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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20028
VALENCE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0214673
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
6504 Bridge Point Parkway, Suite 415
Austin, Texas 78730
(Address of Principal Executive Offices) (Zip Code)
(512) 527-2900
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
None None
Securities registered under Section
12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers, pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates on September 30, 2004 was $146,822,123.*
As of June 3, 2005, there were 89,152,479 shares of common stock and 861
shares of preferred stock outstanding.
*Excludes approximately 38,288,958 shares of common stock held by directors,
officers and holders of 5% or more of registrant's outstanding common stock at
September 30, 2004. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K (THIS "FORM 10-K" OR THIS "REPORT")
CONTAINS STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 21E OF THE EXCHANGE ACT AND SECTION 27A OF THE SECURITIES
ACT. THE WORDS "EXPECT," "ESTIMATE," "ANTICIPATE," "PREDICT," "BELIEVE" AND
SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS
FILING AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF VALENCE TECHNOLOGY, INC. (THE "COMPANY," "VALENCE," "WE," OR
"US"),OUR DIRECTORS OR OFFICERS WITH RESPECT TO, AMONG OTHER THINGS (A) TRENDS
AFFECTING OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS, (B) OUR PRODUCT
DEVELOPMENT STRATEGIES,(C) TRENDS AFFECTING OUR MANUFACTURING CAPABILITIES, (D)
TRENDS AFFECTING THE COMMERCIAL ACCEPTABILITY AND SALES OF OUR PRODUCTS AND (E)
OUR BUSINESS AND GROWTH STRATEGIES. OUR STOCKHOLDERS ARE CAUTIONED NOT TO PUT
UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN
THIS REPORT, FOR THE REASONS, AMONG OTHERS, DISCUSSED IN THE SECTIONS --
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," AND "RISK FACTORS." WE UNDERTAKE NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE
AFTER THE DATE HEREOF.
PART I
ITEM 1. BUSINESS
OVERVIEW
Valence Technology, Inc. was founded in 1989 and has commercialized the
industry's first phosphate based lithium-ion technology. Our mission is to drive
the wide adoption of high-performance, safe, low cost energy storage systems by
drawing on the numerous benefits of our Saphion(R) battery technology, the
experience of our management team and the significant market opportunity
available to us.
In February 2002, we unveiled our Saphion(R) technology, a lithium-ion
technology which utilizes a phosphate-based cathode material. Traditional
lithium-ion technology utilizes an oxide-based cathode material, which has
limited its adoption to small applications such as notebook computers, cellular
phones and personal digital assistants (PDAs) due to safety concerns related its
use in large applications. We believe that Saphion(R) 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(R) technology is able to offer
greater thermal and electrochemical stability than traditional lithium-ion
technologies, which will facilitate its adoption in large application markets
not traditionally served by lithium-ion batteries such as motive power,
vehicular, portable appliances, telecommunications, and utility back-up systems.
Currently, we offer our Saphion(R) technology in both cylindrical and polymer
construction and have initiated the design of a prismatic cell. We believe
offering Saphion(R) technology in multiple constructions will provide us greater
flexibility in our response to the needs of the market.
Key product introductions based on our Saphion(R) technology:
o In February 2002, we launched the N-Charge(TM) Power System into
several channels for sales and distribution, including national and
regional retailers, top tier computer manufacturers, and national
resellers.
o In February 2003, we launched our first large-format energy storage
system, the K-Charge(TM) Power System which was engineered
specifically for large-format applications such as those required by
the telecommunications, industrial and utility markets. It is
currently being offered to customers for evaluation in telecom and
utility back-up as well as alternative energy applications.
o In February 2004, we announced the second generation N-Charge(TM)
Power System II, currently being sold through some of our existing
channels.
o In February 2004, we also introduced a prototype of the U-Charge(TM)
Power System family of large-format products. The U-Charge(TM) Power
System is in production in our China facilities and is designed to
power a
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variety of motive applications from hybrid and electric vehicles to
scooters and wheelchairs, and can also be used in stationary
applications.
o In March 2005, we announced the availability of Saphion(R) powered
batteries for Segway's 2005 products. Our batteries doubled the range
of Segway's Human Transporters that were using Nickel Metal Hydride
batteries.
o In May 2005, we launched the industry's first commercially available
phosphate-based lithium-ion power cell. This cell is also built with
our proprietary Saphion(R) technology and offers high discharge rates
required of power cells with the safety features enabled by our
phosphate-based cathode material. Our power cell is optimal for use in
portable appliances, hybrid and electric vehicles.
As part of our low-cost manufacturing strategy, we have successfully
transitioned our powder manufacturing from Henderson, Nevada to Suzhou, China.
This transition along with the launching of our pack manufacturing in Suzhou and
the opening of our engineering office in Shanghai will allow us to capitalize on
lower manufacturing costs and reduced overhead costs related to administrative
and product development activities. Our research and development efforts are
focused on the design of new products utilizing our Saphion(R) chemistry, the
scale-up of our second generation Saphion(R) technology, the development of
different cell constructions to optimize power and size for new applications, as
well as developing future materials based on the Saphion(R) technology
attributes.
STRATEGY
Our business strategy is focused on a mix of system, cell and licensing
sales, and includes a manufacturing plan that leverages internal capabilities
and partnerships with contract manufacturers. We plan to drive the adoption of
our Saphion(R) technology by offering existing and new solutions that
differentiate our own products and end-users' products by offering safety and
performance characteristics previously unavailable to those end-users products.
Key elements of our strategy include:
o DEVELOP AND MARKET DIFFERENTIATED BATTERY SOLUTIONS FOR A WIDE ARRAY OF
APPLICATIONS THAT LEVERAGE THE TECHNOLOGICAL ADVANTAGES OF OUR SAPHION(R)
TECHNOLOGY. Our product development and marketing efforts are focused on
large format battery solutions, such as our U-Charge(TM) Power System and
K-Charge(TM) Power System and other custom battery solutions that require
the performance and technological advantages of our Saphion(R) technology.
These products are targeted for a broad range of applications in the
motive, power and consumer appliance, telecommunication and utility
industries and as a substitute for certain applications using lead-acid
batteries.
o EXECUTE ON OUR MANUFACTURING PLAN TO PROVIDE HIGH QUALITY, COST COMPETITIVE
PRODUCTS. In fiscal 2004 we determined to move our manufacturing from
Mallusk, Ireland to China and other low-cost manufacturing centers, using
both internal and contract manufacturing capabilities. We have opened three
facilities in China, one for the manufacture of the base powder used in our
Saphion(R) cells, one for the manufacture of large-format battery packs and
assembly of cylindrical cells, and a third that functions as an engineering
office to design and provide sustaining support for new battery systems. We
also have arrangements with contract manufacturers for cell production and
additional capacity. We believe this manufacturing strategy will allow us
to directly control our intellectual property and operations management as
well as deliver high quality, cost-competitive products which meet the
needs of a broad range of customers and applications.
o IMPLEMENT A PHASED APPROACH TO OUR BUSINESS STRATEGY. Our business strategy
has been implemented in three fluid phases, each building on the previous
one.
1. Initial Phase: The initial phase of our strategy is complete and the
focus was on the first generation of our Saphion(R) technology in our
patented polymer construction. During this phase, we introduced the
N-Charge Power System which has been sold through national and
regional retailers, top-tier computer
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manufacturers and national resellers. We also introduced our K-Charge
Power System, a large-format product designed for the
telecommunications and utility markets.
2. Second Phase: The second phase of the business strategy is nearly
complete. Throughout this phase our cell development has focused on
commercializing a cylindrical battery construction, developing of a
large prismatic cell and introducing a power cell all utilizing our
first generation of Saphion(R) material. Additionally, we worked
towards completing the development of our second-generation Saphion(R)
technology. Our systems development focused on creating energy storage
systems for the stationary and motive markets and we launched the
U-Charge Power System Family. This family of products is designed for
motive applications such as hybrid and electric vehicles, scooters and
wheelchairs and has the same dimensions as the most popular lead acid
batteries but with significant increases in performance related to
cycle life and weight.
3. Final Phase: The final phase of our business strategy will entail the
commercial production of Saphion(R) based energy solutions for the
vehicular, portable appliance, telecommunications and utility
industries, with continuing focus on marketing small format Saphion(R)
solutions through our developed sales channels
We believe our strategy will allow us to expand our market opportunity.
Through the sales of products based on our differentiated Saphion(R)
technology, and the establishment of Asian operations and partnerships to
achieve the lowest possible costs, we believe we are equipped to serve
existing lithium-ion technology markets as well as open doors to new market
opportunities.
FISCAL 2005 HIGHLIGHTS AND RECENT EVENTS
o THE N-CHARGE(TM) POWER SYSTEM
o In October of 2004 the N-Charge(TM) Power System II was selected
by Circuit City for roll out to its retails stores nationwide.
o In February 2005, the N-Charge(TM) Power System was shown in six
industry leading partner booths at the 2005 Annual HIMMS
Conference and Exhibition. The HIMMS conference is a premier
marketing event in the healthcare IT industry, with more than 700
exhibitors featuring new products and cutting-edge
interoperability demonstrations.
o THE K-CHARGE(TM) POWER SYSTEM
o In June 2004, we signed an agreement granting Tyco Electronics
Power Systems, Inc. the exclusive right to resell our
K-Charge(TM) Power System to its telecommunications and utility
customers for a period of three years. The K-Charge(TM) Power
System will be privately labeled and marketed by Tyco Electronics
under its ELiTE RK brand. Additionally, sales and marketing,
technical assistance and customer support will be provided by
Tyco Electronics. Tyco has initiated field trials of the
K-Charge(TM) Power System with three separate telecommunications
companies.
o THE U-CHARGE(TM) POWER SYSTEM AND OTHER MOTIVE BATTERIES
o In November 2004, we announced a Joint Development Program with
Segway to provide the first lithium-ion batteries for Segway
Human Transporters. The batteries are available through Segway's
distribution channels and will offer up to 24 miles of range on a
single charge.
o In December 2004, Alternativ Canada selected the U-Charge(TM)
Power System to be the battery solution in their fleet of
electric vehicles. The U-Charge(TM) Power Systems enabled
Alternative Canada to increase the range of their fleet delivery
vehicles from 30km to over 100km. The U-Charge(TM) Power Systems
have been installed in two vehicles for continuing evaluation.
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o In March 2005, we teamed up with EnergyCS to create a plug-in
hybrid electric vehicle (PHEV) based on a 2004 Toyota Prius. The
concept car uses U-Charge Power Systems as a replacement for the
existing nickel-metal-hydride batteries and achieves up to 180
miles per gallon by allowing significant amounts of zero-emission
electric-only driving. The vehicle was unveiled at the EVS 21
industry event in Monaco.
o In March 2005, Phoenix Motorcars became the only car on the
market to achieve CARB level II certification with full zero
emission credits using the U-Charge(TM) Power System. The
vehicles built by Phoenix Motorcars with our battery systems were
able to travel up to 120 miles on a single charge and have four
to five times the cycle life of the competing technology,
nickel-zinc.
o OPERATIONAL ACHIEVEMENTS
o In August 2004, we began the transition of several engineering
and operations functions to China.
o In January 2005, we hired a new vice president of Sales and
Marketing, Dean Bogues. Dean brings a great deal of sales and
operational experience from companies like AMD, Dell, and APC to
the team.
o In January 2005, our powder manufacturing facility in Suzhou
China began mass producing Saphion(R) I powder. Our pack assembly
facility began producing U-Charge Power Systems and components
for Segway batteries and we established our engineering team in
Shanghai.
o In April 2005, we hired a president of our Asian-Pacific
operations, JR Hwang. JR has 30+ years of experience in materials
and chemicals, with a history of success in the Asia-Pacific
region.
o In May 2005, we announced the industry's first phosphate-based
lithium-ion power cell. This cell is based on our Saphion(R)
technology and offers a safe upgrade path for portable appliances
and hybrid and electric vehicles that are currently using
nickel-metal-hydride and nickel-cadmium technologies.
SAPHION(R): THE NEXT-GENERATION IN LITHIUM-ION TECHNOLOGY
The driving force behind the introduction of lithium-ion technology to the
rechargeable battery industry was consumer demand for high energy, small battery
solutions to power portable electronic devices. Lithium-ion cobalt-oxide
technology was developed to meet that demand and represented a significant
advancement in battery technology. Today, however, the challenge is to find ways
to maintain costs and meet safety and environmental concerns, while increasing
energy density. Additionally, as a result of the safety concerns associated with
producing traditional Lithium-ion cobalt-oxide technology in large-format
applications, many markets today remain served by older technologies, such as
lead-acid, nickel cadmium, and nickel metal hydride, which offer low energy
density and significant maintenance costs.
We believe our Saphion(R) technology, which utilizes a natural,
phosphate-based cathode in place of other less stable and more costly materials,
addresses the current challenges facing the rechargeable battery industry and
provides us with several competitive advantages. Key attributes of our
Saphion(R) technology include:
o INCREASED SAFETY. We believe that our Saphion(R) technology significantly
reduces the safety risks associated with oxide based lithium-ion
technologies. Our Saphion(R) technology utilizes less lithium than other
lithium-ion technologies. The unique chemical properties of phosphates
render them incombustible if mishandled during charging or discharging. As
a result, we believe Saphion(R) technology is more stable under overcharge
or short circuit conditions than existing lithium-ion technology and has
the ability to withstand higher temperatures and electrical stress. The
thermal and chemical stability inherent in our Saphion(R) technology
enables the creation of large, high energy density lithium-ion solutions.
5
o PERFORMANCE ADVANTAGES. We believe Saphion(R) technology offers several
performance advantages over the competing battery chemistries of lead-acid,
nickel cadmium, nickel metal-hydride and traditional lithium-ion
technologies, including high rate capability, long cycle life, long shelf
life, and lower total cost of ownership.
o HIGH ENERGY DENSITY. In its large format application, our
Saphion(R) technology exhibits an energy density which exceeds
other battery chemistries utilized in this market such as
lead-acid, nickel-metal hydride and nickel cadmium.
o HIGH RATE CAPABILITY. In the power cell construction, our
Saphion(R) technology offers an exceptional rate capability with
sustained 10 to 15C discharges and low impedance of less than
20mOhms. These two characteristics result in a cell that provides
larger bursts of power while generating less heat than energy
cells.
o INCREASED CYCLE LIFE. Current testing of Saphion(R) technology
has yielded cycle life of 2000 cycles at 23(degree)C to 70% of
the battery's initial capacity, resulting in a longer life span.
o NO MEMORY EFFECT AND MAINTENANCE FREE. Saphion(R) technology does
not exhibit the "memory effect" of nickel cadmium and nickel
metal-hydride solutions and is maintenance free.
o LOWER COST. The phosphate material used in our Saphion(R) technology
is less expensive than the cobalt-oxide material used in competing
lithium-ion technologies. As a result, we believe that as demand
increases for our batteries, resulting in larger production volumes,
we will be able to lower material costs. Finally, the lower
maintenance costs, long cycle life and long service life associated
with Saphion(R) technology, lead to a lower total cost of ownership in
numerous applications.
o FLEXIBILITY. Due to the stability of Saphion(R) technology, it can be
manufactured to fit small as well as large applications. Small applications
include those utilized in the portable device applications, while large
applications include high energy, high power applications such as back-up
power systems and vehicles. Additionally, Saphion(R) technology is
available in both a polymer and cylindrical construction. In the future, we
plan to offer it in a prismatic construction as well.
o ENVIRONMENTAL FRIENDLINESS. Rechargeable batteries that contain
nickel-metal-hydride, nickel-cadmium, lead-acid, or other toxic metals
raise environmental concerns. Saphion(R) technology incorporates a natural,
environmentally friendly, phosphate-based cathode material, and does not
have the same disposal issues as other types of batteries.
COMPETITIVE STRENGTHS
Competition in the battery industry is intense. In the rechargeable battery
market, the principal competitive technologies currently marketed are lead-acid,
nickel-cadmium, nickel-metal-hydride, liquid lithium-ion and lithium-ion polymer
batteries.
The industry consists of major domestic and international companies, which
have substantial financial, technical, marketing, sales, manufacturing,
distribution and other resources available to them. Our primary competitors who
have announced availability of either lithium-ion or other competing
rechargeable battery products include Sony, Panasonic, Saft, and EOne Moli among
others.
The performance characteristics of lithium-ion batteries, in particular,
have consistently improved over time as the market leaders have matured the
technology. Other contenders have recently emerged with a primary focus on price
competition. In addition, a number of companies are undertaking research in
other rechargeable battery technologies, including work on lithium-ion phosphate
technology. Nevertheless, we are continually evolving our technology to meet
these and other competitive threats.
We believe that we have important technological advantages over our
competitors in terms of our ability to compete in the rechargeable battery
market. We believe that our phosphate battery chemistry, construction and
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manufacturing processes enable us to serve a wide range of markets that do not
currently use lithium-ion batteries. We believe that our next-generation
Saphion(R) technology will provide additional advantages in the areas of safety,
cost, size and energy density relative to competing products.
Valence is uniquely positioned for growth due to the following:
o LEADING TECHNOLOGY. Our phosphate-based Saphion(R) lithium-ion technology
offers many performance advantages over competing battery technologies. We
believe the safety advantages inherent to Saphion(R) technology allow for
the creation of large format lithium-ion energy systems. As the first
company in the battery industry to commercialize phosphates, we believe we
have a significant advantage in terms of time to market as well as
chemistry and manufacturing expertise..
o NEW MARKET OPPORTUNITIES. We believe that Saphion(R) technology enables the
production of high-energy density, large-format batteries without the
safety concerns presented by oxide based lithium-ion batteries.
Consequently, we believe that Saphion technology energy and power systems
can be designed in a wide variety of products in markets not served by
current lithium-ion technology. And, with our new Saphion(R) power cells,
we now offer the only safe, large-format alternative to
nickel-metal-hydride and nickel-cadmium batteries. We intend to be able to
expand the market opportunity for lithium-ion by designing our Saphion
technology into a wide variety of products for the telecommunications,
utility, motive power and vehicular markets.
o REFINED STRATEGIC FOCUS. We have transitioned to a company capitalizing on
the results of our research and development by strengthening our sales and
marketing efforts. We are expanding our vision to become an energy
solutions company, and plan to enter markets previously not served by
lithium-ion solutions. Additionally, we have established a low cost
manufacturing plan, which includes leveraging internal capabilities as well
as contract manufacturing partnerships in low cost regions..
PRODUCTS
THE N-CHARGE(TM) POWER SYSTEM FAMILY
The N-Charge(TM) Power System Family includes two generations of a
universal, external battery for mobile devices featuring our Saphion(R)
technology. It is a stand-alone tool that provides easy-to-use, anytime,
anywhere power for a wide variety of portable electronic devices. Our
N-Charge(TM) Power System is available in commercial quantities and is currently
offered through major retailers, resellers and tier-one companies, as well as
through our own direct sales organization. We offer two generations of the
N-Charge(TM) Power System, with the following specifications:
N-Charge(TM) Power System I
Feature Model VNC-130 Model VNC-65
High power port voltage 15.3-24 V DC 15.3-24 V DC
Low power port voltage 5-12 V DC 5-12 V DC
Capacity 10 Ah 5 Ah
Energy 120-130 Wh 60-65 Wh
Charge time (typical) 3-4 hours 2-3hours
Thickness 13 mm 13 mm
Length 300 mm 300 mm
Width 230 mm 230 mm
Weight 1.35 kg .866 kg
Cycle Life > 600 to 70% capacity > 600 to 70% capacity
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N-Charge(TM) Power System II
Base System Expansion Pack
Operating Voltage 15.3V/24V 15.3V/24V
Out power 90+ Watts 90+ Watts
Charge Time 3 hours 3 hours
Operating Temperature -20(degree) C to 60(degree)C -20(degree) C to 60(degree)C
Dimensions 248 mm x 93 mm x 20.5 mm 248 mm x 76 mm x 20.5 mm
Weight < 1.5 lbs. < 1.3 lbs.
The K-Charge(TM) Power System
The K-Charge(TM) Power System is a large-format energy storage system
designed for the telecommunications and utility industries. Our K-Charge(TM)
Power System, based on Saphion(R) technology, has been evaluated by a number of
customers and is currently being marketed into telecommunication back-up
systems, marine buoys and alternative energy markets.
Our K-Charge(TM) Power System has the following specifications:
Operating Voltage 48V
Energy 2.6 KWH (2.3 KWH WITH EXSITING INVENTORY)
Cycle Life > 2000 Cycles (80% Depth of Discharge)
Operating Temperature -20~60(degree)C (-4~140 (degree)(F)
Dimensions 546mm x 295mm x 87.4mm (21.5in. x 11.61in. x 3.44in.)
Weight 30.4 Kg (67 Lb.)
The U-Charge(TM) Power System
The U-Charge(TM) Power System is a family of products based on Saphion(R)
technology and designed to be a direct replacement for standard-sized lead-acid
batteries. The batteries in this line of 12-volt energy storage systems offer
twice the run-time and a third less weight than lead-acid, expanded calendar
life, and greater cycle life with full depth of discharge, resulting in
significantly lower total costs of ownership. U-Charge(TM) Power Systems have
been designed for applications, such as electric vehicles, wheelchairs, scooters
and other motive devices.
Our U-Charge(TM) Power Systems have the following specifications:
U-Charge Power U1 U24 U27
System Family
Operating Voltage 12V 12V 12V
Energy 550Wh 1310Wh 1680Wh
Cycle Life > 2000 Cycles (80% > 2000 Cycles (80% > 2000 Cycles (80%
Depth of Discharge) Depth of Discharge) Depth of Discharge)
Operating Temperature -20~60(degree)C -20~60(degree)C -20~60(degree)
(charge & disch.)
Dimensions 198 x 135 x 186 mm 265 x 173 x 225 mm 308 x 173 x 229 mm
Weight 6Kg 13.4Kg 16.6Kg
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SALES AND MARKETING
At June 3, 2005 we had a sales and marketing team consisting of seventeen
persons, headed up by our Vice President of Sales and Marketing. Our sales and
marketing staff are located in Chicago, Illinois; Raleigh, North Carolina;
Atlanta, Georgia; Mallusk, Northern Ireland, Shanghai, China and Austin, Texas.
Our N-Charge(TM) Power Systems are marketed and sold to national retailers,
distributors and value-added resellers, and directly by our sales force and
through our Web site. Sales are generally made by standard purchase order. Our
K-Charge(TM) Power System was engineered specifically for large-format
applications such as those required by the telecommunications and utility
markets. Our U-Charge(TM) Power System is customized to a particular customer's
application and can require a significant amount of attention and commitment,
including potentially capital outlays, by prospective customers. We anticipate
sales will typically be made through separately negotiated supply agreements,
rather than standard purchase orders. The client evaluation and approval process
is generally between six and twenty-four months. Our K-Charge(TM) and
U-Charge(TM) Power Systems are expected to be sold in both standard and custom
configurations. In addition, we expect to design and sell custom battery systems
based on our Saphion(R) technology. We provide pack level design and engineering
services to assist the customer in configuring a product that meets its needs.
Sales of our products are typically denominated in United States dollars.
Consequently, our sales historically have not been subject to currency
fluctuation risk.
MANUFACTURING
During fiscal 2004 we closed our Northern Ireland manufacturing facility
and now rely on contracts with third-party manufacturers for all of our cell
manufacturing requirements. Our base Saphion(R) battery cathode powder is now
manufactured in one of our Wholly Foreign Owned Enterprise's (WFOE's) in Suzhou,
China. Polymer batteries are manufactured for us by Amperex Technology, Ltd.
(ATL) under a manufacturing contract, cylindrical batteries are manufactured for
us by ATL and Pihsiang Energy Technology Co., Ltd. (PHET), formerly Pacific
Energytech Co., Ltd, or PETC. Our products are assembled into complete systems
using both contract manufacturers in Taiwan and the US or our own assembly
facilities in Suzhou, China.. We have multi-year contracts with each of our
manufacturing sources. However, we believe there are multiple manufacturers of
batteries that are capable of manufacturing our products to our quality and cost
specifications if we require changing or expanding our manufacturing
relationships. With these relationships we believe that we will have sufficient
capacity to meet or exceed the expected demand in fiscal 2006.
RESEARCH AND PRODUCT DEVELOPMENT
We conduct materials research and development at our Henderson, Nevada and
Oxford, England facilities and product development at our Shanghai and Suzhou,
China facilities. Our battery research and development group develops and
improves the existing technology, materials and processing methods and develops
the next generation of our battery technology. Our areas of expertise include:
chemical engineering; process control; safety; and anode, cathode and
electrolyte chemistry and physics; polymer and radiation chemistries; thin film
technologies; coating technologies; and analytical chemistry; and material
science. Our research and development efforts over the past year and ongoing
have focused on three areas:
o CONTINUING DEVELOPMENT OF SAPHION(R) TECHNOLOGY IN MULTIPLE
CONSTRUCTIONS. Our first generation Saphion(R) material was
successfully scaled in cylindrical construction in fiscal 2004.
Throughout fiscal 2005 our development team focused on increasing
capacity of the energy cell, offering other constructions such as a
large prismatic cell and designing the power cell. In late fiscal 2005
our team implemented a product change which increased the capacity of
the energy cell. We have also nearly completed the prismatic cell
which is targeted for launch this summer and officially launched the
industriy's first commercially available phosphate based power cell in
May of 2005.
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o DEVELOPMENT OF SECOND GENERATION OF SAPHION(R) TECHNOLOGY. We are
currently working on the development of an energy cylindrical cell and
a power cylindrical cell using our second generation Saphion(R)
technology. The applications for the energy cell include electric
vehicles, motive applications, notebook computers, and consumer
electronics. The applications for the power cell include consumer
appliances, such as power tools, and hybrid electric vehicles. The
second generation energy cells are expected to ramp over the next few
quarters, while the power cells are still under development. The
second generation Saphion(R) technology is expected to deliver similar
safety attributes with greater energy and power density capabilities
than our first generation Saphion(R) technology and a cycle life
similar to existing lithium-ion technologies
o LARGE FORMAT APPLICATIONS FOR SAPHION(R) TECHNOLOGY. The benefits of
Saphion(R) technology have led to interest across a broad spectrum of
industries from potential customers for large format solutions. In
large format applications, Saphion(R) technology provides kilowatts of
safe, lithium-ion power that is long-lasting, reliable and maintenance
free. It offers excellent cycle life and run-time, and as a result has
attracted customers such as EV manufacturers, AEP, Tyco and Graham
Field, who are currently evaluating the product.
We intend to continuously improve our technology, and are currently
focusing on improving the energy density of our products. We are working to
advance these improvements into production. We also are working with new
materials to make further improvements to the performance of our products. We
believe the safety features of our technology and the ongoing improvement in the
performance of our batteries will allow us to maintain our competitive
advantage.
CUSTOMERS
Over the last three fiscal years, a limited number of our customers have
accounted for a significant portion of our net revenues. During fiscal 2005,
three customers, D&H Distributors, PC Connection, and Best Buy accounted for 46%
of our revenue. During fiscal 2004, sales to Best Buy's accounted for 30% of our
total revenues. During fiscal 2003, two customers, Alliant Techsystems Inc. and
Pabion Corporation, Ltd., 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. Currently,
we do not have any long-term agreements with any of our customers.
INTELLECTUAL PROPERTY
Our ability to compete effectively depends in part on our ability to
maintain the proprietary nature of our technology and manufacturing processes
through a combination of patent and trade secret protection, non-disclosure
agreements and cross-licensing agreements.
We rely on patent protection for certain designs and products. We hold
approximately 182 United States patents, which have expiration dates through
2023 and have about 51 patent applications pending in the United States. We
continually prepare new patent applications for filing in the United States. We
also actively pursue patent protection in certain foreign countries.
In addition to potential patent protection, we rely on the laws of unfair
competition and trade secrets to protect our proprietary rights. We attempt to
protect our trade secrets and other proprietary information through agreements
with customers and suppliers, proprietary information agreements with employees
and consultants and other security measures.
REGULATIONS
Before we commercially introduce our batteries into certain markets, we may
be required, or may decide to obtain approval of our materials and/or products
from one or more of the organizations engaged in regulating
10
product safety. These approvals could require significant time and resources
from our technical staff and, if redesign were necessary, could result in a
delay in the introduction of our products in those markets.
The United States Department of Transportation, or DOT, and the
International Air Transport Association, or IATA, regulate the shipment of
hazardous materials. The United Nations Committee of Experts for the
Transportation of Dangerous Goods has adopted amendments to the international
regulations for "lithium equivalency" tests to determine the aggregate lithium
content of lithium ion polymer batteries. In addition, IATA has adopted special
size limitations for applying exemptions to these batteries. Under IATA, our
N-Charge(TM) Power System (65) and N-Charge(TM) Power System II are exempt from
a class 9 designation for transportation. Our N-Charge(TM) Power System (130),
The K-Charge(TM) Power System and U-Charge(TM) Power System currently fall
within the level such that they are not exempt and require a class 9 designation
for transportation. We comply with all safety-packaging requirements worldwide
and future DOT or IATA regulations or enforcement policies could impose costly
transportation requirements. In addition, compliance with any new DOT and IATA
approval process could require significant time and resources from our technical
staff and if redesign were necessary, could delay the introduction of new
products.
The Nevada Occupational Safety and Health Administration and other
regulatory agencies have jurisdiction over the operation of our Henderson,
Nevada facility. Because of the risks generally associated with the use of
flammable solvents and other hazardous materials, we expect rigorous enforcement
of applicable health and safety regulations. In addition, we currently are
regulated by the State Fire Marshall's office and local Fire Departments.
Frequent audits or changes in their regulations may cause unforeseen delays and
require significant time and resources from our technical staff.
The Clark County Air Pollution Control District has jurisdiction over our
Henderson, Nevada facility and annual audits and changes in regulations could
impact current permits affecting production or time constraints placed upon
personnel.
Federal, state and local regulations impose various environmental controls
on the storage, use and disposal of certain chemicals and metals used in the
manufacture of lithium-ion batteries. There are similar national, provincial and
local regulations in China. Although we believe that our activities conform to
current environmental regulations, any changes in these regulations may impose
costly equipment or other requirements. Our failure to adequately control the
discharge of hazardous wastes also may subject us to future liabilities.
HUMAN RESOURCES
As of June 3, 2005, we had a total of 86 regular full-time employees in the
United States at our Austin, Texas headquarters and our Henderson, Nevada
research and development facility. We have 40 total employees in the areas of
administration, sales, legal, marketing, finance, management information
systems, purchasing, quality control and shipping & receiving. We had 29 total
employees in the areas of engineering, facilities maintenance and environmental
health & safety. We had 17 total employees in the areas of research &
development and product development; product development includes mixing,
coating and assembly. As of June 3, 2005, our Cayman subsidiary had 8 regular
full time employees in the areas of engineering and sales located in the United
Kingdom. In addition, as of June 3, 2005, our China operations, consisting of
two Wholly-owned Foreign Entities, had 206 regular full-time employees and 37
persons working through Foreign Enterprise Services Co. (FESCO). None of our
employees are covered by a collective bargaining agreement, and we consider our
relations with our employees to be good.
WEBSITE AVAILABILITY OF OUR REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
We maintain a website with the address www.valence.com. We are not
including the information contained on our website as a part of, or
incorporating it by reference into, this annual report on Form 10-K. We make
available free of charge through our website our annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments
to these reports, as soon as reasonably practicable after we electronically file
that material with, or furnish such material to, the Securities and Exchange
Commission.
11
ITEM 2. PROPERTIES
Our corporate offices are located in a leased facility in Austin, Texas. We
also rent a research and development facility in Henderson, Nevada under a lease
agreement. Our two Wholly-owned Foreign Entities in China lease three separate
facilities, a 35,000 square meter powder manufacturing facility in Suzhou,
China, a 58,000 square meter product assembly facility in Suzhou, China and a
7,500 square meter research and development facility in Shanghai, China.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and litigation in the normal course of
business. In our opinion, all pending legal matters are either covered by
insurance or, if not insured, will not have a material adverse impact on our
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq SmallCap Market under the symbol
"VLNC." The following table sets forth, for the periods indicated, the high and
low sale prices of our common stock, as reported by published financial sources:
FISCAL 2004: HIGH LOW
Quarter ended June 30, 2003 4.65 2.16
Quarter ended September 30, 2003 4.23 2.67
Quarter ended December 31, 2003 4.48 3.15
Quarter ended March 31, 2004 6.30 3.50
FISCAL 2005:
Quarter ended June 30, 2004 4.86 3.06
Quarter ended September 30, 2004 3.69 2.51
Quarter ended December 31, 2004 3.90 3.11
Quarter ended March 31, 2005 3.30 2.72
FISCAL 2006:
Quarter ended June 30, 2005 (through June 3, 2004) 3.24 2.00
On June 3, 2005, the last reported sale price of our common shares on the
Nasdaq SmallCap Market was $3.02 per share. On that date, we had 89,152,479
shares of common stock outstanding held of record.
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying cash dividends in the foreseeable future.
The following table includes, as of March 31, 2005, information regarding
common stock authorized for issuance under our equity compensation plans:
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
- ----------------------------- ----------------------- --------------------- ---------------------------
Equity compensation plans
approved by security holders 9,228,153 $4.53 1,915,009
Equity compensation plans
not approved by security
holders (1) 1,925,000 $6.45 -
Total 11,153,153 $4.87 1,915,009
- ----------------------------- ----------------------- --------------------- ---------------------------
- --------------
(1) Options to purchase 1,500,000 shares were granted to Stephan Godevais in
May 2001 pursuant to his employment agreement. The exercise price of his
options is $6.52 and they vested over the following four years. Options to
purchase 225,000 shares were granted to Joseph Lamoreux in June 2001
pursuant to his employment offer letter. The exercise price of his options
is $7.18 and they vested over the following four years.
13
RECENT SALES OF UNREGISTERED SECURITIES
On September 30, 2002, the Company drew down $5.0 million from its equity
line financing commitment from Berg & Berg and issued approximately 9.5
million shares of the Company's common stock.
On November 27, 2002, the Company drew down $5.0 million from its equity
line financing commitment from Berg & Berg and issued approximately 4.4
million shares of the Company's common stock.
On February 5, 2003, we drew down $5 million from our equity financing
commitment with Berg & Berg Enterprises, LLC, an affiliate of Carl Berg, a
director and stockholder of ours. Under the terms of the equity commitment
Valence issued to Berg & Berg 3,190,342 shares of restricted Common Stock,
in a private placement exempt from registration pursuant to Section 4(2) of
the Securities Act, at a 15% discount to the average closing price of the
stock for the five days prior to the purchase date or approximately $1.56
per share.
On March 31, 2003, we drew down an additional $5 million from our equity
financing commitment with Berg & Berg and issued to Berg & Berg 2,973,589
shares of our restricted common stock in a private placement transaction
exempt from registration pursuant to Section 4(2) of the Securities Act.
Berg & Berg purchased these shares at a 15% discount to the average closing
price of the stock for the five days prior to the purchase date or
approximately $1.68 per share.
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.
On December 22, 2003, the Company drew down $5 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 1,525,506 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 $3.28 per share.
On March 5, 2004, we drew down $3 million from a commitment offered by Berg
& Berg. The proceeds were used to fund corporate operating needs and
working capital. Under the terms of the commitment, we issued Berg & Berg
594,766 shares at the then-current market value of $5.04 per share,
determined by the average of the five prior days closing bid prices.
On April 19, 2004, the Company drew down $3 million from its equity
commitment with Mr. Carl Berg. Under the terms of the equity commitment,
the Company issued West Coast Venture Capital, Inc., an affiliate of Mr.
Berg, 710,900 shares of its restricted common stock at the average closing
bid price of the stock for the five days prior to the purchase date.
On May 24, 2004, the Company drew down $3 million from its equity
commitment with Mr. Carl Berg. Under the terms of the equity commitment,
the Company issued West Coast Venture Capital, Inc., an affiliate of Mr.
Berg, 829,187 shares of its restricted common stock at the average closing
bid price of the stock for the five days prior to the purchase date.
14
On June 28, 2004, the Company drew down $3 million from its equity
commitment with Mr. Carl Berg. Under the terms of the equity commitment,
the Company issued West Coast Venture Capital, Inc., an affiliate of Mr.
Berg, 910,746 shares of its restricted common stock at the average closing
bid price of the stock for the five days prior to the purchase date.
On July 27, 2004, the Company drew down $2 million from its equity
commitment with Mr. Carl Berg. Under the terms of the equity commitment,
the Company issued West Coast Venture Capital, Inc., an affiliate of Mr.
Berg, 728,332 shares of its restricted common stock at the average closing
bid price of the stock for the five days prior to the purchase date.
On September 1, 2004, the Company drew down $3 million from its equity line
of credit with Mr. Carl Berg. Under the terms of the equity commitment, the
Company issued West Coast Venture Capital, Inc., an affiliate of Mr. Berg,
1,050,420 shares of its restricted common stock at the average closing bid
price of the stock for the five days prior to the purchase date.
On September 30, 2004, the Company drew down $2 million from its equity
line of credit with Mr. Carl Berg. Under the terms of the equity
commitment, the Company issued West Coast Venture Capital, Inc., an
affiliate of Mr. Berg, 623,052 shares of its restricted common stock at the
average closing bid price of the stock for the five days prior to the
purchase date.
On November 3, 2004, the Company drew down $3 million from its equity line
of credit with Mr. Carl Berg. Under the terms of the equity commitment, the
Company issued West Coast Venture Capital, Inc., an affiliate of Mr. Berg,
911,854 shares of its restricted common stock at the average closing bid
price of the stock for the five days prior to the purchase date.
On November 30, 2004, the Company entered into a securities purchase
agreement and subsequently raised $7.5 million (net proceeds of $7.0
million) through the private placement of common stock. The Company sold
2,475,248 shares of its common stock under the agreement pursuant to a
registration statement filed with the Securities and Exchange Commission on
August 20, 2001.
On November 30, 2004, the Company entered into an amendment and exchange
agreement to exchange all of the outstanding 861 shares of the Company's
Series C Convertible Preferred Stock, representing $8.6 million of
principal. The Series C Convertible Preferred Stock was exchanged for 431
shares of Series C-1 Convertible Preferred Stock, with a stated value of
$4.3 million, and 430 shares of Series C-2 Convertible Preferred Stock,
with a stated value of $4.3 million. Under the terms of the Company's new
Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred
Stock, the preferred stock is convertible into common stock at $4.00 per
share, carry a 2% annual dividend rate, payable quarterly in cash or shares
of common stock, and mature on December 15, 2005. The new series of
preferred stock are identical in all respects except that the holder of the
Series C-2 Convertible Preferred Stock will have the right to require the
Company to redeem the Series C-2 Convertible Preferred Stock at any time
during the 30 days following June 15, 2005 and September 15, 2005. 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 February 14, 2005, the Company drew down $3 million from its equity line
of credit with Mr. Carl Berg. Under the terms of the equity commitment, the
Company issued West Coast Venture Capital, Inc., an affiliate of Mr. Berg,
981,033 shares of its restricted common stock at the average closing bid
price of the stock for the five days prior to the purchase date.
On March 15, 2005, the Company drew down $3 million from its equity line of
credit with Mr. Carl Berg. Under the terms of the equity commitment, the
Company issued West Coast Venture Capital, Inc., an affiliate of Mr. Berg,
1,055,594 shares of its restricted common stock at the average closing bid
price of the stock for the five days prior to the purchase date.
15
On April 27, 2005, the Company drew down $3 million from its equity line of
credit with Mr. Carl Berg. Under the terms of the equity commitment, the
Company issued West Coast Venture Capital, Inc., an affiliate of Mr. Berg,
1,251,042 shares of its restricted common stock at the average closing bid
price of the stock for the five days prior to the purchase date.
On May 26, 2005, the Company drew down $2 million from its equity line of
credit with Mr. Carl Berg. Under the terms of the equity commitment, the
Company issued West Coast Venture Capital, Inc., an affiliate of Mr. Berg,
645,577 shares of its restricted common stock at the average closing bid
price of the stock for the five days prior to the purchase date.
16
ITEM 6. SELECTED FINANCIAL DATA
This section presents selected historical financial data of Valence
Technology, Inc. You should read carefully the consolidated financial statements
included in this report, including the notes to the consolidated financial
statements. We derived the statement of operations data for the years ended
March 31, 2003, 2004 and 2005 and balance sheet data as of March 31, 2004 and
2005 from the audited consolidated financial statements in this report. We
derived the statement of operations data for the years ended March 31, 2001 and
2002 and the balance sheet data as of March 31, 2001, 2002, and 2003 from
audited financial statements that are not included in this report.
Fiscal Year Ended March 31,
2001 2002 2003 2004 2005
------------- -------------- -------------- -------------- -------------
(in thousands, except per share data)
Statement of Operations Data:
Revenue:
License and royalty revenue $ 1,500 $ 3,203 $ 125 $ 963 $ 391
Battery and system sales 7,191 1,671 2,432 8,483 10,274
------------- -------------- -------------- -------------- -------------
Total revenues 8,691 4,874 2,557 9,446 10,665
Cost of sales 18,175 8,649 10,996 15,923 16,341
Gross profit (loss) (9,484) (3,775) (8,439) (6,477) 5,676
Research and product development 8,516 9,681 9,293 8,638 7,682
Marketing 1,080 1,957 3,210 4,880 4,292
General and administrative 11,676 11,971 10,140 11,416 12,933
Depreciation and amortization 11,309 7,927 2,790 2,109 884
(Gain)/loss on disposal of assets 15 147 (20) (21) (5,257)
Restructuring charge - - - 926 -
Contract settlement charge - - - 3,046 1,456
Asset impairment charge - 31,884 258 13,660 87
Factory startup costs - - - - -
------------- -------------- -------------- -------------- -------------
Total operating expenses 32,596 63,567 25,671 44,654 22,077
------------- -------------- -------------- -------------- -------------
Operating loss (42,080) (67,342) (34,110) (51,131) (27,753)
Minority interest - - - 69 -
Cost of warrants - - - (181) -
Interest and other income 1,256 2,049 381 345 585
Interest expense (2,332) (4,327) (4,172) (4,059) (4,262)
Equity in loss of joint venture (345) - - - -
------------- -------------- -------------- -------------- -------------
Net loss (43,501) (69,620) (37,901) (54,957) (31,430)
------------- -------------- -------------- -------------- -------------
Dividends on preferred stock - - - 162 171
Beneficial conversion feature and
accretion to redemption value on
preferred stock 591 - - 940 578
------------- -------------- -------------- -------------- -------------
Net loss available to common
stockholders $ (44,092) $ (69,620) $ (37,901) $ (56,059) $ (32,179)
============= ============== ============== ============== =============
Net loss per share available to
common stockholders $ (1.14) $ (1.53) $ (0.65) $ (0.77) $ (0.40)
============= ============== ============== ============== =============
Shares used in computing net loss
per share available to common
stockholders, basic and diluted 38,840 45,504 58,423 73,104 81,108
============= ============== ============== ============== =============
17
March 31,
-----------------------------------------------------------------------------
2001 2002 2003 2004 2005
------------- ------------- ------------- ------------- -------------
Balance sheet data: (in thousands)
Cash and cash equivalents $ 3,755 $ 623 $ 6,616 $ 2,692 $ 2,500
Working capital (deficit) 5,684 (2,696) 4,023 (4,847) (1,651)
Total assets 86,884 30,531 36,154 21,056 10,231
Long-term debt, principal 20,651 34,639 38,865 39,407 34,656
Accumulated deficit (267,083) (336,703) (374,604) (429,724) (461,328)
Total stockholders' equity (deficit) 48,214 (15,863) (17,518) (56,794) (54,642)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS REPORT CONTAINS STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 21E OF THE EXCHANGE ACT AND SECTION 27A OF THE
SECURITIES ACT. THE WORDS "EXPECT," "ESTIMATE," "ANTICIPATE," "PREDICT,"
"BELIEVE" AND SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS APPEAR IN A NUMBER OF
PLACES IN THIS FILING AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF VALENCE TECHNOLOGY, INC. (THE "COMPANY," "VALENCE,"
"WE," OR "US"), OUR DIRECTORS OR OFFICERS WITH RESPECT TO, AMONG OTHER THINGS
(A) TRENDS AFFECTING OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS, (B) OUR
PRODUCT DEVELOPMENT STRATEGIES, (C) TRENDS AFFECTING OUR MANUFACTURING
CAPABILITIES, (D) TRENDS AFFECTING THE COMMERCIAL ACCEPTABILITY AND SALES OF OUR
PRODUCTS AND,(E) 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.
OVERVIEW
We have commercialized the first phosphate-based lithium-ion technology and
have brought to market our initial products utilizing this technology. Our
mission is to drive the wide adoption of high-performance, safe, low cost energy
storage systems by drawing on the numerous benefits of our latest battery
technology, Saphion(R), the experience of our management team and the
significant market opportunity available to us. The introduction of lithium-ion
technology to the market was the result of consumer demand for high-energy,
small battery solutions to power portable electronic devices. The battery
industry, consequently, focused on high-energy solutions at the expense of
safety. Additionally, due to safety concerns, lithium-ion technology has been
limited in adoption to small format applications, such as notebook computers,
cell phones, and personal digital assistant devices. Our Saphion(R) technology,
a phosphate based cathode material, addresses the need for a safe lithium-ion
solution, especially in large-format applications.
Our business plan and strategy focus on the generation of revenue from
product sales, while minimizing costs through a manufacturing plan that utilizes
partnerships with contract manufacturers and internal manufacturing efforts
through our newly-formed Wholly Foreign Owned Enterprises (WFOE's) in China.
These WFOE's initiated operations in late fiscal 2005. We plan to drive the
adoption of our Saphion(R) technology by offering existing and new solutions
that differentiate our own products and 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(R) technology through the licensing of our intellectual
property related to our battery chemistries and manufacturing processes.
To date, we have achieved the following successes in implementing our
business plan:
o Proven the feasibility of our technology;
18
o Launched new Saphion(R) technology based products, including our
N-Charge(TM) Power System family and our K-Charge(TM) Power System, and
introduced our U-Charge(TM) Power System family of products, which is
intended to be a direct replacement for existing lead acid battery
solutions in the market today and serve emerging motive applications;
o Established relationships with top tier customers across many of the target
markets for our products, while continuing to build our brand awareness in
multiple channels;
o Closed and sold our high-cost manufacturing facility in Northern Ireland
and established key manufacturing partnerships in Asia to facilitate low
cost, quality production;
o Signed an agreement granting Tyco Electronics Power Systems, Inc. the
exclusive right to resell our K-Charge(TM) Power System to its
telecommunications and utility customers for a period of three years. The
K-Charge(TM) Power System will be privately labeled and marketed by Tyco
Electronics under its ELiTE RK brand. The agreement is conditioned on the
product meeting performance criteria and on Tyco Electronics achieving
specific quarterly volume requirements. Since execution of this agreement,
our K-Charge(TM) product achieved NEBS level three certification which
resulted in the first order from Tyco Electronics for field trials. Tyco
Electronics will provide sales, marketing, technical assistance and
customer support. Tyco has initiated field trials of the K-Charge(TM) Power
System with three separate telecommunications companies;
o Signed an agreement granting GF Health Products, Inc. (Graham-Field), a
manufacturer and distributor of healthcare products, the exclusive right to
resell our U-Charge(TM) Power System in the power wheelchair and medical
scooter market in the United States and its territories for three years.
Additionally, under the agreement Graham-Field will provide sales and
marketing, technical assistance and customer support functions. Product
development is ongoing with Graham-Field and a product launch is expected
during fiscal 2006;
o Announced a joint technology development program with Segway LLC to develop
long-range battery packs using our Saphion(R) technology for Segway's human
transporter product. Production of the Segway battery packs began in March,
2005 and they are currently available through Segway's distribution
channel;
o Successfully launched our second generation N-Charge(TM) Power System;
o Announced an order by UQM Technologies, Inc. for our U-Charge(TM) Power
System for U.S. Air Force electric truck applications. Fulfillment of this
order is expected during the summer of 2005; and
o Established two WFOE's in China to serve as our powder production and
assembly facilities.
o Launched a phosphate-based Lithium-ion power cell. Batteries designed with
power cells can be discharged and charged more quickly than batteries
designed with energy cells. This makes them ideal for applications that
require powerful bursts rather than slow discharges of energy, such as
portable appliances and future generations of hybrid and electric vehicles.
Our new Saphion(R) power cell offers significant cycling, weight and
longevity benefits over Nickel-Metal-Hydride (NiMH) and Nickel Cadmium
(NiCad) battery technologies.
In fiscal 2005 we were able to achieve several important goals in support
of our business strategy. Total revenue grew by 13% as compared to the prior
year to $10.7 million with battery and system sales growing over 20%. We
achieved improvement of our negative gross margin and expanded our development
and channel launch of Saphion(R)-based products. We continued our efforts to
transition our manufacturing and other operations to China through the
establishment and commencement of initial operations of two wholly-owned
subsidiaries in Suzhou, China.
Valence's business headquarters is located in Austin, Texas. Our materials
research and development centers are in Henderson, Nevada and Oxford, England.
Our European sales and OEM manufacturing support center is in
19
Mallusk, Northern Ireland. Our manufacturing and product development centers are
in Suzhou and Shanghai, China.
BASIS OF PRESENTATION, CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in conformity with generally
accepted accounting principles in the United States. 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, impairment of long-lived assets, and exit costs.
Our accounting policies are described in the Notes to Consolidated Financial
Statements, Note 3, Summary of Significant Accounting Policies. The following
further describes the methods and assumptions we use in our critical accounting
policies and estimates:
REVENUE RECOGNITION: We generate revenues from sales of products including
batteries and battery systems, and from licensing fees and royalties per
technology license agreements. Product sales are recognized 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, primarily product shipments to
resellers that are subject to right of return, are recorded as deferred revenue
and reflected as a liability on our balance sheet. For reseller shipments where
revenue recognition is deferred, we record revenue based upon the
reseller-supplied reporting of sales to their end customers or their inventory
reporting. For direct customers, we estimate a return rate percentage based upon
our historical experience. We review this estimate on a quarterly basis. From
time to time we provide sales incentives in the form of rebates or other price
adjustments; these are recorded as reductions to revenue as incurred. 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 licensee revenue reporting and when
collectibility is reasonably assured.
IMPAIRMENT OF LONG-LIVED ASSETS: We perform a review of long-lived tangible and
intangible assets for impairment whenever events or changes in circumstances
indicate that 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 that 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.
The estimated cash flows used in our impairment analyses reflect our assumptions
about average selling prices, royalties, sales volumes, product costs, operating
costs (including costs associated with our manufacturing transition to China),
disposal costs, and market conditions. These assumptions are sometimes
subjective and may require us to make estimates of matters that are uncertain.
Additionally, we use probability-weighted scenarios to incorporate the impact of
alternative outcomes, where applicable. See Notes to Consolidated Financial
Statements, Note 4, Impairment Charge, regarding impairment of tangible and
intangible assets.
EXIT COSTS: We incurred exit costs associated with the closure of our Northern
Ireland manufacturing facility. In accordance with SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," we recognize liabilities for
costs associated with exit or disposal activities at fair value in the period
during which the liability is incurred. We estimate the liabilities related to
exit or disposal activities including lease termination costs, compensation of
staff, inventory obsolescence, costs to prepare assets for disposal or sale, and
other one-time expenses based upon our analysis of individual transaction
circumstances, agreements and commitments. Some agreements may be revised, or
actual results may be different from costs reasonably estimated at the
incurrence of the liability. In these cases, additional costs or reduced costs
are recorded in the period incurred, and differences are disclosed in the
footnotes to consolidated financial statements. Costs associated with exit or
disposal activities are included in restructuring charges.
CONTRACT SETTLEMENT CHARGE. Since 1994, pursuant to a letter of offer, we
received employment and capital grants from the Ireland Development Board, now
known as Invest Northern Ireland, or INI, for our former manufacturing facility
in Mallusk, Northern Ireland, totaling (pound)9.0 million. Under certain
circumstances, INI had the right to reclaim a portion of these grants and had a
security interest in the facility's land, building, and equipment. On December
21, 2004, we entered into a settlement agreement with INI pursuant to which INI
agreed to release us
20
of all outstanding claims and other obligations owing to INI in connection with
grants previously provided. Under the terms of the settlement agreement we
agreed to pay INI (pound)3 million consisting of a (pound)2 million payment in
cash and a (pound)1 million payment in common stock. On December 6, 2004, we
funded an initial payment of (pound)150,000 and used the net proceeds from the
sale of our Northern Ireland manufacturing facility to fund an additional
(pound)1.54 million. During Q4 of fiscal 2005, we funded the remaining
(pound)307,000 ($589,000) related to the cash portion of the settlement from the
net proceeds from equipment sales. In addition, in order to fund the (pound)1
million common stock payment we issued 539,416 shares of common stock,
equivalent to $3.60 per share. In connection with this final settlement we
recorded an additional charge of $957,000 during the third quarter of fiscal
2005. See Notes to Consolidated Financial Statements, Note 12, Settlement
Agreement.
JOINT VENTURE. On July 9, 2003, Baoding Fengfan - Valence Battery Company, a
joint venture between us and Fengfan Group, Ltd., or Fengfan, was formed as a
corporation in China. The purpose of the joint venture was to provide low-cost
manufacturing of our Saphion(R) Lithium-ion batteries. Under the terms of the
joint venture agreement, we were to contribute 51% of the joint venture's
registered capital, consisting of capital equipment, a nonexclusive license to
its technology, and engineering expertise. Fengfan was to contribute 49% of the
joint venture's registered capital, consisting of the cash required to fund the
joint venture for the first two years, and also to acquire the land and facility
needed for manufacturing operations. As a result of our 51% ownership of the
joint venture, right to name the majority of the joint venture's board of
directors and right to name the Chief Executive Officer as of March 31, 2004,
our consolidated financial statements included the consolidation of the balance
sheet, results of operations and cash flows of the joint venture. However,
during the first quarter of fiscal 2005, a dispute arose between us and our
joint venture partner, resulting in a loss of control over the joint venture and
our initiation of an action to enforce our rights under the joint venture
agreement and, commencing with that quarter we accounted for our investment in
the joint venture under the cost method with no further recognition of assets,
liabilities, operating results, and cash flows.
On November 17, 2004, we entered into a settlement agreement, or the JV
Settlement Agreement, with Baoding Fengfan Group Limited Liability Company,
Ltd., or Fengfan, and Baoding Fengfan - Valence Battery Company, Ltd., or the JV
Company. Under the terms of the JV Settlement Agreement, the parties agreed to
liquidate and dissolve the JV Company, terminate the JV Company contracts and
fully settle any and all remaining obligations among the parties. We agreed to
make compensation payments to the JV Company and to Fengfan totaling $224,417
and to make equipment purchases from the JV Company totaling $275,583. To date,
we have made compensation payments of $157,092 and completed all of the
equipment purchases. The $67,325 final compensation payment will be made upon
final dissolution of the JV legal entity by Fengfan. We recorded a contract
settlement charge of $224,217 in the third quarter of fiscal 2005 for the
compensation payments and capitalized equipment purchases as the payments were
made.
21
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2005 (FISCAL 2005), MARCH 31, 2004 (FISCAL 2004)
AND MARCH 31, 2003 (FISCAL 2003)
The following table summarizes the results of our operations for the past three
fiscal years:
(Dollars in thousands) March 31, 2005 % Change March 31, 2004 % Change March 31, 2003
Licensing and royalty revenue.............. $ 391 (59%) $ 963 670% $ 125
Battery and system sales................... $ 10,275 21% $ 8,483 249% $ 2,432
-----------------------------------------------------------------------------------
Total revenues............................. $ 10,665 13% $ 9,446 269% $ 2,557
-----------------------------------------------------------------------------------
Gross profit (loss)........................ $ (5,676) 10% $ (6,477) 23% $ (8,439)
% of total revenue....................... 53% -69% -330%
Restructuring, settlement, contract
settlement and impairment charges.......... $ 1,544 (91%) $ 17,632 6734% $ 258
% of total revenue....................... 14% 187% 10%
Other operating expenses................... $ 25,790 (5%) $ 27,043 6% $ 25,433
% of total revenue....................... 242% 286% 995%
Gain on disposal of assets $ 5,257 24934% $ 21 100% 20
% of total revenue 49% 0% 1%
-----------------------------------------------------------------------------------
Total operating expenses................... $ 22,077 (51%) $ 44,654 74% $ 25,671
-----------------------------------------------------------------------------------
% of total revenue....................... 207% 473% 1004%
Operating loss............................. $ (27,753) (46%) $ (51,131) 50% $ (34,110)
% of total revenue....................... -260% -541% -1334%
-----------------------------------------------------------------------------------
Net loss................................... $ (31,430) (44%) $ (56,059) 48% $ (37,901)
===================================================================================
% of total revenue....................... 295% -593% -1482%
REVENUES AND GROSS MARGIN
BATTERY AND SYSTEM SALES: Battery and system sales totaled $10.275 million for
the year ended March 31, 2005, as compared to $8.483 million for the year ended
March 31, 2004, and $2.432 for the year ended March 31, 2003. The year over year
increases in revenue during both fiscal 2005 and 2004 were primarily driven by
the establishment and growth of our retail, reseller and education channels for
our N-Charge(TM) Power System product. We achieved the largest growth in fiscal
2005 sales in education channels accounting for almost $2 million of our total
product sales. Product shipments to resellers that are subject to right of
return or monies received for exclusivity or future obligations are recorded on
the balance sheet as deferred revenue. We had $1.240 in deferred revenue on our
balance sheet at March 31, 2005 as compared to $1.593 million on March 31, 2004.
We expect sales of the N-Charge(TM) Power System to continue to grow moderately
in fiscal 2006. We launched our large format products in late 2004 with the
K-Charge system and U-Charge family during fiscal 2005. In fiscal 2006, we plan
to launch our long range battery pack for use in Segway LLC's human transporter
as well as further expansions of our U-Charge family of products. Fiscal 2005
was largely taken up by customer testing and evaluation of our K-Charge and
U-Charge products and, as a consequence, we did not record material sales of
large form at products during the fiscal year. We anticipate that many of these
customers will complete their evaluation in fiscal 2006, at which time customers
will begin to make final purchase decisions..
LICENSING AND ROYALTY REVENUE: For fiscal years 2003 through 2005, license and
royalty revenue was primarily derived from license fees and royalties payments
from Amperex Technology Limited, or ATL, including a one time license fee
payment of $500,000 in fiscal 2004 and on-going royalty payments as sales are
made by ATL using our technology. We expect to continue to pursue a licensing
strategy as our Saphion(R) technology receives greater market acceptance.
22
GROSS PROFIT (LOSS): Gross profit (loss) as a percentage of revenue, or gross
margin, was (53%) for the year ended March 31, 2005 as compared to gross margin
of (69%) for the fiscal year ended March 31, 2004 and gross margin of (330%) for
the year ended March 31, 2003. Although gross margin has improved, we maintained
a negative gross margin on our sales in all periods because of insufficient
production and sales volumes to facilitate the coverage of our indirect and
fixed manufacturing operating costs. Fiscal year 2005 margin improvements were
offset by inventory valuation adjustments related to valuation of our work in
process cell inventory and lower of cost or market tests for our early launch
and US sourced large format products. We have successfully transitioned our
battery manufacturing and N-Charge(TM) product assembly operations to contract
manufacturers in Asia. As of April 2005, we completed the transition of our
powder manufacturing to our WFOEs in Suzhou, China. We are transitioning
additional manufacturing including pack assembly to our WFOE's in Suzhou, China
in fiscal 2006. We expect cost of sales to continue to decrease during fiscal
2006 as a percentage of sales as production volumes continue to increase, as we
continue to implement our lower-cost manufacturing strategy, and as we launch
higher-margin products.
OPERATING EXPENSES:
The following table summarizes our operating expenses during each of the past
three fiscal years:
FISCAL YEAR ENDED
(Dollars in thousands) March 31, 2005 % Change March 31, 2004 % Change March 31, 2003
Operating Expenses:
Research and product development...................... $ 7,682 (11%) $ 8,638 (7%) $ 9,293
Marketing............................................. 4,292 (12%) 4,880 52% 3,210
General and administrative............................ 12,933 13% 11,415 13% 10,140
Depreciation and amortization......................... 884 (58%) 2,109 (24%) 2,790
Gain on disposal of assets............................ (5,257) 24934% (21) 5% (20)
Restructuring charge.................................. - (100%) 926 100% 0
Contract settlement charge, INI....................... 957 (69%) 3,046 100% 0
Contract settlement charge, other..................... 499 100% - - -
Asset impairment charge............................... 87 (99%) 13,660 5195% 258
------------- ----------- ----------- ---------- ------------
Total Operating Expenses.......................... $22,077 (51%) $44,653 74% $25,671
============= =========== =========== ========== ============
% of total revenue..................................... 207% 473% 1004%
We continued to focus on our operating expense management throughout fiscal
2005. Operating expenses as a percentage of revenue decreased to 207% in fiscal
2005 versus 473% in fiscal 2004 and 1004% in fiscal 2003. The decrease is the
result of our focus on expense reductions during fiscal 2005, our final
settlement with the INI, the gain on the sale of our Mallusk, Northern Ireland
facility, and reduced impairment and depreciation expenses related to our assets
as we finalized our transition plans. The decrease in operating expense as a
percent of revenue was offset by increases in general and administrative
expenses related to compliance with the Sarbanes-Oxley Act of 2002 and our
relocation of manufacturing and development operations to China as well as
settlements of other contracts. Of our operating expenses in fiscal 2005, 2004
and 2003, $2.1 million, $17.6 million and $258,000, respectively, related to the
changes in our business plan and subsequent closure of our Northern Ireland
facility and the sale of our Henderson, Nevada facility, representing 20%, 187%
and 10% of revenue in each of these fiscal years. We expect to continue to
improve our operating expenses as a percentage of sales during fiscal 2006
through the transfer of additional operations to Asia and continued revenue
growth.
RESEARCH AND PRODUCT DEVELOPMENT. Research and product development expenses
consist primarily of personnel, equipment and materials to support our efforts
to develop battery chemistry and products, as well as to improve our
manufacturing processes. Research and product development expenses totaled
$7.682 million in fiscal 2005, $8.638 million in fiscal 2004, and $9.293 million
in fiscal 2003. We achieved year over year decreases in research and development
in fiscal 2005 and fiscal 2004 of 11% and 7%, respectively. Decreases in
research and development expenses were the result of cessation of process
development work in our Northern Ireland facility and
23
reductions in research headcount, temporary staff, and consulting expenses and
material costs in our Henderson, Nevada facility. These decreases were offset by
increases in development spending to expand the Saphion(R) family of products.
We expect to continue to achieve reductions in research and product development
expenses as we improve our product development efficiency and transition
portions of our development efforts to Asia.
MARKETING. Marketing expenses consist primarily of costs related to sales and
marketing personnel, public relations and promotional materials. After expanding
our marketing expenses in fiscal 2004 to increase staffing, advertising and
promotions to support brand awareness and expansion of sales channels for our
products, we eliminated the lower performing of these programs and achieved 12%
decrease in marketing expenses in fiscal 2005 as compared to fiscal 2004 while
achieving over 20% growth in product revenue. Specifically, in fiscal 2005, we
reduced expenses related to our N-Charge Power system lead generation and media
advertising as well as reduced consulting related to the European market
development. We expect marketing expenses to grow modestly in fiscal 2006 as we
continue to expand and develop our channels, grow our worldwide sales team,
launch additional Saphion(R) products, and continue our branding efforts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other related costs for finance, human resources,
facilities, accounting, information technology, legal, and corporate related
expenses, including our China initiatives. General and administrative expenses
of $12.933 million in fiscal 2005 represented an increase of $1.518, or 13%,
over general and administrative expenses in fiscal 2004. Fiscal year 2004
general and administrative expenses of $11.415 million represented a 13%
increase over fiscal 2003 expenses. The year over year increases in general and
administrative expense in fiscal 2005 and fiscal 2004 are caused by our ongoing
relocation and establishment of manufacturing and development operations to
China, increased costs of compliance with the Sarbanes-Oxley Act of 2002, and
costs related to shutting down our Northern Ireland facility.
OTHER COSTS RELATED TO OUR MANUFACTURING TRANSITION
IMPAIRMENT CHARGE: An impairment charge of $87,000 was recorded during the
second quarter of fiscal 2005. As a result of our decision to relocate
manufacturing operations from our leased Henderson, Nevada facility to a
newly-formed subsidiary in Suzhou, China, equipment and fixtures in the Nevada
facility would not generate cash flows greater than their carrying value. Assets
with a carrying value of approximately $87,000 were written down in full to fair
value, as we estimate that there will be no future cash flows from these assets.
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 and consequently determined that the carrying value of
certain manufacturing assets at our Northern Ireland facility exceed expected
future cash flows from these assets. Additionally, we determined that the future
cash flows expected to be generated from certain technology we acquired from
Telcordia 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%.
During the fourth quarter of fiscal 2003, we recorded an impairment charge of
$258,000 on our property in Henderson, Nevada related to the planned sale of
this facility. We estimated that the future cash flows expected from the sale of
this facility were less than the asset carrying value and adjusted the assets to
their fair value accordingly.
CONTRACT SETTLEMENT CHARGES:
During fiscal 2005, we recorded contract settlement charges totaling $1.456
million:
24
(Dollars in thousands) FISCAL 2005
INI Settlement $ 957
Joint Venture 224
Supplier Contract Terminations 275
------------------
Total $ 1,456
==================
INI SETTLEMENT: Since 1994, pursuant to a letter of offer, we received
employment and capital grants from the Ireland Development Board, now known as
Invest Northern Ireland, or INI, for our former manufacturing facility located
in Mallusk, Northern Ireland, totaling (pound)9.0 million. Under certain
circumstances, INI had the right to reclaim a portion of these grants and had a
security interest in the facility's land, building, and equipment. On December
21, 2004, we and INI entered into a settlement agreement pursuant to which INI
agreed to release us of all outstanding claims and other obligations owing to
INI in connection with grants previously provided to us. Under the terms of the
settlement agreement we agreed to pay INI (pound)3 million consisting of a
(pound)2 million payment in cash and a (pound)1 million payment in common stock.
On December 6, 2004, we funded an initial payment of (pound)150,000 and used the
net proceeds from the sale of our Northern Ireland manufacturing facility to
fund an additional (pound)1.54 million. During Q4 of fiscal 2005, we funded the
remaining (pound)307,000 ($589,000) related to the cash portion of the
settlement from the net proceeds from equipment sales. In addition, in order to
fund the (pound)1 million common stock payment, we issued 539,416 shares of
common stock, equivalent to $3.60 per share. In connection with this final
settlement, we recorded an additional charge of $957,000 during the third
quarter of fiscal 2005.
JOINT VENTURE SETTLEMENT: On November 17, 2004, we entered into a settlement
agreement with Baoding Fengfan Group Limited Liability Company, Ltd., or Fengfan
and Baoding Fengfan - Valence Battery Company, Ltd., or the JV Company. Under
the terms of the JV Settlement Agreement, the parties agreed to liquidate and
dissolve the JV Company, terminate the JV Company contracts and fully settle any
and all remaining obligations among the parties. We agreed to make compensation
payments to the JV Company and to Fengfan totaling approximately $224,000 and to
make equipment purchases from the JV Company of approximately $276,000. To date,
we have made compensation payments of $157,092 and completed all of the
equipment purchases. The $67,325 final compensation payment will be made upon
final dissolution of the JV legal entity by Fengfan. We recorded a contract
settlement charge of $224,217 in the third quarter of fiscal 2005 for the
compensation payments and capitalized equipment purchases as the payments were
made.
SUPPLIER CONTRACT TERMINATIONS: During the third quarter of fiscal 2005, as a
result of our relocating our core operations to China and selection of
lower-cost suppliers, we terminated two supplier contracts related to producing
product and manufacturing capital equipment. In settlement of these contracts,
we expect to pay these suppliers termination fees which include the settlement
expenses accrued in fiscal 2005 of approximately $275,000.
RESTRUCTURING CHARGE. In the third fiscal quarter of 2004, we recorded
restructuring charges of $926,000 related to the closing of our Northern Ireland
facility. During the third quarter of fiscal 2004, we completed the transition
of our battery production from our Northern Ireland manufacturing facility to
our OEM supplier. All inventory remaining at the conclusion of manufacturing
operations was determined to be obsolete and unusable by any of our battery
manufacturing sources. Raw materials inventory obsolescence expense of
approximately $178,000 and work in process inventory obsolescence expense of
approximately $517,000 were recorded as restructuring charges during the quarter
ended December 31, 2003. Remaining payment obligations for factory equipment
operating leases that extended beyond December 31, 2003 were approximately
$231,000. These lease payment obligations provide no economic benefit to us, and
contractual lease costs of approximately $231,000 were recorded as restructuring
charges during the quarter ended December 31, 2003.
GAIN ON SALE OF ASSETS: Gain on sales of the facility and production and
development equipment from our former Mallusk, Northern Ireland facility was
$5.257 million in fiscal 2005. The majority of the gain is related to the sales
of our Northern Ireland facility completed on December 22, 2004. Additionally,
we determined that the equipment was not required in our manufacturing and
development operations in Suzhou, China, and was sold for fair value. See Notes
to Consolidated Financial Statements, Note 8, Property, Plant and Equipment.
25
DEPRECIATION AND AMORTIZATION, INTEREST EXPENSE, AND OTHER EXPENSES
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense totaled
$884,000, $2.109 million, and $2.790 million for fiscal years ended March 31,
2005, 2004, 2003, respectively. The decrease in depreciation expenses resulted
from the assets in our Northern Ireland facility being classified as held for
sale and not depreciated beginning in the third quarter of fiscal 2005, the
impact of the impairment charges to intellectual property and property, plant,
and equipment and the impact of the sale of our Henderson, Nevada facility.
INTEREST EXPENSE. Interest expense relates to mortgages on our Northern Ireland
facility as well as interest on our long-term debt to stockholder. We completed
the sale of our Northern Ireland facility and paid off the mortgages on December
22, 2004. Interest expense was $4.262 million, $4.059 million and $4.172 million
for the fiscal years 2005, 2004, 2003, respectively.
COST OF WARRANTS. In November 2003, we agreed to extend the time period in which
a warrant holder was able to exercise its warrants. The warrant exercise period
originally ended on July 27, 2003, and was extended to July 27, 2004, at which
time the warrants terminated unexercised. The non-cash expense related to the
exercise period extension of $181,000 was determined using the Black-Scholes
model, with risk free rate of 1.04%, expected life of 0.75 years, and volatility
of 69.88.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
At March 31, 2005, our principal sources of liquidity were cash and cash
equivalents of $2.5 million and $6 million remaining under the $20 million
backup equity funding commitment entered into in June 2004 with Mr. Carl Berg.
Subsequent to March 31, 2005 we have drawn down an additional $5 million of this
prior commitment. On June 13, 2005 we entered into a new $20 million funding
commitment with Mr. Berg to provide funding in the form of equity or a secured
loan on terms to be negotiated. This new commitment can be reduced by Mr. Berg
by the amount of net proceeds received in a debt or equity transaction with a
third party.
At March 31, 2005, we had $4.3 million of Series C-1 Convertible Preferred
Stock and $4.3 million of Series C-2 Convertible Preferred Stock outstanding.
The Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred
Stock are convertible into common stock at $4.00 per share and are redeemable on
December 15, 2005 (subject to an early right of redemption in the case of the
Series C-2 Convertible Preferred Stock during the 30 days following June 15,
2005 and September 15, 2005). Applicable provisions of Delaware corporate law
restrict our ability to redeem the preferred stock. If we do not redeem the
shares when required by their terms, the conversion price will be reduced to an
amount equal to 95% of the lowest closing bid price of our common stock during
the three days ending on and including the conversion date.
Our current forecast projects that these sources of liquidity will be
sufficient for at least the twelve months following March 31, 2005. This
forecast assumes product sales during fiscal 2006 from the N-Charge(TM) Power
System and the Segway pack, which are subject to seasonal fluctuations, of
between $2.5 - $5.0 million per quarter, and expect additional revenues from the
sale of the U-Charge(TM) Power System into large-format applications and direct
cell sale activities. We also anticipate further cash benefits from continued
reductions in operating expenses and manufacturing costs, offset by small
increases to capital expenditures associated with continuing efforts in China.
Our cash requirements may vary materially from those now planned because of
changes in our operations, including the failure to achieve expected revenues,
greater than expected expenses, changes in OEM relationships, market conditions,
the failure to timely realize our product development goals, and other adverse
developments. These events could have a negative impact on our available
liquidity sources during fiscal 2006.
The following table summarizes our statement of cash flows for the fiscal
years ended March 31, 2005, 2004, and 2003:
26
(Dollars in thousands) March 31, 2005 March 31, 2004 March 31, 2003
Net cash flows provided by (used in):
Operating activities.................................. $ (33,125) $ (29,131) $ (32,484)
Investing activities.................................. 7,021 (3,305) (706)
Financing activities.................................. 25,625 28,357 38,999
Effect of foreign exchange rates...................... 287 155 184
----------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents $ (192) $ (3,924) $ 5,993
================= =============== ================
Our use of cash from operations during fiscal 2005, fiscal 2004, and fiscal
2003 was $33.125 million, $27.063, and 32.484 million, respectively. The cash
used for operating activities during all periods was primarily for operating
losses and working capital. Cash used for operating loss in fiscal 2005 was
higher than in fiscal 2004 primarily from the impact of contract settlement
agreements and increases in some of the operating expenses as described above in
the section titled "Operating Expenses" offset by reductions in gross profit
loss.
In fiscal 2005, we received net cash from investing activities of $7.021
million. The cash provided from investing activities during fiscal 2005 related
primarily to the sale of our Northern Ireland facility as described in the Notes
to Consolidated Financial Statements, Note 8, Property, Plant, and Equipment,
and offset by purchases of property, plant and equipment, primarily for
enterprise software and manufacturing fixtures and our investment in our China
subsidiaries. During fiscal 2005, the effect of deconsolidation of our China
joint venture, as described in Notes to Consolidated Financial Statements, Note
19, Joint Venture, was to reduce cash by $913,000, as the assets, liabilities,
and operating results of the joint venture are no longer being consolidated into
our financial statements. During fiscal 2004, purchases of property, plant and
equipment in our joint venture were offset by our sale of the Henderson, Nevada
facility resulting in $3.305 million using in investing activities.
We obtained net cash from financing activities of $25.625 million and
$28.357 million during the fiscal 2005 and 2004, respectively. The 2005
financing included $25.0 million from our Berg & Berg equity lines, net proceeds
from the sale common stock to a third party institutional investor, and less
cash used for the payoff of long-term debt related to the sale of our Northern
Ireland facility.
As a result of the above, we had a net decrease in cash and cash
equivalents of $192,000 during fiscal 2005, a net decrease of $3.924 during
fiscal 2004, and a net increase of $5.993 million during fiscal 2003.
RELATED PARTY TRANSACTIONS
In June of 2005, we entered into a $20 million funding commitment with Mr.
Carl Berg. The commitment is to provide funding in the form of equity or a
secured loan on terms to be negotiated. This new commitment can be reduced by
Mr. Berg by the amount of net proceeds received in a debt or equity transaction
with a third party.
In June of 2004, we entered into a $20 million backup equity funding
commitment with Mr. Carl Berg. The commitment allows us to request Mr. Berg or
an affiliate company to purchase shares of common stock from time to time at the
average closing bid price of the stock for the five days prior to the purchase
date. This commitment can be reduced by Mr. Berg by the amount of net proceeds
received by us from the sale of building or equipment from our Mallusk, Northern
Ireland facility or the amount of net proceeds in a debt or equity transaction,
and may be increased if necessary under certain circumstances. Since June 2004,
we have received net proceeds from these transactions in an aggregate amount
equal to $16.6 million. As of the date hereof, Mr. Berg has not requested that
his commitment be reduced by this amount. As of March 31, 2005, there was $6
million available on this commitment and we have subsequently drawn down $5
million of this remaining committed amount.
On June 10, 2003, Berg & Berg, an affiliate of Carl Berg, a director and
principal shareholder of ours, committed to provide us $10 million in fiscal
2004, increasing its total available remaining financing commitments
27
to $14 million ($10 million under this new financing commitment and $4 million
under a then-existing commitment). Berg & Berg agreed to fund the $14 million
commitments by purchasing shares of common stock from time to time as requested
by us at the then-current market price. At March 31, 2005, we had fully utilized
this financing commitment.
In March 2002, we obtained a $30 million equity line of credit with Berg &
Berg. At December 31, 2003, the equity line was fully drawn. This commitment was
approved by stockholders at our 2002 annual meeting held on August 27, 2002. In
exchange for the amounts funded pursuant to this agreement, we have issued 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. We
agreed to register any shares we issued to Berg & Berg under this commitment.
On January 1, 1998, we granted options to Mr. Dawson, the Company's then
Chairman of the Board, Chief Executive Officer and President, an incentive stock
option to purchase 39,506 shares, which was granted pursuant to our 1990 Plan
(the "1990 Plan"). Also, an option to purchase 660,494 shares was granted
pursuant to our 1990 Plan and an option to purchase 300,000 shares was granted
outside of any of our equity plans, 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. Our
Compensation Committee approved the early exercise of the Nonstatutory Options
on March 5, 1998. The options permitted exercise by cash, shares, full recourse
notes or non-recourse notes secured by independent collateral. The Nonstatutory
Options were exercised on March 5, 1998 with non-recourse promissory notes in
the amounts of $3,343,750 ("Dawson Note One") and $1,518,750 ("Dawson Note Two")
(collectively, the "Dawson Notes") secured by the shares acquired upon exercise
plus 842,650 shares previously held by Mr. Dawson. As of March 31, 2004, amounts
of $3,548,487 and $1,612,683 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 has been paid through March 4, 2005.
CAPITAL COMMITMENTS AND DEBT
At March 31, 2005, we had commitments for capital expenditures for the next
12 months of approximately $100,000 relating to the implementation of our
enterprise software system. We may require additional capital expenditures in
order to meet greater demand levels for our products than are currently
anticipated and/or to support our transition of operations to China.
Our cash obligations for short-term and long-term debt, net of unaccreted
discount consisted of:
(Dollars in thousands) March 31, 2005
--------------------
1998 long-term debt to Berg & Berg 14,950
2001 long-term debt to Berg & Berg 20,000
Interest on long-term debt 12,536
--------------------
Total long-term debt $ 47,486
====================
Repayment obligations of short-term and long-term debt principal are:
2005 2006 2007 2008 THEREAFTER TOTAL
------------- ------------ ------------ ------------- ------------ ------------
(dollars in thousands)
Principal repayment 34,950 34,950
28
If not converted to common stock prior to maturity, the redemption
obligation for the Series C-1 and Series C-2 Preferred Stock is $8.6 million on
December 15, 2005. If the shares are not redeemed in accordance with their
terms, the holder of the preferred stock shall have the option to require that
we convert all or part of the redeemed shares at a share price of 95% of the
lowest closing bid price of our common stock during the three days ending on and
including the conversion date.
If cash flow from operations is not adequate to meet debt obligations,
additional debt or equity financing will be required. There can be no assurance
that we could obtain the additional financing.
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 January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities, an interpretation of ARB NO. 51, which addresses consolidation by
business enterprises of variable interest entities ("VIEs") either: (1) that do
not have sufficient equity investment at risk to permit the entity to finance
its activities without additional subordinated financial support, or (2) in
which the equity investors lack an essential characteristic of a controlling
financial interest. In December 2003, the FASB completed deliberations of
proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date of the VIE.
VIEs created after January 31, 2003, but prior to January 1, 2004, may be
accounted for either based on the original interpretation or the Revised
Interpretations. However, the Revised Interpretations must be applied no later
than the first quarter of fiscal year 2004. VIEs created after January 1, 2004
must be accounted for under the Revised Interpretations. The adoption of these
deferred provisions in 2004 had no effect on the Company's financial position,
results of operations or cash flows.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. The standard requires that abnormal amounts
of idle capacity and spoilage costs should be excluded from the cost of
inventory and expensed when incurred. The provision is effective for fiscal
periods beginning after June 15, 2005. The Company does not expect the adoption
of this standard to have a material effect on its financial position, results of
operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions.
SFAS No. 153 requires exchanges of productive assets to be accounted for at fair
value, rather than at carryover basis, unless (1) neither the asset received nor
the asset surrendered has a fair value that is determinable within reasonable
limits or (2) the transactions lack commercial substance. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company does not expect the adoption of this standard
to have a material effect on its financial position, results of operations or
cash flows.
In December 2004, the FASB released its final revised standard, SFAS No.
123R, Share-Based Payment. SFAS No. 123R requires that an entity measure the
cost of equity based service awards using the grant-date fair value of the
award. That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award or the vesting period. No
compensation cost is recognized for equity instruments for which employees do
not render the requisite service. An entity will initially measure the cost of
liability based service awards using its current fair value; the fair value of
that award will be re-measured subsequently at each reporting date through the
settlement date. Changes in fair value during the requisite service period will
be recognized as compensation cost over that period. Adoption of SFAS No. 123R
is required for fiscal periods beginning after June 15, 2005. The Company is
evaluating SFAS 123R and believes that it will likely have a material effect on
its financial position and results of operations.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
29
The following table sets forth, as of March 31, 2005, our scheduled principal,
interest and other contractual annual cash obligations due for each of the
periods indicated below (in thousands):
PAYMENT DUE BY PERIOD
----------------------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL ONE YEAR 1 - 3 YEARS 3 - 5 YEARS 5 YEARS
- ------------------------------- ------------ ------------ ------------ ------------ ------------
Long-term debt obligations $ 47,486 $ - $ 47,486 $ - $ -
Operating lease obligations 2,009 886 1,123 - -
Purchase obligations 3,600 3,600 - - -
------------ ------------ ------------ ------------ ------------
Total $ 53,095 $ 4,486 $ 48,609 $ - $ -
============ ============ ============ ============ ============
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. The risks and
uncertainties described below are not the only risks and uncertainties we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. If any of the
following risks actually occur, our business, financial condition, and results
of operations could suffer. In that event, the trading price of our common stock
could decline, and you may lose all or part of your investment in our common
stock. The risks discussed below also include forward-looking statements and our
actual results may differ substantially from those discussed in these
forward-looking statements.
RISKS RELATED TO OUR BUSINESS
WE MAY BE REQUIRED TO RAISE ADDITIONAL DEBT OR EQUITY FINANCING TO EXECUTE OUR
BUSINESS PLAN.
At March 31, 2005, our principal sources of liquidity were cash and cash
equivalents of $2.5 million and $6 million remaining under the $20 million
backup equity funding commitment entered into in June 2004 with Mr. Carl Berg.
Subsequent to March 31, 2005 we have drawn down an additional $5 million of this
prior commitment. On June 13, 2005 we entered into a new $20 million funding
commitment with Mr. Berg to provide funding in the form of equity or a secured
loan on terms to be negotiated. This new commitment can be reduced by Mr. Berg
by the amount of net proceeds received in a debt or equity transaction with a
third party.
At March 31, 2005, we had $4.3 million of Series C-1 Convertible Preferred
Stock and $4.3 million of Series C-2 Convertible Preferred Stock outstanding.
The Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred
Stock are convertible into common stock at $4.00 per share and are redeemable on
December 15, 2005 (subject to an early right of redemption in the case of the
Series C-2 Convertible Preferred Stock during the 30 days following June 15,
2005 and September 15, 2005).
30
Applicable provisions of Delaware corporate law restrict our ability to redeem
the preferred stock. If we do not redeem the shares when required by their
terms, the conversion price will be reduced to an amount equal to 95% of the
lowest closing bid price of our common stock during the three days ending on and
including the conversion date.
Our current forecast projects that these sources of liquidity will be
sufficient for at least the twelve months following March 31, 2005. This
forecast assumes product sales during fiscal 2006 from the N-Charge(TM) Power
System and the Segway pack, which are subject to seasonal fluctuations, of
between $2.5 - $5.0 million per quarter, and expect additional revenues from the
sale of the U-Charge(TM) Power System into large-format applications and direct
cell sale activities. We also anticipate further cash benefits from continued
reductions in operating expenses and manufacturing costs, offset by small
increases to capital expenditures associated with continuing efforts in China.
Our cash requirements may vary materially from those now planned because of
changes in our operations, including the failure to achieve expected revenues,
greater than expected expenses, changes in OEM relationships, market conditions,
the failure to timely realize our product development goals, and other adverse
developments. These events could have a negative impact on our available
liquidity sources during the next 12 months..
OUR LIMITED FINANCIAL RESOURCES COULD MATERIALLY AFFECT OUR BUSINESS AND
OUR ABILITY TO COMMERCIALLY EXPLOIT OUR TECHNOLOGY. LIMITED FINANCIAL RESOURCES
CAN ADVERSELY AFFECT OUR ABILITY TO RESPOND TO UNANTICIPATED DEVELOPMENTS AND
PLACE US AT A COMPETITIVE DISADVANTAGE TO OUR COMPETITORS.
Currently, we do not have sufficient sales and gross profit to generate the cash
flows required to meet our operating and capital needs. Nor do we have committed
financing to provide for our operations for more than the next twelve months. As
a consequence, one of our primary objectives has been to reduce expenses and
overhead and thus limiting the resources available to the development and
commercialization of our technology. Our limited financial resources could
materially affect our ability, and the pace at which, we are able to
commercially exploit our Saphion(R) technology. For example, it could:
o limit the research and development resources we are able to commit to
the further development of our technology and the development of
products that can be commercially exploited in our marketplace;
o limit the sales and marketing resources that we are able to commit to
the marketing of our technology;
o have an adverse impact on our ability to attract top-tier companies as
our technology and marketing partners;
o have an adverse impact on our ability to employ and retain qualified
employees with the skills and expertise necessary to implement our
business plan;
o make us more vulnerable to failure to achieve our forecasted results,
economic downturns, adverse industry conditions or catastrophic
external events;
o limit our ability to withstand competitive pressures and reduce our
flexibility in planning for, or responding to, changing business and
economic conditions; and
o place us at a competitive disadvantage to our competitors that have
greater financial resources than we have.
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 our inception in 1989 and had
an accumulated deficit of $461.3 million as of March 31, 2005. We had negative
working capital of $1.6 million as of March 31, 2005, and have sustained
recurring losses related primarily to the research and development and marketing
of our products combined with the lack of sufficient sales to provide for these
needs. We may continue to incur operating losses and
31
negative cash flows during fiscal 2006. We may never achieve or sustain
sufficient revenues or profitability in the future.
IF WE CONTINUE TO EXPERIENCE SIGNIFICANT LOSSES WE MAY BE UNABLE TO MAINTAIN
SUFFICIENT LIQUIDITY TO PROVIDE FOR OUR OPERATING NEEDS.
We reported a net loss of $31.4 million for the fiscal year ended March 31, 2005
and a net loss of $55.0 million for the fiscal year ended March 31, 2004. If we
cannot achieve a competitive cost structure, achieve profitability and access
the capital markets on acceptable terms, we will be unable to fund our
obligations and sustain our operations.
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 depend on our ability to arrange for additional equity or
debt financing since it is likely that cash flow from sales will lag behind
these increased working capital requirements.
OUR INDEBTEDNESS AND OTHER OBLIGATIONS ARE SUBSTANTIAL AND COULD MATERIALLY
AFFECT OUR BUSINESS AND OUR ABILITY TO INCUR ADDITIONAL DEBT TO FUND FUTURE
NEEDS.
We have now and will continue to have a significant amount of indebtedness and
other obligations. As of March 31, 2005, we had approximately $47.2 million of
total consolidated indebtedness. Our substantial indebtedness and other
obligations could negatively impact our operations in the future. For example,
it could:
o limit our ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes;
o require us to dedicate a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the funds available to us for other
purposes;
o make us more vulnerable to failure to achieve our forecasted results,
economic downturns, adverse industry conditions or catastrophic
external events, limit our ability to withstand competitive pressures
and reduce our flexibility in planning for, or responding to, changing
business and economic conditions; and
o place us at a competitive disadvantage to our competitors that have
relatively less debt than we have.
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 this were to occur, we would not have the
financial resources to repay our debt and these lenders could proceed against
our assets.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF OUR SAPHION(R) 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 depends 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(R) technology based batteries, our
business will be
32
adversely affected. It is too early to determine if Saphion(R) 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.
IF OUR PRODUCTS FAIL TO PERFORM AS EXPECTED, WE COULD LOSE EXISTING AND FUTURE
BUSINESS, AND OUR ABILITY TO DEVELOP, MARKET AND SELL OUR BATTERIES COULD BE
HARMED.
If our products when introduced do not perform as expected, our reputation could
be severely damaged, and we could lose existing or potential future business.
This performance failure may have the long-term effect of harming our ability to
develop, market and sell our products.
IN ADDITION TO BEING USED IN OUR OWN PRODUCT LINES, OUR CELLS ARE INTENDED TO BE
INCORPORATED INTO OTHER PRODUCTS. IF WE DO NOT FORM EFFECTIVE ARRANGEMENTS WITH
OEMS TO COMMERCIALIZE THESE PRODUCTS, OUR PROFITABILITY COULD BE IMPAIRED.
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 power system and the
commencement of volume shipments of the power system to the customer, but also
requires the cooperation and assistance of the OEMs for purposes of determining
the requirements for each specific application. We may have technical issues
that arise that may affect the acceptance of our products by OEMs. If we are
unable to design, develop, and introduce products that meet OEMs' requirements,
we may lose opportunities to enter into additional purchase orders and our
reputation may be damaged. As a result, we may not receive adequate assistance
from OEMs or pack assemblers to successfully commercialize our products, which
could impair our profitability.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR OUR REVENUES, AND OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED IF WE WERE TO LOSE THE
BUSINESS OF ANY ONE OF THEM.
To date, our existing purchase orders in commercial quantities are from a
limited number of customers. During fiscal 2005, three customers, D&H
Distributors, PC Connection, and Best Buy accounted for a combined 46% of our
revenue. During fiscal 2004, Best Buy accounted for 30% of revenue. During
fiscal 2003, two customers, Alliant Techsystems Inc. and Pabion Corporation,
Ltd., each accounted for 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;
33
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 MAY 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 power systems. 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. In the past, we have experienced delays in product development
due to the delivery of nonconforming raw materials from our suppliers. 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 those safety problems may develop in the future. 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.
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, represent a significant portion of our sales potential.
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, technology, or
the transport of lithium and phosphate, which may reduce or eliminate our
ability to sell or license in certain markets;
34
o foreign governments may impose tariffs, quotas, and taxes on our batteries
or our import of technology into their countries;
o requirements or preferences of foreign nations for domestic products could
reduce demand for our batteries and our technology;
o fluctuations in currency exchange rates relative to the U.S. dollar could
make our batteries and our technology unaffordable to foreign purchasers
and licensees or more expensive compared to those of foreign manufacturers
and licensors;
o longer payment cycles typically associated with international sales and
potential difficulties in collecting accounts receivable may reduce the
future profitability of foreign sales and royalties;
o import and export licensing requirements in China or other countries where
we intend to conduct business may reduce or eliminate our ability to sell
or license in certain markets; and
o political and economic instability in China or other countries where we
intend to conduct business may reduce the demand for our batteries and our
technology or our ability to market our batteries and our technology in
those countries.
These risks may increase our costs of doing business internationally and reduce
our sales and royalties or future profitability.
WE MAY NEED TO EXPAND OUR EMPLOYEE BASE AND OPERATIONS IN ORDER TO EFFECTIVELY
DISTRIBUTE OUR PRODUCTS COMMERCIALLY, WHICH MAY STRAIN OUR MANAGEMENT AND
RESOURCES AND COULD HARM OUR BUSINESS.
To implement our growth strategy successfully, we will have to increase our
staff, primarily with personnel in sales, marketing, and product support
capabilities, as well as third party and direct distribution channels. However,
we face the risk that we may not be able to attract new employees to
sufficiently increase our staff or product support capabilities, or that we will
not be successful in our sales and marketing efforts. Failure in any of these
areas could impair our ability to execute our plans for growth and adversely
affect our future profitability.
COMPETITION FOR PERSONNEL, IN PARTICULAR FOR PRODUCT DEVELOPMENT AND PRODUCT
IMPLEMENTATION PERSONNEL, IS INTENSE, AND WE MAY HAVE DIFFICULTY ATTRACTING THE
PERSONNEL NECESSARY TO EFFECTIVELY OPERATE OUR BUSINESS.
We believe that our future success will depend in large part on our ability to
attract and retain highly skilled technical, managerial, and marketing personnel
who are familiar with and experienced in the battery industry. 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 who have significantly greater financial
resources than we do. 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.
IF WE ARE SUED ON A PRODUCT LIABILITY CLAIM, OUR INSURANCE POLICIES MAY NOT BE
SUFFICIENT.
Although we maintain general liability insurance and product liability
insurance, our insurance may not cover all potential types of product liability
claims to which manufacturers are exposed or may not be adequate to indemnify us
for all liability that may be imposed. Any imposition of liability that is not
covered by insurance or is in excess of our insurance coverage could harm our
business.
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.
35
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 further reduce our manufacturing costs, which
we intend to do through the effective utilization of manufacturing partners. We
currently manufacture our batteries and assemble our products in China and
Taiwan. We intend to transition additional operations to Asia over the course of
fiscal 2006. As a consequence, we are dependent on the performance of our
manufacturing partners to manufacture and deliver our products to our customers.
If any of our manufacturing partners is unable to continue to manufacture
product in commercial quantities on a timely and efficient basis, we could lose
customers and adversely impact our ability to attract future customers.
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 these 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 that differ from those of the United States, and thus we cannot be
certain that foreign patent applications related to issued U.S. patents will
issue. Furthermore, if these patent applications issue, some foreign countries
provide significantly less effective patent enforcement than in 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
the patent applications that we file will result in patents being issued, or
that our patents and any patents that may be issued to us in the future will
afford protection against competitors with similar technology. In addition,
patents issued to us may be infringed upon or designed around by others and
others may obtain patents that we need to license or design around, either of
which would increase costs and may adversely affect our operations.
IF WE CANNOT PROTECT OR ENFORCE OUR EXISTING INTELLECTUAL PROPERTY RIGHTS OR IF
OUR PENDING PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, WE MAY LOSE THE
ADVANTAGES OF OUR RESEARCH AND MANUFACTURING SYSTEMS.
Our ability to compete successfully will depend on whether we can protect our
existing proprietary technology and manufacturing processes. We rely on a
combination of patent and trade secret protection, non-disclosure agreements and
cross-licensing agreements. These measures may not be adequate to safeguard the
proprietary technology underlying our batteries. Employees, consultants, and
others who participate in the development of our products may breach their
non-disclosure agreements with us, and we may not have adequate remedies in the
event of their breaches. In addition, our competitors may be able to develop
products that are equal or superior to our products without infringing on any of
our intellectual property rights. We currently manufacture and export some of
our products from China. The legal regime protecting intellectual property
rights in China is weak. Because the Chinese legal system in general, and the
intellectual property regime in particular, are relatively weak, it is often
difficult to enforce intellectual property rights in China. In addition, there
are other countries where effective copyright, trademark and trade secret
protection may be unavailable or limited. Accordingly, 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.
36
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 not be economically or technologically feasible.
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.
RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA
SINCE OUR PRODUCTS ARE MANUFACTURED IN CHINA AND WE INTEND TO TRANSFER
ADDITIONAL OPERATIONS TO CHINA, WE FACE RISKS IF CHINA LOSES NORMAL TRADE
RELATIONS WITH THE UNITED STATES.
We manufacture and export our products from China. Our products sold in the
United States are currently not subject to U.S. import duties. On September 19,
2000, the United States Senate voted to permanently normalize trade with China,
which provides a favorable category of United States import duties. In addition,
on December 11, 2001 China was accepted into the World Trade Organization (WTO),
a global international organization of 144 countries that regulates
international trade. As a result of opposition to certain policies of the
Chinese government and China's growing trade surpluses with the United States,
there has been, and in the future may be, opposition to the extension of Normal
Trade Relations, or NTR, status for China. The loss of NTR status for China,
changes in current tariff structures or adoption in the Unites States of other
trade policies adverse to China could have an adverse effect on our business.
37
BECAUSE THE CHINESE LEGAL SYSTEM IN GENERAL, AND THE INTELLECTUAL PROPERTY
REGIME IN PARTICULAR, ARE RELATIVELY WEAK, WE MAY NOT BE ABLE TO ENFORCE
INTELLECTUAL PROPERTY RIGHTS IN CHINA AND ELSEWHERE.
We currently manufacture and export some of our products from China. The legal
regime protecting intellectual property rights in China is weak. Because the
Chinese legal system in general, and the intellectual property regime in
particular, are relatively weak, it is often difficult to enforce intellectual
property rights in China. In addition, there are other countries where effective
copyright, trademark and trade secret protection may be unavailable or limited.
Accordingly, we may not be able to effectively protect our intellectual property
rights outside of the United States.
ENFORCING AGREEMENTS AND LAWS IN CHINA IS DIFFICULT OR MAY BE IMPOSSIBLE AS
CHINA DOES NOT HAVE A COMPREHENSIVE SYSTEM OF LAWS.
We are dependent on our agreements with our Chinese manufacturing partners.
Enforcement of agreements may be sporadic and implementation and interpretation
of laws may be inconsistent. The Chinese judiciary is relatively inexperienced
in interpreting agreements and enforcing the laws, leading to a higher than
usual degree of uncertainty as to the outcome of any litigation. Even where
adequate law exists in China, it may be impossible to obtain swift and equitable
enforcement of such law, or to obtain enforcement of a judgment by a court of
another jurisdiction.
THE GOVERNMENT OF CHINA MAY CHANGE OR EVEN REVERSE ITS POLICIES OF PROMOTING
PRIVATE INDUSTRY AND FOREIGN INVESTMENT, IN WHICH CASE OUR ASSETS AND OPERATIONS
MAY BE AT RISK.
We currently have relationships with manufacturers in China for the
production of our products and have transitioned our core operations to China.
China is a socialist state, which since 1949 has been, and is expected to
continue to be, controlled by the Communist Party of China. Our existing and
planned operations in China are subject to the general risks of doing business
internationally and the specific risks related to the business, economic and
political conditions in China, which include the possibility that the central
government of China will change or even reverse its policies of promoting
private industry and foreign investment in China. Many of the current reforms
which support private business in China are unprecedented or experimental. Other
political, economic and social factors, such as political changes, changes in
the rates of economic growth, unemployment or inflation, or in the disparities
of per capita wealth among citizens of China and between regions within China,
could also lead to further readjustment of the government's reform measures. It
is not possible to predict whether the Chinese government will continue to be as
supportive of private business in China, nor is it possible to predict how
future reforms will affect our business.
THE GOVERNMENT OF CHINA CONTINUES TO EXERCISE SUBSTANTIAL CONTROL OVER THE
CHINESE ECONOMY WHICH COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
The government of China has exercised and continues to exercise substantial
control over virtually every section of the Chinese economy through regulation
and state ownership. China's continued commitment to reform and the development
of a vital private sector in that country have, to some extent, limited the
practical effects of the control currently exercised by the government over
individual enterprises. However, the economy continues to be subject to
significant government controls, which, if directed towards our business
activities, could have a significant adverse impact on us. For example, if the
government were to limit the number of foreign personnel who could work in the
country, or were to substantially increase taxes on foreign businesses or were
to impose any number of other possible types of limitations on our operations,
the impact would be significant.
CHANGES IN CHINA'S POLITICAL AND ECONOMIC POLICIES COULD HARM OUR BUSINESS.
38
The economy of China has historically been a planned economy subject to
governmental plans and quotas and has, in certain aspects, been transitioning to
a more market-oriented economy. Although we believe that the economic reform and
the macroeconomic measures adopted by the Chinese government have had a positive
effect on the economic development of China, we cannot predict the future
direction of these economic reforms or the effects these measures may have on
our business, financial position or results of operations. In addition, the
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD. These
differences include:
o economic structure;
o level of government involvement in the economy;
o level of development
o level of capital reinvestment;
o control of foreign exchange;
o methods of allocating resources; and
o balance of payments position.
As a result of these differences, our operations, including our current
manufacturing operations in China, may not develop in the same way or at the
same rate as might be expected if the Chinese economy were similar to the OECD
member countries.
CHINA CURRENCY EXCHANGE ISSUES
We incur expenses and liabilities in both Chinese RMB and U.S. dollars. As a
result, we are subject to the effects of exchange rate fluctuations with respect
to any of these currencies. For example, the value of the Chinese RMB depends to
a large extent on the PRC's domestic and international economic and political
developments, as well as supply and demand in the local market. Since 1994, the
official exchange rate for the conversion of Chinese RMB to U.S. dollars has
generally been stable and the Chinese RMB has appreciated slightly against the
U.S. dollar. However, given recent economic instability and currency
fluctuations, we can offer no assurance that the Chinese RMB will continue to
remain stable against the U.S. dollar or any other foreign currency.
Although Chinese governmental policies were introduced in 1996 to allow the
convertibility of Chinese RMB into foreign currency for current account items,
conversion of Chinese RMB into foreign exchange for capital items, such as
foreign direct investment, loans or security, requires the approval of the State
Administration of Foreign Exchange, or SAFE, which is under the authority of the
People's Bank of China. These approvals, however, do not guarantee the
availability of foreign currency. We cannot be sure that Chinese regulatory
authorities will not impose greater restrictions on the convertibility of the
Chinese RMB in the future. Because a significant amount of our operations are in
China, any future restrictions on currency exchanges could have an adverse
effect on our ability to do business in China.
BUSINESS PRACTICES IN CHINA MAY ENTAIL GREATER RISK AND DEPENDENCE UPON THE
PERSONAL RELATIONSHIPS OF SENIOR MANAGEMENT THAN IS COMMON IN NORTH AMERICA AND
THEREFORE SOME OF OUR AGREEMENTS WITH OTHER PARTIES IN CHINA COULD BE DIFFICULT
OR IMPOSSIBLE TO ENFORCE.
The business culture of China is, in some respects, different from the business
culture in Western countries and may present some difficulty for Western
investors reviewing contractual relationships among companies in China and
evaluating the merits of an investment. Personal relationships among business
principals of companies and business entities in China are very significant in
the business culture. In some cases, because so much reliance is based upon
personal relationships, written contracts among businesses in China may be less
detailed and specific than is
39
commonly accepted for similar written agreements in Western countries. In some
cases, material terms of an understanding are not contained in the written
agreement but exist as oral agreements only. In other cases, the terms of
transactions which may involve material amounts of money are not documented at
all. In addition, in contrast to Western business practices where a written
agreement specifically defines the terms, rights and obligations of the parties
in a legally binding and enforceable manner, the parties to a written agreement
in China may view that agreement more as a starting point for an ongoing
business relationship which will evolve and require ongoing modification. As a
result, written agreements in China may appear to the Western reader to look
more like outline agreements that precede a formal written agreement. While
these documents may appear incomplete or unenforceable to a Western reader, the
parties to the agreement in the PRC may feel that they have a more complete
understanding than is apparent to someone who is only reading the written
agreement without having attended the negotiations. As a result, contractual
arrangements in China may be more difficult to review and understand. Also,
despite legal developments in China over the past 20 years, adequate laws,
comparable with Western standards, do not exist in all areas and it is unclear
how many of our business arrangements would be interpreted or enforced by a
court in China.
40
IF THE RELATIONSHIP BETWEEN CHINA AND THE UNITED STATES DETERIORATES, THE
GOVERNMENT OF CHINA COULD ADVERSELY CHANGE ITS POLICIES WITH RESPECT TO U.S.
INVESTMENT IN COMPANIES IN CHINA.
Our business may be adversely affected by the diplomatic and political
relationships between the United States and China. These influences may
adversely affect our ability to operate in China. If the relationship between
the United States and China were to materially deteriorate, it could negatively
affect our ability to control our operations and relationships in China, enforce
any agreements we have with Chinese manufacturers or otherwise deal with any
assets or investments we may have in China.
OUR OPERATIONS COULD BE MATERIALLY INTERRUPTED, AND WE MAY SUFFER A LARGE AMOUNT
OF LOSS, IN THE CASE OF FIRE, CASUALTY OR THEFT AT ONE OF OUR MANUFACTURING OR
OTHER FACILITIES.
Our products are manufactured by Chinese manufacturers through contractual
relationships. In addition, we are pursuing a strategy of expanding our
operations in China. Firefighting and disaster relief or assistance in China is
substandard by Western standards. Consistent with common practice in China for
companies the size of us and our business partners in China, neither we nor
they, to our knowledge, maintain fire, casualty, theft insurance or business
interruption insurance. In the event of a loss of revenue or material damage to,
or loss of, the manufacturing plants where our products are currently produced,
or, in the future, where are other operations, including manufacturing, will
occur, due to fire, casualty, theft, severe weather, flood or other cause, we
would be forced to replace any assets lost in such disaster without the benefit
of insurance and our financial position could be materially compromised or we
might have to cease doing business. Also, consistent with customary business
practices among enterprises in China, we do not carry business interruption
insurance.
THE SYSTEM OF TAXATION IN CHINA IS UNCERTAIN AND SUBJECT TO UNPREDICTABLE CHANGE
THAT COULD AFFECT OUR PROFITABILITY.
Many tax rules are not published in China and those that are published can be
ambiguous and contradictory leaving a considerable amount of discretion to local
tax authorities. China currently offers tax and other preferential incentives to
encourage foreign investment. However, the country's tax regime is undergoing
review and there is no assurance that such tax and other incentives will
continue to be made available. Currently, China levies a 10% withholding tax on
profit allocations (i.e., dividends) received from Chinese-foreign joint
ventures. If we enter into a joint venture with a Chinese company as part of our
strategy to reduce costs, such a joint venture may be considered a
Chinese-foreign joint venture if the majority of its equity interests are owned
by a foreign shareholder. A temporary exemption from this withholding tax has
been granted to foreign investors. However, there is no indication when this
exemption will end.
IT IS UNCERTAIN WHETHER WE WILL BE ABLE TO RECOVER VALUE ADDED TAXES IMPOSED BY
THE CHINESE TAXING AUTHORITIES.
China's turnover tax system consists of value-added tax, consumption tax and
business tax. Export sales are exempted under VAT rules and an exporter who
incurs input VAT on purchase or manufacture of goods should be able to claim a
refund from Chinese tax authorities. However, due to a reduction in the VAT
export refund rate of some goods, exporters might bear part of the VAT they
incurred in conjunction with the exported goods. In 2003, changes to the Chinese
Value Added Tax system were announced affecting the recoverability of input VAT
beginning January 1, 2004. Our VAT expense will depend on the reaction of both
our suppliers and customers. Continued efforts by the Chinese government to
increase tax revenues could result in revisions to tax laws or their
interpretation, which could increase our VAT and various tax liabilities.
ANY RECURRENCE OF SEVERE ACUTE RESPIRATORY SYNDROME, OR SARS, OR ANOTHER
WIDESPREAD PUBLIC HEALTH PROBLEM, COULD ADVERSELY AFFECT OUR BUSINESS AND
RESULTS OF OPERATIONS.
A renewed outbreak of SARS or another widespread public health problem in China,
where we have moved our manufacturing operations and may move additional
operations, could have a negative effect on our operations. Our operations may
be impacted by a number of health-related factors, including the following:
41
o quarantines or closures of some of our manufacturing or other
facilities which would severely disrupt our operations; or
o the sickness or death of key officers or employees of our
manufacturing or other facilities.
Any of the foregoing events or other unforeseen consequences of public health
problems in China could adversely affect our business and results of operations.
OUR PRODUCTION AND SHIPPING CAPABILITIES COULD BE ADVERSELY AFFECTED BY ONGOING
TENSIONS BETWEEN THE CHINESE AND TAIWANESE GOVERNMENTS.
Key components of our products are manufactured in China and assembled in Taiwan
into end products or systems. In the event that Taiwan does not adopt a plan for
unifying with China, the Chinese government has threatened military action
against Taiwan. As of yet, Taiwan has not indicated that it intends to propose
and adopt a reunification plan. If an invasion by China were to occur, the
ability of our manufacturing and assembly partners could be adversely affected,
potentially limiting our production capabilities. An invasion could also lead to
sanctions or military action by the United States and/or European countries,
which could further adversely affect our business.
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.
42
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 COULD 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 Power System (Model VNC-65) and N-ChargeTM
Power System II are exempt from a Class 9 designation for transportation, while
our N-ChargeTM Power System (Model VNC-130), our K-Charge(TM) Power System, and
U-Charge(TM) Power System currently fall within the level such that they are not
exempt and require 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 U.N. guidelines. At present it is
not known if or when the proposed regulations would be adopted by the United
States. While we fall under the equivalency levels for the United States 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 June 3, 2005, our officers, directors and their affiliates as a group
beneficially owned approximately 42.6% of our outstanding common stock. Carl
Berg, one of our directors, beneficially owns approximately 39.7% 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 THAT 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, may decrease the market price, and may infringe upon the
voting and other rights of the holders of our common stock.
43
AT ANY GIVEN TIME WE MIGHT NOT MEET THE CONTINUED LISTING REQUIREMENTS OF THE
NASDAQ SMALLCAP MARKET.
Given the volatility of our stock and trends in the stock market in general, at
any given time we might not meet the continued listing requirements of The
Nasdaq SmallCap Market. Among other requirements, Nasdaq requires the minimum
bid price of a company's registered shares to be $1.00. On June 3, 2005, the
closing price of our common stock was $3.02. If we are not able to maintain the
requirements for continued listing on The NASDAQ SmallCap Market, it could have
a materially adverse effect on the price and liquidity of our common stock.
OUR STOCK PRICE IS VOLATILE, WHICH COULD RESULT IN A LOSS OF YOUR INVESTMENT.
The market price 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 87,061,639 shares of common stock as of
March 31, 2005. In addition, at March 31, 2005, we had 13,068,000 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 an
additional 2,152,500 shares of our common stock (based on a conversion price of
$4.00) and up to 352,900 shares upon exercise of the related warrant issued on
June 2, 2003.
44
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK, AND THEREFORE
STOCKHOLDERS WILL BE ABLE TO RECOVER THEIR INVESTMENT IN OUR COMMON STOCK, IF AT
ALL, ONLY BY SELLING THE SHARES OF OUR STOCK THAT THEY HOLD.
Some investors favor companies that pay dividends on common stock. We have never
declared or paid any cash dividends on our common stock. We currently intend to
retain any future earnings for funding growth and we do not anticipate paying
cash dividends on our common stock in the foreseeable future. Because we may not
pay dividends, a return on an investment in our stock likely depends on the
ability to sell our stock at a profit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We considered the provisions of Financial Reporting Release No. 48,
"Disclosures of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments." We had no holdings of derivative financial or commodity
instruments at March 31, 2005. However, we are exposed to financial market
risks, including changes in foreign currency exchange rates and interest rates.
2006 2007 2008 2009 Thereafter Total
------------- ------------ ------------ ------------- ------------ ------------
(dollars in thousands)
Liabilities:
Fixed rate debt: -- 20,000 -- -- -- 20,000
Variable rate debt -- 14,950 -- -- -- 14,950
Based on borrowing rates currently available to us for loans with similar terms,
the carrying value of our debt obligations approximates fair value.
ITEM 8 FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements and notes thereto appear on
pages F-3 through F-22.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 9A CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we have carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures are effective.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management does not expect that our control system will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that
45
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. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
Our management's report on internal control over financial reporting, and
the related report of our independent public accounting firm, are included in
our annual report on Form 10-K under Management's Annual Report on Internal
Control Over Financial Reporting and Report of Independent Registered Public
Accounting Firm on Internal Control Over Financial Reporting , respectively, and
are incorporated by reference.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fourth quarter of 2005, in connection with our evaluation of
internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002, we implemented or revised certain internal control
procedures which affect financial reporting. The changes enhanced controls
already in place or introduced new controls implemented to remove or reduce
reliance on compensating controls. The most significant changes were made in the
area of inventory and information technology systems.
ITEM 9B OTHER INFORMATION
On June 13, 2005 as part of the transition of our operations to China and the
recent appointment of JR Hwang as President of Asia-Pacific Operations, Joseph
Lamoreux resigned his position as Chief Operating Officer. Mr. Lamoreux will
remain employed by the Company and will continue to assist in the transition of
our operations to China and will perform other duties assigned to him by the
Chief Executive Officer.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following persons serve as our directors:
DIRECTORS AGE PRESENT POSITION
- --------- --- ----------------
Carl E. Berg (2)............................. 67 Director
Stephan B. Godevais.......................... 43 Director and Chairman of the Board
Bert C. Roberts (1).......................... 62 Director
Alan F. Shugart (1)(2)....................... 74 Director and Chairman of the Audit Committee
Vassilis G. Keramidas (1) 66 Director
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
The following persons serve as our executive officers:
Executive Officers Age Present Position
- ------------------ --- ----------------
Stephan B. Godevais......................... 43 President and Chief Executive Officer
JR Hwang* 56 President of Asia-Pacific Operations
Dean Bogues 47 Vice President of Sales and Marketing
Kevin W. Mischnick.......................... 38 Vice President of Finance and Assistant Secretary
Roger A. Williams........................... 57 General Counsel and Assistant Secretary
*Mr. Hwang started with the Company on April 4, 2005
Our executive officers are appointed by and serve at the discretion of the
Board. There are no family relationships between any director and/or any
executive officer.
CARL E. BERG. Mr. Berg helped found us and has served on the Board since
September 1991. For more than 30 years, Mr. Berg has been a major Silicon Valley
industrial real estate developer and a private venture capital investor. Mr.
Berg also serves as the director of Mission West Properties, Inc., Monolithic
Systems, Inc. and Focus Enhancements, Inc. Mr. Berg holds a Bachelor of Arts
degree in Business Administration from the University of New Mexico.
STEPHAN B. GODEVAIS. Mr. Godevais joined us in May 2001 and is currently our
Chairman of the Board of Directors, Chief Executive Officer, and President. From
December 1997 to April 2001, Mr. Godevais served as a Vice President at Dell
Computer Corporation where he led Dell's desktop and notebook product lines for
consumers and small businesses. During his tenure at Dell, Mr. Godevais launched
the company's Inspiron division, growing it into a multi-billion dollar business
and introduced the first 15-inch notebook in the industry, sustaining its
position as a market leader from 1998 to 2000. Prior to Dell, Mr. Godevais
managed the worldwide notebook business of Digital Equipment Corporation. From
December 1994 to November 1997, Mr. Godevais served in several positions,
including General Manager and Vice President, at Digital. Mr. Godevais also
spent ten years at Hewlett Packard Company, where he held positions in marketing
for various product and field organizations. Mr. Godevais holds a business
management degree from the Institut d'Etudes Politiques de Paris.
BERT C. ROBERTS, JR. Mr. Roberts originally joined us as a director in 1992 and
served until 1993 prior to rejoining us as a director in 1998. Mr. Roberts
served as Chairman and Chief Executive Officer of MCI, a telecommunications
company from 1992 until 1998, after having served as President and Chief
Operating Officer since 1985. Mr. Roberts serves on the boards of Johns Hopkins
University and CaPCURE (a cancer research funding organization). Mr. Roberts
holds a Bachelor of Science in Engineering from Johns Hopkins University.
47
ALAN F. SHUGART. Mr. Shugart joined us as a director in March 1992. Mr. Shugart
was the Chief Executive Officer and a director of Seagate Technology, Inc., a
technology development and manufacturing company, since its inception in 1979
until July 1998. Mr. Shugart also served as Seagate's President from 1979 to
1983 and from September 1991 to July 1998. Additionally, Mr. Shugart served as
Chairman of the Board of Seagate from 1979 until September 1991, and from
October 1992 to July 1998. Mr. Shugart currently serves as a director of Sandisk
Corporation (a manufacturer of digital flash memory chips) and Cypress
Semiconductor Corporation. Mr. Shugart holds a Bachelor of Science in
Engineering - Physics from the University of Redlands.
Vassilis G. Keramidas. Dr. Keramidas joined us as a directors in August 2004.
Dr. Keramidas has extensive experience in the development and commercialization
of intellectual property and new energy storage technologies and has served as
the managing director of Keramidas International Associates LLC, a consulting
firm in the area of intellectual property, research management and corporate
collaborative research, since May 2003. From 1997 to 2003, Dr. Keramidas served
as vice president and research scientist for Telcordia Technologies, an
international energy storage and memory technologies company. Dr. Keramidas has
authored or co-authored 165 technical publications and holds several patents.
JR HWANG. Mr. Hwang joined us in April 2005 and serves as President of
Asia-Pacific Operations. From 1999 to 2005 he served as managing director of
Pareto Co. Ltd., a chemical manufacturing company, where he led new product
development and marketing and sales of chemicals and components to the
electronics industry. Mr. Hwang also has more than a dozen years of direct
experience in chemical & metallurgical engineering and research. Mr. Hwang holds
several degrees, including a Doctorate in chemical metallurgy and materials
processing from Stanford University and a Master of Business Administration from
Case Western Reserve University.
DEAN BOGUES. Mr. Bogues joined us in December 2004 and serves as our Vice
President of Sales and Marketing. From 1999 to 2004, Mr. Bogues served as
Director of Enterprise Sales for Dell Inc., a computer and peripherals company,
where he directed sales of server and storage products in the government,
education, and healthcare markets. From 1993 to 1999 Mr. Bogues was General
Manager of the Datacenter Solutions Division for American Power Conversion
Corp., a manufacturer of uninterruptible power supplies, where he built and led
a new worldwide business consisting of industry breakthrough modular,
fault-tolerant, network-managed power protection systems. From 1979 to 1993 Mr.
Bogues served in various positions with Hewlett-Packard, a computer and
electronics company. Mr. Bogues holds a Bachelor of Science in Electrical
Engineering from Worcester Polytechnic Institute..
KEVIN W. MISCHNICK. Mr. Mischnick joined us in July 2001 as our Vice President
of Finance. From November 2000 to March 2001, he served as Vice President of
Finance at CarOrder, Inc., an internet automobile dealership. From March 1997 to
October 2000, he served as Vice President of Finance for AMFM, Inc., a radio
broadcasting company, and one of its predecessor companies where he was
responsible for all aspects of treasury and cash management systems. During
other tenures at AMFM and one of its predecessor companies, Mr. Mischnick
completed multiple public equity and debt offerings and gained experience in
Securities and Exchange Commission reporting. From August 1990 to March 1997, he
served in various positions at Ernst & Young LLP, including Audit Manager. He is
a certified public accountant and holds a Bachelor of Business Administration
degree in Accounting from Texas Tech University.
ROGER WILLIAMS. Mr. Williams joined us in April 2001 and serves as our General
Counsel and Assistant Secretary. Mr. Williams has been a practicing intellectual
property attorney for 30 years, having practiced in both private and corporate
positions. From 1991 to 2001, Mr. Williams served as Chief Patent Counsel and
Associate General Counsel for the pharmaceutical company G.D. Searle & Co. Mr.
Williams has his Juris Doctorate degree from Drake University Law School and a
Bachelor of Science in Chemistry from Western Illinois University. He is a
member of the California and Indiana Bars.
AUDIT COMMITTEE FINANCIAL EXPERT
48
On behalf of the Board, the Audit Committee is responsible for providing an
independent, objective review of our auditing, accounting and financial
reporting process, public reports and disclosures, and system of internal
controls regarding financial accounting. We currently do not have a financial
expert on our audit committee.
CODE OF ETHICS
We have adopted a Code of Ethics and Business Conduct applicable to all of
our employees, including our Chief Executive Officer, Principal Financial
Officer, Principal Accounting Officer and all other senior financial executives,
and to our directors when acting in their capacity as directors. Our Code of
Ethics and Business Conduct is designed to set the standards of business conduct
and ethics and to help directors and employees resolve ethical issues. The
purpose of our Code of Ethics and Business Conduct is to ensure to the greatest
possible extent that our business is conducted in a consistently legal and
ethical manner. Employees may submit concerns or complaints regarding audit,
accounting, internal controls or other ethical issues on a confidential basis by
means of a toll-free telephone call or an anonymous email. We investigate all
concerns and complaints. Copies of our Code of Business Conduct and Ethics are
available to investors upon written request. Any such request should be sent by
mail to Valence Technology, Inc., 6504 Bridge Point Parkway, Suite 415, Austin,
Texas 78730, Attn: General Counsel or should be made by telephone by calling
General Counsel at (888) 825-3623.
We intend to disclose on our website amendments to, or waivers from, any
provision of our Code of Ethics and Business Conduct that apply to our Chief
Executive Officer, Principal Financial Officer, Principal Accounting Officer and
persons performing similar functions and amendments to, or waivers from, any
provision which relates to any element of our Code of Ethics and Business
Conduct described in Item 406(b) of Regulation S-K.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, officers (including a
person performing a principal policy-making function) and persons who own more
than 10% of a registered class of our equity securities to file with the
Commission initial reports of ownership and reports of changes in ownership of
our common stock and other equity securities of ours. Directors, officers and
10% holders are required by Commission regulations to send us copies of all of
the Section 16(a) reports they file. Based solely upon a review of the copies of
the forms sent to us and the representations made by the reporting persons to
us, we believe that, other than as described below, during the fiscal year ended
March 31, 2005, our directors, officers and 10% holders complied with all filing
requirements under Section 16(a) of the Exchange Act.
The Form 4 filed by Mr. Carl Berg as an individual, as managing member of Berg &
Berg Enterprises, LLC, and as President of West Coast Venture Capital, Inc. on
June 30, 2004 inadvertantly disclosed a purchase of 910,746 shares of our common
stock as 877,193 shares. This reporting error of 33,553 shares was corrected in
subsequent filings.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer and as to each
of the other four most highly compensated executive officers whose compensation
exceeded $100,000 during fiscal 2005 (referred to as the named executive
officers), information concerning all compensation paid for services to us in
all capacities for each of the three years ended March 31 indicated below.
*Mr. Lamoreux resigned his position as COO on June 13, 2005.
49
Long-Term
Annual Compensation Compensation Awards
---------------------------- -------------------------
Securities Underlying
Name and Principal Position Fiscal Year Salary Bonus Options
- -------------------------------- ------------- ------------- ------------ -------------------------
Stephan B. Godevais 2005 $ 500,000 $ - 50,000
Chairman of the Board, Chief 2004 $ 500,000 $ - -
Executive Officer and 2003 $ 500,000 $ - 350,000
President
Joseph F. Lamoreux 2005 $ 230,000 $ 3,087 100,000
Chief Operating Officer 2004 $ 202,308 $ - 50,000
2003 $ 200,000 $ - 195,000
Kevin W. Mischnick 2005 $ 150,000 $ - 75,000
Vice President of Finance 2004 $ 147,115 $ - -
and Assistant Secretary 2003 $ 135,000 $ 33,750 74,652
Roger A. Williams 2005 $ 180,000 $ - 50,000
General Counsel and 2004 $ 180,000 $ - -
Assistant Secretary 2003 $ 180,000 $ - 83,334
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows for the fiscal year ended March 31, 2005, certain
information regarding options granted to, exercised by, and held at year-end by
the named executive officers:
*Mr. Lamoreux resigned his position as COO on June 13, 2005.
INDIVIDUAL GRANTS
------------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES PERCENT OF TOTAL AT ASSUMED ANNUAL RATES
UNDERLYING OPTIONS GRANTED EXERCISE OF STOCK PRICE APPRECIATION
OPTIONS TO EMPLOYEES IN FOR BASE EXPIRATION FOR OPTION TERM (2)
-----------------------------
NAME GRANTED (#) FISCAL YEAR (1) PRICE ($/SH) DATE 5% 10%
- ----------------------- -------------- ----------------- ------------- ------------- --------------- ----------------
STEPHAN B. GODEVAIS 50,000 (3) 2.78% $3.35 11/16/2014 $105,340 $266,952
JOSEPH F. LAMOREUX 50,000 (3) 2.78% $3.34 6/29/2014 $105,026 $266,255
50,000 (3) 2.78% $3.35 11/16/2014 $105,340 $266,952
KEVIN W. MISCHNICK 40,000 (3) 2.22% $3.34 6/29/2014 $ 84,021 $212,924
35,000 (3) 1.95% $3.35 1/0/1900 $ 73,738 $186,867
ROGER A. WILLIAMS 30,000 (3) 1.67% $3.34 6/29/2014 $ 63,015 $159,693
20,000 (3) 1.11 $3.35 11/16/2014 $ 42,136 $106,780
50
- ------------
(1) Options to purchase an aggregate of 1,799,000 shares were granted to
employees in fiscal year 2005.
(2) The potential realizable value is calculated based on the term of the
option at its time of grant, 10 years, compounded annually. It is
calculated by assuming that the stock price on the date of grant
appreciates at the indicated annual rate, compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price. No gain to the
optionee is possible unless the stock price increases over the option term,
which will benefit all stockholders. These amounts are calculated pursuant
to applicable requirements of the Commission and do not represent a
forecast of the future appreciation of our common stock.
(3) These options vest in 12 equal quarterly installments from the grant date.
51
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR, AND FISCAL YEAR END OPTION VALUES
The following table shows (i) the number of shares acquired and value realized
from option exercises by each of the named executive officers during the fiscal
year ended March 31, 2005 and (ii) the number and value of the unexercised
options held by each of the named executive officers on March 31, 2005:
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
ON VALUE FISCAL YEAR-END (#) AT FISCAL YEAR-END ($) (1)
--------------------------------- -----------------------------
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ------------ ------------ -------------- ------------------ ------------ ---------------
Stephan B. Godevais -- -- 1,645,092 255,208 $ 238,875 $ 121,125
Joseph F. Lamoreux -- -- 360,720 209,580 $ 149,283 $ 97,217
Kevin W. Mischnick -- -- 173,623 96,329 $ 85,445 $ 38,480
Roger A. Williams -- -- 184,312 89,322 $ 90,291 $ 37,166
- ---------
(1) Based on the last reported sales price of our common stock on the Nasdaq
SmallCap Market on March 31, 2005 ($3.07), less the exercise price of the
options multiplied by the number of shares underlying the option.
*Mr. Lamoreux resigned his position as COO on June 13, 2005.
EMPLOYMENT AGREEMENTS
Effective May 2, 2001, and renewed in August 2003, we entered into an employment
agreement with Stephan B. Godevais pursuant to which we retained Mr. Godevais as
Chief Executive Officer and President at a salary of $500,000 per year. The
Board reviews his salary on January 1 of each year and may (in its sole
discretion) increase, but not decrease, his salary.
Under his employment agreement, we granted Mr. Godevais stock options to
purchase an aggregate of 1,500,000 shares of common stock at an exercise price
of $6.52 per share, vesting over a period of four years.
We agreed to nominate Mr. Godevais to the Board for the entire period of his
employment as Chief Executive Officer and President and to use our best efforts
to cause our stockholders to cast their votes in favor of his continued election
to the Board. Mr. Godevais agreed to resign from the Board when he no longer
serves as Chief Executive Officer and President.
Mr. Godevais is entitled to a lump sum payment of $500,000 and continued group
health insurance coverage for one year following termination if within the first
two years of the employment agreement renewal any of the following occurs:
o A liquidation or change in control occurred (excluding an acquisition
by Carl Berg or his affiliated companies of more than 50% of our
voting stock, which will not constitute a change of control);
o We terminated Mr. Godevais' employment for any reason other than for
cause; or
o Mr. Godevais resigned for good reason.
Effective September 18, 2003, we entered into an employment agreement with
Joseph Lamoreux pursuant to which we retained Mr. Lamoreux as Chief Operating
Officer at a salary of $230,000 per year. The Board reviews his salary annually
on January 1 and may, at its sole discretion, increase, but not decrease, his
salary.
52
Mr. Lamoreux is entitled to a lump sum payment of $100,000 and continued group
health insurance coverage for six months following termination if within the
subsequent two years of his employment any of the following occurs:
o A liquidation or change in control occurs (excluding an acquisition by
Carl Berg or his affiliated companies of more than 50% of our voting
stock, which will not constitute a change of control);
o Termination of Mr. Lamoreux's employment for any reason other than for
cause; or
o Mr. Lamoreux resigns for good reason.
On June 13, 2005 Joseph Lamoreux resigned his position as Chief Operating
Officer for personal reasons. Mr. Lamoreux will remain employed by the Company
and will continue to assist in the transition of our operations to China and
will perform other duties assigned to him by the Chief Executive Officer.
We have employment offer letters with each of our named executive officers that
stipulate the initial salaries of each officer and the number of options to
which the officer was initially entitled. Each letter specifies that either the
employee or we, with or without cause, may terminate the employment at any time.
DIRECTORS' COMPENSATION. Our non-employee directors receive no cash
compensation, for board or committee meetings, but are eligible to receive a
$1,000 fee for each official quarterly board meeting, which would be paid in the
form of stock options at the market price of the Company's common stock. In
addition, director's are eligible for reimbursement for their expenses incurred
in connection with attendance at Board meetings in accordance with Company
policy. Directors who are employees do not receive separate compensation for
their services as directors, but are eligible to receive stock options under our
2000 Stock Option Plan.
Upon appointment to the Board of Directors, each non-employee director is
entitled to receive $10,000 as a training fee. Each of our non-employee
directors also receives stock option grants pursuant to the 1996 Non-Employee
Directors' Stock Option Plan, which we refer to as the Directors' Plan, or the
2000 Stock Option Plan. Only non-employee directors or an affiliate of those
directors as defined in the Internal Revenue Code (the "Code") are eligible to
receive options under the Directors' Plan. New directors will receive initial
stock options to purchase 100,000 shares of common stock upon election to the
Board. The per share exercise price for these options will be the fair market
value of a share of our common stock on the day prior to the option grant date.
These options will vest one-fifth on the first and second anniversaries of the
date of grant of the options, and equal quarterly installments over the next
three years. A director who had not received options upon becoming a director,
received stock options to purchase 100,000 shares on the date of the adoption of
the Directors' Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During the fiscal
year ended March 31, 2005, the Compensation Committee consisted of Messrs.
Shugart and Berg.
In July 1990, we entered into a loan agreement with Baccarat Electronics, Inc.
Baccarat subsequently assigned all of its rights, duties and obligations under
that agreement, as the same has been amended from time to time, to Berg & Berg,
a company controlled by Carl Berg, a principal stockholder and one of our
directors. The loan agreement, as amended, allowed us to borrow, prepay and
re-borrow up to $15.0 million under a promissory note on a revolving basis. The
loan bears interest at one percent over the interest rate on the lender's
principal line of credit each year (approximately 9% at March 31, 2004).
Effective December 31, 2001, we further amended the loan agreement to provide
that Berg & Berg has no further obligations to loan or advance funds to us under
this loan agreement, as amended. As of March 31, 2005, the principal balance and
accrued and unpaid interest owing under the July 1990 loan agreement, as
amended, totaled $14.95 million and $7.45 million, respectively. By amendment
dated February 11, 2002, Berg & Berg agreed to extend the maturity date of the
loan from September 30, 2005 to September 30, 2006. In fiscal 1998 and 1999, we
issued warrants to purchase 594,031 shares of our common stock to Berg & Berg in
conjunction with the amended loan agreement. The fair value of these warrants,
totaling approximately $2,158,679, has been reflected as additional
consideration for the loan from Baccarat.
In October 2001, we entered into a loan agreement with Berg & Berg. Under the
terms of the loan agreement, Berg & Berg agreed to advance us up to $20.0
million between the date of the loan agreement and September 30, 2003. Interest
on the loans accrues at 8.0% per annum, and all outstanding amounts with respect
to the loans are due and payable on September 30, 2005. As of March 31, 2005,
the principal balance and accrued and unpaid interest owing under this loan
agreement totaled $20.0 million and $5.1 million, respectively . In conjunction
with the loan agreement, Berg & Berg received a warrant to purchase 1,402,743
shares of our common stock at an exercise price of $3.208 per share. The
warrants are immediately exercisable and expire on October 5, 2005.
53
On June 10, 2003 Berg & Berg committed to provide an additional $10 million
equity commitment to supplement an existing $4 million commitment. We drew down
$3 million under this commitment on each of March 5, April 19, May 24 and June
28, 2004 and $2 million on July 27, 2004 at the then-current market value of our
common stock.
In June 2004, Mr. Carl Berg, a director and stockholder in the Company, agreed
to provide an additional $20 million backup equity funding commitment. This
additional funding commitment was in the form of an equity line of credit and
allowed the Company to request Mr. Berg to purchase shares of common stock from
time to time at the average closing bid price of the stock for the five days
prior to the purchase date. To date the Company has drawn down $19 million of
this funding commitment.
On June 10, 2005 we entered into a new $20 million funding commitment with Mr.
Berg to provide funding in the form of equity or a secured loan on terms to be
negotiated. This new commitment can be reduced by Mr. Berg by the amount of net
proceeds received in a debt or equity transaction with a third party.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
EQUITY COMPENSATION PLANS
The following table summarizes information about the equity securities
authorized for issuance under our compensation plans as of March 31, 2004. For a
description of these plans, please see Note 15, Stockholders' Equity (Deficit),
in our consolidated financial statements.
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF OUTSTANDING EXERCISE PRICE OF FOR FUTURE ISSUANCE
OPTIONS, WARRANTS AND OUTSTANDING OPTIONS, UNDER EQUITY
PLAN CATEGORY RIGHTS WARRANTS AND RIGHTS COMPESNATION PLANS
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 9,228,153 $4.53 1,915,009
Equity compensation plans not
approved by security holders 1,925,000 $6.45 -
Total 11,153,153 $4.87 1,915,009
- -------------------------------------------------------------------------------------------------------------------
- -------------
(1) Options to purchase 1,500,000 shares were granted to Stephan Godevais in
May 2001 pursuant to his employment agreement. The exercise price of his
options is $6.52 and they vested over the following four years. Options to
purchase 225,000 shares were granted to Joseph Lamoreux in June 2001
pursuant to his employment offer letter. The exercise price of his options
is $7.18 and they vested over the following four years.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of our
common stock as of June 3, 2005, by:
o Each of our directors;
o Each of the named executive officers;
o All directors and executive officers as a group; and
o All other stockholders known by us to beneficially own more than 5% of
the outstanding common stock.
Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options held by that person that are currently exercisable or exercisable within
60 days of the date as of which this
54
information is provided, and not subject to repurchase as of that date, are
deemed outstanding. These shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person.
Except as indicated in the notes to this table, and except pursuant to
applicable community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares shown as beneficially
owned by them. Percentage ownership is based on 89,152,479 shares of common
stock outstanding on June 3, 2005. Unless otherwise indicated, the address for
each of the stockholders listed below is c/o Valence Technology, Inc., 6504
Bridge Point Parkway, Suite 415, Austin, Texas 78730.
Beneficial Ownership(1)
------------------------------------
Beneficial Owner Number of Percent of
Shares (#) Total (%)
- ------------------------------------------------------------------------ -------------- ---------------
Carl E. Berg (2) 36,108,662 39.7%
10050 Bandley Drive, Cupertino, CA 95014
1981 Kara Ann Berg Trust, Clyde J. Berg, Trustee; and Clyde J. Berg
10050 Bandley Drive, Cupertino, CA 95014 (3) 8,604,270 9.1%
Alan F. Shugart (4) 543,310 *
Bert C. Roberts, Jr. (5) 509,583 *
Vassilis Keramidas (6) 21,607 *
Stephan B. Godevais (7) 2,129,883 2.3%
JR Hwang (8) - *
Joseph F. Lamoreux (8) 397,383 *
Dean Bogues (8) - *
Kevin W. Mischnick (8) 192,967 *
Roger A. Williams (9) 211,815 *
All directors and executive officers as a group (7 persons) (10) 40,177,294 42.6%
* Indicates less than one percent.
- --------------------
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Commission.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentage ownership is based
on 89,152,479 shares of common stock outstanding on June 3, 2005, adjusted
as required by rules promulgated by the Commission.
(2) Includes 350,000 shares held directly by Mr. Berg; 325,763 shares issuable
upon exercise of options held by Mr. Berg that are exercisable within 60
days of June 3, 2005; 1,525,506 shares held by Berg & Berg Enterprises 401K
Plan FBO Carl E. Berg, of which Mr. Berg is the Trustee; 94,000 shares held
by Berg &Berg Profit Sharing Plan U/A 1/1/80 FBO Carl E. Berg Basic
Transfer, of which Mr. Berg is the Trustee; 21,984,475 shares and 1,536,415
shares issuable upon exercise of warrants held by Berg & Berg Enterprises,
LLC, of which Mr. Berg is the sole manager; 10,292,503 shares held by West
Coast Venture Capital, Inc.(WCVC); and. Mr. Berg has sole voting and
dispositive power with respect to 675,763, shares and shared voting and
dispositive power with respect to 35,432,900 shares. Berg & Berg has no
sole voting and dispositive power with respect to any shares and has shared
voting and dispositive power with respect to 25,140,396 shares. WCVC has no
sole voting and dispositive power with respect to any shares and has shared
voting and dispositive power with respect to 10,292,503 shares.
(3) Based on information contained in a Schedule 13G filed jointly by 1981 Kara
Ann Berg Trust, Clyde J. Berg, Trustee and Clyde J. Berg with the SEC on
February 14, 2003. The Trust has no sole voting and dispositive power with
respect to any shares and has shared voting and dispositive power with
respect to 8,129,270 shares. Clyde J. Berg has sole voting and dispositive
power with respect to 475,000 shares and shared voting and dispositive
power with respect to 8,129,270 shares.
55
(4) Includes 202,000 shares held by Mr. Shugart and 362,143 shares issuable
upon exercise of options that are exercisable within 60 days of June 3,
2005.
(5) Includes 150,000 shares held by Mr. Roberts, 50,000 shares held indirectly
through various entities, 10,000 shares held by his spouse and 340,833
shares issuable upon exercise of options that are exercisable within 60
days of June 3, 2005.
(6) Includes 2,857 shares held by Mr. Keramidas and 18,750 shares issuable upon
exercise of options that are exercisable within 60 days of June 3, 2005.
(7) Includes 365,000 shares held by Mr. Godevais and 1,764,883 shares issuable
upon exercise of options that are exercisable within 60 days of June 3,
2005.
(8) All shares are issuable upon exercise of options that are exercisable
within 60 days of June 3, 2005.
(9) Includes 12,000 shares held by Mr. Williams and 199,815 shares are issuable
upon exercise of options that are exercisable within 60 days of June 3,
2005.
(10) Includes 5,138,953 shares issuable upon exercise of options and warrants
that are exercisable within 60 days of June 3, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other than as described in Item 11 and below, there were no related party
agreements or business transactions in fiscal 2005 that would require disclosure
under this Item 13.
56
On January 4, 2005, the company appointed Dean F. Bogues to serve as Vice
President of Sales and Marketing. Under the terms of Mr. Bogues' employment
agreement he will receive an annual salary of $200,000 per year and is eligible
for a bonus under a sales incentive compensation program with a target bonus
payment of 50% of his annual base salary. Mr. Bogues also received stock options
to purchase 220,000 shares of the Company's common stock at an exercise price of
$3.21 per share, vesting over a period of four years. Under the terms of his
agreement, if within the first 24 months following his initial start date, any
of the following events occur:
o liquidation or a change of control (excluding an acquisition by
Carl Berg or an affiliate company of more than 50% of our voting
stock, which will not constitute a change of control)
o the Company terminates Mr. Bogues's employment for any reason
other than for Good Cause(as defined in the employment
agreement), or
o Mr. Bogues resigns for Good Reason (as defined in the employment
agreement)
Mr. Bogues is entitled to a lump sum payment of $100,000 and continued group
health insurance coverage or paid COBRA coverage for six months following
termination of resignation.
On April 4, 2005, the Company entered into an employment agreement with Mr.
Jin-Rong (JR) Hwang. Mr. Hwang serves as the Company's President of Asia-Pacific
Operations and is responsible for the day-to-day operation and management of the
Company's Asia-Pacific Operations business and affairs. Mr. Hwang receives an
annual salary of $250,000. In connection with his employment, Mr. Hwang was
granted options to purchase 250,000 shares of the Company's common stock with an
exercise price of $3.10 per share. The options vest 25% on the first anniversary
of his employment with the Company with the remaining 75% to vest quarterly over
the three years thereafter. Under the terms of the agreement, the Company has
agreed to pay Mr. Hwang a lump sum payment of $125,000 and six months of COBRA
benefit payments if Valence is acquired or dissolved during the 24 months
following the date of his hire and as a result Mr. Hwang is terminated or forced
to resign.
57
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth the aggregate fees billed to the Company for
fiscal 2005 and 2004 by Deloitte & Touche LLP:
Year Ended March 31, Percentage of Services
----------------------------- -------------------------
2005 2004 2005 2004
------------- ------------ -------------------------
Audit fees $ 396,238 $ 164,000 44% 67%
Audit-related fees $ 30,374 $ 9,500 3% $ 0
Tax fees $ 65,022 $ 71,000 7% 29%
All other fees $ 400,128 - - -
------------- ------------ -------------------------
Total fees $ 891,762 $ 244,500 100% 100%
============= ============ =========================
"Audit Fees" billed during fiscal 2005 and 2004 were for professional
services rendered for the audit of our financial statements. "Audit-Related
Fees" for fiscal 2005 were for services related to reviews of a Form S-3 filed
with the Securities and Exchange Commission. "Audit-Related Fees" in fiscal 2004
were for services related to accounting consultation and reviews of a Form S-3
filed with the Securities and Exchange Commission. "Tax Fees" consist of fees
billed for professional services rendered for tax compliance, tax advice, and
tax planning. "All Other Fees" in fiscal 2005 were for consulting related to
preparation of the Company for documentation of its internal controls under the
requirements Section 404 of the Sarbanes-Oxley Act of 2002..
The Audit Committee has adopted a policy for the pre-approval of all audit
and non-audit services to be performed for the Company by its independent
registered public accounting firm. The Audit Committee has considered the role
of Deloitte & Touche LLP in providing audit, audit-related and tax services to
the Company and has concluded that such services are compatible with Deloitte &
Touche LLP's role as the Company's independent registered public accounting
firm.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS - See Index to Consolidated Financial Statements
of this Annual Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES - All financial statement schedules have
been omitted because they are not applicable or are not required, or
because the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
(3) EXHIBITS - See Exhibit Index on pages [53-58] of this Annual Report on
Form 10-K.
(b) The Company filed the following reports on Form 8-K during the last quarter
of the period for which this Annual Report on Form 10-K covers:
(i) Form 8-K filed January 10, 2005 reporting under Items 1.01 and
9.01.
(ii) Form 8-K filed January 12, 2005, reporting under Items 8.01 and
9.01.
(iii) Form 8-K filed January 20, 2005, reporting under Items 1.01 and
9.01.
(iv) Form 8-K filed February 9, 2005, reporting under Items 2.02 and
9.01.
(v) Form 8-K filed February 15, 2005, reporting under Items 8.01 and
9.01.
(vi) Form 8-K filed February 16, 2005, reporting under Item 3.02.
(vii) Form 8-K filed March 3, 2005, reporting under Items 8.01 and
9.01.
(viii) Form 8-K filed March 16, 2005, reporting under Item 3.02.
(ix) Form 8-K filed March 22, 2005, reporting under Items 8.01 and
9.01.
58
(c) See Exhibit Index on pages 42-44 of this Form 10-K Annual Report.
(d) None.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 (1) Second Restated Certificate of Incorporation of the Company.
3.2 (2) Amendment to the Second Restated Certificate of Incorporation of the Company.
3.3 (3) Certificate of Designations, Preferences and Rights of Series C1 Convertible Preferred
Stock.
3.4 (3) Certificate of Designations, Preferences and Rights of Series C2 Convertible Preferred
Stock.
3.5 (4) Second Amended and Restated Bylaws of the Company.
4.1 (5) Warrant dated January 4, 2002 to Berg & Berg Enterprises, LLC.
4.2 (6) Warrant to Purchase Common Stock, issued June 2, 2003 (to Riverview Group, LLC)
4.3 (1) Loan Agreement between the Company and Baccarat Electronics, Inc., dated July 17, 1990
4.4 (1) Amendment No. 1 to Loan Agreement between the Company and Baccarat Electronics, Inc.,
dated March 15, 1991 (subsequently transferred to Berg & Berg Enterprises, LLC).
4.5 (1) Amendment No. 2 to Loan Agreement between the Company and Baccarat Electronics, Inc.,
dated March 24, 1992 (subsequently transferred to Berg & Berg Enterprises, LLC).
4.6 (1) Amendment No. 3 to Loan Agreement between the Company and Baccarat Electronics, Inc.,
dated August 17, 1992 (subsequently transferred to Berg & Berg Enterprises, LLC).
4.7 (7) Amendment No. 4 to Loan Agreement between the Company and Baccarat Electronics, Inc.,
dated September 1, 1997 (subsequently transferred to Berg & Berg Enterprises, LLC).
4.8 (8) Amendment No. 5 to Loan Agreement between the Company and Baccarat Electronics, Inc.,
dated July 17, 1998 (subsequently transferred to Berg & Berg Enterprises, LLC).
4.9 (7) Amendment No. 6 to Loan Agreement between the Company and Baccarat Electronics, Inc.,
dated November 27, 2000 (subsequently transferred to Berg & Berg Enterprises, LLC).
4.10 (9) Second Amended Promissory Note dated November 27, 2000 issued by the Company to Baccarat
Electronics, Inc. (subsequently transferred to Berg & Berg Enterprises, LLC).
4.11 (4) Amendment No. 7 to Original Loan Agreement between the Company and Berg & Berg
Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated October 10, 2001.
4.12 (9) Amendment No. 8 to Original Loan Agreement and Amendment to Second Amended Promissory Note
between the Company and Berg & Berg Enterprises, LLC (previously with Baccarat
Electronics, Inc.), dated February 11, 2002.
4.13 (10) Loan Agreement dated October 5, 2001 between the Company and Berg & Berg Enterprises, LLC.
4.14 (10) Security Agreement dated October 5, 2001 between the Company and Berg & Berg Enterprises,
LLC.
4.15 (10) Promissory Note dated October 5, 2001 issued by the Company to Berg & Berg Enterprises,
LLC.
4.16 (11) Amendment to Loan Agreements with Berg & Berg dated November 8, 2002 (Amendment No. 1 to
October 5, 2001 Loan Agreement and Amendment No. 9 to 1990 Baccarat Loan Agreement).
4.17 (12) Amendment to Loan Agreements with Berg & Berg dated October 23, 2004 (Amendment No. 2 to
October 5, 2001 Loan Agreement and Amendment No. 10 to 1990 Baccarat Loan Agreement).
10.1 (13) 1990 Stock Option Plan as amended on October 3, 1997.
10.2 (14) 1996 Non-Employee Directors' Stock Option Plan as amended on October 3, 1997.
10.3 (15) Valence Technology, Inc. Amended and Restated 2000 Stock Option Plan.
10.4 (16) Employment Agreement with Stephan B. Godevais dated May 2, 2001.
10.5 (16) Employment Offer Letter with Joseph Lamoreux dated May 21, 2001.
10.6 (17) Option Agreement for Stephan Godevais dated May 2, 2001.
59
10.7 (17) Option Agreement for Joseph Lamoreux dated June 4, 2001.
10.8 (17) Option Agreement for Terry Standefer dated August 20, 2001.
10.9 (18) Form of Indemnification Agreement entered into between the Company and its Directors and
Officers.
10.10 (16) Registration Rights Agreement with West Coast Venture Capital, Inc. (the 1981 Kara Ann
Berg Trust) dated January 13, 2001.
10.17 (19) Joint Venture Contract with Fengfan Group Limited Liability Company dated July 8, 2003.
10.18 (19) Contract for Technology Investment with Baoding Fengfan Group Limited Liability Company
and Baoding Fengfan-Valence Battery Co., Ltd. dated July 8, 2003.
10.19 (19) Export Sales Contract with Baoding Fengfan-Valence Battery Co., Ltd. dated July 8, 2003.
10.20 (19) Equipment Contribution Contract with Baoding Fengfan Group Limited Liability Company dated
July 8, 2003.
10.21 (19) Amended Employment Agreement with Stephan Godevais dated September 15, 2003.
10.22 (19) Amended Employment Agreement with Joseph Lamoreux dated September 18, 2003.
10.23 (19) Amended Employment Agreement with Terry Standefer dated September 18, 2003.
10.24 (20) Purchase and Sale Agreement and Escrow Instructions between Valence Technology Nevada,
Inc. and Mars Partners, dated August 8, 2003.
10.25 (21) Equity Line of Credit Term Sheet, dated June 11, 2004 between the Company and Carl E. Berg.
10.26 (22) Employment Agreement with Dean F. Bogues dated December 2, 2004.
10.27 (23) Letter Agreement with Joseph Lamoreux dated January 13, 2005.
10.28 (3) Securities Purchase Agreement, dated November 30, 2004.
10.29 (3) Amendment and Exchange Agreement, dated November 30, 2004.
10.30 (24) Letter dated April 1, 2005, by and between Valence Technology, Inc. and Jin-Rong Hwang.
10.31 Summary of Board of Directors Compensation.
10.32 Summary of Executive Officers' Compensation.
21.1 List of subsidiaries of the Company.
23.1 Consent of Independent Registered Public Accounting Firm.
24.1 (25) Powers of Attorney.
31.1 Certification of Stephan B. Godevais, Principal Executive Officer, pursuant to Rule 13a-14
and 15d-14 of the Securities Exchange Act of 1934.
31.2 Certification of Kevin W. Mischnick, Principal Financial Officer, pursuant to Rule 13a-14
and 15d-14 of the Securities Exchange Act of 1934.
32.1 Certification of Stephan B. Godevais, Principal Financial Officer and Kevin W. Mischnick,
Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
60
99.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference to the exhibit so described in the Company's Registration
Statement on Form S-1 (File No. 33-46765), as amended, filed with the Securities and
Exchange Commission on March 27, 1992.
(2) Incorporated by reference to the exhibit so described in the Company's Schedule 14A filed
with the Securities and Exchange Commission on January 28, 2000.
(3) Incorporated by reference to the exhibit so described in the Company's Current Report on
Form 8-K dated November 30, 2004, filed with the Securities and Exchange Commission on
December 1, 2005.
(4) Incorporated by reference to the exhibit so described in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2002, filed with the Securities and Exchange
Commission on July 1, 2002.
(5) Incorporated by reference to the exhibit so described in the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 2001, filed with the Securities and
Exchange Commission on February 19, 2002.
(6) Incorporated by reference to the exhibit so described in the Company's Current Report on
Form 8-K dated June 2, 2003, and filed with the Securities and Exchange Commission on June
3, 2003.
(7) Incorporated by reference to the exhibit so described in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2003, filed with the Securities and Exchange
Commission on June 30, 2003.
(8) Incorporated by reference to the exhibit so described in the Company's Current Report on
Form 8-K dated July 27, 1998, and filed with the Securities and Exchange Commission on
August 4, 1998.
(9) Incorporated by reference to the exhibit so described in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2001, and filed with the Securities and
Exchange Commission on July 1, 2002.
(10) Incorporated by reference to the exhibit so described in the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended December 31, 2002 filed with the Securities and
Exchange Commission on February 19, 2002.
(11) Incorporated by reference to the exhibit so described in the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 2002, filed with the Securities and
Exchange Commission on November 14, 2002.
(12) Incorporated by reference to the exhibit so described in the Company's Current Report on
Form 8-K, dated November 3, 2004, filed with the Securities and Exchange Commission on
November 5, 2004.
(13) Incorporated by reference to the exhibit so described in the Company's Registration
Statement on Form S-8 (File No. 333-43203) filed with the Securities and Exchange
Commission on December 24, 1997.
61
(14) Incorporated by reference to the exhibit so described in the Company's Registration
Statement on Form S-8 (File No. 333-74595) filed with the Securities and Exchange
Commission on March 17, 1999.
(15) Incorporated by reference to the exhibit so described in the Company's Registration
Statement on Form S-8 (File No. 333-101708) filed with the Securities and Exchange
Commission on December 6, 2002.
(16) Incorporated by reference to the exhibit so described in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2001, filed with the Securities and Exchange
Commission on July 2, 2001.
(17) Incorporated by reference to the exhibit so described in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2002, and filed with the Securities and
Exchange Commission on July 1, 2002.
(18) Incorporated by reference to the exhibit so described in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2000, filed with the Securities and Exchange
Commission on June 29, 2000.
(19) Incorporated by reference to the exhibit so described in the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 2003, filed with the Securities and
Exchange Commission on November 14, 2003.
(20) Incorporated by reference to the exhibit so described in the Company's Current Report on
Form 8-K, dated December 12, 2003, filed with the Securities and Exchange Commission on
December 17, 2003.
(21) Incorporated by reference to the exhibit so described in the Company's Current Report on
Form 8-K, dated November 9, 2004, filed with the Securities and Exchange Commission on
November 12, 2004.
(22) Incorporated by reference to the exhibit so described in the Company's Current Report on
Form 8-K, dated December 2, 2004, filed with the Securities and Exchange Commission on
January 10, 2005.
(23) Incorporated by reference to the exhibit so described in the Company's Current Report on
Form 8-K, dated January 13, 2005, filed with the Securities and Exchange Commission on
January 20, 2005.
(24) Incorporated by reference to the exhibit so described in the Company's Current Report on
Form 8-K dated April 4, 2005, filed with the Securities and Exchange Commission on April
26, 2005.
(25) Included in signature page.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VALENCE TECHNOLOGY, INC.
/s/ Stephan B. Godevais
Dated: June 14, 2005 ---------------------------------------
Stephan B. Godevais
Chief Executive Officer, President and
Chairman of the Board
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Stephan
B. Godevais and Kevin W. Mischnick, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
Name Position Date
- --------------------------------------------- ------------------------------------------ -----------------------
Chief Executive Officer, President and
Chairman of the Board (Principal
/s/ Stephan B. Godevais Executive Officer) June 14, 2005
- ---------------------------------------------
Stephan B. Godevais
Vice President of Finance (Principal
Financial and Accounting Officer)
/s/ Kevin W. Mischnick June 14, 2005
- ---------------------------------------------
Kevin W. Mischnick
/s/ Carl E. Berg Director June 14, 2005
- ---------------------------------------------
Carl E. Berg
Director
/s/ Bert C. Roberts, Jr. June 14, 2005
- ---------------------------------------------
Bert C. Roberts, Jr.
/s/ Alan F. Shugart Director June 14, 2005
- ---------------------------------------------
Alan F. Shugart
/s/ Vassilis G. Keramidas Director June 14, 2005
- ---------------------------------------------
Vassilis G. Keramidas
63
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
Pages
CONSOLIDATED FINANCIAL STATEMENTS:
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING........................................F-2
Reports of Independent Registered Public Accounting Firm........................................................F-3 to F-4
Consolidated Balance Sheets as of March 31, 2005 and March 31, 2004.............................................F-5
Consolidated Financial Statements for the years ending March 31, 2005, March 31, 2004 and March 31, 2003:
Consolidated Statements of Operations and Comprehensive Loss...............................................F-6
Consolidated Statements of Stockholders' Equity (Deficit)..................................................F-7
Consolidated Statements of Cash Flows......................................................................F-8
Notes to Consolidated Financial Statements......................................................................F-9 to F-24
1
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our consolidated financial statements
for external reporting purposes in accordance with generally accepted accounting
principles.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our management has carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Principal Financial Officer, of
the effectiveness of our internal control over financial reporting as of March
31, 2005. In performing this evaluation, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control - Integrated Framework . Based on our assessment of internal
control over financial reporting, our management has concluded that, as of March
31, 2005, our internal control over financial reporting was effective to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
Deloitte & Touche LLP, the independent registered public accounting firm that
audited the consolidated financial statements included in this annual report on
Form 10-K, has issued an attestation report on management's assessment of our
internal control over financial reporting.
June 14, 2005
/s/ Stephan B. Godevais
- ----------------------------------------
Stephan B. Godevais
Principal Executive Officer
/s/ Kevin W. Mischnick
- ----------------------------------------
Kevin W. Mischnick
Principal Financial Officer
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Valence Technology, Inc. and subsidiaries
Austin, Texas
We have audited the accompanying consolidated balance sheets of Valence
Technology, Inc. and subsidiaries (the "Company") as of March 31, 2005 and 2004,
and the related consolidated statements of operations and comprehensive loss,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended March 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2005
and 2004, and the results of their operations and comprehensive loss and their
cash flows for each of the three years in the period ended March 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of March 31, 2005, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated June 14, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
DELOITTE & TOUCHE LLP
Austin, Texas
June 14, 2005
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Valence Technology, Inc. and subsidiaries
Austin, Texas
We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls over Financial Reporting, that Valence
Technology, Inc and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of March 31, 2005, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of March 31, 2005, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended March 31, 2005 of the Company and our
report dated June 14, 2005 expressed an unqualified opinion on those financial
statements.
DELOITTE & TOUCHE LLP
Austin, Texas
June 14, 2005
F-4
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, 2005 March 31, 2004
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,500 $ 2,692
Trade receivables, net of allowance of $115 and $98, respectively 1,464 1,477
Inventory 2,564 3,318
Prepaid and other current assets 920 837
------------------- -------------------
Total current assets 7,448 8,324
Property, plant and equipment, net 2,383 12,218
Intellectual property, net 400 514
------------------- -------------------
Total assets $ 10,231 $ 21,056
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable $ - $ 2,068
Current portion of long-term debt - 967
Accounts payable 3,251 3,235
Accrued expenses 4,607 3,555
Deferred revenue 1,241 1,593
Grant payable - short term - 1,753
------------------- -------------------
Total current liabilities 9,099 13,171
Grant payable - long term - 3,036
Long-term interest payable to stockholder 12,536 9,720
Long-term debt, less current portion - 5,458
Long-term debt to stockholder 34,656 33,949
------------------- -------------------
Total liabilities 56,291 65,334
------------------- -------------------
Minority interest in joint venture - 4,484
Commitments and contingencies
Redeemable convertible preferred stock, $0.001 par value,
1,000 shares authorized, 861 issued and outstanding
at March 31, 2005, liquidation value $8,610 8,582 8,032
Stockholders' equity (deficit):
Common stock, $0.001 par value, 200,000,000 shares authorized;
100,000,000 and 75,961,826 shares issued and outstanding, respectively 87 76
Additional paid-in capital 415,745 382,282
Deferred compensation (89) (226)
Notes receivable from stockholder (5,164) (5,161)
Accumulated deficit (461,328) (429,724)
Accumulated other comprehensive loss (3,893) (4,041)
------------------- -------------------
Total stockholders' equity (deficit) (54,642) (56,794)
------------------- -------------------
Total liabilities, preferred stock and stockholders' equity (deficit) $ 10,231 $ 21,056
=================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended
----------------------------------------------------------
March 31, 2005 March 31, 2004 March 31, 2003
------------------ --------------- ---------------
Revenue:
Licensing and royalty revenue $ 391 $ 963 $ 125
Battery and system sales 10,274 8,483 2,432
------------------ --------------- ---------------
Total revenues 10,665 9,446 2,557
Cost of sales 16,341 15,923 10,996
Gross profit (loss) (5,676) (6,477) (8,439)
Operating expenses:
Research and product development 7,682 8,638 9,293
Marketing 4,292 4,880 3,210
General and administrative 12,933 11,416 10,140
Depreciation and amortization 884 2,109 2,790
(Gain)/loss on disposal of assets (5,257) (21) (20)
Restructuring charge - 926 -
Contract settlement charge, INI 957 3,046 -
Contract settlement charge, other 499
Asset impairment charge 87 13,660 258
------------------ --------------- ---------------
Total operating expenses 22,077 44,654 25,671
------------------ --------------- ---------------
Operating loss (27,753) (51,131) (34,110)
Minority interest in joint venture - 69 -
Cost of warrants - (181) -
Interest and other income 585 345 381
Interest expense (4,262) (4,059) (4,172)
------------------ --------------- ---------------
Net loss (31,430) (54,957) (37,901)
Dividends on preferred stock 171 162 -
Preferred stock accretion 578 940 -
------------------ --------------- ---------------
Net loss available to common stockholders $ (32,179) $ (56,059) $ (37,901)
================== =============== ===============
Other comprehensive loss:
Net loss $ (31,430) $ (54,957) $ (37,901)
Change in foreign currency translation adjustments 148 121 92
------------------ --------------- ---------------
Comprehensive loss $ (31,282) $ (54,836) $ (37,809)
================== =============== ===============
Net loss per share available to common stockholders $ (0.40) $ (0.77) $ (0.65)
================== =============== ===============
Shares used in computing net loss per share available
to common stockholders, basic and diluted 81,108 73,104 58,423
================== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-6
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended March 31, 2005, 2004, and 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
The accompanying notes are an integral part of these consolidated financial statements.
Notes Accumulated
Additional Receivable Other
Common Stock Paid-in Deferred from Accumulated Comprehensive
Shares Amount Capital Compensation Stockholder Deficit Loss Totals
----------- ------- ---------- ----------- ----------- ----------- ------------ --------
Balances, March 31, 2002 45,570 $ 46 $331,038 $ - $(5,990) $(336,703) $ (4,254) 15,863)
Sale of stock to private investors 26,153 26 35,106 35,132
Modification of stock option 374 (374) -
Stock compensation 193 193
Interest receivable from stockholder (278) (278)
Payment of accrued interest on note
receivable from stockholder 1,107 1,107
Net Loss (37,901) (37,901)
Change in translation adjustment 92 92
--------- -------- ---------- ------- -------- ----------- ---------- ---------
Balances, March 31, 2003 71,723 $ 72 $366,518 $(181) $(5,161) $(374,604) $ (4,162) $(17,518)
--------- -------- ---------- ------- -------- ----------- ---------- ---------
Sale of stock to private investors 3,664 4 12,991 12,995
Exercise of stock options at $0.63 to
$4.94 per share 247 416 416
Conversion of preferred stock 327 1,391 (1) 1,390
Modification of stock option 738 (738) -
Stock compensation 36 693 729
Interest receivable from stockholder (277) (277)
Payment of accrued interest on note
receivable from stockholder 277 277
Dividends on preferred stock (162) (162)
Issuance of common stock warrants 1,132 1,132
Accretion of warrants (940) (940)
Net loss (54,957) (54,957)
Change in translation adjustment 121 121
--------- -------- ---------- ------- -------- --------- ---------- ---------
Balances, March 31, 2004 75,961 $ 76 $382,282 $ (226) $(5,161) $(429,724) $ (4,041) $(56,794)
--------- -------- ---------- ------- -------- ----------- ---------- ---------
Sale of stock to private investors 10,243 10 31,890 31,900
Issuance of stock to INI 539 1 1,915 1,916
Exercise of Stock options at $0.63 to
$4.56 per share 319 - 571 571
Modification of stock option (443) 442 (1)
Stock compensation 108 (305) (197)
Interest receivable from stockholder (304) (304)
Payment of accrued interest on note 301 301
receivable from stockholder -
Dividends on preferred stock (174) (174)
Accretion of warrants (578) (578)
Net Loss (31,430) (31,430)
Change in translation adjustment 148 148
--------- -------- ---------- ------- -------- ----------- ---------- --------
Balances, March 31, 2005 87,062 $ 87 $415,745 $ (89) $(5,164) $(461,328) $ (3,893) $(54,642)
--------- -------- ---------- ------- -------- ----------- ---------- ---------
The accompanying notes are an integral part of these consolidated financial statements.
F-7
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended
-------------------------------------------------
March 31, 2005 March 31, 2004 March 31, 2003
--------------- --------------- ---------------
Cash flows from operating activities:
Net loss $ (31,430) $ (54,957) $ (37,901)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 884 2,109 2,790
Bad debt expense (recoveries) 17 (31) (182)
Accretion of debt discount and other 909 724 924
Impairment charge 87 13,660 258
Contract settlement charge 957 3,046 -
Contract settlement payment to INI (3,211) - -
Restructuring charge - 926 -
Cost of warrants - 181 -
(Gain) loss on disposal of property, plant, & equipment (5,257) (21) (20)
Compensation related to the issuance of stock options (197) 729 193
Interest income on shareholder note receivable (3) - (277)
Reserve for obsolete inventory 741 120 326
Minority interest in joint venture - (69) -
Changes in operating assets and liabilities:
Trade receivables (3) (228) (674)
Inventory 13 (1,376) (492)
Prepaid and other current assets (589) 731 115
Accounts payable 987 (413) 857
Accrued expenses and long-term interest 3,322 4,160 1,599
Deferred revenue (352) 1,578 -
--------------- --------------- ---------------
Net cash used in operating activities (33,125) (29,131) (32,484)
--------------- --------------- ---------------
Cash flows from investing activities:
Effect of deconsolidation of joint venture (913) - -
Purchases of property, plant & equipment (1,838) (5,990) (726)
Proceeds from disposal of property, plant & equipment 9,772 2,685 20
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 7,021 (3,305) (706)
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from note payable - 2,068 -
Proceeds from long-term debt - - 4,671
Payments of long-term debt (6,646) (959) (804)
Dividends paid (172) (116) -
Proceeds from issuance of preferred stock,
net of issuance costs (28) 9,416 -
Proceeds from stock option exercises 571 416 -
Proceeds from issuance of common stock and warrants,
net of issuance costs 31,900 17,532 35,132
--------------- --------------- ---------------
Net cash provided by financing activities 25,625 28,357 38,999
--------------- --------------- ---------------
Effect of foreign exchange rates on cash
and cash equivalents 287 155 184
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents (192) (3,924) 5,993
Cash and cash equivalents, beginning of year 2,692 6,616 623
--------------- --------------- ---------------
Cash and cash equivalents, end of year $ 2,500 $ 2,692 $ 6,616
=============== =============== ===============
Supplemental Information:
Interest paid 275 345 269
Conversion of preferred stock to common stock - 1,390 -
The accompanying notes are an integral part of these consolidated financial statements.
F-8
1. BUSINESS AND BUSINESS STRATEGY:
Valence Technology, Inc. (with its subsidiaries, "the Company") was founded
in 1989 and has commercialized the industry's first phosphate-based
lithium-ion technology. The Company's mission is to drive the wide adoption
of high-performance, safe, low-cost energy storage systems by drawing on
the numerous benefits of its Saphion(R) battery technology, the experience
of its management team, and the significant market opportunity available to
it.
In February 2002, the Company unveiled its Saphion(R) technology, a
lithium-ion technology which utilizes a phosphate-based cathode material.
The Company believes that by incorporating a phosphate-based cathode
material, its Saphion(R) technology is able to offer greater thermal and
electrochemical stability than traditional lithium-ion technologies. The
Company believes that the safety characteristics of Saphion(R) technology
will enable it to be designed into a wide variety of products in both
existing lithium-ion markets, but primarily in markets not served by
current lithium-ion solutions. These markets and products include, among
others, electric vehicles, personal transport (e-bikes, wheelchairs,
scooters), backup power systems for the telecom and utility industry and
home appliances.
The Company's business plan and strategy focus on the generation of revenue
from product sales, while minimizing costs through a manufacturing plan
that utilizes partnerships with contract manufacturers and internal
manufacturing efforts through its newly-formed Wholly Foreign-Owned
Enterprises ("WFOE") in China. These WFOE's started operations during the
third and fourth quarter of fiscal 2005. The market for Saphion(R)
technology will be developed by offering existing and new solutions that
differentiate the Company's products and its customers' products in both
the large-format and small-format markets through the Company's own product
launches, such as the N-Charge(TM) Power System, K-Charge(TM) Power System,
and U-Charge(TM) Power System, and through products designed by others. In
addition, the Company expect to continue to pursue a licensing strategy as
our Saphion(R) technology receives greater market acceptance.
2. LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 2005, the Company's principal sources of liquidity were cash
and cash equivalents of $2.5 million and $6 million remaining under the $20
million backup equity funding commitment entered into in June 2004 with Mr.
Carl Berg. Subsequent to March 31, 2005 the Company has drawn down an
additional $5 million of this prior commitment. On June 10, 2005 the
Company entered into a new $20 million funding commitment with Mr. Berg to
provide funding in the form of equity or a secured loan on terms to be
negotiated. This new commitment can be reduced by Mr. Berg by the amount of
net proceeds received in a debt or equity transaction with a third party.
At March 31, 2005, the Company had $4.3 million of Series C-1 Convertible
Preferred Stock and $4.3 million of Series C-2 Convertible Preferred Stock
outstanding. The Series C-1 Convertible Preferred Stock and Series C-2
Convertible Preferred Stock are convertible into common stock at $4.00 per
share and are redeemable on December 15, 2005 (subject to an early right of
redemption in the case of the Series C-2 Convertible Preferred Stock during
the 30 days following June 15, 2005 and September 15, 2005). Applicable
provisionsof Delaware corporate law restrict the Company's ability to
redeem the preferred stock. If the Company does not redeem the shares when
required by their terms, the conversion price will be reduced to an amount
equal to 95% of the lowest closing bid price of the Company's common stock
during the three days ending on and including the conversion date.
The Company's current forecast projects that these sources of liquidity
will be sufficient for at least the twelve months following March 31, 2005.
This forecast assumes product sales during fiscal 2006 from the
N-Charge(TM) Power System and the Segway pack, which are subject to
seasonal fluctuations, of between $2.5 - $5.0 million per quarter, and
expect additional revenues from the sale of the U-Charge(TM) Power System
into large-format applications and direct cell sale activities. The Company
also anticipate further cash benefits from continued reductions in
operating expenses and manufacturing costs, offset by small increases to
capital expenditures associated with continuing efforts in China.
The Company's cash requirements may vary materially from those now planned
because of changes in the Company's operations, including the failure to
achieve expected revenues, greater than expected expenses, changes
F-9
in OEM relationships, market conditions, the failure to timely realize the
Company's product development goals, and other adverse developments. These
events could have a negative impact on the Company's available liquidity
sources during the next 12 months.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements, as well as the
revenues and expenses for the period. Actual results could differ from
those estimates.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries, and its majority-owned joint venture.
Significant intercompany balances and transactions are eliminated upon
consolidation.
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 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, primarily product
shipments to resellers that are subject to right of return, are recorded as
deferred revenue and reflected as a liability on the Company's balance
sheet. For reseller shipments where revenue recognition is deferred, the
Company records revenue based upon resellers' supplied reporting of sales
to end customers or their inventory reporting. For direct customers, the
Company estimates a return rate percentage based upon its historical
experience, reviewed on a quarterly basis. Customer rebates and other price
adjustments are recognized as incurred. 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 licensee revenue reporting and when
collectibility is reasonably assured.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts receivable and cash
and cash equivalents. The Company provides an allowance for doubtful
accounts based upon the expected collectibility of accounts receivable.
Credit losses to date have been within the Company's estimates.
Cash and cash equivalents are invested in deposits with a major financial
institution. The Company has not experienced any losses on its deposits of
cash and cash equivalents. Management believes that the financial
institution is financially sound and, accordingly, minimal credit risk
exists.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORY:
Inventory is stated at the lower of cost (determined using the first-in,
first out method) or market.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments that potentially subject the Company to an interest
and credit risk consist of cash and cash equivalents, trade receivables,
accounts payable, and accrued expenses, the carrying value of which are a
reasonable
F-10
estimate of their fair values due to their short maturities. Based on
borrowing rates currently available to the Company for loans with similar
terms, the carrying value of its debt obligations and grant payable
approximate fair value.
INVESTMENTS:
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS No. 115, the Company
classifies its securities as held-to-maturity. Held to maturity securities
are those investments in which the Company has the ability and intent to
hold the security until maturity. Held to maturity securities are recorded
at amortized cost, which approximates market value. As of March 31, 2005,
the Company had no held to maturity securities. Dividend and interest
income are recognized in the period earned.
PROPERTY, PLANT AND EQUIPMENT:
Property and equipment are stated at cost and depreciated on the
straight-line method over their estimated useful lives, generally three to
five years. Leasehold improvements are amortized over the lesser of their
estimated useful life, generally five years, or the remaining lease term.
Expenditures for renewals and betterments are capitalized; repairs and
maintenance are charged to expense as incurred. The cost and accumulated
depreciation of assets sold or otherwise disposed of are removed from the
accounts and any gain or loss thereon is reflected in operations.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company performs a review of long-lived tangible and intangible assets
for impairment whenever events or changes in circumstances indicate that
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 that 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.
INTELLECTUAL PROPERTY:
Intellectual properties acquired consist of patents and are recorded at
cost based on the market value of the common stock used in their
acquisition. The costs are amortized over the estimated remaining life of
the patents.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
WARRANTY:
The Company records warranty liabilities at the time of sale for the
estimated costs that may be incurred under its basic limited warranty. The
warranty terms and conditions generally provide for replacement of
defective products. Factors that affect the Company's warranty liability
include the number of units currently under warranty, historical and
anticipated rates of warranty claims on those units, and cost per claim to
satisfy the Company's warranty obligation. Each quarter, the Company
re-evaluates its estimates to assess the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary. See Note 13, Commitments
and Contingencies.
SHIPPING AND HANDLING COSTS:
In accordance with Emerging Issues Task Force No. 00-10, "Accounting for
Shipping and Handling Fees and Costs", the Company recognizes as revenue
amounts billed to customers related to shipping and handling, with related
expenses recorded as a component of cost of sales.
ADVERTISING COSTS:
Advertising costs are charged to expense as incurred. Advertising expenses
for fiscal 2005, 2004, and 2003, were $468,000, $1.3 million, and $611,000,
respectively.
F-11
FOREIGN CURRENCY:
The assets and liabilities of the Company's foreign subsidiaries have been
translated to U.S. dollars using the exchange rate in effect at the balance
sheet date. Results of operations have been translated using the average
exchange rate during the year. Resulting translation adjustments have been
recorded as a separate component of stockholders' equity (deficit) as
accumulated other comprehensive loss. Foreign currency transaction gains
and losses are included in the consolidated statement of operations as they
occur.
STOCK-BASED COMPENSATION:
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123," and consensus of the Emerging Issues
Task Force No. 96-18, "Accounting for Equity Instruments with Variable
Terms That Are Issued for Consideration Other Than Employee Services." 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. Had
compensation expense for the stock plans been determined based on the fair
value at the grant date for options granted in 2005, 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):
2005 2004 2003
-------------------------------------
Net loss available to stockholders - as reported $(32,179) $ (56,059) $(37,901)
Add: stock-based compensation expense, net related taxes (4,117) (5,426) (6,806)
Net loss available to stockholders - pro forma (36,296) (61,485) (44,707)
Net loss available to stockholders per share - as reported (0.40) (0.77) (0.65)
Net loss available to stockholders per share, basic and diluted - pro forma (0.45) (0.84) (0.77)
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes pricing model with the following weighted average assumptions for
grants in fiscal years 2005, 2004, and 2003:
2005 2004 2003
--------------------------------------------
Risk-free Interest Rate 3.69% 2.84% 2.85%
Expected Life 5.0 years 5.0 years 4.71 years
Volatility 101.58% 106.74% 106.52%
Dividend Yield - - -
COMPREHENSIVE INCOME/LOSS:
Comprehensive income/loss is the change in stockholder's equity (deficit)
from foreign currency translation gains and losses.
NEW ACCOUNTING STANDARDS:
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), CONSOLIDATION OF VARIABLE INTEREST
ENTITIES, AN INTERPRETATION OF ARB NO. 51, which addresses consolidation by
business enterprises of variable interest entities ("VIEs") either: (1)
that do not have sufficient equity investment at risk to permit the entity
to finance its activities without additional subordinated financial
support, or (2) in which the equity investors lack an essential
characteristic of a controlling financial interest. In December 2003, the
FASB completed deliberations of proposed modifications to FIN 46 (Revised
Interpretations) resulting in multiple effective dates based on the nature
as well as the creation date of the VIE. VIEs created after January 31,
2003, but prior to January 1, 2004, may be accounted for either based on
the original interpretation or the Revised Interpretations. However, the
Revised Interpretations must be applied no later than the first quarter of
fiscal year 2004. VIEs created after January 1, 2004 must be accounted for
under the Revised Interpretations. The adoption of these deferred
provisions in 2004 had no effect on the Company's financial position,
results of operations or cash flows.
F-12
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. The standard requires that abnormal
amounts of idle capacity and spoilage costs should be excluded from the
cost of inventory and expensed when incurred. The provision is effective
for fiscal periods beginning after June 15, 2005. The Company does not
expect the adoption of this standard to have a material effect on its
financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary
Transactions. SFAS No. 153 requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis, unless (1)
neither the asset received nor the asset surrendered has a fair value that
is determinable within reasonable limits or (2) the transactions lack
commercial substance. SFAS No. 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The
Company does not expect the adoption of this standard to have a material
effect on its financial position, results of operations or cash flows.
In December 2004, the FASB released its final revised standard, SFAS No.
123R, Share-Based Payment. SFAS No. 123R requires that an entity measure
the cost of equity based service awards using the grant-date fair value of
the award. That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award or the
vesting period. No compensation cost is recognized for equity instruments
for which employees do not render the requisite service. An entity will
initially measure the cost of liability based service awards using its
current fair value; the fair value of that award will be re-measured
subsequently at each reporting date through the settlement date. Changes in
fair value during the requisite service period will be recognized as
compensation cost over that period. Adoption of SFAS No. 123R is required
for fiscal periods beginning after June 15, 2005. The Company is evaluating
SFAS 123R and believes that it will likely have a material effect on its
financial position and results of operations.
INCOME TAXES:
The Company utilizes the liability method to account for income taxes where
deferred tax assets or liabilities are determined based on the differences
between the financial reporting and tax reporting bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
NET LOSS PER SHARE:
Net loss per share is computed by dividing the net loss by the weighted
average shares of common stock outstanding during the period. The dilutive
effect of the options and warrants to purchase common stock are excluded
from the computation of diluted net loss per share, since their effect is
antidilutive. The antidilutive instruments excluded from the diluted net
loss per share computation at March 31 were as follows:
2005 2004 2003
-------------- --------------- ---------------
Shares reserved for conversion of Series C preferred stock 2,152,500 2,026,000 -
Common stock options 9,264,000 8,694,000 8,920,000
Warrants to purchase common stock 1,889,000 2,469,000 3,237,000
-------------- --------------- ---------------
Total 13,305,500 13,189,000 12,157,000
============== =============== ===============
4. IMPAIRMENT CHARGE:
During the quarter ended March 31, 2003, the Company recorded an impairment
charge of $258,000 on the property in Henderson, Nevada related to the
planned sale of this facility. The Company estimated that the expected
future cash flows related to the facility were less than the asset carrying
value of $3 million and adjusted the assets to their fair value
accordingly. Fair value was based upon quoted market price for the
facility.
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, "Accounting for Impairment or Disposal of
Long-Lived Assets." During the second quarter of fiscal 2004 the Company
completed qualification of its OEM manufacturer in China, ATL, for
Saphion(R) products. In addition, the Company announced the formation of a
manufacturing joint venture in China with Fengfan Group, Ltd. The Company
has transitioned all manufacturing from its Northern Ireland
F-13
facility to China and other low-cost manufacturing regions as of December
31, 2003, and has ceased all manufacturing operations in its Northern
Ireland facility as of 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%.[You need to update disclosure as it relates to
forward looking disclosures regarding licensing reveneue and manufacturing
capability.]
An impairment charge of $87,000 was recorded during the fiscal quarter
ended September 30, 2004 pursuant to FASB Statement No. 144, "Accounting
for Impairment or Disposal of Long-Lived Assets." As a result of the
Company's decision to relocate manufacturing operations from its leased
Henderson, Nevada facility to a newly-formed subsidiary in Suzhou, China,
equipment and fixtures in the Nevada facility will not generate cash flows
greater than their carrying value. Assets with a carrying value of
approximately $87,000 were written down in full to fair value, as the
company estimates that there will be no future cash flows from these
assets.
5. INVENTORY:
Inventory consisted of the following (in thousands) at:
March 31,
----------------------------
2005 2004
------------ ------------
Raw materials $ 464 $ 317
Work in process 880 1,330
Finished goods 1,220 1,671
------------ ------------
Total inventory $ 2,564 $ 3,318
============ ============
6. PREPAID AND OTHER CURRENT ASSETS:
Prepaid and other current assets consisted of the following (in thousands)
at:
March 31,
----------------------------
2005 2004
------------ ------------
Other receivables $ 9 $ 101
Deposits 124 73
Prepaid insurance 221 351
Other prepaids 566 312
------------ ------------
Total other current assets $ 920 $ 837
============ ============
7. INTELLECTUAL PROPERTY:
Intellectual property consisting of stacked battery construction technology
acquired from Telcordia Technologies, Inc. in December 2000 is amortized
over five years. Intellectual property, net of accumulated amortization and
impairment, consisted of the following (in thousands) at:
F-14
March 31,
-----------------------------------
2005 2004
---------------- ----------------
Intellectual property before impairment $ 13,602 $ 13,602
Less: accumulated amortization (4,708) (4,594)
Less: Impairment (8,494) (8,494)
---------------- ----------------
Intellectual property, net $ 400 $ 514
================ ================
Amortization expense was approximately $114, $781 and $1,450 for the fiscal
years ended March 31, 2005, 2004 and 2003, respectively. Amortization
expense on intellectual property at March 31, 2005 will be $114 for fiscal
years 2006 through 2008 and $58 for fiscal year 2009.
8. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, net of impairment, consisted of the
following (in thousands) at:
March 31,
2005 2004
------------------ ----------------
Building and land $ - $ 15,726
Leasehold improvements 456 50
Machinery and equipment 7,678 13,609
Office and computer equipment 1,238 960
Construction in progress 64 2,490
------------------ ----------------
Total cost 9,436 32,835
Less: accumulated depreciation (5,191) (15,451)
Less: impairment (1,862) (5,166)
------------------ ----------------
Total cost, net of impairment and depreciation $ 2,383 $ 12,218
================== ================
9. ACCRUED EXPENSES:
Accrued expenses consisted of the following (in thousands) at:
March 31,
----------------------------
2005 2004
------------ ------------
Accrued compensation $ 664 $ 1,104
Professional services 167 243
Warranty reserve 1,067 490
Other accrued expenses 2,709 1,718
------------ ------------
Total accrued expenses $ 4,607 $ 3,555
============ ============
10. NOTE PAYABLE:
In January 2004, the Company's joint venture purchased a land permit for
its facility for a price of approximately $3.2 million, consisting of
approximately $1.1 million in cash and a $2.1 million in a note payable due
sixty days from purchase. The obligation was retired as part of the
settlement agreement. See Note 19, Joint Venture.
11. LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands) at:
F-15
March 31,
----------------------------
2005 2004
------------ ------------
Facility loans $ - $ 6,425
Less amounts due within one year - (967)
------------ ------------
Long-term debt, less current portion $ - $ 5,458
============ ============
On December 22, 2004, the Company completed the sale of its Northern Ireland
manufacturing facility and retired the related facility loans.
DEBT TO STOCKHOLDER CONSISTED OF THE FOLLOWING (IN THOUSANDS):
March 31,
-----------------------------
2005 2004
------------- -------------
2001 loan balance $ 20,000 $ 20,000
1998 loan balance 14,950 14,950
Unaccreted debt discount (294) (1,001)
------------- -------------
Balance at year-end $ 34,656 $ 33,949
============= =============
Principal payments of debt to stockholder are as follows (in thousands):
2005 2006 2007 2008 2009
-------------------------------------------------------------
2001 loan - - $ 20,000 - -
1998 loan - - 14,950 - -
-------------------------------------------------------------
Total - - $ 34,950 - -
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, On October 21, 2004 Berg & Berg
agreed to extend the maturity date for the loan principal and interest from
September 30, 2005 to September 30, 2006. On November 8, 2002 the Company
and Berg & Berg amended an affirmative covenant in the agreement to
acknowledge the Nasdaq SmallCap Market as an acceptable market for the
listing of the Company's Common Stock. As of March 31, 2005, accrued
interest on the loan totaled $5.086 million, 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 million 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 method using the assumptions
of a life of 47 months, 100% volatility, and a risk free rate of 5.5%.
Through March 31, 2005, a total of $2.473 million has been accreted and
included as interest expense. The amounts charged to interest expense on
the outstanding balance of the loan for the fiscal years ended March 31,
2005, 2004, and 2003 were $1.622 million, $1.627 million, and $1.465
million, respectively. Interest payments on the loan are currently being
deferred, and are recorded as long-term interest.
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 million 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 million. As of March 31, 2005, the
Company had an outstanding balance of $14.95 million under the 1998 Loan
agreement. The loan bears interest at one percent over lender's borrowing
rate (approximately 9.0% at March 31, 2005). On October 21, 2004, the
parties agreed to extend the loan's maturity date from September 30, 2005
to September 30, 2006. On November 8, 2002 the Company and Berg & Berg
amended an affirmative covenant in the agreement to acknowledge the Nasdaq
SmallCap Market as an acceptable market for the listing of the Company's
Common Stock. As of March 31, 2005, accrued interest on the loan totaled
$7.45 million, 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
F-16
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 million, has been reflected as
additional consideration for the debt financing, recorded as a discount on
the debt and accreted as interest expense to be amortized over the life of
the line of credit. As of March 31, 2005, a total of $2.159 million has
been accreted. The amounts charged to interest expense for each of the
fiscal years ended on March 31, 2005, 2004, and 2003 were $1.349 million.
Interest payments on the loan are currently being deferred, and are
recorded as long-term interest.
All of our assets are pledged as collateral under the 2001 Loan and the
1998 Loan.
12. SETTLEMENT AGREEMENT
Since 1994, pursuant to a letter of offer, the Company 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, totaling (pound)9.0 million. Under certain circumstances, INI had
the right to reclaim a portion of these grants and had a security interest
in the facility's land, building, and equipment. On December 21, 2004, the
Company and INI entered into a settlement agreement pursuant to which INI
agreed to release the Company of all outstanding claims and other
obligations owing to INI in connection with grants previously provided to
the Company. Under the terms of the settlement agreement the Company agreed
to pay INI (pound)3 million consisting of a (pound)2 million payment in
cash and a (pound)1 million payment in common stock. In order to fund the
(pound)1 million common stock payment the Company issued 539,416 shares of
common stock, equivalent to $3.60 per share. In connection with this final
settlement, the Company recorded an additional charge of $957,000 during
the third quarter of fiscal year 2005.
13. COMMITMENTS AND CONTINGENCIES:
LEASES:
Total rent expense for the years ended March 31, 2005, 2004 and 2003 was
approximately $936,000, $885,000, and $662,000, respectively. Future
minimum payments on leases for years following March 31, 2005 (in
thousands) are:
Fiscal Year
-----------
2006 $ 886
2007 614
2008 387
2009 122
2010 -
On December 12, 2003, the Company closed the sale of its Henderson, Nevada
building and land with net book value of $2.664 million for net proceeds of
$2.685 million. A gain of $21,000 was recorded on the sale. The Company is
leasing the facility month-to-month for $20,000 per month.
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 the Company would provide a replacement unit to any customer
returning a purchased product because of a product performance issue. The
Company has also established a warranty reserve in relation to the sale of
its K-Charge(TM) Power Systems and its U-Charge(TM) Power Systems, and its
other large-format power systems. In addition, the Company has established
a reserve for its 30-day right of return policy under which a direct
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
direct N-Charge(TM) Power System sales.
Product warranty liabilities at the years ended March 31, 2005 and March
31, 2004 are as follows (in thousands):
F-17
March 31,
--------------------------------
2005 2004
--------------- ---------------
Beginning balance $ 490 $ 123
Less: claims (695) (445)
Less: returns (33) (34)
Plus: accruals 1,305 846
--------------------------------
Ending balance $ 1,067 $ 490
================================
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.
14. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
On June 2, 2003, the Company issued 1,000 shares of Series C Convertible
Preferred Stock and warrants to purchase the Company's common stock for
$10,000 per share, raising net proceeds of $9.416 million. On January 22,
2004, the holder of the Series C Convertible Preferred Stock converted 139
of its 1,000 shares with the principal amount of $1.39 million, including
accrued and unpaid dividends, into 327,453 shares of the Company's common
stock at the conversion price of $4.25 per share. On November 30, 2004, the
Company entered into an amendment and exchange agreement to exchange all of
the outstanding 861 shares of the Company's Series C Convertible Preferred
Stock, representing $8.6 million of principal. The Series C Convertible
Preferred Stock was exchanged for 431 shares of Series C-1 Convertible
Preferred Stock, with a stated value of $4.3 million, and 430 shares of
Series C-2 Convertible Preferred Stock, with a stated value of $4.3
million. Under the terms of the Company's new Series C-1 Convertible
Preferred Stock and Series C-2 Convertible Preferred Stock, the preferred
stock is convertible into common stock at $4.00 per share, carry a 2%
annual dividend rate, payable quarterly in cash or shares of common stock,
and mature on December 15, 2005. The new series of preferred stock are
identical in all respects except that the holder of the Series C-2
Convertible Preferred Stock will have the right to require the Company to
redeem the Series C-2 Convertible Preferred Stock at any time during the 30
days following June 15, 2005 and September 15, 2005. 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. If the preferred shares are not redeemed in
accordance with their terms, the holder of the preferred stock shall have
the option to require the Company to convert all or part of the redeemed
shares at a share price of 95% of the lowest closing bid price of the
Company's common stock during the three days ending on and including the
conversion date.
In connection with the issue of the initial issuance of the Series C
Convertible Preferred Stock, the Company issued to the Series C Convertible
Preferred Stock holder a warrant to purchase 352,900 shares of the
Company's common stock. The warrant is exercisable at a purchase price of
$5.00 per share and expires in June 2008. The warrant was valued using the
Black-Scholes valuation model. The warrant was recorded to additional paid
in capital at its relative fair value to the Series C Convertible Preferred
Stock at $933,000. Accretion to the remaining redemption value of $8.6
million was recorded over the eighteen-month period of the Series C
Convertible Preferred Stock ending December 2, 2004.
15. STOCKHOLDERS' EQUITY (DEFICIT):
STOCK OPTIONS AND WARRANTS:
The Company has a stock option plan (the "1990 Plan") under which options
granted may be incentive stock options or supplemental stock options.
Options are to be granted at a price not less than fair market value
(incentive options) or 85% of fair market value (supplemental options) on
the date of grant. The options vest as determined by the Board of Directors
and are generally exercisable over a five-year period. Unvested options are
canceled and returned to the 1990 Plan upon an employee's termination.
Generally, vested options, not exercised within three months of
termination, are also canceled and returned to the Plan. The 1990
F-18
Plan terminated on July 17, 2000, and as such options may not be granted
after that date. Options granted prior to July 17, 2000 expire no later
than ten years from the date of grant.
In February 1996, the Board of Directors adopted a stock plan for outside
Directors (the "1996 Non-Employee Director's Stock Option Plan"). The plan
provides that new directors will receive an initial stock option of 100,000
shares of common stock upon their election to the Board. The exercise price
for this initial option will be the fair market value on the day it is
granted. This initial option will vest one-fifth on the first and second
anniversaries of the grant of the option, and quarterly over the next three
years. A director who had not received an option upon becoming a director
will receive an initial stock option of 100,000 shares on the date of the
adoption of the plan. During fiscal years 2004 and 2005, no shares were
granted under this plan. As of March 31, 2005, a total of 21,260 shares
remained available for grant under this plan.
In October 1997, the Board of Directors adopted the 1997 Non-Officer Stock
Option Plan (the "1997 Plan"). The Company may grant options to non-officer
employees and consultants under the 1997 Plan. Options are to be granted at
a price not less than fair market value (incentive options) on the date of
grant. The options vest as determined by the Board of Directors, generally
quarterly over a three- or four-year period. The options expire no later
than ten years from the date of grant. Unvested options are canceled and
returned to the 1997 Plan upon an employee's termination. Vested options,
not exercised within three months of termination, also are canceled and
returned to the 1997 Plan. During fiscal year 2005, a total of 21,000
shares were granted under this plan. At March 31, 2005, the Company had
701,490 shares available for grant under the 1997 Plan.
In January 2000, the Board of Directors adopted the 2000 Stock Option Plan
(the "2000 Plan"). The Company may grant incentive stock options to
employees and non-statutory stock options to non-employee members of the
Board of Directors and consultants under the 2000 Plan. Options are to be
granted at a price not less than fair market value on the date of grant. In
the case of an incentive stock option granted to an employee who owns stock
possessing more than 10% of the total combined voting power of all classes
of stock of the Company or any affiliate, the option is to be granted at a
price not less than 110% of the fair market value on the date of grant. The
options are exercisable as determined by the Board of Directors, generally
over a four-year period. The options expire no later than ten years from
the date of grant. Unvested options are canceled and returned to the 2000
Plan upon an employee's termination. Vested options, not exercised within
three months of termination, also are canceled and returned to the 2000
Plan. During fiscal year 2005, a total of 1,778,000 shares were granted
under this plan. At March 31, 2005, the Company had 1,192,259 shares
available for grant under the 2000 Plan. At March 31, 2005, the Company had
committed 364,000 shares for future options to its China-based employees.
Aggregate option activity is as follows (shares in thousands):
Outstanding Options
---------------------------------
Number of Weighted Avg.
Shares Exercise Price
-----------
Balance, March 31, 2003 8,831 $5.68
-----------
Granted 626 $4.34
Exercised (246) $1.68
Canceled (606) $5.41
-----------
Balance, March 31, 2004 8,605 $5.73
-----------
Granted 1,799 $3.12
Exercised (315) $1.72
Canceled (825) $7.99
-----------
Balance, March 31, 2005 9,264 $5.17
===========
At March 31, 2005, 2004, and 2003, vested options to purchase 6,869,531,
5,699,000, and 4,225,000, shares, respectively, were unexercised.
F-19
The following table summarizes information about fixed stock options
outstanding at March 31, 2005 (shares in thousands):
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- -----------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life (years) Exercise Price Exercisable Exercise Price
- ------------------- --------------- --------------------------- ---------------- ------------- --------------------
$0.63 - $0.83 116 7.48 $0.69 66 $0.70
$1.30 - $1.94 1,244 7.4 1.51 690 1.50
$2.10 - $2.99 1,188 7.41 2.56 820 2.59
$3.02 - $4.62 2,318 6.07 3.68 1,145 3.90
$4.75 - $7.12 3,144 5.44 6.10 2,930 6.14
$7.16 - $10.06 824 5.08 7.84 808 7.85
$11.31 - $15.75 125 5.43 13.43 125 13.43
$17.12 - $23.56 183 5.14 20.36 183 20.36
$29.28 - $34.62 103 4.92 32.86 103 32.86
--------------- --------------------------- ---------------- ------------- --------------------
9,245 5.17 $5.17 6,870 $ 5.94
At March 31, 2005, the Company has reserved approximately 13,068,000 shares
of common stock for the exercise of stock options and warrants.
16. SIGNIFICANT CUSTOMERS:
In the year ended March 31, 2005, 46% of revenue and 41% of trade
receivables were from three customers. Revenues from three significant
customers represented a total of 26% of total revenues for the year ended
March 31, 2003 and a total of 69% of the trade accounts receivable at March
31, 2003. For fiscal year 2002, six customers represented 83% of total
revenues for the year and 65% of trade accounts receivable at March 31,
2002.
17. INCOME TAXES:
There was no recorded income tax benefit related to the losses of fiscal
years 2005, 2004 or 2003 due to the uncertainty of the Company generating
taxable income to utilize its net operating loss carryforwards. The
provision for income taxes differs from the amount computed by applying the
federal statutory rate of 34% to the loss before income taxes as follows:
Year Ended March 31,
--------------------------------
2005 2004 2003
--------- ---------- ----------
Federal tax benefit at statutory rate $ (10,665) $ (18,685) $12,886)
Rate differential - foreign (74) 888 403
Impact of foreign rate change 1,159 - -
State tax provision (96) (371) (435)
Expenses not deductible for tax (61) (39) 20
Research and experimentation credit - (306) (175)
Foreign losses not available as carryforward 3,924 6,001 4,247
Change in valuation allowance 5,813 12,512 8,826
--------- --------- ----------
Tax provision $ - $ - $ -
========= ========= ==========
The components of the net deferred tax asset as of March 31, 2005 and 2004 were
as follows (in thousands):
F-20
March 31,
2005 2004
------------ ------------
Current assets:
Accrued liabilities $ 995 $ 366
Valuation allowance (995) (366)
------------ ------------
- -
============ ============
Non-current assets:
Depreciation and amortization 1,397 854
Research and experimentation credit carryforwards 1,753 1,753
Net operating loss carryforwards - Federal 64,581 58,086
Net operating loss carryforwards - Foreign 45,923 47,590
Impairment reserve 782 968
Imputed interest 1,207 1,207
Valuation allowance (115,643) (110,458)
- ------------ ------------
$ - $ -
============ ============
At March 31, 2005 the Company had federal net operating loss carryforwards
available to reduce future taxable income of approximately $189.0 million.
The valuation allowance increased by approximately $5.8 million during the
year ended March 31, 2005 primarily due to operating losses not benefited.
The carryforwards expire from 2008 to 2025, if not used before such time to
offset future taxable income.
For federal tax purposes, the Company's net operating loss carryforwards
are subject to certain limitations on annual utilization because of changes
in ownership, as defined by federal tax law. The Company also has foreign
operating loss carryforwards available to reduce future foreign income of
approximately $152.9 million.
18. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) plan (the "Plan") as allowed under Section 401(k)
of the Internal Revenue Code. The Plan provides for the tax deferral of
compensation by all eligible employees. All United States employees meeting
certain minimum age and service requirements are eligible to participate
under the Plan.
Under the Plan, participants may voluntarily defer up to 25% of their paid
compensation, subject to specified annual limitations. The Plan does not
provide for, and the Company has not made, contributions under the Plan.
19. JOINT VENTURE:
On July 9, 2003, Baoding Fengfan - Valence Battery Company, a joint venture
(the "JV Company") between the Company and Fengfan Group, Ltd. ("Fengfan")
was formed as a corporation in China. The purpose of the joint venture was
to provide low-cost manufacturing of the Company's Saphion(R) Lithium-ion
batteries. Under the terms of the joint venture agreement, the Company was
to contribute 51% of the joint venture's registered capital, consisting of
capital equipment, a nonexclusive license to its technology, and
engineering expertise. Fengfan was to contribute 49% of the joint venture's
registered capital, consisting of the cash required to fund the joint
venture for the first two years, and also to acquire the land and facility
needed for manufacturing operations. As a result of the Company's 51%
ownership of the joint venture, its right to name the majority of the joint
venture's board of directors, and its right to name the Chief Executive
Officer, as of March 31, 2004, the Company's consolidated financial
statements included the consolidation of the balance sheet, results of
operations, and cash flows of the joint venture. However, during the first
quarter of fiscal 2005, a dispute arose between us and our joint venture
partner, resulting in a loss of control over the joint venture and our
initiation of an action to enforce our rights under the joint venture
agreement and, commencing with that quarter we accounted for our investment
in the joint venture under the cost method with no further recognition of
assets, liabilities, operating results, and cash flows.
On November 17, 2004, the Company, Fengfan and the JV Company entered into
a settlement agreement (the "JV Settlement Agreement"). Under the terms of
the JV Settlement Agreement, the parties agreed to liquidate and dissolve
F-21
the JV Company, terminate the JV Company contracts and fully settle any and
all remaining obligations among the parties. The Company agreed to make
compensation payments to the JV Company and to Fengfan totaling $224,417
and to make equipment purchases from the JV Company totaling $275,583. To
date, the Company has made compensation payments of $157,092 and completed
all of the equipment purchases. The $67,325 final compensation payment will
be made upon final dissolution of the JV legal entity by Fengfan. The
Company recorded a contract settlement charge of $224,417 in the third
quarter of fiscal 2005 for the compensation payments and capitalized
equipment purchases as the payments were made.
20. FACILITY CLOSING:
In the third quarter of fiscal 2003, the Company ceased production at its
Northern Ireland facility and commenced the transfer of manufacturing to
ATL and other third party manufacturers. All inventory remaining at the
conclusion of manufacturing operations was determined to be obsolete and
unusable by any of the Company's battery manufacturing sources. Raw
materials inventory obsolescence expense of approximately $178,000 and work
in process inventory obsolescence expense of approximately $517,000 were
recorded as restructuring charges during the quarter ended December 31,
2003. Remaining payment obligations for factory equipment operating leases
that extended beyond December 31, 2003 were approximately $231,000. These
lease payment obligations provide no economic benefit to the Company, and
contractual lease costs of approximately $231,000 were recorded as
restructuring charges during the quarter ended December 31, 2003. When the
Northern Ireland manufacturing transition was initiated, an incentive
payment plan was established for certain employees. The employees earned
the bonus, which was paid in January 2004, if they were in good standing on
December 31, 2003. The cost of this bonus plan was $352,000 and was charged
to general and administrative expense during the quarter ended December 31,
2003.
Liabilities related to restructuring at March 31, 2004 consisted of
inactive operating leases of approximately $146,000.
21. RELATED PARTY TRANSACTIONS:
In June of 2005, the Company entered into a new $20 million funding
commitment with Mr. Berg to provide funding in the form of equity or a
secured loan on terms to be negotiated. This new commitment can be reduced
by Mr. Berg by the amount of net proceeds received in a debt or equity
transaction with a third party.
In June 2004, Mr. Carl Berg, a director and stockholder in the Company,
agreed to provide an additional $20 million backup equity funding
commitment. This additional funding commitment was in the form of an equity
line of credit and allowed the Company to request Mr. Berg to purchase
shares of common stock from time to time at the average closing bid price
of the stock for the five days prior to the purchase date. As of March 31,
2005, the Company has drawn down $14 million of this commitment and
subsequently drew down an additional $5 million. This commitment can be
reduced by the amount of net proceeds received from the sale of the
building or equipment from the Company's Mallusk, Northern Ireland facility
or the amount of net proceeds in a debt or equity transaction, and may be
increased if necessary under certain circumstances. As of the date of this
report, Mr. Berg has not requested that his commitment be reduced.
On January 1, 1998, the Company granted options to Mr. Dawson, the
Company's then Chairman of the Board, Chief Executive Officer and
President, an incentive stock option to purchase 39,506 shares, which was
granted pursuant to the Company's 1990 Plan (the "1990 Plan"). Also, an
option to purchase 660,494 shares was granted pursuant to the Company's
1990 Plan and an option to purchase 300,000 shares was granted outside of
any equity plan of the Company, neither of which were incentive stock
options (the "Nonstatutory Options"). The exercise price of all three
options is $5.0625 per share, the fair market value on the date of the
grant. The Compensation Committee of the Company approved the early
exercise of the Nonstatutory Options on March 5, 1998. The options
permitted exercise by cash, shares, full recourse notes or non-recourse
notes secured by independent collateral. The Nonstatutory Options were
exercised on March 5, 1998 with non-recourse promissory notes in the
amounts of $3,343,750 ("Dawson Note One") and $1,518,750 ("Dawson Note
Two") (collectively, the "Dawson Notes") secured by the shares acquired
upon exercise plus 842,650 shares previously held by Mr. Dawson. As of
March 31, 2005, amounts of $3,550,313 and $1,613,458 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 has been paid through March 4, 2005.
F-22
22. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company's chief operating decision maker is its Chairman and Chief
Executive Officer, who reviews operating results to make decisions about
resource allocation and to assess performance. The Company's chief
operating decision maker views results of operations of a single operating
segment, the development and marketing of the Company's Saphion(R)
technology. The Company's Chairman and Chief Executive Officer has
organized the Company functionally to develop, market, and manufacture
Saphion(R) products.
The Company conducts its business in two geographic segments.
Long-lived asset information by geographic area at March 31, 2005 and 2004
is as follows (in thousands):
March 31,
----------------------------
2005 2004
------------ ------------
United States $ 987 $ 1,656
International 1,796 11,076
------------ ------------
Total $ 2,783 $ 12,732
============ ============
Revenues by geographic area for the years ended March 31, 2005, 2004 and
2003 are as follows (in thousands):
2005 2004 2003
------------ ------------ ------------
United States $ 9,656 $ 7,229 $ 1,726
International 1,009 2,217 831
------------ ------------ ------------
Total $ 10,665 $ 9,446 $ 2,557
============ ============ ============
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
------------ ------------ ------------ ------------ ------------
Year Ended March 31, 2005
- ----------------------------------
Revenue $ 2,837 $ 2,915 $ 2,547 $ 2,366 $ 10,665
Operating loss (8,000) (5,946) (5,474) (8,333) (27,753)
Net loss available to
common stockholders (9,218) (7,170) (6,609) (9,182) (32,179)
Basic and diluted EPS(1) (0.12) (0.09) (0.08) (0.11) (0.40)
Year Ended March 31, 2004
- ----------------------------------
Revenue $ 1,631 $ 2,345 $ 2,678 $ 2,792 $ 9,446
Operating loss (8,457) (25,017) (9,796) (7,860) (51,130)
Net loss available to
common stockholders (9,505) (26,102) (11,106) (9,346) (56,059)
Basic and diluted EPS(1) (0.13) (0.36) (0.15) (0.12) (0.77)
- ------------
(1) The sum of Basic and Diluted EPS for the four quarters may differ from the
annual EPS due to the required method of computing weighted average number
of shares in the respective periods.
F-23