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UNITED STATES
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, 2003
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 (Zip Code)
Offices)
(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
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
define din Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of the Registrant's voting stock held by
non-affiliates on September 30, 2002 was $20,762,826.*
As of June 17, 2003, there were 71,734,022 shares of common stock and 1,000
shares of preferred stock outstanding.
*Excludes approximately 19,229,829 shares of common stock held by directors,
officers and holders of 5% or more of registrant's outstanding common stock at
september 30, 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.
1
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"),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". 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
Valence Technology, Inc. was founded in 1989. From 1989 through 2000, our
efforts were focused on developing and acquiring our battery technologies. 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, which has fostered an extensive and worldwide portfolio of
issued and pending patents. With this strategic shift, our vision is to become a
leader in energy storage systems 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.
In February 2002, we unveiled our Saphion(TM) technology, a lithium-ion
technology which utilizes a phosphate-based cathode material. Traditional
lithium-ion technology utilizes an oxide-based cathode material, which has
limited its adoption to small applications such as notebook computers, cellular
phones and personal digital assistants (PDAs). We believe that Saphion(TM)
technology addresses the major weaknesses of this existing technology while
offering a solution that is competitive in cost and performance. We believe that
by incorporating a phosphate-based cathode material, our Saphion(TM) technology
is able to offer greater thermal and electrochemical stability than traditional
lithium-ion technologies.
Our business strategy incorporates a balance of system sales and licensing
and a manufacturing plan that leverages internal capabilities and partnerships
with contract manufacturers. We plan to capitalize on our Saphion(TM) technology
by designing solutions that differentiate end-users' products in both the large
format and small format markets. In addition, we will seek to expand the fields
of use of our Saphion(TM) technology through the licensing of our intellectual
property related to our battery chemistries and manufacturing processes.
We introduced our first product based on our Saphion(TM) technology, the
N-Charge(TM) Power System, in February 2002. The N-Charge(TM) Power System is a
rechargeable battery system that provides supplemental battery power for a wide
variety of portable electronic devices. Since the introduction of the
N-Charge(TM) Power System, we have focused our efforts on marketing the
N-Charge(TM) Power System to top tier companies in an effort to validate our
Saphion(TM) technology. We have successfully developed various channels for the
sale and distribution of the N-Charge(TM) system, including resellers, Tier One
companies, and national retailers. In February 2003, we introduced our first
large format energy storage system powered by our Saphion(TM) technology, the
K-Charge(TM) Power System (previously announced as the Pure Po4wer Pack). The
K-Charge(TM) Power System is engineered specifically for large format
applications such as those required by the telecommunications, industrial,
vehicular and utility markets. It is currently in a prototype stage and is being
offered to customers for evaluation and customization for specific product
requirements.
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Currently, our battery products are offered in a polymer construction. Our
research and development efforts are focused on a new generation of our
Saphion(TM) technology which, in addition to expected enhanced performance
characteristics, will provide us the ability to manufacture batteries using the
technology in a cylindrical construction, which we believe will greatly increase
it potential in the marketplace. Our polymer batteries are manufactured at our
manufacturing facility in Northern Ireland. We have recently entered into an OEM
arrangement and have utilized the manufacturer's capabilities for certain
cobalt-oxide based products during the year. We are in the process of qualifying
the manufacturer for our Saphion(TM) products with the goal of transferring some
of our manufacturing operations to China and other low-cost manufacturing
regions.
STRATEGY
Our strategy is to leverage the benefits of our Saphion(TM) technology to
capitalize on the significant opportunities in the energy solutions market. Key
elements of our strategy include:
o EXECUTE A BALANCED LICENSING AND SYSTEM SALES APPROACH. We intend to
capitalize on our advanced Saphion(TM) 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 Developing the market for our Saphion(TM) technology through our own
product launches, such as the N-Charge(TM) Power System and
K-Charge(TM) Power System, and through products designed by others.
With the completion of the next generation of the technology, we plan
to maximize the adoption of Saphion(TM) technology by offering it in
both polymer and cylindrical constructions.
o 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
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 adoption of
our Saphion(TM) technology.
o Continuing sales of our cobalt-oxide based polymer battery solutions
to small and mid-sized companies, where the flexibility of design and
thinness of the stacked polymer is paramount.
o IMPLEMENT A MANUFACTURING PLAN that utilizes contract manufacturing
capabilities for the most competitive and low cost parts of our business,
and focus our Northern Ireland facility on the high value-add portion. We
have recently entered into an OEM arrangement with ATL and are in
discussions to complete a manufacturing joint venture with FengFan. We
intend to seek additional 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.
o IMPLEMENT A PHASED APPROACH TO OUR BUSINESS STRATEGY. Our business strategy
will be implemented in three fluid phases, each building on the one
previous, with its own specific technology and market focus. During the
initial phase, which defines our current operations, the focus is on the
first generation of our Saphion(TM)technology in our patented polymer
construction. We have identified the notebook accessory, PDA and tablet
markets as our key targets for our small format, polymer applications.
During this phase, we also introduced Saphion(TM)technology in its large
format application designed for the vehicular, network and utility markets.
The second phase of the business strategy will encompass the introduction
of our second generation Saphion(TM) technology in cylindrical and
prismatic constructions. During this stage, we plan to target the power
tool, internal notebook battery and consumer appliance sectors, in addition
to the markets targeted in the first phase. We also will continue to
develop our large format applications throughout this phase and focus
additional efforts toward our field of use licensing strategy. The final
phase of our business strategy will entail the commercial production of
second generation Saphion(TM)energy solutions for the vehicular, network
and utility industries, with a continued focus on marketing small format
Saphion(TM)solutions through the developed sales channels and licensing our
battery chemistry and manufacturing process.
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.
3
FISCAL 2003 HIGHLIGHTS AND RECENT EVENTS
o THE N-CHARGE(TM) POWER SYSTEM
o In May 2003, the N-Charge(TM) Power System was selected for sale in
Best Buy stores and in that same month it was selected for sale in
Brookstone airport stores.
o In March 2003, the N-Charge(TM) Power System was selected by HP Compaq
for use with its Compaq branded notebooks.
o In December 2002, CDW, a leading provider of technology solutions
nationwide, began to offer the N-Charge(TM) Power System to its
customers. Since that time, we have formed additional vendor
relationships with other resellers and distributors, including PC
Connection, MCE Technologies LLC and Datavision-Prologix.
o We introduced our first consumer product utilizing our Saphion(TM)
technology, the N-Charge(TM) Power System in February 2002. Sales of
the product in the third and fourth quarter of fiscal 2003 were
$252,000 and $348,000, respectively.
o THE K-CHARGE(TM) POWER SYSTEM
o In February 2003, at DEMO 2003, we introduced our first large format
energy storage system powered by our Saphion(TM)technology, the
K-Charge(TM)Power System. The K-Charge(TM)Power System is engineered
specifically for large format applications including those required by
the telecommunications, industrial, vehicular and utility markets. It
offers the superior performance and safety features inherent to
Saphion(TM)technology. Additionally, with lower weight and less volume
than traditional lead-acid systems, the K-Charge(TM)system provides
the design flexibility and versatility these applications require. The
K-Charge(TM)Power System is in a prototype stage and is being offered
to our customers for evaluation and design of custom products to meet
their requirements. The K-Charge(TM)Power System is currently being
evaluated by Tyco Electronics Power Systems (telecommunications
industry), Electric Vehicles International (EVI) (electric vehicles),
and the United States Advanced Battery Consortium (USABC) (comprised
of representatives from Ford Motor Company, DaimlerChrysler, and
General Motors Corporation and charged with the evaluation of
technologies for consideration in the development of advanced
high-performance batteries for electric and hybrid vehicles).
o MANUFACTURING RELATIONSHIPS
o On May 29, 2002 we signed an OEM agreement with Hong Kong based,
Amperex Technology Limited (ATL) for the manufacturing of our
batteries. We utilized ATL's manufacturing capabilities for certain
cobalt-oxide based products during the year, and we are currently
qualifying ATL as a manufacturing source for our Saphion(TM) products.
o On November 12, 2002, we entered into an agreement to form a joint
venture with FengFan Group, Ltd., the manufacturer of the largest
capacity rechargeable batteries in China. The agreement contemplates
the formation of a joint venture company to be established in China to
manufacture Saphion(TM) Lithium-ion batteries. The formation of the
joint venture is subject to approval by the Chinese government. We are
currently in discussions to complete the joint venture.
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.
4
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 INCREASED SAFETY. We believe that our Saphion(TM)technology significantly
reduces the safety risks associated with cobalt-oxide based lithium-ion
technology. 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 back-up power 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.
We expect that at maturity, Saphion(TM) technology will exceed the
energy density of premium cobalt cells.
o INCREASED CYCLE LIFE. The phosphates in Saphion(TM) technology cycle
similarly to conventional Lithium-ion cobalt-oxide cells, over the
temperature range of -20(degree)C and 60(degree)C. We believe that the
cycle life of our Saphion(TM) technology will be greater than 600
cycles at 23(degree)C to 70% of the battery's initial capacity.
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.
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 will be 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.
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. We believe the safety advantages inherent to Saphion(TM)
technology allow for the creation of large format energy systems. We
believe this will enable us to target markets not previously served by
lithium-ion technology, such as the vehicular, network and utility
industries.
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.
5
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 PRODUCT VERSATILITY. Our products are appropriate for use in a wide variety
of applications for the computer, consumer appliance, vehicular 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.
PRODUCTS
THE N-CHARGE(TM) POWER SYSTEM
The N-Charge(TM) Power System is a rechargeable battery system featuring
our Saphion(TM) technology. It is a stand-alone tool that provides easy-to-use,
anytime, anywhere power for a wide variety of portable electronic devices. The
N-Charge(TM) Power System allows users to charge two portable devices, such as a
notebook computer and a cell phone or PDA, simultaneously. We offer the
N-Charge(TM) Power System in two models, with the following 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) 3-4 hours 2-3hours
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
THE K-CHARGE(TM) POWER SYSTEM
The K-Charge(TM) Power System is a large format energy storage system
designed for the vehicular, network and utility industries. It features our
Saphion(TM) technology in a large format battery application.
Our K-Charge(TM) Power System has the following specifications:
OPERATING VOLTAGE 24V/ 48V
Energy 2.87 KWH
Cycle Life > 2000 Cycles (80% Depth of Discharge)
Operating Temperature -20~60(degree)C (-4~140(degree)F)
(charge & disch.)
Dimensions 546mm x 295mm x 87.4mm (21.5in. x 11.61in. x 3.44in.)
Weight 27.2 Kg (60 Lb.)
6
COBALT-OXIDE AND MANGANESE-OXIDE LITHIUM ION BATTERIES
We continue to offer for sale lithium ion batteries using cobalt-oxide or
manganese-oxide cathodes in stacked polymer battery configurations. These
products are primarily offered to small and mid-size companies for applications
where the flexibility of design and the thinness of the stacked polymer is
paramount. These batteries can be manufactured to as thin a specification as 1
mm and in a large "footprint" or size. Our primary marketing focus is on our
battery products that feature our Saphion(TM) technology. Sales of cobalt-oxide
and manganese-oxide batteries are typically made to address specific customer
requirements and are not being actively promoted or marketed by us.
SALES AND MARKETING
We sell our battery cells and systems through an internal sales force,
resellers, distributors, independent sales representatives and direct to
consumers via our website in the United States, Europe and Asia. We currently
have an in-house sales and marketing team consisting of seven persons. Our Vice
President of Sales resides in Chicago, Illinois. Other members of the team
reside in New York, New York; San Jose, California, Mallusk, Northern Ireland
and Austin, Texas.
We market our products mainly to resellers, distributors, retail chains,
and Tier one computer manufacturers. Our battery cells and systems are sold in
standard and custom configurations to meet the requirements of our customers.
Our N-Charge(TM) Power System product is sold in two standard configurations.
Our K-Charge(TM) Power System is expected to be sold in both standard and custom
configurations. We provide pack level design and engineering services to assist
the customer in configuring a product that meets its needs.
We typically sell our products pursuant to standard purchase orders and
license our technology pursuant to separately negotiated license agreements.
Sales are typically denominated in United States dollars. Consequently, the
Company's sales historically have not been subject to currency fluctuation risk.
MANUFACTURING
We currently manufacture most of our battery products and systems 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 thicknesses, utilizing the
following chemistries: phosphate, cobalt-oxide, and manganese-oxide. Our
batteries are intended for use in multiple applications, including but not
limited to, PDAs, computer accessories, cellular phones and military equipment.
As of June 18, 2003, we employed approximately 92 manufacturing personnel
at our Northern Ireland factory. 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.
7
On May 29, 2002, we entered into an OEM agreement with Amperex Technology
Limited, or ATL, to complement our 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 2004. 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 utilized ATL's manufacturing capabilities for certain cobalt-oxide
based products during the year, and we are currently qualifying ATL as a
manufacturer of our Saphion(TM) products. Once that process is complete, we
intend to transfer a portion of our manufacturing requirements to ATL.
On November 12, 2002, we entered into an agreement to form a joint venture
with FengFan Group, Ltd., the manufacturer of the largest capacity rechargeable
batteries in China. The agreement contemplates the formation of a joint venture
company to be established in China to manufacture powders used in the
manufacturer of our Saphion(TM) Lithium-ion batteries. The formation of the
joint venture is subject to approval by the Chinese government. We are currently
in discussions to complete the joint venture.
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.
Currently, our battery products are offered in a polymer construction. Our
research and development efforts are focused on a new generation of our
Saphion(TM) technology which, in addition to expected enhanced performance
characteristics, will provide us the ability to manufacture batteries using the
technology in a cylindrical construction, which we believe will greatly increase
it potential in the marketplace.
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.
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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 240 United States patents, which have a range of expiration dates
from 2005 through 2022 and have about 51 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.
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. 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 ion polymer batteries. In addition, IATA has adopted special
size limitations for applying exemptions to these batteries. Under IATA, our
N-ChargeTM system currently falls within the level such that it is no longer
exempt and now requires a class 9 designation for transportation. 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 primary batteries that were mishandled at Los Angeles International
Airport, DOT has proposed new regulations harmonizing with the UN regulations.
At present it is not known if or when the proposed regulations would be adopted
by the US. While we fall under the equivalency levels for the US and comply with
all safety packaging requirements worldwide, 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 new products.
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.
9
HUMAN RESOURCES
As of June 18, 2003, we had a total of 95 regular full-time employees in
the United States at our Austin, Texas headquarters and our Henderson, Nevada
research and development facility. We have 36 total employees in the areas of
administration, sales, legal, marketing, finance, management information
systems, purchasing, quality control and shipping & receiving. We had 25 total
employees in the areas of engineering, facilities maintenance and environmental
health & safety. We had 34 total employees in the areas of research &
development and product development; product development includes mixing,
coating and assembly. In addition, as of June 18, 2003, our Dutch subsidiary had
92 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.
WEBSITE AVAILABILITY OF OUR REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
We maintain a website with the address WWW.VALENCE.COM. We are not
including the information contained on our website as a part of, or
incorporating it by reference into, this annual report on Form 10-K. We make
available free of charge through our website our annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments
to these reports, as soon as reasonably practicable after we electronically file
that material with, or furnish such material to, the Securities and Exchange
Commission.
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. We are considering selling the Henderson, Nevada facility. We
currently contemplate that, if we sell the facility, we would continue to occupy
the facility for a period of time pursuant to a lease arrangement.
Our Dutch subsidiary owns a manufacturing facility in Mallusk, Northern
Ireland, with approximately 155,000 square feet. As of March 31, 2003 we had
mortgages on the manufacturing facility of approximately $4,411,000 and
$2,022,000 that bear interest at an annual rate of 5.25% and 5.5%, 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 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
None.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq SmallCap Market or 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 by published financial sources:
FISCAL 2002: HIGH LOW
----- ------
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 3.17 1.28
Quarter ended September 30, 2002 1.86 0.45
Quarter ended December 31, 2002 2.49 0.50
Quarter ended March 31, 2003 2.20 1.20
FISCAL 2004:
Quarter ended June 30, 2003 (through June 17, 2003) 4.65 2.16
On June 17, 2003, the last reported sale price of our common shares on the
Nasdaq SmallCap Market was $3.57 per share. On that date, we had 71,734,022
shares of common stock outstanding held of record by approximately 673 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, 2003, information regarding
common stock authorized for issuance under our equity compensation plans:
NUMBER OF NUMBER OF
SECURITIES TO BE SECURITIES
ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
Equity compensation
plans approved by
security holders 6,994,770 $5.47 122,589
Equity compensation
plans not approved by
security holders (1) 1,925,000 $6.45 -
Total 8,919,770 $5.68 122,589
- ----------- (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 vested in
May 2002 and the remainder vest in 12 equal quarterly installments during the
term of his employment (750,000 shares vested as of June 17, 2003). The vesting
accelerates and become immediately exercisable on the date of a change of
control of the Company (or 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 offer letter. The
exercise price of his options is $7.18 and they vest over four years. 25% of the
options vested in June 2002 and the remainder vest in 12 equal quarterly
installments during the term of his employment (112,500 shares vested as of June
17, 2003). Options to purchase 200,000 shares were granted to Terry Standefer in
August 2001 pursuant to his employment offer letter. The exercise price of his
options is $5.15 and they vest over four years. 25% of the options
11
vested in August 2002 and the remainder vest in 12 equal quarterly installments
during the term of his employment (87,500 shares vested as of June 17, 2003).
RECENT SALES OF UNREGISTERED SECURITIES
On February 5, 2003, we drew down $5 million from our equity financing
commitment with Berg & Berg Enterprises, LLC, an affiliate of Carl Berg, a
director and stockholder of ours. Under the terms of the equity commitment
Valence issued to Berg & Berg 3,190,342 shares of restricted Common Stock, in a
private placement exempt from registration pursuant to Section 4(2) of the
Securities Act, at a 15% discount to the average closing price of the stock for
the five days prior to the purchase date or approximately $1.56 per share. The
commitment was approved by our stockholders on August 27, 2002. The net proceeds
were used to fund working capital for the fourth fiscal quarter of 2003.
On March 31, 2003, we drew down an additional $5 million from our equity
financing commitment with Berg & Berg and issued to Berg & Berg 2,973,589 shares
of our restricted common stock in a private placement transaction exempt from
registration pursuant to Section 4(2) of the Securities Act. Berg & Berg
purchased these shares at a 15% discount to the average closing price of the
stock for the five days prior to the purchase date or approximately $1.68 per
share. The commitment was approved by our stockholders on August 27, 2002. The
net proceeds are being used to fund working capital for the first fiscal quarter
of 2004.
12
ITEM 6. SELECTED FINANCIAL DATA
This section presents selected historical financial data of Valence
Technology, Inc.. 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, 2001, March 31, 2002 and March 31, 2003 and balance sheet data
as of March 31, 2002 and March 31, 2003 from the audited consolidated financial
statements in this report. We derived the statement of operations data for the
years ended March 28, 1999, and March 31, 2000 and the balance sheet data as of
March 28, 1999, March 31, 2000, and March 31, 2001 from audited financial
statements that are not included in this report.
FISCAL YEAR ENDED
-----------------------------------------------------------------
MARCH 28, MARCH MARCH 31, MARCH MARCH 31,
31, 31,
1999 2000 2001 2002 2003
----------- ---------- ---------- ---------- -----------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue:
License and royalty revenue $ --- $ --- $ 1,500 $ 3,203 $ 125
Battery and system sales --- 1,518 7,191 1,671 2,432
----------- ---------- ---------- ---------- -----------
Total revenues --- 1,518 8,691 4,874 2,557
Cost of sales:
Cost of sales --- --- 19,366 8,649 10,996
INI revenue grant --- --- (1,191) --- ---
----------- ---------- ---------- ---------- -----------
Net cost of sales --- --- 18,175 8,649 10,996
Research and product
development 18,783 19,000 8,516 9,681 9,293
Marketing 105 297 1,080 1,957 3,210
General and administrative 6,753 6,795 11,676 11,971 10,140
Depreciation and amortization 3,388 9,510 11,309 7,927 2,790
Asset impairment charge --- --- --- 31,884 258
Factory start-up costs --- 3,171 --- --- ---
----------- ---------- ---------- ---------- -----------
Total operating expenses 29,029 38,773 32,581 63,420 25,691
----------- ---------- ---------- ---------- -----------
Operating loss (29,029) (37,255) (42,065) (67,195) (34,130)
Stockholder lawsuit --- (30,061) --- --- ---
Interest and other income 2,980 804 1,256 2,049 381
Interest expense (643) (1,841) (2,332) (4,327) (4,172)
Gain (loss) on disposal of
assets --- (583) (15) (147) 20
Equity in earnings (loss) of
Joint Venture 268 (210) (345) --- ---
----------- ---------- ---------- ---------- -----------
Net loss (26,424) (69,146) (43,501) (69,620) (37,901)
Beneficial conversion feature
and accretion to redemption value
on preferred stock (2,865) (560) (591) --- ---
----------- ---------- ---------- ---------- -----------
Net loss available to common
stockholders $ (29,289) $ (69,706) $ (44,092) $ (69,620) $ (37,901)
=========== ========== ========== ========== ===========
Net loss per share available
to common stockholders $ (1.13) $ (2.28) $ (1.14) $ (1.53) $ (0.65)
=========== ========== ========== ========== ===========
Shares used in computing net
loss per share available to common
stockholders, basic and
diluted 25,871 30,523 38,840 45,504 58,423
=========== ========== ========== ========== ===========
13
MARCH 298 MARCH 31, MARCH MARCH MARCH 31,
1999 2000 31, 2001 31, 2002 2003
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,454 $ 24,556 $ 3,755 $ 623 $ 6,616
Working capital (deficit) (7,784) 16,007 5,684 (2,696) 4,023
Total assets 38,401 58,516 86,884 30,531 36,154
Long-term debt 8,171 12,369 20,651 34,639 38,865
Accumulated deficit (154,436) (223,582) (267,083) (336,703) (374,604)
Total stockholders' equity
(deficit) 7,955 27,845 48,214 (15,863) (17,518)
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
We were founded in 1989. From 1989 through 2000, our efforts were focused
on developing and acquiring our battery technologies. 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, which
has fostered an extensive and worldwide portfolio of issued and pending patents.
With this strategic shift, our vision is to become a leader in energy storage
systems 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.
In February 2002, we unveiled our Saphion(TM) technology, a lithium-ion
technology which utilizes a phosphate-based cathode material. Traditional
lithium-ion technology utilizes an oxide-based cathode material, which has
limited its adoption to small applications such as notebook computers, cellular
phones and personal digital assistants (PDAs). We believe that Saphion(TM)
technology addresses the major weaknesses of this existing technology while
offering a solution that is competitive in cost and performance. We believe that
by incorporating a phosphate-based cathode material, our Saphion(TM) technology
is able to offer greater thermal and electrochemical stability than traditional
lithium-ion technologies.
Our business strategy incorporates a balance of system sales and licensing
and a manufacturing plan that leverages internal capabilities and partnerships
with contract manufacturers. We plan to capitalize on our Saphion(TM) technology
by designing solutions thaT differentiate end-users' products in both the large
format and small format markets. In addition, we will seek to expand the fields
of use of our Saphion(TM) technology through the licensing of our intellectual
property related to our battery chemistries and manufacturing processes.
We introduced our first product based on our Saphion(TM) technology, the
N-Charge(TM) PowEr System, in February 2002. The N-Charge(TM) Power System is a
rechargeable battery system thaT provides supplemental battery power for a
14
wide variety of portable electronic devices. Since the introduction of the
N-Charge(TM) Power System, we have focused our efforts on marketing the
N-Charge(TM) Power System to top tier companies in an effort to validate our
Saphion(TM) technology. We have successfully developed various channels for the
sale and distribution of the N-Charge(TM)system, including resellers, Tier One
companies, and national retailers. In February 2003, we introduced our first
large format energy storage system powered by our Saphion(TM) technology, the
K-Charge(TM) Power System (previously announced as the Pure Po4wer Pack). The
K-Charge(TM) Power System is engineered specifically for large format
applications such as those required by the telecommunications, industrial,
vehicular and utility markets. It is currently in a prototype stage and is being
offered to customers for evaluation and customization for specific product
requirements.
Currently, our battery products are offered in a polymer construction. Our
research and development efforts are focused on a new generation of our
Saphion(TM) technology which, in addition to expected enhanced performance
characteristics, will provide us the ability to manufacture batteries using the
technology in a cylindrical construction, which we believe will greatly increase
its potential in the marketplace. Our polymer batteries are manufactured at our
manufacturing facility in Northern Ireland. We have recently entered into an OEM
arrangement and have utilized the manufacturer's capabilities for certain
cobalt-oxide based products during the year. We are in the process of qualifying
the manufacturer for our Saphion(TM) products with the goal of transferring some
of our manufacturing operations to China and other low-cost manufacturing
regions.
BASIS OF PRESENTATION, CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in conformity with generally
accepted accounting principles in the U.S. Our accounting policies are described
in Note 3 of the Notes to Consolidated Financial Statements included in "Item 8
- -- Financial Statements and Supplementary Data". The preparation of our
financial statements requires us to make estimates and assumptions that affect
reported amounts. We believe our most critical accounting policies and estimates
relate to revenue recognition and impairment of long-lived assets.
REVENUE RECOGNITION: Revenues are generated from licensing fees and royalties
per technology license agreements and sales of products including batteries and
battery systems. Licensing fees are recognized as revenue upon completion of an
executed agreement and delivery of licensed information, if there are no
significant remaining 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.
IMPAIRMENT OF LONG-LIVED ASSETS: SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," requires us to review long-lived tangible and
intangible assets for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. Recoverability
of these assets is measured by comparison of its carrying amount to future
undiscounted cash flows the assets are expected to generate. If long-lived
assets are considered to be impaired, the impairment to be recognized equals the
amount by which the carrying value of the assets exceeds its fair market value
and is recorded in the period the determination was made.
15
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2003 (FISCAL 2003), MARCH 31, 2002 (FISCAL 2002)
AND MARCH 31, 2001 (FISCAL 2001)
REVENUE. The following table summarizes the Company's revenue (in thousands) by
type for each of the past three fiscal years:
MARCH 31, PERCENTAGE MARCH 31, PERCENTAGE MARCH 31,
2003 CHANGE 2002 CHANGE 2001
Battery and
system sales $ 2,432 46% $1,671 -77% $ 7,191
License and
royalty revenue 125 -96% 3,203 114% 1,500
Total revenues $ 2,557 -48% $ 4,874 -44% $ 8,691
BATTERY AND SYSTEM SALES: 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 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 lines
of business. As a result of the strategic shifts, our revenue for battery sales
decreased 77% to $1.7 million in fiscal 2002. Sales of battery and system
products increased 46% to $2.4 million in fiscal 2003 largely due to the
re-establishment of our customer pipeline for our battery products and launch of
our N-Charge(TM) Power system product.
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 the Hanil Joint Venture
to a license agreement, and began collecting royalties from our licensees
resulting in a 114% increase in license and royalty revenue. During fiscal 2003,
we did not add any additional licensees and collected royalties totaling
$125,000. We continue to pursue licensing of both our process and chemistry
patent portfolios.
TOTAL REVENUES: Revenues from three significant customers totaled 26% of total
revenue for the fiscal year ended March 31, 2003 and 69% of trade accounts
receivable at March 31, 2003. During fiscal 2003, revenue from two customers,
Alliant Techsystems Inc. and Pabion Corporation, Ltd., each comprised more than
10% of total revenues. For fiscal 2002, 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. During fiscal 2002,
revenue from four customers, Hanil Joint Venture, Amperex Technology Limited,
Alliant Techsystems Inc., and Samsung Corporation, each comprised more than 10%
of total revenues. For fiscal year 2001, five customers represented 98% of total
revenues for the year ended March 31, 2001. For fiscal 2001, revenue from four
customers, Alliant Techsystems Inc., MicroEnergy Technologies Inc., Moltech
Corporation, and Qualcomm, each comprised more than 10% of total revenues.
COST OF SALES. Cost of sales consists primarily of expenses incurred to
manufacture battery 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 2003 and 2002, we
recorded cost of sales of $11 million and $8.6 million, respectively.
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 increase in cost of sales from fiscal 2002 to 2003 is largely due to
increased product sales, inventory write offs necessary as a result of the
resolution of the technical issue announced in the second quarter of fiscal
2003, and higher initial product costs associated with the launch of our
N-Charge(TM) Power system. We maintained a negative gross margin on our sales in
all periods due to insufficient production and sales volumes to facilitate the
coverage of our indirect and fixed costs. We expect cost of sales to decrease as
a percentage of sales as production and product sales volumes continue to
increase.
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 $9.3 million, $9.7 million, and $8.5 million for the fiscal
years ended March 31, 2003, 2002, and 2001 respectively. The $.4 million or 4%
decrease in research and development expenses from fiscal
16
2002 to 2003 is due largely to the transfer of our initial Saphion(TM) chemistry
and N-Charge(TM) power system from development to production and the reduction
of headcount as a result of our reorganization which took place in the third
quarter of fiscal 2003. 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 end-user products such as the N-Charge(TM) Power
system and expanded development and pilot production of our Saphion(TM)
chemistry.
MARKETING. Marketing expenses consist primarily of costs related to sales and
marketing personnel, public relations and promotional materials. Marketing
expenses were $3.2 million, $2.0 million, and $1.1 million for the fiscal years
ended March 31, 2003, 2002, and 2001, respectively. The $1.2 million or 60%
increase in marketing expenses during fiscal 2003 was due to increased staffing
and promotions to support expansion of channels to sell our N-Charge(TM) power
system and Saphion(TM) products. The $0.9 million or 82% 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 in all
periods are in line with our continued focus on sales and marketing activities
through expansion of our sales teams, sales channels, and promotional
activities.
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 $10.1 million, $12.0 million, and
$11.7 million for the fiscal years ended March 31, 2003, 2002, and 2001
respectively. The 1.9 million or 16% decrease in general and administrative
expenses from fiscal 2002 to 2003 relates to lower legal expenses and lower
recruiting and relocation expenses with completion of relocation of the
corporate office to Austin, Texas during fiscal 2002. The decrease is partially
offset by an increase in insurance expense. 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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were $2.8
million, $7.9 million, and $11.3 million for fiscal years ended March 31, 2003,
2002, and 2001, respectively. The $5.1 or 65% decrease in fiscal 2003 and the
$3.4 million or 30% decrease 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 subsequent to the third quarter of fiscal 2002.
IMPAIRMENT CHARGE: During the fourth quarter of fiscal 2003, we recorded an
impairment charge of $258,000 on our property in Henderson, Nevada related to
the planned sale of this facility. We estimated that the future cash flows
expected from the sale of this facility were less than the asset carrying value
and adjusted the assets to their fair value accordingly. During the third
quarter of fiscal 2002, we recorded an impairment charge of $31.9 million on
assets in our Northern Ireland facility and intellectual property acquired from
Telcordia. The fiscal 2002 impairment charge resulted from a redefinition of our
business strategy and solidification of our manufacturing plan and product mix.
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.
INTEREST AND OTHER INCOME. Interest and other income totaled $381,000, $2.0
million, and $1.3 million for fiscal years ended March 31, 2003, 2002, and 2001,
respectively. Interest during fiscal 2002 related primarily to interest earned
on investments acquired from West Coast Venture Capital in February 2001. These
assets were transferred to Berg & Berg as a reduction of our debt outstanding
during the fourth quarter of fiscal 2002.
INTEREST EXPENSE. Interest expense was $4.2 million, $4.3 million and $2.3
million for the fiscal years ended March 31, 2003, 2002, and 2001, respectively.
The $.1 million or 2% reduction in interest expense for fiscal 2003 was due to
the payoff of the Henderson facility mortgage and a reduction in the
amortization of debt discount on the 1998 loan with Berg & Berg Enterprises, LLC
and partially offset by increased borrowings of long-term debt. The 87% increase
in interest expense for fiscal 2002 was the result of increased borrowings of
long-term debt.
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.
17
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, our principal sources of liquidity were cash and cash
equivalents of $6.6 million and $10.0 million available under an equity line
financing commitment (subject to conditions discussed below) and a $4 million
working capital commitment with Berg & Berg. On June 2, 2003 we raised net
proceeds of approximately $9.6 million through the sale of one thousand shares
of newly issued Series C Preferred Stock to an unaffiliated investor. In
addition, in June 2003 we received an additional $10.0 million funding
commitment from Berg & Berg for which the terms will be negotiated at a later
date.
Our current forecasts project that these sources of liquidity will be
sufficient to allow us to execute on our current business plan without the need
for additional financing. Our current business plan contemplates that we will
realize increases in cash flow from the sale of our Henderson, Nevada facility,
projected increases in product sales and licensing revenue and further cash
benefits from continued reductions in our administrative and manufacturing
costs., while maintaining capital expenditures and expenditures for research and
development at levels consistent with those incurred in 2003. However, 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 $14.1 million at March 31, 2003, from
the Northern Ireland Industrial Development Board (now titled Invest Northern
Ireland or INI). If we are unable to realize our business plan or if our cash
requirements increase materially from those currently projected, we would
require additional debt or equity financing. There can be no assurance that we
could obtain the additional financing on reasonable terms, if at all.
The Series C Preferred Stock matures December 2, 2004 and carries a 2%
annual dividend, paid quarterly in cash or shares of common stock. On the
maturity date, we will redeem for cash any unconverted shares of the Series C
Preferred Stock at their stated value plus any accrued and unpaid dividends. Our
current business plan contemplates conversion of all shares of Series C
Preferred Stock prior to their maturity date. If the Series C Preferred Stock
shares have not been converted by the maturity date, we may need to raise
additional debt or equity financing to facilitate any required redemption. There
can be no assurance that we could obtain the additional financing on reasonable
terms, if at all.
Currently, we do not have material sales to meet our operating needs.
Consequently, we are dependent on Berg & Berg's continued willingness to fund
our continued operations. However, pursuant to the terms of the equity line
financing commitment, as a result of offerings the Company completed in April
2002 and June 2003, and the drawdowns under the commitment of $5.0 million each
in September 2002, November 2002, February 2003, and March 2003, Berg & Berg may
elect to reduce or eliminate its remaining commitment of $10 million. Berg &
Berg has not elected to reduce their commitment to date. Further, the commitment
expires on March 31, 2004 and our right to draw down on the line is limited to
$5 million per quarter and is further dependent upon our meeting certain
operating conditions. However, so long as Stephan Godevais remains as CEO, Berg
& Berg has waived these operating conditions for the remainder of the
commitment.
The additional $10.0 million funding commitment obtained in June 2003 is
subject to completion of definitive documentation and any required stockholder
approval.
At March 31, 2003, we had commitments for capital expenditures for the next
12 months of approximately $241,000 relating to the installation of specified
manufacturing equipment, which is included in accounts payable and accrued
expenses at March 31, 2003. We may require additional capital expenditures in
order to meet greater demand levels for our products than are currently
anticipated.
We used net cash from operations for fiscal 2003, 2002 and 2001 of $32.5
million, $26.2 million, and $38.2 million, respectively. The cash used in our
fiscal 2003 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 increase in operating cash outflows was
substantially due to higher cost of sales, marketing expenses, and working
capital needs associated with our increased battery sales and battery inventory.
We used $706,000, $8.8 million, and $21.8 million in investing activities
in fiscal 2003, 2002 and 2001, respectively. Capital expenditures during all
periods were primarily related to the establishment and expansion of our
manufacturing facilities and equipment in our Northern Ireland facility. The
significant decrease in fiscal 2003 investing activities is due to the
substantial completion of our Northern Ireland facility.
18
We obtained cash from financing activities of $39.0 million , $32.4
million, and $40.8 million in fiscal 2003, 2002 and 2001, 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 $6.0 million in fiscal 2003.
As of March 31, 2003, our short term and long-term debt obligations,
including long term interest, were $732,000 and $45.7 million, respectively.
During fiscal 2002, we reached an agreement with Berg & Berg to extend the
maturity date of our loan agreement with the loan balance of $14.95 million and
accrued interest of $4.8 million from August 30, 2002 to September 30, 2005.
During fiscal 1994, through our Dutch subsidiary, we signed an agreement or
Letter of Offer with the Northern Ireland Industrial Development Board now
titled Invest Northern Ireland ("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 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 the INI, the subsidiary needed to
maintain a minimum of (pound)12.0 million (approximately $18.9 million) in debt
or equity financing from us. As of March 31, 2003, we had received grants
aggregating (pound)9.0 million (approximately $14.1 million). The amount of the
grants available under the agreement depended primarily on the level of capital
expenditures that we made. Any funding received under the grants in a four-year
period prior to any alleged default is repayable to the INI if the subsidiary is
found to be in default under the agreement. Default includes the permanent
cessation of business in Northern Ireland. Funding received under the grants to
offset capital expenditures can be included in such repayable amount if related
equipment is sold, transferred or otherwise disposed of during a four-year
period after the date of grant. Funding received under the grants can be
included in such repayable amount 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 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
discussions 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. We believe that it is unlikely that the INI will demand
repayment of any grant funds paid in a four-year period prior to any default on
the part of the subsidiary.
INFLATION
Historically, our operations have not been materially affected by
inflation. However, our operations may be affected by inflation in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
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 us to complete a transitional
goodwill impairment test six months from the date of adoption. We adopted SFAS
No. 142 on April 1, 2002, and no impairment charge was considered
necessary under the adoption.
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
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. We adopted SFAS 144 on April 1, 2002. Impairment charges
were deemed appropriate and recorded during the quarter period ended March 31,
2003.
19
In April 2002, SFAS No. 145 ("SFAS 145"), "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" was issued, which rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and an amendment of that Statement,
FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." The Statement also rescinds FASB Statement No. 44, "Accounting
for Intangible Assets of Motor Carriers." The Statement amends FASB Statement
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. We will adopt SFAS 145 in April 2003 and do not
expect this adoption to have a significant effect on the financial statements.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement requires
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred as opposed to the date of an entity's
commitment to an exit plan or disposal activity. We adopted SFAS No. 146 in
January 2003 which did not have a material effect on the financial statements.
In December 2002, SFAS No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of FASB Statement No.
123", was issued, which amends SFAS Statement No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Certain disclosure requirements
under SFAS 148 became effective for us beginning December 15, 2002 and we have
complied with those requirements. The remaining disclosure requirements under
SFAS No. 148 become effective for us in the first quarter of fiscal 2004. We do
not expect these additional reporting requirements to have a material impact on
our financial statements.
In December 2002, FASB Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5,
57, and 107 and rescission of FASB Interpretation No. 34", was issued, which
addresses the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligation under guarantees and clarifies the
requirements related to the recognition of a liability by a guarantor at the
inception of a guarantee for the obligations the guarantor has undertaken in
issuing that guarantee. We adopted FIN 45 in March 2003 which did not have a
material effect on the financial statements.
In April 2003, SFAS No. 149 ("SFAS 149"), "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities", was issued, which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". We will adopt SFAS 149 beginning our second quarter of fiscal year
2004 and do not expect this adoption to have a significant impact on our
financial statements.
In May 2003, SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", was issued,
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. We
will adopt SFAS 150 beginning our first quarter of fiscal year 2004. We are
currently reviewing the impact this statement will have on our financial
statements.
In May 2003, FIN 46, "Consolidation of Variable Interest Entities", was
issued, which clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. We will
adopt FIN 46 beginning our second quarter of fiscal year 2004 and do not expect
this adoption to have a significant impact on our financial statements.
20
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table sets forth, as of March 31, 2003, our scheduled principal,
interest and other contractual annual cash obligations due by us for each of the
periods indicated below (in thousands):
PAYMENT DUE BY PERIOD
---------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- ----------------------- ----- --------- --------- --------- ---------
Long-term debt obligations 41,383 810 36,717 1,985 1,871
Capital lease obligations - - - - -
Operating lease obligations 83 83 - - -
Purchase obligations 2,950 2,950 - - -
Other long-term liabilities 6,744 - 6,744 - -
Total 51,160 3,843 43,461 1,985 1,871
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
EXECUTION OF THE BUSINESS PLAN WITH THE CURRENT AVAILABLE CAPITAL.
At March 31, 2003, our principal sources of liquidity were cash and cash
equivalents of $6.6 million and $10.0 million available under an equity line
financing commitment (subject to conditions discussed below) and a $4 million
working capital commitment from Berg & Berg. On June 2, 2003 we raised net
proceeds of approximately $9.6 million through the sale of one thousand shares
of newly issued Series C Preferred Stock to an independent investor. In
addition, in June 2003 we received an additional $10.0 million funding
commitment from Berg & Berg for which the terms will be negotiated at a later
date.
Our current forecasts project that these sources of liquidity will be
sufficient to allow us to execute on our current business plan without the need
for additional financing. Our current business plan contemplates that we will
realize increases in cash flow from the sale of our Henderson, Nevada facility,
projected increases in product sales and licensing revenue and further cash
benefits from continued reductions in our administrative and manufacturing
costs, while maintaining capital expenditures and expenditures for research and
development at levels consistent with those incurred in 2003. However, 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 $14.1 million at March 31, 2003, from
the Northern Ireland Industrial Development Board (now titled Invest Northern
Ireland or INI). If we are unable to realize on our business plan or if our cash
requirements increase materially from those currently projected, we would
require additional debt or equity financing. There can be no assurance that we
could obtain the additional financing on reasonable terms, if at all.
The Series C Preferred Stock matures December 2, 2004 and carries a 2% annual
dividend, paid quarterly in cash or shares of common stock. On the maturity
date, we will redeem for cash any unconverted shares of the Series C Preferred
Stock at their stated value plus any accrued and unpaid dividends. Our current
business plan contemplates conversion of all shares of Series C Preferred Stock
prior to their maturity date. If the Series C Preferred Stock shares have not
been converted by the maturity date, we may need to raise additional debt or
equity financing to facilitate any required redemption. There can be no
assurance that we could obtain the additional financing on reasonable terms, if
at all.
21
Currently, we do not have material sales to meet our operating needs.
Consequently, we are dependent on Berg & Berg's continued willingness to fund
our continued operations. Pursuant to the terms of the equity line financing
commitment, as a result of the offerings we completed in April 2002 and June
2003, Berg & Berg may elect to reduce or eliminate its remaining commitment of
$10 million. Berg & Berg has not elected to reduce their commitment to date.
Further, the commitment expires on March 31, 2004 and our right to draw down on
the line is limited to $5 million per quarter and is further dependent upon
meeting certain operating conditions. However, so long as Stephan Godevais
remains as CEO, Berg & Berg has waived these conditions for the remainder of the
commitment.
The additional $10.0 million funding commitment obtained in June 2003 is subject
to completion of definitive documentation and any required stockholder approval.
OUR WORKING CAPITAL REQUIREMENTS MAY INCREASE BEYOND THOSE CURRENTLY
ANTICIPATED.
We have planned for an increase in sales, if we experience sales in excess of
our plan, our working capital needs and capital expenditures would likely
increase from that currently anticipated. Our ability to meet this additional
customer demands would be dependent on our ability to arrange for additional
equity or debt financing since it is likely that cash flow from sales is likely
to lag behind these increased working capital requirements. If our working
capital needs increase from that currently anticipated and we do not receive
additional financing from Berg & Berg, we may need to arrange for additional
equity or debt financing.
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 $374.6 million as of March 31, 2003. We have working
capital of $4.0 million as of March 31, 2003, and have sustained recurring
losses related primarily to the research and development and marketing of our
products combined with the lack of material sales. We expect to continue to
incur operating losses and negative cash flows during fiscal 2004, 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 WILL 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. We may have technical
issues that arise that may affect the acceptance of our products by our
customers. Market acceptance may also depend on a variety of other 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 WILL 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
22
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.
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 cannot 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 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
23
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 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
and/or prismatic 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.
IN ADDITION TO OUR OWN PRODUCT LINES, OUR BATTERIES ARE INTENDED TO BE
INCORPORATED INTO OTHER PRODUCTS. WE WILL NEED TO RELY ON OEMS TO COMMERCIALIZE
THESE PRODUCTS.
Our business strategy contemplates that we will be required to rely on
assistance from OEMs to gain market acceptance for our products. We therefore
will need to identify acceptable OEMs and enter into agreements with them. Once
we identify acceptable OEMs 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.
OEMs often require unique configurations or custom designs for batteries, which
must be developed and integrated into their product well before the product is
launched. This development process not only requires substantial lead-time
between the commencement of design efforts for a customized battery system and
the commencement of volume shipments of the battery system to the customer, but
also requires the cooperation and assistance of the OEMs for purposes of
determining the battery requirements for each specific application. We may have
technical issues that arise that may affect the acceptance of our products by
OEMs. If we are unable to design, develop and introduce products that meet OEMs'
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 OEMs or battery pack assemblers to successfully commercialize
our products, which could impair our profitability.
FAILURE TO IMPLEMENT AN EFFECTIVE LICENSING BUSINESS STRATEGY WILL ADVERSELY
AFFECT OUR REVENUE, CASH FLOW AND PROFITABILITY.
As a result of the intellectual property assets we have acquired and internally
developed, such as 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; and
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.
24
THERE IS A POTENTIAL SALES-CHANNEL CONFLICT BETWEEN OUR FUTURE TECHNOLOGY
LICENSEES AND US.
The acquisition of the Telcordia Technologies, Inc.'s 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. 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 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 at our internal manufacturing site and reduce costs
through the effective utilization of OEM partners. 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.
OUR ABILITY TO MANUFACTURE LARGE VOLUMES OF BATTERIES IS LIMITED AND MAY PREVENT
US FROM FULFILLING ORDERS.
We have been manufacturing batteries on a commercial scale to fulfill purchase
orders and we are able to produce sufficient quantities of batteries to supply
our current customer demands. We are actively soliciting additional purchase
orders. We may need additional low cost, quick lead-time equipment or contract
manufacturing support to fulfill large volume orders. 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.
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. During fiscal 2003, revenue from two customers,
Alliant Techsystems Inc. and Pabion Corporation, Ltd., each comprised more than
10% of total revenues. During fiscal 2002, revenue from four customers, Hanil
Joint Venture, Amperex Technology Limited, Alliant Techsystems Inc., and Samsung
Corporation, each comprised more than 10% of total revenues. For fiscal 2001,
revenue from four customers Alliant Techsystems Inc., MicroEnergy Technologies
Inc., Moltech Corporation, and Qualcomm, each comprised more than 10% of total
revenues. 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 one or more 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;
25
o loss of a customer or a disruption in our sales and distribution
channels; or
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.
We 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 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.
26
WE EXPECT TO SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO AND DERIVE A
SIGNIFICANT PORTION OF OUR LICENSING REVENUES FROM CUSTOMERS LOCATED OUTSIDE THE
UNITED STATES. FOREIGN GOVERNMENT REGULATIONS, CURRENCY FLUCTUATIONS AND
INCREASED COSTS ASSOCIATED WITH INTERNATIONAL SALES COULD MAKE OUR PRODUCTS AND
LICENSES UNAFFORDABLE IN FOREIGN MARKETS, WHICH WOULD REDUCE OUR FUTURE
PROFITABILITY.
We expect that international sales 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;
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 MAY NEED TO EXPAND OUR EMPLOYEE BASE AND OPERATIONS IN ORDER TO EFFECTIVELY
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.
27
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 OEMs and other customers. We believe that our
primary competitors are existing suppliers of liquid lithium-ion, competing
polymer and, in some cases, nickel metal-hydride batteries. These suppliers
include Sanyo, Matsushita Industrial Co., Ltd. (Panasonic), Sony, Toshiba, SAFT
and Electrovaya. Most 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 TRANSPORTATION 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. 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. Satisfying any future laws or regulations could require
significant time and resources from our technical staff and possible redesign
which may result in substantial expenditures and delays in the production of our
product, all of which could harm our business and reduce our future
profitability. The transportation of lithium and lithium ion batteries is
regulated both internationally and domestically. Under recently revised United
Nations recommendations and as adopted by the International Air Transport
Association (IATA), our N-ChargeTM system currently falls within the level such
that it is no longer exempt and now requires a class 9 designation for
transportation. The revised United Nations recommendations are not U.S. law
until such time as they are incorporated into the DOT Hazardous Material
Regulations. However, DOT has proposed new regulations harmonizing with the UN
guidelines. At present it is not known if or when the proposed regulations would
be adopted by the US. While we fall under the equivalency levels for the US and
comply with all safety packaging requirements worldwide, 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 new products.
28
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 17, 2003, our officers, directors and their affiliates as a group
beneficially owned approximately 34.1% of our outstanding common stock. Carl
Berg, one of our directors, beneficially owns approximately 31.3% of our
outstanding common stock. 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
stockholders per se and thus from the interests of other stockholders.
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 OUR COMMON STOCK.
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.
AT ANY GIVEN TIME WE MIGHT NOT MEET THE CONTINUED LISTING REQUIREMENTS OF THE
NASDAQ SMALLCAP MARKET.
Given the volatility of our stock and trends in the stock market in general, at
any given time we might not meet the continued listing requirements of the
Nasdaq SmallCap Market. Among other requirements, Nasdaq requires the minimum
bid price of a company's registered shares to be $1.00. On June 17, 2003, the
closing sale price of our common stock was $3.57. If we are not able to maintain
the requirements for continued listing on the NASDAQ SmallCap Market, it could
have a materially adverse effect on the price and liquidity 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
29
o other factors and events beyond our control.
In addition, the stock market in general has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.
As a result of this potential stock price volatility, investors may be unable to
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 71,722,794 shares of common stock as of
March 31, 2003. In addition, at March 31, 2003, we had 5,161,629 shares of our
common stock reserved for issuance under outstanding options and warrants, and
7,379,681 additional shares reserved for issuance under our stock option plans.
In connection with the potential conversion of the Series C Convertible
Preferred Stock issued on June 2, 2003, we expect that we may need to issue up
to 2,352,942 shares of our common stock (based on a conversion price of $4.25)
and up to 352,900 shares in upon exercise of a related warrant issued on June 2,
2003.
WE DO NOT INTEND TO PAY DIVIDENDS ON COMMON STOCK AND THEREFORE STOCKHOLDERS
WILL ONLY BE ABLE TO RECOVER THEIR INVESTMENT IN OUR COMMON STOCK, IF AT ALL, BY
SELLING THE SHARES OF OUR STOCK THAT THEY HOLD.
Some investors favor companies that pay dividends on common stock. 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, a return on an investment in our stock likely depends on the
ability to sell our stock at a profit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We considered the provisions of Financial Reporting Release No. 48 "Disclosures
of Accounting Policies for Derivative Financial Instruments and Derivative
Commodity Instruments, and Disclosures of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Commodity Instruments." We
had no holdings of derivative financial or commodity instruments at March 31,
2003. However, we are exposed to financial market risks, including changes in
foreign currency exchange rates and interest rates.
We have 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% (5.25% and 5.5%, respectively at March 31, 2003). We also have
long-term debt in the form of two loans, which mature 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, 2003) and the second loan has a fixed
interest rate of 8%. The table below presents principal amounts by fiscal year
for our long-term debt.
2004 2005 2006 2007 2008 THEREAFTER TOTAL
---------- -------- -------- -------- ------- ---------- ---------
(dollars in thousands)
Liabilities:
Fixed rate debt: -- ---- 20,000 -- -- -- 20,000
Variable rate debt 810 858 15,859 964 1,021 1,871 21,383
Based on borrowing rates currently available to us for loans with similar terms,
the carrying value of its debt obligations approximates fair value.
30
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.
DIRECTORS AND EXECUTIVE OFFICERS
The following persons serve as our directors:
DIRECTORS AGE PRESENT POSITION
- --------- --- ----------------
Carl E. Berg (1)(2).................. 66 Director
Stephan B. Godevais.................. 41 Director and Chairman of the Board
Bert C. Roberts (1).................. 60 Director
Alan F. Shugart (1)(2)............... 72 Director
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
The following persons serve as our executive officers:
EXECUTIVE OFFICERS AGE PRESENT POSITION
- ------------------ --- ----------------
Stephan B. Godevais................. 41 President and Chief Executive Officer
Joseph F. Lamoreux.................. 41 Vice President of Small Format Energy
Solutions
Kevin W. Mischnick.................. 36 Vice President of Finance and Assistant
Secretary
Terry Standefer..................... 46 Vice President of Worldwide Operations
Roger A. Williams................... 55 General Counsel and Assistant Secretary
The following persons are significant employees:
SIGNIFICANT EMPLOYEE AGE PRESENT POSITION
- -------------------- --- ----------------
David St. Angelo.................... 43 Vice President of Large Format Energy
Solutions
Our executive officers are appointed by and serve at the discretion of the
Board. There are no family relationships between any director and/or any
executive officer.
CARL E. BERG. Mr. Berg helped found us and has served on the Board since
September 1991. Mr. Berg is a major Silicon Valley industrial real estate
developer and a private venture capital investor. Mr. Berg also serves as the
Chairman of the Board, Chief Executive Officer and director of Mission West
Properties, Inc., Monolithic Systems, Inc. and Focus Enhancements, Inc. Mr. Berg
holds a Bachelor of Arts degree in Business Administration from the University
of New Mexico.
STEPHAN B. GODEVAIS. Mr. Godevais joined us in May 2001 as our Chief Executive
Officer, President and a director. In May 2002, the Board appointed him Chairman
of the Board. From December 1997 to April 2001, Mr. Godevais served as a Vice
President at Dell Computer Corporation where he led Dell's desktop and notebook
product lines for consumers and small businesses. During his tenure at Dell, Mr.
Godevais launched the company's Inspiron division, growing it into a
multi-billion dollar business and introduced the first 15-inch notebook in the
industry, sustaining its position as a market leader from 1998 to 2000. Prior to
Dell, Mr. Godevais managed the worldwide notebook business of Digital Equipment
Corporation. From December 1994 to November 1997, Mr. Godevais served in several
positions, including General Manager and Vice President, at Digital. Mr.
Godevais also spent ten years at Hewlett Packard
31
Company, where he held positions in marketing for various product and field
organizations. Mr. Godevais holds a business management degree from the Institut
d'Etudes Politiques de Paris.
BERT C. ROBERTS, JR. Mr. Roberts originally joined us as a director in 1992 and
served until 1993 prior to rejoining us as a director in 1998. Mr. Roberts
served as Chairman of WorldCom, Inc. from 1998 until December 2002. On July 21,
2002, WorldCom, Inc. and substantially all of its active U.S. subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court for the Southern District of New
York. Mr. Roberts served as Chairman and Chief Executive Officer of MCI, a
telecommunications company from 1992 until 1998, after having served as
President and Chief Operating Officer since 1985. Mr. Roberts serves on the
boards of Johns Hopkins University and CaPCURE (a cancer research funding
organization). Mr. Roberts holds a Bachelor of Science in Engineering from Johns
Hopkins University.
ALAN F. SHUGART. Mr. Shugart joined us as a director in March 1992. Mr. Shugart
was the Chief Executive Officer and a director of Seagate Technology, Inc., a
technology development and manufacturing company, since its inception in 1979
until July 1998. Mr. Shugart also served as Seagate's President from 1979 to
1983 and from September 1991 to July 1998. Additionally, Mr. Shugart served as
Chairman of the Board of Seagate from 1979 until September 1991, and from
October 1992 to July 1998. Mr. Shugart currently serves as a director of Sandisk
Corporation (a manufacturer of digital flash memory chips) and Cypress
Semiconductor Corporation. Mr. Shugart holds a Bachelor of Science in
Engineering - Physics from the University of Redlands.
JOSEPH F. LAMOREUX. Mr. Lamoreux joined us in July 2001 as our Vice President of
Small Format Energy Solutions. From May 1997 to May 2001, Mr. Lamoreux worked at
Dell Computer Corporation, where he held several positions, including Director
of Notebook Supply Chain Management, Director of Notebook Engineering and
Director of Engineering, Inspiron. From May 1997 to January 1999, Mr. Lamoreux
served as Director of the Portable PC Division at Compaq Computer Corporation.
Mr. Lamoreux holds a Bachelor of Science degree in Mechanical Engineering from
North Carolina State University.
KEVIN W. MISCHNICK. Mr. Mischnick joined us in July 2001 as our Vice President
of Finance. From November 2000 to March 2001, he served as Vice President of
Finance at CarOrder, Inc., an internet automobile dealership. From March 1997 to
October 2000, he served as Vice President of Finance for AMFM, Inc., a radio
broadcasting company, and one of its predecessor companies where he was
responsible for all aspects of treasury and cash management systems. During
other tenures at AMFM and one of its predecessor companies, Mr. Mischnick
completed multiple public equity and debt offerings and gained experience in
Securities and Exchange Commission reporting. From August 1990 to March 1997, he
served in various positions at Ernst & Young LLP, including Audit Manager. He is
a certified public accountant and holds a Bachelor of Business Administration
degree in Accounting from Texas Tech University.
TERRY STANDEFER. Mr. Standefer joined us in August 2001 as our Vice President of
Worldwide Operations. From March 1996 to April 2001, Mr. Standefer held several
executive positions at Dell Computer Corporation in procurement, manufacturing
and new product operations. Prior to his service at Dell, he spent 13 years at
Apple Computer where he managed operations for high volume systems assembly. Mr.
Standefer holds a Bachelor of Science in Physics and Math from West Texas State
University.
ROGER WILLIAMS. Mr. Williams joined us in April 2001 and serves as our General
Counsel and Assistant Secretary. Mr. Williams has been a practicing intellectual
property attorney for 27 years, having practiced in both private and corporate
positions. From 1991 to 2001, Mr. Williams served as Chief Patent Counsel and
Associate General Counsel for the pharmaceutical company G.D. Searle & Co. Mr.
Williams has his Juris Doctorate degree from Drake University Law School and a
Bachelor of Science in Chemistry from Western Illinois University. He is a
member of the California and Indiana Bars.
DAVID ST. ANGELO. Mr. St. Angelo joined us in September 2001 as Vice President
of Large Format Energy Solutions. Prior to joining us, Mr. St. Angelo served as
program controller for the Multimedia Systems Division of the technology company
Motorola Inc. from 1998 to 2001, during which he steered the definition, design,
development and commercialization of the division's advanced set-top box product
line. From 1994 to 1998 Mr. St. Angelo held various positions including
applications manager, site manager, and applications engineer at Eaton
Corporation's semiconductor division. Prior to joining Eaton, Mr. St. Angelo was
with the energy company Mobil Solar Energy Corporation, from 1988 to 1994, where
he held positions in technology transfer, research and product development. He
holds a Bachelor of Science in Chemical Engineering from the University of
Massachusetts and a Master of Science in Electrical Engineering from
Northeastern University.
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, officers (including a
person performing a principal policy-making function) and persons who own more
than 10% of a registered class of our equity securities to file with the
Commission initial reports of ownership and reports of changes in ownership of
our common stock and other equity securities of ours. Directors, officers and
10% holders are required by Commission regulations to send us copies of all of
the Section 16(a) reports they file. Based solely upon a review of the copies of
the forms sent to us and the representations made by the reporting persons to
us, we believe that during the fiscal year ended March 31, 2003, our directors,
officers and 10% holders complied with all filing requirements under Section
16(a) of the Exchange Act, provided, however, Terry Standefer filed three Forms
4 late, which reported three transactions.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer and as to each
of the other four most highly compensated executive officers whose compensation
exceeded $100,000 during fiscal 2003 (referred to as the named executive
officers), information concerning all compensation paid for services to us in
all capacities for each of the three years ended March 31 indicated below.
Long-Term
Annual Annual Compensation
Compensation Compensation Awards
------------ ------------ ------------
Securities
Name and Principal Underlying
Position Fiscal Year Salary($) Bonus($) Options(#)
- ---------------------------- ----------- --------- -------- ------------
Stephan B. Godevais......... 2003 500,000 -- 350,000
Chairman of the Board, 2002 442,528 -- 1,500,300
Chief Executive Officer and 2001 -- -- --
President
Joseph F. Lamoreux......... 2003 200,000 -- 195,000
Vice President of Small 2002 165,495 -- 225,300
Format Energy Solutions 2001 -- -- --
Terry Standefer......... 2003 180,000 -- 250,000
Vice President of Worldwide 2002 98,563 -- 200,300
Operations 2001 -- -- --
Kevin W. Mischnick......... 2003 135,000 33,750 74,652
Vice President of Finance 2002 93,002 -- 120,300
and Assistant Secretary 2001 -- -- --
Roger A. Williams.......... 2003 180,000 -- 83,334
General Counsel and 2002 164,709 -- 120,300
Assistant Secretary 2001 -- -- --
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows for the fiscal year ended March 31, 2003, certain
information regarding options granted to, exercised by, and held at year-end by
the named executive officers:
33
INDIVIDUAL GRANTS
-------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES PERCENT OF TOTAL AT ASSUMED ANNUAL RATES
UNDERLYING OPTIONS GRANTED EXERCISE OF STOCK PRICE APPRECIATION
OPTIONS TO EMPLOYEES IN FOR BASE EXPIRATION FOR OPTION TERM (2)
NAME GRANTED (#) FISCAL YEAR (1) PRICE ($/SH) DATE 5% 10%
- ---------------------- ------------- ---------------- ------------- ------------ ---------------------------
STEPHAN B. GODEVAIS 300,000 (3) 9.49% 2.10 5/12/2012 $ 396,204 $ 1,004,058
50,000 (4) 1.58% 1.69 12/20/2012 53,142 134,671
JOSEPH F. LAMOREUX 75,000 (5) 2.37% 2.25 5/6/2012 106,126 268,944
20,000 (6) * 0.72 8/26/2012 9,056 22,950
100,000 (4) 3.16% 1.69 12/20/2012 106,283 269,342
TERRY STANDEFER 100,000 (5) 3.16% 2.25 5/6/2012 141,501 358,592
50,000 (7) 1.58% 0.63 10/9/2012 19,810 50,203
100,000 (4) 3.16% 1.69 12/20/2012 106,283 269,342
KEVIN W. MISCHNICK 5,833 (8) * 1.30 7/1/2012 4,769 12,085
18,819 (9) * 0.70 10/1/2012 8,285 20,995
50,000 (4) 1.58% 1.69 12/20/2012 53,142 134,671
ROGER A. WILLIAMS 4,168 (10) * 3.00 4/1/2012 7,851 19,895
18,333 (8) * 1.30 7/1/2012 14,988 37,984
10,833 (9) * 0.70 10/1/2012 4,769 12,086
50,000 (4) 1.58% 1.69 12/20/2012 53,142 134,671
*...Indicates less than one percent.
- ---------------
(1) Options to purchase an aggregate of 3,159,952 shares were granted to
employees in fiscal year 2003.
(2) The potential realizable value is calculated based on the term of the
option at its time of grant, 10 years, compounded annually. It is
calculated by assuming that the stock price on the date of grant
appreciates at the indicated annual rate, compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price. No gain to the
optionee is possible unless the stock price increases over the option term,
which will benefit all stockholders. These amounts are calculated pursuant
to applicable requirements of the Commission and do not represent a
forecast of the future appreciation of our common stock.
(3) These options vest in 16 equal quarterly installments from the grant date,
May 12, 2002.
(4) These options vest in 16 equal quarterly installments from the grant date,
December 20, 2002.
(5) These options vest in 16 equal quarterly installments from the grant date,
May 6, 2002.
(6) These options vest in 16 equal quarterly installments from the grant date,
August 26, 2002.
(7) These options vest in 16 equal quarterly installments from the grant date,
October 9, 2002.
(8) These options vest in 12 equal quarterly installments from the grant date
July 1, 2002.
(9) These options vest in 12 equal quarterly installments from the grant date
October 1, 2002.
(10) These options vest in 12 equal quarterly installments from the grant date
April 1, 2002.
34
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR, AND FISCAL YEAR END OPTION VALUES
The following table shows (i) the number of shares acquired and value realized
from option exercises by each of the named executive officers during the fiscal
year ended March 31, 2003 and (ii) the number and value of the unexercised
options held by each of the named executive officers on March 31, 2003:
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
ON VALUE FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
EXERCISE REALIZED ------------------------------ ------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- -------- -------- ------------ ------------- ------------ ---------------
Stephan B. Godevais -- -- 715,925 1,134,375 $ 4,250 $ 33,750
Joseph F. Lamoreux -- -- 121,553 298,747 $ 6,450 $ 68,150
Terry Standefer -- -- 103,425 346,875 $ 7,625 $ 114,375
Kevin W. Mischnick -- -- 48,051 146,901 $ 4,540 $ 50,706
Roger A. Williams -- -- 57,805 145,829 $ 5,344 $ 48,946
- -------------
(1) Based on the last reported sales price of our common stock on the Nasdaq
SmallCap Market on March 31, 2003 ($2.15), less the exercise price of
the options multiplied by the number of shares underlying the option.
EMPLOYMENT AGREEMENT
Effective May 2, 2001, we entered into an employment agreement with Stephan B.
Godevais pursuant to which we retained Mr. Godevais as Chief Executive Officer
and President at a salary of $500,000 per year. The Board reviews his salary on
January 1 of each year and may (in its sole discretion) increase, but not
decrease, his salary.
Under his employment agreement, we granted Mr. Godevais stock options to
purchase an aggregate of 1,500,000 shares of common stock at an exercise price
of $6.52 per share, vesting over a period of four years.
We agreed to nominate Mr. Godevais to the Board for the entire period of his
employment as Chief Executive Officer and President and to use our best efforts
to cause our stockholders to cast their votes in favor of his continued election
to the Board. Mr. Godevais agreed to resign from the Board when he no longer
serves as Chief Executive Officer and President.
Mr. Godevais is entitled to a lump sum payment of $500,000 and continued group
health insurance coverage for one year following termination if within the first
two years of his employment any of the following occurs:
o A liquidation or change in control occurs (excluding an acquisition by
Carl Berg or his affiliated companies of more than 50% of our voting
stock, which will not constitute a change of control);
o We terminate Mr. Godevais' employment for any reason other than for
cause; or
o Mr. Godevais resigns for good reason.
We have employment offer letters with each of our named executive officers
that stipulate the initial salaries of each officer and the number of options to
which the officer was initially entitled. Each letter specifies that the
employment may be terminated at any time by either the employee or us, with or
without cause. Further, Joseph Lamoreux's letter, dated May 21, 2001, specifies
that if we terminate his employment with us for any or no reason, we will pay
him four months salary, payable as of the termination date.
DIRECTORS' COMPENSATION. Our non-employee directors receive no cash
compensation, but are eligible for reimbursement for their expenses incurred in
connection with attendance at Board meetings in accordance with Company policy.
Directors who are employees do not receive separate compensation for their
services as directors, but are eligible to receive stock options under our
2000 Stock Option Plan.
Each of our non-employee directors receives stock option grants pursuant to the
1996 Non-Employee Directors' Stock Option Plan, which we refer to as the
Directors' Plan. Only non-employee directors or an affiliate of those directors
(as defined in the Internal Revenue Code (referred to as the Code)) are eligible
to receive options under the Directors' Plan. The plan provides that new
directors will receive initial stock options to purchase 100,000 shares of
common stock upon
35
election to the Board. The per share exercise price for these options will be
the fair market value of a share of our common stock on the day the options are
granted. These options will vest one-fifth on the first and second anniversaries
of the date of grant of the options, and equal quarterly installments over the
next three years. A director who had not received options upon becoming a
director, received stock options to purchase 100,000 shares on the date of the
adoption of the Directors' Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During the fiscal
year ended March 31, 2003, the Compensation Committee consisted of Messrs.
Shugart and Berg.
In July 1990, we entered into a loan agreement with Baccarat Electronics, Inc.
Baccarat subsequently assigned all of its rights, duties and obligations under
that agreement, as the same has been amended from time to time, to Berg & Berg,
a company controlled by Carl Berg, a principal stockholder and one of our
directors. The loan agreement, as amended, allowed us to borrow, prepay and
re-borrow up to $15.0 million under a promissory note on a revolving basis. The
loan bears interest at one percent over the interest rate on the lender's
principal line of credit each year (approximately 9% at March 31, 2003).
Effective December 31, 2001, we further amended the loan agreement to provide
that Berg & Berg has no further obligations to loan or advance funds to us under
this loan agreement, as amended. As of March 31, 2003, the principal balance and
accrued and unpaid interest owing under the July 1990 loan agreement, as
amended, totaled $19,701,397. By amendment dated February 11, 2002, Berg & Berg
agreed to extend the maturity date of the loan from August 30, 2002 to September
30, 2005. In fiscal 1998 and 1999, we issued warrants to purchase 594,031 shares
of our common stock to Berg & Berg in conjunction with the amended loan
agreement. The fair value of these warrants, totaling approximately $2,158,679,
has been reflected as additional consideration for the loan from Baccarat.
In October 2001, we entered into a loan agreement with Berg & Berg. Under the
terms of the loan agreement, Berg & Berg agreed to advance us up to $20.0
million between the date of the loan agreement and September 30, 2003. Interest
on the loans accrues at 8.0% per annum, and all outstanding amounts with respect
to the loans are due and payable on September 30, 2005. As of March 31, 2003,
the principal balance and accrued and unpaid interest owing under this loan
agreement totaled $21,837,165. In conjunction with the loan agreement, Berg &
Berg received a warrant to purchase 1,402,743 shares of our common stock at an
exercise price of $3.208 per share. The warrants are immediately exercisable and
expire on October 5, 2005.
In March 2002, Berg & Berg agreed to provide up to $30.0 million in equity
capital. In exchange for any amounts funded pursuant to this commitment, we will
issue to Berg & Berg restricted common stock at a purchase price of 85% of the
average closing price of our common stock over the five trading days prior to
the purchase date. We have agreed to register the resale of the shares of common
stock issued to Berg & Berg. We have drawn $20 million from this commitment as
of March 31, 2003. Pursuant to the terms of the equity line financing
commitment, as a result of the offerings we completed in April 2002 and June
2003 and previous draws under the commitment, Berg & Berg may elect to reduce or
eliminate its remaining commitment of $10 million. Berg & Berg has not elected
to reduce their commitment to date. Further, the commitment expires on March 31,
2004 and our right to draw down on the line is limited to $5 million per quarter
and is further dependent upon meeting certain operating conditions. We do not
currently satisfy these conditions and do not expect to satisfy the conditions
for the immediate future. However, so long as Stephan Godevais remains as CEO,
Berg & Berg has waived these conditions for the remainder of the commitment.
We have also received a $4 million working capital commitment from Berg & Berg.
In addition, in June 2003 we received an additional $10.0 million funding
commitment from Berg & Berg for which the terms will be negotiated at a later
date.
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
EQUITY COMPENSATION PLANS
The following table summarizes information about the equity securities
authorized for issuance under our compensation plans as of March 31, 2003. For a
description of these plans, please see Note 14, Stockholders' Equity (Deficit),
in our consolidated financial statements.
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF OUTSTANDING EXERCISE PRICE OF FOR FUTURE ISSUANCE
OPTIONS, WARRANTS OUTSTANDING OPTIONS, UNDER EQUITY
PLAN CATEGORY AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
- -------------------- ------------------- --------------------- ----------------------
Equity compensation
plans approved by
security holders 6,994,770 $5.47 122,589
Equity compensation
plans not approved by
security holders (1) 1,925,000 $6.45 --
Total 8,919,770 $5.68 122,589
- ----------
(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 vested in May 2002 and
the remainder vest in 12 equal quarterly installments during the term of his
employment (750,000 shares vested as of June 17, 2003). The vesting accelerates
and become immediately exercisable on the date of a change of control of the
Company (or 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 vested in
June 2002 and the remainder vest in 12 equal quarterly installments during the
term of his employment (112,500 shares vested as of June 17, 2003). 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 will vest in August 2002 and the
remainder vest in 12 equal quarterly installments during the term of his
employment (87,500 shares vested as of June 17, 2003).
37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of our
common stock as of June 17, 2003, by:
o Each of our directors;
o Each of the named executive officers;
o All directors and executive officers as a group; and
o All other stockholders known by us to beneficially own more than 5% of
the outstanding common stock.
Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options held by that person that are currently exercisable or exercisable within
60 days of the date as of which this information is provided, and not subject to
repurchase as of that date, are deemed outstanding. These shares, however, are
not deemed outstanding for the purposes of computing the percentage ownership of
any other person.
Except as indicated in the notes to this table, and except pursuant to
applicable community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares shown as beneficially
owned by them. Percentage ownership is based on 71,734,022 shares of common
stock outstanding on June 17, 2003. Unless otherwise indicated, the address for
each of the stockholders listed below is c/o Valence Technology, Inc., 6504
Bridge Point Parkway, Suite 415, Austin, Texas 78730.
Beneficial Ownership(1)
------------------------------
Beneficial Owner Number of Percent of
Shares (#) Total (%)
- ----------------------------------------------------------- ------------ ------------
Carl E. Berg (2) 23,164,330 31.3%
10050 Bandley Drive, Cupertino, CA 95014
1981 Kara Ann Berg Trust, Clyde J. Berg, Trustee; and
Clyde J. Berg
10050 Bandley Drive, Cupertino, CA 95014 (3) 8,604,270 12.0%
Alan F. Shugart (4) 518,567 *
Bert C. Roberts, Jr. (5) 455,419 *
Stephan B. Godevais (6) 1,309,050 1.8%
Joseph F. Lamoreux (7) 152,492 *
Terry Standefer (7) 140,925 *
Kevin W. Mischnick (7) 73,203 *
Roger A. Williams (8) 96,403 *
All directors and executive officers as a group (8
persons) (9) 25,910,389 34.1%
* Indicates less than one percent.
- -----------------------
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Commission.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentage ownership is based
on 71,734,022 shares of common stock outstanding on June 17, 2003, adjusted
as required by rules promulgated by the Commission.
(2) Includes 350,000 shares held directly by Mr. Berg; 283,006 shares issuable
upon exercise of options held by Mr. Berg that are exercisable within 60
days of June 17, 2003; 1,996,774 shares issuable upon exercise of warrants
(subject to adjustment) and 20,440,550 shares held by Berg & Berg
Enterprises, LLC, of which Mr. Berg is the sole manager; and 94,000 shares
held by Berg &Berg Profit Sharing Plan U/A 1/1/80 FBO Carl E. Berg Basic
Transfer, of which Mr. Berg is the Trustee. Mr. Berg has sole voting and
dispositive power with respect to 727,006 shares and shared voting and
dispositive power with respect to 22,437,324 shares. Berg & Berg has
38
no sole voting and dispositive power with respect to any shares and has
shared voting and dispositive power with respect to 22,437,324 shares.
(3) Based on information contained in a Schedule 13G filed jointly by 1981 Kara
Ann Berg Trust, Clyde J. Berg, Trustee and Clyde J. Berg with the SEC on
February 14, 2003. The Trust has no sole voting and dispositive power with
respect to any shares and has shared voting and dispositive power with
respect to 8,129,270 shares. Clyde J. Berg has sole voting and dispositive
power with respect to 475,000 shares and shared voting and dispositive
power with respect to 8,129,270 shares.
(4) Includes 202,000 shares held by Mr. Shugart and 316,567 shares issuable
upon exercise of options that are exercisable within 60 days of June 17,
2003.
(5) Includes 100,000 shares held by Mr. Roberts, 100,000 shares held indirectly
through various entities, 10,000 shares held by his spouse and 245,419
shares issuable upon exercise of options that are exercisable within 60
days of June 17, 2003.
(6) Includes 365,000 shares held by Mr. Godevais and 944,050 shares issuable
upon exercise of options that are exercisable within 60 days of June 17,
2003.
(7) All shares are issuable upon exercise of options that are exercisable
within 60 days of June 17, 2003.
(8) Includes 12,000 shares held by Mr. Williams and 84,403 shares are issuable
upon exercise of options that are exercisable within 60 days of June 17,
2003.
(9) Includes 4,236,839 shares issuable upon exercise of options and warrants
that are exercisable within 60 days of June 17, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None, except for certain transactions with Carl E. Berg described in Item 11
Executive Compensation; Compensation Committee Interlocks and Insider
Participation.
ITEM 14. CONTROLS AND PROCEDURES.
Within 90 days prior to the filing date of our Annual Report on Form 10-K, we
conducted an evaluation, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic reports
with the Commission.
In accordance with the Commission's requirements, our Chief Executive Officer
and Chief Financial Officer note that, since the date of the most recent
evaluation of our disclosure controls and procedures to the date of our Annual
Report on Form 10-K, there have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls or our internal controls
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple errors or mistakes. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of the controls. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and we cannot assure you that any design
will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
39
PART IV
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 16. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS - See Index to Consolidated
Financial Statements of this Annual Report on Form 10-K.
(2) 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.
(3) EXHIBITS - See Exhibit Index on pages 42-44 of this Annual
Report on Form 10-K.
(b) The Company filed the following reports on Form 8-K during
the last quarter of the period for which this Annual Report
on Form 10-K covers:
(i) Form 8-K filed February 7, 2003 reporting under Items 5
and 7.
(c) See Exhibit Index on pages 42-44 of this Form 10-K Annual Report.
(d) None.
40
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 (1) Second Restated Certificate of Incorporation of the Company.
3.2 (6) Amendment to the Second Restated Certificate of Incorporation of
the Company.
3.3 (16) Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock, filed June 2, 2003.
3.4 (13) Second Amended and Restated Bylaws of the Company.
4.1 (3) Form of Warrant to Baccarat Electronics, Inc.
4.2 (4) Form of Warrant to Placement Agent (Gemini Capital, LLC).
4.3 (4) Form of Warrant to Investor (CC Investments, LDC).
4.4 (7) Form of Warrant dated June 28, 2000 to Acqua Wellington Value Fund
Ltd.
4.5 (10) Warrant dated January 4, 2002 to Berg & Berg Enterprises, LLC.
4.6 (16) Warrant to Purchase Common Stock, issued June 2, 2003 (to
Riverview Group, LLC).
4.7 (1) Loan Agreement between the Company and Baccarat Electronics, Inc.,
dated July 17, 1990.
4.8 (1) Amendment No. 1 to Loan Agreement between the Company and Baccarat
Electronics, Inc., dated March 15, 1991 (subsequently transferred
to Berg & Berg Enterprises, LLC).
4.9 (1) Amendment No. 2 to Loan Agreement between the Company and Baccarat
Electronics, Inc., dated March 24, 1992 (subsequently transferred
to Berg & Berg Enterprises, LLC).
4.10 (1) Amendment No. 3 to Loan Agreement between the Company and Baccarat
Electronics, Inc., dated August 17, 1992 (subsequently transferred
to Berg & Berg Enterprises, LLC).
4.11 Amendment No. 4 to Loan Agreement between the Company and Baccarat
Electronics, Inc., dated September 1, 1997 (subsequently
transferred to Berg & Berg Enterprises, LLC).
4.12 (3) Amendment No. 5 to Loan Agreement between the Company and Baccarat
Electronics, Inc., dated July 17, 1998 (subsequently transferred
to Berg & Berg Enterprises, LLC).
4.13 Amendment No. 6 to Loan Agreement between the Company and Baccarat
Electronics, Inc., dated November 27, 2000 (subsequently
transferred to Berg & Berg Enterprises, LLC).
4.14 (13) Second Amended Promissory Note dated November 27, 2000 issued by
the Company to Baccarat Electronics, Inc. (subsequently
transferred to Berg & Berg Enterprises, LLC).
4.15 (10) Amendment No. 7 to Original Loan Agreement between the Company and
Berg & Berg Enterprises, LLC (previously with Baccarat
Electronics, Inc.), dated October 10, 2001.
4.16 (13) 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.
4.17 (10) Loan Agreement dated October 5, 2001 between the Company and Berg
& Berg Enterprises, LLC.
4.18 (10) Security Agreement dated October 5, 2001 between the Company and
Berg & Berg Enterprises, LLC.
4.19 (10) Promissory Note dated October 5, 2001 issued by the Company to
Berg & Berg Enterprises, LLC.
4.20 (14) Amendment to Loan Agreements with Berg & Berg dated November 8,
2002 (Amendment No. 1 to October 5, 2001 Loan Agreement and
Amendment No. 9 to 1990 Baccarat Loan Agreement).
10.1 (2)* 1990 Stock Option Plan as amended on October 3, 1997.
10.2 (5) 1996 Non-Employee Directors' Stock Option Plan as amended on
October 3,
1997.
10.3 (15) Valence Technology, Inc. Amended and Restated 2000 Stock Option
Plan.
10.4 (9) Employment Agreement with Stephan B. Godevais dated May 2, 2001.
10.5 Employment Offer Letter with Joseph Lamoreux dated May 21, 2001.
10.6 (13) Option Agreement for Stephan Godevais dated May 2, 2001.
10.7 (13) Option Agreement for Joseph Lamoreux dated June 4, 2001.
10.8 (13) Option Agreement for Terry Standefer dated August 20, 2001.
10.9 (8) Form of Indemnification Agreement entered into between the Company
and its Directors and Officers.
10.10 (9) Registration Rights Agreement with West Coast Venture Capital,
Inc. (the 1981 Kara Ann Berg Trust) dated January 13, 2001.
41
10.11 (11) Financing commitment letter agreement between the Company and
Berg & Berg Enterprises, LLC dated March 12, 2002.
10.12 (17) Waiver of Conditions of Equity Line of Credit
(identified herein as Exhibit 10.11) from Berg & Berg
Enterprises, LLC to the Company dated May 30, 2003.
10.13 (12) Letter Agreement and Release between the Company and Berg & Berg
Enterprises, LLC dated March 31, 2002.
10.14 (17) Commitment Letter from Berg & Berg Enterprises, LLC to the Company
dated June 9, 2003.
10.15 (16) Securities Purchase Agreement dated June 2, 2003 (between the
Company and the Riverview Group LLC).
10.16 (16) Registration Rights Agreement dated June 2, 2003 (with Riverview
Group, LLC).
21.1 List of subsidiaries of the Company.
23.1 Consent of Independent Auditors.
99.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(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, filed with the Securities and Exchange Commission on
March 27, 1992.
(2) Incorporated by reference to the exhibit so described in the
Company's Registration Statement on Form S-8 (File No.
333-43203) filed with the Securities and Exchange Commission
on December 24, 1997.
(3) 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.
(4) 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.
(5) Incorporated by reference to the exhibit so described in the
Company's Registration Statement on Form S-8 (File No.
333-74595) filed with the Securities and Exchange Commission
on March 17, 1999.
(6) 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.
(7) Incorporated by reference to the exhibit so described in the
Company's Current Report on Form 8-K dated June 22, 2000, and
filed with the Securities and Exchange Commission on June 29,
2000.
(8) Incorporated by reference to the exhibit so described in the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2000, filed with the Securities and Exchange
Commission on June 29, 2000.
(9) 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.
(10) 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.
42
(11) Incorporated by reference to the exhibit so described in the
Company's Current Report on Form 8-K dated March 20, 2002,
and filed with the Securities and Exchange Commission on
March 22, 2002.
(12) Incorporated by reference to the exhibit so described in the
Company's Current Report on Form 8-K dated March 31, 2002,
and filed with the Securities and Exchange Commission on
April 15, 2002.
(13) 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, 2002, filed with the Securities and Exchange
Commission on July 1, 2002.
(14) Incorporated by reference to the exhibit so described in the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2002, filed with the Securities
and Exchange Commission on November 14, 2002.
(15) Incorporated by reference to the exhibit so described in the
Company's Registration Statement on Form S-8 (File No.
333-101708) filed with the Securities and Exchange Commission
on December 6, 2002.
(16) Incorporated by reference to the exhibit so described in the
Company's Current Report on Form 8-K dated June 2, 2003, and
filed with the Securities and Exchange Commission on June 3,
2003.
(17) Incorporated by reference to the exhibit so described in the
Company's Current Report on Form 8-K dated May 30, 2003, and
filed with the Securities and Exchange Commission on June 11,
2003.
* Portions of the text have been omitted. A separate filing of
such omitted text has been made with the Securities and
Exchange Commission as part of the Company's Application for
confidential treatment.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VALENCE TECHNOLOGY, INC.
Dated: June 27, 2003 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
Name Position Date
- ------------------------------------- ---------------------------------- -------------------
Chief Executive Officer, June 27, 2003
President and Chairman of the
Board (Principal Executive
Officer)
/s/ Stephan B. Godevais
- -------------------------------------
Stephan B. Godevais
Vice President of Finance June 27, 2003
(Principal Financial and
Accounting Officer)
/s/ Kevin W. Mischnick
- -------------------------------------
Kevin W. Mischnick
Director June 27, 2003
/s/ Carl E. Berg
- -------------------------------------
Carl E. Berg
Director June 27, 2003
/s/ Bert C. Roberts, Jr.
- -------------------------------------
Bert C. Roberts, Jr.
Director June 27, 2003
/s/ Alan F. Shugart
- -------------------------------------
Alan F. Shugart
44
Certification of
Principal Executive Officer of
Valence Technology, Inc.
I, Stephan B. Godevais, certify that:
1. I have reviewed this annual report on Form 10-K of Valence Technology, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 27, 2003
/s/ Stephan B. Godevais
- ------------------------------------
By: Stephan B. Godevais
Title: Principal Executive Officer
Certification of
Principal Financial Officer of
Valence Technology, Inc.
I, Kevin W. Mischnick , certify that:
1. I have reviewed this annual report on Form 10-K of Valence Technology, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 27, 2003
/s/ Kevin W. Mischnick
- ------------------------------------
By: Kevin W. Mischnick
Title: Principal Financial Officer
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, 2003 and March 31, 2002..........................F-3
Consolidated Financial Statements
for the years ending March 31, 2003, March 31, 2002 and March 31, 2001:
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
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, 2003 and 2002,
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, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years ended March 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 3 to the financial statements, the Company changed its
method of accounting for goodwill and other intangible assets as of April 1,
2002 upon the adoption of Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche LLP
Austin, Texas
June 11, 2003
F-2
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, 2003 March 31, 2002
------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,616 $ 623
Trade receivables, net of allowance of $130 and $312
as of March 31, 2003 and March 31, 2002, respectively 1,218 362
Inventory 2,757 2,589
Prepaid and other current assets 1,495 1,552
------------------- ------------------
Total current assets 12,086 5,126
Property, plant and equipment, net 14,279 14,166
Intellectual property, net 9,789 11,239
------------------- ------------------
Total assets $ 36,154 $ 30,531
=================== ==================
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 810 $ 683
Accounts payable 3,511 2,548
Accrued expenses 2,027 3,038
Grant payable 1,715 1,553
------------------ ----------------
Total current liabilities 8,063 7,822
Long-term interest 6,744 3,933
Long-term debt, less current portion 5,623 5,884
Long-term debt to stockholder 33,242 28,755
------------------- ------------------
Total liabilities 53,672 46,394
------------------- ------------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.001 par value, authorized: 100,000,000 shares,
issued and outstanding: 71,722,794 and 45,570,144 shares
at March 31, 2003 and March 31, 2002, respectively 72 46
Additional paid-in capital 366,518 331,038
Deferred compensation (181) -
Notes receivable from stockholder (5,161) (5,990)
Accumulated deficit (374,604) (336,703)
Accumulated other comprehensive loss (4,162) (4,254)
------------------- ------------------
Total stockholders' equity (deficit) (17,518) (15,863)
------------------- ------------------
Total liabilities and stockholders'
equity (deficit) $ 36,154 $ 30,531
=================== ==================
=================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended
-------------------------------------------------------
March 31, 2003 March 31, 2002 March 31, 2001
---------------- ---------------- ----------------
Revenue:
Licensing and royalty revenue $ 125 $ 3,203 $ 1,500
Battery and system sales 2,432 1,671 7,191
---------------- ---------------- ----------------
Total revenues 2,557 4,874 8,691
Cost of sales:
Cost of sales 10,996 8,649 19,366
INI revenue grant - - (1,191)
---------------- ---------------- ----------------
Net cost of sales 10,996 8,649 18,175
---------------- ---------------- ----------------
Gross loss (8,439) (3,775) (9,484)
Operating expenses:
Research and product development 9,293 9,681 8,516
Marketing 3,210 1,957 1,080
General and administrative 10,140 11,971 11,676
Depreciation and amortization 2,790 7,927 11,309
Asset impairment charge 258 31,884 -
---------------- ---------------- ----------------
Total operating expenses 25,691 63,420 32,581
---------------- ---------------- ----------------
Operating loss (34,130) (67,195) (42,065)
Interest and other income 381 2,049 1,256
Interest expense (4,172) (4,327) (2,332)
Gain (loss) on disposal of assets 20 (147) (15)
Equity in loss of Joint Venture - - (345)
---------------- ---------------- ----------------
Net loss (37,901) (69,620) (43,501)
Beneficial conversion feature and accretion
to redemption value on preferred stock - - (591)
---------------- ---------------- ----------------
Net loss available to common
stockholders $ (37,901) $ (69,620) $ (44,092)
================ ================ ================
================ ================ ================
Other comprehensive loss:
Net loss $ (37,901) $ (69,620) $ (43,501)
Change in foreign currency
translation adjustments 92 (117) (4,303)
---------------- ---------------- ----------------
Comprehensive loss $ (37,809) $ (69,737) $ (47,804)
================ ================ ================
================ ================ ================
Net loss per share available to
common stockholders $ (0.65) $ (1.53) $ (1.14)
================ ================ ================
================ ================ ================
Shares used in computing net
loss per share available
to common stockholders,
basic and diluted 58,423 45,504 38,840
================ ================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) for
the years ended March 31, 2003, 2002, and 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Notes Accumulated
Additional Receivable Other
Common Stock Paid-in Deferred from Accumulated Comprehensive
Shares Amount Capital Compensation Stockholder Deficit Loss Totals
------- ------ --------- ------------ ----------- ----------- -------------- ----------
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)
Sale of stock to private
investors 26,153 26 35,106 35,132
Modification of stock option 374 (374) -
Stock compensation 193 193
Interest receivable from
stockholder (278) (278)
Payment of accrued interest
on note receivable from
stockholder 1,107 1,107
Net Loss (37,901) (37,901)
Change in translation
adjustment 92 92
- -------------------------------- ------- ------ --------- ------------ ---------- ----------- ---------- -----------
Balances, March 31, 2003 71,723 $ 72 $ 366,518 $ (181) $(5,161) $(374,604) $(4,162) $(17,518)
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended
-------------------------------------------------
March 31, 2003 March 31, 2002 March 31, 2001
--------------- --------------- ---------------
Cash flows from operating activities:
Net loss $ (37,901) $ (69,620) $ (43,501)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,790 7,927 11,309
(Recoveries) provision for bad debt (182) 312 -
Accretion of debt discount 924 1,003 651
Impairment charge 258 31,884 -
(Gain) loss on disposal of property, plant, & equipment (20) 147 15
Compensation related to the issuance of stock options 193 260 -
Interest income on shareholder note receivable (277) (277) (274)
Reserve for obsolete inventory 326 - -
Equity in loss of Joint Venture - - 345
Changes in operating assets and liabilities:
Trade receivables (674) 2,288 (2,911)
Prepaid and other current assets 115 253 687
Inventory (492) 2,243 (3,185)
Accounts payable 857 (2,868) 224
Accrued expenses and long-term interest 1,599 2,788 (1,581)
Deferred revenue - (2,500) -
-------------- --------------- ---------------
Net cash used in operating activities (32,484) (26,160) (38,221)
-------------- --------------- ---------------
Cash flows from investing activities:
Purchases of property, plant & equipment (726) (8,947) (21,758)
Proceeds from disposal of property, plant & equipment 20 - -
Proceeds from investments - 154 -
-------------- --------------- ---------------
Net cash used in investing activities (706) (8,793) (21,758)
-------------- --------------- ---------------
Cash flows from financing activities:
Property and equipment grants - - 5,822
Acquisition of West Coast Venture Capital assets - - 11,949
Proceeds from long-term debt 4,671 34,065 10,052
Payments on other long-term debt (804) (1,836) (702)
Proceeds from issuance of common stock and warrants,
net of issuance costs 35,132 173 13,728
-------------- --------------- ---------------
Net cash provided by financing activities 38,999 32,402 40,849
-------------- --------------- ---------------
Effect of foreign exchange rates on cash
and cash equivalents 184 (581) (1,671)
-------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents 5,993 (3,132) (20,801)
Cash and cash equivalents, beginning of year 623 3,755 24,556
-------------- --------------- ---------------
Cash and cash equivalents, end of year $ 6,616 $ 623 $ 3,755
============== =============== ===============
============== =============== ===============
Supplemental Information:
Interest paid $ 269 $ 366 $ 461
Noncash investing and financing activities:
Payment of accrued interest on note receivable from
stockholder 1,107 - -
Fair value of warrants issued in connection with long-term
debt to stockholder - 2,768 -
Conversion of preferred stock to common stock - 2,736 -
Exchange of long-term debt and accrued interest expense
for West Coast Venture Capital assets and accrued - 18,485 -
interest income
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
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
1. BUSINESS AND BUSINESS STRATEGY:
Valence Technology, Inc. (with its subsidiaries, "the Company") was founded
in 1989. From 1989 through 2000, the Company's efforts were focused on
developing and acquiring battery technologies. 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 its
management team and the significant market opportunity available to it.
In February 2002, the Company unveiled its Saphion(TM) technology, a
lithium-ion technology which utilizes a phosphate-based cathode material.
The Company believes that by incorporating a phosphate-based cathode
material, its Saphion(TM) technology is able to offer greater thermal and
electrochemical stability than traditional lithium-ion technologies. The
Company believes that the safety characteristics of Saphion(TM) technology
will enable it to be designed into a wide variety of products in both
existing lithium-ion markets as well as markets not served by current
lithium-ion solutions. These markets include, among others, notebook
accessories, power tools, consumer appliances, vehicles, network and the
telecommunications sectors.
The Company's business strategy incorporates a balance of system sales and
licensing and a manufacturing plan that leverages internal capabilities and
partnerships with contract manufacturers. The market for Saphion(TM)
technology will be developed through the Company's own product launches,
such as the N-Charge(TM) Power System and K-Charge(TM) Power System, and
through products designed by others. The company plans to maximize the
adoption of Saphion(TM) technology by offering it in small and large format
applications and polymer and cylindrical constructions. In addition, the
Company will seek to expand the fields of use of its Saphion(TM) technology
through the licensing of its intellectual property related to its battery
chemistries and manufacturing processes. The Company's strategy will be
implemented in three fluid phases, each building on the one previous, with
its own specific technology and market focus.
2. LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 2003, the Company's principal sources of liquidity were cash
and cash equivalents of $6.6 million, $10 million available under an equity
line financing commitment with Berg & Berg and $4 million under a working
capital commitment from Berg & Berg. As described in Note 22, Subsequent
Financing, in the first quarter of fiscal 2004, the Company secured
additional financing including approximately $9.6 million net proceeds
through the sale of preferred stock and a $10 million additional funding
commitment from Berg & Berg. However, pursuant to the terms of the equity
line financing commitment, as a result of offerings the Company completed
in April 2002 and June 2003, and the drawdowns under the commitment of $5.0
million each in September 2002, November 2002, February 2003, and March
2003 Berg & Berg may elect to reduce or eliminate its remaining commitment.
Further, the commitment expires on March 31, 2004 and the Company's right
to draw down on the line is limited to $5 million per quarter and is
further dependent on our meeting certain operating conditions. However, so
long as Stephan Godevais remains as CEO, Berg & Berg has waived these
operating conditions for the remainder of the commitment. At March 31,
2003, the Company had commitments for capital expenditures of approximately
$241,000.
At the Company's current level of operations, it is using cash from
operations of approximately $6.0 to $9.5 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 $14.1 million at March 31, 2003, from
the Northern Ireland Industrial Development Board, now known as Invest
Northern Ireland ("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 2004. 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. Additionally, if Berg & Berg does not provide the Company
additional funding under its commitments, the Company would exhaust its
existing sources of liquidity. In such a case, the Company's ability to
continue its operations would be dependent on arranging for additional
equity or debt financing, which, given the current equity and debt markets,
could be difficult to arrange.
F-7
3. 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 batteries and battery
systems. 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.
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,
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
F-8
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. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," requires an entity to review long-lived tangible and intangible
assets for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Recoverability of
these assets is measured by comparison of its carrying amount to future
undiscounted cash flows the assets are expected to generate. If long-lived
assets are considered to be impaired, the impairment to be recognized
equals the amount by which the carrying value of the assets exceeds its
fair market value and is recorded in the period the determination was made.
See Note 4 Impairment Charge regarding impairment of tangible and
intangible assets.
INTELLECTUAL PROPERTY:
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 prior
year, the effect of which was to increase the net loss by approximately
$602,000 annually. The estimated remaining life of the patents was
reassessed in the prior year in conjunction with an analysis of the
estimated future cash flows to be generated by these assets, which resulted
in an impairment charge at that time. See Note 4 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 equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation - Transition and Disclosure an
amendment of FASB Statement No. 123," and consensus of the Emerging Issues
Task Force number 96-18. 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
123, as amended by SFAS 148. Accordingly, no compensation expense has been
recognized for the Company's stock plans.
F-9
Had compensation expense for the stock plans been determined based on the
fair value at the grant date for options granted in 2003, 2002, and 2001
consistent with the provisions of SFAS 123, as amended by SFAS 148, the pro
forma net loss would have been reported as follows (in thousands):
2003 2002 2001
--------------------------------
Net loss available to stockholders - as reported $(37,901)$ (69,620) $(44,092)
Add: stock-based compensation expense, net related taxes (6,806) (7,595) (6,030)
---------- --------- ---------
Net loss available to stockholders - pro forma (44,707) (77,215) (50,122)
Net loss available to stockholders per share - as reported (0.65) (1.53) (1.14)
Net loss available to stockholders per share, basic and diluted - pro forma (0.77) (1.70) (1.29)
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 2003, 2002, and 2001:
2003 2002 2001
----------------------------------------------
Risk-free Interest Rate 2.85% 4.25% 5.84%
Expected Life 4.71 years 4.81 years 4.63 years
Volatility 106.52% 90.62% 88.90%
Dividend Yield - - -
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:
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 adopted SFAS No. 142 on April 1, 2002, and no impairment charge
was considered necessary under the adoption.
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 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
adopted SFAS 144 on April 1, 2002. Impairment charges were deemed
appropriate and recorded during the quarter period ended March 31, 2003.
In April 2002, SFAS No. 145 ("SFAS 145"), "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" was issued, which rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," and an amendment of that
Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." The Statement also rescinds FASB Statement No.
44, "Accounting for Intangible Assets of Motor Carriers." The Statement
amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
The Company will adopt SFAS 145 in April 2003 and does not expect this
adoption to have a significant effect on the financial statements.
F-10
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
This statement requires recognition of a liability for a cost associated
with an exit or disposal activity when the liability is incurred as opposed
to the date of an entity's commitment to an exit plan or disposal activity.
The Company adopted SFAS No. 146 in January 2003 which did not have a
material effect on the financial statements.
In December 2002, SFAS 148 was issued, which amends SFAS 123, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. It also
amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. Certain disclosure requirements
under SFAS 148 became effective for the Company beginning December 15, 2002
and the Company has complied with those requirements. The remaining
disclosure requirements under SFAS 148 become effective for the Company in
the first quarter of fiscal 2004. The Company does not expect these
additional reporting requirements to have a material impact on its
financial statements.
In December 2002, FASB Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an interpretation of FASB Statements
No. 5, 57, and 107 and rescission of FASB Interpretation No. 34", was
issued, which addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligation under
guarantees and clarifies the requirements related to the recognition of a
liability by a guarantor at the inception of a guarantee for the
obligations the guarantor has undertaken in issuing that guarantee. The
Company adopted FIN 45 in March 2003 which did not have a material effect
on the financial statements.
In April 2003, SFAS No. 149 ("SFAS 149"), "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities", was issued, which amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Company will adopt SFAS 149
beginning its second quarter of fiscal year 2004 and does not expect this
adoption to have a significant impact on its financial statements.
In May 2003, SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", was
issued, which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. The Company will adopt SFAS 150 beginning its first
quarter of fiscal year 2004. The Company is currently reviewing the impact
this statement will have on its financial statements.
In May 2003, FIN 46, "Consolidation of Variable Interest Entities", was
issued, which clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements", to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties. The Company will adopt FIN 46 beginning its second quarter of
fiscal year 2004 and does not expect this adoption to have a significant
impact on its financial statements.
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:
F-11
2003 2002 2001
---------------- ---------------- ---------------
---------------- ---------------- ---------------
Common stock options 8,920,000 6,426,000 4,398,000
Warrants to purchase common stock 3,237,000 3,237,000 2,494,000
---------------- ---------------- ---------------
---------------- ---------------- ---------------
Total 12,157,000 9,663,000 6,892,000
================ ================ ===============
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).
4. IMPAIRMENT CHARGE:
During the quarter ended March 31 2003, the Company recorded an impairment
charge of $258,000 on the property in Henderson, Nevada related to the
planned sale of this facility. The Company estimated that the expected
future cash flows related to the facility were less than the asset carrying
value of $3.0 million and adjusted the assets to their fair value
accordingly. Fair value was based upon quoted market price for the
facility.
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 3.
5. 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.
6. INVENTORY:
Inventory consisted of the following (in thousands) at:
March 31, 2003 March 31, 2002
------------------ ----------------
Raw materials $ 1,163 $ 1,977
Work in process 1,385 591
Finished goods 209 21
------------------ ----------------
------------------ ----------------
Total inventory $ 2,757 $ 2,589
================== ================
7. OTHER CURRENT ASSETS:
Other current assets consisted of the following (in thousands) at:
March 31, 2003 March 31, 2002
------------------ ----------------
------------------ ----------------
Other receivables $ 217 $ 287
Deposits 115 253
Prepaid insurance 646 741
Other prepaids 517 271
------------------ ----------------
F-12
Total other current assets $ 1,495 1,552
================== ================
8. 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 $602,000 annually. See Note 4
Impairment Charge.
Intellectual property consisted of the following (in thousands) at:
March 31, 2003 March 31, 2002
--------------- ---------------
Intellectual properties, net
of impairment $13,602 $13,602
Less: accumulated amortization (3,813) (2,363)
--------------- ---------------
Intellectual properties, net
of accumulated amortization $ 9,789 $11,239
=============== ===============
Amortization expense on intellectual property for years following March 31,
2003 will be as follows (in thousands):
Fiscal Year
-----------------
2004 $1,450
2005 1,450
2006 1,450
2007 1,450
2008 1,450
Thereafter 2,539
--------
$9,789
========
Amortization expense for the years ended March 31, 2003 and 2002, was
approximately $1,450,000 and $1,803,000, respectively.
9. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, net of impairment, consisted of the
following (in thousands) at:
March 31, March 31,
2003 2002
--------------- -------------
Building and land $ 14,573 $ 13,776
Leasehold improvements 47 38
Machinery and equipment 10,287 7,174
Office and computer equipment 845 817
Construction in progress 2,725 4,741
--------------- -------------
Total cost 28,477 26,546
Less: accumulated depreciation (14,198) (12,380)
--------------- -------------
--------------- -------------
Total cost, net of impairment and depreciation $ 14,279 $ 14,166
=============== =============
During the fourth quarter of fiscal year 2003 and the third quarter of
fiscal year 2002, the Company determined the value of certain property,
plant and equipment assets to be impaired. See Note 4 Impairment Charge.
F-13
10. ACCRUED EXPENSES:
Accrued expenses consisted of the following (in thousands) at:
March 31, 2003 March 31, 2002
------------------ ----------------
Accrued compensation $ 1,220 $ 1,008
Professional services 320 467
Warranty reserve 123 -
Other accrued expenses 364 1,563
------------------ ----------------
Total accrued expenses $ 2,027 3,038
================== ================
11. LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands) at:
March 31, March 31,
2003 2002
----------- ----------
----------- ----------
Facility loans $6,433 $6,567
Less amounts due within one year (810) (683)
----------- ----------
Long-term debt, less current portion $5,623 $5,884
=========== ==========
=========== ==========
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% (5.5% at March 31,
2003) on the outstanding principal. The Company makes monthly payments of
$16,000 and quarterly payments of accrued interest. The outstanding
principal balance as of March 31, 2003 and March 31, 2002 was $ 2,022,000
and $ 1,977,000, respectively. 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 principal
payments of $25,000 and monthly 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% (5.25% at March 31, 2003) 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 $153,000 and semi-annual payments of accrued interest. The loan bears
interest at an adjustable rate based on the Bank of England plus 1.5%
(5.25% at March 31, 2003). The outstanding principal balance as of March
31, 2003 and March 31, 2002 was $4,411,000 and $4,590,000, respectively.
Principal payments on long-term debt at March 31, 2003 are due as follows
(in thousands):
Fiscal Year
--------------------
2004 $810
2005 858
2006 909
2007 964
2008 1,021
Thereafter 1,871
-------
$6,433
=======
F-14
DEBT TO STOCKHOLDER:
March 31, March 31,
2003 2002
-------------- ------------
(in thousands)
2001 Loan balance $20,000 $16,436
1998 Loan balance 14,950 14,950
Unaccreted debt discount (1,708) (2,631)
-------------- ------------
Balance at year end $33,242 $28,755
============== ============
In October 2001, the Company entered into a loan agreement ("2001 Loan")
with Berg & Berg. Under the terms of the agreement, Berg & 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. On November
8, 2002 the Company and Berg & Berg amended an affirmative covenant in the
agreement to acknowledge the Nasdaq SmallCap Market as an acceptable market
for the listing of the Company's Common Stock. As of March 31, 2003,
accrued interest on the loan totaled $1,837,000, which is included in
long-term interest. 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%. Through March 31 2003, a total of
$1,060,000 has been accreted and included as interest expense. The amounts
charged to interest expense on the outstanding balance of the loan for the
fiscal years ended March 31, 2003 and March 31, 2002 were $1,465,000 and
$373,000, respectively.
In July 1998, the Company entered into an amended loan agreement ("1998
Loan") with Berg & 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, 2003, 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 9.0% at March 31 2003). 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. On November 8, 2002 the Company and
Berg & Berg amended an affirmative covenant in the agreement to acknowledge
the Nasdaq SmallCap Market as an acceptable market for the listing of the
Company's Common Stock. As of March 31, 2003, accrued interest on the loan
totaled $4,752,000, which is included in long-term interest. In fiscal
1999, the Company issued warrants to purchase 594,031 shares of common
stock to Berg & 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, 2003, a total of $2,159,000 has been accreted. The amounts
charged to interest expense for fiscal 2003 and fiscal 2002 were $1,346,000
and $1,346,000, 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, 2003, totaling (pound)969,000 ($1.5 million.) 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, 2003 totaling (pound)7,990,000
($12.6 million). As of March 31, 2003, 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).
F-15
13. COMMITMENTS AND CONTINGENCIES:
LEASES:
Total rent expense for the years ended March 31, 2003, 2002 and 2001 was
approximately $256,000, $182,000, and $77,000, and respectively. Future
minimum payments on leases for years following March 31, 2003 are $83,000
in fiscal year 2004 and none thereafter.
WARRANTIES:
The Company has established a warranty reserve in connection with the sale
of N-Charge(TM) Power Systems covering a warranty period ranging from 12 to
15 months during which time if a customer were to return the purchased
product due to a product performance issue, the Company would provide a
replacement unit. The Company has established its initial product warranty
reserves as 10% of N-Charge(TM) Power System sales. The Company will adjust
the percentage based on actual experience for future warranty provisions.
In addition, the Company has established a reserve for its 30 day right of
return policy under which a customer may return a purchased N-Charge(TM)
Power System. The Company has estimated its right of return liability as 5%
of the previous month's N-Charge(TM) Power System sales. The total warranty
liability as of March 31, 2003 is $123,000.
Product warranty liabilities at March 31, 2003 are as follows (in
thousands):
Beginning balance $0
Less: claims (37)
Plus: accruals 160
-------
Ending balance $123
=======
LITIGATION:
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 during
fiscal 2002. Management believes that it is unlikely that the INI will
demand repayment of a portion of the total amounts received, which include
revenue grants of $1.5 million and equipment grants of $12.6 million, net
of the $170,000 release. For equipment that was disposed of in fiscal 2001,
the Company has accrued $1,715,000.
LETTER OF CREDIT:
At March 31, 2003, the Company had an outstanding stand-by letter of credit
of approximately $51,000 secured by a certificate of deposit in a like
amount.
F-16
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. 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. During fiscal year 2003, no shares were granted under
this plan. As of March 31, 2003, 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 2003, a total of 1,172,100 shares were
granted under this plan. At March 31, 2003, the Company had no 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 2003, a total of 1,687,852 shares were granted
under this plan. At March 31, 2003, the Company had 101,329 shares
available for grant under the 2000 Plan.
During fiscal 2003, the Company granted inducement options to purchase a
total of 300,000 shares of common stock to certain officers of the Company
outside of the Company's current stock option plans. These options vest
over four years with 25% vesting after the first year with the remainder
vesting in 12 equal installments. The options expire ten years from the
date of grant.
F-17
Aggregate option activity is as follows (shares in thousands):
Outstanding Options
---------------------------------
Number of Weighted Avg.
Shares Exercise Price
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 3,683 $5.47
Exercised (39) $4.47
Canceled (1,018) $8.62
---------
Balance, March 31, 2002 7,024 $7.58
=========
=========
Granted 3,160 $1.67
Exercised - $0.00
Canceled (1,264) $6.24
---------
Balance, March 31, 2003 8,920 $5.68
=========
=========
At March 31, 2003, March 31, 2002, and March 30, 2001, vested options to
purchase 4,225,000, 2,455,000, and 2,020,000 shares, respectively, were
unexercised.
The following table summarizes information about fixed stock options
outstanding at March 31, 2003 (shares in thousands):
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- -----------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life (years) Exercise Price Exercisable Exercise Price
- ---------------- ------------ ---------------------- -------------- ------------ ----------------
- ---------------- ------------ ---------------------- -------------- ------------ ----------------
$0.63 - $0.83 198 10.14 $0.67 17 $0.69
$1.30 - $1.94 1,973 9.83 1.48 78 1.57
$2.06 - $2.99 641 9.09 2.30 125 2.33
$3.10 - $4.62 1,158 7.21 4.00 685 4.10
$4.75 - $7.12 3,355 7.15 6.08 2,111 6.01
$7.16 - $10.06 875 7.04 7.84 654 7.81
$11.31 - $15.75 213 7.39 14.00 169 14.29
$17.12 - $23.56 401 7.17 19.48 280 19.62
$29.28 - $34.62 106 6.91 32.80 106 32.80
------------ ---------------------- -------------- ------------ ----------------
8,920 7.95 $5.68 4,225 $7.67
At March 31, 2003, the Company has reserved 12,541,000 shares of common
stock for the exercise of stock options and warrants.
F-18
15. SIGNIFICANT CUSTOMERS:
Revenues from three significant customers represented a total of 26% of
total revenues for the year ended March 31 2003 and a total of 69% of the
trade accounts receivable at March 31, 2003. For fiscal year 2002, six
customers represented 83% of total revenues for the year and 65% of trade
accounts receivable at March 31, 2002. In fiscal year 2001, five customers
represented 98% of total revenues for the year and 95% of trade accounts
receivable at March 31, 2001.
16. INCOME TAXES:
There was no income tax benefit related to the losses of fiscal years 2003,
2002 or 2001 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 of 34% to the
loss before income taxes as follows:
F-19
The components of the net deferred tax asset as of March 31, 2003 and March
31, 2002 were as follows (in thousands):
Year Ended:
-------------------------------------
March 31, March 31, March 31,
2003 2002 2001
---------- ----------- -----------
---------- ----------- -----------
Federal tax benefit at statutory rate (12,886) $ (23,671) $ (14,790)
Rate differential - foreign 403 1,324 1,028
State tax provision (435) - -
Expenses not deductible for tax 20 31 (351)
Research and experimentation credit (175) (285) (268)
Provision for prior-year true-ups - - 2,440
Foreign losses not available as
carryforward 4,247 7,721 1,476
Change in valuation allowance 8,826 14,880 10,465
---------- ----------- -----------
---------- ----------- -----------
Tax provision $ - $ - $ -
========== =========== ===========
========== =========== ===========
The components of the net deferred tax asset as of March 31, 2003 and March
31, 2002 were as follows (in thousands):
March 31, March 31,
2003 2002
---------- ----------
Current assets:
Accrued liabilities $ 185 $ 118
Valuation allowance (185) (118)
---------- ----------
- -
========== ==========
Non-current assets:
Depreciation and amortization 828 761
Research and experimentation credit carryforwards 1,447 1,272
Net operating loss carryforwards - Federal 51,677 46,406
Net operating loss carryforwards - Foreign 42,132 39,105
Impairment reserve 654 481
Imputed interest 1,207 1,160
Valuation allowance (97,945) (89,185)
---------- ----------
$ - -
========== ==========
At March 31, 2003 the Company had federal net operating loss carryforwards
available to reduce future taxable income of approximately $150.7 million.
The carryforwards expire between 2007 to 2023, 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 $136.6 million.
17. 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.
F-20
18. JOINT VENTURE AGREEMENTS:
On November 12, 2002, the Company announced that it had signed an agreement
to establish a Chinese joint venture with Baoding Fengfan Group Limited
Liability Company ("Fengfan"). The commencement of this venture is subject
to standard Chinese government approval. The purpose of the joint venture
is to provide low cost manufacturing of the Company's Saphion(TM)
Lithium-ion batteries in China. Under the agreement, the Company will
contribute capital equipment and engineering expertise. Fengfan will
provide the cash required to fund the joint venture for the first two years
as well as the land and facility needed for manufacturing operations. There
was no activity or financial position for the years ended March 31, 2003,
2002, and 2001.
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.
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 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.
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 years ended March 31, 2003 and 2002:
-------------
Year ended
-------------
March 31,
2001
Operations:
Net sales $ 257
Net loss $ (6,105)
Financial position:
Current assets $ 2,315
Noncurrent assets 28,970
-------------
-------------
31,285
=============
Current liabilities 19,234
Noncurrent liabilities 13,123
Shareholders' deficit (1,072)
-------------
$ 31,285
=============
19. RELATED PARTY TRANSACTIONS:
In March 2002, the Company obtained $30 million of additional equity
financing commitment with Berg & Berg, an affiliate of Carl Berg, a
director and principal shareholder in the Company. The Company's financing
commitment with Berg & Berg enables it 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 was approved by stockholders at
the Company's 2002 annual meeting held on August 27, 2002. In exchange for
any amounts funded pursuant to this new agreement, the Company will issue
to Berg & Berg restricted common stock at 85% of the average closing price
of the Company's common stock over the five trading days prior to the
purchase date. The Company will agree to register any shares it issues to
Berg &
F-21
Berg under this agreement. Berg & Berg's obligation to fund the equity
commitment is subject to conditions including, but not limited to, the
Company's achievement of operating milestones. As of May 30, 2003, so long
as Stephan Godevais remains as CEO, Berg & Berg agreed to waive these
conditions to funding. 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. Pursuant to the terms of the commitment, as a result of an
offering the Company completed in April 2002, and the draw downs under the
commitment of $5.0 million each in September 2002, November 2002, February
2003 and March 2003, Berg & Berg may elect to reduce or eliminate its
remaining commitment of $10 million.
On January 1, 1998, the Company granted options to Mr. Dawson, the
Company's then 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. As of
March 31, 2003, amounts of $3,549,134 and $1,612,036 were outstanding under
Dawson Note One and Dawson Note Two, respectively, and under each of the
Dawson Notes, interest from the Issuance Date accrues on unpaid principal
at the rate of 5.69% per annum, or at the maximum rate permissible by law,
whichever is less.
In accordance with the Dawson Notes, interest is payable annually in
arrears and had been unpaid until June 21, 2002. Accrued interest through
March 4, 2002 totaled $1,106,705. On June 21, 2002, the accrued interest,
through March 4, 2002, was paid in full. Accrued interest through March 4,
2003 totaling $276,676 was paid subsequent to year-end.
20. GEOGRAPHIC INFORMATION:
The Company conducts its business in two geographic segments.
Long-lived asset information by geographic area at March 31, 2003 and 2002
is as follows (in thousands):
2003 2002
--------- --------
United States $4,930 $5,733
International 19,138 19,672
--------- --------
TOTAL $24,068 $25,405
========= ========
Revenues by geographic area for the years ended March 31, 2003, 2002 and
2001 are as follows (in thousands):
2003 2002 2001
--------- --------- ---------
United States $1,726 $1,876 $5,120
International 831 2,998 3,571
--------- --------- ---------
TOTAL $2,557 $4,874 $8,691
========= ========= =========
F-22
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
1st 2nd 3rd 4th Total
Qtr Qtr Qtr Qtr
------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
YEAR ENDED MARCH 31, 2003
Revenue $ 509 $ 260 $ 638 $ 1,150 $ 2,557
Operating loss (8,652) (8,689) (7,683) (9,106) (34,130)
Net loss available to common
stockholders (9,659) (9,613) (8,563) (10,066) (37,901)
Basic and diluted EPS(1) (0.19) (0.19) (0.14) (0.13) (.65)
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 available 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)
- ----------
(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.
22. SUBSEQUENT FINANCING:
On June 2, 2003, the Company raised $10 million (net proceeds of $9.6
million) through the sale of Series C Convertible preferred stock and
warrants to purchase common stock. The preferred stock is convertible into
common stock at $4.25 per share, which represents an 11.3% premium over the
closing price of the Company's common stock on May 22, 2003. The preferred
stock is redeemable by the holder upon maturity and upon the occurrence of
certain triggering or default events. Net proceeds from the financing will
be used for working capital purposes.
On June 10, 2003, Berg & Berg committed to provide the Company an
additional $10 million in fiscal 2004. The commitment is conditioned upon
negotiation and execution of definitive documents and any necessary
shareholder approval under the rules of the NASDAQ SmallCap Market. This
issuance will be on competitive terms, which will be finalized as part of
the definitive documents.
F-23