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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6504 BRIDGE POINT PARKWAY,
AUSTIN, TEXAS 78730
(Address of Principal Executive Offices) (Zip Code)
(512) 527-2900
(Registrant's Telephone Number, Including Area Code)
----------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No x
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.001 par value 73,346,400
----------------------------------- ---------------------------------
(Class) (Outstanding at November 7, 2003)
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX
PAGES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
September 30, 2003 and March 31, 2003.................................................3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for Each of the Three-and Six-
Month Periods Ended September 30, 2003 and September 30, 2002.........................4
Condensed Consolidated Statements of Cash Flows
for Each of the Six-Month Periods
Ended September 30, 2003 and September 30, 2002.......................................5
Notes to Condensed Consolidated Financial Statements..................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........................28
Item 4. Controls and Procedures..............................................................29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................30
Item 2. Changes in Securities and Use of Proceeds............................................30
Item 3. Defaults on Senior Securities........................................................30
Item 4. Submission of Matters to a Vote of Security Holders..................................30
Item 5. Other Matters........................................................................30
Item 6. Exhibits and Reports on Form 8-K.....................................................30
SIGNATURE .....................................................................................32
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
September 30, 2003 March 31, 2003
-------------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,055 $ 6,616
Trade receivables, net of allowance of $130
as of September 30, 2003 and March 31, 2003 1,162 1,218
Inventory 3,616 2,757
Prepaid and other current assets 993 1,495
--------------------- -----------------
Total current assets 11,826 12,086
Property, plant and equipment, net 8,939 14,279
Intellectual property, net 571 9,789
--------------------- -----------------
Total assets $ 21,336 $ 36,154
===================== =================
LIABILITIES, PREFERRED STOCK, AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 859 $ 810
Accounts payable 2,456 3,511
Accrued expenses 2,155 2,013
Deferred revenue 1,477 14
Grant payable - short term 1,815 1,715
-------------------- ---------------
Total current liabilities 8,762 8,063
Grant payable - long term 3,144
Long-term interest 8,232 6,744
Long-term debt, less current portion 5,479 5,623
Long-term debt to stockholder 33,596 33,242
--------------------- -----------------
Total liabilities 59,213 53,672
--------------------- -----------------
Commitments and contingencies
Redeemable convertible preferred stock, $0.001 par value,
authorized, issued, and outstanding 1,000 shares at
September 30, 2003, liquidation value $10,000 8,690 -
--------------------- -----------------
Stockholders' equity (deficit):
Common stock, $0.001 par value, authorized: 100,000,000 shares,
issued and outstanding: 73,305,679 and 71,722,794 shares
at September 30, 2003 and March 31, 2003, respectively 73 72
Additional paid-in capital 372,718 366,518
Deferred compensation (162) (181)
Notes receivable from stockholder (5,023) (5,161)
Accumulated deficit (410,005) (374,604)
Accumulated other comprehensive loss (4,168) (4,162)
--------------------- -----------------
Total stockholders' equity (deficit) (46,567) (17,518)
--------------------- -----------------
Total liabililities, preferred stock and stockholders'
equity (deficit) $ 21,336 $ 36,154
===================== =================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended September 30, Six Months Ended September 30,
---------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Revenue:
Licensing and royalty revenue $ 69 $ 7 $ 625 $ 8
Battery and system sales 2,276 253 3,351 761
--------------- --------------- --------------- ---------------
Total revenues 2,345 260 3,976 769
Cost of sales: 4,080 2,713 7,898 5,235
--------------- --------------- --------------- ---------------
Gross profit (loss) (1,735) (2,453) (3,922) (4,466)
Operating expenses:
Research and product development 1,835 2,285 3,891 5,083
Marketing 1,298 569 2,256 1,352
General and administrative 2,673 2,730 5,141 5,143
Depreciation and amortization 770 652 1,558 1,297
Contract settlement charge 3,046 3,046
Asset impairment charge 13,660 - 13,660 -
--------------- --------------- --------------- ---------------
Total costs and expenses 23,282 6,236 29,552 12,875
--------------- --------------- --------------- ---------------
Operating loss (25,017) (8,689) (33,474) (17,341)
Interest and other income 85 81 165 197
Interest expense (913) (1,005) (2,025) (2,128)
--------------- --------------- --------------- ---------------
Net loss (25,845) (9,613) (35,334) (19,272)
Dividends on preferred stock 50 66
Preferred stock accretion 207 207
--------------- --------------- --------------- ---------------
Net loss available to common
stockholders $ (26,102) $ (9,613) $ (35,607) $ (19,272)
=============== =============== =============== ===============
Net loss $ (25,845) $ (9,613) $ (35,334) $ (19,272)
Other comprehensive loss:
Change in foreign currency
translation adjustments (51) (164) (6) (104)
--------------- --------------- --------------- ---------------
Comprehensive loss $ (25,896) $ (9,777) $ (35,340) $ (19,376)
=============== =============== =============== ===============
Net loss per share available to
common stockholders $ (0.36) $ (0.19) $ (0.50) $ (0.37)
=============== =============== =============== ===============
Shares used in computing net
loss per share available
to common stockholders,
basic and diluted 71,761 51,797 71,745 51,643
=============== =============== =============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended Six Months Ended
September 30, 2003 September 30, 2002
----------------- ------------------
Cash flows from operating activities:
Net loss $ (35,334) $ (19,272)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,558 1,297
Asset impairment charge 13,660
Contract settlement charge 3,046
Accretion of debt discount and other 370 570
Interest income on shareholder note receivable (138) (138)
Deferred compensation expense 423
Changes in operating assets and liabilities:
Trade receivables 55 286
Other current assets 529 584
Inventory (860) (811)
Accounts payable (1,231) 515
Accrued expenses and long-term interest 1,643 689
Deferred revenue 1,463
------------------ --------------------
Net cash used in operating activities (14,816) (16,280)
------------------ --------------------
Cash flows from investing activities:
Purchases of property, plant & equipment (72) (809)
Net cash used in investing activities (72) (809)
------------------ --------------------
Cash flows from financing activities:
Proceeds from long-term debt 277 2,600
Other long-term debt (457) (469)
Dividends paid (16)
Proceeds from issuance of preferred stock,
net of issuance costs 9,416
Proceeds from stock option exercises 58
Proceeds from issuance of common stock and warrants,
net of issuance costs 4,996 20,141
------------------ --------------------
Net cash provided by financing activities 14,274 22,272
------------------ --------------------
Effect of foreign exchange rates on cash
and cash equivalents 53 (25)
------------------ --------------------
Increase (decrease) in cash and cash equivalents (561) 5,158
Cash and cash equivalents, beginning of period 6,616 623
------------------ --------------------
Cash and cash equivalents, end of period 6,055 $ 5,781
================== ====================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
These interim condensed consolidated financial statements are unaudited but
reflect, in the opinion of management, all normal recurring adjustments
necessary to present fairly the condensed financial position of Valence
Technology, Inc. and its subsidiaries (the "Company") as of September 30,
2003, its condensed consolidated results of operations for each of the
three-and six-month periods ended September 30, 2003 and September 30,
2002, and the condensed consolidated cash flows for each of the six-month
periods ended September 30, 2003 and September 30, 2002. Because all the
disclosures required by generally accepted accounting principles are not
included, these interim condensed consolidated financial statements should
be read in conjunction with the audited financial statements and notes
thereto in the Company's Annual Report on Form 10-K as of and for the year
ended March 31, 2003. The results for the six-month period ended September
30, 2003 are not necessarily indicative of the results to be expected for
the entire fiscal year ending March 31, 2004. The year-end condensed
consolidated balance sheet data as of March 31, 2003 was derived from
audited financial statements, but does not include all disclosures required
by generally accepted accounting principles.
2. LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 2003, the Company's principal sources of liquidity were
cash and cash equivalents of $6.1 million and $19 million available under
financing commitments with Berg & Berg ($5 million remaining under Berg &
Berg's equity line of credit following the Company's drawdown of $5.0
million on September 30, 2003, and $14 million under other financing
commitments). As described in Note 4, Financing, in the first quarter of
fiscal 2004, the Company consummated a private placement of preferred stock
that resulted in approximately $9.4 million of net proceeds. As a result of
the Company's success in arranging alternative financing in 2002 and 2003,
Berg & Berg has a contractual right to reduce or terminate its remaining $5
million commitment under the equity line of credit. However, Berg & Berg
has waived all conditions to funding other than Stephan Godevais remaining
as CEO. The equity line of credit expires on March 31, 2004; the Company's
right to draw on the line is limited to $5 million per quarter. At
September 30, 2003, the Company had commitments for capital expenditures of
approximately $97,000.
At the Company's current level of operations, it is using cash from
operations of approximately $6.0 to $9.5 million per quarter. 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 current business plan.. 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, or joint venture and business opportunities. 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 could be difficult
to arrange.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION:
Revenues are generated from sales of products including batteries and
battery systems, and from licensing fees and royalties per technology
license agreements. Product sales are recognized when the sale is complete,
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. Product
shipments that are not recognized as revenue during the period shipped are
recorded as deferred revenue and reflected as a liability on the Company's
balance sheet. 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 upon
receipt of cash payment from the licensee.
6
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 No. 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. Had compensation expense for the
stock plans been determined based on the fair value at the grant date for
options granted in the second quarter and the first six months of fiscal
2004 and 2003 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):
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------------- --------------------
Net loss available to common stockholders
- as reported $ (26,102) $ (9,613) $(35,607) $(19,272)
Add: stock-based compensation
expense, net of related taxes (1,338) (1,701) (2,677) (3,403)
Net loss available to common stockholders
- pro forma (27,440) (11,314) (38,284) (22,675)
Net loss available to common stockholders
per share - as reported (0.36) (0.19) (0.50) (0.37)
Net loss available to common stockholders
per share, basic and diluted - pro forma (0.38) (0.22) (0.53) (0.44)
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 the first six months of fiscal 2004 and 2003:
2004 2003
-------------------------
Risk-free Interest Rate 2.49% 2.85%
Expected Life 5.00 years 4.71 years
Volatility 109.72% 106.52%
Dividend Yield - -
RECENT ACCOUNTING PRONOUNCEMENTS:
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 became effective for the Company in
the first quarter of fiscal 2004. These additional reporting requirements
did not have a material impact on its 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 adopted SFAS 149 in its
second quarter of fiscal year 2004. The adoption did not 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
7
certain financial instruments with characteristics of both liabilities and
equity. The Company adopted SFAS 150 in its first quarter of fiscal year
2004, and its adoption did not have a material impact 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 adopted FIN 46 in its second quarter of fiscal year
2004, and its adoption did not have a material impact on its financial
statements.
NET LOSS PER SHARE:
Net loss per share is computed by dividing the net loss available to common
stockholders 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 for the three
month and six month periods ended September 30 were as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
----------------------- ----------------------
Shares reserved for conversion of
Series C preferred stock 2,353,000 2,353,000
Common stock options
Beginning of period 8,698,000 7,296,000 8,698,000 7,296,000
Warrants to purchase common stock 2,375,000 3,237,000 2,375,000 3,237,000
----------------------- ----------------------
Total 13,426,000 10,533,000 13,426,000 10,533,000
======================= ======================
4. FINANCING:
On June 10, 2003, Berg & Berg committed to provide the Company $10 million
in fiscal 2004, increasing its total available remaining financing
commitments to $19 million ($5 million remaining under Berg & Berg's equity
line of credit, $10 million under this new financing commitment and $4
million under a working capital commitment). The new 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.
On September 30, 2003, the Company drew down $5.0 million from its equity
line of credit with Berg & Berg. The proceeds will be used to fund
corporate operating needs and working capital. Under the terms of the
equity line of credit, the Company issued to Berg & Berg 1,543,925 shares
of its restricted common stock at a discount of 15% to the average closing
price of common stock for the last five days prior to the purchase date, or
approximately $3.23 per share. Under Rule 144 of the Securities Act, these
shares are restricted from being traded by Berg & Berg for a period of one
year from the date of issuance, unless registered, and thereafter must be
traded only in compliance with the volume restrictions imposed by this
rule.
On June 2, 2003, the Company raised $10 million (net proceeds of $9.4
million) through the sale of Series C Redeemable 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 date at which the pricing was finalized. The Company has the
right to convert the preferred stock if the average of the volume weighted
average price of the Company's common stock for a ten-day trading period is
at or above $6.38 per share. The preferred stock is redeemable by the
holder at the maturity date of December 2, 2004, and upon the occurrence of
certain triggering or default events. Net proceeds from the financing are
being used for working capital purposes.
8
5. INVENTORY:
Inventory consisted of the following (in thousands) at:
September 30, 2003 March 31, 2003
------------------- -----------------
Raw Materials $ 517 $ 1,163
Work in Progress 1,394 1,385
Finished Goods 1,705 209
----------------- -----------------
$ 3,616 $ 2,757
================= =================
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, net of impairment, consisted of the following (in
thousands) at:
September 30, 2003 March 31, 2003
------------------- ----------------
Building and land $ 15,212 $ 14,573
Leasehold improvements 47 47
Machinery and equipment 10,532 10,287
Office and computer equipment 841 845
Construction in progress 2,879 2,725
----------------- ----------------
Total cost before impairment and depreciation 29,511 28,477
Less: accumulated depreciation (15,405) (14,198)
Less: impairment (5,167) -
----------------- ----------------
Total cost, net of impairment and depreciation $ 8,939 $ 14,279
================= ================
7. INTELLECTUAL PROPERTY:
Intellectual property is amortized over 5 years. Intellectual property,
consisted of the following (in thousands) at:
September 30, 2003 March 31, 2003
------------------ ------------------
Intellectual properties before impairment $ 13,602 $ 13,602
Less: accumulated amortization (4,538) (3,813)
Less: Impairment (8,493)
------------------ ------------------
Intellectual properties, net $ 571 $ 9,789
================== ==================
Amortization expense on intellectual property at September 30, 2003 will be as
follows (in thousands):
Fiscal Year
--------------------
Remainder of 2004 $ 57
2005 114
2006 114
2007 114
2008 114
Thereafter 57
-----------
$ 571
===========
Amortization expense for each of the three months ended September 30, 2003 and
September 30, 2002 was approximately $362,000. The amounts charged to
amortization expense for each of the six months ended September 30, 2003 and
September 30, 2002 was $725,000.
9
8. DEBT TO STOCKHOLDER:
September 30, March 31,
2003 2003
-------------- -------------
(in thousands)
2001 Loan balance $20,000 $20,000
1998 Loan balance 14,950 14,950
Unaccreted debt discount (1,354) (1,708)
-------------- -------------
Balance $33,596 $33,242
============== =============
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 September 30, 2003,
accrued interest on the loan totaled $2,650,000, 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 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 September 30, 2003, a total of $1,414,000 has
been accreted and included as interest expense. The amounts charged to
interest expense on the outstanding balance of the loan for the three-month
periods ended September 30, 2003 and September 30, 2002 were $409,000 and
$331,000, respectively. The amounts charged to interest expense on the
outstanding balance of the loan for the six-month periods ended September
30, 2003 and September 30, 2002 were $813,000 and $673,000, respectively.
In July 1998, the Company entered into an amended loan agreement ("1998
Loan") with Berg & Berg that 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 September 30, 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 September 30, 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 September 30, 2003, accrued
interest on the loan totaled $5,426,000, 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 September 30, 2003, a total of $2,159,000 has
been accreted. The amount charged to interest expense for each of the
three-month periods ended September 30, 2003 and September 30, 2002 was
$339,000. The amount charged to interest expense for each of the six-month
periods ended September 30, 2003 and September 30, 2002 was $675,000.
9. COMMITMENTS AND CONTINGENCIES:
WARRANTIES:
The Company has established a warranty reserve in connection with the sale
of N-Charge(TM) Power Systems covering a 12-month warranty period 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
10
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 September 30, 2003 is $301,000.
Product warranty liabilities for the six month period ended September 30,
2003 and for the year ended March 31, 2003 are as follows (in thousands):
September 30, 2003 March 31, 2003
------------------- -----------------
Beginning balance $ 123 $ 35
Less: claims (148) (26)
Plus: accruals 326 114
----------------- -----------------
Ending Balance $ 301 $ 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:
Beginning in 1994, the Company has received employment and capital grants
from the Ireland Development Board, now known as Invest Northern Ireland,
or INI, for its Mallusk, Northern Ireland manufacturing facility. As a
result of the planned transition of manufacturing from the Mallusk facility
to China and other low cost manufacturing regions and the Company's desire
to obtain unencumbered access to all of its equipment for transfer to the
Baoding Fengfan-Valence Battery Company joint venture or for sale, on
August 1, 2003 the Company reached agreement with INI to terminate the
Letter of Offer, pursuant to which the INI would unconditionally and
irrevocably release the Company from all obligations, liabilities, or
claims under the Letter of Offer in exchange for $4.7 million of restricted
common stock, payable in three installments over three years (with an
agreement by INI not to short the Company's common stock at any time and
not to trade the restricted common stock received for at least one year
from the respective payment dates). The Company had previously accrued a
$1.7 million liability with respect to the INI claim, and accrued an
additional liability of $3 million in its fiscal quarter ended September
30, 2003.
10. SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK:
On June 2, 2003, the Company issued 1,000 shares of Series C Redeemable
Convertible Preferred stock ("Series C") and warrants to purchase the
Company's common stock for $10,000 per share, raising net proceeds of
$9,416,000. Holders of the Series C stock are entitled to receive dividends
at an annual rate of 2%, paid quarterly in cash or common stock. The Series
C stock is convertible to the Company's common stock at $4.25 per share,
which represents a premium of 11.3% over the closing price of the Company's
common stock on May 22, 2003, the date at which the financial terms of the
placement were set. The Company has the right to force conversion of the
Series C preferred stock if the average of the volume weighted average
price of the Company's common stock for a ten consecutive day trading
period is at or above $6.38. The Series C stock matures on December 2,
2004, unless converted to the Company's common stock prior to that date.
The costs of issuance of the Series C stock were $584,000, consisting of
investment banking and legal fees. These costs were deducted from the gross
proceeds.
In connection with the issue of the Series C preferred stock, the Company
issued to the Series C holder warrants to purchase 352,900 shares of the
Company's common stock. The warrants are exercisable at a purchase price of
$5.00 per share and expire in June 2008. The warrants were valued at
$1,029,000 using the Black-Scholes valuation model. The warrants were
recorded to additional paid in capital at their relative fair value to the
Series C stock of 9%, or $933,199, and will accrete using the effective
yield method over the eighteen-month period of the Series C stock.
11. RELATED PARTY TRANSACTIONS:
In March 2002, the Company obtained a $30 million equity line of credit
with Berg & Berg, an affiliate of Carl Berg, a director and principal
shareholder in the Company. At September 30, 2003, there was $5.0 million
remaining on this equity line of credit. The Company's financing commitment
with Berg & Berg enables it to access up to $5.0
11
million per quarter (but no more than $30.0 million in the aggregate) in
equity capital over the two years following the date of the commitment.
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 has agreed to register any shares it issues to Berg &
Berg under this commitment. As a result of the Company's success in
arranging alternative financing in 2002 and 2003, Berg & Berg has a
contractual right to reduce or terminate its remaining $5 million
commitment under the equity line of credit. However, Berg & Berg has waived
all conditions to funding other than Stephan Godevais remaining as CEO. The
equity line of credit expires on March 31, 2004 and the Company's right to
draw on the line is limited to $5 million per quarter.
On January 1, 1998, the Company granted options to Mr. Lev 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
September 30, 2003, amounts of $3,453,000 and $1,569,000 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 paid through March 4, 2003.
12. GEOGRAPHIC INFORMATION:
The Company conducts its business in two geographic segments.
Long lived asset information by geographic area at September 30, 2003 and
March 31, 2003 is as follows (in thousands):
September March 31,
30, 2003 2003
-------------- --------------
United States $3,752 $4,930
International 5,758 19,138
-------------- --------------
Total $9,510 $24,068
============== ==============
Revenues by geographic area for the three-month periods and six-month
periods ended September 30, 2003 and September 30, 2002 are as follows (in
thousands):
Three months ended September 30, Six months ended September 30,
2003 2002 2003 2002
-------------- --------------- ------------- --------------
United States $ 1,905 $ 171 $ 2,817 $ 448
International 440 89 1,159 321
-------------- --------------- ------------- --------------
Total $ 2,345 $ 260 $ 3,976 $ 769
============== =============== ============= ==============
13. JOINT VENTURE:
On July 9, 2003, Boading Fengfan-Valence Battery Company, a joint venture
between the Company and Fengfan Group, Ltd. ("Fengfan") was formed. On July
21, 2003, the Company announced that the joint venture had been granted a
business license for operations in China. The purpose of the joint venture
is to provide low cost
12
manufacturing of the Company's Saphion(TM) Lithium-ion batteries in China.
Under the terms of the joint venture agreement, the Company will contribute
capital equipment, a nonexclusive license to its technology, 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.
14. FACILITY CLOSING:
On August 13, 2003, the Company announced successful qualification of its
OEM manufacturer in China, ATL, for Saphion products. Additionally, the
Company announced its plans to transition manufacturing from its Northern
Ireland facility to China and other low-cost manufacturing regions. The
Company expects the transition to be completed by the end of calendar 2003.
The Company anticipates that manufacturing equipment will begin to move
from Northern Ireland to China in its fiscal quarter ending March 31, 2004.
The Company estimates that the costs related to its transfer of
manufacturing from its Northern Ireland facility will range from $1.5
million to $2.0 million.
15. IMPAIRMENT CHARGE:
An impairment charge of approximately $13.7 million was recorded during the
fiscal quarter, ended September 30, 2003. The charge was recorded pursuant
to FASB Statement No. 144 OAccounting for Impairment or Disposal of
Long-Lived Assets.O During the second fiscal quarter the Company completed
qualification of its OEM manufacturer in China, ATL, for Saphion products.
In addition, the Company announced the formation of a manufacturing joint
venture in China with Fengfan Group, Ltd. (OFengfanO). The Company is in
the process of transitioning all high volume manufacturing from its
Northern Ireland facility to China and other low-cost manufacturing regions
during the remainder of calendar 2003. The Northern Ireland facility will
operate through the end of calendar 2003. The Company also experienced
progress on the development of cylindrical battery construction technology
and now expects greater emphasis on the licensing of cylindrical technology
to the detriment of the licensing of stacked technology (which was the
technology acquired from Telcordia in December 2000). As a result of these
developments, the Company determined that the future cash flows expected to
be generated from its Northern Ireland facility and stacked technology
intellectual property acquired in the Telcordia transaction in December
2000 did not exceed their carrying value. This determination resulted in
the net impairment charge against property, plant, and equipment and
intellectual property to record these assets at their fair value. The
Company determined that assets with a carrying amount of approximately
$19.5 million should be written down by approximately $13.7 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 of 8%.
13
ITEM 2. 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.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED HEREIN AND OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED IN OUR ANNUAL
REPORT ON FORM 10-K AS OF AND FOR THE YEAR ENDED MARCH 31, 2003. THE RESULTS FOR
THE THREE-MONTH AND SIX-MONTH PERIODS ENDED SEPTEMBER 30, 2003 ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED FOR THE ENTIRE FISCAL YEAR
ENDING MARCH 31, 2004.
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 that 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. Therefore, we believe that we can broaden the use of
lithium outside its primary applications into such products as back-up power
systems, vehicles, and power tools, among others.
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 and have been successful
in marketing the N-Charge(TM) Power System to national retailers, top tier
computer companies and resellers in an effort to validate our Saphion(TM)
technology. In February 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 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.
14
Currently, our battery products are offered in a stacked, 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.
Historically, our polymer batteries have been primarily manufactured at our
manufacturing facility in Northern Ireland. We have an OEM arrangement with a
Chinese manufacturing facility and have utilized the OEM manufacturer's
capabilities for certain cobalt-oxide based products over the last several
quarters. In August 2003, we announced the qualification of our OEM to
manufacture our Saphion(TM) products. In July 2003, we announced the grant of a
Chinese business license for our manufacturing joint venture in China with
Fengfan Group, Ltd. ("Fengfan"). Under the terms of the joint venture agreement,
we will contribute capital equipment, a nonexclusive license to our technology,
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. We intend to transition manufacturing from our
Northern Ireland facility to China and other low-cost manufacturing regions
during the remainder of calendar 2003. We will maintain a presence in Northern
Ireland to manage European sales and marketing activities and support our
contract manufacturing partnerships and joint venture company.
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 Condensed Consolidated Financial Statements included
in "Part 1 -- Financial Information, Item 1 - Financial Statements." 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 sales of products including
batteries and battery systems, and licensing fees and royalties per technology
license agreements. Product sales are recognized when the sale is complete, 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. Product shipments that
are not recognized as revenue during the period shipped are recorded as deferred
revenue and reflected as a liability on our balance sheet. 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 upon receipt of cash payment from the licensee.
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 their carrying amounts 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 value and is
recorded in the period the determination was made. See Note 14, Impairment
Charge, regarding impairment of tangible and intangible assets.
15
RESULTS OF OPERATIONS
THREE MONTH AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2003 (SECOND QUARTER OF
FISCAL 2004) AND SEPTEMBER 30, 2002 (SECOND QUARTER OF FISCAL 2003)
BATTERY AND SYSTEM SALES: Battery and system sales increased by $2 million, or
800%, to $2.3 million for the quarter ended September 30, 2003 from $253,000 for
the quarter ended September 30, 2002. Revenue from battery and system sales
increased by $2.6 million, or 340%, to $3.4 million for the first half of fiscal
2004 from $761,000 for the first half of fiscal 2003. Increases in battery and
system sales were primarily due to the establishment and initial penetration of
retail and reseller channels for our N-Charge(TM) Power system product as well
as growing sales volumes achieved through our on-line store. Total product
shipments for the first six months of fiscal 2004 totaled $4.9 million
representing an increase of approximately 550% over the corresponding period in
fiscal 2003. Product shipments to resellers that are subject to right of return,
price protection, or stock balancing are recorded on the balance sheet as
deferred revenue. In addition, we have established a reserve for our 30 day
right of return policy.
LICENSING AND ROYALTY REVENUE: Licensing and royalty revenues relate to revenue
from licensing agreements for technology developed in-house and acquired from
Telcordia Technologies, Inc. Licensing and royalty revenue totaled $69,000 and
$625,000 for the three and six month periods ended September 30, 2003,
respectively, and was primarily related to license fees and royalties payments
from Amperex Technology Limited. Licensing and royalty revenue totaled $7,000
and $8,000 for the three and six month periods ended September 30, 2002,
respectively. We continue to pursue licensing of both our process and chemistry
patent portfolios.
COST OF SALES. Cost of sales consists primarily of expenses incurred to
manufacture battery and system products. Costs of sales totaled $4.1 million and
$2.7 million for the second quarters of fiscal 2004 and 2003, respectively.
Costs of sales totaled $7.9 million and $5.2 million for the six month periods
ended September 30, 2003 and September 2002, respectively. Increases in costs of
sales were largely due to increased product sales. Such increases were partially
offset by lower inventory adjustments recorded in the second quarter of fiscal
2003 as a result of a technical issue announced and resolved during the quarter.
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, primarily from continued operations of our Northern
Ireland manufacturing facility. We expect cost of sales to continue to decrease
as a percentage of sales as production volumes continue to increase and as we
implement lower cost OEM manufacturing and complete our transition of
manufacturing to China.
RESEARCH AND PRODUCT DEVELOPMENT. Research and product development expenses
consist primarily of personnel, equipment and materials to support our battery
and product research and development. Research and product development expenses
decreased by $450,000, or 20%, to $1.8 million for the second quarter of fiscal
2004 from $2.3 million for the second quarter of fiscal 2003. Research and
product development expenses decreased by $1.2 million, or 23%, to $3.9 million
for the six months ended September 30, 2003 from $5.1 million for the six months
ended September 30, 2002. Decreases in research and development expenses were
primarily due to a reduction in headcount and related costs as a result of our
reorganization that took place in the third quarter of fiscal 2003.
MARKETING. Marketing expenses consist primarily of costs related to sales and
marketing personnel, public relations and promotional materials. Marketing
expenses totaled $1.3 million and $569,000 for the second quarters of fiscal
2004 and 2003, respectively. Marketing expenses totaled $2.3 million and $1.3
million for the first half of fiscal 2004 and 2003, respectively. Increases were
due to increased staffing, advertising and promotions to support brand awareness
and expansion of channels to sell our N-Charge(TM) power system and Saphion(TM)
products.
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 $2.7 million for the second fiscal
quarters of both 2004 and 2003. General and administrative expenses totaled $5.1
million for both six month periods ended September 30, 2003 and 2002.
IMPAIRMENT CHARGE: During the second quarter of fiscal 2004, we recorded an
impairment charge of approximately $13.7 million. The charge was recorded
pursuant to FASB Statement No. 144 "Accounting for Impairment or Disposal of
Long-Lived Assets". During the second quarter of fiscal 2004, we arrived at our
decision to transfer manufacturing from our Northern Ireland facility to
low-cost manufacturing regions, including China. Additionally, we continued to
progress in our development of our cylindrical battery construction technology
and expect continued emphasis on the licensing and manufacturing of our
cylindrical technology to the detriment of the licensing and manufacturing of
our stacked technology (which was the technology acquired from Telcordia in
December 2000). As a result of these developments, we determined that the future
cash flows expected to be generated from assets in our Northern Ireland facility
and intellectual property
16
acquired in the Telcordia transaction in December 2000 did not exceed their
carrying value. The impairment charge was recorded against property, plant, and
equipment and intellectual property with a carrying value of $19.5 million to
recognize these assets at their fair value. Fair value was determined based on
estimated future cash flows to be generated by these assets, discounted at our
market rate of interest of 8%.
CONTRACT SETTLEMENT CHARGE: During the second quarter of fiscal 2004, we
recorded a contract settlement charge of $3.0 million. Beginning in 1994, we
received employment and capital grants from the Ireland Development Board, now
known as Invest Northern Ireland, or INI, for our Mallusk, Northern Ireland
manufacturing facility. As a result of the planned transition of manufacturing
from the Mallusk facility to China and other low cost manufacturing regions and
our desire to obtain unencumbered access to all of its equipment for transfer to
the Baoding Fengfan-Valence Battery Company joint venture or for sale, on August
1, 2003 we reached agreement with INI to terminate the Letter of Offer, pursuant
to which the INI would unconditionally and irrevocably release us from all
obligations, liabilities, or claims under the Letter of Offer in exchange for
$4.7 million of restricted common stock, payable in three installments over
three years (with an agreement by INI not to short the Company's common stock at
any time and not to trade the restricted common stock received for at least one
year from the respective payment dates). We had previously accrued a $1.7
million liability with respect to the INI claim, and recorded a $3 million
contract settlement expense in our September 30, 2003 fiscal quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were
$770,000 and $652,000 for the second fiscal quarters of 2004 and 2003,
respectively, and $1.6 million and $1.3 million for the six-month periods ended
September 30, 2003 and 2002, respectively. The increase in depreciation resulted
from placement of installed machinery into service at our Northern Ireland
manufacturing facility in late fiscal 2003. We expect depreciation expense to
decrease in future quarters as a result of the impairment charge recorded in the
second quarter of fiscal 2004.
INTEREST AND OTHER INCOME. Interest and other income totaled $85,000 and $81,000
for the second fiscal quarters of 2004 and 2003, respectively. Interest and
other income totaled $165,000 and $197,000 for the six month periods ended
September 30, 2003 and 2002, respectively.
INTEREST EXPENSE. Interest expense relates to mortgages on our Northern Ireland
facility as well as interest on our long-term debt to stockholder. Interest
expense was $913,000 for the fiscal quarter ended September 30, 2003 and $1.0
million for the fiscal quarter ended September 30, 2002. Interest expense was
$2.0 million and $2.1 million for the first half of fiscal 2004 and 2003,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, our principal sources of liquidity were cash and
cash equivalents of $6.1 million, $19 million available under financing
commitments with Berg & Berg ($5 million remaining under Berg & Berg's equity
line of credit following the Company's drawdown of $5.0 million on September 30,
2003 and $14 million under additional financing commitments discussed below.
Our current forecasts project that these sources of liquidity will be
sufficient to allow us to execute on our current business plan. Our current
business plan contemplates that we will realize increases in cash flow from the
sale of our Henderson, Nevada and Mallusk, Northern Ireland facilities,
projected increases in product sales and licensing revenue, introduction of new
and enhanced products that have improved gross profit margins, and further cash
flow 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 fiscal 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, or joint venture and business opportunities. 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.
On June 2, 2003 we raised net proceeds of approximately $9.4 million
through the sale of one thousand shares of newly issued Series C Preferred Stock
to an unaffiliated investor. 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.
17
Currently, we do not have material sales to meet our operating needs, and
current sales are made at negative gross profit. Consequently, we are dependent
on Berg & Berg's continued willingness to fund our continued operations. As a
result of our success in arranging alternative financing in 2002 and 2003, Berg
& Berg has a contractual right to reduce or terminate its remaining $5 million
commitment under the equity line of credit. Berg & Berg has waived all
conditions to funding other than Stephan Godevais remaining as CEO. The equity
line of credit expires on March 31, 2004 and our right to draw down on the line
is limited to $5 million per quarter.
Of the remaining $14 million in commitments from Berg & Berg, $10.0 million
is subject to completion of definitive documentation and any required
stockholder approval.
At September 30, 2003, we had commitments for capital expenditures for the
next 12 months of approximately $97,000 relating to the production of tooling
and equipment for manufacturing battery products. 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 the first six months of fiscal 2004
and 2003 of $14.8 million and $16.3 million, respectively. The cash used for the
first two quarters of our fiscal 2004 operating activities was due primarily to
working capital requirements, net loss and the add back of non-cash expenses,
including depreciation and amortization, accretion of debt discount, and
compensation related to issuance of stock options. The decrease in the first six
months of fiscal 2004 operating cash requirements was due to lower net working
capital requirements.
We used $72,000 and $809,000 in investing activities during the first two
quarters of fiscal 2004 and 2003, respectively. The decrease in first half of
fiscal 2004 investing activities was due to the substantial completion of our
Northern Ireland facility.
We obtained cash from financing activities of $14.3 million and $22.3
million during the first six months of fiscal 2004 and 2003, respectively.
As a result of the above, we had a net decrease in cash and cash
equivalents of $561,000 during the first six months of fiscal 2004 and a net
increase of $5.2 million for the first six months of fiscal 2003.
As of September 30, 2003, our short term and long-term debt obligations,
including long term interest, were $859,000 and $47.3 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.
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 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 became
effective for the Company in the first quarter of fiscal 2004. These additional
reporting requirements did not have a material impact on its 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 adopted SFAS 149 in its second quarter of fiscal year
2004. The adoption did not 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
18
instruments with characteristics of both liabilities and equity. The Company
adopted SFAS 150 in its first quarter of fiscal year 2004, and its adoption did
not have a material impact 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 adopted FIN 46 in its second quarter of fiscal year 2004, and its
adoption did not have a material impact on its financial statements.
19
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 OUR BUSINESS PLAN WITH OUR CURRENT AVAILABLE CAPITAL.
At September 30, 2003, our principal sources of liquidity were cash and cash
equivalents of $6.1 million and $5.0 million available under an equity line
financing commitment (subject to conditions discussed below), a total of $14
million of funding commitments, from Berg & Berg Enterprises, LLC, an entity
controlled by Carl E. Berg, a director and principal stockholder of ours. Of the
additional $14 million of commitments, $10 million is subject to completion of
definitive documentation and any required stockholder approval.
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 and
Mallusk, Northern Ireland facilities, projected increases in product sales and
licensing revenue, introduction of new and enhanced products that have improved
gross profit margins, 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 fiscal 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, or joint venture and business opportunities.
If we are unable to execute on all aspects of 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.
On June 2, 2003 we raised net proceeds of approximately $9.4 million through the
sale of one thousand shares of newly issued Series C Preferred Stock. The Series
C Preferred Stock matures December 2, 2004 and carries a 2% annual dividend,
paid quarterly in cash or shares of common stock. The preferred stock is
convertible into common stock at $4.25 per share, and the Company has the right
to convert the preferred stock if the average of the volume weighted average
price of the Company's common stock for a ten-day trading period is at or above
$6.38 per share. 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. We may also be required to redeem for cash any unconverted
shares prior to the maturity date upon the occurrence of certain default events.
If the Series C Preferred Stock shares have not been converted by the maturity
date (or we are required to redeem the shares prior to 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. 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
$5 million. Berg & Berg has not elected to reduce its 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 conditioned on
Stephan Godevais remaining as CEO.
OUR WORKING CAPITAL REQUIREMENTS MAY INCREASE BEYOND THOSE CURRENTLY
ANTICIPATED.
We have planned for an increase in sales and, 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 demand 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.
20
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 $410.2 million as of September 30, 2003. We have working
capital of $3.1 million as of September 30, 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 our customers or we 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 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, WHICH WOULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR ABILITY TO COMMERCIALLY EXPLOIT OUR PRODUCTS.
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.
21
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
IS FOUND TO BE INFRINGING, WE MAY NOT BE ABLE TO PROCURE LICENSES TO USE PATENTS
NECESSARY TO OUR BUSINESS AT REASONABLE TERMS, IF AT ALL.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. While we currently are
not engaged in any intellectual property litigation or proceedings, we may
become involved in these proceedings in the future. In the future we may be
subject to claims or inquiries regarding our alleged unauthorized use of a third
party's intellectual property. An adverse outcome in litigation could force us
to do one or more of the following:
o stop selling, incorporating or using our products that use the challenged
intellectual property;
o pay significant damages to third parties;
o obtain from the owners of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
o redesign those products or manufacturing processes that use the infringed
technology, which may be economically or technologically infeasible.
Whether or not an intellectual property litigation claim is valid, the cost of
responding to it, in terms of legal fees and expenses and the diversion of
management resources, could be expensive and harm our business.
OUR 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
22
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.
THERE IS A POTENTIAL SALES-CHANNEL CONFLICT BETWEEN OUR FUTURE TECHNOLOGY
LICENSEES AND US.
Our Saphion(TM) technology licensing strategy, our introduction of products
using SaphioN(TM) technology in retail sales channels, and our acquisition of
the Telcordia Technologies, Inc.'s intellectual property assets have 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 we intend
to do through the effective utilization of OEM partners. We have recently
entered into a manufacturing OEM relationship with a Chinese manufacturing
facility. In addition, we have recently formed a manufacturing joint venture in
China. This is part of our strategic plan to transition during the remainder of
calendar 2003 all of our high volume manufacturing to China and other low cost
manufacturing areas. We have completed the qualification of the OEM manufacturer
but have not yet ordered or received product in commercial quantities. The joint
venture will need to construct a manufacturing facility (using, in part, the
technology and equipment contributed by us) before it is able to manufacture
batteries. In the interim, we are closing our Northern Ireland manufacturing
facility because of its high cost of manufacturing. We expect to have sufficient
inventory on hand at the time of closure to meet our anticipated customer demand
for the immediate future. However, if our OEM partner is unable to manufacture
product in commercial quantities on a timely and efficient basis and/or
manufacturing joint venture suffers delays in constructing its facility, or
fails to timely and efficiently manufacture product, we could 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.
23
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. 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 the first six months of fiscal 2004, two
customers, Best Buy and Amperex Technology Limited, each contributed more than
10% of revenue. During fiscal 2003, two customers, Alliant Techsystems Inc. and
Pabion Corporation, Ltd., each contributed more than 10% of total revenues.
During fiscal 2002, four customers, Hanil Joint Venture, Amperex Technology
Limited, Alliant Techsystems Inc., and Samsung Corporation, each contributed
more than 10% of total revenues. For fiscal 2001, four customers Alliant
Techsystems Inc., MicroEnergy Technologies Inc., Moltech Corporation, and
Qualcomm, each contributed 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;
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 ANY OF WHICH COULD HARM OUR BUSINESS.
Without qualified executives, we face the risk that we will not be able to
effectively run our business on a day-to-day basis or execute our long-term
business plan. We do not have key man life insurance policies with respect to
any of our key members of management.
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
24
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.
Until we successfully transition our manufacturing operations to China and other
low cost manufacturing areas, our revenues are dependent upon the continued
operation of our manufacturing facility in Northern Ireland through December
2003. The operation of a manufacturing plant involves many risks, including
potential damage from fire or natural disasters. In addition, we have obtained
permits to conduct our business as currently operated at the facility. If the
facility were destroyed and rebuilt, there is a possibility that these permits
would not remain effective at the current location, and we may not be able to
obtain similar permits to operate at another location. The occurrence of these
or any other operational problems at our Northern Ireland facility may harm our
business.
WE EXPECT TO SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO AND DERIVE A
SIGNIFICANT PORTION OF OUR LICENSING REVENUES FROM CUSTOMERS LOCATED OUTSIDE THE
UNITED STATES. FOREIGN GOVERNMENT REGULATIONS, CURRENCY FLUCTUATIONS AND
INCREASED COSTS ASSOCIATED WITH INTERNATIONAL SALES COULD MAKE OUR PRODUCTS AND
LICENSES UNAFFORDABLE IN FOREIGN MARKETS, WHICH WOULD REDUCE OUR FUTURE
PROFITABILITY.
We expect that international sales of our products and licenses, as well as
licensing royalties, will represent an increasingly significant portion of our
sales. International business can be subject to many inherent risks that are
difficult or impossible for us to predict or control, including:
o changes in foreign government regulations and technical standards,
including additional regulation of rechargeable batteries or technology or
the transport of lithium and phosphate, which may reduce or eliminate our
ability to sell or license in certain markets;
o foreign governments may impose tariffs, quotas and taxes on our batteries
or our import of technology into their countries;
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 including China 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
including China 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.
25
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. 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.
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.
26
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.
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 November 7, 2003, our officers, directors and their affiliates as a group
beneficially owned approximately 35.6% of our outstanding common stock. Carl
Berg, one of our directors, beneficially owns approximately 32.7% 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 outside
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 November 7, 2003, the
closing price of our common stock was $4.01. 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.
27
OUR STOCK PRICE IS VOLATILE, WHICH COULD RESULT IN A LOSS OF YOUR INVESTMENT.
The market price of the shares of our common stock has been and is likely to
continue to be highly volatile. Factors that may have a significant effect on
the market price of our common stock include the following:
o fluctuation in our operating results;
o announcements of technological innovations or new commercial products by us
or our competitors;
o failure to achieve operating results projected by securities analysts;
o governmental regulation;
o developments in our patent or other proprietary rights or our competitors'
developments;
o our relationships with current or future collaborative partners; and
o other factors and events beyond our control.
In addition, the stock market in general has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.
As a result of this potential stock price volatility, investors may be unable to
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 73,305,679 shares of common stock as of
September 30, 2003. In addition, at September 30, 2003, we had 12,625,845 shares
of our common stock reserved for issuance under warrants and 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 the 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 3. 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 September
30, 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 adjustable rates based on the Bank of England base rate plus 1.5%
and 1.75% (5.25% and 5.5%, respectively at September 30, 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
28
1% above the lenders borrowing rate (9% at September 30, 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 422 885 15,889 996 1,056 2,040 21,288
Based on borrowing rates currently available to us for loans with similar terms,
the carrying value of our debt obligations approximates fair value.
ITEM 4. CONTROLS AND PROCEDURES
We conducted an evaluation, under the supervision and with the participation of
our Chief Executive Officer and Principal Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
first fiscal quarter. Based on this evaluation, our Chief Executive Officer and
Principal 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 Principal Financial Officer note that there were no 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
During the last fiscal quarter, there have been no changes in our internal
control over financial reporting that has materially affected or is reasonably
likely to materially affect our internal control over financial reporting.
Our management, including our Chief Executive Officer and Principal 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 our systems 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.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
29
PART II - OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 30, 2003, we sold 1,543,925 shares of our restricted common stock
at an aggregate price of $5.0 million to Berg & Berg, an affiliate of Carl Berg,
a director and principal stockholder, in a private placement transaction exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended. The issuance was made without general solicitation or advertising. The
single purchaser is a knowledgeable and sophisticated investor with access to
all relevant information necessary to evaluate its investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 28, 2003, we held an annual meeting of our stockholders for the
fiscal year ended March 31, 2003. Our stockholders voted on the following
matters at the annual meeting:
(i) The following individuals were elected as our directors for terms
expiring at our 2004 annual meeting of stockholders (there were no votes
against or broker non-votes):
NOMINEE VOTES IN FAVOR VOTES ABSTAINED
Carl E. Berg 68,858,105 731,943
Stephan B. Godevais 68,837,730 752,318
Bert C. Roberts, Jr. 68,878,553 711,495
Alan F. Shugart 68,877,343 712,705
(ii) Approval of an amendment to our 2000 Stock Incentive Plan to increase
the number of shares of our common stock reserved for issuance under that
plan by 1,000,000. There were no broker non-votes.
VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED
67,520,578 1,951,440 118,030
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Joint Venture Contract with Fengfan Group Limited Liability Company dated
July 8, 2003.
30
10.2 Contract for Technology Investment with Baoding Fengfan
Group Limited Liability Company and Baoding Fengfan-Valence Battery Co.,
Ltd. dated July 8, 2003.
10.3 Export Sales Contract with Baoding Fengfan-Valence Battery Co., Ltd. dated
July 8, 2003.
10.4 Equipment Contribution Contract with Baoding Fengfan Group Limited
Liability Company dated July 8, 2003.
10.5 Amended Employment Agreement with Stephan Godevais dated September 15,
2003.
10.6 Amended Employment Agreement with Joseph Lamoreux dated September 18, 2003.
10.7 Amended Employment Agreement with Terry Standefer dated September 18, 2003.
31.1 Rule 13a-14/15d-14(a) Certifications.
32.1 Section 1350 Certifications.
(b) Reports on Form 8-K:
(1) Report on Form 8-K, filed August 14, 2003, disclosing under Item 5 and
7 our press releases issued on June 25, 2003, July 21, 2003 and August 13, 2003
and disclosing under Item 12 our condensed consolidated balance sheets and
condensed consolidated statements of operations and comprehensive loss, each for
the quarter ended June 30, 2003.
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
VALENCE TECHNOLOGY, INC.
Date: November 14, 2003 By: /s/ Stephan B. Godevais
--------------------------------------
Stephan B. Godevais
President, Chief Executive Officer
and Chairman of the Board
By: /s/ Kevin W. Mischnick
--------------------------------------
Kevin W. Mischnick
Vice President of Finance (Principal
Financial and Accounting Officer)
32
EXHIBIT INDEX
EXHIBIT NO.
10.1 Joint Venture Contract with Fengfan Group Limited Liability Company dated
July 8, 2003.
10.2 Contract for Technology Investment with Baoding Fengfan
Group Limited Liability Company and Baoding Fengfan-Valence Battery Co.,
Ltd. dated July 8, 2003.
10.3 Export Sales Contract with Baoding Fengfan-Valence Battery Co., Ltd. dated
July 8, 2003.
10.4 Equipment Contribution Contract with Baoding Fengfan Group Limited
Liability Company dated July 8, 2003.
10.5 Amended Employment Agreement with Stephan Godevais dated September 15,
2003.
10.6 Amended Employment Agreement with Joseph Lamoreux dated September 18, 2003.
10.7 Amended Employment Agreement with Terry Standefer dated September 18, 2003.
31.1 Rule 13a-14 and 15d-14(a) Certifications.
32.1 Section 1350 Certifications.
33