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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, 2001
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 June 21, 2001 was $182,990,942.*
As of June 21, 2001, there were 45,535,439 shares of common stock
outstanding.
*Excludes approximately 18,304,644 shares of common stock held by Directors,
Officers and holders of 5% or more of the Registrant's outstanding Common Stock
at June 21, 2001. 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.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S PROXY STATEMENT RELATING TO ITS 2001 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III OF THIS ANNUAL REPORT.
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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 ACCEPTABILITY 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 are a leader in the design, manufacture and marketing of rechargeable lithium
polymer batteries. Founded in 1989, our business has been driven primarily by
our research and development efforts, which has fostered our intellectual
property position, currently consisting of 790 issued and pending patents.
We appointed Stephan B. Godevais as our Chief Executive Officer and President in
May 2001. Mr. Godevais also joined our Board of Directors at that time. Mr.
Godevais joins us from Dell Computer Corporation, where he led Dell's desktop
and notebook product lines for consumers and small businesses. During his tenure
at Dell, Mr. Godevais launched the company's Inspiron division, growing it into
a multi-billion dollar business. He also introduced the first 15 inch notebook
computer in the industry and sustained its position as a market leader from 1998
to 2000. Prior to Dell, Mr. Godevais managed Digital Equipment Corporation's
notebook business worldwide. In his various positions at Digital, Mr. Godevais
transitioned an innovative product line into a recognized and highly profitable
worldwide business. Mr. Godevais also spent ten years at Hewlett-Packard where
he held positions in marketing for various product and field organizations.
Before he left Hewlett-Packard, Godevais managed its mobile business in Europe,
including personal digital assistants, or PDAs, and calculators.
With the appointment of Stephan B. Godevais to the role of chief executive
officer in May 2001, we have begun the process of transitioning our business
from a research and development oriented company, to an operational company with
a strong sales and marketing focus. With this strategic shift, our vision is for
Valence to become the world leader in energy solutions by taking advantage of
the flexibility and other performance characteristics of our technology to
provide solutions to our customers, which will allow them to offer greater
differentiation in their products. We believe that the differentiation offered
to our customers - based on Valence's proprietary lithium-ion chemistries and
processes - will come in the form of safer, more customized, lower-cost, higher
performance energy solutions which are becoming increasingly critical to today's
energy solutions market.
As we accelerate our transition to a marketing oriented company, we will also be
expanding our focus on the markets in which we participate. Historically, we
have leveraged the application of our technology in the mobile communications
market. However, as we move to approach the market as a total energy solutions
provider, we will be in a position to greatly expand the target markets we
participate in to include computing and communications, consumer electronics,
appliances and toys, vehicular and uninterruptible power supplies systems, among
others.
As we target new markets, we expect to be supported by our proprietary battery
technology, which we believe 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.
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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.
To solidify our technology position, in December 2000, we acquired all of the
rights of Telcordia Technologies, Inc. to lithium-ion polymer battery
technology, with the intention to package the acquired technology with our own
internally developed lithium-ion polymer battery technology, and actively
license the package of technology and know-how worldwide. The acquisition
provided us with all of Telcordia's patent rights covering lithium-ion, solid
state, polymer batteries, including 42 U.S. patents, 14 U.S. patents pending,
and more than 200 foreign patents issued and pending, and 15 Telcordia licenses
with battery manufacturers throughout the world, 12 of which are currently
active.
Following the Telcordia acquisition, we embarked upon an aggressive program to
upgrade existing licenses to include technology developed by us and to identify
and enter into licensing arrangements with new manufacturing partners.
From a manufacturing standpoint, we are continuing to enhance our manufacturing
facilities in Mallusk, Northern Ireland to prepare for the commercialization of
our technology. To that end, 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 Northern Ireland facilities.
We anticipate that the additional equipment will be operational by the end of
2001, which will provide us the capacity to manufacture and ship batteries in
high volumes.
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, some cellular telephones and PDAs are now
being used for Internet access, in addition to their original uses.
These enhanced capability products require larger capacity, higher
rate batteries. New battery technologies must be developed or existing
technologies must be improved to support these increased energy
demands.
o DEMAND FOR LIGHTER AND THINNER PRODUCTS. The marketplace continues to
demand lighter and thinner portable electronic devices. As a result,
portable electronic device manufactures require lighter, thinner
batteries for these new products. At the same time, these thinner and
lighter batteries must sufficiently serve the energy needs of the new
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 electronic 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
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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 lithium 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.
We believe that our technology solutions provide us with a substantial
competitive advantage to strategically address these current challenges facing
the rechargeable battery industry.
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 PDAs, and we believe that there is a broad range of applications for lithium
polymer batteries beyond consumer electronic applications.
We also believe that our next generation batteries, with which we are in the
research and development stages, would offer additional advantages, including
longer cycle life and more energy density than current battery technology, if
successfully developed and commercially feasible.
KEY ATTRIBUTES OF OUR BATTERIES INCLUDE:
o SUPERIOR PERFORMANCE. We believe our lithium polymer chemistry offers
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.
o FORM FACTOR - THIN, LIGHTWEIGHT AND LARGE FOOTPRINT. The chemistry and
construction of our lithium polymer batteries makes it possible for us
to manufacture thin, lightweight batteries required for portable
electronic 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 processes enable us to manufacture batteries into
large footprint sizes for applications such as
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notebook computers. By contrast, our competitors must combine several
batteries together in manufacturing a power source for a large
footprint application, which we believe results in a higher
application cost. We believe that our ability to accommodate various
sizes and shapes of cells enables us to effectively target emerging
mobile device applications while also enabling our customers to
differentiate their products from those of their competitors.
o SCALABLE AND FLEXIBLE MANUFACTURING PROCESSES. 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. We believe that our proprietary manufacturing know-how
gives us a distinct competitive advantage in commercially exploiting
our lithium polymer products. Finally, our battery production
processes are vertically integrated. We produce our 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 for Valence to become the world leader in energy solutions. We
expect that the differentiation offered to our customers - based on Valence's
proprietary lithium-ion chemistries and processes - will come in the form of
safer, more customized, lower-cost, higher performance energy solutions which
are becoming increasingly critical to today's energy solutions market.
While we are currently in the process of developing the details of our business
plan to transition the company from a research and development driven to a
marketing and customer driven company, key broad elements of our strategy
include the following:
o Bringing our sales and marketing, as well as operational structure, in
line to match the strength of our technology.
o Expanding the vision of the company and the markets we serve from a
pure battery company to an energy solutions company.
o Migrating the culture of the company from an engineering focused
company to a customer focused company.
Taken together, these changes are designed to position us as the world leader in
energy solutions by taking advantage of the flexibility and other performance
characteristics of our technology to provide solutions to our customers, which
will allow them to offer greater differentiation in their products and to enable
us to differentiate ourselves from our competitors. We are focused on leveraging
the depth and breadth of our technology position to provide an expansive
platform from which to begin the process of realizing Valence's growth
potential.
Our growth strategy involves many tactical steps and we expect to finalize and
announce our strategy by the end of summer 2001.
MANUFACTURING AND SALE OF BATTERY PRODUCTS
PRODUCTS
We have developed seven 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 electronic devices, such as notebook
computers, HPCs, PDAs
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and cellular telephones. The table below describes our currently available
products in terms of functionality and key features:
Product Family and Type Size Range/Thickness Key Applications
- ----------------------- ------------------------------------- -----------------------------------------------------------------
Model 25 Series (small Cell size is 25 mm x 110 mm, with Used to fit in tight applications such as satellite and cellular
footprint battery) thickness up to 8.4 mm telephones where light-weight and high energy capacity are
required.
Model 43 Series (small Cells available in heights ranging Designed for technically advanced applications including cellular
footprint battery) from 1.2 mm to 5.7 mm, with thickness telephones, where size, weight and thickness are key
ranging from 1.1 mm to 5.6 mm considerations.
Model 65 Series (small Cells available in heights ranging Applications in technically advanced power applications including
footprint battery) from 1.2 mm to 5.7 mm, with thickness pagers, cellular telephones, PDAs and HPCs, where size, weight,
ranging from thickness and energy capacity are key considerations.
1.2 mm to 5.7 mm.
Model 44 Series (large Cell size measures 103 mm x 103 mm Designed for PDAs, notebook computers and other high performance
footprint battery) and has a thickness range of 1.2 mm applications where safety, weight, thickness and energy capacity
to 5.7 mm are key considerations.
Model 74 Series (large Cell size measures 70 mm x 140 mm Designed for PDAs, notebook computers and other advanced personal
footprint battery) and has a thickness ranging from electronic devices, where energy capacity is a key consideration.
1.2 mm to 5.7 mm
Model 35 Series (large Cell size measures 35mm x 62mm and Designed for PDAs, cell phones and other advanced personal
footprint battery) has a thickness of 4mm electronic devices, where energy capacity is a key consideration.
Model 59 Series (large Cell size measures 55mm x 90mm and Designed for PDAs, hand held personal computers, wireless modems
footprint battery) has a thickness of 3mm and other advanced personal electronic devices, where energy
capacity is 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 inception, we have focused on research and development. However, we
have recently begun production and shipment of our batteries in commercial
quantities and intend to expand our sales and marketing capabilities. Currently,
we sell our batteries primarily through original equipment manufacturers, or
OEMs, battery pack makers, and independent sales representatives. We currently
have a sales and marketing team consisting of eight persons. During this
transition phase, we are in the process of restructuring and expanding our sales
and marketing force. While we are continuing the process of preparing a
restructuring and expansion plan, we have initially targeted four focus areas
for our sales and marketing efforts:
o Sales of materials;
o Licensing of our technology;
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o Sales of our batteries; and
o Development and marketing of battery-based energy solutions.
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. Refinement of this line and the
rest of the manufacturing process has proceeded on an ongoing basis since 1999.
This first line produces batteries for cellular telephones and other small
battery applications. We have purchase orders in place for additional equipment
to expand our manufacturing capabilities. The production of our Model 25 battery
was transferred on to one of our high-speed production lines at the Mallusk
facility to ramp up production capacity to meet follow-on orders. We also moved
into the second phase of our expansion during the summer of 2000, including the
addition of a second automated assembly line for our smaller batteries and a new
machine, the Flexible Automated Battery Assembly Line, or FABAL. The FABAL
produces larger footprint batteries for notebook computers and PDAs and can be
easily adjusted to produce different size batteries. Installation was completed
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 end of 2001. All of the equipment necessary
to complete phase three of our plan will be delivered during summer 2001.
However, the new equipment requires extensive qualification and adjustment
before it will be operational, and this process is expected to take a number of
months.
On March 30, 2001, the Company reduced its non-managerial manufacturing
personnel by 181 people at its Mallusk, Northern Ireland manufacturing site. The
layoffs were a result of the expected arrival of new state-of-the-art high-speed
automated production and packaging machinery in May 2001.
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. 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.
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LICENSING OUR TECHNOLOGY
We intend to continue our licensing efforts and increase our licensing revenues
through the collection of licensing royalties and fees. On December 26, 2000,
the Company acquired all of the rights held by Telcordia Technologies, Inc.
(formerly Bellcore) to lithium-ion solid-state polymer battery technology in
exchange for three million shares of our common stock. The assets acquired in
the acquisition include 42 U.S. patents, 14 U.S. patents pending, more than 200
foreign patents, issued and pending, and 15 Telcordia licenses with battery
manufacturers in several countries, 12 of which are currently active. As a
result of the Telcordia acquisition, we have expanded our business to include
the licensing of our battery technology to third party manufacturers. At May 31,
2001, two of those 12 active former Telcordia licensees elected to convert their
agreements into a Valence agreement whereby they license both former Telcordia
technology and other Valence technology. Prior to the Telcordia acquisition, the
Company licensed certain patents pertaining to lithium-ion battery technology
under a non-exclusive license with Telcordia.
Our form license agreement includes a non-exclusive license to use the
proprietary rights in our technology (and improvements we create to that
technology to the extent related to producing batteries) to:
o manufacture, market and sell batteries containing certain cathode
active materials in a specified territory;
o create modifications, extensions or derivative works of the
proprietary rights in our technology; and
o sublicense, only to controlled affiliates, the rights granted to the
licensee.
RESEARCH AND PRODUCT DEVELOPMENT
We conduct research and development and pilot production at our Henderson,
Nevada facility. Our research personnel consist of two groups: the battery
research and development group and the systems 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.
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 systems engineering group designs and adapts our products for eventual sale
to customers. We do this by evaluating our customers' applications and offering
solutions that add value and differentiate their end products by exploiting the
versatility and advantages of our technology and manufacturing capabilities.
We are currently in the planning and testing stages of developing a next
generation battery based on new materials. We expect to have prototype samples
prepared by the end of 2001 and plan to evaluate their feasibility at that time
in light of market conditions and other factors.
Our research and development expenses for the fiscal years ended March 28, 1999,
March 31, 2000 and March 31, 2001 totaled $18.8 million, $19 million and $12.7
million, respectively.
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, liquid lithium ion and lithium polymer 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
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competitors who have announced availability of either lithium ion or lithium
polymer based rechargeable battery product include Sony, Sanyo, Panasonic and
Toshiba, among others.
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
believe that our battery construction and manufacturing processes allow us to
produce thinner, lighter and larger batteries, thus enabling us to enter a wide
range of markets that do not currently use lithium polymer batteries. We believe
that our next generation materials will provide additional advantages in the
arenas of safety, cost, size and energy density relative to competing products.
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.
The assets acquired in the Telcordia acquisition include 42 U.S. patents, 14
U.S. patents pending, more than 200 foreign patents, issued and pending, and 15
Telcordia licenses with battery manufacturers in several countries, 12 of which
are currently active. Prior to this acquisition, the Company licensed certain
patents pertaining to lithium-ion battery technology under a non-exclusive
license with Telcordia.
We rely on patent protection for certain designs and products. We hold
approximately 267 United States patents, which have a range of expiration dates
from 2005 through 2019 and have in excess of 49 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.
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-ion 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 during summer, 1999, involving another supplier of liquid
button batteries that were mishandled at Los Angeles International Airport, DOT
staff members are reviewing regulations.
Page 10
At present it is expected the equivalency standards and tests to qualify for
exemption will be implemented in January, 2003. 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.
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
In June 2001, we entered into an agreement with Hanil Telecom Co. Ltd. to
terminate the Hanil Valence Korean joint venture that we maintained with Hanil
Telecom Co., Ltd. through our Dutch subsidiary, creating a company that is now
an independent licensee of ours. We no longer have an equity position in the
surviving company from this former joint venture. The license provides that
Valence would receive revenues for sales of film/laminate and engineering
services to the company and royalties for batteries sold worldwide by the
company.
HUMAN RESOURCES
As of May 31, 2001, we had 82 full-time employees in the United States at our
Henderson, Nevada headquarters. We have 29 total employees in the areas of
administration, legal, marketing, finance, management information systems,
purchasing, quality control and shipping & receiving. We have 17 total employees
in the areas of engineering, facilities maintenance and environmental health &
safety. We have 36 total employees in the areas of research & development and
product development; product development includes mixing, coating and assembly.
In addition, as of May 31, 2001, our Dutch subsidiary had 119 permanent, 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.
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
$1,272,150 on the facility as of March 31, 2001.
Page 11
Our Dutch subsidiary owns a manufacturing facility in Mallusk, Northern
Ireland, with approximately 155,000 square feet, and we are in the process of
expanding our facilities within this space. We have exercised the option to
purchase an adjacent facility of approximately 50,000 square feet under a lease
purchase agreement. In connection with the purchase of this additional property,
we entered into a mortgage of $2,098,617 that bears interest at an annual rate
of 7.25%.
We are in the process of migrating our business functions to Austin, Texas
within the next few months and are currently looking for office space in that
city. Our Henderson facility would continue to be dedicated to our research and
development efforts. We believe that our existing facilities will be adequate to
meet the Company's needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In June 1998, the Company 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, the Company 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 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. On July 7, 2000 we entered into a settlement agreement which
specified that the Company pay Powell the sum of $370,000. Payment was made on
July 17, 2000, and on July 20, 2000 the court entered a formal dismissal with
prejudice pursuant to the terms of the settlement.
We 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
Page 12
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.
The Company has received notification that seventeen former employees of the
Mallusk, Northern Ireland facility have filed claims against the Company
alleging breach of contract and lack of consultation prior to termination due to
the reduction in force in March 2001 at the facility. The time period for filing
such claims has not expired, therefore the Company cannot assess the merit, nor
likelihood and extent of liability, if any, presented by such claims at this
time.
The Company is subject to various claims and litigation in the normal course of
business. In the opinion of management, all pending legal matters are either
covered by insurance or, if not insured, will not have a material adverse impact
on the Company's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 26, 2001, 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.
The votes cast in the election for directors were as follows:
NOMINEE VOTES IN FAVOR VOTES AGAINST
------- -------------- -------------
Lev M. Dawson 33,789,781 1,857,285
Carl E. Berg 35,405,323 241,743
Bert C. Roberts, Jr. 35,454,675 192,391
Alan F. Shugart 35,453,064 194,002
Stockholders also voted to ratify the selection of Deloitte & Touche LLP as
independent accountants for the fiscal year ending March 31, 2001. There were
35,582,778 votes cast in favor of the ratification, 25,430 votes cast against
the ratification and 38,858 abstentions.
Page 13
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 in the
Nasdaq National Market or published financial sources:
HIGH LOW
------- --------
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
FISCAL 2001:
Quarter ended June 30, 2000 24.38 11.13
Quarter ended September 30, 2000 23.13 13.50
Quarter ended December 31, 2000 19.00 7.75
Quarter ended March 31, 2001 14.00 3.875
FISCAL 2002:
Quarter ended June 30, 2001 (through June 21, 2001) 10.25 2.875
On June 21, 2001, the last reported sale price of our common shares on the
Nasdaq National Market was $6.72 per share. On that date, we had 45,535,439
shares of common stock outstanding held of record by approximately 603 record
holders and an estimated over 15,000 beneficial owners.
ITEM 6. SELECTED FINANCIAL DATA
This section presents selected historical financial data of Valence. You should
read carefully the consolidated financial statements included in this report,
including the notes to the consolidated financial statements. We derived the
statement of operations data for the years ended March 28, 1999, March 31, 2000
and March 31, 2001 and balance sheet data as of March 31, 2000 and March 31,
2001 from the audited consolidated financial statements in this report. We
derived the statement of operations data for the years ended March 30, 1997, and
March 29, 1998, and the balance sheet data as of March 30, 1997, March 29, 1998,
and March 28, 1999 from audited financial statements that are not included in
this report.
Page 14
FISCAL YEAR ENDED
MARCH 30, MARCH 29, MARCH 28, MARCH 31, MARCH 31,
1997 1998 1999 2000 2001
------------- ------------- ------------ ------------- -------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS
DATA:
Revenue
License Fees $ --- $ --- $ --- $ --- $ 1,500
Battery and laminate sales --- --- --- 1,518 7,191
------------- ------------- ------------ ------------- -------------
Total revenue --- --- --- 1,518 8,691
Cost and expenses:
Cost of Sales --- --- --- --- 19,366
IDB Revenue Grant --- --- --- --- (1,191)
------------- ------------- ------------ ------------- -------------
Cost of Sales, Net --- --- --- --- 18,175
Research and product development 10,825 15,432 18,783 19,142 12,726
Marketing 205 855 105 297 1,080
General and administrative 6,168 7,066 6,753 6,653 7,133
Depreciation and amortization(4) --- --- 3,388 9,510 11,309
One time social charge(3) --- --- --- --- 333
Factory start-up costs(1) --- --- --- 3,171 ---
Stockholder lawsuit(2) --- --- --- 30,061 ---
------------- ------------- ------------ ------------- -------------
Total costs and expenses 17,198 23,353 29,029 68,834 50,756
------------- ------------- ------------ ------------- -------------
Operating loss (17,198) (23,353) (29,029) (67,316) (42,065)
Interest and other income 2,558 1,174 2,980 221 1,241
Interest expense (814) (528) (643) (1,841) (2,332)
Equity in earnings (loss) of Joint Venture (434) (1,779) 268 (210) (345)
------------- ------------- ------------ ------------- -------------
Net loss (15,888) (24,486) (26,424) (69,146) (43,501)
Beneficial conversion feature
on preferred stock --- --- (2,865) (560) (591)
------------- ------------- ------------ ------------- -------------
Net loss attributable to common stockholders $ (15,888) $ (24,486) $ (29,289) $ (69,706) $ (44,092)
============= ============= ============ ============= =============
Net loss per share attributable to common $ (0.73) $ (1.06) $ (1.13) $ (2.28) $ (1.14)
stockholders, basic and diluted ============= ============= ============ ============= =============
Shares used in computing
net loss per share attributable to
common stockholders, basic and diluted(2) 21,684 23,010 25,871 30,523 38,840
============= ============= ============ ============= =============
Page 15
MARCH 30, MARCH 29, MARCH 28, MARCH 31, MARCH 31,
1997 1998 1999 2000 2001
----------- ----------- ------------ ------------ ------------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 27,832 $ 8,400 $ 2,454 $ 24,556 $ 3,755
Investments 9,556 - - - -
Working capital 26,105 (1,773) (7,784) 16,007 6,720
Total assets 55,526 42,894 38,401 58,516 87,735
Long-term debt 5,217 4,950 8,171 12,369 20,651
Accumulated deficit (103,526) (128,012) (154,436) (223,582) (267,083)
Total stockholders' equity 38,349 22,962 7,955 27,845 49,065
- ----------------------
(1)(2) See Results of Operations discussion in Item 7 Below.
(3) See Note 2 of Notes to Consolidated Financial Statements.
(4) For the fiscal years ended March 30, 1997 and March 29, 1998 such
amounts are included in General & Administrative expenses.
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 ACCEPTABILITY 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
The Company was founded in 1989 to develop and commercialize advanced
rechargeable batteries based on lithium and polymer technologies. Since its
inception, the Company has been a development stage company primarily engaged in
acquiring and developing its initial technology, manufacturing limited
quantities of prototype batteries, recruiting personnel, and acquiring capital.
In the first three-month period of fiscal 2001, the Company recorded its first
significant commercial sales. The Company is a development stage company in as
much as significant revenues from operations have not been achieved. Previously,
other than immaterial revenues from limited sales of prototype batteries, the
Company had not received any significant revenues from the sale of products.
Before the first three-month period of fiscal 2001, substantially all revenues
were derived from a research and development contract with the Delphi Automotive
Systems Group, formerly the Delco Remy Division, an operating group of the
General Motors Corporation. This research and development contract expired in
May 1998. The Company has incurred cumulative losses of $267,083,000 from its
inception to March 31, 2001.
Page 16
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2001 (FISCAL 2001), MARCH 31, 2000 (FISCAL 2000)
AND MARCH 28, 1999 (FISCAL 1999)
REVENUE. The first commercial sale of batteries was in February, 2000. Sales of
batteries and laminate totaled $1.5 million in fiscal 2000. During fiscal 2001,
sales increased 380% to $7.2 million. These increased battery revenues reflect
the Company's transition from a research and development entity to a
manufacturing and sales entity. The first revenues from licensing were recorded
during fiscal 2001 at $1.5 million.
COST OF SALES. As the Company ramped-up production and began the transformation
from an R & D operation to a manufacturing operation, the costs of labor and
materials were recorded as cost of sales. As production and efficiencies
increase, it is anticipated that the cost of sales, as a percentage of sales,
will decrease. Costs recorded as cost of sales for fiscal 2001 totaled $19.4
million. Cost of sales now reflects certain operating costs previously reported
as R&D. During fiscal 2001, the Company received revenue grant funding of
$1,191,000 from the Northern Ireland Industrial Development Board, or IDB, which
was offset against the cost of sales as a reduction of direct labor.
RESEARCH AND PRODUCT DEVELOPMENT. Research and product development expenses
decreased to $12.7 million for the fiscal year ended March 31, 2001 from $19.0
million for the fiscal year ended March 31, 2000, representing a decrease of
33.2%. Research and product development expenses increased to $19.0 million for
the fiscal year ended March 31, 2000 from $18.8 million for the fiscal year
ended March 28, 1999, representing an increase of 1.1%. The decrease in fiscal
2001 versus fiscal 2000 reflects the beginning of our transition from a research
and development effort into a manufacturing and sales entity. The increase in
fiscal 2000 versus fiscal 1999 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 $1.1 million for the fiscal year
ended March 31, 2001 from $297,000 for the fiscal year ended March 31, 2000,
representing an increase of 270.4%. 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%. The increase in fiscal 2001
compared to fiscal 2000 was the result of our transition from a research and
development effort into a manufacturing and sales entity. The increase in
expenditures in fiscal 2000 compared to fiscal 1999 was the result of higher
travel expenses, the utilization of consultant services, and increased payroll.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$7.1 million for the fiscal year ended March 31, 2001 as compared to $6.7
million for the fiscal year ended March 31, 2000. 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 March 28, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $11.3 million
for fiscal year 2001 and $9.5 million for fiscal 2000, an increase of 19.0%.
Depreciation and amortization increased 179.4% to $9.5 million in fiscal year
2000 from $3.4 million in fiscal 1999. Increased capital expenditures in
previous periods have caused depreciation to rise accordingly.
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 has 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.
Page 17
INTEREST AND OTHER INCOME. Interest and other income increased to $1.2 million
for the fiscal year ended March 31, 2001, from $221,000 for the fiscal year
ended March 31, 2000, representing an increase of 442.9%. 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%. The increase in fiscal 2001 from fiscal 2000 was due primarily to
increased investment income. The decrease in fiscal 2000 over fiscal 1999
resulted primarily from the fiscal 1999 receipt of the final payment from
Delphi.
INTEREST EXPENSE. Interest expense increased to $2.3 million for the fiscal year
ended March 31, 2001, from $1.8 million for the fiscal year ended March 31,
2000, representing an increase of 27.7%. 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%. The increase in
fiscal 2001 was the result of additional long-term debt acquired during the
fiscal year, as was the increase in fiscal 2000.
EQUITY IN EARNINGS(LOSS) OF JOINT VENTURE. Equity in loss of joint venture
increased to $345,000 for the fiscal year ended March 31, 2001 from $210,000
for the fiscal year ended March 31, 2000, representing an increase of 64.29%.
Equity in loss of joint venture decreased to $(210,000) for the fiscal year
ended March 31, 2000, from equity in earnings of joint venture of $268,000 for
the fiscal year ended March 28, 1999. The losses in fiscal 2001 and 2000 were
primarily the result of unfavorable exchanges in foreign currency.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity requirements are for funding R & D operations and
capital expenditures.
Net cash used in operations for fiscal 2001, 2000 and 1999 was $38,221,000,
$29,829,000 and $22,395,000, respectively. We expect that our operations will
continue to use net cash for the foreseeable future while we prepare for a
significant expansion of our commercial activities; however, with the reduction
in the labor force at the plant, monthly expenditures have been reduced.
Expansion of the labor force will only occur to meet increased sales demand.
We used $21,758,000, $5,238,000 and $9,554,000 in investing activities in fiscal
2001, 2000 and 1999, respectively. Capital expenditures incurred during this
period were primarily related to the establishment and expansion of our
manufacturing facilities and equipment in our Dutch subsidiary. In fiscal 2002,
planned capital expenditures are projected to equal $10 million, $5 million of
which has been committed and $5 million of which is planned but not committed.
These capital expenditures do not include a new powder production facility in
the amount of about $9 million, the need for which has not been determined.
We have funded our operating and capital requirements primarily from debt and
equity placements. Financing activities contributed $40.8 million, $57.2 million
and $26.1 million in fiscal 2001, 2000 and 1999, respectively. Over this
three-year period, we have raised an aggregate of $85.9 million from the sale of
equity and $20.0 million of debt. These funds have been supplemented by $7.8
million in net proceeds from an IDB grant (discussed below) to fund plant and
equipment at our Ireland manufacturing facility and $11.9 million in cash
resulting from our purchase of the assets of West Coast Venture Capital.
Additionally, we have the ability to utilize a line of credit of up to $20
million secured by investments acquired from West Coast Venture Capital. In
addition, in June 2001, Carl Berg provided us with a financing commitment letter
pursuant to which he committed, subject to customary conditions, to providing
(or causing another person or entity to provide) the Company with additional
financing of up to $20 million during fiscal 2002, in the form of a secured
loan, equity investment, or a combination of both.
The Company is obligated to make a $1.2 million balloon payment on the Henderson
facility in December 2001. It is our intention to refinance the facility prior
to that date thereby avoiding the necessity to make that payment.
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 available
over a five-year period through October 31, 2001. As of March 31, 2001, we had
received grants aggregating (pound)9.0 million ($12.7 million), The amount of
the grants available under the agreement and offers depends
Page 18
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. As
a result of the temporary cessation of Northern Ireland business activity,
specified employment levels have not been maintained, but the IDB is not seeking
repayment and on the advice of counsel, on the basis that successful
negotiations will be concluded, we believe that the chances of any legal action
being brought by the IDB pursuant to the Letter of Offer would apppear slim. The
Company has begun discussion with the IDB to end the current agreement and enter
into a new agreement more closely aligned to current business conditions.
The Company began fiscal 2002 with $3.8 million in cash and the remaining line
of credit available from Mr. Berg in excess of $16 million. If sales and
licensing revenues significantly fall below the Company's internally budgeted
amounts, additional external financing may be required. If such financing is not
available, the Company may need to reduce the labor forces at the Ireland plant
and the U.S. facilities, thereafter concentrating our efforts on R & D for new
materials.
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 2002. If our cash from operations is less than anticipated
or our working capital requirements and capital expenditures are greater than we
expect, we will need to raise additional debt or equity financing in order to
provide for our operations. There can be no assurance that additional debt or
equity financing will be available on acceptable terms or at all.
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. If we fail to
substantially increase yields of our batteries and reduce unit manufacturing
costs, we will not be able to offer our batteries at a competitive price. We
will lose our current customers and fail to attract future customers.
Failure to scale up our manufacturing facility will harm our customer relations
and threaten future profits. We currently are in the process 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 engineering work and capital expenses and is subject to
significant risks, including risks of cost
Page 19
overruns and significant delays. In automating, redesigning and modifying the
manufacturing processes, we continue to depend on, several developers of
automated production lines, all of whom have limited experience in producing
equipment for the manufacture of batteries. If we fail to develop and implement
a large scale manufacturing facility capable of cost-effectively producing
commercial quantities of batteries according to customer specifications, it will
harm our ability to serve the needs of our customers and threaten our future
sales and profits.
OUR PATENT APPLICATIONS MAY NOT RESULT IN PATENTS ISSUED AND IF OUR PATENTS ARE
FOUND TO BE INFRINGING, WE MAY NOT BE ABLE TO PROCURE LICENSES TO USE PATENTS
NECESSARY TO OUR BUSINESS AT REASONABLE TERMS, IF AT ALL.
Patent applications in the United States are maintained in secrecy until the
patents issue or are published. 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. 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.
THE LIMITED NUMBER OF SKILLED AND UNSKILLED WORKERS IN NORTHERN IRELAND COULD
AFFECT THE SUCCESS OF OUR IMPROVEMENTS IN THE MANUFACTURING FACILITY.
We may need to hire and train a substantial number of new manufacturing workers.
The availability of skilled and unskilled workers in Northern Ireland is limited
because of 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.
Page 20
CONTINUED DELAYS IN QUALIFYING OUR MANUFACTURING FACILITIES 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 we do not control the design and delivery of most of the production
equipment which is specifically manufactured for us;
o we are modifying and bringing many of the manufacturing processes of
this production equipment up to date for the first time and may need
to refine these processes;
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.
These delays would impair our ability to bring our batteries to market,
adversely affecting revenue growth and our cash position and harm our
competitive position and economic growth.
OUR ABILITY TO MANUFACTURE LARGE VOLUMES OF BATTERIES IS LIMITED AND MAY PREVENT
US FROM FULFILLING EXISTING ORDERS.
We currently have several outstanding unfilled purchase orders for our batteries
and actively are soliciting additional purchase orders. We presently have
limited quantities of batteries available for sale and do not have the necessary
equipment in operation to manufacture a commercially adequate volume of
products. We are installing additional automated equipment at our facilities in
Mallusk, Northern Ireland, and expect this production facility to be fully
operational by the end of calendar 2001, which will provide us with sufficient
capacity to manufacture and ship batteries in high volumes.
In 1993, we ultimately were unable to fulfill a purchase order for batteries
that 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 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 ADDITIONAL CAPITAL
At March 31, 2001, we had cash and cash equivalents of $3,755,000. In addition,
effective February 13, 2001, we completed the acquisition of $30.0 million of
assets consisting of cash and investment equivalent instruments from West Coast
Venture Capital, Inc. in exchange for approximately 3.5 million shares of our
common stock. During fiscal year 2001, Mr. Carl Berg (stockholder), extended a
$20 million line of credit to the Company to be secured by the assets acquired
from West Coast Venture Capital, Inc.
In June 2001, Carl Berg provided us with a financing commitment letter pursuant
to which he committed, subject to customary conditions, to providing (or causing
another person or entity to provide) the Company with additional financing of up
to $20 million during fiscal 2002, in the form of a secured loan, equity
investment, or a combination of both.
After taking into account our cash and cash equivalents, projected revenues,
receipt of funds, and financial commitments, we expect that we will have
sufficient financing through fiscal 2002 to complete funding of required capital
expansion, research and product development, marketing, general and
administrative expenses and the costs of integrating the Telcordia licensing
activities. Our cash requirements, however, may vary materially from those
Page 21
now planned because of changes in our operations, including changes in original
equipment manufacturer relationships, market conditions, joint venture and
business opportunities or our failure to receive additional IDB grant funds. In
such event, we may need to raise additional funding through debt or equity
financing through fiscal 2002. We cannot assure you that additional funds for
these purposes, whether from equity or debt financing agreements, will be
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 $267,083,000 as of March 31, 2001. We have working
capital of $6.7 million as of March 31, 2001, 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 2002, 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 performance failure were
corrected, this performance failure might have the long-term effect of harming
our ability to market and sell our batteries.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR OUR REVENUES, AND OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED IF WE WERE TO LOSE THE
BUSINESS OF ANY ONE OF THEM.
To date, our existing purchase orders in commercial quantities are from a
limited number of 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 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 had grown from 184 employees at March 1999 to 362 employees as
of May 2000. On March 30, 2001, the Company announced the reduction of
non-managerial manufacturing personnel by 181 people. The layoffs were a result
of the expected arrival of new state-of-the-art high-speed automated production
and packaging machinery in May 2001. As the need
Page 22
arises, 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.
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 from original equipment manufacturers and battery
pack assemblers to gain market acceptance for our products. We therefore will
need to meet these companies' requirements by developing and introducing new
products and enhanced, or modified, versions of our existing products on a
timely basis. Original equipment manufacturers 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 original equipment manufacturers
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.
THE FACT THAT WE DEPEND ON A SOLE SOURCE SUPPLIER FOR OUR ANODE RAW MATERIALS,
AND A LIMITED NUMBER OF SUPPLIERS FOR OTHER KEY RAW MATERIALS, MIGHT DELAY OUR
PRODUCTION OF BATTERIES.
We depend on a sole source supplier for our anode, or negative electrode, raw
material, and 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:
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. 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, it may delay battery
production, impede our ability to fulfill existing or future purchase
orders and harm our reputation and profitability.
Page 23
OUR BATTERIES MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN MARKET ACCEPTANCE
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
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. Failure 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.
WE MUST EFFICIENTLY INTEGRATE THE TELCORDIA ASSETS INTO OUR BUSINESS.
We are a development stage company primarily engaged in acquiring and developing
our initial technology, manufacturing limited quantities of prototype batteries,
recruiting personnel and acquiring capital. Except for revenues from limited
sales of prototype batteries and battery materials, we did not record
significant revenues from sales of our products until the first three-month
period of fiscal 2001. In December, 2000, we acquired the intellectual property
assets of Telcordia Technologies, Inc. As a result of the acquisition of these
intellectual property assets, we significantly increased the role of licensing
in our business activities. Our future operating results could be affected by a
variety of factors including:
o our ability to secure and maintain significant customers of our
proprietary technology;
o the extent to which our future licensees successfully incorporate our
technology into their products;
o the acceptance of new or enhanced versions of our technology;
o the rate that our licensees manufacture and distribute their products
to OEMs;
o our ability to secure one-time license fees and ongoing royalties for
our technology from licensees.
Our future success will depend on our ability to integrate successfully our
licensing operations with our other business activities. The degree to which we
can successfully integrate these operations will depend on a number of factors,
including our ability to expand the scope of our operations beyond the design,
development, manufacture and marketing or our rechargeable lithium polymer
batteries to include substantially increased technology licensing activities.
The integration of these licensing operations following the acquisition of the
Telcordia intellectual property assets will require the dedication of management
and other personnel resources which may temporarily distract them from our
day-today business. If we fail to integrate the acquired intellectual property
efficiently or otherwise substantially expand our licensing activities, our
results of operations and financial condition will be adversely affected.
Our revenue from license fees and royalties will fluctuate and depends
significantly on the success of our licensees and the market demand for our
products.
We expect to generate income from license fees as well as ongoing royalties
based on sales by licensees that design, manufacture and sell products
incorporating our technology. License fees will be nonrefundable and may be paid
in one or more installments. Ongoing royalties will be nonrefundable and
generally based upon a percentage of the selling price of the products that
incorporate our technology sold by the licensee. Because we expect to derive a
portion of our future revenues from royalties on shipments by our licensees, our
future success depends upon the
Page 24
ability of our licensees to develop and introduce high volume products that
achieve and sustain market acceptance. We cannot assure you that our licensees
will be successful or that the demand for lithium polymer batteries or for
devices utilizing these batteries will continue to increase. In addition, our
license fee revenues depend on our ability to gain additional licensees within
existing and new markets. A reduction in the demand for lithium polymer
batteries, our loss of key existing licensees or our failure to gain additional
licensees could have a material adverse effect on our business.
THERE IS A POTENTIAL CONFLICT BETWEEN OUR FUTURE TECHNOLOGY LICENSEES AND US.
The acquisition of the Telcordia intellectual property assets has added
significant diversity to our overall business structure and our opportunities.
We recognize that there is potential for a conflict among our sales channels and
those of our future technology licensees. Although our manufacturing and
marketing business generally is complimentary to our licensing business, we
cannot assure you that sales-channel conflicts will not arise. If these
potential conflicts do materialize, we may not be able to mitigate the effect of
a conflict that, if not resolved, may impact our results of operations.
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 also are 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 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;
Page 25
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. We could therefore, be
exposed to possible 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 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.
Page 26
WE EXPECT TO SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO AND DERIVE A
SIGNIFICANT PORTION OF OUR LICENSING REVENUES FROM CUSTOMERS LOCATED OUTSIDE THE
UNITED STATES. FOREIGN GOVERNMENT REGULATIONS, CURRENCY FLUCTUATIONS AND
INCREASED COSTS ASSOCIATED WITH INTERNATIONAL SALES COULD MAKE OUR PRODUCTS AND
LICENSES UNAFFORDABLE IN FOREIGN MARKETS, WHICH WOULD REDUCE OUR FUTURE
PROFITABILITY.
We expect that international sales and licensing royalties (and other licensing
revenues) will represent an increasingly significant portion of our product
sales. International business can be subject to many inherent risks that are
difficult or impossible for us to predict or control, including:
o changes in foreign government regulations and technical standards,
including additional regulation of rechargeable batteries or
technology or the transport of lithium, which may reduce or eliminate
our ability to sell or license in certain markets;
o foreign governments may impose tariffs, quotas and taxes on our
batteries or our import of technology into their countries;
o requirements or preferences of foreign nations for domestic products
could reduce demand for our batteries and our technology;
o fluctuations in currency exchange rates relative to the U.S. dollar
could make our batteries and our technology unaffordable to foreign
purchasers and licensees or more expensive compared to those of
foreign manufacturers and licensors;
o longer payment cycles typically associated with international sales
and potential difficulties in collecting accounts receivable may
reduce the future profitability of foreign sales and royalties;
o import and export licensing requirements in Northern Ireland or Korea
may reduce or eliminate our ability to sell or license in certain
markets; and
o political and economic instability in Northern Ireland or Korea may
reduce the demand for our batteries and our technology or our ability
to market our batteries and our technology in foreign countries.
These risks may increase our costs of doing business internationally and reduce
our sales and royalties 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
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 rapid technological change that we expect
to continue. 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
Page 27
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.
We have invested in research and development of next generation technology in
energy solutions. If we are not successful in developing and commercially
exploiting new energy solutions based on new materials, or we experience delays
in the development and exploitation of new energy solutions, compared to our
competitors, our future growth and revenues will be adversely affected.
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, and long
standing relationships with original equipment manufacturers 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 THEIR 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 June 21, 2001, 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.
Page 28
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.
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. We had outstanding 45,535,439 shares of common stock, based
upon shares outstanding as of June 21, 2001 and the conversion of all of our
Series B Preferred Stock. Of these shares, most will be registered and freely
tradable. In addition, we have filed registration statements on Form S-8 under
the Securities Act that cover 1,414,526 shares of common stock pursuant to
outstanding but unexercised vested options to acquire our common stock.
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
Page 29
paying cash dividends on our common stock in the foreseeable future. Because we
may not pay dividends, your return on an investment in our stock likely depends
on your ability to sell your shares 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,
2001. However, we are exposed to financial market risks, including changes in
foreign currency exchange rates and interest rates.
The Company has long term debt, in the form of two building mortgages, one of
which has a balloon payoff in calendar 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 (6.875% at March 31, 2001). The Company also has
long-term debt in the form of a loan, which matures in August 2002, to a
stockholder at a fixed interest rate of 9% and a line of credit from the same
stockholder, which matures in January 2006, at a fixed interest rate of 8%. The
table below presents principal amounts by fiscal year for the Company's
long-term debt.
2002 2003 2004 2005 2006 THEREAFTER TOTAL
-------- -------- -------- -------- --------- ---------- ---------
(dollars in thousands)
Liabilities:
Fixed rate debt: 1,272 14,083 -- -- 2,000 -- 17,355
Variable rate debt 414 502 537 575 615 2,339 4,982
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its debt obligations approximates fair
value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes thereto appear on
pages F-4 to F-26 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 had come
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
through June 8, 2000, there were 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 fiscal year 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 six fiscal years included an
explanatory paragraph regarding substantial doubt about the Company's ability to
continue as a going concern.
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 most recent fiscal year 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
Page 30
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).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
Information regarding directors and executive officers of the Company will
appear in the Proxy Statement for the 2001 Annual Meeting of Stockholders, and
is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation will appear in the Proxy Statement
for the 2001 Annual Meeting of Stockholders, and is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management of the Company will appear in the Proxy Statement for the 2001 Annual
Meeting of Stockholders, and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions will appear
in the Proxy Statement for the 2001 Annual Meeting of Stockholders, and is
incorporated herein by this reference.
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 31-34 of this
Form 10-K Annual Report.
(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: Form 8-K dated February 13,
2001 and filed February 28, 2001, announcing the
acquisition of certain assets from West Coast
Venture Capital, Inc. and filing a press release
related to such acquisition and a press release
announcing the Registrant's third quarter results.
(c) See Exhibit Index on pages 31-34 of this
Form 10-K Annual Report.
Page 31
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(2) Form of Warrant to Baccarat Electronics, Inc.
4.2(3) Form of Warrant to Placement Agent.
4.3(3) Form of Warrant to CC Investments (Investor).
4.4(3) Amended and Restated Registration Rights Agreement
dated December 11, 1998 by and between the Company and
CC Investments, LDC.
4.5(7) Form of Warrant dated June 28, 2000 to Acqua
Wellington Value Fund Ltd.
10.1(8) Form of Indemnification Agreement entered into between
the Registrant and its Directors and Officers.
10.2(8) Form of Common Stock Purchase Agreement by and between the
Company and Ridgeway Investment Limited, dated November 29,
1999.
10.3(8) 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.
10.4(10) Registration Rights Agreement dated June 28, 2000
between the Company and Acqua Wellington Value Fund
Ltd.
10.5(4)(*) 1990 Stock Option Plan as amended on October 3, 1997.
10.6(5) 1996 Non-Employee Directors' Stock Option Plan as
amended on October 3, 1997.
10.7(6) Promissory Note issued by Lev M. Dawson to Valence
Technology, Inc. in the amount of $3,343,750.88.
10.8(6) Promissory Note issued by Lev M. Dawson to Valence
Technology, Inc. in the amount of $1,518,750.
10.9(6) Stock Pledge Agreement dated March 5, 1998 by Lev M. Dawson
(included as Exhibit E to Exhibit 10.12 and Exhibit 10.14).
10.10(2) Amendment No. 5 to Loan Agreement and Promissory Note
between the Company and Baccarat Electronics, Inc.
dated July 27, 1998.
10.11(8) Year 2000 Stock Option Plan.
Page 32
10.12 Financing commitment letter from Carl Berg dated
June 27, 2001.
10.13 Employment agreement with Stephan B. Godevais dated
May 2, 2001.
10.14 Purchase Agreement with Telcordia Technologies, Inc.
dated November 3, 2000.
10.15 License Back Agreement with Telcordia Technologies, Inc.
dated November 3, 2000.
10.16 Amendment Agreement with Telcordia Technologies, Inc.
dated November 3, 2000.
10.17 Asset Purchase Agreement with West Coast Venture Capital,
Inc. dated January 13, 2001.
10.18 Registration Rights Agreement with West Coast Venture
Capital, Inc. dated January 13, 2001.
10.19 Guaranty dated January 13, 2001 by 1981 Kara Ann Berg
Trust.
21.1 List of subsidiaries of the Company.
23.1 Consent of Independent Accountants.
23.2 Consent of Independent Accountants.
(1) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED
IN THE COMPANY'S REGISTRATION STATEMENT ON FORM 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.
(4) 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.
(5) 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.
(6) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED
IN THE SCHEDULE 13-D FILED BY LEV M. DAWSON ON MARCH
16, 1998.
(7) 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.
(8) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN
THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31,
2000, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
JUNE 29, 2000.
Page 33
(*) 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 34
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, 2001 By: /S/ STEPHAN B. GODEVAIS
-------------------------------
Stephan B. Godevais
Chief Executive Officer and
President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Stephan
B. Godevais 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 and President June 29, 2001
/s/ Stephan B. Godevais (Principal Executive Officer)
- ------------------------------
Stephan B. Godevais
/s/ Lev M. Dawson Chairman of the Board of Directors June 29, 2001
- ------------------------------
Lev. M. Dawson
Vice President and Chief Financial Officer
/s/ Jay L. King (Principal Financial and Accounting Officer) June 29, 2001
- ------------------------------
Jay L. King
/s/ Carl E. Berg Director June 29, 2001
- ------------------------------
Carl E. Berg
/s/ Bert C. Roberts, Jr. Director June 29, 2001
- ------------------------------
Bert C. Roberts, Jr.
/s/ Alan F. Shugart Director June 29, 2001
- ------------------------------
Alan F. Shugart
Page 35
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
PAGES
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report...........................................F-2
Report of Independent Accountants......................................F-3
Consolidated Balance Sheets as of March 31, 2001 and
March 31, 2000.....................................................F-4
Consolidated Financial Statements for the period from
March 3, 1989 (date of inception) to March 31, 2001
and for the years ending March 31, 2001, March 31, 2000
and March 28, 1999:
Consolidated Statements of Operations and
Comprehensive Loss..........................................F-5
Consolidated Statements of Stockholders'
Equity (Deficit)............................................F-6
Consolidated Statements of Cash Flows.........................F-8
Notes to Consolidated Financial Statements.....................F-9 to F-26
Page F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Valence Technology, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Valence
Technology, Inc. (a development stage company) (the "Company") as of March 31,
2001 and 2000, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity (deficit), and cash flows for the years
then ended, and for the period from March 3, 1989 (date of inception) to March
31, 2001. 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. The Company's consolidated financial statements
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 consolidated 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 audits 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 audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits 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, 2001 and 2000, and the results
of its operations and its cash flows for the years then ended, and for the
period from March 3, 1989 (date of inception) to March 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
June 27, 2001
Page F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Valence Technology, Inc. and Subsidiaries
Henderson, Nevada
In our opinion, the 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 the year ended March 28, 1999, present fairly, in all material
respects, the results of operations, stockholders' equity (deficit), and cash
flows of Valence Technology, Inc. and its subsidiaries (companies in the
development stage) for the period from March 3, 1989 (date of inception) to
March 28, 1999 (which statement is not presented herein) and for the year 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 had 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.
Page F-3
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
----
March 31, March 31,
ASSETS 2001 2000
----------- -----------
Current Assets:
Cash and cash equivalents $ 3,755 $ 24,556
Receivables 4,889 1,869
Short term investments 5,133 -
Inventory 4,825 1,641
Prepaid and other current assets 901 1,597
-------------- -------------
Total current assets 19,503 29,663
Long term investments 12,554 -
Property, plant and equipment, net 29,988 28,508
Intellectual property, net 25,690 -
Investment in joint venture - 345
-------------- -------------
Total assets $ 87,735 $ 58,516
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,686 $ 402
Accounts payable 5,759 6,060
Accrued expenses 2,977 2,882
Accrued royalties and license fees - 2,000
Grant payable 1,713 1,923
Accrued compensation 648 389
-------------- -------------
Total current liabilities 12,783 13,656
Deferred revenue 2,500 2,500
Long-term debt, less current portion 4,568 3,937
Long-term debt to stockholder 16,083 8,432
-------------- -------------
Total liabilities 35,934 28,525
-------------- -------------
Commitments and contingencies (Note 12)
Mandatorily redeemable convertible preferred stock
Authorized: 10,000,000 shares
Series B, $0.001 par value, Issued and outstanding: 3,500 shares
at March 31, 2001 and March 31, 2000 2,736 2,146
(Liquidation value: $3,973 and $3,764)
Stockholders' Equity
Common stock, $0.001 par value, authorized: 100,000,000 shares,
Issued and outstanding: 44,421,974 and 36,838,631 shares
at March 31, 2001 and March 31, 2000, respectively 44 37
Additional paid-in capital 325,103 256,086
Notes receivable from shareholder (4,862) (4,862)
Deficit accumulated during the development stage (267,083) (223,582)
Accumulated other comprehensive (loss) income (4,137) 166
-------------- -------------
Total stockholders' equity 49,065 27,845
-------------- -------------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity $ 87,735 $ 58,516
============== =============
Page F-4
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(a development stage company)
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 31, March 28,
to March 31, 2001 2001 2000 1999
------------------- ------------- ------------- -------------
Revenue:
Research and development
contracts $ 21,605 $ - $ - $ -
License revenue 1,500 1,500 - -
Battery and laminate sales 8,709 7,191 1,518 -
---------------- ------------- ------------ -------------
Total revenue 31,814 8,691 1,518 -
---------------- ------------- ------------ -------------
Cost of sales 19,366 19,366 - -
IDB revenue grant (1,191) (1,191) - -
---------------- ------------- ------------ -------------
Net cost of sales 18,175 18,175 - -
---------------- ------------- ------------ -------------
Gross margin 13,639 (9,484) 1,518 -
---------------- ------------- ------------ -------------
Costs and expenses:
Research and product
development 114,828 12,726 19,000 18,783
Marketing 5,014 1,080 297 105
General and administrative 58,653 7,133 6,795 6,753
Depreciation and amortization 45,826 11,309 9,510 3,388
Write-off of in-process technology 8,212 - - -
Investment in Danish subsidiary 3,489 - - -
Factory start-up costs 3,171 - 3,171 -
One-time social charge 333 333
Special charges 18,872 - - -
---------------- ------------- ------------ -------------
Total costs and expenses 258,398 32,581 38,773 29,029
---------------- ------------- ------------ -------------
Operating loss (244,759) (42,065) (37,255) (29,029)
Stockholder lawsuit settlement (30,061) - (30,061) -
Interest and other income 19,343 1,241 221 2,980
Interest expense (9,106) (2,332) (1,841) (643)
Equity in earnings (loss) of Joint Venture (2,500) (345) (210) 268
---------------- ------------- ------------ -------------
Net loss $ (267,083) (43,501) (69,146) (26,424)
================
Beneficial conversion feature and accretion
to redemption value on preferred stock (591) (560) (2,865)
------------- ------------ -------------
Net loss attributable to
common stockholders $ (44,092) $ (69,706) $ (29,289)
============= ============ =============
Other comprehensive loss:
Net loss $ (43,501) $ (69,146) $ (26,424)
Change in foreign currency
translation adjustments (4,303) (603) (1,484)
------------- ------------ -------------
Comprehensive loss $ (47,804) $ (69,749) $ (27,908)
============= ============ =============
Net loss per share attributable to
common stockholders: basic and diluted $ (1.14) $ (2.28) $ (1.13)
============= ============ =============
Shares used in computing net loss
per share attributable to common
stockholders: basic and diluted 38,840 30,523 25,871
============= ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
Page F-5
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(a development stage company)
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-6
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(a development stage company)
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 393 291 291
Conversion of note payable 305 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) (223,582) 166 27,845
Exercise of stock options at $2.63 to
$8.38 per share 243 1,243 1,243
Sale of stock to private investors 847 1 12,499 12,500
Stock issued to acquire Telcordia Technology
(Purchase of intellectual property) 3,000 3 26,233 26,236
Stock issued to acquire WCVC assets
(Purchase of investments) 3,493 3 29,633 29,636
Net loss (43,501) (43,501)
Beneficial conversion feature on
preferred stock (591) (591)
Change in translation adjustment (4,303) (4,303)
------- ------- -------- ------- ------- --------- ------- ---------
Balances, March 31, 2001 44,422 $ 44 $325,103 $(4,862) $- $(267,083) $(4,137) $49,065
------- ------- -------- ------- ------- --------- ------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
Page F-7
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Period from
March 3, 1989 Years Ended
(date of ----------------------------------------------
inception) to March 31, March 31, March 28,
March 31, 2001 2001 2000 1999
----------------- ----------- ------------ -----------
Cash flows from operating activities:
Net loss $ (267,083) $ (43,501) $ (69,146) $ (26,424)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 45,826 11,309 9,510 3,388
Loss on disposal of property, plant, & equipment 15,390 15 583
Write-off of in-process technology 6,211
Compensation related to stock options 3,891 331 364
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 2,500 345 210 (270)
Amortization of debt discount 1,292 651 586 55
Changes in operating assets and liabilities:
Receivables (3,952) (3,185) (718) 291
Prepaid expenses and other current assets (1,789) 687 (1,445) 855
Inventory (4,826) (3,185) (1,641)
Accounts payable 6,305 224 4,485 (656)
Accrued liabilities (2,168) (1,581) (2,034) 2
Deferred revenue 2,500
-------------- ------------- -------------- --------------
Net cash used in operating activities (164,208) (38,221) (29,829) (22,395)
-------------- ------------- -------------- --------------
Cash flows from investing activities:
Purchase of investments (665,789)
Maturities of long-term investments 661,545
Purchases of property, plant and equipment (93,366) (21,758) (6,507) (9,554)
Proceeds from disposal of property, plant, & equipment 1,269 1,269
Other (222)
-------------- ------------- -------------- --------------
Net cash used in investing activities (96,563) (21,758) (5,238) (9,554)
-------------- ------------- -------------- --------------
Cash flows from financing activities:
Property and equipment grants 12,243 5,822 2,002
Acquisition of West Coast Venture Capital assets 11,949 11,949
Borrowings of long-term debt 35,504 10,052 5,450 4,500
Payments of long-term debt
Product development loan (482)
Shareholder and director (6,173)
Other long-term debt (13,370) (702) (434) (397)
Proceeds from issuance of common stock and warrants, net of
issuance costs 214,860 13,728 52,216 5,766
Proceeds from issuance of preferred stock and warrants, 7,075 7,075
Series A, net of issuance costs
Proceeds from issuance of preferred stock and warrants, 7,125 7,125
Series B, net of issuance costs
-------------- ------------- -------------- --------------
Net cash provided by financing activities 268,731 40,849 57,232 26,071
-------------- ------------- -------------- --------------
Effect of foreign exchange rates on cash and cash equivalents (4,205) (1,671) (63) (68)
-------------- ------------- -------------- --------------
Increase (decrease) in cash and cash equivalents 3,755 (20,801) 22,102 (5,946)
Cash and cash equivalents, beginning of period 24,556 2,454 8,400
-------------- ------------- -------------- --------------
Cash and cash equivalents, end of period $ 3,755 $ 3,755 $ 24,556 $ 2,454
============== ============= ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
Page F-8
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS OF THE COMPANY:
Valence Technology, Inc. (the "Company") was founded in 1989 to develop and
commercialize advanced rechargeable batteries based on lithium and polymer
technologies. Since its inception, the Company has been a development stage
company primarily engaged in acquiring and developing its initial
technology, manufacturing limited quantities of prototype batteries,
recruiting personnel, and acquiring capital. In the first three-month
period of fiscal 2001, the Company recorded its first significant
commercial sales. Previously, other than immaterial revenues from limited
sales of prototype batteries, the Company had not received any significant
revenues from the sale of products. The Company has incurred cumulative
losses of $267,083,000 from its inception to March 31, 2001.
The Company is in the development stage as of March 31, 2001. Successful
completion of the Company's development program and, ultimately, the
attainment of profitable operations is dependent upon future events,
including maintaining adequate financing to fulfill its development
activities, and achieving a level of sales adequate to support the
Company's cost structure.
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.
RECEIVABLES:
Receivables consist primarily of amounts due from customers as a result of
normal business operations. The Company periodically performs credit
evaluations of its customers and reviews receivable balances in order to
determine an allowance for potential credit losses. At March 31, 2001, no
allowance for potential credit losses was deemed necessary. Additionally,
at March 31, 2001, receivables accrued contained interest due from a
stockholder and amounts due for VAT refunds pertaining to purchases made by
the Company's Northern Ireland facility.
INVENTORIES:
Inventories are stated at the lower of cost or market. The Company utilizes
the first-in, first-out inventory method, commonly known as FIFO.
Page F-9
INVESTMENTS:
The Company accounts for its investments in accordance with SFAS No. 115,
Accounting for Certain Investments In Debt and Equity Securities. Under
SFAS No. 115, the Company currently classifies its securities as
held-to-maturity. Held to maturity securities are those investments in
which the Company has the ability and intent to hold the security until
maturity. Held to maturity securities are recorded at amortized cost, which
approximates market value. Dividend and interest income are recognized in
the period earned.
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.
REVENUE GRANTS:
During fiscal 1994, the Company 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. The Company has also received offers from the IDB to
receive additional grants. Under the terms of the existing agreements, the
Company has qualified for and received revenue grants, through March 31,
2001, totaling (pound)867,000 ($1,191,000.) These funds are made available
to reduce the cost of labor in Northern Ireland and have been accounted for
as a reduction of the labor costs included in the cost of sales.
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 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:
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
reviews for impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In general, the Company
will recognize an impairment loss when the sum of undiscounted expected
future cash flows is less than the carrying amount of such assets. The
measurement for such an impairment loss is then based on the fair value of
the asset. The Company had no impairment losses for the years ended March
31, 2001, March 31, 2000, or March 28, 1999.
INTELLECTUAL PROPERTIES:
Intellectual properties acquired consist of patents and are recorded at
cost based on the market value of the common stock used in their
acquisition. These costs are being amortized over the average remaining
lives of the patents, which is 13.67 years. Intellectual properties
developed in-house are expensed as incurred.
REVENUE RECOGNITION:
For product sales, revenue is recognized when the sale is complete and
title has transferred to the buyer. For license and royalty fees, revenue
is realized and earned when all of the following criteria are met:
o Persuasive evidence of an arrangment exists,
o Delivery has occurred or services have been rendered,
o The seller's price to the buyer is fixed or determinable, and
o Collectibility is reasonably assured.
DEFERRED REVENUE:
Deferred revenue relates to activity with 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
Page F-10
Company anticipates that production by the joint venture will be sufficient
to recognize a portion of this deferred revenue in fiscal 2002.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
ONE-TIME SOCIAL CHARGE:
On March 30, 2001, the Company reduced its non-managerial manufacturing
personnel by 181 people at its Mallusk, Northern Ireland manufacturing
site. The layoffs were a result of the expected arrival of new
state-of-the-art high-speed automated production and packaging machinery in
May 2001. Based on this reduction in force, there was a one-time government
required social charge (termination charge) of $333,000.
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.
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, short-term investments, 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 and investments 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.
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):
Page F-11
Years Ended
March 31, 2001 March 31, 2000 March 28, 1999
----------------------------------------------------
Net loss available to
common stockholders ($44,092) ($69,706) ($29,289)
Weighted average
shares outstanding 38,840 30,523 25,871
Earnings per share,
basic and diluted ($1.14) ($2.28) ($1.13)
Shares excluded from the calculation of diluted EPS as their effect was
anti-dilutive were 5,908,000, 5,025,000, and 6,472,000 in fiscal years
ended March 31, 2001, March 31, 2000, and March 28, 1999, 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. The Company will adopt SFAS 133 effective April 1, 2001.
Currently, the Company does not hold derivative instruments or engage in
hedging activities, and as such, management does not expect the adoption of
SFAS 133 to have a significant impact on the financial position, results of
operations, or cash flows of the Company.
SECURITIES AND EXCHANGE COMMISSION STAFF ACCOUNTING BULLETIN NO. 101,
"REVENUE RECOGNITION IN FINANCIAL STATEMENTS"
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 clarifies existing accounting principles related to
revenue recognition in financial statements. The Company adopted SAB 101
during the third quarter of 2001 and the adoption did not affect the
Company's consolidated financial statements.
RECLASSIFICATIONS:
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the current year's presentation. These
reclassifications had no effect on the Company's net loss.
Page F-12
3. RECEIVABLES:
Receivables consist of the following (in thousands):
March 31, 2001 March 31, 2000
-------------- ----------------
Trade receivables $ 2,840 $ 328
Interest receivable 851 577
Other receivables 1,198 964
-------------- ----------------
Total receivables $ 4,889 $ 1,869
============== ================
4. INVESTMENTS:
During the fourth quarter of fiscal 2001, the Company completed the
acquisition of the assets of West Coast Venture Capital, Inc. which
included investment equivalent instruments. These instruments have a value
of $17,687,000 as of March 31, 2001 and are presented as short-term
investments of $5,133,000 and long-term investments of $12,554,000 on the
balance sheet depending upon scheduled maturity.
MATURITY DATE OF INVESTMENTS
-------------------------------------------------------
LESS THAN 1-5 5-10 AFTER
1 YEAR YEARS YEARS 10 YEARS TOTAL
-------------------------------------------------------
5,133 977 11,577 17,687
5. INVENTORIES:
Inventories consist of the following (in thousands):
March 31, 2001 March 31, 2000
---------------- ----------------
Raw materials $ 3,295 $ 423
Work-in-process 1,530 1,218
---------------- ----------------
Total $ 4,825 $ 1,641
================ ================
6. INTELLECTUAL PROPERTY:
During the third quarter of fiscal year 2001, the Company acquired, from
Telcordia Technologies, Inc., its rights in lithium-ion polymer battery
technology including 42 U.S. patents, 14 U.S. patents pending, and more
than 200 foreign patents, issued and pending. The purchase price was
3,000,000 shares of newly issued common stock valued at $26,250,000. In
conjunction with the purchase, a payment of $2,000,000 of accrued royalties
was made at the time of purchase. The patents acquired are being amortized
over the average lives of the patents, which is 13.67 years. As of March
31, 2001, $560,000 has been expensed as amortization.
Page F-13
7. PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS):
2001 2000
---------- ----------
Building and land $ 10,974 $ 8,520
Leasehold improvements 3,234 2,745
Machinery & Equipment 75,482 40,773
Office and computer equipment 1,463 1,255
Construction in progress 0 15,531
--------- ---------
Total cost 91,153 68,824
Less capital grants (10,402) (5,450)
--------- ---------
Total cost, net of capital grants 80,751 63,374
Less Accumulated depreciation (50,763) (34,866)
--------- ---------
Total cost, net of capital grants,
depreciation and amortization $ 29,988 $ 28,508
========= =========
8. LONG-TERM DEBT (IN THOUSANDS):
March 31, March 31,
2001 2000
---------- ----------
Facility loans $6,254 $4,339
Less amounts due within one year (1,686) (402)
---------- ----------
Long-term debt due after one year $4,568 $3,937
========== ==========
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, and $1,272,150 at March 31, 2001, 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 (6.875% at March 31, 2001) on the
outstanding principal. In September, 2000, the loan was increased by
$2,874,000 for the construction of a factory extension. The outstanding
principal balance as of March 31, 2000 was $2,900,000. As of March 31,
2001, the outstanding principal balance is $4,982,000. The loan is
collateralized by the related building.
Page F-14
Principal payments on long-term debt at March 31, 2001 are due as follows
(in thousands):
Facility
Fiscal Year Loans
-------------- ----------
2002 $1,686
2003 502
2004 537
2005 575
2006 615
Thereafter 2,339
----------
$6,254
==========
9. LONG-TERM DEBT TO STOCKHOLDER:
March 31, March 31,
2001 2000
--------- ---------
(in thousands)
Loan balance $ 14,950 $ 9,950
Line of credit balance 2,000 -
Unaccreted debt discount (867) (1,518)
--------- ---------
Balance at year end $ 16,083 $ 8,432
========= =========
In July 1998, 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 $10,000,000 principal under a 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. In November, 2000, the loan
agreement was amended to increase the maximum amount to $15,000,000. As of
March 31, 2001, the Company had an outstanding balance of $14,950,000 under
the loan agreement. The loan bears interest at one percent over lender's
borrowing rate (approximately 9.00% at March 31, 2001) and is available
through August 30, 2002. For fiscal 1999, interest accrued on this loan was
$136,110. Accrued interest of $842,609 during fiscal 2000 increased
interest payable to $978,719. For fiscal 2001, an additional $1,081,670 has
been accrued bringing the outstanding interest payable to $2,060,389.
In conjunction with the amended loan agreement in fiscal 1999, 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 discount on the debt and accreted as interest
expense to be amortized over the life of the line of credit. As of March
31, 2001, a total of $1,291,257 has been charged to interest expense.
During June 2000 the Company entered into separate private placement
funding arrangements with Acqua Wellington Value Fund Ltd., an
institutional investor, and Carl E. 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 29, 2000 by the
purchase of 846,665 shares of common stock and a warrant to purchase
169,333 shares of common stock, 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. On February 13, 2001, the
Company replaced the remaining $12.5 million commitment from Mr. Berg with
the acquisition of $30.0 million of assets of West Coast Venture Capital,
Inc. consisting of cash and investment equivalent instruments in exchange
for approximately 3.5 million shares of the Company's common stock. The
investment instruments have maturities that run from less than one year to
over ten years. Mr. Berg has agreed to provide a line of credit secured by
the investment instruments. As of March 31, 2001, a total of $2,000,000 had
been drawn on this line of credit.
Page F-15
10. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental Disclosures of Noncash Investing and Financing Activities (in
thousands):
(date of
inception) Year Ended
to March 31, March 31, March 31, March 28,
2001 2001 2000 1999
------------- ---------- ---------- ----------
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 5,489 $461 $373 $452
Return of equipment for extinguishment of debt 301
Exchange of common stock for in-process technology 4,063
Exchange of common stock for Telcordia technology 26,250 26,250
Exchange of common stock for West Coast Venture Capital assets 29,636 29,636
Disposal of equipment fully reserved for in prior year 3,346 28
Exercise of options with note receivable 4,862
Beneficial conversion feature on preferred stock 4,216 591 560 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
11. 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)25,600,000 ($36,314,000 as of March 31, 2001), generally available
over a five-year period through October 31, 2001. 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 8).
As a condition to receiving funding from the IDB, the subsidiary must
obtain a minimum of (pound)12,000,000 ($17,022,000) in debt or equity
financing from the Company.
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,
as a reduction of depreciation expense, 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, but
Page F-16
the IDB is not seeking repayment and on the advice of counsel, the chances
of repayment being requested is nil. The Company has begun discussion with
the IDB to end the current agreement and enter into a new agreement more
closely aligned to current business conditions.
12. COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leased approximately 4,200 square feet in Kirkland, Washington
for the purpose of advanced materials research. The facilities were leased
for a term of 36 months at a monthly rental of $3,600. In November 2000,
the Company terminated the leasing arrangement, with a payment equal to two
months rent, and moved this research operation to its Henderson, Nevada
location. There are no further lease payments due on the Kirkland facility.
Total rent expense for the years ended March 31, 2001, March 31, 2000, and
March 28, 1999 was $77,328, $76,000, and $57,000 respectively.
LITIGATION:
In June 1998, the Company 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, the Company 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 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. On July 7, 2000 we entered
into a settlement agreement which specified that the Company pay Powell the
sum of $370,000. Payment was made on July 17, 2000, and on July 20, 2000
the court entered a formal dismissal with prejudice pursuant to the terms
of the settlement.
We 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).
Page F-17
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.
The Company has received notification that seventeen former employees of
the Mallusk, Northern Ireland facility have filed claims against the
Company alleging breach of contract and lack of consultation prior to
termination due to the reduction in force in March 2001 at the facility.
The time period for filing such claims has not expired, therefore the
Company cannot assess the merit, nor likelihood and extent of liability, if
any, presented by such claims at this time.
The Company is subject to various claims and litigation in the normal
course of business. In the opinion of management, all pending legal matters
are either covered by insurance or, if not insured, will not have a
material adverse impact on the Company's consolidated financial statements.
PURCHASE OF TECHNOLOGY AND LICENSE AGREEMENTS:
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.
In December, 2000, the Company executed agreements to acquire all rights in
lithium-ion solid state polymer battery technology from Telcordia
Technologies, Inc. (formerly Bellcore). Since the transactions which are
reflected by these agreements are completed, they have given the Company
all of Bellcore's rights with respect to lithium-ion, solid state polymer
batteries and the Company has become the licensor under Bellcore's existing
license agreements. The assets included in the acquisition include 42 U.S.
patents, 14 U.S. patents pending, more than 200 foreign patents, issued and
pending, and 15 Bellcore licenses with battery manufacturers throughout the
world, 12 of which are currently active. The Company anticipates that the
acquisition will have a positive effect on its operations during fiscal
2002 with increases in licensing and royalty income.
LETTERS OF CREDIT:
At March 31, 2001, the Company had an outstanding stand-by letter of credit
totaling $250,000 secured by a certificate of deposit in a like amount.
Page F-18
13. 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 Plan. There were no
shares granted under this plan during fiscal 2001. At March 31, 2001, the
Company had 332,636 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 100,000
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 the 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 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 100,000 shares on the date of the adoption of the plan, and
then receive annual options on the anniversary dates of that grant. During
fiscal year 2001, a total of 105,516 shares were granted to two directors
under this plan. As of March 31, 2001, a total of 41,260 shares remained
available for grant 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. During fiscal
year 2001, a total of 1,351,156 shares were granted under this plan. At
March 31, 2001, the Company had 419,392 shares available for grant under
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 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 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
Page F-19
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 ("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 were
$3,976,559 and $1,806,175, respectively. As of March 31, 2001, amounts of
$3,976,559 and $1,806,175 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 March 31, 2001, 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-Scholes pricing model with the following weighted average
assumptions for grants in fiscal years 2001, 2000, and 1999:
2001 2000 1999
------------- -------------- -------------
Risk-free Interest Rate 5.84% 6.05% 5.14%
Expected Life 4.63 years 4.34 years 4.58 years
Volatility 88.90% 81.10% 74.40%
Dividend Yield - - -
Page F-20
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 (696) $4.28
Canceled (19) $5.47
-------------
Balances, March 31, 2000 3,183 $7.20
Granted 1,457 $14.77
Exercised (243) $5.12
Canceled (538) $8.45
-------------
Balances, March 31, 2001 3,859 $8.81
=============
At March 31, 2001, March 31, 2000, and March 28, 1999, vested options to
purchase 2,020,000, 1,412,000, and 908,000 shares, respectively, were
unexercised. The weighted average fair value per share of those options
granted in 2001, 2000, and 1999 was $16.87, $7.24, and $3.35 respectively.
Page F-21
The following table summarizes information about fixed stock options
outstanding at March 31, 2001 (shares in thousands):
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------- -----------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life (years) Exercise Price Exercisable Exercise Price
- ---------------------- ---------------- -------------------------- ------------------- --------------- ------------------
$1.00 - $1.88 0.125 4.00 $1.88 0.125 $1.88
$3.00 - $3.75 34 6.89 3.66 26 3.63
$4.12 - $6.06 1,402 7.27 4.87 984 4.86
$6.22 - $8.88 1,521 7.84 7.00 860 6.99
$9.00 - $34.63 902 9.29 18.18 150 21.56
---------------- -------------------------- ------------------- --------------- ------------------
3,859 7.97 $8.81 2,020 $6.99
At March 31, 2001, the Company has reserved 5,245,000 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 2001, 2000, and 1999 consistent with the provisions of
SFAS 123, the pro forma net income would have been reported as follows (in
thousands):
2001 2000 1999
---------- ---------- ---------
Net loss attributable to stockholders - as reported ($44,092) ($69,706) ($29,289)
Net loss attributable to stockholders - pro forma (50,122) (73,781) (31,896)
Net loss attributable to stockholders per share, basic and diluted - as reported (1.14) (2.28) (1.13)
Net loss attributable to stockholders per share, basic and diluted - pro forma (1.29) (2.42) (1.23)
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 was in
the form of an amended loan agreement (Note 9).
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.
Page F-22
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.
On April 11, 2001, Castle Creek Investments, LDC, elected to convert 2,500
shares of their Series B Convertible Participating Preferred Stock. These
shares of Series B stock, including the accreted redemption value through
the date of conversion, converted to 792,476 shares of our common stock.
On April 12, 2001, Castle Creek Investments, LDC elected to convert the
last 1,000 shares of their Series B Convertible Participating Preferred
Stock. These shares of Series B stock, including the accreted redemption
value through the date of conversion, converted to 317,036 shares of
our common stock.
Changes in the Series A and Series B preferred stock during fiscal 2001 and
2000 are as follows (in thousands):
2001 2000
-------------- -------------
Balance at beginning of year $ - $ 4,514
Accretion to redemption value 232
Conversion of common stock (4,746)
-------------- -------------
Balance at end of year $ - $ -
============== =============
Balance at beginning of year $ 2,146 $ 3,702
Accretion to redemption value 591 328
Conversion of common stock (1,884)
-------------- -------------
Balance at end of year $ 2,736 $ 2,146
============== =============
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.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A and Series B preferred stock were 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
Page F-23
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 were 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.
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.
14. INCOME TAXES:
There was no income tax benefit related to the losses of fiscal years 2001,
2000, or 1999 due to the uncertain ability of the Company to utilize its
net operating loss carryforwards. 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 31, March 28,
2001 2000 1999
---------------- --------------- ---------------
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, 2001 and March
31, 2000 were as follows (in thousands):
March 31, March 31,
2001 2000
-------------- ---------------
Current assets:
Accrued liabilities $ 78 $ 836
Valuation allowance (78) (836)
-------------- ---------------
$ - $ -
============== ===============
Non-current assets:
Depreciation and amortization $ 1,224 $ 1,005
Research and development credit carryforwards 719 719
Net operating loss carryforwards - Federal 43,206 42,433
Net operating loss carryforwards - Foreign 31,714 -
Stockholder litigation - 10,224
-------------- ---------------
Valuation allowance (76,863) (54,381)
-------------- ---------------
$ - $ -
============== ===============
At March 31, 2001, the Company had federal operating loss carryforwards
available to reduce future taxable income of approximately $127,000,000.
The carryforwards expire between 2008 to 2021, if not used before such time
to offset future taxable income.
Page F-24
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. The Company also has foreign
operating loss carryforwards available to reduce future foreign income of
approximately $101,000,000.
15. 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.
16. 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, 2001, the joint venture had a net deficit and net loss of
approximately $(1,072,000) and $(6,105,000), respectively. The
proportionate share of the joint venture's income (losses) is recorded in
the statements of operations as non-operating income (loss). The Company
has discontinued applying the equity method as the investment has been
reduced to zero in the current year. The Company's share of investee losses
in excess of zero amounted to $2,707,500 at March 31, 2001.
Following is a summary of the operating results and financial position of
the joint venture (in thousands):
Years ended
-------------------------------------------------
March 31, March 31, March 28,
2001 2000 1999
------------ ------------ -----------
Operations:
Net sales $ 257 $ 256 $ -
Net (loss) income $ (6,105) $ (420) $ 539
Financial position:
Current assets $ 2,315 $ 1,565 $ 3,758
Noncurrent assets 28,970 32,815 26,180
------------ ------------ -----------
$ 31,285 $ 34,380 $ 29,938
============ ============ ===========
Current liabilities $ 19,234 $ 13,061 $ 5,474
Noncurrent liabilities 13,123 16,176 19,408
Shareholders' (deficit) equity (1,072) 5,143 5,056
------------ ------------ -----------
$ 31,285 $ 34,380 $ 29,938
============ ============ ===========
Page F-25
17. SEGMENT INFORMATION:
The Company conducts its business in two operating segments and uses only
one measurement of profitability. During 2001, the Company recorded battery
and laminate sales of $7.2 million and license and royalty fees of $1.5
million. If the licensing and royalty revenue grows as a percentage of
total sales, the Company will separate the revenue and related costs.
Long-lived asset information by geographic area at March 31, 2001 and March
31, 2000 is as follows (in thousands):
2001 2000
------- -------
United States $ 4,741 $ 4,851
International 25,247 23,657
------- -------
Total $29,988 $28,508
======= =======
Revenues by geographic area at March 31, 2001, March 31, 2000 and March 28,
1999 are as follows (in thousands):
2001 2000 1999
------- ------- -------
United States $ 5,120 $ 956 -
International 3,571 562 -
------- ------- -------
Total $ 8,691 $ 1,518 -
======= ======= =======
18. SUBSEQUENT EVENTS:
In June 2001, Carl Berg provided Valence with a financing commitment letter
pursuant to which he committed, subject to customary conditions, to
providing (or causing another person or entity to provide) Valence with
additional financing of up to $20 million during fiscal 2002, in the form
of a secured loan, equity investment, or a combination of both.
In June 2001, Valence entered into an agreement with Hanil Telecom Co. Ltd.
to terminate the Hanil Valence Korean joint venture that it maintained with
Hanil Telecom Co., Ltd. through Valence's Dutch subsidiary, creating a
company that is now an independent licensee of Valence. Valence no longer
has an equity position in the surviving company from this former joint
venture. The license provides that Valence would receive revenues for sales
of film/laminate and engineering services to the company and royalties for
batteries sold worldwide by the company.
On April 11, 2001, Castle Creek Investments, LDC, elected to convert 2,500
shares of their Series B Convertible Participating Preferred Stock. These
shares of Series B stock, icluding the accreted redemption value through
the date of conversion, converted to 792,476 shares of Valence's common
stock.
On April 12, 2001, Castle Creek Investments, LDC, elected to convert the
last 1,000 shares of their Series B Convertible Participating Preferred
Stock. These shares of Series B stock, including the accreted redemption
value through the date of conversion, converted to 317,036 shares of
Valence's common stock.
Page F-26
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr Total
---------- ----------- ----------- ---------- ----------
(Dollars in thousands, except per share amounts)
YEAR ENDED MARCH 31, 2001
Revenues $ 2,000 $ 2,101 $ 1,854 $ 2,736 $ 8,691
Operating loss (8,771) (9,141) (10,175) (13,978) (42,065)
Net loss (9,299) (9,302) (10,628) (14,863) (44,092)
Basic EPS(1) (0.25) (0.25) (0.28) (0.35) (1.13)
Diluted EPS(1) (0.25) (0.25) (0.28) (0.35) (1.13)
YEAR ENDED MARCH 31, 2000
Revenues $ - $ 389 $ 408 $ 721 $ 1,518
Operating loss (7,751) (8,555) (9,757) (11,192) (37,255)
Net loss (8,410) (9,544) (10,148) (41,604) (69,706)
Basic EPS(1) (0.31) (0.34) (0.32) (1.15) (2.12)
Diluted EPS(1) (0.31) (0.34) (0.32) (1.15) (2.12)
(1) The sum of Basic and Diluted EPS for the four quarters may differ from the
annual EPS due to the required method of computing weighted average number
of shares in the respective periods.
Page F-26