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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, 2002
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)
6504 BRIDGE POINT PARKWAY, SUITE 415
AUSTIN, TEXAS 78730
(Address of Principal Executive Offices) (Zip Code)
(512) 527-2900
(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, 2002 was $54,594,600.*
As of June 21, 2002, there were 51,692,144 shares of common stock
outstanding.
*Excludes approximately 15,295,744 shares of common stock held by Directors,
Officers and holders of 5% or more of the Registrant's outstanding Common Stock
at June 21, 2002. 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 2002 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III OF THIS ANNUAL REPORT.
Page 2
FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K (THIS "FORM 10-K" OR THIS "REPORT")
CONTAINS STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 21E OF THE EXCHANGE ACT AND SECTION 27A OF THE SECURITIES
ACT. THE WORDS "EXPECT", "ESTIMATE", "ANTICIPATE", "PREDICT", "BELIEVE" AND
SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS
FILING AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF VALENCE TECHNOLOGY, INC. (THE "COMPANY," "VALENCE," "WE," OR
"US"), ITS DIRECTORS OR OFFICERS WITH RESPECT TO, AMONG OTHER THINGS (A) TRENDS
AFFECTING OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS, (B) OUR PRODUCT
DEVELOPMENT STRATEGIES, TRENDS AFFECTING OUR MANUFACTURING CAPABILITIES AND
TRENDS AFFECTING THE COMMERCIAL ACCEPTABILITY OF OUR PRODUCTS, AND (C) OUR
BUSINESS AND GROWTH STRATEGIES. OUR STOCKHOLDERS 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". WE UNDERTAKE 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
Founded in 1989, our business has been driven primarily by our research and
development efforts, which have fostered our intellectual property position,
currently consisting of 818 issued and pending patents, including 268 patents
issued in the United States. Since our inception, we have been focused on
acquiring and developing our technology, developing our manufacturing
capabilities, recruiting personnel, establishing our sales channels and pipeline
and acquiring capital.
With the appointment of Stephan B. Godevais as our Chief Executive Officer
and President in May 2001, we initiated the transition of our business by
broadening our marketing and sales efforts to take advantage of our strengths in
research and development. With this strategic shift, our vision is to become a
leader in energy solutions by drawing on the numerous benefits of our latest
battery technology, the extensive experience of our management team and the
significant market opportunity available to us.
Historically, we focused our product development on the application of our
cobalt-oxide and manganese-oxide based lithium-ion technology to the mobile
communications market. Lithium-ion polymer batteries such as these are well
suited for applications including notebook computers, cellular telephones and
personal digital assistants, or PDAs, because they can be uniquely manufactured
as thin as one millimeter.
Recently, we unveiled our new lithium-ion technology, which utilizes a
phosphate-based cathode material. We have branded our phosphate-based
lithium-ion technology, Saphion(TM) technology, and believe that it addresses
the major weaknesses of existing oxide based lithium-ion alternatives while
offering a solution that is competitive in cost and performance. We believe
phosphate, in combination with different metals, enables greater energy density
than oxide technologies, whether cobalt or manganese. We believe that these
characteristics, along with the safety attributes of Saphion(TM) technology,
enable it to be designed into a wide variety of products in markets not served
by current lithium-ion solutions, including among others, consumer electronics,
appliances, toys, vehicles, uninterrupted power supply systems and other
industrial applications. Saphion(TM) technology will allow us to offer solutions
in the form of safer, environmentally friendly, lower-cost, higher performance
energy products which are becoming increasingly critical in today's energy
solutions market.
Our business strategy is enhanced by the substantial and broad based
experience of our management team in the high technology industry. During the
past year, management successfully implemented and reached key milestones of our
business transition plan. We launched the Saphion(TM) technology and
transitioned the production of our Saphion(TM) polymer batteries from research
and development to our vertically integrated manufacturing facility in Northern
Ireland. We currently are ramping up production of high quality, large format
Saphion(TM) batteries for use in the N-Charge(TM) Power System, our first
end-user product. The N-Charge(TM) Power System is the first solution
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powered by Saphion(TM) technology and is the first portable battery system
designed to recharge and/or run two mobile electronic devices simultaneously.
As we move to approach the market as a total energy solutions provider, we
believe that the cost, safety, flexibility, environmental and performance
characteristics of our Saphion(TM) technology will enable us to substantially
increase the target markets for our technology. Additionally, we believe our
management team has the industry knowledge and business experience to drive the
expansion of our technology into these new markets.
RECENT EVENTS
o SAPHION(TM) TECHNOLOGY AND THE N-CHARGE(TM) POWER SYSTEM
On February 11, 2002, at the DEMO 2002 conference, we announced the launch
of our Saphion(TM) technology, a significant and positive development for the
lithium-ion rechargeable battery marketplace. A key benefit of the technology is
its inherent electrochemical stability, which enables the creation of large,
high energy density lithium-ion solutions. It utilizes natural, phosphate-based
cathode material in place of the less stable and more costly cobalt-oxide. As a
result, Saphion(TM) technology energy systems can be designed into a wide
variety of products in markets not served by earlier lithium-ion solutions. Key
benefits of the Saphion(TM) technology include:
o COST COMPETITIVENESS: high energy density at a low cost.
o PERFORMANCE SAFETY: stable under higher temperatures and electrical
stress.
o ENVIRONMENTAL FRIENDLINESS: natural cathode material.
o INCREASED CYCLE LIFE: among the highest available for lithium-ion.
o FLEXIBILITY: appropriate for large or small, stacked or wound, polymer
or wet constructions.
o NO MAINTENANCE: Saphion(TM) technology is maintenance free.
o NO MEMORY EFFECT: no negative effect from partial versus full charge
and discharge.
o HIGH EFFICIENCY: equivalent to other lithium-ion technologies.
At DEMO 2002, we also introduced our first end-user mobile device, powered
by our Saphion(TM) technology, the N-Charge(TM) Power System. It is the first
portable battery system designed to recharge and/or run two mobile electronic
devices simultaneously. The N-Charge(TM) Power System is an easy-to-use,
stand-alone energy solution that provides power for a variety of mobile
electronic devices. With its built-in multi-device support and long-lasting
run-time, the N-Charge(TM) Power System reduces or eliminates the end-user's
need to carry multiple adapters and additional batteries. We are currently in
production of high quality, large format Saphion(TM) technology batteries for
use in the N-Charge(TM) Power System. The N-Charge(TM) Power System is available
through the Company's on-line store, via our corporate website at
WWW.VALENCE.COM or WWW.N-CHARGEPOWER.COM, and through original equipment
manufacturers, or OEMs. Key features of the N-Charge(TM) Power System include:
o SUPERIOR TECHNOLOGY: our Saphion(TM) lithium-ion technology.
o INCREASED RUN-TIME: up to 10 hours of continuous notebook use or up to
five days of non-stop cell phone talk-time (times may vary depending
on mobile device and usage pattern).
o VERSATILE POWERING/CHARGING: simultaneous powering/charging of
multiple portable devices via Adaptive Sensing Technology(TM).
o FLICKER-FREE FUNCTIONALITY: no dimming due to the detection of battery
source.
o ADVANTAGEOUS DESIGN: sleek, portable design (13 mm (H) x 300 mm (L) x
230 mm (W)).
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o STRATEGIC RELATIONSHIPS
On February 14, 2002, we announced the signing of a Memorandum of
Understanding with Acer Inc., one of the world's leading personal computer
vendors, to work together to introduce the N-Charge(TM) Power System, a product
compatible with a range of Acer's mobile devices. An Acer branded N-Charge(TM)
product is expected to be distributed by Acer. On the same date, we announced
the signing of a Memorandum of Understanding with Wistron Corporation to work
together on a new mobile device that includes Saphion(TM) technology. Wistron,
formerly the Design, Manufacturing & Services operation of Acer, is one of the
largest global suppliers for the personal computer industry to both original
equipment manufacturers (OEMs) and original device manufacturers (ODMs).
Although neither of our agreements with Acer nor Wistron provides contractual
purchase commitments on the part of the other parties, we believe that these
agreements demonstrate our ability to work with market leaders on the
development of new product applications employing our new Saphion(TM)
technology.
On March 13, 2002, we announced that our N-Charge(TM) Power System will be
featured in Hewlett-Packard Company's Education Solutions Portfolio product
bundle for the K-12 education market. We began shipments to Hewlett Packard in
April, 2002. The bundle is tailored to address the on-campus mobility needs of
the K-12 market. K-12 schools are increasingly relying on the notebook PCs
because of the mobility and flexibility they provide in the campus environment.
The inclusion of the N-Charge(TM) Power System in the product bundle helps meet
the demands of Hewlett-Packard's mobile users for longer lasting, higher
performance, safer energy solutions at a low cost. Although our arrangement with
Hewlett-Packard does not provide for contractual purchase commitments, we
believe our relationship with Hewlett-Packard is further evidence of our ability
to work with market leaders in developing new product applications employing our
Saphion(TM) technology.
SAPHION(TM): THE NEXT-GENERATION IN THE RECHARGEABLE BATTERY INDUSTRY
The driving force behind the introduction of lithium-ion technology to the
rechargeable battery industry was consumer demand for high energy, small battery
solutions to power portable electronic devices. Lithium-ion cobalt-oxide
technology was developed to meet that demand and represented a significant
advancement in battery technology. Today, however, the challenge is to find ways
to maintain costs and meet safety and environmental concerns, while increasing
energy density. Although lithium cobalt-oxide technology meets some of these
challenges, its adoption has been limited to the high technology industry for
reasons such as the following:
o EXPENSE. The majority of lithium-ion rechargeable batteries have been made
with cobalt-oxide which, although not a rare compound, is not widely
available and is expensive. Lithium-ion batteries utilizing cobalt-oxide
technology require numerous safety devices, which further increase the
costs of these batteries. In addition to the expense associated with using
cobalt material specifically, there are other general costs facing the
rechargeable battery industry as a whole. The manufacturing costs
associated with rechargeable batteries have not declined over the years
primarily because the quantities of raw materials utilized have not
decreased and the manufacturing process itself has not experienced the
types of productivity and/or yield advancements of other technologies. As a
result, over the past several years, manufacturers developing end-products
that incorporate rechargeable batteries have experienced an increase in the
relative proportional cost of the rechargeable batteries.
o SAFETY CONCERNS. A lithium-ion battery which utilizes a cobalt-oxide based
cathode requires approximately two times the amount of lithium for its full
charge and discharge operations as a lithium-ion battery which utilizes a
Saphion(TM) technology phosphate-based cathode. The lithium that is not
used for operation provides stability to the molecular structure of the
cobalt-oxide, which is inherently unstable and can break down under thermal
stress or in abnormal conditions. If a lithium-ion battery utilizing a
cobalt-oxide based cathode overcharges to a level above its rated voltage
cutoffs the cobalt-oxide may decompose, liberating heat and oxygen. This
heat and oxygen, when combined with other flammable components may cause
thermal events such as gassing, heat generation, leakage and even fire or
explosion. While the threat of a thermal event is minimized with the
manufacture of small batteries, these safety concerns have made
cobalt-oxide based batteries unsuitable for large format battery
applications.
o ENVIRONMENTAL ISSUES. Consumer awareness regarding environmental issues has
increased, encouraging the public to purchase more environmentally friendly
products, including batteries. Additionally, rechargeable battery
manufacturers, as with all other industries, must comply with environmental
regulations set by various
Page 5
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 effort to manufacture
more environmentally friendly batteries.
o ENERGY DENSITY. Rechargeable batteries must supply power for evolving
products with constantly increasing energy demands. As the capabilities and
features of products are enhanced, the energy demands on the batteries for
these products also are increased. For example, some cellular telephones
and PDAs now are being used for Internet access, in addition to their
original uses. This increased energy demand results in a need for batteries
which offer increased battery life without a corresponding increase in
weight and size.
We believe our Saphion(TM) technology, which utilizes a natural,
phosphate-based cathode in place of other less stable and more costly materials
addresses the current challenges facing the rechargeable battery industry and
provides us with several competitive advantages. Key attributes of our
Saphion(TM) technology include:
o LOWER COST. The phosphate material used in our Saphion(TM) technology is
less expensive than the cobalt-oxide material used in competing
technologies. As a result, we believe that as we manufacture batteries
utilizing our Saphion(TM) technology, we are able to do so with lower
material costs. In addition, due to the inherent safety associated with the
phosphate-based materials used in our Saphion(TM) technology, we expect
that batteries manufactured with our Saphion(TM) technology will not
require the addition of several costly safety devices.
o INCREASED SAFETY. We believe that our Saphion(TM) technology significantly
reduces the safety risks associated with cobalt-oxide based lithium-ion
technology for large format battery applications. Our Saphion(TM)
technology utilizes less lithium than other lithium-ion technologies. The
unique chemical properties of phosphates render them incombustible if
mishandled during charging or discharging. As a result, we believe
Saphion(TM) technology is more stable under overcharge or short circuit
conditions than existing lithium-ion technology and has the ability to
withstand higher temperatures and electrical stress. The thermal and
chemical stability inherent in our Saphion(TM) technology enables the
creation of large, high energy density lithium-ion solutions.
o ENVIRONMENTAL FRIENDLINESS. Rechargeable batteries that contain
nickel-metal-hydride, nickel-cadmium and lead-acid raise environmental
concerns. Saphion(TM) technology incorporates a natural, environmentally
friendly, phosphate-based cathode material.
o FLEXIBILITY. Saphion(TM) technology is intended for use in stacked, wound,
polymer or wet battery construction types. When combined with our polymer
technology, we believe it offers increased design flexibility and
stability. Saphion(TM) technology can be manufactured to fit small as well
as large applications. Large cells are well-suited for many high energy,
high power applications such as remote power supplies, load leveling
systems and vehicles.
o PERFORMANCE ADVANTAGES. We believe Saphion(TM) technology offers several
performance advantages over the competing battery chemistries of nickel
cadmium, nickel metal-hydride and traditional lithium-ion technologies.
o HIGH ENERGY DENSITY. We believe that phosphate, in combination with
different metals, can allow for greater energy density than the more
currently prevalent oxide technologies, whether cobalt or manganese.
For example, our laboratory test results for cobalt-phosphate (which
results we hope to achieve in production) show that the voltage of
cobalt-phosphate is 4.7 volts as compared to 3.7 volts for
cobalt-oxide.
o INCREASED CYCLE LIFE. We believe the cycle life of this technology is
among the highest available for lithium-ion technologies.
o NO MEMORY EFFECT AND MAINTENANCE FREE. Saphion(TM) technology does not
exhibit the "memory effect" of nickel cadmium and nickel metal-hydride
solutions and is maintenance free.
Page 6
SAPHION(TM) TECHNOLOGY DEVELOPMENT GOALS
On February 11, 2002, we announced the launch of our Saphion(TM)
technology. We expect our Saphion(TM) technology family of products to deliver
performance levels ranging from 200-550 Watt-hours per liter, depending on
construction and chemistry. We expect higher energy densities of our Saphion(TM)
technology to be achieved in the cylindrical construction, which we plan to
launch next year. We also expect that in certain configurations Saphion(TM)
technology, at 23(0)C (room temperature), will be able to deliver a cycle life
of greater than 700 cycles to 70% capacity. As we continue to develop and apply
this technology, we intend to further improve its characteristics in areas such
as energy density, cycle life and rate capability.
COMPETITIVE STRENGTHS
We believe we are uniquely positioned for growth due to the following
competitive strengths:
o LEADING TECHNOLOGY. We believe our latest technological advancement, our
phosphate-based Saphion(TM) lithium-ion technology, offers many performance
advantages over competing battery technologies and creates new market
opportunities. In addition, in combination with our polymer technology, our
Saphion(TM) technology enables us to continue to manufacture thin,
lightweight batteries required for portable electronic devices.
o NEW MARKET OPPORTUNITIES. We believe that Saphion(TM) technology enables
the production of high energy density, large format batteries without the
safety concerns presented by cobalt-oxide based batteries. Consequently, we
believe that Saphion(TM) technology energy systems can be designed in a
wide variety of products in markets not served by current lithium-ion
technology.
o EXPERIENCED MANAGEMENT TEAM. We have strengthened our management team with
several key people who have a broad base of experience in the high
technology industry. The leader of our team is Stephan Godevais, who has 18
years of management and marketing experience at Dell Computer Corporation,
Digital Equipment Corporation and Hewlett-Packard Company. During his
tenure at Dell, Mr. Godevais launched the company's Inspiron division,
growing it into a multi-billion dollar business and introduced the first
15" notebook in the industry, sustaining its position as a market leader
from 1998 to 2000. Terry Standefer, Vice President of Worldwide Operations
is also a key member of the management team. Mr. Standefer has 23 years of
operational experience at Dell and Apple Computer. With its extensive
knowledge base and market experience, we believe our management team will
be able to identify customer needs and drive the expansion of our
technology into new markets.
o REFINED STRATEGIC FOCUS. We have transitioned to a company capitalizing on
the results of our research and development by strengthening our sales and
marketing efforts. We are expanding our vision to become an energy
solutions company, and in addition to competing in existing lithium-ion
markets, plan to enter markets previously not served by lithium-ion
solutions.
o NEW PRODUCT APPLICATIONS. In February, 2002 we unveiled the N-Charge(TM)
Power System, which is the first portable battery system designed to
recharge and/or run two mobile electronic devices simultaneously. In
addition, we announced agreements to work with Acer, Wistron and
Hewlett-Packard. We plan to continue to develop relationships with these
and other customers in an effort to leverage our technology into new
markets.
o PRODUCT VERSATILITY. Our products are appropriate for use in a wide variety
of applications for the communications, computer and military markets. We
intend to be able to expand these markets with our Saphion(TM) technology
and believe that it can be designed into a wide variety of products in
markets not served by current lithium-ion technologies.
STRATEGY
Beginning in August 2001, our management team organized our business
transformation into three phases: technology phase, product phase and customer
phase, incorporating key milestones in each. Management has, and in each phase
plans to continue to, inform and educate the market regarding the advantages of
its technology and products.
Page 7
o TECHNOLOGY PHASE: During this phase we evangelized the technology,
completed our management team, announced the first major design win from a
systems sales standpoint and signed an OEM agreement for the production of
lithium-ion polymer batteries. This phase of our business transformation
began in August 2001, and while ongoing, all but one, of our milestones
have been met.
o PRODUCT PHASE: During this phase we expect to continue to complete the
design of new products and market our phosphate based Saphion(TM)
technology to potential licensees. In addition, we expect to launch
phosphate products, announce key milestones around phosphate production,
and initiate phosphate product ramps at our Northern Ireland facility and
through OEM partners. This phase began in February 2002 with the launch of
the N-Charge(TM) Power System. We are ramping up production of our
phosphate batteries out of our Northern Ireland facility and are pursuing
contract manufacturing arrangements with cylindrical battery manufacturers
with the objective of using Saphion(TM) technology as a "drop in"
lithium-ion chemistry replacement for notebook computers and communication
devices.
o CUSTOMER PHASE: During this phase, which will become our ongoing business,
we expect to engage with customers regarding the launch of products using
Saphion(TM) technology. On February 14, 2002 we announced the signing of a
Memorandum of Understanding with Acer to work together to introduce the
N-Charge(TM) Power System, which is powered by Saphion(TM) technology. On
the same date, we announced the signing of a Memorandum of Understanding
with Wistron to work together on a new mobile device that would include our
Saphion(TM) technology. On March 13, 2002, we announced that our
N-Charge(TM) Power System will be featured in Hewlett-Packard's Education
Solutions Portfolio product bundle for the K-12 education market.
Subsequent to March 31, 2002, we began shipment of the N-Charge(TM) Power
System to Hewlett Packard. We have engaged with several other Tier 1 OEMs
regarding the N-Charge(TM) System and the use of our Saphion(TM) technology
in other applications.
Our strategy is to leverage our next-generation innovations in battery
technology and capitalize on the significant opportunities in the energy
solutions market. Key elements of our strategy include:
o ROLLOUT OF OUR PHOSPHATE-BASED SAPHION(TM) LITHIUM-ION TECHNOLOGY. We
recently introduced our phosphate-based, Saphion(TM) lithium-ion technology
and have commenced production in our Northern Ireland manufacturing
facility. We plan to continue to pursue opportunities to introduce our
technologies in additional markets.
o EXECUTE A BALANCED LICENSING AND SYSTEM SALES APPROACH. In an effort to
rapidly expand the fields of use of our technology, we intend to license
intellectual property related to our patent-protected manufacturing
processes and battery chemistries. Our stacked polymer battery
manufacturing process and our Saphion(TM) technology are our key offerings
in the licensing arena. We intend to partner with large material producers
to leverage their manufacturing capabilities and existing sales channels to
facilitate the rapid adoption of our Saphion(TM) technology. The adoption
of the Saphion(TM)technology is expected to result in licensing and royalty
revenue for the Company. We also intend to capitalize on our advanced
technology to design solutions that differentiate end-users' products.
Additionally, we plan to leverage our understanding of certain market
segments to develop new, emerging markets for our Saphion(TM) lithium-ion
technology solutions. Our systems sales strategy includes:
o Continuing sales of our cobalt-oxide and manganese-oxide based stacked
polymer battery solutions to small and mid-sized companies, where the
flexibility of design and thinness of the stacked polymer is
paramount.
o Developing the market for our Saphion(TM) technology through our own
product launches, such as the N-Charge(TM) Power System, and through
products designed by others, such as the Wistron agreement announced
in February 2002. Our success in developing this market for our
Saphion(TM) technology is evidenced by our February 2002 agreement
with Acer, as well as our relationship with Hewlett-Packard, announced
in March 2002.
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o Maximizing the adoption of Saphion(TM) technology by offering it in
both polymer and cylindrical constructions. We plan to enter contract
manufacturing arrangements with cylindrical battery manufacturers.
o IMPLEMENT A MANUFACTURING PLAN THAT LEVERAGES INTERNAL CAPABILITIES AS WELL
AS OEM RELATIONSHIPS. We intend to expand production assembly capacity in
our Northern Ireland facility and to seek OEM partners for cylindrical cell
construction and worldwide material production. We believe this
manufacturing strategy will allow us to deliver to a broad range of
customer needs, from low cost, high volume to highly customized, higher
value added solutions.
We believe our strategy will allow us to expand our market opportunity.
Through the sales of our current technology and the licensing and market
development of our Saphion(TM) technology, we believe we are equipped to serve
existing lithium-ion technology markets as well as open doors to new market
opportunities.
MANUFACTURING AND SALE OF BATTERY PRODUCTS
We have developed six standard "footprints" or battery product designs,
which can be commercially produced through low cost, high volume manufacturing
processes at our Northern Ireland manufacturing facility. These products are
intended for use in a number of applications, including as rechargeable power
sources for portable electronic devices, such as notebook computers, home
personal computers, PDAs and cellular telephones.
Cell Capacity Thickness x Width x Length Weight Key Applications
Designation (mAh) (mm) (g)
================================================================================================
VM41103103 2910 4.1 x 103 x 103 82 Designed for applications
requiring high energy
capacity solutions such as
EV and SUV where weight,
thickness or pressure
tolerance are key
considerations.
Designed for applications
requiring high energy
capacity solutions such as
VM60103103 4360 6 x 103 x 103 121 EV and SUV where weight,
thickness or pressure
tolerance are key
considerations.
Designed for hand-held
devices, notebook
computers and other high
performance applications
VM4172140 2750 4.1 x 72 x 140 79 where safety, weight,
thickness and energy
capacity are key
considerations.
Designed for hand-held
devices, notebook
computers and other
advanced personal
VM6072140 4120 6 x 72 x 140 116 electronic devices where
energy capacity is a key
consideration.
Designed for PDA-phones,
hand-held entertainment
devices and other advanced
personal electronic
VC315590 1290 3.1 x 55 x 90 30 devices where energy
capacity and pulse load
capability are key
considerations.
VC497165 1860 4.9 x 71 x 65 42 Designed for PDA-phones,
hand-held entertainment
devices and other advanced
personal electronic
devices where energy
capacity and pulse load
capability are key
considerations.
Page 9
In addition to our standard product offering, we recently launched two
models of our first end-user product, the N-Charge(TM) Power System. Both models
of the N-Charge(TM) Power System represent the first commercial introduction of
our Saphion(TM) lithium-ion technology.
N-CHARGE(TM) SPECIFICATIONS
FEATURE MODEL VNC-130 MODEL VNC-65
- ------------------------ --------------------- ---------------------
High power port voltage 16-24 V DC 16-24 V DC
Low power port voltage 5-12 V DC 5-12 V DC
Capacity 10 Ah 5 Ah
Energy 120-130 Wh 60-65 Wh
Charge time (typical) Up to 4 hours Up to 3.5 hours
Thickness 13 mm 13 mm
Length 300 mm 300 mm
Width 230 mm 230 mm
Weight 1.35 kg .866 kg
Cycle Life > 600 to 70% capacity > 600 to 70% capacity
MANUFACTURING
We currently manufacture our six standard battery product designs at our
vertically integrated manufacturing plant in Mallusk, Northern Ireland. The
Northern Ireland factory began automated assembly in the first quarter of 1999
and is state-of-the-art in high-volume manufacturing equipment. We have the
ability to manufacture a range of battery sizes and thickness, utilizing the
following chemistries: cobalt-oxide; manganese-oxide; and phosphate. Our
batteries are intended for use in multiple applications, including but not
limited to, PDAs, computer accessories, cellular phones and military equipment.
On May 29, 2002, we entered into an OEM agreement with Amperex Technology
Limited, or ATL, to complement out internal manufacturing capabilities. ATL, a
Hong Kong based battery manufacturer, will provide us with additional production
capacity in a low cost region of the world. With this agreement and the
continuing expansion of our internal capabilities, we believe that we will have
sufficient capacity to meet or exceed the expected demand in fiscal 2003. This
agreement, which provides ATL with a right of first refusal to manufacture our
non-Saphion(TM) based batteries (but no obligation to do so), expires in May
2007.
We currently employ approximately 120 manufacturing personnel at our
facility. These employees include process engineers, chemists, supervisors and
production personnel.
Our manufacturing process is entirely vertically integrated. We begin the
production process by mixing dry powders and solvents together to produce liquid
slurries for the anode, cathode and separator. Each slurry is then cast into a
film on one of our two 150 foot long coating lines. After coating, the material
is stored in a roll of material, called films. These films are the raw materials
that are later assembled through the lamination, assembly and packaging
processes to become the battery.
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 film makeup to ensure that the films meet the 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.
o DESIGN CONTROL: We customize the design of batteries in terms of
desired performance and physical characteristics through our
manipulation of physical and chemical properties of the films.
o TECHNOLOGY CONTROL: We believe our strength lies in the ability to
develop new battery materials and translate the new technology into
high volume production. We have a strong relationship between our
Research and Development and Manufacturing teams. We use a phased
project approach in introducing new products into production.
Page 10
The processes we have in place at our Northern Ireland facility enable us
to build and deliver high quality products to our end customers due to the
integrated approach of Development, Manufacturing, Procurement and Systems
Design.
RESEARCH AND PRODUCT DEVELOPMENT
We conduct research and development and pilot production at our Henderson,
Nevada facility. 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 and radiation chemistries; 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
advance these improvements into 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 allows us to maintain
our competitive advantage.
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-ion polymer
batteries. We believe that our Saphion(TM) technology will compete in these
traditional rechargeable battery markets and address other markets currently not
being served by these technologies.
The industry consists of major domestic and international companies, which
have substantial financial, technical, marketing, sales, manufacturing,
distribution and other resources available to them. Our primary competitors who
have announced availability of either lithium-ion or lithium-ion polymer type
rechargeable battery products include Sony, Sanyo, Panasonic and Toshiba, among
others.
The performance characteristics of lithium-ion batteries, in particular,
have consistently improved over time as the market leaders have matured the
technology. Other contenders have recently emerged with a primary focus on price
competition. In addition, a number of companies are undertaking research in
other rechargeable battery technologies, including work on lithium-ion 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-ion polymer
battery market. We believe that our battery construction and manufacturing
processes allow us to produce thinner, lighter and larger footprint batteries,
thus enabling us to enter a wide range of markets that do not currently use
lithium-ion 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.
We rely on patent protection for certain designs and products. We hold
approximately 268 United States patents, which have a range of expiration dates
from 2005 through 2019 and have about 64 patent applications pending in the
United States. We continually prepare new 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.
Page 11
REGULATION
Before we commercially introduce our batteries into certain markets, we may
be required, or may decide to obtain approval of our materials and/or products
from one or more of the organizations engaged in regulating 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 the summer of 1999, involving another supplier of
liquid button batteries that were mishandled at Los Angeles International
Airport, DOT staff members are reviewing regulations. 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.
HUMAN RESOURCES
As of June 14, 2002, we had a total of 120 regular full-time employees in
the United States at our Austin, Texas headquarters and our Henderson, Nevada
research and development facility. We have 40 total employees in the areas of
administration, sales, legal, marketing, finance, management information
systems, purchasing, quality control and shipping & receiving. We had 30 total
employees in the areas of engineering, facilities maintenance and environmental
health & safety. We had 50 total employees in the areas of research &
development and product development; product development includes mixing,
coating and assembly. In addition, as of June 14, 2002, our Dutch subsidiary had
120 regular full time employees located in Northern Ireland. None of our
employees are covered by a collective bargaining agreement, and we consider our
relations with our employees to be good.
Page 12
ITEM 2. PROPERTIES
Our corporate offices are located in a leased facility in Austin, Texas. In
addition, we own a 55,000 square foot research and development facility in
Henderson, Nevada. In December 2001 we paid the mortgage in full on the
facility.
Our Dutch subsidiary owns a manufacturing facility in Mallusk, Northern
Ireland, with approximately 105,000 square feet. We exercised the option to
purchase an adjacent facility, with approximately 50,000 square feet, under a
lease purchase agreement. As of March 31, 2002 we had mortgages on the
manufacturing facility of approximately $4,590,000 and $1,977,000 that bear
interest at an annual rate of 5.5% and 5.75%, respectively.
We believe that our existing facilities will be adequate to meet the
Company's needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We received notification that 23 former employees of the Mallusk, Northern
Ireland facility filed claims against us alleging breach of contract and lack of
consultation prior to termination due to the reduction in force in March 2001 at
the facility. We have settled 18 of the claims and are pursuing resolutions of
the five remaining claims. We contest the claims and believe we have adequate
defenses and will continue to defend our position.
We are subject to various claims and litigation in the normal course of
business. In our opinion, all pending legal matters are either covered by
insurance or, if not insured, will not have a material adverse impact on our
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 2002, we held an annual meeting of our stockholders for the
fiscal year ended March 31, 2001. The following directors were elected at the
meeting: Carl E. Berg, Lev M. Dawson, Stephan B. Godevais, Bert C. Roberts, Jr.
and Alan F. Shugart.
The votes cast in the election for directors were as follows (there were no
votes against and no broker non-votes):
NOMINEE VOTES IN FAVOR WITHHELD
------- -------------- -----------
Carl E. Berg 25,167,441 915,652
Lev M. Dawson 25,211,341 871,752
Stephan B. Godevais 24,455,723 1,627,370
Bert C. Roberts, Jr. 25,201,941 881,152
Alan F. Shugart 25,196,641 886,452
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:
FISCAL 2001: HIGH LOW
--------- ---------
Quarter ended June 30, 2000 $ 24.375 $ 11.125
Quarter ended September 30, 2000 23.125 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 10.25 2.875
Quarter ended September 30, 2001 7.25 3.15
Quarter ended December 31, 2001 4.30 3.00
Quarter ended March 31, 2002 4.80 2.33
FISCAL 2003:
Quarter ended June 30, 2002
(through June 21, 2002) 3.17 1.28
On June 21, 2002, the last reported sale price of our common shares on the
Nasdaq National Market was $1.50 per share. On that date, we had 51,692,144
shares of common stock outstanding held of record by approximately 640 record
holders and an estimated over 15,000 beneficial owners.
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying cash dividends in the foreseeable future.
The following table includes, as of March 31, 2002, information regarding
common stock authorized for issuance under our equity compensation plans:
NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE NUMBER OF SECURITIES
EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE OR
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
-------------------- -------------------- -------------------------
Equity compensation
plans approved by
security holders 4,501,592 7.90 2,023,253
Equity compensation
plans not approved by
security holders (1) 1,925,000 6.45 -
Total 6,426,592 7.47 2,023,253
(1) Options to purchase 1,500,000 shares were granted to Stephan Godevais in May
2001 pursuant to his employment agreement. The exercise price of his options is
$6.52 and they vest over four years. 25% of the options (375,000 shares) vested
in May 2002 and the remainder vest in 12 equal quarterly installments during the
term of his employment. The vesting accelerates and become immediately
exercisable on the date of a change of control of the Company (including if he
has been terminated without good cause or resigned for good reason). Options to
purchase 225,000 shares were granted to Joseph Lamoreux in June 2001 pursuant to
his employment agreement. The exercise price of his options is $7.18 and they
vest over four years. 25% of the options (56,250 shares) vested in June 2002 and
the remainder vest in 12 equal quarterly installments during the term of his
employment. Options to purchase 200,000 shares were granted to Terry Standefer
in August 2001 pursuant to his employment agreement. The exercise price of his
options is $5.15 and they vest over four years. 25% of the options (50,000
shares) will vest in August 2002 and the remainder vest in 12 equal quarterly
installments during the term of his employment.
Page 14
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 31, 2000, March 31,
2001 and March 31, 2002 and balance sheet data as of March 31, 2001 and March
31, 2002 from the audited consolidated financial statements in this report. We
derived the statement of operations data for the years ended March 29, 1998, and
March 28, 1999, and the balance sheet data as of March 29, 1998, March 28, 1999,
and March 31, 2000 from audited financial statements that are not included in
this report.
Page 15
FISCAL YEAR ENDED
-----------------------------------------------------------------
MARCH 29, MARCH 28, MARCH 31, MARCH 31, MARCH 31,
1998 1999 2000 2001 2002
----------- ---------- ---------- ---------- -----------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue
License Fees $ --- $ --- $ --- $ 1,500 $ 3,203
Battery and laminate sales --- --- 1,518 7,191 1,671
----------- ---------- ---------- ---------- -----------
Total revenue --- --- 1,518 8,691 4,874
Cost and expenses:
Cost of Sales --- --- --- 19,366 8,649
INI Revenue Grant --- --- --- (1,191) ---
----------- ---------- ---------- ---------- -----------
Cost of Sales, Net --- --- --- 18,175 8,649
Research and product development 15,432 18,783 19,000 8,516 9,681
Marketing 855 105 297 1,080 1,957
General and administrative 7,066 6,753 6,795 11,676 11,971
Depreciation and amortization(3) --- 3,388 9,510 11,309 7,927
Impairment Charge --- --- --- --- 31,884
Factory start-up costs(1) --- --- 3,171 --- ---
----------- ---------- ---------- ---------- -----------
Total costs and expenses 23,353 29,029 38,773 32,581 63,420
----------- ---------- ---------- ---------- -----------
Operating loss (23,353) (29,029) (37,255) (42,065) (67,195)
Stockholder lawsuit(2) --- --- (30,061) --- ---
Interest and other income 1,174 2,980 804 1,256 2,049
Interest expense (528) (643) (1,841) (2,332) (4,327)
Loss on disposal of assets --- --- (583) (15) (147)
Equity in earnings (loss) of
Joint Venture (1,779) 268 (210) (345) ---
----------- ---------- ---------- ---------- -----------
Net loss (24,486) (26,424) (69,146) (43,501) (69,620)
Beneficial conversion feature
on preferred stock --- (2,865) (560) (591) ---
----------- ---------- ---------- ---------- -----------
Net loss attributable to
common stockholders $ (24,486) $(29,289) $(69,706) $(44,092) $ (69,620)
=========== ========== ========== ========== ===========
Net loss per share
attributable to common
stockholders, basic and
diluted $ (1.06) $ (1.13) $ (2.28) $ (1.14) $ (1.53)
=========== ========== ========== ========== ===========
Shares used in computing net
loss per share attributable to
common stockholders, basic and
diluted(2) 23,010 25,871 30,523 38,840 45,504
=========== ========== ========== ========== ===========
Page 16
MARCH 29, MARCH 28, MARCH 31, MARCH 31, MARCH 31,
1998 1999 2000 2001 2002
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 8,400 $ 2,454 $ 24,556 $ 3,755 $ 623
Working capital (deficit) (1,773) (7,784) 16,007 5,684 (2,851)
Total assets 42,894 38,401 58,516 86,884 30,531
Long-term debt 4,950 8,171 12,369 20,651 34,639
Accumulated deficit (128,012) (154,436) (223,582) (267,083) (336,703)
Total stockholders' equity 22,962 7,955 27,845 48,214 (15,863)
- ---------------------
(1)(2) See Results of Operations discussion in Item 7 Below.
(3) For the fiscal year ended 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"), OUR DIRECTORS OR OFFICERS WITH RESPECT TO, AMONG OTHER THINGS
(A) TRENDS AFFECTING OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS, (B) OUR
PRODUCT DEVELOPMENT STRATEGIES, TRENDS AFFECTING OUR MANUFACTURING CAPABILITIES
AND TRENDS AFFECTING THE COMMERCIAL ACCEPTABILITY OF OUR PRODUCTS, AND (C) OUR
BUSINESS AND GROWTH STRATEGIES. OUR STOCKHOLDERS 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. WE UNDERTAKE
NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS OR CIRCUMSTANCES THAT ARISE AFTER THE DATE HEREOF.
BUSINESS AND BUSINESS STRATEGY
Founded in 1989, our business has been driven primarily by our research and
development efforts, which have fostered our intellectual property position,
currently consisting of 818 issued and pending patents, including 268 patents
issued in the United States. Since our inception, we have been focused on
acquiring and developing our technology, developing our manufacturing
capabilities, recruiting personnel, establishing our sales channels and pipeline
and acquiring capital.
With the appointment of Stephan B. Godevais as our Chief Executive Officer
and President in May 2001, we initiated the transition of our business by
broadening our marketing and sales efforts to take advantage of our strengths in
research and development. With this strategic shift, our vision is to become a
leader in energy solutions by drawing on the numerous benefits of our latest
battery technology, the extensive experience of our management team and the
significant market opportunity available to us.
Our business strategy is to leverage our innovations in battery technology
to capitalize on the significant opportunities in the energy solutions market.
The strategy comprises the introduction of our "next generation" phosphate-based
Saphion(TM) Lithium-ion technology; a balance of system sales and licensing; and
a manufacturing plan that leverages internal capabilities as well as OEM
relationships. The strategy has been separated into three phases: technology
phase, product phase and customer phase, incorporating key milestones in each.
Page 17
We have introduced our phosphate-based, Saphion(TM) Lithium-ion technology
and have transitioned production from research and development to our Northern
Ireland manufacturing facility. We believe our Saphion(TM) technology addresses
the major weaknesses of existing Lithium-ion alternatives while offering a
solution that is competitive in cost and performance.
The system sales component of the strategy involves capitalizing on our
advanced technology and understanding of certain market segments to design
solutions that differentiate end customers' products and to develop new,
emerging markets for our Saphion(TM) Lithium-ion technology solutions. Our
systems sales strategy includes (i) continuing sales of our Cobalt and Manganese
based stacked polymer batteries solutions to small to mid-sized companies where
the flexibility of design and thinness of the stacked polymer is paramount, (ii)
developing the market for Saphion(TM) technology through our own product
launches, such As the N-Charge(TM) Power System, and products designed by
others, such as the Wistron deal announced in February 2002 and (iii) maximizing
the adoption of Saphion(TM) technology by offering it in both polymer and
cylindrical constructions.
Our licensing strategy is to pursue technology licenses of intellectual
property related to patent protected manufacturing processes and battery
chemistries. Our stacked polymer battery manufacturing process and Saphion(TM)
technology are our key assets in the licensing arena. In addition, we intend to
partner with large material producers to leverage their manufacturing
capabilities and existing sales channels. This should facilitate the rapid
adoption of our Saphion(TM) technology and provide a source for licensing and
royalty revenue.
Our manufacturing strategy involves both our own manufacturing capabilities
in the Northern Ireland facility and OEM relationships. In May, 2002 we entered
into an OEM agreement with Amperex Technology Limited, and intend to seek
additional OEM partners for cylindrical cell construction and worldwide material
production. We plan to enter into contracted manufacturing arrangements with
cylindrical battery manufacturers. We believe this manufacturing strategy will
allow us to deliver to a broad range of customer needs from low cost, high
volume to highly customized, higher value added solutions.
We have outlined our business strategy in three phases as follows:
TECHNOLOGY PHASE: During this phase we evangelized the technology, completed our
management team, announced the first major design win from a systems sales
standpoint and signed an OEM agreement for the production of lithium-ion polymer
batteries. This phase of our business transformation began in August 2001, and
while ongoing, all but one, of our milestones have been met.
PRODUCT PHASE: During this phase we expect to complete the design of new
products and continue the marketing to potential phosphate licensees, begin to
launch phosphate products, announce key milestones around phosphate production
and begin phosphate product ramps from both our Northern Ireland facility and
OEM partners. This phase began in February 2002 with the launch of the
N-Charge(TM) Power System. We are ramping up production of our phosphate
batteries out of our Northern Ireland facility and are pursuing contract
manufacturing arrangements with cylindrical battery manufacturers with the
objective of using Saphion(TM) technology as a "drop in" lithium-ion chemistry
replacement for notebook computers and communication devices.
CUSTOMER PHASE: During this phase, which will become our ongoing business, we
expect to engage with customers regarding the launch of products using
Saphion(TM) technology. On February 14, 2002 we announced the signing of a
Memorandum of Understanding with Acer to work together to introduce the
N-Charge(TM) Power System, which is powered by Saphion(TM) technology. On the
same date, we announced the signing of a Memorandum of Understanding with
Wistron to work together on a new mobile device that would include our Saphion
(TM) technology. On March 13, 2002, we announced that our N-Charge(TM) Power
System will be featured in Hewlett-Packard's Education Solutions Portfolio
product bundle for the K-12 education market. Subsequent to March 31, 2002, we
began shipment of the N-Charge(TM) Power System to Hewlett Packard. We have
engaged with several other Tier 1 OEMs regarding the N-Charge(TM) System and the
use of our Saphion(TM) technology in other applications.
We have established a strategy that we believe will allow us to expand our
market opportunity. Through the sale of our current technology and the licensing
and market development of our Saphion(TM) technology, we believe we are equipped
to serve existing Lithium-ion technology markets as well as open doors to new
market opportunities.
Page 18
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2002 (FISCAL 2002), MARCH 31, 2001 (FISCAL 2001)
AND MARCH 31, 2000 (FISCAL 2000)
REVENUE. The following table summarizes the Company's revenue by type for each
of the past three fiscal years:
MARCH 31, PERCENTAGE MARCH 31, PERCENTAGE MARCH 31,
2002 CHANGE 2001 CHANGE 2000
----------- ---------- ---------- ---------- ---------
Amounts in 000s
Battery and laminate sales $ 1,671 -77% $7,191 374% $ 1,518
License and royalty
revenue 3,203 114% 1,500 N/A -
Total revenues $ 4,874 -44% $8,691 473% $ 1,518
BATTERY AND LAMINATE SALES: We completed our first commercial sale of batteries
during February 2000. During fiscal 2001, we achieved an increase of 374% in
revenue from sales of battery and laminate. In December 2000, we completed the
acquisition of technology rights from Telcordia Technologies, Inc. and
correspondingly completed a strategic shift away from expanding our battery and
laminate sales pipeline to an emphasis on licensing and royalty revenue. During
fiscal 2002, we implemented a balanced strategy leveraging revenues from both
our licensing and battery and laminate lines of business. As a result of the
strategic shifts, our revenue for battery and laminate sales decreased 77% to
$1.7 million in fiscal 2002.
LICENSING AND ROYALTY REVENUE: In December 2000, we completed the acquisition of
technology rights from Telcordia Technologies, Inc. We recorded initial revenues
from licensing totaling $1.5 million during fiscal 2001. During fiscal 2002, we
expanded our licensee base, including the conversion of a joint venture to a
licensee, and began collecting royalties from our licensees resulting in a 114%
increase in license and royalty revenue.
TOTAL REVENUES: Revenues from six significant customers represented a total of
83% of total revenues for the fiscal year and a total of 65% of the trade
accounts receivable at March 31, 2002. For fiscal year 2001, five customers
represented 98% of total revenues for the year and 95% of trade accounts
receivable at March 31, 2001. In the fiscal year ended March 31, 2000, two
customers had 98% of the total revenues for the year.
COST OF SALES. Cost of sales consists primarily of expenses incurred to
manufacture battery and laminate products. We initiated the recording of costs
of sales as we ramped production and began our transition from a research and
development focused organization during fiscal 2001. During fiscal 2002, we
recorded cost of sales of $8.6 million. Comparably, cost of sales totaled $18.2
million during fiscal 2001, net of grant funding of $1.2 million provided by the
Northern Ireland Industrial Development Board, now known as Invest Northern
Ireland or INI, as a reduction of labor costs. The decrease from fiscal 2001 to
fiscal 2002 represents over a 30% reduction of costs of sales as a percentage of
sales. The substantial decrease in fiscal 2002 from fiscal 2001 is due to
continued automation improvements in the Northern Ireland facility and the
reduction in battery and laminate production volumes.
RESEARCH AND PRODUCT DEVELOPMENT. Research and product development expenses
consist primarily of personnel, equipment and materials to support the Company's
battery and product research and development. Research and product development
expense totaled $9.7 million, $8.5 million, and $19.0 million for the fiscal
years ended March 31, 2002, 2001, and 2000, respectively. The $1.2 million or
14% increase in research and product development expenses from fiscal 2001 to
2002 relates to the both additional engineering for development of the our first
end-user product and expanded development and pilot production of our Saphion
chemistry. The $10.5 million or 55% decrease in research and product development
expenses from fiscal 2000 to 2001 reflects our initial transition from solely a
research and development focus.
MARKETING. Marketing expenses consist primarily of costs related to sales and
marketing personnel, public relations and promotional materials. Marketing
expenses were $2.0 million, $1.1 million, and $0.3 million for the fiscal years
ended March 31, 2002, 2001, and 2000, respectively. The $0.9 million or 81%
increase in marketing expenses during fiscal 2002 resulted from increased
personnel, the launch of a new corporate web site, the development of our
on-line store, and the creation of promotional materials and sales tools. Our
increased expenditures during fiscal 2002 and 2001 are in line with our
transition from a research and development focused organization to a sales and
customer focused entity.
Page 19
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other related costs for finance, human resources,
accounting, information technology, legal, and corporate related expenses.
General and administrative expenses totaled $12.0 million, $11.7 million, and
$6.8 million for the fiscal years ended March 31, 2002, 2001, and 2000
respectively. The $0.3 million or 3% increase in general and administrative
expenses from fiscal 2001 to fiscal 2002 relate primarily to increased
recruiting efforts associated with completion of the management team and
relocation of the corporate office to Austin, Texas. The $4.9 million or 72%
increase in general and administrative expenses from fiscal 2000 to fiscal 2001
was due to additional finance and management headcount, increased spending on
investor relations, insurance, environmental compliance, and legal fees
associated with intellectual property transactions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were $7.9
million, $11.3 million, and $9.5 million for fiscal years ended March 31, 2002,
2001, and 2000, respectively. The $3.4 million or 30% decrease in depreciation
and amortization expenses during fiscal 2002 resulted primarily from the impact
of an impairment charge taken during the third quarter of fiscal 2002 as
described below. This decrease is partially offset by depreciation for capital
assets acquired during fiscal 2002.
IMPAIRMENT CHARGE: During the third quarter of fiscal 2002, we recorded an
impairment charge of $31.9 million. The charge was recorded pursuant to FASB
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". During the third quarter of fiscal 2002,
we refined our business strategy and solidified our manufacturing plan and
product mix. As a result, we determined that the future cash flows expected to
be generated from older manufacturing equipment in our Northern Ireland facility
and intellectual property acquired in the Telcordia transaction in December 2000
did not exceed their carrying value. This determination resulted in a net
impairment charge against property, plant and equipment and intellectual
property to adjust these assets to their fair value.
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, we reached a
settlement in the securities class-action lawsuit that had been pending against
the Company. The court-approved settlement dismissed all claims against us 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 we issued 950,000 shares of common stock, to the class fund.
We took an accounting charge during the fourth quarter of fiscal 2000 of $30.1
million or ($0.98) per share for the impact of this settlement.
INTEREST AND OTHER INCOME. Interest and other income increased 63% to $2.0
million for the fiscal year ended March 31, 2001 from $1.3 million for the
fiscal year ended March 31, 2001. Interest and other income increased 56% to
$1.3 million for the fiscal year ended March 31, 2001, from $804,000 for the
fiscal year ended March 31, 2000. The increases in both fiscal 2002 and 2001
were due primarily to increased investment income.
INTEREST EXPENSE. Interest expense increased 86% to $4.3 million for the fiscal
year ended March 31, 2002 from $2.3 million for the fiscal year ended March 31,
2001. Interest expense increased 27% to $2.3 million for the fiscal year ended
March 31, 2001, from $1.8 million for the fiscal year ended March 31, 2000. The
increases for both fiscal 2002 and in 2001 were the result of increased
borrowings from Berg & Berg.
EQUITY IN EARNINGS (LOSS) OF JOINT VENTURE. In June 2001, we reached and
agreement with our joint venture partner, Hanil Telecom Co., Ltd. (Hanil
Telecom) to terminate the Hanil Valence Korean joint venture. As conditions of
the termination, Shinhan Bank transferred its payment guarantee obligations
under a line of credit from us to Hanil Telecom and we granted a license to an
affiliate of Hanil Telecom. In addition, the deferred revenue balance of $2.5
million was offset by approximately $896,000 of accounts receivable and the
remaining $1.6 million balance was recorded as license revenue to recognize the
license agreement.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had cash and cash equivalents of $623,000. On April
9, 2002 we raised net proceeds of approximately $15.2 million through the sale
of 6.122 million shares of our common stock. In addition, as of March 31,
Page 20
2002 we had $3.5 million available under a loan agreement and $30.0 million
available under an equity line of credit with Berg & Berg Enterprises. This
equity line of credit is subject to stockholder approval at our 2002 annual
meeting and completion of definitive documentation. We have commitments for
capital expenditures for the next 12 months of approximately $1.2 million
relating to specified manufacturing equipment, which is included in accrued
expenses at March 31, 2002. We may require additional capital expenditures in
order to meet greater demand levels for our products than are currently
anticipated. After taking into account our cash and cash equivalents, projected
cash flows from licensing and systems sales and available funding from our loan
agreement and equity line of credit, we expect that we will have sufficient
financing through fiscal 2003 to meet our working capital, capital expenditure
and investment requirements. At our current level of operations, we are using
cash from operations of approximately $6.0 to $9.0 million per quarter. We
expect our cash requirements to increase as our sales increase, and we intend to
manage our capital expenditures based on our then available sources of cash. We
may have additional sources of cash from the commercialization of our
Saphion(TM) technology into new markets and customers in addition to the sale of
new products announced in February 2002. However, at this time we are not able
to accurately forecast cash from these sources.
We used net cash from operations for fiscal 2002, 2001 and 2000 of $26.2
million, $38.2 million and $29.8 million, respectively. The cash used in our
fiscal 2002 operating activities was primarily due to net loss and the add back
of non-cash expenses, including depreciation and amortization, provision for bad
debt, impairment charge, accretion of debt discount, and compensation related to
issuance of stock options. The decrease in operating cash outflows was
substantially due to operational improvements, lower production levels and
inventory utilization in our Northern Ireland facility.
We used $8.8 million, $21.8 million and $5.2 million in investing
activities in fiscal 2002, 2001 and 2000, respectively. Capital expenditures
during fiscal 2001and fiscal 2002 were primarily related to the establishment
and expansion of our manufacturing facilities and equipment in our Dutch
subsidiary.
We obtained cash from financing activities of $32.4 million, $40.8 million
and $57.2 million in fiscal 2002, 2001 and 2000, respectively.
As a result of the above, we had a net decrease in cash and cash
equivalents of $3.1 million and $20.8 million in fiscal 2002 and 2001; and a net
increase in cash and cash equivalents of $22.1 million in fiscal 2000.
As of March 31, 2002, our short term and long-term debt obligations were
$683,000 and $34.6 million respectively. During fiscal 2002, we reached an
agreement with Mr. Berg to extend the maturity date of our loan agreement with
the loan balance of $14.95 million and accrued interest of $3.4 million from
August 30, 2002 to September 30, 2005.
During fiscal year 1994, we, through our Dutch subsidiary, signed an
agreement with the INI to open an automated manufacturing plant in Northern
Ireland in exchange for capital and revenue grants from the INI. The grants
available under the agreement and offers for an aggregate of up to (pound)25.6
million, generally became available over a five-year period through October 31,
2001. As a condition to receiving funding from INI, the subsidiary must maintain
a minimum of (pound)12.0 million (approximately $16.9 million) in debt or equity
financing from the Company. As of March 31, 2002, we had received grants
aggregating (pound)9.4 million ($13.4 million). The amount of the grants
available under the agreement and offers depends primarily on the level of
capital expenditures that are made by the Company. Substantially all of the
funding received under the grants is repayable to the INI 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 reduction of Northern Ireland business activity,
specified employment levels have not been maintained, but the INI is not seeking
repayment and on the advice of counsel, on the basis that successful
negotiations will be concluded, we do not believe that the INI will bring any
legal action pursuant to the Letter of Offer. We have begun discussion with the
INI to end the current agreement and enter into a new agreement more closely
aligned to current business conditions. We may not be able to meet the
requirements necessary to retain grants under the INI agreement. Although it is
unlikely, the INI could demand repayment of a portion of the total amounts
received, which include revenue grants of $1.2 million and equipment grants of
$12.2 million.
Since inception, we have experienced significant losses and negative cash
flow from operations. We believe that our existing cash and cash equivalents,
anticipated cash flows from our operating activities and available financing
will be sufficient to fund our working capital and capital expenditure needs
through fiscal 2003. If our working capital requirements and capital
Page 21
expenditures are greater than we expect, we may 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.
RECENT EVENTS
Pursuant to a Letter Agreement and Release effective March 31, 2002, we
disposed of certain assets consisting of cash and investment equivalent
instruments valued at approximately $18.6 million in exchange for a discharge
and release of all obligations under our loan agreement with Berg & Berg
Enterprises, LLC dated February 24, 2002. That loan agreement had an outstanding
balance in the principal amount of $17,500,000 and accrued and unpaid interest
of $1,140,370.41 at March 31, 2002.
INFLATION
Historically, our operations have not been materially affected by
inflation. However, our operations may be affected by inflation in the future.
RISK FACTORS
CAUTIONARY STATEMENTS AND RISK FACTORS
SEVERAL OF THE MATTERS DISCUSSED IN THIS REPORT 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 FORECASTED IN THIS REPORT 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 MAY HAVE A NEED FOR ADDITIONAL FINANCING.
We may need to raise additional capital. If we cannot obtain additional
financing on reasonable terms, or at all, we may not be able to execute our
business strategy as planned and our results of operations would suffer. At
March 31, 2002, we had cash and cash equivalents of $623,000. On April 9, 2002
we raised net proceeds of approximately $15.2 million through the sale of 6.122
million shares of our common stock. In addition, at March 31, 2002 we had $3.5
million available under a loan agreement and $30.0 million available under an
equity line of credit with Berg & Berg Enterprises.
Our financing commitment with Berg & Berg will enable us to access up to $5.0
million per quarter (but no more than $30.0 million in the aggregate) in equity
capital over the next two years. This commitment is subject to stockholder
approval at our 2002 annual meeting and completion of definitive documentation.
In exchange for any amounts funded pursuant to this new agreement, we will issue
to Berg & Berg restricted common stock at a customary discount to market. We
will agree to register any shares we issue to Berg & Berg under this agreement.
Berg & Berg's obligation to fund the equity commitment is subject to conditions
including, but not limited to, our achievement of operating milestones. In
addition, Berg & Berg has the option to reduce the commitment to the extent we
enter into a debt or equity financing arrangement with a third party at any time
during the term of the commitment. As a result of the offering we completed in
April 2002, Berg & Berg may elect to reduce its commitment to $13,470,600.
At our current level of operations, we are using cash from operations of
approximately $6.0 to $9.0 million per quarter. To sustain our operations for a
longer period of time than can be funded from operations and our commitments
from Berg & Berg, we may need to seek additional financing. Our cash
requirements may vary materially from those now planned because of changes in
our operations, including changes in OEM relationships, market conditions, joint
venture and business opportunities, or a request for repayment of a portion or
all of our existing grants, which totaled $13.4 million at March 31, 2002, from
the Northern Ireland Industrial Development Board.
Page 22
ALL OF OUR ASSETS ARE PLEDGED AS COLLATERAL UNDER OUR LOAN AGREEMENTS. OUR
FAILURE TO MEET THE OBLIGATIONS UNDER OUR LOAN AGREEMENTS COULD RESULT IN
FORECLOSURE OF OUR ASSETS.
All of our assets are pledged as collateral under various loan agreements. If we
fail to meet our obligations pursuant to these loan agreements, our lenders may
declare all amounts borrowed from them to be due and payable together with
accrued and unpaid interest. If we are unable to repay our debt, these lenders
could proceed against our assets.
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 $336.7 million as of March 31, 2002. We have negative
working capital of $2.9 million as of March 31, 2002, 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 2003, as we begin to build inventory, increase our
marketing efforts and continue our product development. We may never achieve or
sustain significant revenues or profitability in the future.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF OUR SAPHION(TM) TECHNOLOGY BATTERIES
ARE NOT COMMERCIALLY ACCEPTED.
We are researching and developing batteries based upon phosphate chemistry. Our
batteries are designed and manufactured as components for other companies and
end-user customers. Our success is dependent on the acceptance of our batteries
and the products using our batteries in their markets. Market acceptance may
depend on a variety of factors, including educating the target market regarding
the benefits of our products. Market acceptance and market share are also
affected by the timing of market introduction of competitive products. If we or
our customers are unable to gain any significant market acceptance for
Saphion(TM) technology based batteries, our business will be adversely affected.
It is too early to determine if Saphion(TM) technology based batteries will
achieve significant market acceptance.
IF WE ARE UNABLE TO DEVELOP, MANUFACTURE AND MARKET PRODUCTS THAT GAIN WIDE
CUSTOMER ACCEPTANCE, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
The process of developing our products is complex and uncertain, and failure to
anticipate customers' changing needs and to develop products that receive
widespread customer acceptance could significantly harm our results of
operations. We must make long-term investments and commit significant resources
before knowing whether our predictions will eventually result in products that
the market will accept. After a product is developed, we must be able to
manufacture sufficient volumes quickly and at low costs. To accomplish this, we
must accurately forecast volumes, mix of products and configurations that meet
customer requirements, and we may not succeed.
FAILURE TO DEVELOP SALES CHANNELS FOR OUR CURRENT AND FUTURE END-USER PRODUCTS
WOULD SIGNIFICANTLY IMPACT OUR FUTURE REVENUE AND PROFITABILITY.
We introduced the N-Charge(TM) Power System, our first end-user product in
February 2002. We must develop reliable sales channels for distribution of our
N-Charge(TM) product and any future end-user products. If our N-Charge(TM)
product is not commercially accepted, our results of operations will be
adversely affected. In addition, failure to develop effective sales channels
will significantly impact our future revenue and profitability.
OUR FAILURE TO DEVELOP PARTNERSHIPS WITH OTHER BATTERY MANUFACTURERS WILL LIMIT
OUR ABILITY TO WIDELY INTRODUCE OUR PHOSPHATE CHEMISTRY TECHNOLOGY INTO THE
MARKETPLACE AND COULD SIGNIFICANTLY IMPACT OUR SALES AND PROFITABILITY IN FUTURE
PERIODS.
To successfully implement our business strategy of broadly disseminating the
Saphion(TM) technology, we intend to develop relationships with manufacturers of
lithium-ion batteries using stacked polymer technology as well as cylindrical
battery manufacturers. Our failure to develop these relationships will limit our
ability to widely introduce our phosphate chemistry technology into the
marketplace and could significantly impact our sales and profitability in future
periods.
Page 23
WE RECENTLY FORMED RELATIONSHIPS WITH THREE OF THE WORLD'S LEADING PERSONAL
COMPUTER VENDORS. THESE RELATIONSHIPS MAY NOT RESULT IN SALES OR PROFITABILITY.
We recently entered into a Memorandum of Understanding with each of Acer and
Wistron for the development of devices using our technology. Additionally, we
have entered into a relationship with Hewlett-Packard in which our N-Charge(TM)
product will be featured in Hewlett-Packard's Education Solutions Portfolio
product bundle. Subsequently, Hewlett Packard placed an initial purchase order
and we began shipment of the N-Charge(TM) product in April, 2002. Neither the
Memoranda of Understanding with Acer or Wistron nor the relationship with
Hewlett-Packard requires the companies to make any financial commitments to us
and may not lead to additional purchase orders. As a result, these relationships
may not result in significant sales of products incorporating our Saphion(TM)
technology, including sales of our N-Charge(TM) product. If these relationships
result in additional sales, we cannot assure you that they will be profitable.
If these relationships do not lead to significant purchase orders, our future
revenues and profitability may be materially adversely affected.
BECAUSE OUR BATTERIES ARE INTENDED PRIMARILY TO BE INCORPORATED INTO OTHER
PRODUCTS, WE WILL NEED TO RELY ON ORIGINAL EQUIPMENT MANUFACTURERS TO
COMMERCIALIZE OUR PRODUCTS. WE MAY NOT OBTAIN ADEQUATE ASSISTANCE FROM THESE
THIRD PARTIES TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.
Our business strategy contemplates that we will be required to rely heavily on
assistance from original equipment manufacturers to gain market acceptance for
our products. We therefore will need to identify acceptable original equipment
manufacturers and enter into agreements with them. Once we identify acceptable
original equipment manufacturers and enter into agreements with them, we 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 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
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' requirements, 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 original equipment
manufacturers or battery pack assemblers to successfully commercialize our
products, which could impair our profitability.
FAILURE TO IMPLEMENT AN EFFECTIVE LICENSING BUSINESS STRATEGY COULD ADVERSELY
AFFECT OUR REVENUE, CASH FLOW AND PROFITABILITY.
In December 2000, we acquired the intellectual property assets of Telcordia
Technologies, Inc. As a result of the acquisition of these intellectual property
assets and the internal development of our Saphion(TM) technology, we
significantly increased the role of licensing in our business strategy. We have
not entered into any licensing agreements for our Saphion(TM) technology. 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 also depend on our ability to execute our licensing
operations simultaneously with our other business activities. If we fail to
substantially expand our licensing activities while maintaining our other
business activities, our results of operations and financial condition will be
adversely affected.
Page 24
FAILURE TO OBTAIN INTERNATIONAL REGULATORY APPROVAL FOR COMMERCIAL SHIPMENTS OF
PHOSPHATE MATERIAL WOULD CAUSE DELAYS IN THE PRODUCTION RAMP PLAN FOR OUR
BATTERY TECHNOLOGY AND RESULT IN DELAYS OR LOSSES OF REVENUES ASSOCIATED WITH
THAT PLAN.
We currently are shipping phosphate material from our facility in Henderson,
Nevada to our manufacturing facility in Mallusk, Northern Ireland as research
and development material. We must receive regulatory approval from the
appropriate international regulatory entities to ship commercial quantities of
the material. Failure to obtain the appropriate regulatory approvals
internationally would cause delays in the production ramp plan for our battery
technology and result in delays or losses of revenue associated with that plan.
OUR FAILURE TO COST-EFFECTIVELY 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. To facilitate commercialization
of our products, we will need to reduce our manufacturing costs, which includes
substantially raising and maintaining battery yields of commercial quality in a
cost-effective manner. If we fail to substantially increase yields in our
manufacturing process and reduce unit-manufacturing costs, we will not be able
to offer our batteries at a competitive price, and 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 have begun to manufacture batteries on a commercial scale to fulfill purchase
orders and we are able to produce sufficient quantities of batteries for short
term needs. We continue to install, de-bug and qualify equipment in our
manufacturing facility. If we fail to develop and efficiently operate a large
scale manufacturing facility capable of cost-effectively producing significant
quantities of batteries according to customer specifications, our ability to
serve the needs of our customers will be harmed and our future sales and profits
will be threatened.
OUR PATENT APPLICATIONS MAY NOT RESULT IN ISSUED PATENTS.
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 also can 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 effective patent enforcement than 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, patents
issued to us may be infringed upon or designed around by others and others may
obtain patents that we need to license or design around, either of which would
increase costs and may adversely affect our 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
Page 25
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. We
cannot be certain that our pending patent applications will result in issued
patents or that our issued patents will afford us protection against a
competitor. Our inability 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, AND IF ANY OF OUR PRODUCTS OR PROCESSES 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.
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 products that use the
challenged intellectual property;
o pay significant damages to third parties;
o obtain from the owners of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms, or at all; or
o redesign those products or manufacturing processes that use the
infringed technology, which may be economically or technologically
infeasible.
Whether or not an intellectual property litigation claim is valid, the cost of
responding to it, in terms of legal fees and expenses and the diversion of
management resources, could be expensive and harm our business.
OUR ABILITY TO MANUFACTURE LARGE VOLUMES OF BATTERIES IS LIMITED AND MAY PREVENT
US FROM FULFILLING ORDERS.
We are actively soliciting additional purchase orders. We are qualifying
additional automated equipment at our facility in Mallusk, Northern Ireland
which will provide us with sufficient capacity to assemble batteries in high
volumes. We expect this equipment to be fully operational during the second
quarter of fiscal 2003. If we cannot rapidly increase our production
capabilities to make sufficient quantities of commercially acceptable batteries,
we may not be able to fulfill 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.
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 is
corrected, this performance failure might have the long-term effect of harming
our ability to market and sell our batteries.
Page 26
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.
THE FACT THAT WE DEPEND ON A SOLE SOURCE SUPPLIER OR A LIMITED NUMBER OF
SUPPLIERS FOR KEY RAW MATERIALS MIGHT DELAY OUR PRODUCTION OF BATTERIES.
We depend on a sole source supplier or a limited number of suppliers for certain
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, 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 on competitive pricing terms 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.
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.
Other than our written employment agreement with Stephan B. Godevais, our
President and Chief Executive Officer, we do not have written employment
contracts and do not have key man life insurance policies with respect to any of
our 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.
OUR REVENUE FROM LICENSE FEES AND ROYALTIES WILL DEPEND SIGNIFICANTLY ON THE
SUCCESS OF OUR LICENSEES AND THE MARKET DEMAND FOR THEIR PRODUCTS.
We expect to generate income from license fees as well as ongoing royalties
based on sales by licensees that design, manufacture and sell batteries
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 on a percentage of the selling price of the batteries 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 ability of our licensees to develop and
introduce high volume batteries that achieve and sustain market acceptance. If
our licensees are not successful or the demand for lithium-ion polymer
batteries, Saphion(TM) technology batteries or devices utilizing these batteries
does not increase, our revenues and profitability will be adversely affected. In
addition, our license fee revenues depend on our ability to gain additional
licensees within existing and new markets.
Page 27
A reduction in the demand for lithium-ion polymer batteries, Saphion(TM)
technology 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 SALES-CHANNEL CONFLICT BETWEEN OUR FUTURE TECHNOLOGY
LICENSEES AND US.
The acquisition of the Telcordia intellectual property assets and our
Saphion(TM) technology licensing strategy 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, sales-channel conflicts
may 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.
OUR OXIDE-BASED BATTERIES, WHICH NOW COMPRISE A SMALL PORTION OF OUR AVAILABLE
PRODUCTS, CONTAIN POTENTIALLY DANGEROUS MATERIALS, WHICH COULD EXPOSE US TO
PRODUCT LIABILITY CLAIMS.
In the event of a short circuit or other physical damage to an oxide based
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. 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. Battery pack assemblers using batteries
incorporating 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
oxide-based 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 OUR NORTHERN IRELAND 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. If the facility were destroyed and rebuilt there is a
possibility that these permits would not remain effective at the current
location, and we may not be able to obtain similar permits to operate at another
location. The occurrence of these or any other operational problems at our
Northern Ireland facility may harm our business.
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 of our products and licenses, as well as
licensing royalties will represent an increasingly significant portion of our
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 and phosphate, 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;
Page 28
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 United States
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 other
countries where we intend to conduct business may reduce or eliminate
our ability to sell or license in certain markets; and
o political and economic instability in Northern Ireland or other
countries where we intend to conduct business may reduce the demand
for our batteries and our technology or our ability to market our
batteries and our technology in those countries.
These risks may increase our costs of doing business internationally and reduce
our sales and royalties or future profitability.
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.
To implement our growth strategy successfully, we will have to increase our
staff, primarily with personnel in sales, marketing, 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 cannot be certain that we will be successful in attracting
and retaining the skilled personnel necessary to operate our business
effectively in the future.
THE LIMITED NUMBER OF SKILLED WORKERS IN NORTHERN IRELAND COULD AFFECT THE
SUCCESS OF OUR IMPROVEMENTS IN THE MANUFACTURING FACILITY.
We may need to hire and train additional manufacturing workers. The availability
of skilled 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 hire and train the new manufacturing workers necessary for the ramp-up
of our Mallusk, Northern Ireland manufacturing facility;
o develop improved processes;
o implement multiple production lines; or
o efficiently operate the Mallusk facility.
Page 29
Our failure to efficiently 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.
POLITICAL INSTABILITY IN NORTHERN IRELAND COULD INTERRUPT MANUFACTURING OF OUR
BATTERIES AND END-USER PRODUCTS 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 and end-user products 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.
Rapid and ongoing changes in technology and product standards could quickly
render our products less competitive, or even obsolete. Other companies are
seeking to enhance traditional battery technologies, such as lead acid and
nickel cadmium or have recently introduced or are developing batteries based on
nickel metal-hydride, liquid lithium-ion and other emerging and potential
technologies. These competitors are engaged in significant development work on
these various battery systems, and we believe that much of this effort is
focused on achieving higher energy densities for low power applications such as
portable electronics. One or more new, higher energy rechargeable battery
technologies could be introduced which could be directly competitive with, or
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, SAFT and Electrovaya. 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
Page 30
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, 2002, our officers, directors, and their affiliates as a group
beneficially owned approximately 12.1% of our outstanding common stock. Carl
Berg, one of our directors, owns a substantial portion of that amount. As a
result, these stockholders will be able to exercise significant control over all
matters requiring stockholder approval, including the election of directors and
the approval of significant corporate transactions, which could delay or prevent
someone from acquiring or merging with us. The interest of our officers and
directors, when acting in their capacity as stockholders, may lead them to:
o vote for the election of directors who agree with the incumbent
officers' or directors' preferred corporate policy; or
o oppose or support significant corporate transactions when these
transactions further their interests as incumbent officers or
directors, even if these interests diverge from their interests as
shareholders per se and thus from the interests of other shareholders.
SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT,
WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND LIMIT THE PRICE POTENTIAL
ACQUIRERS MAY BE WILLING TO PAY FOR YOUR SHARES.
Our board of directors has the authority, without any action by the
stockholders, to issue additional shares of our preferred stock, which shares
may be given superior voting, liquidation, distribution and other rights as
compared to those of our common stock. The rights of the holders of our capital
stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
additional shares of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. These provisions may have the effect of delaying, deferring or preventing
a change in control, may discourage bids for our common stock at a premium over
its market price and may decrease the market price, and infringe upon the voting
and other rights of the holders, of our common stock.
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.
Page 31
As a result of this potential stock price volatility, investors may be unable to
sell 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 51,692,144 shares of common stock as of
June 21, 2002. In addition, at June 21, 2002, we had 5,461,629 shares of our
common stock reserved for issuance under outstanding options and warrants, and
12,066,000 additional shares reserved for issuance under our stock option plans.
SALES OF SHARES ELIGIBLE FOR FUTURE SALE COULD IMPAIR OUR STOCK PRICE.
Sales of a substantial number of shares of common stock in the public market, or
the perception that sales could occur, could adversely affect the market price
for our common stock. This offering will result in additional shares of our
common stock being available on the public market. These factors could also make
it more difficult to raise funds through future offerings of 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 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,
2002. 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, which
bear interest at a adjustable rates based on the Bank of England base rate plus
1.5% and 1.75% (5.5% and 5.75%, respectively at March 31, 2002). The Company
also has long-term debt in the form of two loans, which matures in September
2005, to a stockholder. The first loan has an adjustable rate of interest at 1%
above the lenders borrowing rate ( 9% at March 31, 2002) and the second loan has
a fixed interest rate of 8%. The table below presents principal amounts by
fiscal year for the Company's long-term debt.
2003 2004 2005 2006 2007 THEREAFTER TOTAL
------- ------- -------- -------- -------- ---------- ----------
(dollars in thousands)
Liabilities:
Fixed rate debt: -- -- -- 16,436 -- -- 16,436
Variable rate debt 683 734 776 15,771 869 2,684 21,517
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its debt obligations approximates fair
value.
Page 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes thereto appear on
pages F-3 to F-23 of this Form 10-K Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
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 2002 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 2002 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 2002 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 2002 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) 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.
(4) EXHIBITS -- See Exhibit Index on pages 34-36 of this Form 10-K Annual
Report.
(b) The Company filed the following reports on Form 8-K during the last
quarter of the period for which this Form 10-K covers:
(i) Form 8-K filed February 15, 2002 reporting under Item 5;
(ii) Form 8-K filed March 14, 2002 reporting under Item 5;
(iii) Form 8-K filed March 18, 2002 reporting under Item 5; and
(iv) Form 8-K filed March 22, 2002 reporting under Item 5.
(c) See Exhibit Index on pages 34-36 of this Form 10-K Annual Report.
Page 33
EXHIBIT INDEX
EXHIBIT NO.
3.1(1) Second Restated Certificate of Incorporation of the Company
3.2(2) Certificate of Designation of Series A Convertible Preferred
Stock, as filed with the Delaware Secretary of State on July 27,
1998
3.3(3) Certificate of Designation of Series B Convertible Preferred
Stock, as filed with the Delaware Secretary of State on December
17, 1998.
3.4(7) Amendment to the Second Restated Certificate of Incorporation of
the Company
3.5 Second Amended and Restated Bylaws of the Company.
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(8) Registration Rights Agreement dated July 1, 2000 between the
Company and Acqua Wellington Value Fund Ltd.
4.6(8) Form of Warrant dated July 1, 2000 to Acqua Wellington Value Fund
Ltd.
4.7(10) Registration Rights Agreement with the 1981 Kara Ann Berg Trust
dated January 13, 2001.
4.8 Second Amended Promissory Note dated November 27, 2000 issued by
the Company to Baccarat Electronics, Inc. (subsequently
transferred to Berg & Berg Enterprises, LLC).
4.9(11) Loan Agreement dated October 5, 2001 between the Company and Berg
& Berg Enterprises, LLC.
4.10(11) Security Agreement dated October 5, 2001 between the Company and
Berg & Berg Enterprises, LLC.
4.11(11) Amendment No. 7 to Original Loan Agreement between the Company
and Berg & Berg Enterprises, LLC (previously with Baccarat
Electronics, Inc.), dated October 10, 2001.
4.12 Amendment No. 8 to Original Loan Agreement and Amendment to
Second Amended Promissory Note between the Company and Berg &
Berg Enterprises, LLC (previously with Baccarat Electronics,
Inc.), dated February 11, 2002.
4.13(11) Promissory Note dated October 5, 2001 issued by the Company to
Berg & Berg Enterprises, LLC.
4.14(11) Warrant dated January 4, 2002 to Berg & Berg Enterprises, LLC.
10.1(9) Form of Indemnification Agreement entered into between the
Registrant and its Directors and Officers.
10.2(9) Form of Common Stock Purchase Agreement by and between the
Company and Ridgeway Investment Limited, dated November 29, 1999.
10.3(9) Common Stock Purchase Agreement dated July 1, 2000 between the
Company and Acqua Wellington Value Fund Ltd.
10.4(4)(*) 1990 Stock Option Plan as amended on October 3, 1997.
Page 34
10.5(5) 1996 Non-Employee Directors' Stock Option Plan as amended on
October 3, 1997.
10.6(9) 2000 Stock Option Plan.
10.7(6) Promissory Note issued by Lev M. Dawson to Valence Technology,
Inc.
10.8(6) Promissory Note issued by Lev M. Dawson to Valence Technology,
Inc.
10.9(6) Stock Pledge Agreement dated March 5, 1998 by Lev M. Dawson
(included as Exhibit E to Exhibit 10.7 and Exhibit 10.8).
10.10(10) Financing commitment letter from Carl Berg dated June 27, 2001.
10.11(12) Financing commitment letter agreement between the Company and
Berg & Berg Enterprises, LLC dated March 12, 2002.
10.12(10) Employment agreement with Stephan B. Godevais dated May 2, 2001.
10.13(10) Purchase Agreement with Telcordia Technologies, Inc. dated
November 3, 2000.
10.14(10) License Back Agreement with Telcordia Technologies, Inc. dated
November 3, 2000.
10.15(10) Amendment Agreement with Telcordia Technologies, Inc. dated
November 3, 2000.
10.16(10) Asset Purchase Agreement with West Coast Venture Capital, Inc.
and the 1981 Kara Ann Berg Trust dated January 13, 2001.
10.17(10) Guaranty dated January 13, 2001 by the 1981 Kara Ann Berg Trust.
10.18 Option Agreement for Stephan Godevais dated May 2, 2001
10.19 Option Agreement for Joseph Lamoreux dated June 4, 2001
10.20 Option Agreement for Terry Standefer dated August 20, 2001
21.1 List of subsidiaries of the Company.
23.1 Consent of Independent Auditors.
(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 SCHEDULE 14A FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ON JANUARY 28, 2000.
(8) 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.
Page 35
(9) 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.
(10) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED MARCH 31, 2001, FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON JULY 2, 2001.
(11) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL
QUARTER ENDED DECEMBER 31, 2001, FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION ON FEBRUARY 19, 2002.
(12) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE
COMPANY'S FORM 8-K DATED MARCH 20, 2002, AND FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2002.
(*) 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 36
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: July 1, 2002 By:/S/ STEPHAN B. GODEVAIS
-----------------------------------
Stephan B. Godevais
Chief Executive Officer,
President and Chairman of the Board
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Stephan
B. Godevais and Kevin W. Mischnick, 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, July 1, 2002
President and Chairman of the
Board (Principal Executive
/s/ Stephan B. Godevais Officer)
- --------------------------------
Stephan B. Godevais
Vice President of Finance July 1, 2002
(Principal Financial and
/s/ Kevin W. Mischnick Accounting Officer)
- --------------------------------
Kevin W. Mischnick
/s/ Carl E. Berg Director July 1, 2002
- --------------------------------
Carl E. Berg
/s/ Bert C. Roberts, Jr. Director July 1, 2002
- --------------------------------
Bert C. Roberts, Jr.
/s/ Alan F. Shugart Director July 1, 2002
- --------------------------------
Alan F. Shugart
Page 37
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
PAGES
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report...............................................F-2
Consolidated Balance Sheets as of March 31, 2002 and March 31, 2001........F-3
Consolidated Financial Statements for the years ending March 31, 2002,
March 31, 2001 and March 31, 2000:
Consolidated Statements of Operations and Comprehensive Loss...........F-4
Consolidated Statements of Stockholders' Equity (Deficit)..............F-5
Consolidated Statements of Cash Flows..................................F-6
Notes to Consolidated Financial Statements.........................F-7 to F-23
Page F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Valence Technology, Inc. and subsidiaries
Austin, Texas
We have audited the accompanying consolidated balance sheets of Valence
Technology, Inc. and subsidiaries (the "Company") as of March 31, 2002 and 2001,
and the related consolidated statements of operations and comprehensive loss,
stockholders' equity (deficit), and cash flows for the three years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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 provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years ended March 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Austin, Texas
May 24, 2002
Page F-2
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, March 31,
ASSETS 2002 2001
------------- ------------
Current assets:
Cash and cash equivalents $ 623 $ 3,755
Trade receivables, net of allowance of $312 and $0
as of March 31, 2002 and March 31, 2001, respectively 362 2,956
Short term investments - 5,133
Inventory, net 2,589 4,825
Other current assets 1,552 1,798
------------- ------------
Total current assets 5,126 18,467
Long term investments - 12,554
Property, plant and equipment, net 14,166 30,173
Intellectual property, net 11,239 25,690
------------- ------------
Total assets $ 30,531 $ 86,884
============= ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 683 $ 1,686
Accounts payable 2,548 5,396
Accrued expenses 2,632 3,340
Grant payable 1,553 1,713
Accrued payroll and benefits 561 648
------------- ------------
Total current liabilities 7,977 12,783
Deferred revenue - 2,500
Long-term interest 3,778 -
Long-term debt, less current portion 5,884 4,568
Long-term debt to stockholder 28,755 16,083
------------- ------------
Total liabilities 46,394 35,934
------------- ------------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock
Authorized: 10,000,000 shares
Series B, $0.001 par value, Issued and outstanding:
0 and 3,500 shares at March 31, 2002 and March 31, 2001
(Liquidation value: $0 and $3,973) - 2,736
Stockholders' equity (deficit):
Common stock, $0.001 par value, authorized: 100,000,000 shares,
Issued and outstanding: 45,570,144 and 44,421,974 shares
at March 31, 2002 and March 31, 2001, respectively 46 44
Additional paid-in capital 331,038 325,103
Notes receivable from stockholder (5,990) (5,713)
Accumulated deficit (336,703) (267,083)
Accumulated other comprehensive loss (4,254) (4,137)
------------- ------------
Total stockholders' equity (deficit) (15,863) 48,214
------------- ------------
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' equity (deficit) $ 30,531 $ 86,884
============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
Page F-3
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended
-------------------------------------
March 31, March 31, March 31,
2002 2001 2000
----------- ----------- -----------
Revenue:
License and royalty revenue $ 3,203 $ 1,500 $ -
Battery and laminate sales 1,671 7,191 1,518
----------- ----------- -----------
Total revenues 4,874 8,691 1,518
----------- ----------- -----------
Cost of sales: 8,649 19,366 -
INI revenue grant - (1,191) -
----------- ----------- -----------
Net cost of revenue 8,649 18,175 -
----------- ----------- -----------
Gross profit (loss) (3,775) (9,484) 1,518
----------- ----------- -----------
Operating expenses:
Research and product development 9,681 8,516 19,000
Marketing 1,957 1,080 297
General and administrative 11,971 11,676 6,795
Depreciation and amortization 7,927 11,309 9,510
Asset impairment charge 31,884 - -
Factory start-up costs - - 3,171
----------- ----------- -----------
Total operating expenses 63,420 32,581 38,773
----------- ----------- -----------
Operating loss (67,195) (42,065) (37,255)
Stockholder lawsuit settlement - - (30,061)
Interest and other income 2,049 1,256 804
Interest expense (4,327) (2,332) (1,841)
Loss on disposal of property, plant and equipment (147) (15) (583)
Equity loss of Joint Venture - (345) (210)
----------- ----------- -----------
Net loss (69,620) (43,501) (69,146)
Beneficial conversion feature and accretion
to redemption value on preferred stock - (591) (560)
----------- ----------- -----------
Net loss attributable to common stockholders $ (69,620) $ (44,092) $ (69,706)
=========== =========== ===========
Other comprehensive loss:
Net loss $ (69,620) $ (43,501) $ (69,146)
Change in foreign currency translation adjustments (117) (4,303) (603)
----------- ----------- -----------
Comprehensive loss $ (69,737) $ (47,804) $ (69,749)
=========== =========== ===========
Net loss per share attributable to
common stockholders - Basic and diluted $ (1.53) $ (1.14) $ (2.28)
=========== =========== ===========
Weighted average common shares used in per share
computation attributable to common stockholders -
Basic and diluted 45,504 38,840 30,523
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
Page F-4
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) for
the years ended March 31, 2002, 2001, and 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Notes Accumulated
Additional Receivable Other
Common Stock Paid-in from Accumulated Comprehensive
Shares Amount Capital Stockholder Deficit Loss Totals
-------- -------- ----------- ----------- ------------ ------------- ----------
Balances, March 28, 1999 26,722 $ 27 $ 166,457 $(5,158) $ (154,436) $ 769 $ 7,659
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
Interest receivable from stockholder (281) (281)
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 (5,439) (223,582) 166 27,268
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
Interest receivable from stockholder (274) (274)
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 (5,713) (267,083) (4,137) 48,214
Exercise of stock options at $3.13 to
$4.94, per share 39 1 172 173
Conversion of preferred stock 1,109 1 2,735 2,736
Issuance of common stock warrants 2,768 2,768
Stock compensation 260 260
Interest receivable from stockholder (277) (277)
Net Loss (69,620) (69,620)
Change in translation adjustment (117) (117)
--------- -------- ---------- --------- ---------- --------- ----------
Balances, March 31, 2002 45,570 $ 46 $ 331,038 $ (5,990) $ (336,703) $ (4,254) $ (15,863)
--------- -------- ---------- --------- ------------- -------------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
Page F-5
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended
---------------------------------------
March 31, March 31, March 31,
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (69,620) $ (43,501) $ (69,146)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 7,927 11,309 9,510
Provision for bad debt 312 - -
Accretion of debt discount 1,003 651 586
Impairment charge 31,884 - -
Loss on disposal of property, plant, & equipment 147 15 583
Compensation related to stock options 260 - 332
Interest income on shareholder note receivable (277) (274) (281)
Non-cash charge from stockholder lawsuit settlement - - 29,450
Equity in loss of Joint Venture - 345 210
Changes in operating assets and liabilities:
Trade receivables 2,288 (2,911) (438)
Other current assets 253 687 (1,445)
Inventory 2,243 (3,185) (1,641)
Accounts payable (2,868) 224 4,485
Accrued expenses and long-term interest 2,788 (1,581) (2,034)
Deferred revenue (2,500) - -
----------- ----------- ----------
Net cash used in operating activities (26,160) (38,221) (29,829)
----------- ----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (8,947) (21,758) (6,507)
Proceeds from disposal of property, plant, & equipment - - 1,269
Proceeds from investments 154 - -
----------- ----------- ----------
Net cash used in investing activities (8,793) (21,758) (5,238)
----------- ----------- ----------
Cash flows from financing activities:
Property and equipment grants - 5,822 -
Acquisition of West Coast Venture Capital Assets - 11,949 -
Borrowings of long-term debt 34,065 10,052 5,450
Other long-term debt (1,836) (702) (434)
Proceeds from issuance of common stock and warrants,
net of issuance costs 173 13,728 52,216
----------- ----------- ----------
Net cash provided by financing activities 32,402 40,849 57,232
----------- ----------- ----------
Effect of foreign exchange rates on cash and cash equivalents (581) (1,671) (63)
----------- ----------- ----------
Increase (decrease) in cash and cash equivalents (3,132) (20,801) 22,102
Cash and cash equivalents, beginning of year 3,755 24,556 2,454
----------- ----------- ----------
Cash and cash equivalents, end of year $ 623 $ 3,755 $ 24,556
=========== =========== ==========
Supplemental Information:
Interest paid $ 366 $ 461 $ 373
Noncash investing and financing activities:
Fair value of warrants issued in connection with long-term
debt to stockholder 2,768 - 1,372
Conversion of preferred stock to common stock 2,736 - 6,630
Exchange of long-term debt and accrued interest expense for
West Coast Venture Capital Assets and accrued interest income 18,485 - -
Exchange of common stock for Telcordia technology - 26,236 -
Exchange of common stock for West Coast Venture Capital assets - 29,636 -
Beneficial conversion feature on preferred stock - 591 560
Conversion of note payable to common stock - - 1,540
Conversion of warrants to common stock - - 291
The accompanying notes are an integral part of these
consolidated financial statements.
Page F-6
1. BUSINESS AND BUSINESS STRATEGY:
Valence Technology, Inc. (with its subsidiaries, "the Company") was founded
in 1989. The Company's business has been driven primarily by its research
and development efforts, which have fostered the Company's intellectual
property position, currently consisting of 818 issued and pending patents,
including 268 patents issued in the United States. Since its inception, the
Company has been focused on acquiring and developing its technology,
developing its manufacturing capabilities, recruiting personnel,
establishing its sales channels and pipeline and acquiring capital.
With the appointment of Stephan B. Godevais as its Chief Executive Officer
and President in May 2001, the Company initiated the transition of its
business by broadening its marketing and sales efforts to take advantage of
its strengths in research and development. With this strategic shift, the
Company's vision is to become a leader in energy solutions by drawing on the
numerous benefits of its latest battery technology, the extensive experience
of the Company's management team and the significant market opportunity
available to it.
Historically, the Company focused its product development on the application
of its cobalt-oxide and manganese-oxide based lithium-ion technology to the
mobile communications market. Lithium-ion polymer batteries such as these
are well suited for applications including notebook computers, cellular
telephones and personal digital assistants, or PDAs, because they can be
uniquely manufactured as thin as one millimeter.
Recently, the Company unveiled its new lithium-ion technology, which
utilizes a phosphate-based cathode material. The Company has branded its
phosphate-based lithium-ion technology, Saphion(TM) technology, and believes
that it addresses the major weaknesses of existing oxide based lithium-ion
alternatives while offering a solution that is competitive in cost and
performance. The Company believes phosphate, in combination with different
metals, enables greater energy density than oxide technologies, whether
cobalt or manganese. The Company believes that these characteristics, along
with the safety attributes of Saphion(TM) technology, enable it to be
designed into a wide variety of products in markets not served by current
lithium-ion solutions, including, among others, consumer electronics,
appliances, toys, vehicles, uninterrupted power supply systems and other
industrial applications. Saphion(TM) technology will allow the Company to
offer solutions in the form of safer, environmentally friendly, lower-cost,
higher performance energy products which are becoming increasingly critical
in today's energy solutions market.
The Company's business strategy is enhanced by the substantial and broad
based experience of its management team in the high technology industry.
During the past year, management successfully implemented and reached key
milestones of its business transition plan. The Company launched the
Saphion(TM) technology and transitioned the production of its Saphion(TM)
polymer batteries from research and development to its vertically integrated
manufacturing facility in Northern Ireland. The Company currently is ramping
up production of high quality, large format Saphion(TM) batteries for use in
the N-Charge(TM) Power System, its first end-user product. The N-Charge(TM)
Power System is the first solution powered by Saphion(TM) technology and is
the first portable battery system designed to recharge and/or run two mobile
electronic devices simultaneously.
As the Company moves to approach the market as a total energy solutions
provider, it believes that the cost, safety, flexibility, environmental and
performance characteristics of its Saphion(TM) technology will enable it to
substantially increase the target markets for its technology. Additionally,
the Company believes its management team has the industry knowledge and
business experience to drive the expansion of its technology into these new
markets.
2. LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 2002, the Company had cash and cash equivalents of $623,000. On
April 9, 2002 the Company raised net proceeds of approximately $15.2 million
through the sale of 6.122 million shares of the Company's common stock. In
addition, as of March 31, 2002 the Company had $3.5 million available under
a loan agreement and $30.0 million available under an equity line of credit
with Berg & Berg Enterprises.
Our financing commitment with Berg & Berg will enable us to access up to
$5.0 million per quarter (but no more than $30.0 million in the aggregate)
in equity capital over the next two years. This commitment is subject to
stockholder approval at our 2002 annual meeting and completion of definitive
documentation. In exchange for any amounts funded pursuant to this new
agreement, we will issue to Berg & Berg restricted common stock at a
customary discount to market. We will agree to register any shares we issue
to Berg & Berg under this agreement. Berg & Berg's obligation to fund the
equity commitment is subject to conditions including, but not limited to,
our achievement of operating milestones. In addition, Berg & Berg has the
option to reduce the commitment to the extent we enter into a debt or
Page F-7
equity financing arrangement with a third party at any time during the term
of the commitment. As a result of an offering we completed in April 2002,
Berg & Berg may elect to reduce its commitment to $13,470,600.
At the Company's current level of operations, it is using cash from
operations of approximately $6.0 to $9.0 million per quarter. To sustain its
operations for a longer period of time than can be funded from operations
and its commitments from Berg & Berg, the Company may need to seek
additional financing. The Company's cash requirements may vary materially
from those now planned because of changes in its operations, including
changes in OEM relationships, market conditions, joint venture and business
opportunities, or a request for repayment of a portion or all of its
existing grants, which totaled $13.4 million at March 31, 2002, from the
Northern Ireland Industrial Development Board, now known as Invest Northern
Ireland or INI.
The Company believes that its existing cash and cash equivalents,
anticipated cash flows from its operating activities and available financing
will be sufficient to fund its working capital and capital expenditure needs
through fiscal 2003. If the Company's working capital requirements and
capital expenditures are greater than it expects, it may need to raise
additional debt or equity financing in order to provide for its operations.
There can be no assurance that additional debt or equity financing will be
available on acceptable terms or at all.
3. BASIS OF PRESENTATION:
During fiscal 2002, the Company completed its transition from a research and
development focused entity to a marketing and customer-focused entity. In
accomplishing its transition, the Company successfully executed the
following milestones: launch of its Saphion technology, establishment of a
sales pipeline including generation of initial revenues, completion of its
management team, and scale up of its manufacturing operations in Northern
Ireland. Accordingly, for financial reporting purposes, the Company
transitioned out of its development stage status.
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.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements, as well as the
revenues and expenses for the period. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Significant intercompany balances and
transactions are eliminated upon consolidation.
REVENUE RECOGNITION:
Revenues are generated from licensing fees and royalties per technology
license agreements and sales of products including battery packs, batteries
and laminate. Licensing fees are recognized as revenue upon completion of an
executed agreement and delivery of licensed information, if there are no
significant remaining vendor obligations and collection of the related
receivable is reasonably assured. Royalty revenues are recognized as revenue
upon receipt of cash payment from the licensee. Product sales are recognized
when the sale is complete, generally upon shipment, when all of the
following criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred, seller's price to the buyer is fixed and
determinable, and collectibility is reasonably assured.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily accounts receivable and cash and cash
equivalents. The Company provides an allowance for doubtful accounts based
upon the expected collectibility of accounts receivable. Credit losses to
date have been within the Company's estimates.
Page F-8
Cash and cash equivalents are invested in deposits with a major financial
institution. The Company has not experienced any losses on its deposits of
cash and cash equivalents. Management believes that the financial
institution is financially sound and, accordingly, minimal credit risk
exists.
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.
INVENTORY:
Inventory is stated at the lower of cost (determined using the first-in,
first out method) or market.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments that potentially subject the Company to an interest
and credit risk consist of cash and cash equivalents, trade receivables,
short-term investments, accounts payable, and accrued expenses, the carrying
value of which are a reasonable estimate of their fair values due to their
short maturities. Based on borrowing rates currently available to the
Company for loans with similar terms, the carrying value of its debt
obligations and grant payable approximate fair value.
INVESTMENTS:
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments In Debt and Equity Securities". Under SFAS No. 115, the Company
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:
Property and equipment are stated at cost and depreciated on the
straight-line method over their estimated useful lives, generally three to
five years. Leasehold improvements are amortized over the lesser of their
estimated useful life, generally five years, or the remaining lease term.
Expenditures for renewals and betterments are capitalized; repairs and
maintenance are charged to expense as incurred. The cost and accumulated
depreciation of assets sold or otherwise disposed of are removed from the
accounts and any gain or loss thereon is reflected in operations.
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.
IMPAIRMENT OF LONG-LIVED ASSETS:
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," requires an entity to review
long-lived tangible and intangible assets for impairment and recognize a
loss if expected future undiscounted cash flows are less than the carrying
amount of the assets; such losses are measured as the difference between the
carrying value and the estimated fair value of the assets. The estimated
fair value is determined based on expected discounted future cash flows. See
Note 5 Impairment Charge regarding impairment of tangible and intangible
assets.
Page F-9
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. The
costs are amortized over the estimated remaining life of the patents, which
was changed from 13.67 years to 8 years in the current year, the effect of
which was to increase the net loss by approximately $130,000. The estimated
remaining life of the patents was reassessed in the current year in
conjunction with an analysis of the estimated future cash flows to be
generated by these assets, which resulted in an impairment charge. See Note
5 Impairment Charge. Intellectual property developed in-house is expensed as
incurred.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
FOREIGN CURRENCY GAINS AND LOSSES:
The assets and liabilities of the Company's foreign subsidiaries have been
translated to U.S. dollars using the exchange rate in effect at the balance
sheet date. Results of operations have been translated using the average
exchange rate during the year. Resulting translation adjustments have been
recorded as a separate component of stockholders' equity (deficit) as
accumulated other comprehensive loss. Foreign currency transaction gains and
losses are included in the consolidated statement of operations as they
occur.
STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees" and complies with
the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of SFAS No. 123 and
consensus of the Emerging Issues Task Force number 96-18.
COMPREHENSIVE INCOME/LOSS:
SFAS No. 130, "Reporting Comprehensive Income" requires the disclosure of
comprehensive income/loss and its components in the financial statements.
Comprehensive income/loss is the change in stockholder's equity (deficit)
from foreign currency translation gains and losses.
NEW ACCOUNTING STANDARDS:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, establishes standards for measuring, classifying
and reporting all derivative financial instruments in the financial
statements. SFAS No. 133 became effective for the Company beginning the
first quarter of fiscal year 2002. The Company currently does not use any
derivative financial products for hedging or speculative purposes and, as a
result, there was no impact on the financial statements upon implementation
of this standard.
In June 2001, SFAS No.141 ("SFAS 141"), "Business Combinations", was issued.
SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 did not have an impact
on the Company's financial statements.
In June 2001, SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets", was issued, which requires, among other things, the discontinuance
of goodwill amortization. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption.
The Company will adopt SFAS No. 142 on April 1, 2002. An assessment of the
value of the Company's intellectual property was performed during the
quarter ended December 31, 2001 under SFAS No. 121. An impairment charge was
deemed appropriate and recorded during the quarter ended December 31, 2001,
as described in Note 5 Impairment Charge, and the useful life of the
Company's intellectual property was reduced. The Company does not expect an
additional impairment charge or change in the useful life of its
intellectual property upon adoption of SFAS No. 142.
In August 2001, SFAS No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets", was issued, which addresses the financial
accounting and reporting for the impairment of long-lived assets. This
statement
Page F-10
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
for the disposal of a segment of a business. The Company will adopt SFAS No.
144 on April 1, 2002. An impairment charge was deemed appropriate and
recorded during the quarter period ended December 31, 2001, as described in
Note 5 Impairment Charge. The Company does not expect an additional
impairment charge upon adoption of SFAS No. 144.
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.
NET LOSS PER SHARE:
Net loss per share is computed by dividing the net loss by the weighted
average shares of common stock outstanding during the period. The dilutive
effect of the options and warrants to purchase common stock are excluded
from the computation of diluted net loss per share, since their effect is
antidilutive. The antidilutive instruments excluded from the diluted net
loss per share computation at March 31 were as follows:
2002 2001 2000
------------ ------------ ------------
Common stock options 6,426,000 4,398,000 3,722,000
Warrants to purchase common stock 3,237,000 2,494,000 2,290,000
------------ ------------ ------------
Total 9,663,000 6,892,000 6,012,000
============ ============ ============
RECLASSIFICATIONS:
Reclassification of certain prior-year amounts have been made to conform to
the current year presentation. Such reclassifications had no effect on the
results of operations or stockholder's equity (deficit).
5. IMPAIRMENT CHARGE:
During the quarter ended December 31, 2001, the Company refined its business
strategy to focus its efforts on the development of its Saphion(TM)
technology and solidified its manufacturing plan and product mix,
accordingly. As a result, the Company evaluated the ongoing value of the
property, plant and equipment in its Northern Ireland manufacturing facility
and the intellectual property acquired from Telcordia in December 2000. The
Company determined that assets with a carrying amount of approximately $53.2
million were impaired and wrote them down by approximately $31.9 million to
their fair value. Fair value was based on estimated future cash flows to be
generated by these assets, discounted at the Company's market rate of
interest. The useful lives for property, plant and equipment in the Northern
Ireland manufacturing facility were unchanged as a result of the impairment.
Based upon the forecast period used in determining the impairment, the
useful life for the intellectual property acquired from Telcordia was
reduced from 13.67 years to 8 years as described in Note 4.
6. 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. Pursuant to a Letter Agreement and
Release effective March 31, 2002, the Company disposed of these assets in
exchange for a discharge and release of all obligations under the Company's
loan agreement with Berg & Berg Enterprises, LLC ("Berg & Berg") dated
February 24, 2001. No gain or loss was recorded as a result of this
transaction. See Note 11 Long-Term Debt.
7. INVENTORY:
Inventory consisted of the following (in thousands) at:
Page F-11
March 31, 2002 March 31, 2001
-------------- --------------
Raw materials $ 1,977 $ 3,295
Work in process 591 1,530
Finished goods 21 -
-------------- ------------
$ 2,589 $ 4,825
============== ============
8. OTHER CURRENT ASSETS:
Other current assets consisted of the following (in thousands) at:
March 31, 2002 March 31, 2001
-------------- --------------
Other receivables $ 287 $ 1,082
Deposits 253 144
Prepaid insurance 741 254
Other prepaids 271 318
-------------- --------------
Total other current assets $ 1,552 $ 1,798
============== ==============
9. 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 at the time of
purchase. A payment of $2,000,000 of accrued royalties was made at the time
of purchase. During the third quarter of fiscal year 2002, the Company
determined the value of these assets to be impaired and reassessed the
useful life from 13.67 years to 8 years, the effect of which was to increase
the net loss by approximately $130,000. See Note 5 Impairment Charge.
Amortization expense for the years ended March 31, 2002 and 2001,was
approximately $1,803,000 and $560,000, respectively.
Intellectual property, net of impairment consisted of the following (in
thousands) at:
March 31, 2002 March 31, 2001
-------------- --------------
Intellectual properties $ 13,602 26,250
Less: accumulated
amortization (2,363) (560)
-------------- --------------
Intellectual properties,
net of accumulated
amortization $ 11,239 $ 25,690
============== ==============
10. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, net of impairment consisted of the following
(in thousands) at:
March 31, March 31,
2002 2001
-------------- -----------
Building and land $ 13,776 $ 10,974
Leasehold improvements 38 3,234
Machinery & equipment 11,852 75,482
Office and computer equipment 817 1,463
Construction in progress 63 185
-------------- -----------
Total cost 26,546 91,338
Less: capital grants - (10,402)
-------------- -----------
Total cost, net of capital grants 26,546 80,936
Less: accumulated depreciation and
amortization (12,380) (50,763)
-------------- -----------
Total cost, net of capital grants,
impairment, depreciation and
amortization $ 14,166 $ 30,173
============== ===========
Page F-12
During the third quarter of fiscal year 2002, the Company determined the
value of certain property, plant and equipment assets to be impaired. See
Note 5 Impairment Charge.
11. LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands) at:
March 31, March 31,
2002 2001
---------- ----------
Facility loans $6,567 $6,254
Less amounts due within one year (683) (1,686)
---------- ----------
Long-term debt, less current portion $5,884 $4,568
========== ==========
In May 2001, the Company purchased an additional building, adjacent to its
existing Northern Ireland facility, for a purchase price of $2,090,000. This
10-year facility term loan bears interest at an adjustable interest rate
based on the Bank of England base rate plus 1.75% (5.75% at March 31, 2002)
on the outstanding principal. The Company makes monthly principal payments
of $25,000 and quarterly payments of accrued interest. The outstanding
principal balance as of March 31, 2002 was $ 1,977,000. The related building
is collateral for the loan.
In April 2000, the Company obtained a 15-year facility loan for its Northern
Ireland main factory building. The Company makes monthly payments of $22,000
and periodic payments of accrued interest. This facility term loan bears
interest at an adjustable rate based on the Bank of England base rate plus
1.5% (5.5% at March 31, 2002) on the outstanding principal. In August 2000,
the Company borrowed an additional $2,874,000 for the construction of a
factory extension. The Company makes semi-annual payments of $130,000 and
periodic payments of accrued interest. The loan bears interest at an
adjustable rate based on the Bank of England plus 1.5% (5.5% at March 31,
2002). The outstanding principal balance as of March 31, 2002 and March 31,
2001 was $4,590,000 and $4,982,000, respectively.
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 was paid in its
entirety during the quarter ended December 31, 2001 out of proceeds from the
Company's October 2001 loan agreement with Berg & Berg.
Principal payments on long-term debt at March 31, 2002 are due as follows
(in thousands):
Fiscal Year
-----------
2003 $ 683
2004 734
2005 776
2006 821
2007 869
Thereafter 2,684
-------
$ 6,567
=======
DEBT TO STOCKHOLDER:
March 31, March 31,
2002 2001
----------- ------------
(in thousands)
2001 Loan balance $ 16,436 $ -
2001 Line of credit balance - 2,000
1998 Loan balance 14,950 14,950
Unaccreted debt discount (2,631) (867)
----------- ------------
Balance at year end $ 28,755 $ 16,083
=========== ============
Page F-13
In October 2001, the Company entered into a loan agreement ("2001 Loan")
with Berg & Berg. Under the terms of the agreement, Berg and Berg agreed to
advance the Company funds of up to $20 million between the date of the
agreement and September 30, 2003. Interest on the 2001 Loan accrues at 8.0%
per annum, payable from time to time, and all outstanding amounts with
respect to the loans are due and payable on September 30, 2005. As of March
31, 2002, a total of $16,436,000 had been drawn on the 2001 Loan. Subsequent
to March 31, 2002, Berg & Berg agreed to reduce the principal amount of the
2001 loan by $1,106,705, representing interest due to the Company by Mr. Lev
Dawson (See Note 20, Related Party Transactions). The Company will have the
ability to reborrow this principal as needed. In conjunction with the 2001
Loan, Berg & Berg received a warrant to purchase 1,402,743 shares of the
Company's common stock at the price of $3.208 per share. The warrants were
exercisable beginning on the date they were issued and expire on August 30,
2005. The fair value assigned to these warrants, totaling approximately
$2,768,000 has been reflected as additional consideration for the debt
financing, recorded as a discount on the debt and accreted as interest
expense, amortized over the life of the loan. The warrants were valued using
the Black-Scholes valuation method using the assumptions of a life of 47
months, 100% volatility, and a risk free rate of 5.5%. As of March 31, 2002,
a total of $353,000 has been accreted and included as interest expense. The
amount charged to interest expense on the outstanding balance of the loan
for the fiscal year ended March 31, 2002 was $373,000.
During June 2000 the Company entered into a private placement funding
arrangement with Carl E. Berg ("Mr. Berg"), a principal stockholder and
director of the Company, for an equity investment commitment totaling $12.5
million. On February 24, 2001, the Company replaced this $12.5 million
commitment from Mr. Berg with the acquisition of approximately $30.0 million
of assets from 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. On February
24, 2001, Mr. Berg provided a line of credit ("2001 Line of Credit") in the
amount of up to $20 million collateralized by the investment instruments.
The 2001 Line of Credit bears interest at 8% per annum. All accrued interest
and unpaid principal is payable on or before January 31, 2006. Pursuant to a
Letter Agreement and Release effective March 31, 2002, the Company disposed
of West Coast Venture Capital, Inc. assets valued at approximately $18.6
million in exchange for a discharge and release of all obligations under the
2001 Line of Credit, which had an outstanding balance in the principal
amount of $17,500,000 and accrued and unpaid interest of $1,140,000
immediately before the transaction.
In July 1998, the Company entered in to an amended loan agreement ("1998
Loan") with Mr. Berg which allows the Company to borrow, prepay and
re-borrow up to $10,000,000 principal under a promissory note on a revolving
basis. In November 2000, the 1998 Loan agreement was amended to increase the
maximum amount to $15,000,000. As of March 31, 2002, the Company had an
outstanding balance of $14,950,000 under the 1998 Loan agreement. The loan
bears interest at one percent over lender's borrowing rate (approximately
9.00% at March 31, 2002). Effective December 31, 2001 the Company and the
lender agreed to extend the loan's maturity date from August 30, 2002 to
September 30, 2005. As of March 31, 2002, accrued interest on the loan
totaled $ 3,406,000, which is included in long-term interest. In fiscal
1999, the Company issued warrants to purchase 594,031 shares of common stock
to Carl Berg in conjunction with the 1998 Loan agreement, as amended. 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
$2,159,000, 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,
2002, a total of $1,942,000 has been accreted. The amounts charged to
interest expense for fiscal 2002 and fiscal 2001 were $1,346,000 and
$1,082,000, respectively.
12. GRANT AGREEMENTS
During fiscal 1994, the Company signed an agreement with the INI, to open an
automated manufacturing plant in Northern Ireland in exchange for capital
and revenue grants from the INI. Under the terms of the existing agreements,
the Company qualified for and received revenue grants, through March 31,
2001, totaling (pound)867,000 ($1,191,000.) During fiscal 2001, these funds
were 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. The Company has also qualified for and received capital grants
through March 31, 2002 totaling (pound)8,541,000 ($12.2 million). As of
March 31, 2002, the Company is not in compliance with certain grant
agreement terms and is currently in negotiations with the INI to amend its
agreement to be more in line with the business strategy (Note 13).
Page F-14
13. COMMITMENTS AND CONTINGENCIES:
LEASES:
Total rent expense for the years ended March 31, 2002, 2001 and 2000 was
approximately $182,000, $77,000, and $76,000, and respectively.
Future minimum payments on leases at March 31, 2002 are due as follows (in
thousands):
Fiscal Year
-------------
2003 $191
2004 61
2005 -
2006 -
2007 -
Thereafter -
-------
$252
=======
LITIGATION:
During fiscal year 2002, the Company received notification that 23 former
employees of the Mallusk, Northern Ireland facility filed claims against the
Company in connection with the reduction in work force at the facility in
March 2001. The time period for filing such claims expired July 6, 2001,
although the Tribunal may accept late claims. The Company has successfully
settled 18 of the claims for a total of $12,000. The Company is pursuing
settlement of the final 5 claims and does not expect the potential charge to
be material.
In June 1998, the Company filed a breach of contract lawsuit in the Superior
Court Santa Clara County, California, against L&I Research, Inc., Powell
Electrical Manufacturing Company and others. In September 1998, Powell filed
a cross-complaint for breach of contract against the Company and others
claiming damages of approximately $900,000. In April 2000, the Company
prevailed on a motion for partial summary judgment against Powell's claims.
On July 7, 2000 the Company entered into a settlement agreement with Powell
for a payment of $370,000 which was made on July 17, 2000. On July 20, 2000,
the court entered a formal dismissal with prejudice of the remaining claims
pursuant to the terms of the settlement.
The Company reached a settlement in a lawsuit by a class of persons who
purchased its common stock between May 7, 1992 and August 10, 1994, alleging
that the Company violated federal securities laws and sought 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 the Company as a defendant as well as some of
the Company's present and former officers and directors, asserting that the
Company and those individuals violated federal securities laws by
misrepresenting and failing to disclose certain information about its
business during the class period. On February 3, 2000 the Company entered
into a settlement agreement, pursuant to which it delivered $1.3 million in
cash to a settlement fund. In addition, the Company issued 950,000 shares of
common stock to a wholly owned subsidiary, which pledged these shares to
secure the Company's 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-15
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 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.
GRANTS:
Resulting from the reduction of Northern Ireland manufacturing activity at
the end of the fiscal year ended March 31, 2001, the employment levels
specified by the Industrial Development Board, now the INI, have not been
maintained. Consequently, the Company is in default of its agreement with
the INI. The INI is not seeking repayment and on the advice of counsel, on
the basis that successful negotiations will be concluded, the Company does
not believe that the INI will bring any legal action pursuant to the Letter
of Offer. The Company has begun discussions with the INI to end the current
agreement and enter into a new agreement more closely aligned to current
business conditions. Initial discussions with the INI resulted in the INI
releasing its potential clawback on $170,000 of capital grants. Although it
is unlikely, the INI could demand repayment of a portion of the total
amounts received, which include revenue grants of $1.2 million and equipment
grants of $12.2 million, net of the $170,000 release. The Company's estimate
of the maximum liability is $1,553,000.
LETTER OF CREDIT:
At March 31, 2002, the Company had an outstanding stand-by letter of credit
of approximately $51,000 secured by a certificate of deposit in a like
amount.
14. STOCKHOLDERS' EQUITY (DEFICIT):
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 vest as determined by the Board of Directors
and are generally exercisable over a five-year period. Unvested options are
canceled and returned to the 1990 Plan upon an employee's termination.
Generally, vested options, not exercised within three months of termination,
are also canceled and returned to the Plan. The 1990 Plan terminated on July
17, 2000, and as such options may not be granted after that date. Options
granted prior to July 17, 2000 expire no later than ten years from the date
of grant.
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 2002, a total of
20,000 shares were
Page F-16
granted to a director under this plan. As of March 31, 2002, a total of
21,260 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 vest as determined by the Board of Directors, generally
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 2002, a total of 450,057 shares were granted
under this plan. At March 31, 2002, the Company had 736,887 shares available
for grant under the 1997 Plan.
In January 2000, the Board of Directors adopted the 2000 Stock Option Plan
(the "2000 Plan"). The Company may grant incentive stock options to
employees and nonstatutory stock options to non-employee members of the
Board of Directors and consultants under the 2000 Plan. Options are to be
granted at a price not less than fair market value on the date of grant. In
the case of an incentive stock option granted to an employee who owns stock
possessing more than 10% of the total combined voting power of all classes
of stock of the Company or any affiliate, the option is to be granted at a
price not less than 110% of the fair market value on the date of grant. The
options are exercisable as determined by the Board of Directors, generally
over a four-year period. The options expire no later than ten years from the
date of grant. Unvested options are canceled and returned to the 2000 Plan
upon an employee's termination. Vested options, not exercised within three
months of termination, also are canceled and returned to the 2000 Plan.
During fiscal year 2002, a total of 1,265,233 shares were granted under this
plan. At March 31, 2002, the Company had 1,265,106 shares available for
grant under the 2000 Plan.
During fiscal 2002, the Company granted inducement options to purchase a
total of 1,925,000 shares of common stock to certain officers of the
Company. These options vest over four years with 25% vesting after the first
year and the remainder vesting in 12 equal installments. The options expire
ten years from the date of grant.
Aggregate option activity is as follows (shares in thousands):
Outstanding Options
---------------------------------
Number of Weighted Avg.
Shares Exercise Price
Balance, March 28, 1999 2,576 $5.57
Granted 1,861 $9.00
Exercised (696) $4.28
Canceled (19) $5.47
---------
Balance, March 31, 2000 3,722 $7.20
Granted 1,457 $14.77
Exercised (243) $5.12
Canceled (538) $8.45
---------
Balance, March 31, 2001 4,398 $8.81
=========
Granted 3,660 $5.46
Exercised (39) $4.47
Canceled (1,593) $8.72
---------
Balance, March 31, 2002 6,426 $7.47
=========
At March 31, 2002, March 31, 2001, and March 30, 2000, vested options to
purchase 2,455,000, 2,020,000, and 1,412,000 shares, respectively, were
unexercised.
The following table summarizes information about fixed stock options
outstanding at March 31, 2002 (shares in thousands):
Page F-17
Options Outstanding Options Exercisable
- ---------------------------------------------------------------- ------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- --------------- ----------- ---------------- ----------- ----------- ---------
$1.88 - $1.88 0.125 3.00 $1.88 0.125 $ 1.88
$2.77 - $3.12 222 9.03 3.07 54 3.12
$3.35 - $4.01 672 9.59 3.84 90 3.79
$4.04 - $4.81 612 6.53 4.47 451 4.49
$4.88 - $5.75 893 7.74 5.13 424 5.06
$5.87 - $7.00 2,290 8.42 6.51 610 6.63
$7.06 - $8.30 677 7.69 7.28 340 7.34
$8.55 - $10.25 251 8.52 9.64 84 9.36
$11.31 - $11.93 114 8.62 11.63 41 11.67
$13.75 - $16.31 247 8.30 14.92 145 14.83
$17.12 - $19.47 261 8.25 18.15 105 18.13
$21.59 - $23.56 69 7.92 22.72 33 22.61
$29.28 - $34.62 118 7.91 32.45 78 32.45
----------- ---------------- ----------- ---------- ----------
6,426 8.19 $7.47 2,455 $ 8.08
At March 31, 2002, the Company has reserved 12,096,000 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 2002, 2001, and 2000 consistent with the provisions of
SFAS 123, the pro forma net loss would have been reported as follows (in
thousands):
2002 2001 2000
--------------------------------
Net loss attributable to stockholders - as reported $(69,620) $(44,092) $(69,706)
Net loss attributable to stockholders - pro forma (77,215) (50,122) (73,781)
Net loss attributable to stockholders per share -
as reported (1.53) (1.14) (2.28)
Net loss attributable to stockholders per share,
basic and diluted - pro forma (1.70) (1.29) (2.42)
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 2002, 2001, and 2000:
2002 2001 2000
---------------------------------------
Risk-free Interest Rate 4.25% 5.84% 6.05%
Expected Life 4.81 years 4.63 years 4.34 years
Volatility 90.62% 88.90% 81.10%
Dividend Yield - - -
15. 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") 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") 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
11).
Page F-18
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, 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 were valued at of $2.9 million using the Black-Scholes
valuation method and were recorded as a component of common stock.
During October 1999, the Series A investor elected to convert all 7,500
shares of its Series A. These 7,500 shares of Series A, including the
accreted redemption value through the date of conversion, converted to
1,334,764 shares of the Company's common stock.
The Series B investor elected to convert 4,000 shares of its Series B during
September and November of 1999. These 4,000 shares of Series B, including
the accreted redemption value through the dates of conversion, converted to
925,652 shares of the Company's common stock.
On April 11, 2001, Castle Creek Investments, LDC elected to convert 2,500
shares of their Series B. These shares of Series B, including the accreted
redemption value through the date of conversion, converted to 792,476 shares
of the Company's common stock.
On April 12, 2001, Castle Creek Investments, LDC, elected to convert the
last 1,000 shares of their Series B. These shares of Series B, including the
accreted redemption value through the date of conversion, converted to
317,036 shares of the Company's common stock.
Changes in the Series B during fiscal 2002 and 2001 are as follows (in
thousands):
2002 2001
----------- ----------
Balance at beginning of year $ 2,736 $ 2,146
Accretion to redemption value - 591
Conversion to common stock (2,736) -
----------- ----------
Balance at end of year $ - $ 2,736
=========== ==========
TERMS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Both Series A and Series B 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 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 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 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 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 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
Page F-19
dividends, combinations or splits) plus the 6% premium. In the event that
upon liquidation or dissolution, the assets and funds of the Company are
insufficient to permit the payment to the holders of preferred stock of the
full preferential amounts, then the entire assets and funds of the Company,
legally available for distribution, are to be distributed ratably among the
holders of Series A and Series B 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, any
remaining assets and funds were to be distributed equally among both the
holders of the Series A and Series B 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 are not entitled to receive
dividends and have no voting power whatsoever, except as otherwise provided
by applicable law.
16. SIGNIFICANT CUSTOMERS:
Revenues from six significant customers represented a total of 83% of total
revenues for the year and a total of 65% of the trade accounts receivable at
March 31, 2002. For fiscal year 2001, five customers represented 98% of
total revenues for the year and 95% of trade accounts receivable at March
31, 2001. In fiscal year 2000, two customers had 98% or more of the total
revenues for the year.
17. INCOME TAXES:
There was no income tax benefit related to the losses of fiscal years 2002,
2001 or 2000 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 31,
2002 2001 2000
---------- ----------- -----------
Federal tax benefit at statutory rate $ (23,671) $ (14,790) $ (23,509)
Rate differential - foreign 1,324 1,028 914
Expenses not deductible for tax 31 (351) (3,268)
Research and experimentation credit (285) (268) -
Provision for prior-year true-ups - 2,440 (76)
Foreign losses not available as
carryforward 7,721 1,476 1,717
Change in valuation allowance 14,880 10,465 24,222
---------- ----------- -----------
Tax provision $ - $ - $ -
========== =========== ===========
Page F-20
The components of the net deferred tax asset as of March 31, 2002 and March
31, 2001 were as follows (in thousands):
March 31, March 31,
2002 2001
---------- -----------
Current assets:
Accrued liabilities $ 118 $ 60
Valuation allowance (118) (60)
---------- -----------
$ - $ -
========== ===========
Non-current assets:
Depreciation and amortization $ 761 $ 887
Research and experimentation credit
carryforwards 1,272 987
Net operating loss carryforwards - Federal 46,406 42,799
Net operating loss carryforwards - Foreign 39,105 29,178
Impairment reserve 481 -
Imputed interest 1,160 512
Valuation allowance (89,185) (74,363)
----------- ----------
$ - $ -
=========== ==========
At March 31, 2002 the Company had federal net operating loss carryforwards
available to reduce future taxable income of approximately $136,490,000.
The carryforwards expire between 2007 to 2022, if not used before such time
to offset future taxable income.
For federal tax purposes, the Company's net operating loss carryforwards are
subject to certain limitations on annual utilization because of changes in
ownership, as defined by federal tax law. The Company also has foreign
operating loss carryforwards available to reduce future foreign income of
approximately $126,489,000.
18. 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.
19. 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
in Korea. All funds were to be provided to the joint venture by Hanil
Telecom. Hanil Telecom and the Company, through its Dutch subsidiary, each
held a 50% stake of the company. The Company supplied the technology,
initial equipment and product designs and technical support out of its
Northern Ireland facility. Hanil Telecom was to market the joint venture's
initial products for a period of several years, depending on the market. The
Company accounted 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) was recorded in the statements of operations
as non-operating income (loss). The Company discontinued applying the equity
method as the investment has been reduced to zero in fiscal 2001.
Page F-21
In June 2001, the Company and Hanil Telecom reached an agreement to
terminate the joint venture. As conditions of the termination, Shinhan Bank
transferred its payment guarantee obligations under a line of credit from
the Company to the Company's former joint venture partner and the Company
granted a license to Hanil Telecom. In addition, the deferred revenue
balance of $2.5 million was offset by approximately $896,000 of accounts
receivable and the remaining $1.6 million balance was recorded as license
revenue to recognize the license agreement.
Following is a summary of the operating results and financial position of
the joint venture (in thousands). There was no activity or financial
position for the year ended March 31, 2002:
Years Ended
----------------------------------
March 31, March 31,
2001 2000
------------- -------------
Operations:
Net sales $ 257 $ 256
Net loss $ (6,105) $ (420)
Financial position:
Current assets $ 2,315 $ 1,565
Noncurrent assets 28,970 32,815
------------- -------------
31,285 34,380
============= =============
Current liabilities 19,234 13,061
Noncurrent liabilities 13,123 16,176
Shareholders' (deficit) equity (1,072) 5,143
------------- -------------
$ 31,285 $ 34,380
============= =============
20. RELATED PARTY TRANSACTIONS:
In March 2002, the Company secured $30 million of additional equity
financing with Berg & Berg Enterprises, an affiliate of Carl Berg, a
director and major shareholder in the Company. The Company and Berg & Berg
agreed to a $30 million equity commitment. This commitment is subject to
stockholder approval at the 2002 annual meeting and completion of
definitive documentation. The Company will, at its sole discretion, be able
to access this equity capital at any time for a period of two years
beginning April 1, 2002. Berg & Berg will receive restricted common stock,
at a customary discount to market, in exchange for the amounts funded. The
obligation to fund the equity commitment is subject to certain conditions
tied to the Company's achievement of operating milestones. The shares are
subject to registration rights as provided in existing agreements. In
addition, Berg & Berg has the option to reduce the commitment to the extent
the Company enters into a debt or equity financing arrangement with a third
party at any time during the term of the commitment. As a result of an
offering completed in April 2002, Berg & Berg may elect to reduce its
commitment to $13,470,600.
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
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 $4,119,383 and $1,871,046,
respectively. As of March 31, 2002, amounts of $4,119,383 and $1,871,046
were outstanding under Dawson Note One and Dawson Note Two, respectively,
and under each of the
Page F-22
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.
In accordance with the Dawson Notes, interest is payable annually in arrears
and has been unpaid to date. Accrued interest through March 4, 2002, the
last interest payment due date, totaled $1,106,705. Subsequent to March 31,
2002, the accrued interest was paid in full (See Note 11, Long-Term Debt;
Debt to Stockholder). In addition, the stock price of the Company's common
stock has suffered a decline, subsequent to year-end. Management believes
that this is a temporary decline and feels that the principal on the Dawson
Notes will be fully collectible.
21. GEOGRAPHIC INFORMATION:
The Company conducts its business in two geographic segments.
Long-lived asset information by geographic area at March 31, 2002 and 2001
is as follows (in thousands):
2002 2001
--------- ---------
United States $4,609 $4,926
International 9,557 25,247
--------- ---------
TOTAL $14,166 $30,173
========= =========
Revenues by geographic area for the years ended March 31, 2002, 2001 and
2000 are as follows (in thousands):
2002 2001 2000
--------- --------- ---------
United States $1,876 $5,120 $956
International 2,998 3,571 562
--------- --------- ---------
TOTAL $4,874 $8,691 $1,518
========= ========= =========
22. SUBSEQUENT FINANCING:
On April 4, 2002, the Company sold 6.122 million shares in a new issuance of
common stock to a select group of institutional investors, at a price of
$2.70 per share. A.G. Edwards & Sons, Inc. and Wm Smith Securities,
Incorporated served as placement agents for the offering. The Company raised
net proceeds of approximately $15.2 million in the transaction. Proceeds
from the financing will be used for working capital purposes.
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr Total
------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
YEAR ENDED MARCH 31, 2002
Revenue $ 2,858 $ 527 $ 1,103 $ 386 $ 4,874
Operating loss (8,587) (9,566) (41,004) (8,038) (67,195)
Net loss attributable to
common stockholders (9,141) (10,107) (42,165) (8,207) (69,620)
Basic and Diluted EPS(1) (0.20) (0.22) (0.93) (0.18) (1.53)
YEAR ENDED MARCH 31, 2001
Revenue $ 2,000 $ 2,101 $ 1,854 $ 2,736 $ 8,691
Operating loss (8,771) (9,141) (10,175) (13,978) (42,065)
Net loss attributable to
common stockholders (9,299) (9,302) (10,628) (14,863) (44,092)
Basic and Diluted EPS(1) (0.25) (0.25) (0.28) (0.35) (1.13)
(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-23