against Klockner alleging breach of
contract, breach of express warranty, breach of the implied warranty of
merchantability, breach of the implied warranty of fitness for a particular
purpose, and rescission and restitution and claimed compensatory damages to be
determined at trial. On April 10, 2000, the court granted the parties' motion
for a Stipulated Dismissal of Action With Prejudice pursuant to the parties'
Settlement Agreement and Mutual General Release, and formally dismissed the
case, without presumption or admission of any liability of wrongdoing.
In June 1998, we filed a lawsuit in the Superior Court of California, Santa
Clara County, against L&I Research, Inc., Powell Electrical Manufacturing
Company and others seeking relief based on rescission and damages for breach of
contract. In September 1998, Powell filed a cross-complaint against the Company
and others (File No. CV7745534) claiming damages of approximately $900,000. The
cross-complaint alleges breach of written contract, oral modification of written
contract, promissory estoppel, fraud, quantum meruit, and quantum valebant. On
December 10, 1998, we filed a first amended complaint for breach of contract,
breach of express warranty, breach of implied warranty of merchantability,
breach of implied
Page 14
warranty of fitness for particular purpose, and breach of the implied covenant
of good faith and fair dealing. On or about December 23, 1998, Powell Electric
Manufacturing Company filed a first amended complaint again seeking damages of
approximately $900,000. In April 2000, we prevailed on a motion for summary
adjudication against Powell's claims for oral modification, promissory estoppel,
and fraud. The matter is currently being tried in a jury trial. We intend to
defend vigorously the claims against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 15, 2000, we held an annual meeting of our stockholders.
The following directors were elected at the meeting: Lev M. Dawson, Carl E.
Berg, Bert C. Roberts, Jr. and Alan F. Shugart.
Stockholders voted to approve an amendment to our Certificate of Incorporation
to increase authorized common stock from 50,000,000 to 100,000,000. There were
29,090,298 votes cast in favor of the amendment, 1,586,862 votes cast against
the amendment, 36,370 abstentions and 49,125 broker non-votes.
Stockholders voted to approve the 2000 Stock Option Plan. There were 14,525,421
votes cast in favor of the Stock Option Plan, 1,779,203 votes cast against the
Stock Option Plan, 145,364 abstentions and 14,243,542 broker non-votes.
Stockholders voted to ratify the selection of PricewaterhouseCoopers LLP as
independent accountants for the fiscal year ending March 31, 2000. There were
30,634,927 votes cast in favor of the ratification, 44,617 votes cast against
the ratification and 33,986 abstentions.
At the meeting, the votes cast in the election for directors were as
follows:
NOMINEE VOTES IN FAVOR VOTES AGAINST
Lev M. Dawson 29,775,102 938,428
Carl E. Berg 29,772,952 940,578
Bert C. Roberts, Jr. 29,758,662 954,868
Alan F. Shugart 29,773,402 940,128
Page 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the symbol
"VLNC" since May 7, 1992. The following table sets forth, for the periods
indicated, the high and low sale prices of our common stock, as reported on the
Nasdaq National Market.
FISCAL 1999: HIGH LOW
Quarter ended June 28, 1998 6.06 4.56
Quarter ended September 27, 1998 5.75 3.44
Quarter ended December 27, 1998 10.88 4.13
Quarter ended March 28, 1999 8.56 6.13
FISCAL 2000:
Quarter ended June 27, 1999 8.44 6.50
Quarter ended September 26, 1999 7.38 4.38
Quarter ended December 26, 1999 21.06 4.53
Quarter ended March 31, 2000 39.66 16.63
On May 31, 2000, the last reported sale price of our common shares on the Nasdaq
National Market was $14.63 per share. On that date, we had 36,848,808 shares of
common stock outstanding held of record by approximately 591 record holders.
ITEM 6. SELECTED FINANCIAL DATA
This section presents selected historical financial data of Valence. You should
read carefully the financial statements included in this Report, including the
notes to the financial statements. The selected data in this section is not
intended to replace the financial statements. We derived the statement of
operations data for the years ended March 29, 1998, March 28, 1999 and March 31,
2000 and balance sheet data as of March 29, 1998, March 28, 1999 and March 31,
2000 from the audited financial statements in this Report. Those financial
statements were audited by PricewaterhouseCoopers LLP, independent auditors. We
derived the statement of operations data for the years ended March 31, 1996 and
March 30, 1997 and the balance sheet data as of March 31, 1996 and March 30,
1997 from audited financial statements that are not included in this Report.
FISCAL YEAR ENDED
MARCH 31, MARCH 30, MARCH 29, MARCH 28, MARCH 31,
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS
DATA:
Revenue:
Battery and laminate sales -- -- -- -- 1,518
--------- -------- -------- ------- ------
Total revenue................. -- -- -- -- 1,518
Cost and expenses: 8,047 10,825 15,432 22,171 28,510
Marketing....................... 486 205 855 105 297
General and administrative...... 5,614 6,168 7,066 6,753 6,795
Write-off of in-process
technology ................... 6,064 -- -- -- --
Page 16
Factory start-up costs (1) .... -- -- -- -- 3,171
Stockholder lawsuit(2)......... -- -- -- -- 30,061
--------- -------- -------- -------- --------
Total costs and expenses 20,211 17,198 23,353 29,029 68,834
Operating loss................ (20,211) (17,198) (23,353) (29,029) (67,316)
Interest and other income.......... 3,549 2,558 1,174 2,980 221
Interest expense................... (931) (814) (528) (643) (1,841)
Equity in earnings (loss) of
Joint Venture................. -- (434) (1,779) 268 (210)
--------- -------- -------- -------- --------
Net loss...................... (17,593) (15,888) (24,486) (26,424) (69,146)
========= ======== ======== ======== ========
Beneficial conversion feature
on preferred stock............ -- -- -- (2,865) (560)
========= ======== ======== ======== ========
Net loss available to common
stockholders.................. $(17,593) $(15,888) $(24,486) $(29,289) $(69,706)
========= ======== ======== ======== ========
Net loss per share available
to common stockholders,
basic and diluted............... $ (0.83) $ (0.73) $ (1.06) $ (1.13) $ (2.28)
========= ======== ======== ======== ========
Shares used in computing net
loss per share available to
common stockholders, basic
and diluted(3).................. 21,261 21,684 23,010 25,871 30,523
========= ======== ======== ======== ========
MARCH 31, MARCH 30, MARCH 29, MARCH 28, MARCH 31,
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents.................$.24,569.. $ 27,832 $ 8,400 $ 2,454 $ 24,556
Investments.................................32,282.. 9,556 - - -
Working capital.............................41,281.. 26,105 (1,773) (7,784) 16,007
Total assets................................70,247.. 55,526 42,894 38,401 58,516
Long-term debt...............................6,169.. 5,217 4,950 8,171 12,369
Accumulated deficit........................(87,638). (103,526) (128,012) (154,436) (223,582)
Total stockholders' equity..................53,010.. 38,349 22,962 7,955 27,845
- ---------------------
(1)(2) See Results of Operations discussion in Item 7 Below.
(3) See Note 2 of Notes to Consolidated Financial Statements
Page 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS REPORT CONTAINS STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 21E OF THE EXCHANGE ACT AND SECTION 27A OF THE
SECURITIES ACT. THE WORDS "EXPECT", "ESTIMATE", "ANTICIPATE", "PREDICT",
"BELIEVE" AND SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS APPEAR IN A NUMBER OF
PLACES IN THIS FILING AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF VALENCE TECHNOLOGY, INC. (THE "COMPANY," "VALENCE,"
"WE," OR "US"), ITS DIRECTORS OR OFFICERS WITH RESPECT TO, AMONG OTHER THINGS
(A) TRENDS AFFECTING THE FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF
VALENCE, (B) OUR PRODUCT DEVELOPMENT STRATEGIES, TRENDS AFFECTING OUR
MANUFACTURING CAPABILITIES AND TRENDS AFFECTING THE COMMERCIAL ACCEPTIBILITY OF
OUR PRODUCTS, AND (C) THE BUSINESS AND GROWTH STRATEGIES OF VALENCE. THE
STOCKHOLDERS OF VALENCE ARE CAUTIONED NOT TO PUT UNDUE RELIANCE ON SUCH
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES
OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THIS REPORT, FOR THE REASONS,
AMONG OTHERS, DISCUSSED IN THE SECTIONS -- "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", AND "RISK FACTORS". THE
FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS
AND RELATED NOTES, WHICH ARE PART OF THIS REPORT OR INCORPORATED BY REFERENCE TO
OUR REPORTS FILED WITH THE COMMISSION. VALENCE UNDERTAKES NO OBLIGATION TO
PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES THAT ARISE AFTER THE DATE HEREOF.
OVERVIEW
Valence was founded in 1989 to develop and commercialize advanced rechargeable
batteries based on lithium and polymer technologies. Since inception, we have
been a development stage company primarily engaged in acquiring and developing
our initial technology, manufacturing limited quantities of prototype batteries,
recruiting personnel, and acquiring capital. Although we currently have three
purchase orders of approximately $17 million, to date, other than immaterial
revenues from limited sales of batteries and laminate, we have not received any
significant revenues from the sale of products. We will no longer be classified
as a development stage company in fiscal 2001. Substantially all revenues to
date have been derived from a research and development contract with the Delphi
Automotive Systems Group, or Delphi, formerly the Delco Remy Division, an
operating group of the General Motors Corporation, which expired in May 1998. We
have incurred cumulative losses of $223,582,000 from inception to March 31,
2000.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2000 (FISCAL 2000), MARCH 28, 1999 (FISCAL
1999) AND MARCH 29, 1998 (FISCAL 1998)
RESEARCH AND PRODUCT DEVELOPMENT. Research and product development expenses
increased to $28.5 million for the fiscal year ended March 31, 2000 from $22.2
million for the fiscal year ended March 28, 1999, representing an increase of
28.4%. Research and product development expenses increased to $22.2 million for
the fiscal year ended March 28, 1999 from $15.4 million for the fiscal year
ended March 29, 1998, representing an increase of 44.2%. The increase in fiscal
2000 versus fiscal 1999 and fiscal 1999 versus fiscal 1998 reflects our
increased efforts to commercialize our products, including increases in
purchasing, machine design engineering, testing, and raw materials for debugging
equipment.
MARKETING. Marketing expenses increased to $297,000 for the fiscal year ended
March 31, 2000 from $105,000 for the fiscal year ended March 28, 1999,
representing an increase of 182.9%. Marketing expenses decreased to $105,000 for
the fiscal year ended March 28, 1999 from $855,000 for the fiscal year ended
March 29, 1998, representing a decrease of 87.7%. The increase in fiscal 2000
compared to fiscal 1999 was the result of higher travel expenses, the
utilization of consultant services, and increased payroll. The decrease in
expenditures in fiscal 1999 compared to fiscal 1998 was the result of severance
payments made to two highly compensated former employees during fiscal 1998. No
further severance expense was required in 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses remained at $6.8
million for the fiscal year ended March 31, 2000 as compared to $6.8 million for
the fiscal year ended March 28, 1999. General and administrative expenses
decreased to $6.8 million for the fiscal year ended March 28, 1999, from $7.1
million for the fiscal year March 29, 1998, representing a decrease of 4.2%. The
fiscal 1999 decrease was due to the reduction of payroll, partially offset by
compensation expenses of $362,000 related to the term extensions of certain
vested stock options.
Page 18
FACTORY START-UP COSTS. During the fourth quarter of fiscal 2000, the Company
started shipping commercial quality grade batteries under an existing purchase
order. The cost of raw materials used to bring the machinery up to production
quality, along with related consumables and direct labor, were separated as
factory start-up costs in the amount of $3.2 million.
STOCKHOLDER LAWSUIT SETTLEMENT. As announced on February 10, 2000, a settlement
was reached in the securities class-action lawsuit that had been pending against
the Company. The court-approved settlement dismissed all claims against the
Company and all other defendants without presumption or admission of any
liability or wrong-doing. Under the terms of the settlement, a payment of $1.3
million in cash was made, and the Company issued 950,000 shares of common stock,
to the class fund. The Company took an accounting charge during the fourth
quarter of fiscal 2000 of $30.1 million or ($0.83) per share for the impact of
this settlement.
INTEREST AND OTHER INCOME. Interest and other income decreased to $221,000 for
the fiscal year ended March 31, 2000, from $3.0 million for the fiscal year
ended March 28, 1999, representing a decrease of 92.6%. Interest and other
income increased to $3.0 million for the fiscal year ended March 28, 1999, from
$1.2 million for the fiscal year ended March 29, 1998, representing an increase
of 150%. The decrease in fiscal 2000 from fiscal 1999 resulted primarily from
the fiscal 1999 receipt of the final payment from Delphi. The increase in fiscal
1999 over fiscal 1998 was due primarily to the final payment from Delphi offset
by decreased investment income.
INTEREST EXPENSE. Interest expense increased to $1.8 million for the fiscal year
ended March 31, 2000, from $643,000 for the fiscal year ended March 28, 1999,
representing an increase of 179.9%. Interest expense increased to $643,000 for
the fiscal year ended March 28, 1999, from $528,000 for the fiscal year ended
March 29, 1998, representing an increase of 21.8%. The increase in fiscal 2000
was the result of additional long-term debt acquired during the fiscal year, as
was the increase in fiscal 1999.
EQUITY IN EARNINGS(LOSS) OF JOINT VENTURE. Equity in earnings (loss) of joint
venture decreased to $(210,000) for the fiscal year ended March 31, 2000 from
$268,000 for the fiscal year ended March 28, 1999, representing a decrease of
178.4%. Equity in earnings (loss) of joint venture increased to $268,000 for the
fiscal year ended March 28, 1999, from ($1.78 million) for the fiscal year ended
March 29, 1998. The losses in fiscal 2000 were primarily the result of
unfavorable exchanges in foreign currency. The earnings in fiscal 1999 were
primarily the result of favorable exchanges in foreign currency and the losses
in fiscal 1998 were the result of start up costs for the joint venture.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $28,560,000 net cash for operating activities during fiscal
2000, whereas it used $22,395,000 during fiscal 1999 and $16,650,000 during
fiscal 1998. These respective increases of 27.5% and 34.5% resulted from losses
incurred with efforts to commercialize the Company's products.
Net cash used in investing activities decreased to $6.5 million for the fiscal
year ended March 31, 2000 from $9.6 million for the fiscal year ended March 28,
1999, representing an decrease of 32.3%. Net cash used in investing activities
increased to $9.6 million for the fiscal year ended March 28, 1999 from $6.7
million for the fiscal year ended March 29, 1998, representing an increase of
43.3%. The usage in fiscal 2000 and fiscal 1999 was solely the result of
continuing capital equipment expenditures.
The Company provided $57.2 million of net cash from financing activities during
fiscal 2000 as compared to $26.1 million during fiscal 1999, an increase of
$31.1 million. The Company provided $26.1 million of net cash from financing
activities during fiscal 1999 as compared to $5.1 million in fiscal 1998, an
increase of $21.0 million. The increase in fiscal 2000 resulted from proceeds
from the issuance of common stock. The increase in fiscal 1999 resulted from the
issuance of preferred and common stock, and loans from a principal stockholder.
As a result of the above, the Company had a net increase in cash and cash
equivalents of $22.1 million during fiscal 2000 versus decreases of $5.9 million
and $19.4 million during fiscal 1999 and fiscal 1998, respectively.
During fiscal year 1994, Valence, through its Dutch subsidiary, signed an
agreement with the Northern Ireland Industrial Development Board, or IDB, to
open an automated manufacturing plant in Northern Ireland in exchange for
capital and revenue grants from the IDB. Valence also received offers from the
IDB to receive additional grants. The grants available under the agreement and
offers for an aggregate of up to (pound)25.6 million, generally become
Page 19
available over a five-year period through October 31, 2001. As of March 31,
2000, we had received grants aggregating (pound)4.1 million, reducing remaining
grants available to (pound)21.5 million ($37.9 million as of March 31, 2000).
As a condition to receiving funding from the IDB, our Dutch subsidiary must
maintain a minimum of (pound)12.0 million in debt or equity financing from
Valence. Aggregate funding under the grants was limited to (pound)4,080,000
until we had recognized $4.0 million in aggregate revenue from the sale of our
batteries produced in Northern Ireland. An amendment to the agreement with the
IDB permits Valence to receive (pound)500,000 (approximately $808,000) after
achieving sales of batteries manufactured by the Northern Ireland operation of
at least $1.5 million. An additional (pound)500,000 is available when the total
related sales reach $2.5 million.
The amount of the grants available under the agreement and offers depends
primarily on the level of capital expenditures that we make. 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. We
have guaranteed the Dutch subsidiary's obligations to the IDB under the
agreement.
We cannot be certain that we will be able to meet the requirements necessary for
us to receive and retain grants under the IDB agreement and offers.
The major components of construction in progress with their estimated costs and
start dates are as follows: extraction, packaging, and conditioning equipment,
$3.4 million, August 1993; assembly equipment, $8.8 million, March 1994; mixing,
coating, etching, laminating and slitting equipment, $2.7 million, March 1997;
and factory improvements and miscellaneous equipment, $629,000, June 1997. The
estimated completion date for these major categories of construction in progress
is July 2001. These statements are forward-looking statements, and actual costs
and completion dates are subject to change due to a variety of risks and
uncertainties, including the availability of funds for completion, the risk that
actual costs will be materially greater due to unforeseen difficulties in
completion of the projects, reliance on manufacturers to deliver equipment in a
timely manner and that performs as intended, and other risks and uncertainties.
During October 1999, Castle Creek Investments, LDC elected to convert all 7,500
shares of their Series A Convertible Participating Preferred Stock. These 7,500
shares of Series A stock, including the accreted redemption value through the
date of conversion, converted to 1.3 million shares of our common stock.
In October 1999, we obtained a loan in the amount of $1.5 million from a major
stockholder. The loan is in the form of a demand note such that the holder can
request payment after January 31, 2000 or convert the loan and accrued interest
to common stock. The conversion rate is $5.05 per share, which equals the
ten-day average closing sale price prior to the loan date. The interest rate is
9% per annum.
In October, November and December 1999, we sold an aggregate of 3.4 million
shares of our common stock to institutional investors, raising aggregate net
proceeds of approximately $38.5 million. We estimate that the total expenses
incurred in connection with the sale of shares in October, November and
December, including finders' fees and legal and accounting fees, were
approximately $1.8 million.
On November 3, 1999, Castle Creek elected to convert 1,000 shares of their
Series B Convertible Participating Preferred Stock. These 1,000 shares of Series
B stock, including the accreted redemption value through the date of conversion,
converted to 225,845 shares of our common stock.
During June 2000 the Company entered into separate private placement funding
arrangements with Acqua Wellington Value Fund Ltd.("Acqua Wellington"), an
institutional investor, and Carl E. Berg ("Mr. Berg"), a principal stockholder
and director of the Company, for an equity investment commitment totaling $25
million. Acqua Wellington funded $12.5 million on June 29th by the purchase of
846,665 shares of common stock and a warrant to purchase 169,333 shares,
exercisable at $18.45 per share. The remaining $12.5 million is in the form of a
binding commitment from Mr. Berg for funding through the fiscal year end. The
draw down of this Berg commitment is at the Company's option. The shares to be
issued under these commitments will be restricted shares. Only the institutional
investor has registration rights on its shares. The Company has agreed to file
a registration statement with respect to the Acqua Wellington shares, to be
effective within 120 days of closing.
Page 20
Since inception, we have experienced significant losses and negative cash flow
from operations. We believe that our existing cash and cash equivalents and
anticipated cash flows from our operating activities and available financing
will be sufficient to fund our minimum working capital and capital expenditure
needs through fiscal 2001. If in the future we do not have sufficient cash to
finance our operations, we may be required to obtain additional debt or equity
financing. We cannot be certain that we will be able to obtain additional
financing on acceptable terms or at all.
YEAR 2000
To date, we have not experienced any material failures of any of our systems
related to the failure of Year 2000 compliance. In addition, to date, we have
not been made aware of any Year 2000 compliance failures involving our customers
and suppliers. To date, we have spent an immaterial amount on the compliance
program, and we do not expect to incur any material additional amounts. The
costs discussed above do not include our internal costs, including the payroll
costs for those persons working on our Year 2000 compliance project, which costs
we do not track.
RISK FACTORS
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain
forward-looking statements that involve risks and uncertainties. Factors
associated with the forward-looking statements that could cause actual results
to differ from those projected or forecast are included in the statements
below. In addition to other information contained in this Report, you should
carefully consider the following cautionary statements and risk factors.
RISKS RELATED TO OUR BUSINESS
WE ARE IN THE EARLY STAGES OF MANUFACTURING, AND OUR FAILURE TO DEVELOP THE
ABILITY TO EFFICIENTLY MANUFACTURE BATTERIES IN COMMERCIAL QUANTITIES WHICH
SATISFY OUR CUSTOMERS' PRODUCT SPECIFICATIONS COULD DAMAGE OUR CUSTOMER
RELATIONSHIPS AND RESULT IN SIGNIFICANT LOST BUSINESS OPPORTUNITIES FOR US.
To be successful, we must cost-effectively manufacture commercial quantities of
our batteries that meet customer specifications. Until recently, our batteries
only had been manufactured on our pilot manufacturing line, which is able to
produce prototype batteries in quantities sufficient to enable customer sampling
and testing and product development. Our manufacturing facilities will require
additional development to enable us to produce batteries cost-effectively,
according to customer specifications and on a commercial scale. To facilitate
commercialization of our products, we will need to reduce our manufacturing
costs. This includes being able to substantially raise and maintain battery
yields of commercial quality in a cost-effective manner. Failure to achieve
substantially increased yields of our batteries and to reduce unit-manufacturing
costs will preclude us from offering our batteries at a competitive price to the
market, which would impair our ability to attract current and future customers.
Page 21
We are currently in the early stages of transitioning production to an automated
production line that will work with our newest battery technology in our
manufacturing facility in Mallusk, Northern Ireland. We have begun to
manufacture batteries on a commercial scale to fulfill our first significant
purchase orders. The redesign and modification of the Mallusk manufacturing
facility, including its customized manufacturing equipment, will continue to
require substantial engineering work and capital expenses and is subject to
significant risks, including risks of cost overruns and significant delays. In
addition, in order to scale up the manufacturing capacity, we will need to begin
qualification of additional automated production lines. In automating,
redesigning and modifying the manufacturing processes, we have been, and will
continue to depend on, several developers of automated production lines, all of
whom have limited experience in producing equipment for the manufacture of
batteries. A failure to successfully develop and implement a large scale
manufacturing facility capable of cost-effectively producing commercial
quantities of batteries and according to customer specifications would harm our
ability to serve the needs of our customers and threaten our future sales and
profits.
As part of our manufacturing ramp-up, we will need to hire and train a
substantial number of new manufacturing workers. The availability of skilled and
unskilled workers in Northern Ireland, the site of our manufacturing facility,
is limited due to a relatively low unemployment rate. As a result, we face the
risk that we may not:
o successfully hire and train the new manufacturing workers necessary
for the ramp-up of our Mallusk, Northern Ireland manufacturing
facility;
o successfully develop improved processes;
o design required production equipment;
o enter into acceptable contracts for the fabrication of required
production equipment;
o obtain timely delivery of required production equipment;
o implement multiple production lines; or
o successfully operate the Mallusk facility.
Our failure to successfully automate our production on a timely basis, if at
all, could damage our reputation, relationships with future and existing
customers, cause us to lose business and potentially prevent us from
establishing the commercial viability of our products.
IF WE CONTINUE TO EXPERIENCE DELAYS IN QUALIFYING OUR MANUFACTURING FACILITIES,
THIS COULD SIGNIFICANTLY DELAY OUR BRINGING COMMERCIAL QUANTITIES OF PRODUCT TO
MARKET AND INTERFERE WITH OUR ABILITY TO GENERATE THE REVENUE AND CASH THAT WE
NEED TO SUSTAIN OUR BUSINESS.
We may be unable to meet our schedules regarding delivery, installation,
de-bugging and qualification of our Northern Ireland facility production
equipment, and face the prospect of further delays or problems related to
facility qualification because:
o most of the production equipment is being specifically manufactured
for us; thus, delays may occur since the design and delivery of this
equipment is not within our control;
o through our laboratory scale prototype work, we are modifying and
bringing many of the manufacturing processes that we are implementing
in this production equipment up to date for the first time and may
need to refine these processes, which could cause delays;
o even if we are able to refine our process, we may not be able to
produce the amount of qualification samples required by our customers;
and
o our customers generally require an extensive qualification period once
they receive their first commercial product off a production line.
Any qualification-related delays or problems would impair our ability to bring
our batteries to market and would harm our business by adversely affecting
revenue growth and our cash position. Any extended delays in bringing our
products to market could harm our competitive position and harm our economic
growth.
OUR LIMITED ABILITY TO MANUFACTURE LARGE VOLUMES OF BATTERIES MAY PREVENT US
FROM FULFILLING EXISTING ORDERS WHICH MAY HARM OUR BUSINESS.
We currently have three outstanding unfilled purchase orders for our batteries
and are actively soliciting additional purchase orders. We presently have
limited quantities of batteries available for sale and do not currently have the
necessary equipment in operation to manufacture a commercially adequate volume
of products. In 1993, we were ultimately unable to fulfill a purchase order for
batteries which incorporated a previous technology due to our inability to
produce our batteries on a commercial scale. If we cannot rapidly increase our
production capabilities to make sufficient quantities of commercially acceptable
batteries, we may not be able to fulfill existing purchase
Page 22
orders in a timely manner, if at all. In addition, we may not be able to procure
additional purchase orders, which could cause us to lose existing and future
customers, purchase orders, revenue and profits.
WE MAY HAVE A NEED FOR ADDITONAL CAPITAL
We may have a need for additional capital. At March 31, 2000, we had cash and
cash equivalents of $24,556,000. After taking into account our cash and cash
equivalents, projected revenues and receipt of funds from other sources, we may
need to raise additional funding through debt or equity financing through fiscal
2001 to complete funding of planned capital expansion, research and product
development, marketing and general and administrative expenses and to pursue
joint venture and other business opportunities. Our cash requirements, however
may vary materially from those now planned because of changes in our operations,
including changes in original equipment manufacturer (OEM) relationships or
market conditions. There can be no assurance that additional funds for these
purposes, whether from equity or debt financing agreements, will available on
favorable terms, if at all. If we need capital and cannot raise additional
funds, it may delay further development and production of our batteries or
otherwise delay our execution of our business plan, all of which may have a
material adverse effect on our operations and financial condition.
WE HAVE A HISTORY OF LOSSES, HAVE AN ACCUMULATED DEFICIT AND MAY NEVER ACHIEVE
OR SUSTAIN SIGNIFICANT REVENUES OR PROFITABILITY.
We have incurred operating losses each year since inception in 1989 and had an
accumulated deficit of $223,582,000 as of March 31, 2000. We have working
capital of $16 million as of March 31, 2000, and have sustained recurring losses
related primarily to the research and development and marketing of our products.
We expect to continue to incur operating losses and negative cash flows through
fiscal 2001, as we continue our product development, begin to build inventory
and continue our marketing efforts. We may never achieve or sustain significant
revenues or profitability in the future.
IF OUR BATTERIES FAIL TO PERFORM AS EXPECTED, WE COULD LOSE EXISTING AND FUTURE
BUSINESS, AND OUR LONG-TERM ABILITY TO MARKET AND SELL OUR BATTERIES COULD BE
HARMED.
If we manufacture our batteries in commercial quantities and they fail to
perform as expected, our reputation could be severely damaged, and we could lose
existing or potential future business. Even if the defect were corrected, this
performance failure might have the long-term effect of harming our ability to
market and sell our batteries.
BECAUSE WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR OUR REVENUES, OUR RESULTS
OF OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED IF WE WERE TO LOSE THE
BUSINESS OF ANY ONE OF THESE CUSTOMERS.
To date, our three existing purchase orders in commercial quantities are from
two customers. We anticipate that sales of our products to a limited number of
key customers will continue to account for a significant portion of our total
revenues. We do not have long-term agreements with any of our customers, and do
not expect to enter into any long-term agreements in the near future. As a
result, we face the substantial risk that any of the following events could
occur:
o reduction, delay or cancellation of orders from a customer;
o development by a customer of other sources of supply;
o selection by a customer of devices manufactured by one of our competitors
for inclusion in future product generations;
o loss of a customer or a disruption in our sales and distribution channels;
and
o failure of a customer to make timely payment of our invoices.
If we were to lose one or more customers, or if we were to lose revenues due to
a customer's inability or refusal to continue to purchase our batteries, our
business, results of operations and financial condition could be harmed.
WE ARE INVOLVED IN A LAWSUIT THAT COULD RESULT IN PAYMENTS OF DAMAGE AWARDS OR
SETTLEMENTS THAT COULD HAVE AN ADVERSE EFFECT ON OUR CASH RESOURCES AND OUR
FINANCIAL CONDITION.
We are currently involved in a lawsuit involving a contract claim that we
instituted against several parties. One defendant has filed a counterclaim
against Valence and third parties claiming damages of approximately $900,000,
based on a theory of breach of contract. In April 2000, we prevailed on a motion
for summary adjudication against one of the defendant's claims for oral
modification, promissory estoppel, and fraud. The remaining issues currently are
being tried in a jury trial. Although we intend to defend vigorously the claims
against us, if the lawsuit is resolved unfavorably to us or if we choose to
settle the lawsuit, we may be required to pay substantial monetary damages,
which would adversely affect our cash flows, and have an adverse effect on our
financial condition and results of operations.
WE MUST CONTINUE TO EXPAND OUR EMPLOYEE BASE AND OPERATIONS IN ORDER TO
DISTRIBUTE OUR PRODUCTS COMMERCIALLY, WHICH MAY STRAIN OUR MANAGEMENT AND
RESOURCES AND COULD HARM OUR BUSINESS.
During 1999, we grew rapidly, expanding our manufacturing capacity
significantly. We have grown from 184 employees at March 1999 to 362 employees
as of May 2000. We plan to expand our manufacturing capability in the next six
months by adding more equipment. We plan to expand our sales and marketing
organizations in addition to increasing the number of manufacturing employees
and adding to our operating team. To implement our growth strategy successfully,
we will have to increase our staff, including personnel in sales and marketing,
engineering, development and product support capabilities, as well as third
party and direct distribution channels. However, we face the risk that we may
not be able to attract new employees to sufficiently increase our staff or
product support capabilities, or that we will not be successful in our sales and
marketing efforts. Failure in any of these areas could impair our ability to
execute our plans for growth and adversely affect our future profitability.
Page 23
COMPETITION FOR PERSONNEL, IN PARTICULAR FOR PRODUCT DEVELOPMENT AND PRODUCT
IMPLEMENTATION PERSONNEL, IS INTENSE, AND WE MAY HAVE DIFFICULTY ATTRACTING THE
PERSONNEL NECESSARY TO EFFECTIVELY OPERATE OUR BUSINESS.
We believe that our future success will depend in large part on our ability to
attract and retain highly skilled technical, managerial and marketing personnel
who are familiar with and experienced in the battery industry, as well as
skilled personnel to operate our facility in Northern Ireland. If we cannot
attract and retain experienced sales and marketing executives, we may not
achieve the visibility in the marketplace that we need to obtain purchase
orders, which would have the result of lowering our sales and earnings. We
compete in the market for personnel against numerous companies, including
larger, more established competitors with significantly greater financial
resources than us. We have experienced difficulty in recruiting qualified
personnel in the past, and we cannot be certain that we will be successful in
attracting and retaining the skilled personnel necessary to operate our business
effectively in the future.
BECAUSE OUR BATTERIES ARE PRIMARILY SOLD TO BE INCORPORATED INTO OTHER
PRODUCTS, WE RELY ON ORIGINAL EQUIPMENT MANUFACTURERS AND BATTERY PACK
ASSEMBLERS TO COMMERCIALIZE OUR PRODUCTS. WE MAY NOT OBTAIN ADEQUATE ASSISTANCE
FROM THESE THIRD PARTIES TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.
We rely heavily on assistance in gaining market acceptance for our products from
original equipment manufacturers, or OEMs, (manufacturers who produce complex
equipment from components usually bought from other manufacturers) and battery
pack assemblers who incorporate our batteries into products that they later sell
to commercial manufacturers or the public. We will therefore need to meet these
companies' requirements by developing and introducing on a timely basis, new
products and enhanced, or modified, versions of our existing products. OEMs and
battery pack assemblers often require unique configurations or custom designs
for batteries, which must be developed and integrated into their product well
before the product is launched. This development process not only requires
substantial lead-time between the commencement of design efforts for a
customized battery system and the commencement of volume shipments of the
battery system to the customer, but also requires the cooperation and assistance
of the OEMs or battery pack assemblers for purposes of determining the battery
requirements for each specific application. If we are unable to design, develop
and introduce products that meet original equipment manufacturers' and battery
pack assemblers' requirements, we may not be able to fulfill our obligations
under existing purchase orders, we may lose opportunities to enter into
additional purchase orders and our reputation may be damaged. As a result, we
may not receive adequate assistance from OEMs or battery pack assemblers to
successfully commercialize our products, which could impair our profitability.
WE DEPEND ON A SOLE SOURCE SUPPLIER FOR OUR ANODE RAW MATERIALS, AND UTILIZE A
LIMITED NUMBER OF SUPPLIERS FOR OTHER KEY RAW MATERIALS THAT WE USE IN
DEVELOPING AND MANUFACTURING OUR BATTERIES. IF WE CANNOT OBTAIN NECESSARY RAW
MATERIALS, OUR PRODUCTION OF BATTERIES WILL BE DELAYED.
We depend on a sole source supplier for our anode, or negative electrode, raw
material. In addition, we utilize a limited number of suppliers for other key
raw materials used in manufacturing and developing our batteries. We generally
purchase raw materials pursuant to purchase orders placed from time to time and
have no long-term contracts or other guaranteed supply arrangements with our
sole or limited source suppliers. As a result, we face the following risks
relating to our supply of raw materials necessary for operating our business:
o our suppliers may not be able to meet our requirements relative to
specifications and volumes for key raw materials, and we may not be
able to locate alternative sources of supply at an acceptable cost;
and
o we have in the past experienced delays in product development due to
the delivery of nonconforming raw materials from our suppliers, and if
in the future we are unable to obtain high quality raw materials in
sufficient quantities and on a timely basis, our production of
batteries may be delayed.
Any loss, delay or failure in obtaining key raw materials could impede our
ability to fulfill existing or future purchase orders and harm our reputation
and profitability.
IF OUR BATTERIES OR OUR CUSTOMERS' APPLICATIONS THAT INCORPORATE OUR BATTERIES
DO NOT ACHIEVE LASTING MARKET ACCEPTANCE, WE MAY LOSE POTENTIAL CUSTOMERS.
To achieve market acceptance, our batteries must offer significant performance
or other measurable advantages at a cost-effective rate as compared to other
current and potential alternative battery technologies in a broad range of
Page 24
applications. Our batteries may not be able to achieve or sustain these
advantages. Even if our batteries provide meaningful price or performance
advantages, there is a risk our batteries may not be able to achieve or maintain
market acceptance in any potential market application. The success of our
products also will depend upon the level of market acceptance of OEMs and other
customers' end products that incorporate our batteries, a circumstance over
which we have little or no control. Our ability to realize these performance
advantages and our failure to achieve significant market acceptance with our
products could hurt our ability to attract customers in the future.
WE HAVE FOUR KEY EXECUTIVES. THE LOSS OF A SINGLE EXECUTIVE OR THE FAILURE TO
HIRE AND INTEGRATE CAPABLE NEW EXECUTIVES COULD HARM OUR BUSINESS.
Our success is highly dependent upon the active participation of four key
executives. We do not have written employment contracts or key man life
insurance policies with respect to any of these key members of management.
Without qualified executives, we face the risk that we will not be able to
effectively run our business on a day-to-day basis or execute our long-term
business plan.
IF WE CANNOT PROTECT OR ENFORCE OUR EXISTING INTELLECTUAL PROPERTY RIGHTS OR IF
OUR PENDING PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, WE MAY LOSE THE
ADVANTAGES OF OUR RESEARCH AND MANUFACTURING SYSTEMS.
Our ability to compete successfully will depend on whether we can protect our
existing proprietary technology and manufacturing processes. We rely on a
combination of patent and trade secret protection, non-disclosure agreements and
cross-licensing agreements. These measures may not be adequate to safeguard the
proprietary technology underlying our batteries. Employees, consultants, and
others who participate in the development of our products may breach their
non-disclosure agreements with us, and we may not have adequate remedies in the
event of their breaches. In addition, our competitors may be able to develop
products that are equal or superior to our products without infringing on any of
our intellectual property rights. Moreover, we may not be able to effectively
protect our intellectual property rights outside of the United States.
We have established a program for intellectual property documentation and
protection in order to safeguard our technology base. We intend to vigorously
pursue enforcement and defense of our patents and our other proprietary rights.
We could incur significant expenses in preserving our proprietary rights, and
these costs could harm our financial condition.
We are also attempting to expand our intellectual property rights through our
applications for new patents. Patent applications in the United States are
maintained in secrecy until the patents that are applied for are ultimately
issued. Since publication of discoveries in the scientific or patent literature
tends to lag behind actual discoveries by several months, we cannot be certain
that we were the first creator of inventions covered by pending patent
applications or the first to file patent applications on such inventions.
Therefore, our pending patent applications may not result in issued patents and
our issued patents may not afford protection against a competitor. Our failure
to protect our existing proprietary technologies or to develop new proprietary
technologies may substantially impair our financial condition and results of
operations.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS BROUGHT AGAINST US COULD BE TIME
CONSUMING AND EXPENSIVE TO DEFEND.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. While we currently are
not engaged in any intellectual property litigation or proceedings, we may
become involved in these proceedings in the future. In the future we may be
subject to claims or inquiries regarding
Page 25
our alleged unauthorized use of a third party's intellectual property. An
adverse outcome in litigation could force us to do one or more of the following:
o stop selling, incorporating or using our product that use the
challenged intellectual property;
o pay significant damages to third parties;
o obtain from the owners of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms, or at all; or
o redesign those products or manufacturing processes that use the
infringed technology, which may be economically or technologically
infeasible.
Whether or not an intellectual property litigation claim is valid, the cost of
responding to it, in terms of legal fees and expenses and the diversion of
management resources, could be expensive and harm our business.
OUR BATTERIES CONTAIN POTENTIALLY DANGEROUS MATERIALS, WHICH COULD EXPOSE US TO
PRODUCT LIABILITY CLAIMS.
In the event of a short circuit or other physical damage to a battery, a
reaction may result with excess heat or a gas being generated and released. If
the heat or gas is not properly released, the battery may be flammable or
potentially explosive. Our batteries that were based on an earlier technology,
have, in the past, smoked, caught fire and vented gas. If we are unsuccessful in
our efforts to reduce these risks in our current design, we could be exposed to
product liability litigation. In addition, our batteries incorporate potentially
dangerous materials, including lithium. It is possible that these materials may
require special handling or that safety problems may develop in the future. We
are aware that if the amounts of active materials in our batteries are not
properly balanced and if the charge/discharge system is not properly managed, a
dangerous situation may result. Other battery manufacturers using technology
similar to ours include special safety circuitry within the battery to prevent
such a dangerous condition. We expect that our customers will have to use a
similar type of circuitry in connection with their use of our products.
WE ARE ENGAGED IN ONGOING SAFETY TESTING OF OUR BATTERIES TO MEET CUSTOMER
REQUIREMENTS AND MAY NOT BE ABLE TO INCREASE COMMERCIAL SALES OF OUR BATTERIES
IF OUR PRODUCTS ARE NOT SUCCESSFUL IN THESE TESTS.
We have conducted safety testing of our batteries and have submitted batteries
to Underwriters Laboratories for certification, which is required by a number of
OEMs prior to placing a purchase order with us. Underwriters Laboratories has
granted a preliminary acceptance of an earlier generation of our batteries,
pending a manufacturing site audit. Those batteries, while similar to the
batteries we are selling today, are not of the current design and composition.
Our current batteries must be submitted for Underwriters Laboratories' approval,
and Underwriters Laboratories has not yet begun a scheduled audit of our
Northern Ireland manufacturing facility.
As part of our safety testing program, prototype batteries of various sizes,
designs and chemical formulations are subject to abuse testing, in which the
battery is subjected to conditions outside expected normal operating conditions.
Each new battery design will continue to require new safety testing. In
addition, safety problems may develop with respect to our current and future
battery technology that could prevent or delay commercial introduction of our
products.
ACCIDENTS AT OUR FACILITIES COULD DELAY PRODUCTION AND ADVERSELY AFFECT OUR
OPERATIONS.
An accident in our facilities could occur. Any accident, whether due to the
production of our batteries or otherwise resulting from our facilities'
operations, could result in significant manufacturing delays or claims for
damages resulting from personal or property injuries, which would adversely
affect our operations and financial condition.
WE DEPEND UPON THE CONTINUED OPERATION OF A SINGLE MANUFACTURING FACILITY.
OPERATIONAL PROBLEMS AT THIS FACILITY COULD HARM OUR BUSINESS.
Our revenues are dependent upon the continued operation of our manufacturing
facility in Northern Ireland. The operation of a manufacturing plant involves
many risks, including potential damage from fire or natural disasters. In
addition, we have obtained permits to conduct our business as currently operated
at the facility. There can be no assurance that these permits would continue to
be effective at the current location if the facility were destroyed and
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rebuilt, or that we would be able to obtain similar permits to operate at
another location. There can be no assurance that the occurrence of these or any
other operational problems at our Northern Ireland facility would not harm our
business.
WE DO NOT FULLY CONTROL THE OPERATION OF OUR JOINT VENTURES' OPERATIONS,
STRATEGIES AND FINANCIAL DECISIONS, AND WE CANNOT ASSURE YOU THAT OUR PRODUCTS
WILL BE MARKETED SUCCESSFULLY THROUGH THESE VENTURES.
At the present time, we have investment interests in two operating joint
ventures. We established a joint venture company in Korea, Hanil Valence Co.,
Ltd., to manufacture, package and distribute advanced rechargeable solid polymer
batteries. We supply Hanil Valence Co. with its proprietary laminates (film and
laminate materials), from which Hanil Valence Co. will manufacture batteries for
the Korean market. In addition, we will supply technology, initial equipment and
product designs and technical support for the Hanil Valence Co. joint venture
out of our Northern Ireland facility. We cannot be certain that the Hanil
Valence Co. joint venture will be profitable, and if this joint venture does not
remain in business, we would need to find other business partners and/or
contract with third parties for purposes of manufacturing, selling and
distributing rechargeable batteries in the Korean market.
We also established a joint venture company, Alliant/Valence, L.L.C., to market
our battery technology and technology obtained under our non-exclusive license
with Telecordia Technologies (formerly Bellcore) and to develop and to
manufacture batteries for our U.S. military customers, as well as for foreign
military sales activities. In connection with this joint venture, Alliant Power
Sources Company, an Alliant operating company, has ordered both battery
component material and finished battery cells from Valence to be used in the
construction of several different specialized batteries for military and
aerospace applications.
We do not control or manage either of these joint ventures. Consequently, we
must rely on the management skills of our venture partners to successfully
operate these ventures. Our joint venture partners may have economic, businesses
or legal interests or goals that conflict with ours. In addition, we may have
significant disagreements with our venture partners regarding strategic or
operational issues that could have material adverse effect on the ventures'
business or financial conditions. We may be required to fulfill the obligations
of our joint venture partners if they are unable to meet their obligations.
We also depend to a significant degree on local partners in our joint ventures
to provide us with regulatory and marketing expertise and familiarity with the
local business environment. Any disruption in our relationship with these
parties could make it more difficult to market our products in the geographic
regions or to the customers to which the joint venture relates. Unsuccessful
ventures could also significantly damage our reputation, making it more
difficult to obtain purchase orders for our batteries.
WE DO NOT HAVE A COLLABORATIVE PARTNER TO ASSIST US IN DEVELOPMENT OF OUR
BATTERIES, WHICH MAY LIMIT OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR
PRODUCTS.
The use of alliances for our development, product design, volume purchase and
manufacturing and marketing expertise could reduce the need for development and
use of internal resources. We have received substantially all our revenues to
date from a research and development agreement for joint development in the
automotive market with Delphi Automotive Systems Group, which we completed in
May 1998. Although we have held discussions with OEMs in the portable consumer
electronics and telecommunications markets about possible strategic
relationships as a means to accelerate introduction of our batteries into these
markets, we may choose not to, or may not be able to, enter into any such
alliances. Further, even if we could collaborate with a desirable partner, the
partnership may not be successful. The success of any strategic alliance that we
may enter into depends on, among other things, the general business condition of
the partner, its commitment to the strategic alliance and the skills and
experience of its employees. Without a collaborative partner to assist us in
development of our batteries, our ability to develop and commercialize our
products may be limited.
WE EXPECT TO SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO CUSTOMERS LOCATED
OUTSIDE THE UNITED STATES. FOREIGN GOVERNMENT REGULATIONS, CURRENCY FLUCTUATIONS
AND INCREASED COSTS ASSOCIATED WITH INTERNATIONAL SALES COULD MAKE OUR PRODUCTS
UNAFFORDABLE IN FOREIGN MARKETS, WHICH WOULD REDUCE OUR FUTURE PROFITABILITY.
The largest of our initial product orders is with an international customer. We
expect that international sales will represent an increasingly significant
portion of our product sales. International sales can be subject to many
inherent risks that are difficult or impossible for us to predict or control,
including:
Page 27
o changes in foreign government regulations and technical standards,
including additional regulation of rechargeable batteries or the
transport of lithium, which may reduce or eliminate our ability to
sell in certain markets;
o foreign governments may impose tariffs, quotas and taxes on our
batteries;
o requirements or preferences of foreign nations for domestic products
could reduce demand for our batteries;
o fluctuations in currency exchange rates relative to the U.S. dollar
could make our batteries unaffordable to foreign purchasers or more
expensive compared to those of foreign manufacturers;
o longer payment cycles typically associated with international sales
and potential difficulties in collecting accounts receivable may
reduce the future profitability of foreign sales;
o import and export licensing requirements in Northern Ireland or Korea
may reduce or eliminate our ability to sell in certain markets; and
o political and economic instability in Northern Ireland or Korea may
reduce the demand for our batteries or our ability to market our
batteries in foreign countries.
These risks may increase our costs of doing business internationally and reduce
our sales or future profitability.
POLITICAL INSTABILITY IN NORTHERN IRELAND COULD INTERRUPT MANUFACTURING OF OUR
BATTERIES AT OUR NORTHERN IRELAND FACILITY AND CAUSE US TO LOSE SALES AND
MARKETING OPPORTUNITIES.
Northern Ireland has experienced significant social and political unrest in the
past and we cannot assure you that these instabilities will not continue in the
future. Any political instability in Northern Ireland could temporarily or
permanently interrupt our manufacturing of batteries at our facility in Mallusk,
Northern Ireland. Any delays could also cause us to lose sales and marketing
opportunities, as potential customers would find other vendors to meet their
needs.
RISKS ASSOCIATED WITH OUR INDUSTRY
THERE HAS BEEN, AND CONTINUES TO BE, A RAPID EVOLUTION OF BATTERY TECHNOLOGIES.
IF COMPETING TECHNOLOGIES THAT OUTPERFORM OUR BATTERIES WERE DEVELOPED AND
SUCCESSFULLY INTRODUCED, THEN OUR PRODUCTS MIGHT NOT BE ABLE TO COMPETE
EFFECTIVELY IN OUR TARGETED MARKET SEGMENTS.
The battery industry has experienced, and is expected to continue to experience,
rapid technological change. Rapid and ongoing changes in technology and product
standards could quickly render our products less competitive, or even obsolete.
Various companies are seeking to enhance traditional battery technologies, such
as lead acid and nickel cadmium. Other companies have recently introduced or are
developing batteries based on nickel metal hydride, liquid lithium ion and other
emerging and potential technologies. These competitors are engaged in
significant development work on these various battery systems and we believe
that much of this effort is focused on achieving higher energy densities for low
power applications such as portable electronics. One or more new, higher energy
rechargeable battery technologies could be introduced which could be directly
competitive with, or be superior to, our technology. The capabilities of many of
these competing technologies have improved over the past several years.
Competing technologies that outperform our batteries could be developed and
successfully introduced and, as a result, there is a risk that our products may
not be able to compete effectively in our targeted market segments.
OUR PRINCIPAL COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES THAN WE
DO AND THEY MAY THEREFORE DEVELOP BATTERIES SIMILAR OR SUPERIOR TO OURS OR
OTHERWISE COMPETE MORE SUCCESSFULLY THAN WE DO.
Competition in the rechargeable 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 ours. There is a risk that other companies
may develop batteries similar or superior to ours. In addition, many of these
companies have name recognition, established positions in the market,
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and long standing relationships with OEMs and other customers. We believe that
our primary competitors are existing suppliers of liquid lithium ion, competing
polymer and, in some cases, nickel metal hydride batteries. These suppliers
include Sanyo, Matsushita Industrial Co., Ltd. (Panasonic), Sony, Toshiba and
SAFT America, Inc. All of these companies are very large and have substantial
resources and market presence. We expect that we will compete against
manufacturers of other types of batteries in our targeted application segments,
which include laptops, cellular telephones and personal digital assistant
products, on the basis of performance, size and shape, cost and ease of
recycling. There is also a risk that we may not be able to compete successfully
against manufacturers of other types of batteries in any of our targeted
applications.
LAWS REGULATING THE MANUFACTURE OR TRANSPORT OF BATTERIES MAY BE ENACTED WHICH
COULD RESULT IN A DELAY IN THE PRODUCTION OF OUR BATTERIES OR THE IMPOSITION OF
ADDITIONAL COSTS THAT WOULD HARM OUR ABILITY TO BE PROFITABLE.
At the present time, international, federal, state or local law does not
directly regulate the storage, use and disposal of the component parts of our
batteries or the transport of our batteries. However, laws and regulations may
be enacted in the future which could impose environmental, health and safety
controls on the storage, use, and disposal of certain chemicals and metals used
in the manufacture of lithium polymer batteries as well as regulations governing
the transport of our batteries. Satisfying any future laws or regulations could
require significant time and resources from our technical staff and possible
redesign which may result in substantial expenditures and delays in the
production of our product, all of which could harm our business and reduce our
future profitability.
GENERAL RISKS ASSOCIATED WITH STOCK OWNERSHIP
CORPORATE INSIDERS OR AFFILIATES WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL
OVER MATTERS REQUIRING STOCKHOLDER APPROVAL THAT MIGHT NOT BE IN THE BEST
INTERESTS OF OUR STOCKHOLDERS AS A WHOLE.
As of May 31, 2000, our officers, directors, and their affiliates as a group
beneficially owned approximately 21.1% of our outstanding common stock. Carl
Berg, one of our directors, owns a substantial portion of that amount. As a
result, these stockholders will be able to exercise significant control over all
matters requiring stockholder approval, including the election of directors and
the approval of significant corporate transactions, which could delay or prevent
someone from acquiring or merging with us. The interest of our officers and
directors, when acting in their capacity as stockholders, may lead them to:
o vote for the election of directors who agree with the incumbent
officers' or directors' preferred corporate policy; or
o oppose or support significant corporate transactions when these
transactions further their interests as incumbent officers or
directors, even if these interests diverge from their interests as
shareholders per se and thus from the interests of other shareholders.
SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT,
WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND LIMIT THE PRICE POTENTIAL
ACQUIRERS MAY BE WILLING TO PAY FOR YOUR SHARES.
Our board of directors has the authority, without any action by the
stockholders, to issue additional shares of our preferred stock, which shares
may be given superior voting, liquidation, distribution and other rights as
compared to those of our common stock. The rights of the holders of our capital
stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
additional shares of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. These provisions may have the effect of delaying, deferring or preventing
a change in control, may discourage bids for our common stock at a premium over
its market price and may decrease the market price, and infringe upon the voting
and other rights of the holders, of our common stock.
CONVERSION OF PREFERRED STOCK AND SALES OF COMMON STOCK BY CC INVESTMENTS MAY
DEPRESS THE PRICE OF OUR COMMON STOCK AND SUBSTANTIALLY DILUTE YOUR STOCK.
If CC Investments LDC ("CC Investments") were to exercise all of the warrants it
holds and convert all of the shares of preferred stock it owns, as of June 18,
2000, it would then own approximately 1,080,479 shares of our common stock. This
amount includes 632,718 shares of our common stock that CC Investments would
acquire upon their conversion of the shares of Series B Preferred Stock it
currently holds. Our Series B Preferred Stock has a variable conversion rate
Page 29
and is convertible into a larger amount of shares when our common stock trades
at a price below $6.03 in six out of ten consecutive trading days. In addition,
the number of shares into which the preferred stock converts increases at 6% per
year. If CC Investments exercises additional warrants or converts its preferred
stock into shares of our common stock and sells the shares into the market,
these sales could depress the market price of our common stock and would dilute
your holdings in our common stock. Additionally, dilution or the potential for
dilution could harm our ability to raise capital through the future sale of
equity securities.
OUR STOCK PRICE IS VOLATILE.
The market price of the shares of our common stock has been and is likely to
continue to be highly volatile. Factors that may have a significant effect on
the market price of our common stock include the following:
o fluctuation in our operating results;
o announcements of technological innovations or new commercial products
by us or our competitors;
o failure to achieve operating results projected by securities analysts;
o governmental regulation;
o developments in our patent or other proprietary rights or our
competitors' developments;
o our relationships with current or future collaborative partners; and
o other factors and events beyond our control.
In addition, the stock market in general has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.
As a result of this potential stock price volatility, investors may be unable to
resell their shares of our common stock at or above the cost of their purchase
prices. In addition, companies that have experienced volatility in the market
price of their stock have been the object of securities class action litigation.
If we were the subject of securities class action litigation, this could result
in substantial costs, a diversion of our management's attention and resources
and harm to our business and financial condition.
FUTURE SALES OF CURRENTLY OUTSTANDING SHARES COULD ADVERSELY AFFECT OUR STOCK
PRICE.
The market price of our common stock could drop as a result of sales of a large
number of shares in the market or in response to the perception that these sales
could occur. In addition these sales might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. As of the filing date of this Report, we had outstanding
37,479,808 shares of common stock, based upon shares outstanding as of May 31,
2000, and the conversion of all of our Series B Preferred Stock. Of these
shares, most will be registered and freely tradable. Included in these shares
are 950,000 shares issued to a wholly owned subsidiary, which pledged these
shares to secure our obligations in accordance with the settlement of a class
action lawsuit. On May 8, 2000, the court approved the parties' settlement
agreement for this class action lawsuit and issued and order formally dismissing
the case. Under the terms of the settlement, the plaintiffs' settlement counsel,
or their authorized agents, acting on behalf of the settlement class and subject
to the supervision and direction of the court, will administer and calculate the
claims submitted by the settlement class members and will oversee distribution
of the balance of the settlement fund to the authorized claimants as of the
effective date of the settlement. The settlement fund will be applied in the
following order: (a) to pay counsel to the representative plaintiffs attorneys'
fees the fee and expense award (as defined in the settlement and if and to the
extent allowed by the court); (b) to pay all costs and expenses reasonably and
actually incurred in connection with providing notice i.e. locating class
members; (c) to pay the taxes and tax expenses as described in the settlement
agreement; and (d) to distribute the balance of the settlement fund to
authorized claimants as allowed by the terms of the settlement, the Court or the
Plan of Allocation (as defined in the settlement). In addition, we have filed
registration statements on Form S-8 under the Securities Act of 1933 that cover
1,414,526 shares of common stock pursuant to outstanding but unexercised vested
options to acquire our common stock.
Page 30
WE DO NOT INTEND TO PAY DIVIDENDS AND THEREFORE YOU WILL ONLY BE ABLE TO RECOVER
YOUR INVESTMENT IN OUR COMMON STOCK, IF AT ALL, BY SELLING THE SHARES OF OUR
STOCK THAT YOU HOLD.
Some investors favor companies that pay dividends. We have never declared or
paid any cash dividends on our common stock. We currently intend to retain any
future earnings for funding growth and we do not anticipate paying cash
dividends on our common stock in the foreseeable future. Because we may not pay
dividends, your return on an investment in our shares likely depends on your
ability to sell our stock at a profit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We considered the provisions of Financial Reporting Release No. 48 "Disclosures
of Accounting Policies for Derivative Financial Instruments and Derivative
Commodity Instruments, and Disclosures of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Commodity Instruments." We
had no holdings of derivative financial or commodity instruments at March 31,
2000. However, we are exposed to financial market risks, including changes in
foreign currency exchange rates and interest rates.
The Company has long term debt, principally in the form of two building
mortgages, one of which has a balloon payoff in 2001. One note bears interest at
a fixed rate of 10.4% and the other note bears interest at an annually
adjustable published interest rate index (7.375% at March 31, 2000). The
Company's long term debt to stockholder as of March 31, 2000 carried a variable
interest rate of the lender's borrowing rate plus one percent (approximately 9%
at March 31, 2000).
The table below presents principal amounts by fiscal year for the Company's
long-term debt.
2001 2002 2003 2004 2005 THEREAFTER TOTAL
(dollars in thousands)
Liabilities:
Fixed rate debt:............. 162 1,277 -- -- -- -- 1,439
Variable rate debt........... 240 263 285 305 325 1,482 2,900
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes thereto appear on
pages F-3 to F-22 of this Form 10-K Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On June 8, 2000, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") resigned
as the independent accountants of Valence Technology, Inc. (the "Company" or the
"Registrant"), after PricewaterhouseCoopers determined that they did not meet
the requirements for independence in order to audit the Company's consolidated
financial statements at March 31, 2000 and for the year then ended. It recently
came to the attention of PricewaterhouseCoopers that the extent of bookkeeping
and payroll services provided by an overseas office of PricewaterhouseCoopers
exceeded the amount of such services allowed under the Securities and Exchange
Commission's ("SEC") independence policies. The decision to change accountants
was not recommended or approved by either the Board of Directors or the Audit
Committee of the Registrant.
In connection with the Company's audits for the two most recent fiscal years and
through June 8, 2000, there have been no disagreements with
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers
would have caused them to make reference thereto in their report on the
financial statements for such years. The reports of PricewaterhouseCoopers on
the Company's financial statements for the past two fiscal years contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles, except that their reports
for the past two fiscal years included an explanatory paragraph regarding
substantial doubt about the Company's ability to continue as a going concern.
Page 31
On June 12, 2000, the Company engaged Deloitte & Touche LLP as its new
independent accountants (the "New Accounting Firm") to audit the Company's
consolidated financial statements at March 31, 2000 and for the year then ended.
During the two most recent fiscal years and the subsequent interim period prior
to the engagement of the New Accounting Firm, the New Accounting Firm has not
been engaged as either the principal accountant of the Registrant to audit its
financial statements or of any significant subsidiary, nor has the Registrant
consulted with the New Accounting Firm regarding any of the matters listed in
Regulation S-K Items 304(a)(2)(i) or (ii).
Page 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 31, 2000, are
as follows:
NAME AGE POSITION
Lev M. Dawson 61 Chairman of the Board, Chief Executive Officer,
President
Roy A. Wright 56 Senior Vice President, Operations
Robert J. Horning 57 Vice President, Engineering & Standards
Jay L. King 53 Vice President & Chief Financial Officer
Mr. Dawson rejoined the Company in December 1997 as Chairman of the Board, Chief
Executive Officer and President. Mr. Dawson, a founder of the Company, served as
Chairman of the Board and Chief Executive Officer from its founding in March
1989 until April 1993. Mr. Dawson also served as President from March 1989 until
June 1991. From May 1993 to December 1997, Mr. Dawson was involved in private
family companies. From January 1988 to March 1989, Mr. Dawson devoted
significant time to the organization of the Company. From May 1978 through
January 1988, Mr. Dawson was President, Chairman, and Chief Executive Officer of
Robinton Products, Inc., a company which manufactured solid state meters and
data retrieval systems for the electric utility industry. Mr. Dawson holds a
B.S.E.E. degree in Electrical Engineering from the University of Southwestern
Louisiana.
Mr. Wright joined the Company in his current capacity in February of 1999. He
was previously Chairman and Chief Executive Officer of Iwerks Entertainment,
Inc., a technology-based attractions company from 1994 to 1998. Prior to Iwerks,
Mr. Wright held senior management positions in a number of technology based
companies including President and Chief Executive Officer of both RDI Computer
Corporation and Unison Technologies, Inc., and Chief Operating Officer of Corvus
Systems, Inc. and Victor Technologies, Inc. Mr. Wright holds a B.S. degree in
Social Science and Business from California State Polytechnic University.
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 Power Sources Center, a division of Honeywell Inc.), a developer
and 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 both a B.S. in Chemical
Engineering and an M.B.A. from Drexel University.
Mr. King joined the Company in April of 1999. Mr. King previously served as the
Chief Financial Officer and member of the Board of Casinovations Inc., a
high-tech developer and manufacturer of electronic based and software-driven
gaming devices and products from 1995. Mr. King has also held key management
positions at a number of engineering and technology based companies, spending
more than ten years at Bechtel Corp. in San Francisco and six years at PG&E
Corporation. In addition, he previously held senior positions at I.C.
Refreshments Company, Sigma Game Inc. and Ernst & Whinney LTD. Mr. King holds
both a bachelor's degree in accounting and an M.B.A. from the University of Utah
and is a Certified Public Accountant.
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.
DIRECTORS OF THE REGISTRANT
The names of the Company's directors and certain information about them are set
forth below:
The directors of the Company and their ages as of March 31, 2000, are as
follows:
Page 33
NAME AGE POSITION HELD WITH THE COMPANY
Lev M. Dawson 61 Chairman of the Board, Chief Executive
Officer, President
Carl E. Berg(1)(2) 62 Director
Bert C. Roberts, Jr.(1) 57 Director
Alan F. Shugart(1)(2) 69 Director
- ----------------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Dawson rejoined the Company in December 1997 as Chairman of the Board, Chief
Executive Officer and President. Mr. Dawson, a founder of the Company, served as
Chairman of the Board and Chief Executive Officer from its founding in March
1989 until April 1993. Mr. Dawson also served as President from March 1989 until
June 1991. From May 1993 to December 1997, Mr. Dawson was involved in private
family companies. From January 1988 to March 1989, Mr. Dawson devoted
significant time to the organization of the Company. From May 1978 through
January 1988, Mr. Dawson was President, Chairman, and Chief Executive Officer of
Robinton Products, Inc., a company which manufactured solid state meters and
data retrieval systems for the electric utility industry. Mr. Dawson holds a
B.S.E.E. degree in Electrical Engineering from the University of Southwestern
Louisiana.
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 PLC. Mr. Berg holds a
B.A. in Business Administration from the University of New Mexico.
Mr. Roberts rejoined the Company as a director in November 1998, after having
previously served as a director of the Company from March 1992 to June 1993. Mr.
Roberts is Chairman of MCI Worldcom, Inc, a communications company. He was named
Chairman and Chief Executive Officer of MCI Worldcom, Inc. in 1992, after
serving as President and Chief Operating Officer since 1985. Additionally, Mr.
Roberts serves on the boards of Telefonica de Espana, S.A., and News
Corporation, Ltd. Mr. Roberts holds a B.S. in Engineering from The Johns Hopkins
University.
Mr. Shugart joined the Company as a director in March 1992. Mr. Shugart was the
Chief Executive Officer and a director of Seagate Technology, Inc. since its
inception in 1979 until July 1998. Mr. Shugart also served as Seagate's
President from 1979 to 1983 and from September 1991 to July 1998. Additionally,
Mr. Shugart served as Chairman of the Board of Seagate from 1979 until September
1991, and from October 1992 to July 1998. Mr. Shugart currently serves as a
director of Sandisk Corporation, Inktomi Corporation and Cypress Semiconductor
Corporation. Mr. Shugart holds a B.S. in Engineering - Physics from the
University of Redlands.
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 31, 2000, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were complied with, with the exception of a Form 5, "Annual
Statement of Changes in Beneficial Ownership," filed for Lev M. Dawson,; a Form
5, "Annual Statement of Changes in Beneficial Ownership," filed for Carl E.
Berg, and, a Form 5, "Annual Statement of Changes in Beneficial Ownership,"
filed for Alan F. Shugart, which were filed late.
Page 34
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.
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 Internal Revenue 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.
During the last fiscal year, the Company granted options for 47,408 shares to
Carl E. Berg, at an exercise price per share of $34.63 and 48,400 shares to Alan
F. Shugart, at an exercise price per share of $31.66, both non-employee
Directors of the Company, under the Directors' Plan. The fair market value of
such Common Stock on the dates of grant was $34.63 and $31.66 respectively, per
share (based on the closing sales price reported in the NASDAQ National Market
for the date of grant). As of June 22, 2000, no options had been exercised under
the Directors' Plan.
EXECUTIVE COMPENSATION
Executive officers are eligible to receive stock options under the 1990 Plan.
In June 1996, the Compensation Committee of the Board passed a resolution that
provides for the automatic granting of stock options to the officers of the
Company. According to this resolution, each quarter, each officer receives a
grant of options under the 1990 plan in an amount necessary to keep the amount
of unvested options held by that officer at a predetermined level. These levels
are 360,000 shares for the CEO, 180,000 shares for an executive vice president,
and 120,000 shares for a vice president. The resolution was effective when
passed, and the Company's officers have been receiving such grants since that
time. The resolution further provided that in the event the Company ever grants
a bonus to any officer, that one half of any such bonus would be held by the
Company for use by the officer only for exercising his or her stock options. As
of March 31, 2000, no bonuses have been granted to any officer.
The following table shows for the fiscal years ended March 31, 2000, March 28,
1999 and March 29, 1998, certain compensation awarded or paid to, or earned by
the Company's Chief Executive Officer and its other four most highly compensated
executive officers at March 31, 2000 (the "Named Executive Officers"):
Page 35
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation All Other
Compensation Awards Compensation
---------------------- --------------- ---------------- -----------------
Securities
Other Annual Underlying
Fiscal Salary Bonus Compensation Options(1)
Name and Principal Position Year ($) ($) ($) (#) ($)
- ------------------------------------------ -------- ----------- ---------- --------------- ---------------- -----------------
Lev M. Dawson 2000 293,240 -- -- 384,270 --
Chairman of the Board, Chief 1999 274,208 -- -- -- 31(2)
Executive Officer and President 1998 82,923 -- -- 1,000,000 9,762(3)
Roy A. Wright 2000 260,871 -- -- 150,000 --
Senior Vice President, 1999 28,846 -- -- 275,000 --
Operations 1998 -- -- -- -- --
R. Joseph Horning 2000 174,621 -- -- 59,004 --
Vice President, 1999 156,872 -- -- 52,818 --
Engineering & Standards 1998 145,600 -- -- 44,762 42(2)
William J. Battison III 2000 166,376 -- -- 150,000 --
Senior Vice President, 1999 -- -- -- 200,000 --
Marketing & Business Development(4) 1998 -- -- -- -- --
Jay L. King 2000 152,370 -- -- 50,000 --
Vice President and 1999 -- -- -- 200,000 --
Chief Financial Officer 1998 -- -- -- -- --
- --------------------------------------
(1) The Company has no stock appreciation rights ("SARs").
(2) 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.
(3) Relocation expenses paid by the Company.
(4) As of May 1, 2000, Mr. Battison was no longer employed by the Company.
Page 36
STOCK OPTION GRANTS AND EXERCISES
The following tables show for the fiscal year ended March 31, 2000, certain
information regarding options granted to, exercised by, and held at year-end by
the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term(3)
---------------------------------- ----------------------------------
Number of
Securities Percent of Total
Underlying Options Granted to
Option Employees in Exercise Expiration
Name (#)(1)(5) Fiscal Year(2)(5) Price ($/Sh) Date 5% ($) 10% ($)
- ---------------------------- ------------- -------------------- ------------- ------------- --------------- ------------------
Lev M. Dawson 26,626 2.26% 7.25 3/29/09 121,401 307,654
166,687 14.17% 7.19 6/28/09 753,455 1,909,404
168,352 14.31% 5.00 9/27/09 529,378 1,341,549
22,605 1.92% 21.59 12/27/09 306,980 777,948
Roy A. Wright 150,000 12.75% 4.38 9/1/09 412,712 1,045,893
R. Joseph Horning 16,096 1.37% 7.25 3/29/09 73,389 185,983
15,587 1.32% 7.19 6/28/09 70,456 178,549
15,101 1.28% 5.00 9/27/09 47,485 120,336
12,220 1.04% 21.59 12/27/09 165,950 420,550
William J. Battison III(4) 150,000 12.75% 4.38 9/1/09 412,712 1,045,893
Jay L. King 50,000 4.25% 4.38 9/1/09 137,571 348,631
- --------------------------------------
(1) Options granted in fiscal 2000 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 1,176,502 options granted to employees, including
the Named Executive Officers, in fiscal year 2000.
(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.
(4) As of May 1, 2000, Mr. Battison was no longer employed by the Company.
(5) As of the date of the filing of this Form 10-K, the Company had no stock
appreciation rights, or SARs.
Page 37
The following table shows the number and value of the unexercised options held
by each of the Named Executive Officers on March 31, 2000:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUES
Shares
Acquired Value Number of Securities Underlying Value of Unexercised In-the-Money
on Exercise Realized Unexercised Options at Fiscal Options at Fiscal Year End ($)(1)
Year End (#)(3) (3)
----------------------------------- -------------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ------------ ------------ ----------------- ----------------- ------------------ ------------------
Lev M. Dawson 0 0 99,875 323,901 1,744,665 5,229,160
Roy A. Wright 0 0 112,500 312,500 1,939,844 5,527,344
R. Joseph Horning 0 0 156,745 100,281 2,879,887 1,581,398
William J. Battison 0 0 75,000 275,000 1,332,813 4,957,812
Jay L. King 0 0 58,334 191,666 1,008,346 3,344,779
- --------------------------------------
(1) Based on the fair market value of the Company's Common Stock as of March
31, 2000 ($23.5625) minus the exercise price of the options multiplied by
the number of shares underlying the option.
(2) As of May 1, 2000, Mr. Battison was no longer employed by the Company.
(3) As of the date of the filing of this Form 10-K, the Company had no stock
appreciation rights, or SARs.
EMPLOYMENT AGREEMENTS
In January 1998, the Company entered into an employment agreement with Lev M.
Dawson pursuant to which the Company retained Mr. Dawson as its Chairman of the
Board, Chief Executive Officer and President at an annual salary of $280,000.
The Company granted Mr. Dawson an option to purchase 1,000,000 shares of common
stock at an exercise price of $5.06 per share, vesting over a period of eighteen
months. The Company agreed to pay Mr. Dawson's relocation expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the fiscal year ended March 31, 2000, the Compensation Committee
consisted of Messrs. Shugart and Berg.
COMPENSATION COMMITTEE REPORT(1)
The Compensation Committee of the Board of Directors (the "Committee")
consists of Messrs. Berg and Shugart, neither of who is currently an employee or
an officer of the Company. It is the responsibility of the Committee to
establish and administer the Company's policies governing employee compensation
and to administer the Company's employee benefits plans, including the Company's
1990 Stock Option Plan and the 1997 Non-Officer Employee Stock Option Plan, as
amended (the "Plans"). The Committee evaluates the performance of management,
determines compensation policies and levels, and makes decisions concerning
salaries and incentive compensation.
- --------------------
(1) The material in this report of the Committee is not "soliciting material,"
is not deemed to be filed with the SEC and is not to be incorporated by
reference in any filing of the Company under the 1933 Act or the 1934 Act
whether made before the date hereof and irrespective of any general
incorporation in any such filing.
Page 38
The Company's executive compensation program is designed to attract and
retain executives capable of leading the Company in its pursuit of its business
objectives and to motivate them in order to enhance long-term stockholder value.
Long-term equity compensation is also used to harmonize the interests of
management and stockholders. The main elements of the program are competitive
pay and equity incentives. Annual compensation for the Company's executive
officers historically consists of two elements: cash salary and stock options.
The Company does not have a management bonus plan; however, it is expected that
as the Company moves from being primarily involved in research and development
to being a manufacturing company, the Committee will recommend the institution
of a bonus plan as well.
The Committee considers a variety of individual and corporate factors in
assessing the Company's executive officers and making informed compensation
decisions. These factors include each officer's contributions to the Company,
the compensation paid by comparable companies to employees in similar
situations, and, most importantly, the progress of the Company towards its
long-term business objectives. When determining compensation for executive
officers, the committee looks to the following measures in evaluating the
Company's progress: (i) the acquisition and management of capital to allow the
Company to complete development and ultimately realize significant revenues,
(ii) the recruitment and retention of officers and other important personnel,
(iii) the progress of the Company's product development program, and (iv) the
evolution of manufacturing capability. The factors that are used by the
Committee in evaluating the compensation of the Chief Executive Officer are no
different from those that are used to evaluate the compensation of other
executives.
During the fiscal year 2000, the Committee provided stock option grants to
the executive officers of the Company pursuant to the Plans. The exercise price
of the option grants were equal to the fair market value of the Company's Common
Stock on the date of grant. The executive officers received a total of 734,270
options. The Committee based this determination on the need to incentivize the
staff in connection with the Company's efforts to commercialize the technology.
Compensation of the Chief Executive Officer is evaluated by the
Compensation Committee based on the criteria outlined above for all other
executive officers of the Company, including his contributions for the prior
year, his success in managing and motivating the Company's employees, and the
challenges to be faced in the year ahead, as well as the desire to offer a
competitive salary. The Compensation Committee has set Mr. Dawson's total annual
compensation, including salary and option grants, at a level they believe is
competitive with that of other Chief Executive Officers at other companies in
the same industry. In addition, Mr. Dawson's salary and option grants were set
at a level the Compensation Committee believes will properly motivate and retain
Mr. Dawson as the Chief Executive Officer of the Company.
Section 162(m) of the Code limits the Company to a deduction for federal
income tax purposes of no more than $1 million of compensation paid to certain
Named Executive Officers in a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code. The Committee believes that at the present time it is unlikely that the
compensation paid to any Named Executive Officer in a taxable year, which is
subject to the deduction limit will exceed $1 million. However, the Committee
has determined that stock awards granted under the Plans with an exercise price
at least equal to the fair market value of the Company's Common Stock on the
date of grant shall be treated as "performance-based compensation."
Carl E. Berg
Alan F. Shugart
PERFORMANCE MEASUREMENT COMPARISON(1)
The following chart shows total stockholder return for the periods
indicated for each of (i) the Company's common stock, (ii) the Nasdaq Stock
Market (U.S.), and (iii) the Chase H&Q Growth Index, [a subset of the Hambrecht
& Quist Technology Index.] All values assume reinvestment of the full amount of
all dividends and are calculated as of March 31 of each year.
Page 39
[GRAPHIC OBJECT OMITTED]
COMPARISON OF CUMULATIVE TOTAL RETURN ON INVESTMENT
AMONG VALENCE TECHNOLOGY, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX,
AND THE CHASE H&Q GROWTH INDEX
Valence Technology Inc (VLNC)
CUMULATIVE TOTAL RETURN
-------------------------------------------------------------
3/26/95 3/31/96 3/30/97 3/31/98 3/28/99 3/31/00
VALENCE TECHNOLOGY, INC. 100.00 255.56 400.00 292.59 407.41 1,396.33
NASDAQ STOCK MARKET (U.S.) 100.00 135.54 154.15 228.44 303.22 572.94
CHASE H & Q GROWTH 100.00 153.50 129.97 190.21 281.57 741.04
(1) The material in this report is not "soliciting material," is not deemed to
be filed with the Commission and is not to be incorporated by reference in
any filing of the Company under the 1933 Act or the 1934 Act whether made
before the date hereof and irrespective of any general incorporation in
any such filing.
(2) $100 invested on 3/26/95 in stock or index--including reinvestment of
dividends.
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 May 31, 2000 by: (i) each 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. The address of each person listed is in care of the Company, 301
Conestoga Way, Henderson, Nevada 89015, unless otherwise set forth below such
person's name.
Page 40
BENEFICIAL OWNERSHIP(1)
Name of Beneficial Owner and Address Number of Shares Percent of Total
- ------------------------------------ ---------------- -----------------
Carl E. Berg(2) 4,701,000 12.8%
Lev M. Dawson(3) 2,059,293 5.6
Alan F. Shugart(4) 391,831 1.1
R. Joseph Horning(5) 172,494 *
Bert C. Roberts, Jr.(6) 91,000 *
Roy A. Wright(5) 140,625 *
Jay L. King(5) 75,001 *
William J. Battison III(5) 75,000 *
All directors and executive officers
as a group (8 persons)(7) 7,706,244 20.9%
- --------------------------------------
* 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 36,848,808 shares of
common stock outstanding on May 31, 2000, adjusted as required by rules
promulgated by the Commission.
(2) Includes 983,300 shares held by Mr. Berg; 2,000,000 shares held by West
Coast Venture Capital; 143,772 shares issuable upon exercise of options
that are exercisable within 60 days of May 31, 2000; 594,031 shares
issuable upon exercise of warrants held by Baccarat Electronics, Inc.;
499,997 shares held by Baccarat Development Partnership for which Mr. Berg
serves as the President of the corporate general partner; 409,900 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.
(3) Includes 1,933,144 shares held by Mr. Dawson and 126,149 shares issuable
upon exercise of options that are exercisable within 60 days of May 31,
2000.
(4) Includes 206,000 shares held by Mr. Shugart and 185,831 shares issuable
upon exercise of options that are exercisable within 60 days of May 31,
2000.
(5) All shares are issuable upon exercise of options that are exercisable
within 60 days of May 31, 2000.
(6) Includes 50,000 shares held by Mr. Roberts, 1,000 shares held by his spouse
and 40,000 shares issuable upon exercise of options that are exercisable
within 60 days of May 31, 2000.
(7) Includes 958,872 shares issuable upon exercise of options that are
exercisable within 60 days of May 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Employment Agreement" for a description of certain transactions between the
Company and certain named Executive Officers.
On July 27, 1998, the Company entered into an agreement with an institutional
investor for the private placement of up to $15,000,000 of its convertible
preferred stock. Concurrently with the preferred stock financing, Baccarat
Electronics, Inc. ("Baccarat Electronics"), an affiliate of Carl Berg, a
director of the Company, loaned the Company $2.5 million and agreed to loan the
Company up to an additional $7.5 million (the "Baccarat Loan"). The Baccarat
Loan accrues interest on unpaid principal at the rate of 9% per annum, or at
the maximum rate permissible by law, whichever is less. As of March 31, 2000,
the Company had drawn down $9.95 million of the loan availability and had issued
Baccarat Electronics warrants to purchase 594,031 shares of common stock. As of
May 31, 2000, an amount of $9.95 million was outstanding under the Baccarat
Loan, plus accrued interest of $1.1 million.
Page 41
On January 1, 1998, the Company granted options to Mr. Dawson, the Company's
Chairman of the Board, Chief Executive Officer and President, to purchase 39,506
shares pursuant to the Company's 1990 Stock Option Plan (the "1990 Plan"). Also,
an option to purchase 660,494 shares was granted pursuant to the Company's 1990
Plan and an option to purchase 300,000 shares was granted outside of any equity
plan of the Company, neither of which were incentive stock options (the
"Nonstatutory Options"). The exercise price of all three options is $5.0625 per
share, the fair market value on the date of the grant. The Compensation
Committee of the Company approved the early exercise of the Nonstatutory Options
on March 5, 1998. The options permitted exercise by cash, shares, full recourse
notes or non-recourse notes secured by independent collateral. The Nonstatutory
Options were exercised on March 5, 1998 with non-recourse promissory notes in
the amounts of $3,343,750.88 ("Dawson Note One") and $1,518,750 ("Dawson Note
Two") (collectively, the "Dawson Notes") secured by the shares acquired upon
exercise plus 842,650 shares previously held by Mr. Dawson. Since the issuance
date of the Notes (March 5, 1998), the largest aggregate amounts of indebtedness
outstanding at any time under Dawson Note 1 and Dawson Note 2 (up to the filing
date of this Form 10-K) were $3,769,192 and $1,711,988, respectively. As of May
31, 2000, amounts of $3,769,192 and $1,711,988 were outstanding under Dawson
Note 1 and Dawson Note 2, respectively, and under each of the Notes, interest
from the Issuance Date accrues on unpaid principal at the rate of 5.69% per
annum, or at the maximum rate permissible by law, whichever is less. Purchased
shares for which the underlying options have not vested are subject to
repurchase by the Company. As of May 31, 2000, all of the shares in the
underlying options had vested.
On June 22, 2000, the Company executed a binding letter of intent (the "Binding
Letter of Intent") for the purchase/sale of up to $12,500,000 of shares of its
common stock (the "Shares") to Carl Berg ("Purchaser"), a director. Under the
Binding Letter of Intent, the Company will be permitted to sell and Purchaser
agrees to purchase the shares in one or more transactions, each one of which
will involve no less than $500,000 in proceeds. The Company will initiate each
sale by providing an irrevocable written notice to Purchaser specifying the
number of shares it wishes to sell. Purchaser's commitment to purchase the
Shares expires, to the extent not utilized by the Company, on March 31, 2001.
The pricing of the Shares, or purchase price, will be determined based on the
average of daily Nasdaq National Market prices, taken over a five day trading
period, and will be 94% of the volume weighted average daily price. Under the
terms of the Binding Letter of Intent, the Company also agreed to issue to the
Purchaser warrants (the "Warrants") to purchase up to 20% of the Shares
purchased by the Purchaser pursuant to the Binding Letter of Intent. The
Warrants would have a three (3) year life from the date of issuance and would
have an exercise price of 125% of the daily prices during the applicable pricing
period. The terms of the Binding Letter of Intent, including the purchase price
for the Shares, was determined based on arms-length negotiations between the
parties.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS - See Index to Consolidated Financial
Statements of this Form 10-K Annual Report.
(2) INDEPENDENT AUDITORS' REPORT -- See Index to Consolidated
Financial Statements of this Form 10-K Annual Report.
(3) REPORT OF INDEPENDENT ACCOUNTANTS -- See Index to Consolidated
Financial Statements of this Form 10-K Annual Report.
(4) FINANCIAL STATEMENT SCHEDULES - All financial statement
schedules have been omitted because they are not
applicable or are not required, or because the
information required to be set forth therein is
included in the Consolidated Financial Statements or
Notes thereto.
(5) EXHIBITS -- See Exhibit Index on pages 44-47 of this
Form 10-K Annual Report.
Page 42
(b) The Registrant filed the following reports on Form 8-K
during the last quarter of the period for which this
Form 10-K covers:
o Form 8-K filed January 7, 2000 announcing
the sale of common stock to Capital Guardian
Trust Company on behalf of its clients;
o Form 8-K filed February 14, 2000 announcing the
settlement reached by the Company in a securities
class-action lawsuit that had been pending against the
Company and certain of its present and former officers
and directors;
o Form 8-K filed March 6, 2000 announcing the change of
the Company's fiscal year from the last Sunday in the
month of March to March 31; and
o Form 8-K filed June 14, 2000 announcing the resignation
of Pricewaterhouse Coopers LLP as the Company's
independent accountants and the formal engagement of
Deloitte & Touche LLP as the Company's new independent
accountants.
o Form 8-K filed June 29, 2000 announcing the sale of up
to $12,500,000 of shares of common stock to Acqua
Wellington Value Fund Ltd. and the sale of up to
$12,500,000 of shares of common stock to Carl E.
Berg.
(c) See Exhibit Index on pages 44-47 of this Form 10-K Annual
Report.
Page 43
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.
3.3(3) Certificate of Designation of Series B Convertible
Preferred Stock, as filed with the Delaware Secretary
of State on December 17, 1998.
4.1(3) Amended and Restated Securities Purchase Agreement by
and between the Company and CC Investments, LDC, dated
December 11, 1998.
4.2(2) Form of Warrant to Baccarat Electronics, Inc.
4.3(3) Form of Warrant to Placement Agent.
4.4(3) Form of Warrant to CC Investments (Investor).
4.4 Form of Warrant to Ridgeway Investment Limited.
4.5(3) Amended and Restated Registration Rights Agreement
dated December 11, 1998 by and between the Company and
CC Investments, LDC.
4.6 Form of Common Stock Purchase Agreement by and between
the Company and Ridgeway Investment Limited, dated
November 29, 1999.
4.7(10) Common Stock Purchase Agreement dated June 28, 2000
between the Company and Acqua Wellington Value Fund
Ltd. for up to $12,500,000 of Common Shares of the
Company.
4.8(10) Form of Warrant dated June 28, 2000 to Acqua Wellington
Value Fund Ltd.
4.9(10) Registration Rights Agreement dated June 28, 2000
between the Company and Acqua Wellington Value Fund
Ltd.
4.10(10) Letter of Intent between the Company and Carl E. Berg
for up to $12,500,000 of Common Shares of the Company.
10.1 Form of Indemnification Agreement.
Page 44
10.2(4)(*) Technology Transfer Agreement between the Company and
Bell Communications Research, Inc., dated as of June
29, 1995.
10.3(5)(*) Joint Venture Agreement between the Company, through
its Dutch subsidiary, and Hanil Telecom Co., Ltd.,
dated as of July 10, 1996.
10.4(5)(*) License and Support Agreement between the Company,
through its Dutch subsidiary, and Hanil Valence Co.,
Ltd.
10.5(5)(*) Battery Laminate Supply Agreement between the Company,
through its Dutch subsidiary, and Hanil Valence Co.,
Ltd.
10.6(6)(*) Joint Venture Agreement between the Company and Alliant
Techsystems.
10.7(6)(*) License and Support Agreement between the Company and
Alliant/ Valence, L.L.C.
10.8(6)(*) Battery Laminate Supply Agreement between the Company
and Alliant / Valence, L.L.C.
10.9(7)(*) 1990 Stock Option Plan as amended on October 3, 1997.
Page 45
10.10(8) 1996 Non-Employee Directors' Stock Option Plan as
amended on October 3, 1997
10.11(9) Early Exercise Stock Purchase Agreement dated March
5, 1998 between Valence Technology, Inc. and Lev M.
Dawson regarding option to purchase 660,494 shares,
including exhibits.
10.12(9) Promissory Note issued by Lev M. Dawson to Valence
Technology, Inc. in the amount of $3,343,750.88.
10.13(9) Early Exercise Stock Purchase Agreement dated
March 5, 1998 between Valence Technology, Inc. and Lev
M. Dawson regarding option to purchase 300,000 shares,
including exhibits.
10.14(9) Promissory Note issued by Lev M. Dawson to Valence
Technology, Inc. in the amount of $1,518,750.
10.15(9) Stock Pledge Agreement dated March 5, 1998 by Lev M.
Dawson (included as Exhibit E to Exhibit 10.12 and
Exhibit 10.14).
10.16(9) Amendment No. 5 to Loan Agreement and Promissory Note
between the Company and Baccarat Electronics, Inc.
dated July 27, 1998.
10.17 Year 2000 Stock Option Plan
10.18(10) Binding Letter of Intent for the Purchase/Sale of up to
$12,500,000 of Common Shares of the Company by and
between the Company and Carl E. Berg.
21.1 List of subsidiaries of the Company.
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Accountants.
27.1 Financial Data Schedule
(1) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S REGISTRATION STATEMENT ON FORST S-1 (FILE NO.
33-46765), AS AMENDED.
(2) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S CURRENT REPORT ON FORM 8-K DATED JULY 27, 1998 AND
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
AUGUST 4, 1998.
(3) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S CURRENT REPORT ON FORM 8-K DATED DECEMBER 11, 1998 AND
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
DECEMBER 21, 1998.
Page 46
(4) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S FORM 10-Q FILED FOR FISCAL QUARTER ENDED JUNE 25, 1995.
(5) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S FORM 10-Q FILED FOR FISCAL QUARTER ENDED JUNE 30, 1996.
(6) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S FORM 10-Q FILED FOR FISCAL QUARTER ENDED SEPTEMBER 29,
1996.
(7) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-8 (FILE NO.
333-43203) FILED ON DECEMBER 24, 1997.
(8) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-8 (FILE NO.
333-74595) FILED ON MARCH 17, 1999.
(9) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
SCHEDULE 13-D FILED BY LEV M. DAWSON ON MARCH 16, 1998.
(10) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S FORM 8-K DATED JUNE 22, 2000, AND FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 2000.
(*) 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.
Page 47
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT, THE REGISTRANT
HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, HEREUNDER
DULY AUTHORIZED.
VALENCE TECHNOLOGY, INC.
Dated: June 29, 2000 By: /S/ LEV M. DAWSON
---------------------------------------
Lev M. Dawson
Chairman of the Board, Chief Executive
Officer and President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Lev
M. Dawson and Jay L. King, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
IN ACCORDANCE WITH EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE
DATES INDICATED:
Name Position Date
- ------------------------------ ------------------------------------------ -----------------------
Chief Executive Officer, Chairman of the June 29, 2000
Board of Directors and President
/S/ LEV. M. DAWSON (Principal Executive Officer)
- ------------------------------
Lev. M. Dawson
Vice President and Chief Financial June 29, 2000
Officer (Principal Financial and
/S/ JAY L. KING Accounting Officer)
- ------------------------------
Jay L. King
/S/ CARL E. BERG Director June 29, 2000
- ------------------------------
Carl E. Berg
/S/ BERT C. ROBERTS, JR. Director June 29, 2000
- ------------------------------
Bert C. Roberts, Jr.
/S/ ALAN F. SHUGART Director June 29, 2000
- ------------------------------
Alan F. Shugart
Page 48
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
PAGES
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report...............................................................F-1
Report of Independent Accountants..........................................................F-2
Consolidated Balance Sheets as of March 31, 2000 and March 28, 1999........................F-3
Consolidated Financial Statements for the period from
March 3, 1989 (date of inception) to March 31, 2000 and for the years
ending March 31, 2000, March 28, 1999 and March 29, 1998:
Consolidated Statements of Operations and Comprehensive Loss......................F-4
Consolidated Statements of Stockholders' Equity (Deficit).........................F-5
Consolidated Statements of Cash Flows.............................................F-7
Notes to Consolidated Financial Statements.................................................F-8
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Valence Technology, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheet of Valence
Technology, Inc. (a development stage company) as of March 31, 2000, and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity (deficit), and cash flows for the year then ended, and for
the period from March 3, 1989 (date of inception) to March 31, 2000. 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 audit. The Company's financial statements as of and for the year ended March
28, 1999, and for the period March 3, 1989 (date of inception) through March 28,
1999 were audited by other auditors whose report, dated May 20, 1999 except for
Note 17 which is dated June 16, 1999, expressed an unqualified opinion on those
statements with an explanatory paragraph concerning substantial doubt about the
Company's ability to continue as a going concern. The financial statements for
the period March 3, 1989 (date of inception) through March 28, 1999 reflect
total revenues and net loss of $21,605,000 and $154,436,000, respectively, of
the related totals. The other auditors' report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such prior period, is
based solely on the report of such other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of March 31, 2000, and the results of its
operations and its cash flows for the year then ended, and for the period from
March 3, 1989 (date of inception) to March 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
June 28, 2000
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Valence Technology, Inc. and Subsidiaries
Henderson, Nevada
In our opinion, the consolidated balance sheet as of March 28, 1999 and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity (deficit) and cash flows for the period from March 3, 1989
(date of inception) to March 28, 1999 (which statement is not presented herein)
and for each of the two years in the period ended March 28, 1999, present
fairly, in all material respects, the financial position, results of operations
and cash flows of Valence Technology, Inc. and its subsidiaries (companies in
the development stage) at March 28, 1999 and for the period from March 3, 1989
(date of inception) to March 28, 1999 (which statement is not presented herein)
and for each of the two years in the period ended March 28, 1999, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Valence Technology, Inc. and
its subsidiaries for any period subsequent to March 28, 1999.
The financial statements referred to above were prepared assuming that the
Company would continue as a going concern. At March 28, 1999, the Company had
negative working capital and has suffered recurring losses related primarily to
the development and marketing of its products. Management was actively pursuing
additional equity and debt financing from both institutional and corporate
investors. However, there was no assurance that any new debt or equity issuances
could be successfully consummated. These factors raised substantial doubt about
the Company's ability to continue as a going concern. The financial statements
referred to above do not include any adjustments that might have resulted from
the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
May 20, 1999, except for the borrowing of an aggregate of $5,450,000 from a
stockholder during the first quarter of fiscal 2000, as to which the date is
June 16, 1999
F-2
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
-----
March 31, 2000 March 28, 1999
-------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 24,556 $ 2,454
Receivables 1,869 1,168
Inventory 1,641 -
Prepaid and other current assets 1,597 153
------------- ------------
Total current assets 29,663 3,775
Property, plant and equipment, net 28,508 34,071
Investment in joint venture 345 555
------------- ------------
Total assets $ 58,516 $ 38,401
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 402 $ 423
Accounts payable 6,060 1,648
Accrued expenses 2,882 4,207
Accrued royalties and license fees 2,000 1,000
Advances and deposits - 1,881
Grant payable 1,923 1,958
Accrued compensation 389 442
------------- ------------
Total current liabilities 13,656 11,559
Deferred revenue 2,500 2,500
Long-term debt, less current portion 3,937 4,402
Long-term debt to stockholder 8,432 3,769
------------- ------------
Total liabilities 28,525 22,230
------------- ------------
Commitments and contingencies (Note 8)
Mandatorily redeemable convertible preferred stock
Authorized: 10,000,000 shares
Series A, $0.001 par value, Issued and outstanding: no shares and
7,500 shares at March 31, 2000 and March 28, 1999, respectively - 4,514
(Liquidation value: $0 and $7,800)
Series B, $0.001 par value, Issued and outstanding: 3,500 shares and
7,500 shares at March 31, 2000 and March 28, 1999, respectively 2,146 3,702
(Liquidation value: $3,764 and $7,613)
Stockholders' Equity
Common stock, $0.001 par value, authorized: 100,000,000 shares,
Issued and outstanding: 36,839,000 and 26,722,000 shares
at March 31, 2000 and March 28, 1999, respectively 37 27
Additional paid-in capital 256,086 166,457
Notes receivable from shareholder (4,862) (4,862)
Deficit accumulated during the development stage (223,582) (154,436)
Accumulated other comprehensive income 166 769
------------- -------------
Total stockholders' equity 27,845 7,955
------------- -------------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity $ 58,516 $ 38,401
============= =============
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 AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------
Period from Years Ended
March 3, 1989 ------------------------------------------------------
(date of inception) March 31, March 28, March 29,
to March 31, 2000 2000 1999 1998
------------------- ------------- ------------ ------------
Revenue:
Research and development
contracts $ 21,605 $ - $ - $ -
Battery and laminate sales 1,518 1,518 - -
----------- ------------ ----------- -----------
Total revenue 23,123 1,518 - -
----------- ------------ ----------- -----------
Costs and expenses:
Research and product development 135,162 28,510 22,171 15,432
Marketing 3,934 297 105 855
General and administrative 52,977 6,795 6,753 7,066
Write-off of in-process technology 8,212 - - -
Investment in Danish subsidiary 3,489 - - -
Factory start-up costs 3,171 3,171 - -
Special charges 18,872 - - -
----------- ------------ ----------- -----------
Total costs and expenses 225,817 38,773 29,029 23,353
----------- ------------ ----------- -----------
Operating loss (202,694) (37,255) (29,029) (23,353)
Stockholder lawsuit settlement (30,061) (30,061) - -
Interest and other income 18,102 221 2,980 1,174
Interest expense (6,774) (1,841) (643) (528)
Equity in earnings (loss) of Joint Venture (2,155) (210) 268 (1,779)
----------- ------------ ----------- -----------
Net loss $ (223,582) (69,146) (26,424) (24,486)
===========
Beneficial conversion feature
on preferred stock (560) (2,865) -
------------- ------------ ------------
Net loss available to
common stockholders $ (69,706) $ (29,289) $ (24,486)
============= ============ ============
Other comprehensive loss:
Net loss $ (69,146) $ (26,424) $ (24,486)
Change in foreign currency
translation adjustments (603) (1,484) 958
------------- ------------ ------------
Comprehensive loss $ (69,749) $ (27,908) $ (23,528)
============= ============ ============
Net loss per share available to
common stockholders: basic and diluted $ (2.28) $ (1.13) $ (1.06)
============= ============ ============
Shares used in computing net loss
per share available to common
stockholders: basic and diluted 30,523 25,871 23,010
============== ============= =============
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 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Deficit
Accumu- Accumu-
Notes lated lated
Receiv- Options During Other
Addi- able to the Comprehen-
Common Stock tional from Purchase Develop- sive
Paid-in Stock- Treasury ment Income
Shares Amount Capital holder Stock Stage (Loss) Totals
-------- -------- ------- ------- -------- --------- --------- -----------
Issuance of common stock to founders:
March 1989 at $0.001 per share 4,500 $ 5 $ 5
May 1989 at $0.01 per share 3,370 3 $ 31 34
Net loss $ (394) (394)
-------- ------ ------- -------- ---------
Balances, March 31, 1990 7,870 8 31 (394) (355)
Issuance of common stock for cash in
September 1990 at $0.01 per share 500 1 4 5
Net loss (5,137) (5,137)
-------- ------ ------- -------- --------
Balances, March 31, 1991 8,370 9 35 (5,531) (5,487)
Exercise of warrants 130 572 572
Options purchased $ (1,125) (1,125)
Net loss (3,769) (3,769)
-------- ------ ------- --------- -------- --------
Balances, March 31, 1992 8,500 9 607 (1,125) (9,300) (9,809)
Issuance of common stock in public
offerings, net of offering costs:
May and June 1992 at $8.00 per share 4,140 4 30,151 30,155
November 1992 at $18.00 per share 3,380 3 57,028 57,031
Exercise of stock options: July 1992
through March 1993 at $0.01
to $0.25 per share 289 21 21
Compensation related to exercised
stock options 75 75
Net loss (8,463) (8,463)
-------- ------- ------- --------- -------- ---------
Balances, March 28, 1993 16,309 16 87,882 (1,125) (17,763) 69,010
Issuance of common stock in public
offering, net of offering costs:
December 1993 at $14.00 per share 3,680 4 48,488 48,492
Exercise of stock options during year
at $0.01 to $13.00 per share 410 481 481
Compensation related to exercised
stock options 243 243
Exercise of options to purchase treasury
stock and retirement of shares (375) (1,125) 1,125 0
Net loss (18,653) (18,653)
Change in translation adjustment $ 56 56
-------- ------- ------- --------- -------- -------- ----------
Balances, March 27, 1994 20,024 20 135,969 0 (36,416) 56 99,629
Exercise of stock options during year
at $0.01 to $4.00 per share 83 33 33
Compensation related to exercised
stock options 43 43
Net loss (33,629) (33,629)
Change in translation adjustment 708 708
-------- ------- ------- -------- -------- ----------
Balances, March 26, 1995 20,107 20 136,045 (70,045) 764 66,784
Exercise of stock options during year
at $0.25 to $4.00 per share 58 179 179
Common stock issued to purchase Bellcore
technology 1,500 2 4,061 4,063
Net loss (17,593) (17,593)
Change in translation adjustment (423) (423)
-------- ------- ------- -------- -------- ----------
Balances, March 31, 1996 21,665 22 140,285 (87,638) 341 53,010
Exercise of stock options during year
at $1.88 to $4.31 per share 80 273 273
Net loss (15,888) (15,888)
Change in translation adjustment 954 954
-------- ------- ------- --------- -------- ----------
Balances, March 30, 1997 21,745 22 140,558 (103,526) 1,295 38,349
F-5
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 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Deficit
Accumu- Accumu-
Notes lated lated
Receiv- Options During Other
Addi- able to the Comprehen-
Common Stock tional from Purchase Develop- sive
Paid-in Stock- Treasury ment Income
Shares Amount Capital holder Stock Stage (Loss) Totals
-------- -------- ------- ------- -------- --------- --------- ----------
Balances, March 30, 1997 21,745 22 140,558 (103,526) 1,295 38,349
Exercise of stock options and warrants
at $0.01 to $7.13 per share 3,322 3 11,225 (4,862) 6,366
Stock compensation 1,775 1,775
Net loss (24,486) (24,486)
Change in translation adjustment 958 958
------- ------- ------- ------- ------- --------- ------- ---------
Balances, March 29, 1998 25,067 25 153,558 (4,862) (128,012) 2,253 22,962
Exercise of stock options during year
at $0.01 to $8.88 per share 1,655 2 5,764 5,766
Stock compensation 364 364
Issuance of common stock warrants 3,660 3,660
Net loss (26,424) (26,424)
Beneficial conversion feature on
preferred stock 3,111 3,111
Change in translation adjustment (1,484) (1,484)
------- ------- -------- ------- ------- --------- ------- ---------
Balances, March 28, 1999 26,722 $ 27 $166,457 (4,862) (154,436) $ 769 $ 7,955
Exercise of stock options
at $1.00 to $8.56 per share 696 1 3,177 3,178
Sale of stock to private investors 5,513 6 47,400 47,406
Issuance of common stock warrants 1,372 1,372
Conversion of preferred stock 2,260 2 6,628 6,630
Conversion of warrants 393 0 291 291
Conversion of note payable 305 0 1,540 1,540
Stock compensation 332 332
Stockholder lawsuit settlement 950 1 29,449 29,450
Net loss (69,146) (69,146)
Beneficial conversion feature on
preferred stock (560) (560)
Change in translation adjustment (603) (603)
------- ------- -------- ------- ------- --------- ------- ---------
Balances, March 31, 2000 36,839 $ 37 $256,086 $(4,862) $0 $(223,582) $ 166 $27,845
======= ======= ======== ======== ======= ========== ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Period from
March 3,
1989 (date of Years Ended
inception) ------------------------------------------------
to March 31, March 31, March 28, March 29,
2000 2000 1999 1998
-------------- ------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (223,582) $ (69,146) $ (26,424) $ (24,486)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 34,517 9,510 3,388 1,774
Write-off of equipment 15,375 583
Write-off of in-process technology 6,211
Compensation related to stock options 3,891 331 364 1,775
Non-cash charge related to acquisition of Danish subsidiary 2,245
Non-cash charge from stockholder lawsuit settlement 29,450 29,450
Equity in (Earnings) Losses of Joint Venture 2,155 210 (270) 1,781
Amortization of debt discount 641 586 55
Changes in assets and liabilities:
Receivables (767) (718) 291 (998)
Prepaid expenses and other current assets (2,476) (1,445) 855 (552)
Inventory (1,641) (1,641)
Accounts payable 6,081 4,485 (656) 404
Accrued liabilities (587) (2,034) 2 1,152
Deferred revenue 2,500 2,500
-------------- ------------- ------------- -------------
Net cash used in operating activities (125,987) (29,829) (22,395) (16,650)
-------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of investments (665,789) (187,561)
Maturities of long-term investments 661,545 197,117
Capital expenditures (71,608) (6,507) (9,554) (16,295)
Sale of equipment 1,269 1,269
Other (222)
-------------- ------------- ------------- -------------
Net cash used in investing activities (74,805) (5,238) (9,554) (6,739)
-------------- ------------- ------------- -------------
Cash flows from financing activities:
Property and equipment grants 6,421 2,002
Borrowings of long-term debt 25,452 5,450 4,500
Payments of long-term debt:
Product development loan (482)
Shareholder and director (6,173)
Other long-term debt (12,668) (434) (397) (1,301)
Proceeds from issuance of common stock and warrants,
net of issuance costs 201,132 52,216 5,766 6,366
Proceeds from issuance of preferred stock and warrants,
Series A, net of issuance costs 7,075 7,075
Proceeds from issuance of preferred stock and warrants,
Series B, net of issuance costs 7,125 7,125
-------------- ------------- ------------- -------------
Net cash provided by financing activities 227,882 57,232 26,071 5,065
-------------- ------------- ------------- -------------
Effect of foreign exchange rates on cash and cash equivalents (2,534) (63) (68) (1,108)
-------------- ------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 24,556 22,102 (5,946) (19,432)
Cash and cash equivalents, beginning of period 0 2,454 8,400 27,832
-------------- ------------- ------------- -------------
Cash and cash equivalents, end of period $ 24,556 $ 24,556 $ 2,454 $ 8,400
============== ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 began commercial production, shipment, and sales in
February 2000. 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 has
sustained recurring losses related primarily to the development and
marketing of its products. To fund operating losses, the Company has
been dependent upon equity and debt financing from both corporate and
institutional investors. Management believes that expanding sales in
conjunction with current cash levels, committed equity and potential
IDB funding will be adequate to meet minimum cash flows.
During fiscal year 2000, the Company changed to a fiscal year ending on
March 31, from a 52/53 week fiscal year. The change did not have a
significant effect on the comparability of the Company's financial
statements.
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.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that effect 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.
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 five banks and one
investment brokerage company, and primarily comprise money market funds
and government securities.
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.
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
lease 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
F-8
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
realizable value. In the period assets are retired or otherwise
disposed of, the costs and accumulated depreciation or amortization are
removed from the accounts, and any gain or loss on disposal is included
in results of operations.
LONG-LIVED ASSETS:
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
might not be recoverable. The Company had no impairment losses for the
years ended March 31, 2000, March 28, 1999 and March 29, 1998.
DEFERRED REVENUE:
Deferred revenue relates to payments received from the Company's joint
venture partner in Hanil Valence Co., Ltd. This amount will be
recognized as income once significant product shipments commence from
the joint venture. The Company anticipates that production by the joint
venture will be sufficient to recognize a portion of this deferred
revenue in fiscal 2001.
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, receivables, 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.
EARNINGS PER SHARE:
Earnings per share ("EPS") is computed by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding for that period. Diluted EPS is computed giving effect to
all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of incremental common
shares issuable upon conversion of preferred stock and exercise of
stock options and warrants for all periods.
F-9
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following is a reconciliation of the numerator (net loss) and
denominator (number of shares) used in the basic and diluted EPS
calculation (in thousands):
Years Ended
MARCH 31, 2000 MARCH 28, 1999 MARCH 29, 1998
-------------- -------------- --------------
Net loss available to
common stockholders $ (69,706) $ (29,289) $ (24,486)
Weighted average
shares outstanding 30,523 25,871 23,010
Earnings per share,
basic and diluted $ (2.28) $ (1.13) $ (1.06)
Shares excluded from the calculation of diluted EPS as their effect was
anti-dilutive were 5,025,000, 6,472,000 and 4,983,000 in fiscal years
ended March 31, 2000, March 28, 1999, and March 29, 1998, respectively.
RECENT PRONOUNCEMENTS:
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities". SFAS 133
establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the balance sheet, and that
the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on
the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 2000. Currently,
the Company does not hold derivative instruments or engage in hedging
activities.
3. PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS):
March 31, March 28,
2000 1999
------------- ------------
Building and land $ 8,520 $ 8,627
Leasehold improvements 2,745 2,477
Machinery and equipment 33,476 31,942
Office and computer equipment 1,255 1,137
Construction in progress 15,531 13,954
------------- ----------
Total cost 61,527 58,137
Less capital grants (5,450) (5,664)
------------- ----------
Total cost, net of capital grants 56,077 52,473
Less accumulated depreciation and amortization (27,569) (18,402)
------------- ----------
Total cost, net of capital grants, depreciation and amortization $ 28,508 $ 34,071
============= ==========
F-10
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. LONG-TERM DEBT (IN THOUSANDS):
March 31, March 28,
2000 1999
------------- ------------
Equipment term loans $ - $ 33
Facility loans 4,339 4,792
------------- ------------
4,339 4,825
Less amounts due within one year (402) (423)
------------- ------------
Long-term debt due after one year $ 3,937 $ 4,402
============= ============
EQUIPMENT TERM LOANS:
In June 1999, the Company paid in full an equipment term loan
outstanding with an institutional lender. The term loan had a fixed
interest rate of 9.50% and was collateralized by certain of the
Company's equipment.
FACILITY LOANS:
During fiscal 1995, a bank provided the Company a $2,500,000 facility
term loan under which drawdowns were available for the purchase and
improvement of a facility in Henderson, Nevada. The facility term loan
of $1,439,000 at March 31, 2000, bears interest at 10.4% and is
collateralized by the related building. The Company makes monthly
principal payments of $14,000 plus accrued interest through November
2001, and a final principal payment of $1,161,000 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 $20,000 plus
accrued interest. The facility term loan bears interest at an annually
adjustable published interest rate index (7.375% at March 31, 2000) on
the outstanding principal of $2,900,000 at March 31, 2000. The loan is
collateralized by the related building.
Principal payments on long-term debt at March 31, 2000 are due as
follows (in thousands):
Facility and
Fiscal Year Term Loans
----------------
2001 $ 402
2002 1,540
2003 285
2004 305
2005 325
Thereafter 1,482
----------------
$ 4,339
================
5. LONG-TERM DEBT TO STOCKHOLDER:
In July 1997, the Company entered in to an amended loan agreement with
a stockholder and director which allows the Company to borrow, prepay
and re-borrow up to the full $10,000,000 principal under the promissory
note on a revolving basis and provided that the stockholder will
subordinate its security interest to other lenders when new debt is
obtained after the stockholder's loan is prepaid to zero. As of March
31, 2000, the Company had an outstanding balance of $9,950,000 under
the loan agreement. The loan bears interest at one percent over
lender's borrowing rate (approximately 9.00% at March 31, 2000) and is
available through August 30, 2002.
In conjunction with the amended loan agreement, the Company issued
warrants to purchase 594,031 shares of common stock. The warrants were
valued using the Black Scholes valuation method and had an average
weighted fair value of approximately $3.63 per warrant at the time of
issuance. The fair value of these warrants, totaling approximately
$2,158,679, has been reflected as additional consideration for the debt
financing, recorded as a
F-11
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
discount on the debt and accreted as interest expense to be amortized
over the life of the line of credit. As of March 31, 2000, a total of
$640,713 has been charged to interest expense.
6. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental Disclosures of Noncash Investing and Financing Activities
(in thousands):
Period from
March 3,
1989 (date
of
inception) Twelve Months Ended
to ------------------------------------------
March 31, March 31, March 28, March 29,
2000 2000 1999 1998
----------- ---------- ---------- ----------
Acquisition of property, plant and equipment
through grants and long-term debt $ 7,957
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 5,028 $ 373 $ 452 $ 515
Return of equipment for extinguishment of debt 301
Exchange of common stock for in-process technology 4,063
Disposal of equipment fully reserved for in prior year 3,346 28
Exercise of options with note receivable 4,862 $ 4,862
Beneficial conversion feature on preferred stock 3,425 560 2,865
Fair value of warrants issued in connection with
preferred stock 2,874 2,874
Fair value of warrants issued in connection with
long-term debt to stockholder 786 786
7. 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 (pound)25,600 ($40,960 as of March 31, 2000), to be
available over a five-year period through October 31, 2001. As of March
31, 2000, the Company had remaining grants available of (pound)23,400
($37,440). 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 4).
As a condition to receiving funding from the IDB, the subsidiary must
obtain a minimum of (pound)12,000 in debt or equity financing from the
Company. Aggregate funding under the grants is limited to (pound)4,080
until the Company has recognized $4,000 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 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 for the purchase of capital equipment
is recorded as a contra account to property, plant and equipment and
will be amortized to income over the life of the related asset. Amounts
may be 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,
F-12
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
but the IDB is not seeking repayment at this time. The Company has
guaranteed the subsidiary's obligations to the IDB under the
agreement.
The Company anticipates that it will be able to meet the requirements
necessary for it to receive and retain grants under the IDB agreement
and offers.
8. COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leases approximately 4,200 square feet in Kirkland,
Washington for the purpose of advanced materials research. The
facilities are leased for a term of 36 months at a current monthly
rental of $3,600. The lease expires September 30, 2001.
Total rent expense for the years ended March 31, 2000, March 28, 1999
and March 29, 1998 was $76,000, $57,000, and $66,000 respectively.
LITIGATION:
We recently reached a settlement in a lawsuit by a class of persons who
purchased our common stock between May 7, 1992 and August 10, 1994,
alleging that we violated federal securities laws and seeking
unspecified compensatory and punitive damages, attorneys' fees and
costs for claimed misstatement of our stock price in the public
offering and open market purchases of stock during that period. The
complaint named us as a defendant as well as some of our present and
former officers and directors, asserting that Valence and those
individuals violated federal securities laws by misrepresenting and
failing to disclose certain information about our business during the
class period. On February 3, 2000 we entered into a settlement
agreement, pursuant to which we delivered $1.3 million in cash to a
settlement fund. In addition, we issued 950,000 shares of common stock
to a wholly owned subsidiary, which has pledged these shares to secure
our obligations under the settlement agreement. The escrow agent has
full authority to sell or otherwise enter into transactions regarding
these shares. Any proceeds from the sale of these shares shall be
placed in the settlement fund. On May 8, 2000, the court approved the
parties' settlement agreement and entered an order formally dismissing
the case without presumption or admission of any liability or
wrongdoing.
In September 1998, Klockner Bartelt/Medipak, Inc. d/b/a/ Klockner
Medipak ("Klockner") filed suit against the Company in the United
States District Court for the Middle District of Florida (File No.
98-1844-Civ-7-24E) alleging breach of contract by the Company with
respect to an agreement for the supply of battery manufacturing
equipment, and claimed damages of approximately $2.5 million. On
January 20, 1999, the Company filed a counterclaim against Klockner
alleging breach of contract, breach of express warranty, breach of the
implied warranty of merchantability, breach of the implied warranty of
fitness for a particular purpose, and rescission and restitution and
claimed compensatory damages to be determined at trial. On April 10,
2000, the court granted the parties' motion for a Stipulated Dismissal
of Action With Prejudice pursuant to the parties' Settlement Agreement
and Mutual General Release, and formally dismissed the case.
In June 1998, we filed a lawsuit in the Superior Court of California,
Santa Clara County, against L&I Research, Inc., Powell Electrical
Manufacturing Company and others seeking relief based on rescission and
damages for breach of contract. In September 1998, Powell filed a
cross-complaint against the Company and others (File No. CV7745534)
claiming damages of approximately $900,000. The cross-complaint alleges
breach of written contract, oral modification of written contract,
promissory estoppel, fraud, quantum meruit, and quantum valebant. On
December 10, 1998, we filed a first amended complaint for breach of
contract, breach of express warranty, breach of implied warranty of
merchantability, breach of implied warranty of fitness for particular
purpose, and breach of the implied covenant of good faith and fair
dealing. On or about December 23, 1998, Powell Electric Manufacturing
Company filed a first amended complaint again seeking damages of
approximately $900,000. In April 2000, we prevailed on a motion for
summary adjudication against Powell's claims for oral modification,
promissory estoppel, and fraud. The matter is currently being tried in
a jury trial. We intend to defend vigorously the claims against us.
F-13
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 $6,064,000, which
consisted of 1,500,000 shares of Valence stock plus an initial payment
of $2 million. In addition to the initial purchase price, the Company
paid a $1 million payment to Bellcore in June 1997 and another $1
million payment in June 1998. An additional $1 million payment was due
in each of June 1999 and June 2000. The Company was granted a "favored
nations" clause in the original contract. The Company is in discussions
with Bellcore to exercise its rights under the "favored nations" clause
and accordingly has withheld the 1999 and 2000 payments pending outcome
of the discussions.
LETTERS OF CREDIT:
At March 31, 2000, the Company had outstanding stand-by letters of
credit totaling $550,000 secured by certificates of deposit in like
amounts.
9. 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
market value (incentive options) or 85% of fair market value
(supplemental options) on the date of grant. The options are
exercisable as determined by the Board of Directors and are generally
exercisable over a five-year period. The options expire no later than
ten years from the date of grant. Unvested options are canceled and
returned to the 1990 Plan upon an employee's termination. Vested
options, not exercised within three months of termination, are also
canceled and returned to the 1990 Plan. At March 31, 2000, the Company
had 57,636 shares available for grant under the 1990 Plan.
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 31, 2000, a total of 603,224 options have been granted to
three directors under this plan.
In October 1997, the Board of Directors adopted the 1997 Non-Officer
Stock Option Plan (the "1997 Plan"). The Company may grant options to
non-officer employees and consultants under the 1997 Plan. Options are
to be granted at a price not less than fair market value (incentive
options) on the date of grant. The options are exercisable as
determined by the Board of Directors and are generally exercisable
quarterly over a three-year period. The options expire no later than
ten years from the date of grant. Unvested options are canceled and
returned to the 1997 Plan upon an employee's termination. Vested
options, not exercised within three months of termination, also are
canceled and returned to the 1997 Plan. At March 31, 2000, the Company
had 1,507,186 shares available for grant under
F-14
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
the 1997 Plan. Options granted to consultants and non-employee members
of the Board of Directors are accounted for using the fair value method
as prescribed in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
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 850,000 shares of common stock. Additionally, in fiscal 1992
the Company granted options to purchase a total of 330,000 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.
On January 1, 1998, the Company granted options to Mr. Dawson, the
Company's Chairman of the Board, Chief Executive Officer and
President, an incentive stock option to purchase 39,506 shares, which
was granted pursuant to the Company's 1990 Stock Option Plan (the
"1990 Plan"). Also, an option to purchase 660,494 shares was granted
pursuant to the Company's 1990 Plan and an option to purchase 300,000
shares was granted outside of any equity plan of the Company, neither
of which were incentive stock options (the "Nonstatutory Options").
The exercise price of all three options is $5.0625 per share, the fair
market value on the date of the grant. The Compensation Committee of
the Company approved the early exercise of the Nonstatutory Options on
March 5, 1998. The options permitted exercise by cash, shares, full
recourse notes or non-recourse notes secured by independent
collateral. The Nonstatutory Options were exercised on March 5, 1998
with non-recourse promissory notes in the amounts of $3,343,750.88
("Dawson Note One") and $1,518,750 ("Dawson Note Two") (collectively,
the "Dawson Notes") secured by the shares acquired upon exercise plus
842,650 shares previously held by Mr. Dawson. Since the issuance date
(the "Issuance Date") of the Dawson Notes (March 5, 1998), the largest
aggregate amounts of indebtedness outstanding at any time under Dawson
Note One and Dawson Note Two (up to the filing date of this Form 10-K)
were $3,769,192 and $1,711,988, respectively. As of May 31, 2000,
amounts of $3,769,192 and $1,711,988 were outstanding under Dawson
Note One and Dawson Note Two, respectively, and under each of the
Dawson Notes, interest from the Issuance Date accrues on unpaid
principal at the rate of 5.69% per annum, or at the maximum rate
permissible by law, whichever is less. Purchased shares for which the
underlying options have not vested are subject to repurchase by the
Company. As of May 31, 2000, all of the shares in the underlying
options had vested.
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 fiscal years 2000, 1999, and 1998:
2000 1999 1998
---------- ----------- -----------
Risk-free Interest Rate 6.05% 5.14% 5.65%
Expected Life 4.34 years 4.58 years 2.17 years
Volatility 81.10% 74.40% 71.80%
Dividend Yield - - -
F-15
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Aggregate option activity is as follows (in thousands):
Outstanding Options
------------------------------
Number of Weighted Avg.
Shares Exercise 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
Granted 1,649 $4.50
Exercised (2,100) $2.70
Canceled (404) $5.68
--------
Balances, March 29, 1998 3,173 $4.07
Granted 2,358 $5.96
Exercised (1,655) $3.34
Canceled (1,300) $5.35
--------
Balances, March 28, 1999 2,576 $5.57
Granted 1,322 $9.00
Exercised (686) $4.28
Canceled (19) $5.47
--------
Balances, March 31, 2000 3,183
========
At March 31, 2000, March 28, 1999, and March 29, 1998, vested options
to purchase 1,412,000, 908,000 and 2,273,000 shares, respectively,
were unexercised. The weighted average fair value per share of those
options granted in 2000, 1999, and 1998 was $7.24, $3.35, and $2.23
respectively.
The following table summarizes information about fixed stock options
outstanding at March 31, 2000 (shares in thousands):
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
------------- ----------- ---------------- -------- ------------ -----------
$1.00 - $1.88 .125 5.01 $ 1.88 .125 $ 1.88
$2.62 - $3.81 92 6.12 $ 3.71 70 $ 3.70
$4.12 - $6.06 1,343 8.31 $ 4.78 759 $ 4.84
$6.31 - $8.88 1,550 8.87 $ 6.95 570 $ 6.98
$9.00 -$34.63 198 9.86 $27.76 13 $29.84
----------- ---------------- -------- ------------ -----------
3,183 8.61 $7.04 1,412 $ 5.88
F-16
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At March 31, 2000, the Company has reserved 5,025,000 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 2000,
1999, and 1998 consistent with the provisions of SFAS 123, the pro
forma net income would have been reported as follows (in thousands):
2000 1999 1998
------------- ---------- -----------
Net loss available to stockholders - as reported $ (69,706) $ (29,289) $ (24,486)
Net loss available to stockholders - pro forma (73,781) (31,896) (27,422)
Net loss available to stockholders per share - as reported (2.28) (1.13) (1.06)
Net loss available to stockholders per share - pro forma (2.42) (1.23) (1.19)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In July 1998, the Company completed private financing arrangements of
up to $25 million. The Company issued 7,500 shares of Series A
mandatorily redeemable convertible preferred stock ("Series A preferred
stock") at $1,000 per share and warrants, raising gross proceeds of
$7.5 million, with transaction costs of $425,000. In December 1998, the
Company completed the equity portion of the financing arrangements,
issuing 7,500 shares of Series B mandatorily redeemable convertible
preferred stock ("Series B preferred stock") at $1,000 per share and
warrants, raising gross proceeds of $7.5 million, with transaction
costs of $375,000. The Series A preferred stock and Series B preferred
stock accrete at an annual rate of 6% per year, and are convertible
into common stock based upon defined conversion formulas. The remaining
$10 million of the financing arrangements is in the form of a line of
credit arrangement (Note 5).
Under the terms of the certificate of designations of the preferred
stock and the warrants, the preferred stock investor may not convert
the preferred stock or exercise the warrants if after by doing so the
investor will own more than 4.9% of the Company's common stock.
In connection with the issuance of Series A and Series B preferred
stock, the Company issued warrants to purchase 895,522 shares of common
stock to the Series A and B investor. The warrants are exercisable at a
purchase price of $6.78 per share and expire in July 2003. In addition,
the Company issued warrants to purchase 175,000 shares of common stock
to the placement agent. The warrants are exercisable at a price of
$4.94 per share and also expire in July 2003. The warrants have a fair
value of $2.9 million using the Black Scholes valuation method and were
recorded as a component of common stock.
During October 1999, the Series A investor elected to convert all
7,500 shares of their Series A Convertible Participating Preferred
Stock. These 7,500 shares of Series A stock, including the accreted
redemption value through the date of conversion, converted to
1,334,764 shares of our common stock.
The Series B investor elected to convert 4,000 shares of their Series B
Convertible Participating Preferred Stock during September and November
of 1999. These 4,000 shares of Series B stock, including the accreted
redemption value through the dates of conversion, converted to 925,652
shares of our common stock.
F-17
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Changes in the Series A and Series B preferred stock during fiscal
2000 and 1999 are as follows (in thousands):
2000 1999
--------- -------
Balance at beginning of year $ 4,514 $ -
Issuance of Series A preferred stock, net of issuance
costs of $425 and allocation to warrants of $1,138 - 5,937
Beneficial conversion feature - (1,708)
Accretion to redemption value 232 285
Conversion to common stock (4,746) -
--------- --------
Balance at end of year $ - $ 4,514
========= ========
Balance at beginning of year $ 3,702 $ -
Issuance of Series B preferred stock, net of issuance
costs of $375 and allocation to warrants of $1,736 - 5,389
Beneficial conversion feature - (4,267)
Dividend related to beneficial conversion feature
of preferred stock - 2,468
Accretion to redemption value 328 112
Conversion to common stock (1,884) -
--------- --------
Balance at end of year $ 2,146 $ 3,702
========= ========
TERMS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Both Series A and Series B preferred stock are redeemable at the option
of the holders upon certain redemption events, as defined, at the
greater of $1,250 per share or an amount defined by the redemption
formula.
The amount at which Series A and Series B preferred stock are recorded
is less than its redemption value as a result of amounts allocated to
warrants to purchase common stock and the beneficial conversion
feature. In addition, the cash proceeds from Series A and Series B
preferred stock were reduced by placement agent fees paid in cash.
Accordingly, the preferred stock is being accreted to its redemption
value each period. The amount of accretion recorded in each period
increases the net loss available to common stockholders.
Each share of Series A and Series B preferred stock is convertible
initially on a one for one basis, at the option of the holder, into a
number of fully paid shares of common stock as determined by dividing
the respective preferred stock issue price plus a premium by the
conversion price in effect at that time. The initial conversion price
of Series A and Series B preferred stock is $6.03 per share and is
subject to adjustment in accordance with the antidilution provisions
contained in the Company's amended Articles of Incorporation. The
Series A and Series B preferred stock automatically convert to shares
of common stock in accordance with a conversion formula in July 2001.
In the event of any liquidation, dissolution or winding up of the
Company, the holders of Series A and Series B preferred stock are
entitled to receive, prior and in preference to any distribution of any
of the assets of the Company to the holders of common stock, an amount
per share equal to the sum of $1,000 per share of preferred stock (as
adjusted for any stock dividends, combinations or splits) plus the 6%
premium. In the event that upon liquidation or dissolution, the assets
and funds of the Company are insufficient to permit the payment to the
holders of preferred stock of the full preferential amounts, then the
entire assets and funds of the Company, legally available for
distribution, are to be distributed ratably among the holders of Series
A and Series B preferred stock in proportion to the full preferential
amount each is otherwise entitled to receive.
After payment has been made to the holders of Series A and Series B
preferred stock, any remaining assets and funds are to be distributed
equally among both the holders of the Series A and Series B preferred
stock and common stock as if all shares of preferred stock had been
converted into common stock.
F-18
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The holders of shares of Series A and Series B preferred stock are not
entitled to receive dividends and have no voting power whatsoever,
except as otherwise provided by applicable law.
OTHER WARRANTS:
In connection with certain borrowings from a stockholder and director,
the Company issued a total of 1,353,000 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 130,000
warrants were exercised at an exercise price of $4.40 per share payable
through the cancellation of $520,000 of indebtedness including accrued
interest. The warrants expired 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.
In fiscal 1998, the remaining 1,223,000 warrants were exercised at
$4.00 per share.
10. INCOME TAXES:
There was no provision for income taxes for fiscal years 2000, 1999, or
1998. The provision for income taxes differs from the amount computed
by applying the federal statutory rate to the loss before income taxes
as follows:
Year Ended:
----------------------------------
March 31, March 28, March 29,
2000 1999 1998
--------- --------- ----------
Federal tax at statutory rate 34% 34% 34%
Change in valuation allowance (34) (34) (34)
--------- --------- ----------
Tax provision - - -
========= ========= ==========
The components of the net deferred tax asset as of March 31, 2000 and
March 28, 1999 were as follows (in thousands):
March 31, March 28,
2000 1999
----------- -----------
Current assets:
Accrued liabilities $ 836 $ 376
Valuation allowance (836) (376)
----------- -----------
$ - $ -
=========== ===========
Noncurrent assets:
Depreciation and amortization $ 1,005 $ 2,209
Research and development credit carryforwards 719 719
Net operating loss carryforwards 42,433 23,633
Stockholder litigation 10,224 -
Valuation allowance (54,381) (26,561)
----------- -----------
$ - $ -
=========== ===========
At March 31, 2000, the Company had federal operating loss
carryforwards available to reduce future taxable income of
approximately $125,000,000.
The carryforwards expire between 2008 to 2020, if not used before such
time to offset future taxable income.
For federal 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.
F-19
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. 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) ("Delphi") 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.
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 facility in Henderson, Nevada. The 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 $0, $100,000, and $600,000 was
recognized during fiscal 2000, 1999, and 1998, respectively, as an
offset to research and product development expenses), as well as Delphi
contributing to a portion of the facility's operating costs over the
term of the five year agreement.
In May 1998, the Company and Delphi announced the successful completion
of their collaboration on lithium polymer battery development. Delphi
will retain a license to use Company-developed lithium polymer
technology for vehicular and stationary load leveling / peak shaving
applications. The Company will retain a license to use Delphi-developed
lithium polymer technology in all other applications. The Company
anticipates that it will receive no further payments as a result of the
Delphi agreement.
12. 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 25% 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.
13. 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 accounts for the
joint venture using the equity method. At March 31, 2000, the joint
venture had net equity and net loss of approximately $5,179,000 and
$420,000, respectively. The proportionate share of the joint venture's
income (losses) are recorded in the statements of operations as
non-operating income (losses).
F-20
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Following is a summary of the operating results and financial position
of the joint venture (in thousands):
Years ended March 31,
2000 1999
--------- ---------
Operations:
Net sales $ 256 $ -
Net income (loss) $ (420) $ 539
Financial position:
Current assets $ 1,565 $ 3,758
Noncurrent assets 32,815 26,180
-------- --------
$34,380 $29,938
======== ========
Current liabilities $13,061 $ 5,474
Noncurrent liabilities 16,140 19,408
Shareholders' equity 5,179 5,056
-------- --------
$34,380 $29,938
======== ========
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 31,
2000, 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.
14. SEGMENT INFORMATION:
The Company conducts its business in one operating segment and uses
only one measurement of profitablity. Long-lived asset information by
geographic area at March 31, 2000 and March 28, 1999 is as follows (in
thousands):
2000 1999
---------- -----------
United States $ 4,851 $ 5,502
International (primarily Northern Ireland) 23,657 28,569
---------- -----------
TOTAL $ 28,508 $ 34,071
========== ===========
F-21
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. SUBSEQUENT EVENTS:
During June 2000 the Company entered into separate private placement
funding arrangements with Acqua Wellington Value Fund Ltd.("Acqua
Wellington"), an institutional investor, and Carl E. Berg ("Mr.
Berg"), a principal stockholder and director of the Company, for an
equity investment commitment totaling $25 million. Acqua Wellington
funded $12.5 million on June 29th by the purchase of 846,665 shares of
common stock and a warrant to purchase 169,333 shares, exercisable at
$18.45 per share. The remaining $12.5 million is in the form of a
binding commitment from Mr. Berg for funding through the fiscal year
end. The draw down of this Berg commitment is at the Company's option.
Only the institutional investor has registration rights on its
shares. The Company has agreed to file a registration statement with
respect to the Acqua Wellington shares, to be effective within 120
days of closing.
On February 3, 2000 we entered into a settlement agreement, pursuant to
which we delivered $1.3 million in cash to a settlement fund. In
addition, we issued 950,000 shares of common stock to a wholly owned
subsidiary, which has pledged these shares to secure our obligations
under the settlement agreement. The escrow agent has full authority to
sell or otherwise enter into transactions regarding these shares. Any
proceeds from the sale of these shares shall be placed in the
settlement fund. On May 8, 2000, the court approved the parties'
settlement agreement and entered an order formally dismissing the case
without presumption or admission of any liability or wrongdoing.
F-22