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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended MARCH 28, 1999
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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
301 CONESTOGA WAY
HENDERSON, NEVADA 89015
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code, is (702) 558-1000
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of class)
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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 proceeding 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 5
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates on June 11, 1999 (based upon the Nasdaq National Market closing
price on such date) was $150,962,182.*
As of June 11, 1999, there were 26,744,167 shares of the Registrant's Common
Stock outstanding.
*Excludes approximately 5,178,141 shares of common stock held by Directors,
Officers and holders of 5% or more of the Registrant's outstanding Common Stock
at June 11, 1999. 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.
Exhibit Index on pages 39 and 40
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Part I
The following discussion contains forward-looking statements. Such statements
are based on current expectations and are subject to risks, uncertainties and
assumptions, including those discussed in "Item 1. Business" as well as under
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Risk Factors and Forward Looking Information." Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Thus, no assurance can be given that
Valence Technology, Inc. (together with its subsidiaries, "Valence" or the
"Company") will be able to accomplish the strategies discussed below.
ITEM 1
BUSINESS
OVERVIEW
Valence is engaged in research and development to produce advanced rechargeable
batteries based upon lithium ion and polymer technologies. The Company's
objective is to become a leading provider of rechargeable batteries and/or
rechargeable battery technology. The Company announced in July 1995, that it had
obtained a license to a plastic lithium battery technology from Bell
Communications Research, Inc. ("Bellcore"). Since that time, the Company has
been working to integrate the Bellcore technology with its own lithium polymer
battery technology. At the same time, the Company has continued the redesign and
modifications to its manufacturing equipment in Northern Ireland to support the
potential future commercial introduction of this new battery design.
Widespread use of a variety of portable consumer electronics such as portable
computers, cellular telephones, camcorders and handheld power tools, as well as
continued demand from conventional applications such as automobiles, have
resulted in large markets for rechargeable batteries. These new and conventional
applications are placing growing demands on existing battery technologies to
deliver increasing amounts of electricity through smaller and lighter batteries.
In some cases, current battery capabilities are a major limitation to the
introduction of enhanced electronic products.
Valence is a development stage company whose primary activities to date have
been acquiring and developing technology, implementing a production line,
manufacturing limited quantities of prototype batteries, recruiting personnel
and obtaining capital. Except for insubstantial revenues from limited sales of
prototype lithium polymer batteries, substantially all of the Company's revenues
to date have been derived from a completed research and development contract
with the Delphi Automotive Systems Group of General Motors Corporation ("Delphi"
- - formerly Delco-Remy Division), and the Company presently has no commercial
batteries available for sale. Prior to commencing volume production, the Company
does not expect to receive any significant revenues from the sale of its
products. To achieve profitable operations, the Company must successfully
develop, manufacture and market its products. There can be no assurance that any
products can be developed or manufactured at an acceptable cost and with
appropriate performance characteristics, or that such products will be
successfully marketed or achieve market acceptance.
The Company was incorporated in Delaware in March 1989 under the name Ultracell,
Inc. and changed its name to Valence Technology, Inc. in March 1992. The
Company's executive offices are currently located at 301 Conestoga Way,
Henderson, Nevada 89015 and the telephone number is (702) 558-1000.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has negative
working capital and has sustained recurring losses related primarily to the
development and marketing of its products. Management is actively pursuing
additional equity and debt financing from both institutional and corporate
investors. Management has implemented certain budgetary controls and is actively
pursuing capital grant advances from the Northern Ireland Industrial Board.
However, the Company's fiscal 2000 operations plan places significant reliance
on obtaining outside financing. There can be no assurance that any new debt or
equity issuances could be successfully consummated. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. The effects of any such adjustments, if
necessary, could be substantial.
In the event that the Company's research and development activities lead to
commercially viable products, the Company's strategy is to accelerate the
introduction of its batteries into the portable consumer electronics and
telecommunications markets by providing prototype batteries to a limited number
of potential OEM customers, with the expectation that, if the Company's
prototype batteries meet customer requirements, batteries incorporating this
technology will be incorporated into advance product designs. The Company
expects that customers will require an extensive qualification period once the
customer receives its first commercial product off a production line. In working
with OEMs, the Company will seek to obtain technical assistance in designing its
batteries for industry-specific applications. To date, the Company has only been
able to deliver small quantities of handmade prototype batteries to OEMs. These
prototype batteries meet some of the
-2-
requirements of these OEMs but are not necessarily representative of the
batteries that will be produced off the Company's production equipment. There
can be no assurance that the Company's discussions with OEMs will result in any
such relationships or, if such relationships are initiated, that the
relationships will achieve their goals. The Company believes that these
potential customers will continue to be interested in advanced rechargeable
batteries from the Company, should the Company succeed in meeting their exacting
requirements.
THE BATTERY INDUSTRY
There are two types of batteries, primary and rechargeable. A primary battery is
used until discharged and then discarded. In contrast, after a rechargeable
battery is discharged, it can be recharged to near full capacity and used again.
Rechargeable batteries are generally usable in all primary battery applications
as well as other applications, such as notebook computers, cellular telephones,
camcorders, automobiles and cordless tools and appliances.
In the rechargeable battery market, the principal competitive technologies are
NiCad, lead acid, nickel metal hydride, and liquid and solid electrolyte lithium
metal and liquid lithium ion batteries. NiCad batteries are currently the most
widely used batteries in portable electronics. Lead acid batteries are primarily
used in automobiles and, to a lesser degree, are also used in a sealed form in
certain portable electronic products. Nickel metal hydride batteries, which
offer certain performance and environmental improvements over NiCad batteries,
have been introduced into the market and compete directly with existing
applications for NiCad batteries. Sony Corporation ("Sony") and other Japanese
manufacturers are selling liquid electrolyte lithium ion batteries. Liquid
electrolyte lithium ion batteries offer significant advantages in energy density
and cycle life over conventional rechargeable battery technologies currently in
use and are expected by the Company to be the technology of choice for high
value added applications. Sony and other manufacturers are offering liquid
electrolyte lithium ion batteries in the marketplace and to OEMs in significant
volumes. Bellcore has licensed its plastic lithium ion battery technology to as
many as eleven other companies, in addition to the Company, although their
identities have not been announced. As OEMs frequently require extensive lead
times to design new batteries into their products, the availability of these
liquid and solid electrolyte lithium ion batteries from the Company's
competitors could materially adversely affect the demand for, and market
acceptance and penetration of the Company's products, if and when developed.
Additionally, the Company may have to compete with the other Bellcore licensees,
who may have access to essentially the same base technology as the Company.
THE COMPANY'S LITHIUM POLYMER BATTERY TECHNOLOGY
The Company's current research design is a hybrid of the Company's proprietary
battery technology and the licensed Bellcore technology. The Company's current
research design contains no metallic lithium, unlike earlier Company designs,
but rather moves lithium ions from an anode to a cathode on discharge, and from
the cathode to the anode on recharge. The lithium ions are stored in either the
cathode or anode, and do not form metallic lithium. This type of system is often
referred to as "rocking chair battery," because the lithium ions are "rocked"
back and forth between the cathode and anode, and "lithium ion" because the
lithium in the batteries is always in an ionic form rather than a metallic form.
The Company's research prototype battery is composed of flexible solid plastic
matrixes which are formed into an anode matrix layer, a separator matrix layer,
and a cathode matrix layer. The anode matrix layer contains a carbon material
capable of holding lithium ions. The separator matrix layer is composed
primarily of the plastic matrix. The cathode matrix layer contains metal oxide
material that stores lithium ions. After the matrix layers are formed and cut
into the desired shape, they are laminated together to form a cell. The cell is
interconnected to other like cells to form a battery. Plasticizer material in
the cell matrix layers is then extracted, leaving voids throughout the matrix
layers of the cells. Finally, liquid electrolyte is absorbed into the cell,
filling the voids left by the extracted filler material, activating the cells
and the battery.
In conventional liquid electrolyte batteries, the liquid electrolyte that
permeates the battery's components is sealed in a metal container to assure its
contact with all the internal components of the battery. The liquid electrolyte
in the Company's battery is contained within the solid polymer matrix that forms
the anode, separator and cathode matrix layers. Because the liquid electrolyte
is contained in the solid polymer matrix and is therefore in intimate contact
with anode and cathode materials, it does not need to be held under pressure,
and the battery can be packaged in a thin flexible plastic/foil packaging
material, instead of a metal container, which reduces weight and volume.
The Company believes that its lithium polymer battery technology constitutes an
advance over most rechargeable battery technologies currently available in the
market, although its program is still in the preproduction phase and therefore
substantial uncertainties exist, including whether the Company will be able to
market a commercial product. The Company believes that energy density is the
most important performance characteristic for comparing battery technologies.
The Company's research prototype lithium polymer batteries have demonstrated
energy density generally superior to most other rechargeable technologies,
except for some liquid electrolyte lithium ion batteries, although the Company
has experienced variability in energy density in its research prototype designs.
Greater energy density will permit the use of batteries for a given size or
weight with energy capacity significantly exceeding that of most batteries
currently in use. Alternatively, greater energy density will enable the use of
smaller and lighter batteries with energy capacity comparable to those currently
marketed.
In addition, form factor, or the shape of a battery, can affect the packaging
efficiency of batteries. For example, some battery technologies are best suited
to cylindrical shapes, but if cylinders must be stacked, approximately 22% loss
in packaging
-3-
efficiency results. Because the Company's research prototype battery is produced
as a thin laminate, it can be shaped into a variety of form factors, including
very thin batteries. The Company is currently evaluating the performance effects
of various battery shapes with regard to energy density, recharge cycles and
safety concerns.
In addition, battery technologies vary in relative safety as a result of their
differing chemical compositions. Most battery technologies incorporate a liquid
electrolyte which, if leaked, may be dangerous. In addition, in the event of a
short circuit or other physical damage to the battery, the liquid electrolyte
may be free to flow to the reaction site and produce a continuous chemical
reaction. This reaction may result in excess heat or a gas release and, if not
properly released, may be explosive. The Company's lithium polymer battery
technology appears to avoid these risks, because the liquid electrolyte in the
Company's current research prototypes is held in the solid polymer matrix and
should not be free to leak or freely flow to a reaction site.
The Company has not fully completed safety testing and does not know whether the
advantages inherent in the Company's technology will make the battery as safe or
safer than other battery technology. As part of the Company's safety testing
program, prototype batteries of various sizes, designs, and chemical
formulations are subject to abuse testing, where the battery is subjected to
conditions outside the expected normal operating conditions of the battery.
While some prototype batteries have survived these tests, others have vented
gases, containing vaporized solvents from the electrolyte, which have caught
fire. Such results were generally expected and, until the testing is completed,
the Company cannot make a valid determination as to the safety envelope in which
the battery must be operated. Additionally, each new battery design requires new
safety testing. There can, therefore, be no assurance that safety problems will
not develop with respect to the Company's battery technology, that would prevent
commercial introduction.
The Company's products will incorporate materials containing lithium ions. While
these materials are less reactive than metallic lithium, which is known in its
metallic form to cause explosions and fires if not properly handled, it is
possible that special handling will be required. Although the Company believes
that its research prototype batteries designed for portable electronics
applications do not present safety risks substantially different from those
inherent in currently marketed non-lithium batteries or other liquid electrolyte
lithium ion batteries, there can be no assurance that safety problems will not
develop in the future. The Company is aware that if the amounts of active
materials in the anode and cathode are not properly balanced and the charge /
discharge regime is not properly managed, metallic lithium may be plated within
the battery packaging. The plating of lithium in a lithium ion battery is a
dangerous situation and other lithium ion battery manufacturers include special
safety circuitry within the battery to prevent such a condition. The Company
expects that such circuitry will have to be used by its customers.
The Company is currently conducting research to determine whether its lithium
polymer battery technology poses increased risks when used in larger sized
batteries because of the greater amount of ionic lithium contained in the
battery, and the increased amount of energy stored in the battery. The Company
incorporates safety policies in its research and development activities and will
do so in its manufacturing processes, designed to minimize safety risks,
although there can be no assurance that an accident in its facilities will not
occur. Any accident, whether occasioned by the use of a battery or in the
Company's operations, could result in significant delays or claims for damages
resulting from injuries, which would adversely affect the Company's operations
and financial condition.
MARKETS AND APPLICATIONS
The Company believes that its battery technology, if it can lead to commercial
products, will potentially be usable in a number of applications, including as a
portable, rechargeable power source for portable electronics products including
notebook computers and cellular telephones, automotive starter, lighting and
ignition ("SLI"), electric vehicles and military equipment. To commercialize its
products in the foregoing markets, the Company will be dependent upon obtaining
assistance from OEMs into whose products the Company's future batteries will
have to be incorporated. Other than certain completed research and development
commitments from Delphi and a completed joint research and development agreement
with Eveready Battery Company ("Eveready"), to date, the Company has not
received any commitments either for the development of its technology or for the
purchase of its products. There can be no assurance that the Company will
succeed in establishing additional relationships or that the Company's products
and technology will ever receive market acceptance.
REAL PROPERTY
The Company's corporate offices and principal laboratories are in a facility
that it owns, with approximately 55,000 square feet, located in Henderson,
Nevada. The Company has a mortgage of $1,606,000 on the facility as of March 28,
1999 which bears interest at 10.4%. An independent real estate appraisal
completed July 27, 1998 estimated the fair market value of the property at
$4,700,000. The Company's Dutch subsidiary owns a manufacturing facility in
Mallusk, Northern Ireland, with approximately 80,000 square feet. The Company
has an option to purchase an adjacent facility of approximately 50,000 square
feet under a lease purchase agreement. The lease purchase agreement provides for
a two-year term that commenced on May 11, 1999. The Company has the option to
purchase this property at any time until the termination of the lease at the
purchase price of L1,000,000. The rent for this property is L200,000 per annum.
Additionally, the Company leases 4,200 square feet in Kirkland, Washington for
the purpose of advanced materials research. This lease provides for a term of 36
months that commenced on October 11, 1998.
-4-
The Company believes that its existing facilities will be adequate to meet the
Company's needs for the foreseeable future. Should the Company need additional
space, management believes that the Company will be able to secure it at
reasonable rates.
THIRD PARTY RELATIONSHIPS
DELPHI
In 1991, to leverage its limited resources and accelerate the introduction of
its lithium polymer batteries, the Company entered into a research and
development agreement with Delphi to develop lithium polymer batteries for the
land, marine and air vehicular and load leveling markets. Under the agreement,
the Company obtained a multi-year funding commitment of $20,000,000 and, if its
batteries are successfully commercialized by Delphi, will receive ongoing
royalties. Upon completion of the 1991 agreement, the Company and Delphi, in
June 1994, extended the 1991 agreement until the end of 1994, for an additional
fee of $900,000. Both the 1991 agreement and the June 1994 extension have been
completed and the Company has received full payment under those agreements.
In September 1994, the Company and Delphi entered into a new agreement for Joint
Research and Development for a five year period which began in September 1994,
with payments to Valence of $50,000 for a monthly research and development
access fee, of which $100,000, $600,000, and $650,000 was recognized during
fiscal year 1999, 1998, and 1997, respectively, as an offset to research and
product development expenses. Under this agreement the Company and Delphi agreed
to co-locate their research and development efforts at an unoccupied lithium
battery manufacturing facility located in Henderson, Nevada. As of June 1995,
both parties had relocated to the facility and begun joint research efforts.
Under the agreement, Delphi, in addition to the monthly research and development
access fee, was paying a portion of the operating expenses of the facility.
Delphi is a leading manufacturer of SLI batteries in North America, producing
batteries for new General Motors Corporation vehicles and the replacement
market. Delphi is experienced in working with a number of currently-used battery
technologies and is a leader in the research and development of innovative
battery technologies. Under its agreements with the Company, Delphi provided
fundamental research assistance and manufacturing expertise. The Company's work
with Delphi has enhanced the Company's scientific and technical understanding of
its lithium polymer battery.
The Company has granted Delphi worldwide, exclusive licenses under the Company's
patents and technical information to manufacture, use and sell lithium polymer
batteries for commercial land and marine vehicles, electric vehicles, and for
electric utility load leveling, the storage of energy produced at off peak
periods for release during peak demand. Each license converts to a non-exclusive
license four years after the first commercial sale of such a battery. Under the
agreement, Delphi granted to the Company an exclusive license under Delphi's
patents and technical information to manufacture, use and sell lithium polymer
batteries, other than the vehicular and load leveling batteries exclusively
licensed to Delphi, and a non-exclusive license under Delphi's patents and
technical information to manufacture vehicular and load leveling batteries after
the termination of Delphi's exclusive rights. The Company's exclusive license
converts to a non-exclusive license four years after the first commercial sale
of a battery by the Company. As additional compensation to the Company, Delphi
agreed to pay royalties to the Company on each battery manufactured under
Delphi's license until 2008. However, in procuring the right to sublicense
Bellcore technology to Delphi, the Company agreed to pass on to Bellcore
substantially all royalties received from Delphi. The Company hopes that its
greatest benefit from the Delphi license will be the cost leverage from Delphi's
potential substantial materials purchases from third party vendors. However,
should Delphi decide to use different materials in their products, than those
used by the Company, there would be less or no cost leverage from Delphi's
purchases. Additionally, if General Motors decided to significantly delay
commercialization or decided not to commercialize a product, then no such cost
leverage would be available.
In May 1998, the Company and Delphi announced the successful completion of their
collaboration on lithium polymer battery development. Delphi will retain a
license to use Company-developed lithium polymer technology for vehicular and
stationary load leveling / peak shaving applications. The Company will retain a
license to use Delphi-developed lithium polymer technology in all other
applications. The Company anticipates that it will receive no further payments
as a result of the Joint Research and Development agreement with Delphi. As part
of the early termination of the collaboration agreement, Delphi paid the Company
$2.2 million. The Company has no future obligations under the termination
agreement and has recorded the payment as a component of other income.
VALTRON TECHNOLOGY PTE. LTD.
In March 1994, the Company and Goldtron Ltd. ("Goldtron") signed an agreement to
establish a joint venture company in Singapore to manufacture, package and
distribute advanced rechargeable solid polymer electrolyte batteries utilizing
the Company's solid polymer technologies. Goldtron is a worldwide developer,
manufacturer and distributor of electronic and telecommunications products, with
extensive distribution channels in the Far East, as well as worldwide
distribution capabilities. In light of the Company's refocus on research and
development, the Company and Goldtron have put the joint venture on hold,
awaiting development of a viable battery technology that Valtron may be able to
manufacture. Since the joint venture was on hold, Goldtron has licensed a liquid
lithium-ion technology and is in the process of commercializing that technology.
There can be no assurance that if the Company desires to reactivate the joint
venture, Goldtron will still be interested in pursuing the Company's technology.
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If the joint venture is reactivated, it is anticipated that the Company will
supply the new joint venture company with its proprietary laminates, from which
the new joint venture company will manufacture batteries for certain agreed upon
applications. The parties will evaluate potential products for marketing by the
new joint venture company, including uninterruptable power supplies and personal
lighting systems. Other battery applications may also be proposed by the new
joint venture company. It should be noted, however, that selection of candidate
product opportunities will be delayed by the parties pending further research
and development activities by Valence. Uncertainty over the financial condition
of the economy in the Far East may also adversely and materially affect the
joint venture.
HANIL VALENCE CO., LTD.
In July 1996, the Company, through its Dutch subsidiary, and Hanil Telecom Co.,
Ltd. ("Hanil Telecom") signed an agreement to establish a joint venture company
in Korea to manufacture, package and distribute advanced rechargeable solid
polymer electrolyte batteries utilizing the Company's solid polymer technologies
for the Korean markets. Hanil Telecom is a subsidiary of Hanil Cement Mfg. Co.,
Ltd., a major conglomerate in Korea producing a wide variety of products for the
Korean market. Hanil Valence Co., Ltd. ("Hanil Valence Co."), the joint venture
company, is located in a Korean facility and has a capitalization of $10
million. All funds have been provided to the joint venture by Hanil Telecom.
Hanil Telecom and the Company, through its Dutch subsidiary, each hold a 50%
stake of Hanil Valence Co. Additionally, Hanil Telecom will provide $40 million
in loan guarantees to Hanil Valence Co. It is anticipated that the Company will
supply Hanil Valence Co. with its proprietary laminates, from which Hanil
Valence Co. will manufacture batteries for the Korean market. The Company began
shipping laminate material for the testing of production equipment and the
manufacture of batteries to Hanil Valence Co. in May 1999. Additionally, Valence
will supply the technology, initial equipment and product designs and technical
support out of its Northern Ireland facility. Hanil Telecom is obligated to
market the joint venture's initial products for a period of several years,
depending on the market. The Company has no experience in manufacturing in Korea
or selling into the Korean marketplace, and is dependent on its joint venture
partner in these areas. The Korean marketplace has experienced turmoil in the
last several years and such activity may adversely and materially affect Hanil
Valence Co.
ALLIANT / VALENCE, L.L.C.
The Company and Alliant Techsystems Inc. ("Alliant") signed an agreement in
October 1996, to establish a joint venture company utilizing the Company's
battery technology and technology obtained under the Company's Bellcore license
to develop and manufacture batteries for its U.S. military customers as well as
for foreign military sales activities. Alliant / Valence, L.L.C. ("Alliant /
Valence"), the joint venture company, will operate a battery fabrication
facility at Alliant's Power Sources Center in Horsham, Pennsylvania. The Company
is expected to supply the electrode laminate materials that are key to
manufacturing high performance batteries. Alliant's Power Sources Center is a
major producer of military and aerospace batteries. In January 1997, Alliant
announced receipt of a $1.2 million contract award from the U.S. Army
Communications Electronics Command ("CECOM") to develop and implement flexible
manufacturing processes for lithium ion polymer batteries to be used by the
Army. The work will be performed by Alliant / Valence. At March 28, 1999, the
net assets and operations of the joint venture were not material.
EVEREADY BATTERY COMPANY
In May 1994, the Company signed a joint development and license agreement with
Eveready for cross-licensing of all background technology, and certain
foreground technology developed during a two-year period. Under the
cross-license, Valence has access to Eveready's extensive battery technology
portfolio to apply to Valence's advanced polymer batteries, including two
patents that Eveready believes cover the Company's use of a manganese oxide,
used in the Company's current research prototypes. Eveready has access to
Valence's battery technology portfolio, including its proprietary solid state
electrolyte, to make advanced polymer round cell batteries. Under certain
conditions, including commercialization of round cell batteries by Eveready and
meeting of certain requirements to purchase non-round cell batteries from
Valence, Eveready may produce non-round cell batteries. In addition, if Eveready
commercializes batteries using Valence's background technology, Valence will
receive royalties.
In August 1994, Eveready, Delphi and Valence amended the Delphi / Valence
agreement and the Eveready / Valence agreement to form a joint three-way
steering committee for the parties' research and development efforts.
Additionally, Valence sublicensed certain proprietary rights, including patents,
trade secrets and technical know-how, it had received from each party to the
other party, to form a three-way cross-license arrangement.
In June 1995, when the Company took the license to the Bellcore technology, the
Company was prohibited from sharing information regarding this technology to
non-Bellcore licensees. To date, Eveready has not taken a license to the
Bellcore technology, and the Company was prohibited from working with Eveready
on certain of its research and development efforts. In May 1996, the joint
research and development program ended, although the agreement remains in
effect.
BELL COMMUNICATIONS RESEARCH, INC.
In June 1995, the Company entered into a non-exclusive license agreement with
Bellcore, to license Bellcore's plastic lithium battery technology. Under this
agreement, the Company received rights to patents, trade secrets and know-how
developed by Bellcore. The Company is in the process of integrating the Bellcore
technology with the Company's lithium
-6-
polymer technology, and believes that the Bellcore technology provides solutions
to several technical problems the Company was facing with regard to its
technology. As part of the agreement, which includes license fees and royalty
payments, Bellcore received a minority equity position in the Company of
1,500,000 shares of common stock. Additionally, the Company secured the right to
grant, and has granted, to Delphi a sublicense to make, have made, use and sell
batteries for land, marine, and air vehicles, including electric vehicles, and
utility load-leveling applications. In November 1997, Bellcore was acquired by
Science Applications International Corporation ("SAIC") and its name was changed
to TELCORDIA Technologies.
RESEARCH AND PRODUCT DEVELOPMENT
The Company's research and product development expenses in fiscal years 1999,
1998 and 1997 were approximately, $22,171,000, $15,432,000 and $10,825,000
respectively. During fiscal years 1999, 1998 and 1997, the Company received
$100,000, $600,000 and $650,000, respectively,
as reimbursements for research and
development activities.
The Company's research personnel are divided into two groups: the battery
research and development group and the battery engineering group. The Company's
battery research and development group works on developing the existing
technology, materials and processing methods and developing the Company's
battery technology. The 10 people in this group have expertise in chemical
engineering, process control, safety, and anode, cathode and electrolyte
chemistry and physics, polymer chemistry and radiation chemistry, thin film
technologies, coating technologies, and analytical chemistry and material
science.
The battery engineering group designs products for eventual sale to customers.
Its current objectives are to provide prototypes to prospective customers and to
improve current designs and manufacturing methods. The principal objectives of
this group also include making significant improvements in battery design to
increase energy densities and cycling capabilities. The 8 people in this group
have expertise in battery design, failure analysis, packaging engineering,
process development and manufacturing engineering.
MANUFACTURING
The Company's research prototype battery is produced using thin film laminate
technology. The cathode and anode ("electrodes") matrix layers, and separator
matrix layer are manufactured utilizing coating techniques. These matrix layers
may be either cut or stamped out into various engineered configurations, which
are then laminated together to form cells. These cells can then be stacked and
connected to form a functional battery, which is finally packaged and tested.
Even if the Company's current research and development activities result in the
design of batteries with commercially desirable characteristics, to be
successful, the Company will have to manufacture in commercial quantities
products with appropriate performance characteristics at competitive costs. At
present, the Company has, at its Henderson, Nevada facility, manual and
semi-automated coating, laminating, assembly and packaging lines that produce
small quantities of prototype batteries for internal testing and customer
sampling. For coating the matrix layers, the Company is adapting existing
manufacturing technologies and processes. However, further development of
manufacturing technology may be delayed pending further research and development
activities by the Company and the definition of manufacturable specifications
with OEM customers.
In September 1993, the Company signed an agreement to open an automated
manufacturing plant in Mallusk, Northern Ireland. The Company currently occupies
80,000 square feet, and has the option to add 50,000 square feet. The Company,
with its equipment suppliers, has designed and constructed a high volume,
automated assembly and packaging lines for the Northern Ireland facility. The
Company's high volume manufacturing equipment was specifically designed for use
with the Company's prior metallic lithium anode technology. The Company has been
working with its equipment suppliers to redesign and modify this equipment to
work with the Company's newest battery technology. The amount of redesign and
modification that is required is substantial and there can be no assurance that
such redesign and modifications will work or will be cost effective. If all or
some of the equipment in Northern Ireland cannot be effectively redesigned and
modified, the Company will have to procure new equipment at considerable expense
and loss of time.
The first automated assembly lines have been delivered to the Northern Ireland
facility. De-bugging of the lines has gone much slower than expected. The lines'
reliability and yield are predictably low, although the Company believes that it
will eventually reach its production goals, but there can be no assurance as to
the timing or even the success of this qualification process. Upon qualification
of the lines, product samples are expected to be sent to potential customers for
evaluation. The first line is initially slated to produce the Company's larger
portable-computer cell format (approximately four inches by four inches)
battery. The second line will produce smaller batteries for cellular phones and
other small battery applications.
The Company has been unable to meet its prior schedules regarding delivery,
installation, de-bugging and qualification of the Northern Ireland production
equipment. As most of the production equipment is being custom manufactured for
the Company, it is possible that further problems will develop and cause delay
in the Company's current schedules. Many of the manufacturing processes that are
being implemented in this production equipment are being scaled up for the first
time from the Company's laboratory scale prototype work. It is likely that some
of these scaled up processes will require refinement, adjustment or redesign.
Any of these possibilities could cause substantial delay in the qualification
and/or production start-up of this equipment. Such delays could cause the
Company to miss significant sales and marketing opportunities, as
-7-
potential lithium polymer battery customers are forced to find other vendors to
meet their needs. Additionally, even if the Company is able to qualify
production equipment in this calendar year, the reliability and/or production
yields may not allow the Company to provide sufficient qualification samples to
potential customers.
From its discussion with potential customers, the Company expects that customers
will require an extensive qualification period once the customer receives its
first commercial product off a production line. As of June 11, 1999, the Company
has not provided any such commercial product to any potential customer, and
therefore, has not started any formal product qualification period.
COMPETITION
Competition in the 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 those of the Company. The Company believes that its lithium polymer
batteries will compete in most segments of the rechargeable battery market.
In the rechargeable battery market, the principal competitive technologies
currently marketed are NiCad batteries, lead acid batteries, nickel metal
hydride batteries and liquid electrolyte lithium ion batteries. Eveready, Sanyo
Electric Co., Ltd., and Matsushita Industrial Co., Ltd., among others, currently
manufacture NiCad batteries. Major lead acid manufacturers include Delphi,
Johnson Controls, Exide Corp., Portable Energy Products, Inc., Hawker Energy
Products and Yuasa Battery Co., Ltd. Manufacturers of nickel metal hydride
batteries include Matsushita Industrial Co., Ltd., Toshiba, Eveready, Sanyo
Electric Co. and Sony. Sony produces a liquid electrolyte lithium ion battery
used in Sony's products, and sold to OEMs. Toshiba has a joint venture with
Asahi Chemical Industry Company to manufacture liquid electrolyte lithium ion
batteries. In addition, Saft America Inc., Ray O Vac, PolyStor Corp., Matsushita
Industrial Co., Ltd., Moli Energy and Sanyo Electric Co., Ltd. have developed
liquid electrolyte lithium ion batteries. The capabilities of many of these
competing technologies have improved over the past year, which has resulted in a
customer perception that the Company's lithium polymer technology may not offer
as many advantages as previously anticipated. Sony has consistently been
improving the energy density of its lithium ion battery over the last several
years.
Liquid electrolyte lithium ion batteries offer significant advantages in energy
density and cycle life over the principal rechargeable battery technologies
currently in use and are expected by the Company to be the emerging technology
most competitive to the Company's technology. Sony or other manufacturers are
offering liquid electrolyte lithium ion batteries in the marketplace and to OEMs
in substantial volumes prior to the Company's commencement of volume production.
As OEMs frequently require extensive lead times to design new batteries into
their products, the availability of liquid electrolyte lithium ion batteries
could materially adversely affect the demand for, and market acceptance and
penetration of, the Company's products.
In addition to currently marketed technologies, a number of companies are
undertaking research in rechargeable battery technologies, including work on
lithium polymer technology. Reportedly, as many as eleven other companies have
taken licenses to Bellcore's battery technology, although their identities have
not been announced. Ultralife Batteries, Inc., which acquired Dowty Battery
Company in the United Kingdom in 1994, has announced shipment of prototype
lithium ion polymer batteries, and announced plans to begin commercial shipments
in 1998. Hydro-Quebec in Canada has signed an agreement with Yuasa Battery Co.,
Ltd. of Japan for technology transfer and the manufacture of lithium ion polymer
batteries. Recently, Hydro-Quebec and Yuasa have announced the introduction of
such a rechargeable lithium polymer battery. The Company believes that other
research and development activities on lithium polymer batteries are taking
place at W. R. Grace & Co., 3M, and Ray O Vac in the U.S. and at other companies
in Japan and Malaysia. In May 1995, Moltech Corp. announced that it expected to
begin production shipments of its lithium polymer batteries in mid-to-late 1996.
This was subsequently modified to 1998. In October 1992, the United States
Advanced Battery Consortium ("USABC") awarded the first $6,300,000 of a
three-year $24,500,000 contract to a group consisting of W. R. Grace & Co.,
Johnson Controls and affiliated laboratories to develop a thin-film lithium
polymer bipolar battery utilizing solid polymer electrolytes. At that time, the
USABC also awarded a three-year $17,300,000 contract to Saft America Inc. to
pursue a bipolar form of the lithium iron disulfide battery first developed at
the Argonne National Laboratory. In December 1993, the USABC announced the grant
of a two-year $33,000,000 contract to a partnership formed by 3M, Hydro-Quebec
and Argonne for the development of lithium polymer batteries for electric
vehicles, for which a second phase was announced in February 1996, for
$27,400,000. The Company also believes that research is underway on zinc air,
aluminum air, sodium sulphur, zinc bromine and nickel zinc battery technologies.
No assurance can be given that such companies are not developing batteries
similar or superior to the Company's lithium polymer batteries.
PATENTS AND TRADE SECRETS
The Company's ability to compete effectively will depend in part on its ability
to maintain the proprietary nature of its technology and manufacturing processes
through a combination of patent and trade secret protection, non-disclosure
agreements and cross-licensing agreements.
As of March 28, 1999, the Company held 191 United States patents which have a
range of expiration dates from 2003 to 2015 and had 41 patent applications
pending in the United States. The Company was preparing 81 additional patent
applications for filing in the United States. The Company also actively pursues
foreign patent protection in countries of
-8-
interest to the Company. As of March 28, 1999, the Company had been granted 23
foreign patents and had 114 patent applications pending in foreign countries.
Patent applications in the United States are maintained in secrecy until patents
issue, and since publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries by several months, the Company
cannot be certain that it was the first creator of inventions covered by pending
patent applications or the first to file patent applications on such inventions.
There can be no assurance that the Company's pending patent applications will
result in issued patents or that any of its issued patents will afford
protection against a competitor. In addition, patent applications filed in
foreign countries are subject to laws, rules and procedures which differ from
those of the United States, and thus there can be no assurance that foreign
patent applications related to issued United States patents will issue.
Furthermore, if these patent applications issue, some foreign countries provide
significantly less patent protection than the United States.
The status of patents involves complex legal and factual questions and the
breadth of claims allowed is uncertain. Accordingly, there can be no assurance
that patent applications filed by the Company will result in patents being
issued or that its patents, and any patents that may be issued to it in the
future, will afford protection against competitors with similar technology. In
addition, no assurances can be given that patents issued to the Company will not
be infringed upon or designed around by others or that others will not obtain
patents that the Company would need to license or design around. If existing or
future patents containing broad claims are upheld by the courts, the holders of
such patents could require companies to obtain licenses. If the Company is found
to be infringing third party patents, there can be no assurance that licenses
that might be required for the Company's products would be available on
reasonable terms, if at all.
In addition to potential patent protection, the Company relies on the laws of
unfair competition and trade secrets to protect its proprietary rights. The
Company attempts to protect its trade secrets and other proprietary information
through agreements with customers and suppliers, proprietary information
agreements with employees and consultants and other security measures. Although
the Company intends to protect its rights vigorously, there can be no assurance
that these measures will be successful.
REGULATION
Prior to the commercial introduction of the Company's batteries into a number of
markets, the Company may seek to obtain approval of its products by one or more
of the organizations engaged in testing product safety. Such approvals could
require significant time and resources from the Company's technical staff and,
if redesign were necessary, could result in a delay in the introduction of the
Company's products.
Pursuant to the regulations of the United States Department of Transportation
("DOT"), a permit is required to transport lithium across state lines. The
International Air Transport Association ("IATA") similarly regulates the
international shipment of lithium. At this time, lithium ion batteries, because
they contain no metallic lithium, are not subject to these regulations and are
being freely shipped. However, due to recent safety incidents, including fires,
with the shipment of lithium-ion batteries produced by other manufacturers, the
DOT has indicated that it is reviewing this position, and there can be no
assurance that DOT or IATA will not decide to regulate the shipment of lithium
ion batteries in the future. While, in such an event, the Company believes that
DOT has granted permits for, and IATA has allowed, the transport of rechargeable
lithium-based batteries in the past, there can be no assurance that DOT and IATA
would permit the Company's batteries to be shipped or used by the general
public, or that changes in such regulations, or in their enforcement, will not
impose costly requirements or otherwise impede the transport of lithium. In
addition, the DOT and IATA approval processes would require significant time and
resources from the Company's technical staff and if redesign were necessary,
could delay the introduction of the Company's products.
The Nevada Occupational Safety and Health Administration and other regulatory
agencies have jurisdiction over the operation of the Company's Henderson, Nevada
manufacturing facilities, and similar regulatory agencies have jurisdiction over
the Company's Mallusk, Northern Ireland manufacturing facilities. Because of the
risks generally associated with the use of lithium, the Company expects rigorous
enforcement. No assurance can be given that the Company will not encounter any
difficulties in complying with applicable health and safety regulations.
Historically, lithium battery manufacturers have suffered significant damage and
losses to equipment, facilities and production from fires and other industrial
accidents. There can be no assurance that the Company will not sustain such
damage and losses.
Federal, state and local regulations impose various environmental controls on
the storage, use and disposal of certain chemicals and metals used in the
manufacture of lithium polymer batteries. Although the Company believes its
activities conform to current environmental regulations, there can be no
assurance that changes in such regulations will not impose costly equipment or
other requirements. Any failure by the Company to adequately control the
discharge of hazardous wastes could also subject it to future liabilities.
HUMAN RESOURCES
As of May 1, 1999, the Company had 50 full-time employees at its Henderson,
Nevada headquarters, of whom 7 held Ph.D. degrees. Of these employees, 10
employees were engaged in research and development, 8 in battery engineering, 17
in operations and 15 in marketing, general and administrative functions. The
Company's success will depend in large part on its ability to attract and retain
skilled and experienced employees. None of the Company's employees are covered
by a
-9-
collective bargaining agreement, and the Company considers its relations with
its employees to be good. In addition to the above employees, as of May 1, 1999,
the Company's Dutch subsidiary had 123 full-time employees located in Northern
Ireland.
-11-
ITEM 2
PROPERTIES
The Company's corporate offices and principal laboratories are in a facility
that it owns, with approximately 55,000 square feet, located in Henderson,
Nevada. The Company's Dutch subsidiary owns a manufacturing facility in Mallusk,
Northern Ireland, with approximately 80,000 square feet. The Company has an
option to purchase an adjacent facility of approximately 50,000 square feet
under a lease purchase agreement. The lease purchase agreement provides for a
two-year term that commenced on May 11, 1999. The Company has the option to
purchase this property at any time until the termination of the lease at the
purchase price of L1,000,000. The rent for this property is L200,000 per annum.
Additionally, the Company leases 4,200 square feet in Kirkland, Washington for
the purpose of advanced materials research. This lease provides for a term of 36
months that commenced on October 11, 1998.
The Company believes that its existing facilities will be adequate to meet the
Company's needs for the foreseeable future. Should the Company need additional
space, management believes that the Company will be able to secure it at
reasonable rates.
ITEM 3
LEGAL PROCEEDINGS
In May 1994, a series of class action lawsuits was filed in the United States
District Court for the Northern District of California against the Company and
certain of its present and former officers and directors. These lawsuits were
consolidated, and in September 1994 the plaintiffs filed a consolidated and
amended class action complaint. Following the Court's orders on motions to
dismiss the complaint, which were granted in part and denied in part, the
plaintiffs filed an amended complaint in October 1995 ("Complaint"). The
Complaint alleges violations of the federal securities laws against the Company,
certain of its present and former officers and directors, and the underwriters
of the Company's public stock offerings, claiming that the defendants issued a
series of false and misleading statements, including filings with the Securities
and Exchange Commission, with regard to the Company's business and future
prospects. The plaintiffs seek to represent a class of persons who purchased the
Company's common stock between May 7, 1992 and August 10, 1994. The Complaint
seeks unspecified compensatory and punitive damages, attorney's fees and costs.
On January 23, 1996, the Court dismissed, with prejudice, all claims against the
underwriters of the Company's public stock offerings, and one claim against the
Company and its present and former officers and directors. On April 29, 1996,
the Court dismissed with prejudice all remaining claims against a present
director and limited claims against a former officer and director to the period
when that person was an officer. In December 1996, the Company and the
individual defendants filed motions for summary judgment, which the plaintiffs
opposed. In November 1997, the Court granted the Company's motion for summary
judgment and entered a judgment in favor of all defendants. Plaintiffs appealed
to the Ninth Circuit Court of Appeals, which heard argument in December 1998. In
April 1999, the Ninth Circuit issued an opinion reversing the District Court's
order with respect to the grant of summary judgment in favor of the Company and
remanded the case back to the District Court. Although the Company continues to
believe that it has a meritorious defense in this lawsuit, an unfavorable
resolution of the lawsuit could have a material adverse effect on the Company's
financial condition and results of operation.
In June 1998, the Company filed a lawsuit in the Superior Court of California,
Santa Clara County, against L&I Research, Inc., Powell Electrical Manufacturing
Company and others seeking relief based on rescission and damages for breach of
a contract. In September 1998, Powell filed a cross-complaint against the
Company and others (File No. CV7745534) claiming damages of approximately
$900,000. The cross-complaint alleges breach of written contract, oral
modification of written contract, promissory estoppel, fraud, quantum meruit,
and quantum valebant. The matter is presently stayed pending settlement
discussions, and no trial date has been set.
In September 1998, Klockner Bartelt/Medipak, Inc. d/b/a/ Klockner Medipak filed
suit against the Company in the United States District Court for the Middle
District of Florida (File No. 98-1844-Civ-7-24E) alleging breach of contract by
the Company with respect to an agreement for the supply of battery manufacturing
equipment, and claimed damages of approximately $2,500,000. On January 20, 1999,
the Company filed a counterclaim against Klockner alleging breach of contract,
breach of express warranty, breach of the implied warranty of merchantability,
breach of the implied warranty of fitness for a particular purpose, and
rescission and restitution and claimed compensatory damages to be determined at
trial. The case has been set for trial in March 2000.
-12-
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the stockholders of the Company was held on February 4,
1999. The Company's stockholders elected the Board's nominees as directors by
the votes indicated:
Nominee Votes For Votes Against
------- --------- -------------
Lev M. Dawson 23,279,261 180,507
Carl E. Berg 23,280,185 179,583
Alan F. Shugart 23,279,665 180,103
Bert C. Roberts, Jr. 23,281,342 178,426
A proposal to amend the 1996 Non-Employee Directors' Stock Option Plan to
increase the aggregate number of shares of Common Stock authorized for issuance
under such plan by 410,000 shares was ratified with 22,585,386 votes in favor,
764,403 against and 109,979 abstentions.
A proposal to approve the conversion and exercise of the Company's securities
issued in a private financing was ratified with 11,964,282 votes in favor,
407,844 against, 132,465 abstentions and 10,955,177 broker non-votes.
The selection of PricewaterhouseCoopers LLP as independent accountants of the
Company for its fiscal year ending March 28, 1999 was ratified with 23,340,273
votes in favor, 74,876 against and 44,619 abstentions.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 28, 1999, are
as follows:
Name Age Position
---- --- --------
Lev M. Dawson 60 Chairman of the Board, Chief Executive Officer, President
Roy A. Wright 55 Senior Vice President, Operations
Robert J. Horning 56 Vice President, Engineering & Standards
George W. Adamson 32 Vice President, Process Engineering & Development
Joseph T. Lundquist 59 Vice President, Research & Development
Jay L. King 52 Vice President & Chief Financial Officer
William J. Battison III 49 Vice President, Marketing & Sales
Mr. Dawson rejoined the Company in December 1997 as Chairman of the Board, Chief
Executive Officer and President. Mr. Dawson, a founder of the Company, served as
Chairman of the Board and Chief Executive Officer from its founding in March
1989 until April 1993. Mr. Dawson also served as President from March 1989 until
June 1991. From May 1993 to December 1997, Mr. Dawson was involved in private
family companies. From January 1988 to March 1989, Mr. Dawson devoted
significant time to the organization of the Company. From May 1978 through
January 1988, Mr. Dawson was President, Chairman, and Chief Executive Officer of
Robinton Products, Inc. ("Robinton"), a company which manufactured solid state
meters and data retrieval systems for the electric utility industry. Mr. Dawson
holds a B.S.E.E. degree in Electrical Engineering from the University of
Southwestern Louisiana.
Mr. Wright joined the Company in his current capacity in February of 1999. He
was previously Chairman and CEO of Iwerks Entertainment, a technology based
attractions company from 1994 to 1998. Prior to Iwerks, Mr. Wright held senior
management positions in a number of technology based companies including
President and CEO of both RDI Computer Corporation and Unison Technologies, and
COO of Corvus Systems, Inc. and Victor Technologies, Inc.
Mr. Horning joined the Company as Director of Product Engineering in January
1993 and became Vice President, Engineering in September 1993. From April 1987
to January 1993, Mr. Horning was Manager of Engineering at Alliant Techsystems
Inc. (formerly a subsidiary of Honeywell Inc.), Power Sources Center, a
developer and manufacturer of special purpose liquid electrolyte lithium
batteries unrelated to the Company's current lithium polymer battery technology.
From March 1984 to April 1987, Mr. Horning was Director of Product Engineering
for Duracell Inc., a battery manufacturer. Mr. Horning holds a B.S. in Chemical
Engineering and an M.B.A. from Drexel University.
Dr. Adamson was appointed Vice President, Process Engineering and Development in
September 1998. He joined Valence
-13-
in 1996 and has held positions as a research scientist, project manager, and
Director of Product Development. From 1994 to 1996, he was a research scientist
with Zinc Air Power. Dr. Adamson, who has a Ph.D. in physical chemistry from
Massachusetts Institute of Technology, has authored various technical
publications and has several patents pending in the area of battery
components.
Dr. Lundquist rejoined the Company in July 1998 as Director of Research and
Development. In September 1998, he was appointed Vice President of Research and
Development. For the prior two years, he served as a consultant to the battery
industry. Prior to that, he worked for United Technologies and W.R. Grace & Co.,
for over 20 years, on fuel cells, batteries and battery components research and
development. Dr. Lundquist, who has a Ph.D. in electro-analytical chemistry from
Michigan State University, has authored over 35 technical articles and holds
approximately 30 patents in the areas of batteries and battery components.
Mr. King joined the Company in April of 1999. Mr. King previously served as the
CFO and was a member of the board of Casinovations, a high-tech developer and
manufacturer of electronic based and software driven gaming devices and products
from 1995. Mr. King has also held key management positions at a number of
engineering and technology based companies, spending more than 10 years at
Bechtel in San Francisco and 6 years at PG&E. In addition, he previously held
senior positions at I.C. Refreshments Company, Sigma Game Inc. and Ernst &
Whinney. Mr. King holds a bachelor's degree in accounting and an MBA from the
University of Utah and is a Certified Public Accountant.
Mr. Battison joined the company in March of 1999. Previously he was Executive
Vice President, Marketing and Sales of Iwerks Entertainment from 1995 to 1998.
Prior to Iwerks he owned his own software development firm, MDS, Inc. He was
President of Westwood One, Inc., the nation's largest radio network from 1985 to
1992 and prior to that, President of Admar Research, a marketing research firm
based in New York. He was also formerly a management consultant in the
Technology Management practice with Booz-Allen and Hamilton.
Each officer serves at the discretion of the Board of Directors. There are no
family relationships among any of the directors or officers of the company.
-14-
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Since May 7, 1992, Valence's common stock, par value $0.001, has been traded on
the Nasdaq National Market System under the symbol "VLNC." The high and low
closing sales prices during each quarter for Valence common stock on Nasdaq for
fiscal years 1998 and 1999 were as follows:
High Low
---- ---
Fiscal 1998
-----------
Quarter ended June 29, 1997 $10 $5-3/4
Quarter ended September 28, 1997 9-1/8 6-7/8
Quarter ended December 28, 1997 9 4-1/4
Quarter ended March 29, 1998 6-1/2 4-1/4
Fiscal 1999
-----------
Quarter ended June 28, 1998 $ 6-1/16 $4-9/16
Quarter ended September 27, 1998 5-3/4 3-7/16
Quarter ended December 27, 1998 10-7/8 4-1/8
Quarter ended March 28, 1999 8-9/16 6-1/8
The approximate number of record holders of the Company's Common Stock as of
June 11, 1999, was 708.
Valence has not paid any cash dividends since its inception. As the Company
intends to retain earnings, if any, to finance future operations and expansion,
the Company does not anticipate paying cash dividends in the foreseeable future.
Any future payment of dividends will depend upon the financial condition,
capital requirements and earnings of the Company, as well as other factors that
the Board of Directors may deem relevant. The terms of our Series A preferred
stock and Series B preferred stock also prohibit the payment of cash dividends
without the prior consent of the holder.
Concurrently with the sale of the Company's Series A Preferred Stock on July 27,
1998, Baccarat Electronics. Inc. ("Baccarat"), an affiliate of Carl Berg, a
director of the Company, loaned the Company $2.5 million. Baccarat has agreed to
loan the Company up to an additional $7.5 million on specified terms. In
connection with the loan, Baccarat received warrants to purchase up to 149,254
shares of the Company's Common Stock at an exercise price of $6.7838 per share,
and was entitled to additional warrants if further amounts are loaned to the
Company. Pursuant to this agreement, the Company issued to Baccarat additional
warrants to purchase an aggregate of 119,403 shares of the Company's Common
Stock at an exercise price of $6.7838 per share in connection with further loans
in an aggregate amount of $2,000,000 during the fourth quarter of Fiscal 1999.
Such warrants were issued pursuant to Section 4(2) of the Securities Act of
1933, as amended, over the period beginning on December 28, 1998 and ending on
March 28, 1999.
-15-
ITEM 6
SELECTED CONSOLIDATED FINANCIAL DATA
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Period from Years ended
March 3, 1989
-------------------------------------------------------------------
(date of inception) March 28, March 29,
March 30, March 31, March 26,
to March 28, 1999 1999 1998 1997 1996 1995
------------------- --------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue:
Research and development contracts $ 21,065 $ -- $ -- $ -- $ -- $ 4,150
Cost and expenses:
Research and product development 106,652 22,171 15,432 10,825 8,047 14,762
Marketing 3,637 105 855 205 486 705
General and administrative 46,182 6,753 7,066 6,168 5,614 6,269
(1)Write-off of in-process technology 8,212 -- -- -- 6,064 --
(2)Investment in Danish subsidiary 3,489 -- -- -- -- --
Special charges 18,872 -- -- -- -- 18,872
--------- --------- --------- --------- --------- ---------
Total costs and expenses 187,044 29,029 23,353 17,198 20,211 40,608
Operating loss (165,439) (29,029) (23,353) (17,198) (20,211) (36,458)
Interest and other income 17,881 2,980 1,174 2,558 3,549 3,606
Interest expense (4,933) (643) (528) (814) (931) (777)
Equity in earnings (losses)
of Joint Venture (1,945) 268 (1,779) (434) -- --
--------- --------- --------- --------- --------- ---------
Net Loss $(154,436) (26,424) (24,486) (15,888) (17,593) (33,629)
---------
---------
Beneficial conversion feature on
preferred stock (2,865) -- -- -- --
Net loss available to common
stockholders $(29,289) $(24,486) $(15,888) $(17,593) $(33,629)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share available to common
stockholders, basic and diluted $ (1.13) $ (1.06) $ (0.73) $ (0.83) $ (1.68)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(3)Shares used in computing net loss per
share available to common stockholders,
basic and diluted 25,871 23,010 21,684 21,261 20,059
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
March 28, March 29, March 30, March 31, March 26,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,454 $ 8,400 $ 27,832 $ 24,569 $ 16,602
Investments -- -- 9,556 32,282 57,869
Working capital (7,784) (1,773) 26,105 41,281 45,011
Total assets 38,401 42,894 55,526 70,247 92,007
Long-term debt 8,171 4,950 5,217 6,169 8,811
Accumulated deficit (154,436) (128,012) (103,526) (87,638) (70,045)
Total stockholders' equity 7,955 22,962 38,349 53,010 66,784
- --------------
(1) See Note 12 of Notes to Consolidated Financial Statements (2) See Note 13 of
Notes to Consolidated Financial Statements (3) See Note 2 of Notes to
Consolidated Financial Statements
-17-
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was founded in 1989 to develop and commercialize advanced
rechargeable batteries based on lithium and polymer technologies. Since its
inception, the Company has been a development stage company primarily engaged in
acquiring and developing its initial technology, manufacturing limited
quantities of prototype batteries, recruiting personnel, and acquiring capital.
To date, other than insubstantial revenues from limited sales of prototype
batteries, the Company has not received any significant revenues from the sale
of products. Substantially all revenues to date have been derived from a
completed research and development contract with the Delphi Automotive Systems
Group of General Motors Corporation ("Delphi" - formerly Delco-Remy Division).
The Company has incurred cumulative losses of $154,436,000 from its inception to
March 28, 1999.
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, market acceptance, changing economic conditions, risks in product
and technology development, effect of the Company's accounting policies and
other risk factors detailed in this section as well as in the section entitled
"Business." Readers should also carefully review the factors set forth in other
reports or documents filed from time to time with the Securities and Exchange
Commission, particularly the quarterly reports on Form 10-Q and any other
current reports on Form 8-K.
The following discussion should be read in conjunction with the five-year
summary of selected financial data and the Company's consolidated financial
statements and the notes thereto. All references to years represent fiscal years
unless otherwise noted.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 28, 1999 (FISCAL 1999), MARCH 29, 1998 (FISCAL 1998)
AND MARCH 30, 1997 (FISCAL 1997)
During fiscal 1999, the Company continued development activities under a
research and development agreement with Delphi. The first phase of the original
multi-year agreement, which provided for aggregate funding of up to $20,000,000,
was completed during the quarter ending September 25, 1994.
In September 1994, the Company and Delphi signed a new five-year agreement to
combine efforts in developing the Company's rechargeable solid state lithium
polymer battery technology. Under the agreement, Delphi and the Company combined
their research and development activities in a new facility in Henderson,
Nevada. The new facility is owned by the Company, and Delphi paid a fee of
$50,000 per month over the five-year term of the new agreement for access to the
Company's research and development (of which $100,000, $600,000 and $650,000
were recognized during fiscal 1999, fiscal 1998 and fiscal 1997, respectively as
an offset to research and product development expenses). In addition, Delphi
paid a portion of the facility's operating costs through August 1998. The
Company has treated both of these payments as an offset to expenses.
In May 1998, the Company and Delphi announced the successful completion of their
collaboration on lithium polymer battery development. Delphi will retain a
license to use Company-developed lithium polymer technology for vehicular and
stationary load leveling / peak shaving applications. The Company will retain a
license to use Delphi-developed lithium polymer technology in all other
applications. The Company anticipates that it will receive no further payments
as a result of the Joint Research and Development agreement with Delphi. The
final payment of $2,200,000 was received on June 30, 1998 and was recorded as a
component of other income.
Research and product development expenses were $22,171,000, $15,432,000 and
$10,825,000 during fiscal 1999, 1998 and 1997, respectively. The increase in
fiscal 1999 versus fiscal 1998 and fiscal 1998 versus fiscal 1997 reflects the
Company's increased efforts to commercialize a product, including increases in
purchasing, machine design engineering, testing, and production raw materials
for debugging equipment.
Marketing expenses were $105,000, $855,000 and $205,000 for fiscal 1999, 1998
and 1997, respectively. The decrease in expenditures between fiscal 1999 and
fiscal 1998 is the result of the completion of the severance process for two
highly compensated former employees during fiscal 1998. No further severance
expense was required in 1999. The marketing efforts in 1999 were a concentration
on core product development. The comparative increase from fiscal 1997 to fiscal
1998 was the result of higher travel expenses, the utilization of consultant
services, and increased payroll which included substantial severance expense.
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General and administrative expenses were $6,753,000, $7,066,000 and $6,168,000
in fiscal 1999, 1998 and 1997, respectively. The fiscal 1999 decrease is due to
the reduction of payroll partially offset by compensation expenses of $362,000
related to the extension of certain vested stock options. The fiscal 1998
increase was due to severance expenses of $1,775,000 related to the extension of
certain vested options offset by decreased legal costs associated with the
shareholder class action lawsuit.
Interest and other income was $2,980,000, $1,174,000 and $2,558,000 in fiscal
1999, 1998 and 1997, respectively. The increase in fiscal 1999 was due primarily
to the termination payment from Delphi offset by decreased investment income.
The decrease in fiscal 1998 from fiscal 1997 resulted from fewer funds being
available for investment.
Interest expense was $643,000, $528,000 and $814,000 during fiscal 1999, 1998
and 1997, respectively. The increase in fiscal 1999 is the result of additional
long-term debt acquired during the fiscal year. The decrease in fiscal 1998 was
the result of a reduction in long-term debt associated with capital equipment
leases.
Equity in the earnings (losses) of the Hanil Valence Co. Ltd joint venture was
$268,000, ($1,779,000) and ($434,000) for fiscal 1999, 1998 and 1997,
respectively. The earnings in fiscal 1999 were primarily the result of favorable
exchanges in foreign currency. The losses in fiscal years 1998 and 1997 were the
result of start up costs for the joint venture.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $22,395,000 net cash for operating activities during fiscal
1999, whereas it used $16,650,000 during fiscal 1998 and $9,537,000 during
fiscal 1997, an increase between fiscal 1999 and fiscal 1998 of $5,745,000. This
increase as well as an increase between fiscal years 1998 and 1997 of $7,113,000
primarily resulted from research and development losses incurred with efforts to
commercialize the Company's products.
During fiscal 1999, the Company used $9,554,000 net cash from investing
activities compared to using $6,739,000 during fiscal 1998, while providing
$15,103,000 of cash during fiscal 1997. The usage in fiscal 1999 was primarily
the result of continuing capital equipment expenditures. The increase in usage
between fiscal years 1998 and 1997 was a result of increased capital equipment
expenditures and the shortening of investment maturities to support those
expenditures.
The Company provided $26,071,000 of net cash from financing activities during
fiscal 1999 as compared to $5,065,000 in fiscal 1998 and used $1,399,000 during
fiscal 1997. The increase of $21,006,000 in fiscal 1999 resulted from proceeds
from the issuance of preferred and common stock and loans from a principal
stockholder. The increase in fiscal 1998 from fiscal 1997 of $6,464,000 resulted
from reductions in long-term debt and proceeds from the issuance of common
stock.
As a result of the above, the Company had a net decrease in cash and cash
equivalents of $5,946,000 during fiscal 1999 versus a decrease of $19,432,000
during fiscal 1998.
As of March 28, 1999, the Company had two outstanding letters of credit totaling
$550,000 which were collateralized by certificates of deposit equal to the full
amount of the letters of credit.
In July 1998, the Company completed private financing arrangements of up to $25
million. The Company issued 7,500 shares of Series A convertible preferred stock
at $1,000 per share and warrants, raising gross proceeds of $7,500,000, with
transaction costs of $425,000. In December 1998, the Company completed the
equity portion of the financing arrangements, issuing 7,500 shares of Series B
convertible preferred stock at $1,000 per share and warrants, raising gross
proceeds of $7,500,000, with transaction costs of $375,000. The Series A
convertible preferred stock and Series B convertible preferred stock accrete at
an annual rate of 6% per year, and are convertible into common stock based upon
defined conversion formulas. The remaining $10,000,000 of the financing
arrangements is in the form of a line of credit arrangement described below.
Under the terms of the certificate of designations of the preferred stock and
the warrants, the preferred stock investor may not convert the preferred stock
or exercise the warrants if after by doing so the investor will own more than
4.9% of the Company's common stock.
In July 1997, the Company entered into an amended loan agreement with a
stockholder, affiliated with a director, which allows the Company to borrow,
prepay and re-borrow up to the full $10,000,000 principal under the promissory
note on a revolving basis and provided that the lender will subordinate its
security interest to other lenders when the loan balance is at zero. As of March
28, 1999, the Company had an outstanding balance of $4,500,000 under the Loan
Agreement. The loan bears interest at one percent over lender's borrowing rate
(approximately 9.00% at March 28, 1999) and is available through August
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30, 2002.
In connection with certain borrowings from a stockholder and director, the
Company issued a total of 1,353,000 warrants for the purchase of common stock
with exercise prices of between $4.00 and $6.40 per share, subject to certain
adjustments. In fiscal 1992, a total of 130,000 warrants were exercised at an
exercise price of $4.40 per share payable through the cancellation of $520,000
of indebtedness including accrued interest. The warrants expire on the earlier
of the effective date of a reorganization of the Company, as defined, or July
31, 1997. The warrants were deemed to have a nominal value at their date of
issuance. In fiscal 1998, the remaining 1,223,000 warrants were exercised at
$4.00 per share. In fiscal 1999, in conjunction with an amended loan agreement
with a stockholder, the Company issued warrants to purchase 149,254 and 119,403
shares of common stock with an exercise price of $6.03.
During fiscal 1994, the Company, through its Dutch subsidiary, signed an
agreement with the Northern Ireland Industrial Development Board (the "IDB") to
open an automated manufacturing plant in Northern Ireland in exchange for
capital and revenue grants from the IDB. The Company has also received offers
from the IDB to receive additional grants. The grants available under the
agreement and offers, for an aggregate of up to L27,555,000 ($44,652,878 U.S.),
generally become available over a five-year period through October 31, 2001. As
of March 28, 1999, the Company had received grants aggregating L4,035,000
($6,538,718 U.S.) reducing remaining grants available to L23,520,000
($38,114,160 U.S.) as of March 28, 1999).
As a condition to receiving funding from the IDB, the subsidiary must maintain a
minimum of L12,000,000 in debt or equity financing from the Company. Aggregate
funding under the grants is limited to L4,035,000 until the Company has
recognized $4,000,000 in aggregate revenue from the sale of its batteries
produced in Northern Ireland. Given that the Company has no agreements to supply
batteries using its current technology, there are no assurances that the Company
will be able to meet the agreement's revenue test.
The amount of the grants available under the agreement and offers is primarily
dependent on the level of capital expenditures made by the Company.
Substantially all of the funding received under the grants is repayable to the
IDB if the subsidiary is in default under the agreement and offers, which
includes the permanent cessation of business in Northern Ireland. Funding
received under the grants to offset capital expenditures is repayable if related
equipment is sold, transferred or otherwise disposed of during a four year
period after the date of grant. In addition, a portion of funding received under
the grants may also be repayable if the subsidiary fails to maintain specified
employment levels for the two year period immediately after the end of the five
year grant period. The Company has guaranteed the subsidiary's obligations to
the IDB under the agreement.
There can be no assurance that the Company will be able to meet the requirements
necessary for it to receive and retain grants under the IDB agreement and
offers.
The major components of construction in progress with their estimated costs and
start dates are as follows: mixing, coating, etching, laminating and slitting
equipment, $2,481,000, March 1997; assembly equipment, $9,918,000, March 1994;
extraction, packaging, and conditioning equipment, $855,000, August 1993; and
factory improvements and miscellaneous equipment, $700,000, June 1997. The
estimated completion date for these major categories of construction in progress
is the end of the third quarter of fiscal 2000. These statements are
forward-looking statements, and actual costs and completion dates are subject to
change due to a variety of risks and uncertainties, including the availability
of funds for completion, the risk that actual costs will be materially greater
due to unforeseen difficulties in completion of the projects, reliance on
manufacturers to deliver equipment in a timely manner and that performs as
intended, and other risks and uncertainties.
At March 28, 1999, the Company had cash and cash equivalents of $2,454,000 and
available credit under a line of credit with a stockholder of $5,500,000. The
Company expects that its existing funds and available line, together with the
interest earned thereon, will be sufficient to fund the Company's operations
through the first quarter of fiscal 2000. The Company anticipates that, after
taking into account projected revenues and receipt of funds from other sources,
it will need to raise in either a debt or equity financing a minimum of $25
million to fund planned capital expenditures, research and product development,
marketing and general and administrative expenses and to pursue joint venture
opportunities in fiscal 2000. The Company's cash requirements, however, may vary
materially from those now planned because of changes in the Company's
operations, including changes in OEM relationships or market conditions. There
can be no assurance that funds for these purposes, whether from equity or debt
financing agreements with strategic partners or other sources, will be available
on favorable terms, if at all. These factors raise substantial doubts about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. The effects of such adjustments, if necessary, could be
material.
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RECENT ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the balance
sheet, and that the corresponding gains or losses be reported either in the
statement of operations or as a component of comprehensive income, depending on
the type of hedging relationship that exists. SFAS 133 will be effective for
fiscal years beginning after June 15, 1999. Currently, the Company does not hold
derivative instruments or engage in hedging activities.
YEAR 2000 COMPLIANCE
Many existing software programs, computers and other types of equipment were not
designed to accommodate the Year 2000 and beyond. If not corrected, these
computer applications and equipment could fail or create erroneous results. For
Valence, this could disrupt purchasing, manufacturing, sales, finance and other
support, thereby causing potential lost sales and additional expenses.
OUR STATE OF READINESS
Our Year 2000 project encompasses both information and non-information systems
within Valence as well as the investigation of the readiness of our strategic
suppliers/vendors. We have created a Year 2000 Project Team that is responsible
for planning and monitoring all Year 2000 activities and reporting to our
executive management. It has been reviewing Valence's Year 2000 status for
approximately six months now, and has identified and evaluated crucial areas of
concern regarding Year 2000 compliance. We define Year 2000 compliance to be,
with respect to information technology, that the information technology
accurately processes date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000 and leap year calculations,
to the extent that other information technology, used in combination with the
information technology being acquired, properly exchanges date/time data with
it. Fixes have begun on a majority of these areas. Other areas are still being
tested. Our goal is to have all Year 2000 issues resolved by December 31, 1999.
To that end, we have inventoried and assessed the Year 2000 readiness of the
following:
VENDORS/SERVICE PROVIDERS. We have distributed letters and
questionnaires to all vendors and service providers that are critical to the
day-to-day operations of Valence. We have received a letter of compliance from
our fire alarm company that our current fire alarm system is in compliance. We
are waiting for certification from our electric utility company, however we do
have a standby 1000 KW generator with enough fuel to run four weeks.
ENVIRONMENTAL, HEALTH, SAFETY AND SECURITY SYSTEMS. We have been
advised by Statewide Fire Electronics that the fire alarm systems within our
plant are Y2K compliant. However, they are dependent on our electric utility
company, Nevada Power.
A Nevada Power representative said that when Y2K approaches, they will be off
the national grid and will be on their own power. Nevada Power is powered by two
generating stations, one is coal powered and the other is gas powered. The
Company believes that Nevada Power has a sufficient amount of coal for the
coal-powered station. The other station, which is gas powered, will be dependent
on Southwest Gas.
Statewide Fire Protection Co. who makes and inspects our sprinklers, risers
and hydrant systems said that the system is not electrical and our fire
system is in compliance.
The Henderson Fire Department has advised us that it is Y2K compliant. As part
of their disruption preparations they are planning to have additional manpower
working and a spare fuel truck on site. In the event of a power outage, the Fire
Department will man local recreation centers with personnel equipped with
radios. In the event of an emergency, or if phone service is disrupted, we will
be able to go to the manned recreation center closest to Valence which is the
Black Mountain Recreation Center on Horizon.
The EMS system said that 911 is not currently compliant, but they will be
compliant by the end of June. The new system is a
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reverse calling system that will be set up to warn neighbors in the event of a
Chlorine release from Timet or any other BMI Complex industries. The residential
neighbors will receive an electronic message that tells them to `Shelter In
Place' or any other necessary instructions.
Our emergency lights will work on battery back-up long enough to allow employees
to evacuate the building.
We will be closed during Y2K but security guards will maintain the building.
Wells Fargo, our security provider, said we will be covered. The security
computer that regulates badge entry into the building has been backdated to
1993. We anticipate no issues with security. We are furnishing the guards with
extra chains and padlocks in the event the doors need to be secured manually.
Conclusion: There are no known areas of concern as related to EHS functions.
OPERATIONS AND PROCESS EQUIPMENT. In reviewing the compliance of all
operations and process equipment in the Henderson facility, no compliance issues
where found. Statements from equipment vendors were obtained to verify this.
PERSONAL COMPUTERS. All personal computer BIOSs' (basic input/output
systems) are being tested for Year 2000 compliance. Currently 100% of all Novell
network servers are Year 2000 compliant. Currently 95% of all user workstations
are known to have a Year 2000 BIOS. Currently 75% of the personal computers that
operate equipment have been tested. Only 2% of these have a Year 2000 compliant
BIOS. We have patched the computers that are not Year 2000 compliant with a TSR,
a software program that loads at computer startup, that will report the correct
date and time to the operating system. This method has been tested and provides
acceptable results.
All Northern Ireland primary engineering drawing software is fully compliant as
well as our general office software, which has been upgraded to Microsoft Office
97, which is compliant. Our Fourth Shift manufacturing system in its current
16-bit database form is not compliant. An upgrade to the 32 bit database is
planned for August / September 1999 at a cost of L10k (approximately $16,500).
LABORATORIES. The Maccor lab is in the process of being upgraded.
Machines are being upgraded and patched for Year 2000. The lab is 50% complete
for BIOS and operating system testing and fixes. The electrical chemistry lab is
98% patched and tested. The data acquisition software run by these machines has
been tested and we have concluded that there is a minor Year 2000 bug. This may
be fixed by a slight program change or upgrading to a newer version of the
software. This does not affect the ending results of the data. The Northern
Ireland lab is 88% complete for BIOS and operating system testing and fixes.
Lantastic Network Version 5, which networks the Maccor cyclers, is not
compliant. Lantastic Version 8 has been purchased and is being installed
(currently 25% complete). Maccor has been contacted concerning their data
acquisition software compliance.
The dedicated PCs for QC lab equipment are also being BIOS checked.
Currently 6 are compliant, 4 were made compliant with the TSR, with another 2 to
be tested (83% compliant). All software which interfaces with the instruments is
being checked, with 16% so far responding as compliant. One instrument is known
not to be compliant and will cease to function in September but we are currently
considering whether to backdate the system date. This is a feasible option since
we have not previously collected data with this instrument or taken advantage of
a reduced price upgrade offer by the manufacturer.
AUTOMATED MACHINERY. The manufacturing machinery is controlled
primarily by PLCs (Programmable Logic Controllers) and in some cases an
industrial PC is added as the MMI (Man Machine Interface). Not all PLCs are date
aware (their function also does not require it) and therefore would not be
affected. We are currently tracking 43 systems which fall in this category, 10
of which have already been fully certified, 15 that are compliant but waiting
for vendor written certification, 15 awaiting replies, and 3 with known issues.
The three systems with known issues require a software upgrade which will cost
L2,500 ($4,125) each.
IN-HOUSE SYSTEMS. One database has been tested and is known not to be
compliant. A programmer has been hired to rewrite the database in another
platform making it Year 2000. All other databases at the US facility are Year
2000 compliant, and the Year 2000 Project Team is reviewing the databases at the
Northern Ireland facility. The accounting software is not compliant and an
upgrade has been received. The upgrade will be installed in early July 1999. The
badge security system is not compliant and will need to be replaced or fixed. At
present, the system has been backdated to 1993 and
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there are no apparent problems with this fix. There is no critical data or
integration that will be affected by this change. A task force has been
assembled and will look into issues that may have been overlooked and to help
continue the efforts to make our facilities compliant. Valence's phone system
has been upgraded and is now Year 2000 compliant. The e-mail system is not Year
2000 compliant and replacements are being evaluated. The Voice Mail system is
not Year 2000 compliant and will be upgraded as soon as replacement e-mail
software is selected. Microsoft Office 97 has been implemented throughout the
facility and is patched with all of Microsoft's latest patches. A new backup
system has been purchased and is being implemented to replace a backup system
that is Y2K compliant but will not be supported after December 31, 1999.
COSTS TO ADDRESS THE YEAR 2000
Spending for modifications and updates is being expensed as incurred and is not
expected to have a material impact on our results of operations or cash flows.
The cost of our Year 2000 project is being funded through available funds. We
estimate that our total Year 2000 expenditures will not be material. Through the
end of 1998, Valence had incurred $40,000 in connection with its Year 2000
compliance program, and is expected to incur approximately $50,000 during fiscal
2000.
RISK ANALYSIS
Like most business enterprises, we are dependent upon our own internal computer
technology and rely upon the timely performance of our suppliers/vendors. A
large-scale Year 2000 failure could impair our ability to timely complete our
research and development, or deliver batteries with the exacting specifications
that will be required by our customers, thereby causing potential lost sales and
additional expenses, which would have a material adverse effect on Valence, its
financial condition and its results of operations. Our Year 2000 project seeks
to identify and minimize this risk and includes testing of our in-house
applications, purchased software and embedded systems to ensure that all such
systems will function before and after the Year 2000. We are continually
refining our understanding of the risk the Year 2000 poses to our
suppliers/vendors based upon information obtained through our surveys. This
refinement will continue through the rest of 1999.
CONTINGENCY PLANS
Our Year 2000 project anticipates the development of contingency plans for
business critical systems and manufacturing equipment as well as for
suppliers/vendors to attempt to minimize disruption to our operations in the
event of a Year 2000 failure. We have not yet developed these plans, but will be
formulating plans to address a variety of failure scenarios, including failures
of our in-house applications, as well as failures of suppliers/vendors. Valence
does not have an estimated completion date for its contingency plans.
CAUTIONARY STATEMENT
Year 2000 issues are widespread and complex. While we believe we will address
them on a timely basis, we cannot assure that we will be successful or that
these problems will not materially adversely affect our business or results of
operations. To a large extent, we depend on the efforts of our suppliers and
other organizations with which we conduct transactions to address their Year
2000 issues, over which we have no control. The statements regarding the
expected outcome and timing of Year 2000 efforts are forward-looking statements.
Actual results could differ materially from our expectations due to unforeseen
problems arising in connection with completion of our Year 2000 program, the
risk that we will fail to identify a Year 2000 problem critical to the
operations of Valence, or that our vendors/suppliers will suffer problems that
will inhibit them from delivering their products to us on a timely basis.
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RISK FACTORS AND FORWARD LOOKING INFORMATION
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"). SUCH STATEMENTS REFER TO EVENTS THAT COULD OCCUR IN THE FUTURE
OR MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "INTENT," "PLAN," "BELIEVES",
CORRELATIVE WORDS, AND OTHER EXPRESSIONS INDICATING FUTURE EVENTS ARE
CONTEMPLATED. SUCH STATEMENTS ARE SUBJECT TO INHERENT RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH
BELOW AND ELSEWHERE IN THIS REPORT. IN ADDITION TO THE OTHER INFORMATION
CONTAINED HEREIN, READERS OF THIS REPORT SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS.
WE HAVE AN IMMEDIATE NEED FOR ADDITIONAL CAPITAL. We have an immediate need for
additional capital which, if not obtained, would cause us to reduce
developmental efforts and impair or ability to commercialize our products. At
March 28, 1999, we had cash and cash equivalents of $2,454,000 and available
credit under a line of credit with a stockholder of $5,500,000. We expect that
our existing funds and available line, together with the interest earned
thereon, will be sufficient to fund our operations through the first quarter of
fiscal 2000. We anticipate that,after taking into account projected revenues and
receipt of funds from other sources, we will need to raise in either a debt or
equity financing a minimum of $25 million to fund planned capital expenditures,
research and product development, marketing and general and administrative
expenses and to pursue joint venture opportunities in fiscal 2000. Our cash
requirements, however, may vary materially from those now planned because of
changes in our operations, including changes in OEM relationships or market
conditions. There can be no assurance that funds for these purposes, whether
from equity or debt financing agreements with strategic partners or other
sources, will be available on favorable terms, if at all. These factors raise
substantial doubts about our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The effects of such adjustments, if
necessary, could be material.
WE ARE A DEVELOPMENT STAGE COMPANY WITH NO PRODUCTS CURRENTLY AVAILABLE FOR
SALE. We are a development stage company and cannot anticipate when, or if, we
will ever have significant revenues from a product. We have derived our revenues
primarily from a research and development contract with Delphi Automotive
Systems Group, which we completed in May 1998. We presently have no commercially
developed and manufactured products available for sale, although we have
developed working prototypes of our batteries. These factors raise substantial
doubt about our ability to continue as a going concern. Our financial statements
do not include any adjustments that might result from the outcome of this
uncertainty, and such adjustments, if necessary, could be substantial.
OUR CURRENT AVAILABLE CAPITAL AND FUTURE REVENUES, IF ANY, WILL NOT BE
SUFFICIENT TO MEET OUR FUTURE OPERATING NEEDS. We have generally incurred
operating losses since inception in 1989 and had an accumulated deficit of
$154,436,000 as of March 28, 1999, the end of our fiscal year. We cannot assure
you that we will ever achieve or sustain significant revenues or profitability
in the future. We have negative working capital and have sustained recurring
losses related primarily to the research and development and marketing of our
products. We expect to incur significant losses in the future as we continue our
product development, begin to build inventory and continue our marketing
efforts. We will need to secure additional financing in order to continue
operations past 1999 unless we begin to generate significant operating revenue.
We will have to continue to devote a significant amount of management time to
obtaining financing.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL, IN WHICH CASE WE WOULD NEED TO
REDUCE DEVELOPMENTAL EFFORTS AND MAY NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS.
If we are unable to achieve profitability or we are unable to secure additional
financing on acceptable terms, we will be unable to continue to fund our
operations. We are actively pursuing capital grant advances from the Northern
Ireland Industrial Development Board, such advances are contingent on us
achieving cumulative revenues from the sale of batteries of $4 million. We may
not achieve such cumulative revenue over the short term, or at all.
Additionally, a lack of capital may require us to license to third parties
rights to commercialize products or technologies we might otherwise seek to
develop ourselves, and to scale back or eliminate our research and product
development programs. The unavailability of adequate funds would have a material
adverse effect on our business, financial condition and results of operations.
WE NO LONGER HAVE A COLLABORATIVE PARTNER TO ASSIST US IN DEVELOPMENT OF OUR
BATTERIES, WHICH MAY LIMIT OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR
PRODUCTS. We have received substantially all our revenues to date from a
research and development agreement with Delphi Automotive Systems Group, which
we completed in May 1998. The Delphi agreement was for joint development in the
automotive market. Although we have held discussions with original equipment
manufacturers (OEMs) in the portable consumer electronics and telecommunications
markets about possible strategic relationships as a means to accelerate
introduction of our batteries into these markets, we cannot assure you that we
will be able to enter into any such alliances. The use of alliances for our
development, product design, volume purchase and
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manufacturing and marketing expertise can reduce the need for development and
use of internal resources. Further, even if we could collaborate with a
desirable partner, there is a chance that the partnership may not be successful.
The success of any strategic alliance is dependent upon, among other things, the
general business condition of the partner, its commitment to the strategic
alliance and the skills and experience of its employees.
BECAUSE OUR BATTERIES ARE ONLY SOLD WHEN INCORPORATED INTO OTHER PRODUCTS, WE
WILL NEED TO RELY ON ORIGINAL EQUIPMENT MANUFACTURERS TO COMMERCIALIZE OUR
PRODUCTS. To be successful, our batteries must gain broad market acceptance. In
addition, our success will depend significantly on our ability to meet OEM
customer requirements by developing and introducing on a timely basis new
products and enhanced or modified versions of its existing products. OEMs often
require unique configurations or custom designs for battery systems which must
be developed and integrated in the OEM's product well before the product is
launched by the OEM. Thus, there is often substantial lead time between the
commencement of design efforts for a customized battery system and the
commencement of volume shipments of the battery system to the OEM (referred to
as the "design in time"). If we are unable to design, develop and introduce
products that meet OEMs' and other customers' exacting requirements on a timely
basis, our business, results of operations and financial condition could be
materially adversely affected. To determine the requirements of each specific
application, we will be dependent upon OEMs and other intermediaries such as
battery pack designers into whose products our batteries will be incorporated.
There is a risk that we will not receive adequate assistance from OEMs to
successfully commercialize our products. Furthermore, there is a risk that the
perceived safety risks associated with lithium, an element used in our
batteries, will impede acceptance of our batteries by OEMs or end users.
WE DO NOT YET HAVE THE SALES STAFF, SUPPORT CAPABILITIES AND DISTRIBUTION
CHANNELS TO DISTRIBUTE OUR PRODUCTS ON A COMMERCIAL SCALE. To implement our
strategy successfully, we may have to develop a sizeable sales staff and product
support capabilities, as well as third party and direct distribution channels.
We cannot assure you that we will be able to establish sales and product support
capabilities, or be successful in our sales and marketing efforts.
WE MAY NOT BE ABLE TO COST-EFFECTIVELY MANUFACTURE OUR BATTERIES. To be
successful, we must manufacture commercial, high-quality quantities of our
products at competitive costs. We have produced prototype products that we
believe have performance characteristics that are suitable for a broad market.
However, additional development will be required to enable us to consistently
produce battery systems with these characteristics. In addition, to achieve
broad commercialization of our products, we will need to reduce manufacturing
costs of our battery systems. Our batteries may not be able to be manufactured
in commercial quantities to the performance specifications demanded by
customers. Even if our current research and development activities result in the
design of batteries with commercially desirable characteristics, we will still
have to be able to competitively manufacture these batteries. Our current
manufacturing technology must be further developed before we will be able to
manufacture our batteries in commercial quantities. Any failure to achieve
acceptable yields of commercial quality batteries in commercial quantities, and
thereby reduce unit manufacturing costs, could have a material adverse effect on
our business, results of operations and financial condition.
WE ARE IN THE EARLY STAGE OF MANUFACTURING, AND IF WE ARE UNABLE TO DEVELOP
MANUFACTURING CAPABILITY COST EFFECTIVELY, WE WILL NOT BE ABLE TO GENERATE
PROFITS; MANUFACTURING RISKS; POTENTIAL CAPACITY
CONSTRAINTS AND RISKS OF PROPOSED EXPANSION. To date, we have not manufactured
batteries on a commercial scale. Any failure to achieve acceptable yields of
commercial quality batteries in commercial quantities, and thereby to reduce our
unit manufacturing costs, could have a material adverse effect on our business,
results of operations and financial condition. Until recently, our batteries
have been only manufactured on our pilot manufacturing line, which is able to
produce prototype cells in quantities sufficient to enable customer sampling and
testing and product development. We are currently in the early stages of
transitioning production to an automated high volume production line that will
work with our newest battery technology in our manufacturing facility in
Mallusk, N.I. The redesign and modification of the manufacturing facility,
including its customized manufacturing equipment, will continue to require
substantial engineering work and expenses and is subject to significant risks,
including risks of cost overruns and significant delays. In addition, in order
to rapidly scale up the manufacturing capacity, we will need to begin
fabrication of a second automated production line before completing full
qualification of the first line. In automating, redesigning and modifying the
manufacturing processes, we have been and will continue to be dependent on
several developers of automated production lines, which have limited experience
in producing equipment for the manufacture of batteries. A key determinant of
our current and future production capacity and profitability is the production
yield of our manufacturing process. The redesign and modification of our
manufacturing facility and the development and implementation of automated
production lines will entail significant risks and will require a substantial
investment of our capital. As part of our manufacturing ramp-up, we will need to
hire and train a substantial number of new manufacturing workers. The
availability of skilled and unskilled workers in Northern Ireland, the site of
our manufacturing facility, is limited due to a relatively low unemployment
rate. We may not successfully develop improved processes, design required
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production equipment, enter into acceptable contracts for the fabrication of
such equipment, obtain timely delivery of such equipment, implement multiple
production lines or successfully operate the Mallusk facility. We may not be
able to successfully automate our production on a timely basis or at all, and
such automation may not result in greater manufacturing capacity or lower
manufacturing costs than our pilot production line. Customer relationships could
be damaged if we fail to begin volume manufacturing on a timely basis. Such
failure could cause lost opportunities and have a material adverse effect on our
business, results of operations and financial condition.
WE ARE EXPERIENCING DELAYS IN QUALIFYING OUR MANUFACTURING FACILITIES. We have
been unable to meet our prior schedules regarding delivery, installation,
de-bugging and qualification of the Northern Ireland production equipment. As
most of the production equipment is being specially manufactured for us, further
problems may develop and cause further delay in our current schedules. We are
improving and bringing many of the manufacturing processes that we are
implementing in this production equipment up to date for the first time from our
laboratory scale prototype work. We may need to further refine the improved
processes, which could cause substantial delays in the qualification and use of
this equipment. Furthermore, if we are able to refine our process, we may not be
able to produce the required amount of qualification samples to potential
customers. From our discussions with potential customers, we expect that
customers will require an extensive qualification period once the customer
receives its first commercial product off a production line.
WE ARE DEPENDENT ON OUR SUPPLIERS FOR CERTAIN KEY RAW MATERIALS TO DEVELOP AND
MANUFACTURE OUR BATTERIES. We are dependent on sole or limited source suppliers
for certain key raw materials used in our products. We generally purchase sole
or limited source 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. 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. We may not be
able to purchase raw materials at an acceptable cost. In addition, the raw
materials which we utilize must be of a very high quality and we have at times
in the past experienced delays in product development due to the delivery of
nonconforming raw materials from our suppliers.
UNCERTAINTY OF MARKET OF OUR BATTERIES; OUR REPUTATION. To achieve market
acceptance, our batteries must offer significant price and/or performance
advantages over other current and potential alternative battery technologies in
a broad range of applications. Our rechargeable batteries may not be able to
achieve or sustain any such advantages. Even if our rechargeable batteries
provide meaningful price or performance advantages, there is a risk our
batteries may not be able to achieve or maintain market acceptance in any
potential market application. The success of our products also will depend upon
the level of market acceptance of OEMs' and other customers' end products which
incorporate our batteries, over which we have no control. If our rechargeable
batteries do not achieve and maintain significant price and/or performance
advantages over other technologies and achieve significant and sustained market
acceptance, or if customers' applications which incorporate our products do not
achieve lasting market acceptance, our business, results of operations and
financial condition could be materially adversely affected. If we do manufacture
our batteries in commercial quantities and they fail to perform as expected, our
reputation could be severely damaged, which would have a material adverse effect
on our ability to market our batteries even if the defect were corrected.
RAPID EVOLUTION OF BATTERY TECHNOLOGIES. The battery industry has experienced,
and is expected to continue to experience, rapid technological change. Various
companies are seeking to enhance traditional battery technologies, such as lead
acid and NiCd, and other companies have recently introduced or are developing
rechargeable batteries based on nickel metal hydride ("NiMH"), lithium and other
emerging and potential technologies. 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.
DEPENDENCE UPON MANAGEMENT; ATTRACTION AND RETENTION OF KEY EMPLOYEES. OUR
business is highly dependent upon the active participation of our senior
management personnel. We do not have written employment contracts with any key
employees and do not maintain key man life insurance policies with respect to
any of our employees. 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. Competition for such personnel, in particular for product development
and product implementation personnel, is intense, and we compete in the market
for such personnel against numerous companies, including larger, more
established companies with significantly greater financial resources than us. We
have at times experienced difficulty in recruiting qualified personnel, and
there can be no assurance that we will be successful in attracting and retaining
skilled personnel. Our inability to attract and retain other qualified employees
could have a material adverse effect on our business.
-26-
OUR COMPETITORS MAY DEVELOP BATTERIES SIMILAR OR SUPERIOR TO OURS OR OTHERWISE
COMPETE MORE SUCCESSFULLY THAN WE DO. Competition in the 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 those that we have.
Although we believe that our batteries will compete in most segments of the
rechargeable battery market, there is a risk that other companies may develop
batteries similar or superior to our batteries. In addition, many of these
companies have name recognition, established positions in the market, and long
standing relationships with OEMs and other customers. While there is significant
development work being done by these competitors on various battery systems
(including electrochemistries such as NiCd, NiMH and lithium), 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 be superior to our technology. We believe that our primary
competitors are existing suppliers of Lithium Ion, competing polymer and in some
cases NiMH batteries. Our primary competitors include Matsushita Industrial Co.,
Ltd., Sony, Toshiba, SAFT America, Inc. ("SAFT")and PolyStor Corp. All of these
companies are very large and have substantial resources and market presence. We
expect that we will compete against other types of batteries in the targeted
application segments on the basis of performance, cost and ease of recycling and
there is a risk that we may not be able to compete successfully against
manufacturers of other types of batteries in any of the targeted applications.
In addition, in the rechargeable battery market there are a variety of competing
technologies. The capabilities of many of these competing technologies have
improved over the past year, which has resulted in a customer perception that
our technology may not offer as many advantages as previously anticipated.
THERE IS A RISK THAT OUR PENDING PATENT APPLICATIONS WILL NOT RESULT IN ISSUED
PATENTS AND THAT ANY OF OUR ISSUED PATENTS WILL NOT AFFORD PROTECTION AGAINST A
COMPETITOR. Our ability to compete successfully will depend on whether we can
protect our proprietary technology and manufacturing processes. We rely on a
combination of patent and trade secret protection, non-disclosure agreements and
cross-licensing agreements. Nevertheless, such measures may not be adequate or
safeguard the proprietary technology underlying our batteries. In addition,
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 for any such breach. Moreover, notwithstanding our efforts to
protect our intellectual property, 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. In addition, we may not be able to effectively
protect our intellectual property rights in certain countries. If existing or
future patents containing broad claims are upheld by the courts, the holders of
such patents could require companies to obtain licenses. If we are found to be
infringing third party patents, there is a risk that we may not be able to
obtain licenses to such products on reasonable terms, or at all. Our failure to
protect our proprietary technology may materially adversely affect our financial
condition and results of operations. Patent applications in the United States
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries by several months, we cannot be certain that we were the first
creator of inventions covered by pending patent applications or the first to
file patent applications on such inventions. Therefore, our pending patent
applications may not result in issued patents and any of our issued patents may
not afford protection against a competitor.
OUR BATTERIES CONTAIN POTENTIALLY DANGEROUS MATERIAL, WHICH COULD EXPOSE US TO
LIABILITY. Battery technologies vary in relative safety as a result of their
differing chemical compositions. In the event of a short circuit or other
physical damage to the battery, a reaction may result with excess heat or a gas
being released and, if not properly released, may be explosive. We have designed
our batteries to avoid this risk, but if we are unsuccessful, we could be
exposed to product liability litigation. Our products will incorporate
potentially dangerous materials, including lithium ions. While these materials
are less reactive than other potentially dangerous materials found in other
types of batteries such as metallic lithium, which is known in its metallic form
to cause explosions and fires if not properly handled, it is possible that these
materials will require special handling. It is possible that safety problems may
develop in the future. We are aware that if the amounts of active materials in
our batteries are not properly balanced and the charge/discharge system is not
properly managed, a dangerous situation may result. Other battery manufacturers
using technology similar to ours include special safety circuitry within the
battery to prevent such a condition. We expect that our customers will have to
use such circuitry.
WE HAVE NOT COMPLETED SAFETY TESTING OUR BATTERIES AND WILL NOT BE ABLE TO
COMMERCIALLY SELL OUR BATTERIES UNTIL WE SUCCESSFULLY COMPLETE THE SAFETY TESTS.
We have conducted extensive safety testing of our batteries and will in the
short-term submit batteries to UL for certification. As part of our safety
testing program, prototype batteries of various sizes, designs and chemical
formulations are subject to abuse testing, where the battery is subjected to
conditions outside the expected normal operating conditions of the battery.
While some prototype batteries have survived these tests, others have vented
gases containing vaporized solvents and have caught fire. Such results were
generally expected, and until we have completed testing we cannot make a valid
determination as to the conditions in which the battery must be operated.
-27-
Additionally, each new battery design requires new safety testing. Therefore,
safety problems may develop with respect to our battery technology that could
prevent or delay commercial introduction.
SAFETY RISKS IN OUR FACILITIES COULD CREATE DELAYS. We incorporate safety
policies designed to minimize safety risks in our research and development
activities and will do so in our manufacturing processes. There is a risk,
however, that an accident in our facilities will occur. Any accident, whether
with the use of a battery or in our operations, could result in significant
delays or claims for damages resulting from injuries, which would adversely
affect our operations and financial condition.
THE STRICT REGULATORY ENVIRONMENT IN WHICH WE OPERATE MAY DELAY SHIPMENTS AND
IMPOSE ADDITIONAL COSTS ON US. Prior to the commercial introduction of our
batteries into a number of markets, we may need to seek approval of our products
by one or more of the organizations engaged in testing product safety and/or
agencies regulating transportation. There is a risk that such agencies would not
permit our batteries to be shipped or used by the general public, and that
changes in regulations, or in their enforcement, will impose costly requirements
or otherwise impede the transport of lithium. If we are able to obtain such
approvals, they could require significant time and resources from our technical
staff and delays in shipments and, if redesign were necessary, could result in
further delays in the introduction of our products. Because of the risks
generally associated with the use of lithium, we expect rigorous enforcement.
Federal, state and local regulations impose various environmental and health and
safety controls on the storage, use and disposal of certain chemicals and metals
used in the manufacture of lithium polymer batteries. Although we believe our
activities conform to current environmental regulations, there is a risk that
changes in such environmental regulations will impose costly equipment or other
requirements. Any failure by us to adequately control the discharge of hazardous
wastes could also subject us to future liabilities.
WE ARE INVOLVED IN LAWSUITS WHICH COULD NEGATIVELY IMPACT OUR BUSINESS. We are
subject to litigation arising from time to time in the course of our business.
We currently have three substantial lawsuits in which we are involved. The first
is a class action lawsuit by a class of persons who purchased our common stock
between May 7, 1992 and August 10, 1994 alleging our violation of federal
securities laws and seeking unspecified damages. The second involves a claim by
a manufacturer of one of our pieces of manufacturing equipment that we owe it
approximately $2,500,000, and in which we have filed a counterclaim against the
manufacturer seeking damages to be determined at trial. The third is a contract
claim we instituted against several parties, in which one party filed a
counterclaim against us others claiming damages of approximately $900,000 based
on breach of a contract, and which is presently stayed pending settlement
discussions. These lawsuits are more fully described in "Item 3. Legal
Proceedings." Although we believe that we have meritorious defenses to these
suits, if any of them is resolved unfavorably to us it could have a material
adverse effect on our financial condition.
THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS. We use a number of computer software programs
and operating systems in our internal operations, including applications used in
financial business systems and various administration functions. To the extent
that these software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000," some level of
modification or even possible replacement of such source code or applications
will be necessary. Given the current information, we currently do not anticipate
that such "Year 2000" costs will have a material impact upon us. We have
requested information regarding "Year 2000" compliance from suppliers and
providers of all of our mission critical software systems and have obtained some
responses. Based on the information we currently have, all mission critical
systems appear to be "Year 2000" compliant. We are currently contacting major
vendors and customers to obtain "Year 2000" compliance certificates. The failure
of any of our key suppliers or customers to be "Year 2000" compliant could have
a material adverse effect on our business, financial condition and results of
operations.
POLITICAL INSTABILITY IN NORTHERN IRELAND MAY DELAY PROGRESS IN OUR NORTHERN
IRELAND FACILITY. The current political instability in Northern Ireland, which
to date has had no negative impact on our manufacturing plant, could cause
delays in completing our manufacturing capability or in manufacturing our
batteries. Such delays could cause us to miss significant sales and marketing
opportunities, as such delays will force our potential customers to find other
vendors to meet their needs.
CONTROL BY EXISTING STOCKHOLDERS. As of June 11, 1999, our officers, directors
and their affiliates as a group beneficially owned approximately 23.88% of the
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 approval of significant corporate
transactions.
EFFECT OF ANTI-TAKEOVER PROVISIONS. Our Board of Directors has the authority to
issue up to 50,000,000 shares of
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undesignated preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of our capital stock are subject to the
rights of the holders of the Series A and Series B Preferred Stock and 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. While we have no present
intention to issue any additional shares of preferred stock, such issuance,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of our outstanding voting stock. In
addition, we are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits us from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of Valence Technology, Inc. Furthermore, our
classified Board of Directors and certain other provisions of our Certificate of
Incorporation may have the effect of delaying or preventing changes in control
or management, which could adversely affect the market price of our common stock
and Series A and Series B Preferred Stock.
IF THE ISSUANCE OF OUR PREFERRED STOCK WAS IN VIOLATION OF NASDAQ'S LISTING
MAINTENANCE REQUIREMENTS, OR WE OTHERWISE FAIL TO CONTINUE TO MEET NASDAQ'S
LISTING MAINTENANCE REQUIREMENTS, NASDAQ MAY DELIST OUR COMMON STOCK. In late
January 1999, Nasdaq released its guidance on "future priced securities" and the
necessity of the issuer to comply with Nasdaq's listing maintenance requirements
in issuing these securities. We believe that the issuances of our Series A
Preferred Stock and Series B Preferred Stock do not violate these criteria, and
that we are in compliance with Nasdaq's listing maintenance criteria. However,
in the event that Nasdaq were to determine that the issuance of our Series A
Preferred Stock and/or Series B Preferred Stock was in violation of the Nasdaq
listing maintenance requirements, or if we are otherwise unable to continue to
meet Nasdaq's listing maintenance requirements, Nasdaq may delist us. Such
delisting could have a material adverse effect on the price of our common stock
and on the levels of liquidity currently available to our stockholders. We may
not be able to satisfy these requirements on an ongoing basis.
CONVERSION OF PREFERRED STOCK AND SALES OF COMMON STOCK BY CC INVESTMENTS MAY
DEPRESS THE PRICE OF OUR COMMON STOCK AND SUBSTANTIALLY DILUTE YOUR STOCK. If CC
Investments were to exercise all of the warrants it holds and convert all of the
shares of preferred stock it owns, as of June 11, 1999 it would have acquired
approximately 3,484,087 shares of our common stock. The number of shares into
which the preferred stock converts increases at 6% per year. If CC Investments
exercises the warrants or converts our preferred stock into shares of common
stock and sells the shares into the market, such sales could have a negative
effect on the market price of our common stock and will dilute your holdings in
our common stock. Additionally, dilution or the potential for dilution could
materially impair our ability to raise capital through the future sale of equity
securities.
VOLATILITY OF STOCK PRICE; NO DIVIDENDS ON COMMON STOCK. The market price of the
shares of common stock has been and is likely to be highly volatile. Factors
such as the fluctuation in our operating results, announcements of technological
innovations or new commercial products by us or our competitors, governmental
regulation, developments in our patent or other proprietary rights or our
competitors, including litigation, developments in our relationships with
current or future collaborative partners, and general market conditions may have
a significant effect on the market price of the common stock. We have never paid
any cash dividends and do not anticipate paying cash dividends on the common
stock in the foreseeable future.
POSSIBLE VARIABLE CONVERSION OF SERIES B PREFERRED STOCK. After July 27, 1999,
the Series B Preferred Stock may become convertible into more shares than
otherwise if our common stock trades at a price below $6.03 in six out of ten
consecutive trading days. For example, if on July 28, 1999 our common stock in
the previous ten trading days had been trading at or above $6.03, the 7,500
shares of Series B Preferred Stock would be convertible into approximately
1,289,000 shares of our common stock. If, however, on that date the average of
the lowest six closing bid prices of our common stock over the previous ten
trading days (referred in the table below as the "average price") had been a
lower price, then the Series B Preferred Stock would have converted into a
greater number of shares. The following table illustrates this effect:
AVERAGE NUMBER OF SHARES INTO WHICH THE 7,500
PRICE SHARES OF SERIES B PREFERRED WOULD CONVERT
$6.03 1,289,171
$5.00 1,554,740
$4.00 1,943,425
$3.00 2,591,233
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The effect of this variable conversion rate, if it becomes applicable, will be
to depress further the market price of our common stock and to dilute further
stockholder holdings in our common stock.
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 28,
1999. However, we are exposed to financial market risks, including changes in
foreign currency exchange rates and interest rates.
The Company has long term debt, principally in the form of two building
mortgages, one of which has a balloon payoff in 2001. One note bears interest at
a fixed rate of 10.4% and the other note bears interest at an annually
adjustable published interest rate index (6.625% at March 28, 1999). The
Company's long term debt to stockholder as of March 28, 1999 carried a variable
interest rate of the lender's borrowing rate plus one percent (approximately 9%
at March 28, 1999).
The table below presents principal amounts and related weighted average interest
rates by fiscal year for the Company's long term debt.
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(dollars in thousands)
Liabilities:
Fixed rate debt 184 108 1,346 -- -- -- 1,638
Variable rate debt 239 256 273 290 310 1,819 3,187
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes thereto appear on
pages F-1 to F-19 of this Form 10-K Annual Report.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
There have been no changes in, or disagreements with accountants, on accounting
and financial disclosures.
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PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 28, 1999, are
as follows:
Name Age Position
---- --- --------
Lev M. Dawson 60 Chairman of the Board, Chief Executive Officer, President
Roy A. Wright 55 Senior Vice President, Operations
Robert J. Horning 56 Vice President, Engineering & Standards
George W. Adamson 32 Vice President, Process Engineering & Development
Joseph T. Lundquist 59 Vice President, Research & Development
Jay L. King 52 Vice President & Chief Financial Officer
William J. Battison III 49 Vice President, Marketing & Sales
Mr. Dawson rejoined the Company in December 1997 as Chairman of the Board, Chief
Executive Officer and President. Mr. Dawson, a founder of the Company, served as
Chairman of the Board and Chief Executive Officer from its founding in March
1989 until April 1993. Mr. Dawson also served as President from March 1989 until
June 1991. From May 1993 to December 1997, Mr. Dawson was involved in private
family companies. From January 1988 to March 1989, Mr. Dawson devoted
significant time to the organization of the Company. From May 1978 through
January 1988, Mr. Dawson was President, Chairman, and Chief Executive Officer of
Robinton Products, Inc. ("Robinton"), a company which manufactured solid state
meters and data retrieval systems for the electric utility industry. Mr. Dawson
holds a B.S.E.E. degree in Electrical Engineering from the University of
Southwestern Louisiana.
Mr. Wright joined the Company in his current capacity in February of 1999. He
was previously Chairman and CEO of Iwerks Entertainment, a technology based
attractions company from 1994 to 1998. Prior to Iwerks, Mr. Wright held senior
management positions in a number of technology based companies including
President and CEO of both RDI Computer Corporation and Unison Technologies, and
COO of Corvus Systems, Inc. and Victor Technologies, Inc.
Mr. Horning joined the Company as Director of Product Engineering in January
1993 and became Vice President, Engineering in September 1993. From April 1987
to January 1993, Mr. Horning was Manager of Engineering at Alliant Techsystems
Inc. (formerly a subsidiary of Honeywell Inc.), Power Sources Center, a
developer and manufacturer of special purpose liquid electrolyte lithium
batteries unrelated to the Company's current lithium polymer battery technology.
From March 1984 to April 1987, Mr. Horning was Director of Product Engineering
for Duracell Inc., a battery manufacturer. Mr. Horning holds a B.S. in Chemical
Engineering and an M.B.A. from Drexel University.
Dr. Adamson was appointed Vice President, Process Engineering and Development in
September 1998. He joined Valence in 1996 and has held positions as a research
scientist, project manager, and Director of Product Development. From 1994 to
1996, he was a research scientist with Zinc Air Power. Dr. Adamson, who has a
Ph.D. in physical chemistry from Massachusetts Institute of Technology, has
authored various technical publications and has several patents pending in the
area of battery components.
Dr. Lundquist rejoined the Company in July 1998 as Director of Research and
Development. In September 1998, he was appointed Vice President of Research and
Development. For the prior two years, he served as a consultant to the battery
industry. Prior to that, he worked for United Technologies and W.R. Grace & Co.,
for over 20 years, on fuel cells, batteries and battery components research and
development. Dr. Lundquist, who has a Ph.D. in electro-analytical chemistry from
Michigan State University, has authored over 35 technical articles and holds
approximately 30 patents in the areas of batteries and battery components.
Mr. King joined the Company in April of 1999. Mr. King previously served as the
CFO and was a member of the board of Casinovations, a high-tech developer and
manufacturer of electronic based and software driven gaming devices and products
from 1995. Mr. King has also held key management positions at a number of
engineering and technology based companies,
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spending more than 10 years at Bechtel in San Francisco and six years at PG&E.
In addition, he previously held senior positions at I.C. Refreshments
Company, Sigma Game Inc. and Ernst & Whinney. Mr. King holds a bachelor's
degree in accounting and an MBA from the University of Utah and is a
Certified Public Accountant.
Mr. Battison joined the Company in March of 1999. Previously he was Executive
Vice President, Marketing and Sales of Iwerks Entertainment from 1995 to 1998.
Prior to Iwerks he owned his own software development firm, MDS, Inc. He was
President of Westwood One, Inc., the nation's largest radio network from 1985 to
1992 and prior to that, President of Admar Research, a marketing research firm
based in New York. He was also formerly a management consultant in the
Technology Management practice with Booz-Allen and Hamilton.
Each officer serves at the discretion of the Board of Directors. There are no
family relationships among any of the directors or officers of the Company.
DIRECTORS OF THE REGISTRANT
The names of the Company's directors and certain information about them are set
forth below:
The directors of the Company and their ages as of March 28, 1999, are as
follows:
NAME AGE POSITION HELD WITH THE COMPANY
- ------------------------------ ------- --------------------------------------------------------------------------
Lev M. Dawson 60 Chairman of the Board, Chief Executive Officer, President
Carl E. Berg(1)(2) 61 Director
Bert C. Roberts, Jr. 56 Director
Alan F. Shugart(1)(2) 68 Director
- --------------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Dawson rejoined the Company in December 1997 as Chairman of the Board, Chief
Executive Officer and President. Mr. Dawson, a founder of the Company, served as
Chairman of the Board and Chief Executive Officer from its founding in March
1989 until April 1993. Mr. Dawson also served as President from March 1989 until
June 1991. From May 1993 to December 1997, Mr. Dawson was involved in private
family companies. From January 1988 to March 1989, Mr. Dawson devoted
significant time to the organization of the Company. From May 1978 through
January 1988, Mr. Dawson was President, Chairman, and Chief Executive Officer of
Robinton Products, Inc. ("Robinton"), a company which manufactured solid state
meters and data retrieval systems for the electric utility industry. Mr. Dawson
holds a B.S.E.E. degree in electrical engineering from the University of
Southwestern Louisiana.
Mr. Berg helped found the Company and has served on the Board of Directors since
September 1991. For more than the past five years, Mr. Berg has been a major
Silicon Valley industrial real estate developer and a private venture capital
investor. Mr. Berg also serves as a director of Integrated Device Technology,
Inc., Videonics, Inc., and Systems Integrated Research.
Mr. Roberts rejoined the Company as a director in November 1998. Mr. Roberts is
Chairman of MCI Worldcom, Inc., one of the world's largest and fastest growing
communications companies. He was named Chairman and CEO of MCI in 1992, after
serving as President and Chief Operating Officer since 1985. Additionally, Mr.
Roberts serves on the boards of Telefonica de Espana, News Corporation, Ltd.,
Avantel, and CaPCURE.
Mr. Shugart joined the Company as a director in March 1992. Mr. Shugart was the
Chief Executive Officer and a director of Seagate 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, Inktomi, and Cypress Semiconductor.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Commission
initial
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reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and greater than ten
percent stockholders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 28, 1999, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with, except that based on such
reports David P. Archibald failed to file one report of a single transaction
after the date that he ceased to be an officer or employee of the Company.
ITEM 11
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company's non-employee directors receive no cash compensation, but are
eligible for reimbursement for their expenses incurred in connection with
attendance at Board meetings in accordance with Company policy. Directors who
are employees of the Company do not receive separate compensation for their
services as directors, but are eligible to receive stock options under the
Company's 1990 Stock Option Plan.
Each non-employee director of the Company also receives stock option grants
pursuant to the 1996 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). Only non-employee directors of the Company or an affiliate of such
directors (as defined in the Internal Revenue Code) are eligible to receive
options under the Directors' Plan. The plan provides that new directors will
receive an initial stock option of 100,000 shares of common stock upon their
election to the Board. The exercise price for this initial option will be the
fair market value on the day it is granted. This initial option will vest
one-fifth on the first and second anniversaries of the grant of the option, and
quarterly over the next three years. On each anniversary of the director's
election to the Board, the director will receive an annual stock option in the
amount of 100,000 Shares less the total amount of unvested shares remaining in
the initial option and Any annual options previously granted. The exercise price
for this new option will be the fair market value on the day it is granted. This
annual option will vest quarterly over a three year period. A director who had
been granted an option prior to the adoption of the Directors' Plan will start
receiving annual grants on the anniversary date of that director's prior grant.
A director who had not received an option upon becoming a director will receive
an initial stock option of 100,000 shares on the date of the adoption of the
plan, and then receive annual options on the anniversary dates of that grant.
During the last fiscal year, the Company granted options covering 35,560 shares
to Carl E. Berg, at an exercise price per share of $7.19; 56,296 shares to Alan
F. Shugart, at an exercise price per share of $7.00; and 200,000 shares to Bert
C. Roberts, Jr., at an exercise price per share of $7.06; all non-employee
Directors of the Company, under the Directors' Plan. The fair market value of
such Common Stock on the dates of grant was $7.19, $7.00, and $7.06
respectively, per share (based on the closing sales price reported in the Nasdaq
National Market for the date of grant). As of June 11, 1999, no options had been
exercised under the Directors' Plan.
EXECUTIVE COMPENSATION
Executive officers are eligible to receive stock options under the 1990 Plan.
In June 1996, the Compensation Committee of the Board passed a resolution which
provides for the automatic granting of stock options to the officers of the
Company. According to this resolution, each quarter, each officer receives a
grant of options under the 1990 plan in an amount necessary to keep the amount
of unvested options held by that officer at a predetermined level. These levels
are 360,000 shares for the CEO, 180,000 shares for an executive vice president,
and 120,000 shares for a vice president. The resolution was effective when
passed, and the Company's officers have been receiving such grants since that
time. The resolution further provided that in the event the Company ever grants
a bonus to any officer, that one half of any such bonus would be held by the
Company for use by the officer only for exercising his or her stock options. To
date, no bonuses have been granted to any officer.
In January 1998, the Company entered into an employment agreement with Joseph P.
Hendrickson pursuant to which the Company retained Mr. Hendrickson as its Vice
President of Administration at an annual salary of $175,000. Subsequently, Mr.
Hendrickson was promoted to Senior Vice President of Operations at an annual
salary of $200,000. The Company granted Mr. Hendrickson an option to purchase
150,000 shares of common stock at an exercise price of $5.31 per share, vesting
over a period of eighteen months. The Company agreed to pay Mr. Hendrickson's
relocation expenses. Mr. Hendrickson's last day with the Company was February
26, 1999. On his last day with the Company, the following stock option amounts
vested: nine thousand four hundred ten (9,410) shares of his second stock option
grant, dated January 5, 1998 and fifteen thousand five hundred ninety (15,590)
shares of his third stock option grant, dated January 5, 1998.
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The following table shows for the fiscal years ended March 28, 1999, March 29,
1998 and March 30, 1997, certain compensation awarded or paid to, or earned by
the Company's Chief Executive Officer and its other four most highly compensated
executive officers at March 28, 1999 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
Other Long Term
Annual Annual Compensation All Other
Compensation Compensation Awards Compensation
----------------------- ------------ ----------------- --------------
Fiscal Salary Bonus Options(1)
Name and Principal Position Year ($) ($) ($) (#) ($)
- ------------------------------------------ -------- ----------- ----------- ------------ ----------------- --------------
Lev M. Dawson 1999 274,208 -- -- -- 31(2)
Chairman of the Board, Chief 1998 82,923 -- -- 1,000,000(3) 9,762(4)
Executive Officer and President 1997 -- -- -- -- --
Joseph P. Hendrickson(5) 1999 186,717 -- -- 90,000 --
Former Senior Vice President, 1998 37,019 -- -- 150,000 --
Operations 1997 -- -- -- -- --
R. Joseph Horning 1999 156,872 -- -- 52,818 --
Vice President, 1998 145,600 -- -- 44,762 42(2)
Engineering & Standards 1997 145,600 -- -- 44,442 --
George W. Adamson 1999 114,691 -- -- 98,215 50(2)
Vice President, 1998 78,884 -- -- 40,500 50(2)
Process Engineering & Development 1997 16,154 -- -- 4,500 --
- --------------------------------------
(1) The Company has no stock appreciation rights ("SARs").
(2) Patent award payments. Patent awards are granted to employees of the
Company for inventions made by employees for which they have submitted
invention disclosures to the Company, for which the Company has filed a
patent application with the United States Patent and Trademark Office, or
for which a patent has been issued by the United States Patent and
Trademark Office.
(3) The shares are exercisable over a period of eighteen (18) months.
(4) Relocation expenses paid by the Company.
(5) Joseph P. Hendrickson was employed by the Company through February 26,
1999.
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STOCK OPTION GRANTS AND EXERCISES
The following tables show for the fiscal year ended March 28, 1999, certain
information regarding options granted to, exercised by, and held at year-end by
the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term(3)
---------------------------------- ----------------------------------
Percent of Total
Options Options Granted to
Granted Employees in Exercise Expiration
Name (#)(1) Fiscal Year(2) Price ($/Sh) Date 5% ($) 10% ($)
- ---------------------------- ------------- -------------------- ------------- ------------- --------------- ------------------
Lev M. Dawson -- -- -- -- -- --
Joseph P. Hendrickson 90,000 4.4% 4.94 5/7/08 279,465 708,219
R. Joseph Horning 15,529 0.8% 4.81 3/30/08 46,999 119,106
9,155 0.4% 5.75 6/29/08 33,106 83,897
20,000 1.0% 3.75 9/11/08 47,167 119,531
8,134 0.4% 6.31 12/28/08 32,291 81,832
George W. Adamson 35,000 1.7% 4.94 5/7/08 108,681 275,419
30,000 1.5% 5.69 6/30/08 107,305 271,932
20,000 1.0% 3.75 9/11/08 47,167 119,531
2,474 0.1% 4.13 9/28/08 6,418 16,265
10,741 0.5% 6.31 12/28/08 42,641 108,060
- --------------------------------------
(1) Options granted in fiscal 1999 generally vest over four years, with 1/16 of
the shares vesting each quarter and with full vesting occurring on the
fourth anniversary date. See "Executive Compensation" on page 33 of this
report for a description of severance agreements and how they affect the
vesting of options for Mr. Hendrickson.
(2) Based on an aggregate of 2,066,632 options granted to employees, including
the Named Executive Officers, in fiscal year 1999.
(3) 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.
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The following table shows the number and value of the unexercised options held
by each of the Named Executive Officers on March 28, 1999:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUES
Shares
Acquired Number of Unexercised Options at Value of Unexercised In-the-Money
on Value FY-End (#) Options at FY-End ($)(1)
Exercise Realized ----------------------------------- -------------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ------------ ------------ ----------------- ----------------- ------------------ ------------------
Lev M. Dawson 0 0 19,753 19,753 $ 35,802 $ 35,802
Joseph P. Hendrickson 0 0 147,500 0 $ 238,906 $ 0
R. Joseph Horning 0 0 159,118 103,904 $ 415,033 $ 155,212
George W. Adamson 0 0 34,937 108,278 $ 70,737 $ 202,765
- --------------------------------------
(1) Based on the fair market value of the Company's Common Stock as of March
28, 1999 ($6.875) minus the exercise price of the options multiplied by the
number of shares underlying the option.
EMPLOYMENT AGREEMENTS
In January 1993, the Company entered into an employment agreement with Mr.
Horning pursuant to which the Company retained Mr. Horning as its Director of
Product Engineering for an annual salary of $125,000. The Company granted Mr.
Horning an option to purchase 22,000 shares of common stock at an exercise price
of $22.75 per share, vesting over a five-year period. In addition, the Company
agreed to pay Mr. Horning's relocation expenses. The Company also loaned Mr.
Horning $45,000 pursuant to a loan agreement, in which the Company forgave the
loan at a rate of $15,000 per year of his employment. Mr. Horning became a Vice
President of the Company in September 1993.
In January 1998, the Company entered into an employment agreement with Lev M.
Dawson pursuant to which the Company retained Mr. Dawson as its Chairman of the
Board, Chief Executive Officer and President at an annual salary of $280,000.
The Company granted Mr. Dawson an option to purchase 1,000,000 shares of common
stock at an exercise price of $5.06 per share, vesting over a period of eighteen
months. The Company agreed to pay Mr. Dawson's relocation expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the fiscal year ended March 28, 1999, the Compensation Committee
consisted of Messrs. Shugart and Berg.
On July 27, 1998, the Company entered into an agreement with an institutional
Investor for the private placement of up to $15,000,000 of its convertible
preferred stock. Concurrently with the preferred stock financing, Baccarat
Electronics, Inc., an affiliate of Mr. Berg, loaned the Company $2.5 million and
agreed to loan the Company up to an additional $7.5 million on terms specified
in the amended loan agreement. Baccarat Electronics received a warrant to
purchase 149,254 shares of the common stock of the Company in connection with
the $2.5 million loan, and is entitled to warrants to purchase up to 447,761
additional shares as additional amounts of the remaining $7.5 million loan
availability are drawn down. As of March 28, 1999, the Company has drawn down an
additional $2 million under the remaining $7.5 million loan availability and
issued Baccarat Electronics additional warrants to purchase an additional
119,403 shares of common stock in connection with such draw downs.
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ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
the Company's common stock as of June 11, 1999 by: (i) each director; (ii) each
of the executive officers in the Summary Compensation table; (iii) all executive
officers and directors of the Company as a group; and (iv) all those known by
the Company to be beneficial owners of more than five percent (5%) of its common
stock.
BENEFICIAL OWNERSHIP(1)
Beneficial Owner Number of Shares Percent of Total
- ------------------------------------------------------------------------- ---------------------- ---------------------
Carl E. Berg(2) 3,747,436 14.0%
10050 Bandley Drive, Cupertino, CA 95014
Lev M. Dawson(3) 1,972,650 7.4
301 Conestoga Way, Henderson, NV 89015
Bell Communications Research, Inc. 1,500,000 5.6
445 South Street, Morristown, NJ 07960
Alan F. Shugart(4) 337,288 1.3
R. Joseph Horning(5) 181,989 *
George W. Adamson(5) 55,196 *
Bert C. Roberts, Jr. 20,000 *
All directors and executive officers as a group (10 persons)(6) 6,386,436 23.9%
- --------------------------------------
* Less than one percent (1%)
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13G filed with the Securities and
Exchange Commission (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 26,744,167 shares of
common stock outstanding on June 11, 1999, adjusted as required by rules
promulgated by the Commission.
(2) Includes 150,000 shares held by Mr. Berg; 300,000 shares held by West Coast
Venture Capital; 94,080 shares issuable upon exercise of options held by
Mr. Berg that are exercisable within 60 days of June 11, 1999; 528,359
shares issuable upon exercise of warrants held by Baccarat Electronics,
Inc.; 2,499,997 shares held by Baccarat Development Partnership for which
Mr. Berg serves as the President of the corporate general partner; 105,000
shares held by Berg & Berg Enterprises, Inc. and 70,000 shares held by Berg
& Berg Profit Sharing Plan U/A 1/1/80 FBO Carl E. Berg Basic Transfer Carl
E. Berg, Trustee. Does not include 1,222,825 shares held in trust for Mr.
Berg's children. Mr. Berg is not a trustee of the trust and he disclaims
beneficial ownership of such shares.
(3) Includes 1,933,144 shares held by Mr. Dawson and 39,506 shares issuable
upon exercise of options within 60 days of June 11, 1999.
(4) Includes 100,000 shares held by Mr. Shugart and 237,288 shares issuable
upon exercise of options within 60 days of June 11, 1999.
(5) All shares are issuable upon exercise of options that are exercisable
within 60 days of June 11, 1999.
(6) Includes 1,270,321 issuable upon exercise of options within 60 days of
June 11, 1999.
ITEM 13
CERTAIN TRANSACTIONS
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See "Compensation Committee Interlocks and Insider Participation" for a
description of certain transactions between the Company and Mr. Berg.
See "Employment Agreement" for a description of certain transactions between the
Company and certain named Executive Officers.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Bylaws provide that the Company will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person whom it
is required or permitted to indemnify. Pursuant to this provision, the Company
has entered into indemnity agreements with each of its directors and officers.
In addition, the Company's Second Restated Certificate of Incorporation provides
that to the fullest extent permitted by Delaware law, the Company's directors
will not be personally liable for monetary damages for breach of the directors'
fiduciary duty of care to the Company and its stockholders. This provision in
the Certificate of Incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under Delaware law. Each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Company, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, for acts or
omissions that the director believes to be contrary to the best interests of the
Company or its stockholders, for any transaction from which the director derived
an improper personal benefit, for acts or omissions involving a reckless
disregard for the director's duty to the Company or its stockholders when the
director was aware or should have been aware of a risk of serious injury to the
Company or its stockholders, for acts or omissions that constitute an unexecuted
pattern of inattention that amounts to an abdication of the director's duty to
the Company or its stockholders, for improper transactions between the director
and the Company and for improper distributions to stockholders and loans to
directors and officers. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Company has obtained directors and officers liability insurance with
coverage of $2,000,000.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company and its officers and directors have
been informed that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM 14
EXHIBITS, FINANCIAL STATEMENTS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS -- See Index to Consolidated
Financial Statements on page F-1 of this Form 10-K Annual
Report.
(2) REPORT OF INDEPENDENT ACCOUNTANTS -- See Index to
Consolidated Financial Statements on F-1 of this Form 10-K
Annual Report.
(3) FINANCIAL STATEMENT SCHEDULES - All financial statement
schedules have been omitted because they are not applicable
or are not required, or because the information required to
be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.
(4) EXHIBITS -- See Exhibit Index on pages 39 and 40 of this
Form 10-K Annual Report.
(b) The Registrant did not file a report on Form 8-K during the
last quarter of the period for which this Report covers.
(c) See Exhibit Index on pages 39 and 40 of this Form 10-K Annual
Report.
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
EXHIBIT INDEX
EXHIBIT NO.
3.1(1) Second Amended and Restated Certificate of Incorporation of the Registrant.
3.2(1) Amended and Restated Bylaws of the Registrant.
3.3(2) Certificate of Designation of Series A Convertible Preferred Stock, as filed with the
Delaware Secretary of State on July 27, 1998.
3.4(3) Certificate of Designation of Series B. Convertible Preferred Stock, as filed with the
Delaware Secretary of State on December 17, 1998.
4.1(3) Amended and Restated Securities Purchase Agreement by and between the Company and CC
Investments, LDC, dated December 11, 1998.
4.2(2) Form or Warrant to Baccarat Electronics, Inc.
4.3(3) Form of Warrant to Placement Agent.
4.4(3) Form of Warrant to CC Investments (Investor).
10.1(1) Form of Indemnification Agreement entered into between the Registrant and its Directors and
Officers.
10.2(1) Stock Purchase Agreement between Mead and the Company, effective July 27, 1990.
10.3(1) Stock Assignment and License Agreement between Mead and the Company, dated July 26, 1990.
10.4(1) Amendment No. 1 to Assignment and License Agreement, dated December 6, 1991.
10.5(1) Contribution Agreement between Mead and Devres MS Co., dated July 26, 1990.
10.6(1) Agreement between the Company, Innocell and Delco Remy Division -- General Motors, dated
March 1, 1991.
10.7(1) Loan Agreement between the Company and Baccarat Electronics Inc., dated July 17, 1990.
10.8(1) Amendment No. 1 to Loan between the Company and Baccarat Electronics, dated March 15, 1991.
10.9(1) Amendment No. 2 to Loan between the Company and Baccarat Electronics, dated March 24, 1992.
10.10(1) Settlement Agreement and General Release by and among Jorgen S. Lundsgaard, H. Hope, S. Hope,
H&L, HII, Lithion, HTI, Devres and the Company, dated September 9, 1991.
10.11 Indemnification Agreement by and between the Company and Carl E. Berg, dated March 21, 1992.
10.12(4) Amendment No. 3 to Loan Agreement and Promissory Note between the Company and Baccarat
Electronics, Inc., dated August 17, 1992.
10.13(5)(*) Agreement between Motorola, Inc., and the Company, effective November 30, 1992.
10.14(6)(*) Agreement between Hewlett-Packard Company, Valence Technology Cayman Islands Inc. and the
Company, dated as of January 18, 1994.
10.15(6)(*) Joint Venture Agreement between Goldtron Cayman Islands Inc. and Valence Technology Cayman
Islands Inc., dated as of March 15, 1994.
10.16(6)(*) License and Support Agreement between Goldtron Cayman Islands Inc. and Valence Technology
Cayman Islands Inc., dated as of March 15, 1994.
10.17(6)(*) Battery Laminate Supply Agreement between Goldtron Cayman Islands Inc. and Valence Technology
Cayman Islands Inc., dated as of March 16, 1994.
10.18(6)(*) Joint Development and License Agreement between Eveready
Battery Company, Inc., the Company and Valance Technology
Cayman Islands, Inc., dated as of May 20, 1994.
10.19(7) Purchase Agreement between the Company and Whittaker Technical Products, Inc. for the Premises
at 301 Conestoga Way, Henderson, Nevada 89015, dated as of September 21, 1994.
10.20(7)(*) Joint Research and Development Agreement between the Company
and AC Delco Systems Division of General Motors Corporation,
dated as of September 15, 1994.
10.21(8)(*) Technology Transfer Agreement between the Company and Bell
Communications Research, Inc., dated as of June 29, 1995.
10.22(9)(*) Joint Venture Agreement between the Company, through its Dutch
subsidiary, and Hanil Telecom Co., Ltd., dated as of July 10,
1996.
10.23(9)(*) License and Support Agreement between the Company, through its Dutch subsidiary, and
Hanil Valence Co., Ltd.
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10.24(9)(*) Battery Laminate Supply Agreement between the Company, through its Dutch subsidiary, and Hanil
Valence Co., Ltd.
10.25(9)(*) Letter Agreement from the Company, through its Dutch subsidiary, to Hanil Telecom Co., Ltd.
10.26(10)(*) Joint Venture Agreement between the Company and Alliant Techsystems.
10.27(10)(*) License and Support Agreement between the Company and Alliant / Valence, L.L.C.
10.28(10)(*) Battery Laminate Supply Agreement between the Company and Alliant / Valence, L.L.C.
10.29(11) 1990 Stock Option Plan as amended on October 3, 1997.
10.30(12) 1996 Non-Employee Directors' Stock Option Plan as amended on October 3, 1997.
10.31(13)(**) Early Exercise Stock Purchase Agreement dated March 5, 1998 between Valence Technology, Inc.
and Lev M. Dawson regarding option to purchase 660,494 shares, including exhibits.
10.32(13)(**) Promissory Note issued by Lev M. Dawson to Valence Technology, Inc. in the amount of
$3,343,750.88 (included as Exhibit D to Exhibit 10.32).
10.33(13)(**) Early Exercise Stock Purchase Agreement dated March 5, 1998 between Valence Technology, Inc.
and Lev M. Dawson regarding option to purchase 300,000 shares, including exhibits.
10.34(13)(**) Promissory Note issued by Lev M. Dawson to Valence Technology, Inc. in the amount of $1,518,750
(included as Exhibit D to Exhibit 10.34).
10.35(13)(**) Stock Pledge Agreement dated March 5, 1998 by Lev M. Dawson (included as Exhibit E to Exhibit
10.32 and Exhibit 10.34).
10.36(2) Amendment No. 5 to Loan Agreement and Promissory Note between the Company and Baccarat
Electronics, Inc. dated July 27, 1998.
10.37(14) Termination Agreement by and between the Company, Valence
Technology Cayman Islands, Inc., and the Delphi Energy and
Engine Management Systems Group of the General Motors
Corporation.
21.1 List of subsidiaries of the Company.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule
- -------------------------------------------------------------------------------
(1) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 33-46765), AS AMENDED.
(2) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED JULY 27, 1998 AND FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1998.
(3) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED DECEMBER 11, 1198 AND FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 1998.
(4) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 33-52888), AS AMENDED.
(5) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S FORM
10-K FILED FOR FISCAL YEAR ENDED MARCH 28, 1993.
(6) INCORPORATED BY REFERENCE TO THE EXHIBIT IN THE COMPANY'S FORM 10-K FILED
FOR FISCAL YEAR ENDED MARCH 27, 1994.
(7) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S FORM
10-K FILED FOR FISCAL YEAR MARCH 26, 1995.
-40-
(8) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S FORM
10-Q FILED FOR FISCAL QUARTER ENDED JUNE 25, 1995.
(9) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S FORM
10-Q FILED FOR FISCAL QUARTER ENDED JUNE 30, 1996.
(10) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S FORM
10-Q FILED FOR FISCAL QUARTER ENDED SEPTEMBER 29, 1996.
(11) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-43203) FILED ON DECEMBER
24, 1997.
(12) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-74595) FILED ON MARCH 17,
1999.
(13) INCORPORATED BY REFERENCE TO THE EXHIBIT SO DESCRIBED IN THE SCHEDULE 13-D
FILED BY LEV M. DAWSON ON MARCH 16, 1998.
(14) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10-Q FILED FOR FISCAL QUARTER ENDED JUNE 28, 1998.
(**) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS.
(*) PORTIONS OF THE TEXT HAVE BEEN OMITTED. A SEPARATE FILING OF SUCH OMITTED
TEXT HAS BEEN MADE WITH THE COMMISSION AS PART OF REGISTRANT'S APPLICATION
FOR CONFIDENTIAL TREATMENT.
-41-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VALENCE TECHNOLOGY, INC.
June 25, 1999 By: /s/ Lev M. Dawson
-----------------
Lev M. Dawson
Chairman of the Board, Chief Executive Officer
and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Lev M. Dawson Chairman of the Board, Chief June 25, 1999
- ----------------- Executive Officer and President
Lev M. Dawson
/s/ Jay L. King Vice President and Chief Financial June 25, 1999
- ----------------- Officer (Principal Financial and
Jay L. King Accounting Officer)
/s/ Carl E. Berg Director June 25, 1999
- ----------------
Carl E. Berg
/s/ Bert C. Roberts, Jr. Director June 25, 1999
- ------------------------
Bert C. Roberts, Jr.
/s/ Alan F. Shugart Director June 25, 1999
- --------------------
Alan F. Shugart
-42-
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
Pages
-----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants................................................................................F-2
Consolidated Balance Sheets as of March 28, 1999 and March 29, 1998..............................................F-3
Consolidated Financial Statements for the period from March 3, 1989 (date
of inception) to March 28, 1999 and for the years ending March 28,
1999, March 29, 1998 and March 30, 1997:
Consolidated Statements of Operations and Comprehensive Loss............................................F-4
Consolidated Statements of Stockholders' Equity (Deficit)...............................................F-5
Consolidated Statements of Cash Flows...................................................................F-6
Notes to Consolidated Financial Statements.......................................................................F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Valence Technology, Inc. and Subsidiaries
Henderson, Nevada
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive loss, stockholders
equity (deficit) and cash flows present fairly, in all material respects, the
financial position of Valence Technology, Inc. and its subsidiaries (companies
in the development stage) at March 28, 1999 and March 29, 1998, and the
consolidated results of their operations and their cash flows for the period
from March 3, 1989 (date of inception) to March 28, 1999 and for each of the
three years in the period ended March 28, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency which raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
San Jose, California May 20,1999 except for Note 17 as to which the date is June
16, 1999
F-2
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
---------
March 28, 1999 March 29, 1998
-------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,454 $ 8,400
Receivables 1,168 1,429
Prepaid and other current assets 153 880
-------------------- ------------------
Total current assets 3,775 10,709
Property, plant and equipment, net 34,071 31,712
Investment in joint venture 555 285
Other assets - 188
-------------------- ------------------
Total assets $ 38,401 $ 42,894
-------------------- ------------------
-------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 423 $ 399
Accounts payable 1,648 2,353
Accrued expenses 4,207 3,996
Accrued royalties and license fees 1,000 1,000
Advances and deposits 1,881 1,911
Grant payable 1,958 2,006
Accrued compensation 442 817
-------------------- ------------------
Total current liabilities 11,559 12,482
Deferred revenue 2,500 2,500
Long-term debt, less current portion 4,402 4,950
Long-term debt to stockholder 3,769 -
-------------------- ------------------
Total liabilities 22,230 19,932
-------------------- ------------------
Commitments and contingencies (Note 8)
Mandatorily redeemable convertible preferred stock
Authorized: 10,000,000 shares
Series A, $0.001 par value, Issued and outstanding: 7,500 shares and
no shares at March 28, 1999 and March 29, 1998, respectively 4,514 -
(Liquidation value: $7,800)
Series B, $0.001 par value, Issued and outstanding: 7,500 shares and
no shares at March 28, 1999 and March 29, 1998, respectively 3,702 -
(Liquidation value: $7,613)
Stockholders' Equity
Common stock, $0.001 par value, authorized: 50,000,000 shares,
Issued and outstanding: 26,722,000 and 25,067,000 shares
at March 28, 1999 and March 29, 1998, respectively 27 25
Additional paid-in capital 166,457 153,558
Notes receivable from shareholder (4,862) (4,862)
Deficit accumulated during the development stage (154,436) (128,012)
Accumulated other comprehensive income 769 2,253
-------------------- ------------------
Total stockholders' equity 7,955 22,962
-------------------- ------------------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity $ 38,401 $ 42,894
-------------------- ------------------
-------------------- ------------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
Period from Years Ended
March 3, 1989 ---------------------------------
(date of inception) March 28, March 29, March 30,
to March 28, 1999 1999 1998 1997
------------------- --------- --------- ---------
Revenue:
Research and development contracts $ 21,065 $ -- $ -- $ --
Costs and expenses:
Research and product development 106,652 22,171 15,432 10,825
Marketing 3,637 105 855 205
General and administrative 46,182 6,753 7,066 6,168
Write-off of in-process technology 8,212 -- -- --
Investment in Danish subsidiary 3,489 -- -- --
Special charges 18,872 -- -- --
--------- --------- --------- ---------
Total costs and expenses 187,044 29,029 23,353 17,198
Operating loss (165,439) (29,029) (23,353) (17,198)
Interest and other income 17,881 2,980 1,174 2,558
Interest expense (4,933) (643) (528) (814)
Equity in earnings (loss)
of Joint Venture (1,945) 268 (1,779) (434)
--------- --------- --------- ---------
Net Loss $ (154,436) (26,424) (24,486) (15,888)
---------
---------
Beneficial conversion feature on
preferred stock (2,865) -- --
--------- --------- ---------
Net loss available to common
stockholders $(29,289) $(24,486) $(15,888)
--------- --------- ---------
Other comprehennsive loss:
Net loss $(26,424) $(24,486) $(15,888)
Change in foreign currency
translation adjustments (1,484) 958 954
--------- --------- ---------
Comprehensive loss $(27,908) $(23,528) $(14,934)
--------- --------- ---------
--------- --------- ---------
Net loss per share available to common
stockholders: basic and diluted $ (1.13) $ (1.06) $ (0.73)
--------- --------- ---------
--------- --------- ---------
Shares used in computing net loss per share available
to common stockholders:
basic and diluted 25,871 23,010 21,684
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
for the cumulative period from
March 3, 1989 (date of inception) to March 28, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
Deficit
Notes Options to Accumulated Accumulated
Common Stock Additional Receivable Purchase During the Other
--------------------- Paid-in from Treasury Development Comprehensive
Shares Amount Capital Stockholder Stock Stage Income(Loss) Totals
--------- --------- --------- ----------- ----------- ----------- ------------- ------
Issuance of common stock
to founders:
March 1989 at $0.001
per share 4,500 $ 5 $ 5
May 1989 at $0.01
per share 3,370 3 $ 31 34
Net loss $ (394) (394)
------ ----- -------- -------- -------- ---------- -------- ---------
Balances, March 31, 1990 7,870 8 31 (394) (355)
Issuance of common
for cash in September
1990 at $0.01
per share 500 1 4 5
Net loss (5,137) (5,137)
------ ----- -------- -------- -------- ---------- -------- ---------
Balances, March 31, 1991 8,370 9 35 (5,531) (5,487)
Exercise of warrants 130 572 572
Options purchased $(1,125) (1,125)
Net loss (3,769) (3,769)
------ ----- -------- -------- -------- ---------- -------- ---------
Balances, March 31, 1992 8,500 9 607 (1,125) (9,300) (9,809)
Issuance of common stock
in public offerings,
net of offering
costs:
May and June 1992
at $8.00 per share 4,140 4 30,151 30,155
November 1992 at
$18.00 per share 3,380 3 57,028 57,031
Exercise of stock
options: July 1992
through March 1993 at
$0.01 to $0.25 per
share 289 21 21
Compensation related to
exercised stock
options 75 75
Net loss (8,463) (8,463)
------ ----- -------- -------- -------- ---------- -------- ---------
Balances, March 28, 1993 16,309 16 87,882 (1,125) (17,763) 69,010
Issuance of common
stock in public
offering, net of
offering costs:
December 1993
at $14.00 per
share 3,680 4 48,488 48,492
Exercise of stock
options during
year at $0.01 to
$13.00 per share 410 481 481
Compensation related
to exercised stock
options 243 243
Exercise of options
to purchase treasury
stock and retirement
of shares (375) (1,125) 1,125 0
Net loss (18,653) (18,653)
Change in translation
adjustment $ 56 56
------ ----- -------- -------- -------- ---------- -------- ---------
Balances, March 27, 1994 20,024 20 135,969 0 (36,416) 56 99,629
Exercise of stock
options during year
at $0.01 to $4.00
per share 83 33 33
Compensation related
to exercised stock
options 43 43
Net loss (33,629) (33,629)
Change in translation
adjustment 708 708
------ ----- -------- -------- -------- ---------- -------- ---------
Balances, March 26, 1995 20,107 20 136,045 (70,045) 764 66,784
Exercise of stock
options during year
at $0.25 to $4.00
per share 58 179 179
Common stock issued to
purchase Bellcore
technology 1,500 2 4,061 4,063
Net loss (17,593) (17,593)
Change in translation
adjustment (423) (423)
------ ----- -------- -------- -------- ---------- -------- ---------
Balances, March 31, 1996 21,665 22 140,285 (87,638) 341 53,010
Exercise of stock
options during year
at $1.88 to $4.31
per share 80 273 273
Net loss (15,888) (15,888)
Change in translation
adjustment 954 954
------ ----- -------- -------- -------- ---------- -------- ---------
Balances, March 30, 1997 21,745 22 140,558 (103,526) 1,295 38,349
Exercise of stock
options and warrants
at $1.01 to $7.13
per share 3,322 3 11,225 $(4,862) 6,366
Stock compensation 1,775 1,775
Net loss (24,486) (24,486)
Change in translation
adjustment 958 958
------ ----- -------- -------- -------- ---------- -------- ---------
Balances, March 29, 1998 25,067 25 153,558 (4,862) (128,012) 2,253 22,962
Exercise of stock
options during year
at $0.01 to $8.88
per share 1,655 2 5,764 5,766
Stock compensation 364 364
Issuance of common
stock warrants 3,660 3,660
Net loss (26,424) (26,424)
Beneficial conversion
feature on preferred
stock 3,111 3,111
Change in translation
adjustment (1,484) (1,484)
------ ----- -------- -------- -------- ---------- -------- ---------
Balances, March 28, 1999 26,722 $ 27 $166,457 $(4,862) $ 0 $(154,436) $ 769 $ 7,955
------ ----- -------- -------- -------- ---------- -------- ---------
------ ----- -------- -------- -------- ---------- -------- ---------
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
-----
Period from Years Ended
March 3, 1989 ------------------------------------------------
(date of inception) March 28, March 29, March 30,
to March 28, 1999 1999 1998 1997
-------------- ------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (154,436) $ (26,424) $ (24,486) $ (15,888)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 25,007 3,388 1,774 3,536
Write-off of equipment 14,792 25
Write-off of in-process technology 6,211
Compensation related to stock options 3,560 364 1,775
Noncash charge related to acquisition of Danish
subsidiary 2,245
Equity in (Earnings) Losses of Joint Venture 1,945 (270) 1,781 434
Amortization of debt discount 55 55
Changes in assets and liabilities:
Receivables (49) 291 (998) 114
Prepaid expenses and other current assets (1,031) 855 (552) 505
Accounts payable 1,596 (656) 404 698
Accrued liabilities 1,447 2 1,152 1,039
Deferred revenue 2,500 2,500
-------------- ------------- ------------- -------------
Net cash used in operating activities (96,158) (22,395) (16,650) (9,537)
-------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of investments (665,789) (187,561) (81,139)
Maturities of long-term investments 661,545 197,117 99,621
Capital expenditures (65,101) (9,554) (16,295) (3,379)
Other (222)
-------------- ------------- ------------- -------------
Net cash provided by (used in) investing activities (69,567) (9,554) (6,739) 15,103
-------------- ------------- ------------- -------------
Cash flows from financing activities:
Property and equipment grants 6,421 2,002 125
Borrowings of long-term debt 20,002 4,500
Payments of long-term debt:
Product development loan (482)
Shareholder and director (6,173)
Other long-term debt (12,234) (397) (1,301) (1,797)
Proceeds from issuance of common stock and warrants, net
of issuance costs 148,916 5,766 6,366 273
Proceeds from issuance of preferred stock and warrants,
Series A, net of issuance costs 7,075 7,075
Proceeds from issuance of preferred stock and warrants,
Series B, net of issuance costs 7,125 7,125
-------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities 170,650 26,071 5,065 (1,399)
-------------- ------------- ------------- -------------
Effect of foreign exchange rates on cash and cash equivalents (2,471) (68) (1,108) (904)
-------------- ------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 2,454 (5,946) (19,432) 3,263
Cash and cash equivalents, beginning of period 0 8,400 27,832 24,569
-------------- ------------- ------------- -------------
Cash and cash equivalents, end of period $ 2,454 $ 2,454 $ 8,400 $ 27,832
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
1. ORGANIZATION AND BUSINESS OF THE COMPANY:
Valence Technology, Inc. (the "Company") is engaged in research and
development to produce advanced rechargeable batteries based on lithium
and polymer technologies. The Company's primary activities to date have
been acquiring and developing its initial technology, implementing a
production line, manufacturing limited quantities of prototype
batteries, recruiting personnel and obtaining capital; such activities
have resulted in losses since inception.
The Company's current research prototype batteries do not meet all of
the specifications demanded by the marketplace, and the Company
presently has no products available for sale. To achieve profitable
operations, the Company must successfully develop, manufacture and
market its products. There can be no assurance that any products can be
developed or manufactured at an acceptable cost and with appropriate
performance characteristics, or that such products will be successfully
marketed.
The Company uses a 52/53-week fiscal year, ending on the Sunday closest
to March 31. All years presented are 52-week years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has negative working capital and has sustained recurring losses related
primarily to the development and marketing of its products. Management
is actively pursuing additional equity and debt financing from both
institutional and corporate investors. Management has implemented
certain budgetary controls and is actively pursuing capital grant
advances from the Northern Ireland Industrial Board (Note 7). However,
the Company's fiscal 2000 operating plan places significant reliance on
obtaining outside financing. There can be no assurance that any new
debt or equity issuances could be successfully consummated. These
factors raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The
effects of any such adjustments, if necessary, could be substantial.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Primarily all cash and cash equivalents are held by five banks and one
investment brokerage company, and primarily comprise money market funds
and government securities.
PROPERTY, PLANT AND EQUIPMENT GRANTS:
Grants relating to the acquisition of property, plant and equipment are
recorded upon satisfaction of the capital investment requirements
underlying the grant and the receipt of grant funds. Such grants are
deferred and amortized over the estimated useful lives of the related
assets as a reduction of depreciation expense.
DEPRECIATION AND AMORTIZATION:
F-7
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
Property and equipment are stated at cost and depreciated on the
straight-line method over their estimated useful lives, generally three
to five years. Building improvements are amortized over the lesser of
their estimated useful life, generally five years, or the remaining
mortgage term. The Company assesses its ability to recover the net book
value of its long-term assets. The carrying value of assets determined
to be impaired is written down to net realizable value. In the period
assets are retired or otherwise disposed of, the costs and accumulated
depreciation or amortization are removed from the accounts, and any
gain or loss on disposal is included in results of operations.
LONG-LIVED ASSETS:
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
might not be recoverable. In certain situations, an impairment loss
would be recognized. The Company had no impairment losses for the years
ended March 28, 1999, March 29, 1998, and March 30, 1997.
DEFERRED REVENUE:
Deferred revenue relates to payments received from the Company's joint
venture partner in Hanil Valence Co., Ltd. This amount will be
recognized as income once significant product shipments commence from
the joint venture. The Company does not anticipate recognizing this
deferred revenue in fiscal 2000.
CONTRACT REVENUES:
Research and development contract revenues are recognized over the
performance period in accordance with the contract terms. Payments
related to future performance are deferred and recorded as revenues as
they are earned over specified future performance periods.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
FOREIGN CURRENCY TRANSLATION:
Exchange adjustments resulting from foreign currency transactions are
generally recognized in operations, whereas adjustments resulting from
the translation of financial statements are reflected as a separate
component of stockholders' equity. Net foreign currency transaction
gains or losses are not material in any of the years presented.
INCOME TAXES:
The Company utilizes the liability method to account for income taxes
where deferred tax assets or liabilities are determined based on the
differences between the financial statements and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which
the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amounts expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, receivables, accounts payable, and
other accrued liabilities, approximate fair value due to their short
maturities. Based on borrowing rates currently available to the Company
for loans with similar terms, the carrying value of its debt
obligations approximates fair value.
EARNINGS PER SHARE:
Earnings per share ("EPS") is computed by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding for that period. Diluted EPS is computed giving effect to
all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of incremental common
shares issuable upon conversion of preferred stock and exercise of
stock options and warrants for all periods.
The following is a reconciliation of the numerator (net loss) and
denominator (number of shares) used in the basic and diluted EPS
calculation:
F-8
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
Years Ended
------------------------------------------------------------------
March 28, 1999 March 29, 1998 March 30, 1997
-------------- -------------- --------------
Net loss available to
common stockholders $ (29,289) $ (24,486) $ (15,888)
Weighted average
shares outstanding 25,871 23,010 21,684
------ ------ ------
Earnings per share,
basic and diluted $ (1.13) $ (1.06) $ (0.73)
Shares excluded from the calculation of diluted EPS as their effect was
anti-dilutive were 6,472, 4,983, and 4,038 in fiscal years ended March
28, 1999, March 29, 1998, and March 30, 1997, respectively.
RECLASSIFICATIONS:
Certain amounts in the prior years' financial statements have been
reclassified to conform with fiscal 1999 presentation. These
reclassifications did not change previously reported capital,
stockholders' equity, loss from operations, or net loss.
RECENT PRONOUNCEMENTS:
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities". SFAS 133
establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the balance sheet, and that
the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on
the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 1999. Currently,
the Company does not hold derivative instruments or engage in hedging
activities.
3. PROPERTY, PLANT AND EQUIPMENT:
March 28, March 29,
1999 1998
----------------- -----------------
Building and land $ 8,627 $ 9,190
Leasehold improvements 2,477 1,377
Machinery and equipment 31,942 8,711
Office and computer equipment 1,137 994
Construction in progress 13,954 30,395
----------------- -----------------
Total cost 58,137 50,667
Less capital grants (5,664) (3,965)
----------------- -----------------
Total cost, net of capital grants 52,473 46,702
Less accumulated depreciation and amortization (18,402) (14,990)
----------------- -----------------
Total cost, net of capital grants, depreciation and amortization $ 34,071 $ 31,712
----------------- -----------------
----------------- -----------------
4. LONG-TERM DEBT:
March 28, March 29,
1999 1998
---------------- -----------------
Equipment term loans $ 33 $ 50
Facility loans 4,792 5,299
---------------- -----------------
4,825 5,349
Less amounts due within one year (423) (399)
---------------- -----------------
---------------- -----------------
Long-term debt due after one year $ 4,402 $ 4,950
---------------- -----------------
---------------- -----------------
EQUIPMENT TERM LOANS:
The Company has one equipment term loan outstanding with an
institutional lender in the amount of $33. The term loan bears interest
at a fixed rate of 9.50% and is collateralized by certain of the
Company's equipment. Principal and accrued interest are payable in
monthly installments which expire in February 2001. Under the loan, the
F-9
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
Company is required to maintain certain financial ratios and meet other
covenants, including restrictions on additional indebtedness and
payments of dividends. The Company was in violation of certain
covenants during fiscal 1999. The Company has obtained the necessary
waivers for such violations.
FACILITY LOANS:
During fiscal 1995, a bank provided the Company a $2,500 facility term
loan under which drawdowns were available for the purchase and
improvement of a facility in Henderson, Nevada. The facility term loan
of $1,606 at March 28, 1999, bears interest at 10.4% and is
collateralized by the related building. The Company makes monthly
principal payments of $14 plus accrued interest through November 2001,
and a final principal payment of $1,346 is due December 2001.
The Company also has a 15 year facility loan for the Northern Ireland
building payable in equal monthly principal payments of $20 plus
accrued interest. The facility term loan bears interest at an annually
adjustable published interest rate index (6.625% at March 28, 1999) on
the outstanding principal of $3,186 at March 28, 1999. The loan is
collateralized by the related building.
Principal payments on long-term debt at March 28, 1999 are due as
follows:
Facility and
Fiscal Year Term Loans
----------- ----------------
2000 $ 423
2001 364
2002 1,619
2003 290
2004 310
Thereafter 1,819
----------------
$ 4,825
----------------
----------------
5. LONG-TERM DEBT TO STOCKHOLDER:
In July 1997, the Company entered in to an amended loan agreement with
a stockholder which allows the Company to borrow, prepay and re-borrow
up to the full $10,000 principal under the promissory note on a
revolving basis and provided that the lender will subordinate its
security interest to other lenders when the loan balance is at zero. As
of March 28, 1999, the Company had an outstanding balance of $4,500
under the Loan Agreement. The loan bears interest at one percent over
lender's borrowing rate (approximately 9.00% at March 28, 1999) and is
available through August 30, 2002.
In conjunction with the amended loan agreement, the Company issued
warrants to purchase 149 and 119 shares of common stock. The warrants
were valued using the Black Scholes valuation method and had a fair
value of approximately $2.45 and $3.87 per warrant at the time of
issuance. The fair value of these warrants, totaling $786, 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 28, 1999, a
total of $55 has been charged to interest expense.
6. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental Disclosures of Noncash Investing and Financing
Activities (in thousands):
Period from
March 3,
1989 (date of Twelve Months Ended
inception) to March 28, March 29, March 30,
March 28, 1999 1998 1997
1999
Acquisition of property, plant and equipment through
grants and long-term debt $ 7,957
Acquisition of property and equipment through
capitalized leases 1,459
Exercise of warrants in cancellation of indebtedness 572
Exercise of options to purchase treasury stock and
retirement of treasury stock 1,125
Interest paid 4,655 $ 452 $ 515 $ 814
Return of equipment for extinguishment of debt 301
Exchange of common stock for in-process technology 4,063
F-10
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
Disposal of equipment fully reserved for in prior 3,318 1,679
year
Exercise of options with note receivable 4,862 $ 4,862
Beneficial conversion feature on preferred stock 2,865 2,865
Fair value of warrants issued in connection with 2,874 2,874
preferred stock
Fair value of warrants issued in connection with
long-term debt to stockholder 786 786
7. GRANT AGREEMENT AND OFFERS:
During fiscal 1994, the Company, through its Dutch subsidiary, signed
an agreement with the Northern Ireland Industrial Development Board
(the IDB) to open an automated manufacturing plant in Northern Ireland
in exchange for capital and revenue grants from the IDB. The Company
has also received offers from the IDB to receive additional grants. The
grants available under the agreement and offers provide for an
aggregate of up to L27,555 ($44,653 as of March 28, 1999), to be
available over a five-year period through October 31, 2001. As of March
28, 1999, the Company had remaining grants available of L23,520
($38,114). The IDB offers also provided a fully amortized 15-year
mortgage to finance the purchase of a manufacturing plant, which the
Company has utilized (see Note 4).
As a condition to receiving funding from the IDB, the subsidiary must
obtain a minimum of L12,000 in debt or equity financing from the
Company. Aggregate funding under the grants is limited to L4,035 until
the Company has recognized $4,000 in aggregate revenue from the sale of
its batteries produced in Northern Ireland.
The amount of the grants available under the agreement and offers is
primarily dependent on the level of capital expenditures made by the
Company. Substantially all of the funding received under the grants is
repayable to the IDB if the subsidiary is in default under the
agreement and offers, which includes the cessation of business in
Northern Ireland; yet, the agreement does allow for a temporary
cessation of operations without penalty to the Company. During fiscal
1995, the Company entered into such a temporary break in operations.
Funding received under the grants for the purchase of capital equipment
is recorded as a contra account to property, plant and equipment and
will be amortized to income over the life of the related asset. Amounts
may be repayable if related equipment is sold, transferred or otherwise
disposed of during a four-year period after the date of grant. In
addition, a portion of funding received under the grants may also be
repayable if the subsidiary fails to maintain specified employment
levels for the two-year period immediately after the end of the
five-year grant period. As a result of the temporary cessation of
Northern Ireland business activity, specified employment levels have
not been maintained, but the IDB is not seeking repayment at this time.
The Company has guaranteed the subsidiary's obligations to the IDB
under the agreement.
There can be no assurance that the Company will be able to meet the
requirements necessary for it to receive and retain grants under the
IDB agreement and offers.
8. COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leased certain facilities under a noncancelable operating
lease which had an expiration date of April 1998. The facilities were
leased from a partnership whose general partner is a stockholder and
director of the Company. Under the terms of the lease, the Company was
responsible for utilities, taxes, insurance and maintenance. During
fiscal years 1995 and 1996, the Company vacated the facilities.
Total rent expense for the period from March 3, 1989 (date of
inception) to March 28, 1999 and for the years ended March 28, 1999,
March 29, 1998 and March 30, 1997 was $1,513, $57, $66 and $44
respectively.
LITIGATION:
In May 1994, a series of class action lawsuits were filed in the United
States District Court for the Northern District of California against
the Company and certain of its present and former officers and
directors. These lawsuits were consolidated, and in September 1994 the
plaintiffs filed a consolidated and amended class action complaint.
Following the Court's Orders on motions to dismiss the complaint, which
were granted in part and denied in part, the plaintiffs filed an
amended complaint in October 1995 ("Complaint"). The Complaint alleges
violations of the federal securities laws against the Company, certain
of its present and former officers and directors, and the underwriters
of the Company's public stock offerings, claiming that the defendants
issued a series of false and misleading statements, including filings
with the Securities and Exchange Commission, with regard to the
Company's business and future prospects. The plaintiffs seek to
represent a class of persons who purchased the
F-11
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
Company's common stock between May 7, 1992 and August 10, 1994. The
Complaint seeks unspecified compensatory and punitive damages,
attorney's fees and costs.
On January 23, 1996, the Court dismissed, with prejudice, all claims
against the underwriters of the Company's public stock offerings, and
one claim against the Company and its present and former officers and
directors. On April 29, 1996, the Court dismissed with prejudice all
remaining claims against a present director and limited claims against
a former officer and director to the period when that person was an
officer. In December 1996, the Company and the individual defendants
filed motions for summary judgment, which the plaintiffs opposed. In
November 1997, the Court granted the Company's motion for summary
judgment and entered a judgment in favor of all defendants. Plaintiffs
appealed to the Ninth Circuit Court of Appeals, which heard argument in
December 1998. In April 1999, the Ninth Circuit issued an opinion
reversing the District Court's order with respect to the grant of
summary judgment in favor of the Company and remanded the case back to
the District Court. Although the Company continues to believe that it
has a meritorious defense in this lawsuit, an unfavorable resolution of
the lawsuit could have a material adverse effect on the Company's
financial condition and results of operation.
In June 1998, the Company filed a lawsuit in the Superior Court of
California, Santa Clara County, against L&I Research, Inc., Powell
Electrical Manufacturing Company and others seeking relief based on
rescission and damages for breach of a contract. In September 1998,
Powell filed a cross-complaint against the Company and others (File No.
CV7745534) claiming damages of approximately $900. The cross-complaint
alleges breach of written contract, oral modification of written
contract, promissory estoppel, fraud, quantum meruit, and quantum
valebant. The matter is presently stayed pending settlement
discussions, and no trial date has been set.
In September 1998, Klockner Bartelt/Medipak, Inc. d/b/a/ Klockner
Medipak filed suit against the Company in the United States District
Court for the Middle District of Florida (File No. 98-1844-Civ-7-24E)
alleging breach of contract by the Company with respect to an agreement
for the supply of battery manufacturing equipment, and claimed damages
of approximately $2,500. On January 20, 1999, the Company filed a
counterclaim against Klockner alleging breach of contract, breach of
express warranty, breach of the implied warranty of merchantability,
breach of the implied warranty of fitness for a particular purpose, and
rescission and restitution and claimed compensatory damages to be
determined at trial. The case has been set for trial in March 2000.
The ultimate outcome of these actions cannot presently be determined.
Accordingly, no provision for any liability or loss that may result
from adjudication or settlement thereof has been made in the
accompanying consolidated financial statements.
In addition to the litigation noted above, the Company is from time to
time subject to routine litigation incidental to its business. The
Company believes that the results of this routine litigation will not
have a material adverse effect on the Company's financial condition.
LETTERS OF CREDIT:
At March 28, 1999, the Company had outstanding letters of credit
totaling $550.
9. STOCKHOLDERS' EQUITY:
STOCK OPTIONS AND WARRANTS:
The Company has a stock option plan (the "1990 Plan") under which
options granted may be incentive stock options or supplemental stock
options. Options are to be granted at a price not less than fair market
value (incentive options) or 85% of fair market value (supplemental
options) on the date of grant. The options are exercisable as
determined by the Board of Directors and are generally exercisable over
a five-year period. The options expire no later than ten years from the
date of grant. Unvested options are canceled and returned to the Plan
upon an employee's termination. Vested options, not exercised within
three months of termination, are also canceled and returned to the
Plan. At March 28, 1999, the Company had 1,054 shares available for
grant under the 1990 Plan.
In fiscal 1993, the Board of Directors authorized the issuance of 210
stock warrants, which have the same terms as stock options granted
under the 1990 Stock Option Plan, to employees of the Company's Danish
subsidiary.
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 shares of common stock upon their election to the
Board. The exercise price for this initial option will be the fair
market value on the day it is granted. This initial option will vest
one-fifth on the first and second anniversaries of the grant of the
option, and quarterly over the next three years. On the anniversary of
the director's election to the Board, the director will receive an
annual stock option in the amount of 100 shares less the total amount
of unvested shares remaining in the initial option and any annual
options previously granted. The exercise price for this new
F-12
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
option will be the fair market value on the day it is granted. This
annual option will vest quarterly over a three year period. A director
who had been granted an option prior to the adoption of the 1996
Non-Employee Director's Stock Option Plan will start receiving annual
grants on anniversary date of that director's prior grant. A director
who had not received an option upon becoming a director will receive an
initial stock option of 100 shares on the date of the adoption of the
plan, and then receive annual options on the anniversary dates of that
grant. As of March 28, 1999, a total of 507 options have been granted
to three directors under this plan.
In October 1997, the Board of Directors adopted the 1997 Non-Officer
Stock Option Plan (1997 Plan). The Company may grant options to
non-officer employees and consultants under the 1997 Plan. Options are
to be granted at a price not less than fair market value (incentive
options) on the date of grant. The options are exercisable as
determined by the Board of Directors and are generally exercisable
quarterly over a three-year period. The options expire no later than
ten years from the date of grant. Unvested options are canceled and
returned to the Plan upon an employee's termination. Vested options,
not exercised within three months of termination, also are canceled and
returned to the Plan. At March 28, 1999, the Company had 1,986 shares
available for grant under the 1997 Plan. Options granted to consultants
and non employee members of the Board of Directors are accounted for
using the fair value method as prescribed in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
Prior to adopting the 1990 Stock Option Plan, the Board of Directors
had granted options to three employees of the Company to purchase a
total of 850 shares of common stock. Additionally, in fiscal 1992 the
Company granted options to purchase a total of 330 shares of common
stock to certain directors and employees. These options vest over five
years with 20% becoming exercisable after the first year, with an
additional 20% becoming exercisable after the second year, and an
additional 5% becoming exercisable every three months thereafter. The
options expire ten years from the date of grant.
On January 1, 1998, the Company granted options to Mr. Dawson, the
company's new Chairman of the Board, Chief Executive Officer and
President, an incentive stock option to purchase 40 shares which was
granted pursuant to the Company's 1990 Stock Option Plan (the "1990
Plan"). Also, an option to purchase 660 shares was granted pursuant to
the Company's 1990 Plan and an option to purchase 300 shares was
granted outside of any equity plan of the Company, neither of which are
incentive stock options (the "Nonstatutory Options"). The exercise
price of all three options is $5.0625 per share. 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 secured by the shares
acquired upon exercise plus 843 shares previously held by Mr. Dawson.
Purchased shares for which the underlying options have not vested are
subject to repurchase by the Company. As of March 28, 1999, none of the
shares in the underlying options have vested.
During fiscal year 1999, the Company accelerated the vesting and
extended the term of certain options resulting in a new measurement
date. The difference between the exercise price and fair market value
of the Company's common stock at the date of issue of the stock
options, totaling $364, has been recorded as compensation expense in
fiscal year 1999.
The fair value of each option grant is estimated at the date of grant
using the Black-Sholes pricing model with the following weighted
average assumptions for grants in 1999, 1998 and 1997:
1999 1998 1997
---------------- --------------- ----------------
Risk-free Interest Rate 5.14% 5.65% 6.51%
Expected Life 4.58 years 2.17 years 4.76 years
Volatility 74.40% 71.80% 78.00%
Dividend Yield - - -
F-13
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
Aggregate option activity is as follows:
Outstanding Options
------------------------------------------
Number of Weighted Avg.
Shares Exercise Price
----------------- ------------------
Balances, March 28, 1993 2,699 $2.54
Granted 536 $13.63
Exercised (410) $1.17
Canceled (398) $12.03
-----------------
Balances, March 27, 1994 2,427 $3.67
Granted 1,758 $3.86
Exercised (83) $0.40
Canceled (1,400) $8.02
-----------------
Balances, March 26, 1995 2,702 $1.64
Granted 498 $4.71
Exercised (58) $3.09
Canceled (140) $2.85
-----------------
Balances, March 31, 1996 3,002 $2.06
Granted 1,126 $5.21
Exercised (80) $3.41
Canceled (20) $6.59
-----------------
Balances, March 30, 1997 4,028 $3.14
Granted 1,649 $4.50
Exercised (2,100) $2.70
Canceled (404) $5.68
-----------------
Balances, March 29, 1998 3,173 $4.07
Granted 2,358 $5.96
Exercised (1,655) $3.34
Canceled (1,300) $5.35
-----------------
Balances, March 28, 1999 2,576 $5.57
-----------------
-----------------
At March 28, 1999, March 29, 1998 and March 30, 1997, vested options to
purchase 908, 2,273 and 1,950 shares, respectively, were unexercised.
The weighted average fair value per share of those options granted in
1999, 1998, and 1997 was $3.35, $2.23, and $3.73 respectively.
The following table summarizes information about fixed stock options
outstanding at March 28, 1999:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------- --------------------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (years) Price Exercisable Price
--------------- ---------------- --------------------- ------------- -------------- --------------
$1.00 - $1.88 101 2.99 $1.01 20 $1.01
$2.62 - $3.81 223 6.82 $3.50 140 $3.44
$4.12 - $6.06 1450 8.54 $4.93 670 $4.90
$6.31 - $8.88 802 9.47 $7.03 78 $6.95
---------------- --------------------- ------------- -------------- --------------
2,576 8.47 $5.31 908 $4.76
At March 28, 1999, the Company has reserved 6,472 shares of common
stock for the exercise of stock options and warrants.
The Company has adopted the disclosure-only provisions of the Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation." Accordingly, no compensation expense has
been recognized for the Company's stock plans. Had compensation expense
for the stock plans been determined based
F-14
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
on the fair value at the grant date for options granted in 1999, 1998
and 1997 consistent with the provisions of SFAS 123, the pro forma net
income would have been reported as follows:
1999 1998 1997
---------------- ------------- ---------------
Net loss available to stockholders - as reported $ (29,289) $ (24,486) $ (15,888)
Net loss available to stockholders - pro forma (31,896) (27,422) (16,787)
Net loss available to stockholders per share - as reported (1.13) (1.06) (0.73)
Net loss available to stockholders per share - pro forma (1.23) (1.19) (0.78)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In July 1998, the Company completed private financing arrangements of
up to $25 million. The Company issued 7.5 shares of Series A
mandatorily redeemable convertible preferred stock ("Series A preferred
stock") at $1,000 per share and warrants, raising gross proceeds of
$7.5 million, with transaction costs of $425. In December 1998, the
Company completed the equity portion of the financing arrangements,
issuing 7.5 shares of Series B mandatorily redeemable convertible
preferred stock ("Series B preferred stock") at $1,000 per share and
warrants, raising gross proceeds of $7.5 million, with transaction
costs of $375. The Series A preferred stock and Series B preferred
stock accrete at an annual rate of 6% per year, and are convertible
into common stock based upon defined conversion formulas. The remaining
$10 million of the financing arrangements is in the form of a line of
credit arrangement (Note 5).
Under the terms of the certificate of designations of the preferred
stock and the warrants, the preferred stock investor may not convert
the preferred stock or exercise the warrants if after by doing so the
investor will own more than 4.9% of the Company's common stock.
In connection with the issuance of Series A and Series B preferred
stock, the Company issued warrants to purchase 896 shares of common
stock to the Series A and B investor. The warrants are exercisable at a
purchase price of $6.78 per share and expire in July 2003. In addition,
the Company issued warrants to purchase 175 shares of common stock to
the placement agent. The warrants are exercisable at a price of $4.94
per share and also expire in July 2003. The warrants have a fair value
of $2.9 million using the Black Scholes valuation method and were
recorded as a component of common stock.
F-15
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
Changes in the Series A and Series B preferred stock during fiscal year
1999 are as follows:
Amount
---------
Balance at March 30, 1998 $ -
Issuance of Series A preferred stock, net of issuance costs
of $425 and allocation to warrants of $1,138 5,937
Beneficial conversion feature (1,708)
Accretion to redemption value 285
---------
4,514
---------
Issuance of Series B preferred stock, net of issuance costs
of $375 and allocation to warrants of $1,736 5,389
Beneficial conversion feature (4,267)
Dividend related to beneficial conversion feature
of preferred stock 2,468
Accretion to redemption value 112
---------
3,702
---------
Balance at March 28, 1999 $ 8,216
---------
---------
TERMS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Both Series A and Series B preferred stock are redeemable at the option
of the holders upon certain redemption events, as defined, at the
greater of $1,250 per share or an amount defined by the redemption
formula.
The amount at which Series A and Series B preferred stock are recorded
is less than its redemption value as a result of amounts allocated to
warrants to purchase common stock and the beneficial conversion
feature. In addition, the cash proceeds from Series A and Series B
preferred stock were reduced by placement agent fees paid in cash.
Accordingly, the preferred stock is being accreted to its redemption
value each period. The amount of accretion recorded in each period
increases the net loss available to common stockholders.
Each share of Series A and Series B preferred stock is convertible
initially on a one for one basis, at the option of the holder, into a
number of fully paid shares of common stock as determined by dividing
the respective preferred stock issue price plus a premium by the
conversion price in effect at that time. The initial conversion price
of Series A and Series B preferred stock is $6.03 per share and is
subject to adjustment in accordance with the antidilution provisions
contained in the Company's amended Articles of Incorporation. The
Series A and Series B preferred stock automatically convert to shares
of common stock in accordance with a conversion formula in July 2001.
In the event of any liquidation, dissolution or winding up of the
Company, the holders of Series A and Series B preferred stock are
entitled to receive, prior and in preference to any distribution of any
of the assets of the Company to the holders of common stock, an amount
per share equal to the sum of $1,000 per share of preferred stock (as
adjusted for any stock dividends, combinations or splits) plus the 6%
premium. In the event that upon liquidation or dissolution, the assets
and funds of the Company are insufficient to permit the payment to the
holders of preferred stock of the full preferential amounts, then the
entire assets and funds of the Company, legally available for
distribution, are to be distributed ratably among the holders of Series
A and Series B preferred stock in proportion to the full preferential
amount each is otherwise entitled to receive.
After payment has been made to the holders of Series A and Series B
preferred stock, any remaining assets and funds are to be distributed
equally among both the holders of the Series A and Series B preferred
stock and common stock as if all shares of preferred stock had been
converted into common stock.
The holders of shares of Series A and Series B preferred stock are not
entitled to receive dividends and have no voting power whatsoever,
except as otherwise provided by applicable law.
OTHER WARRANTS:
In connection with certain borrowings from a stockholder and director,
the Company issued a total of 1,353 warrants for the purchase of common
stock with exercise prices of between $4.00 and $6.40 per share,
subject to certain adjustments. In fiscal 1992, a total of 130 warrants
were exercised at an exercise price of $4.40 per share payable through
the cancellation of $520 of indebtedness including accrued interest.
The warrants expire on the earlier of the effective date of a
reorganization of the Company, as defined, or July 31, 1997. The
warrants were
F-16
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
deemed to have a nominal value at their date of issuance. In fiscal
1998, the remaining 1,223 warrants were exercised at $4.00 per share.
10. INCOME TAXES:
There was no provision for income taxes for fiscal years 1999, 1998 or
1997. The provision for income taxes differs from the amount computed
by applying the federal statutory rate to the loss before income taxes
as follows:
Year Ended:
-------------------------------------------------------
March 28, March 29, March 30,
1999 1998 1997
---------------- -------------- ----------------
Federal tax at statutory rate 34% 34% 34%
Change in valuation allowance (34) (34) (34)
---------------- -------------- ----------------
Tax provision - - -
---------------- -------------- ----------------
---------------- -------------- ----------------
The components of the net deferred tax asset as of March 28, 1999 and
March 29, 1998 were as follows:
March 28, 1999 March 29, 1998
----------------- ----------------
Current assets:
Accrued liabilities $ 376 $ 419
Valuation allowance (376) (419)
----------------- ----------------
$ - $ -
----------------- ----------------
----------------- ----------------
Noncurrent assets:
Depreciation and amortization $ 2,209 $ 3,112
Research and development credit carryforwards 719 719
Net operating loss carryforwards 23,633 18,970
Valuation allowance (26,561) (22,801)
----------------- ----------------
$ - $ -
----------------- ----------------
----------------- ----------------
At March 28, 1999, the Company had federal operating loss carryforwards
available to reduce future taxable income of approximately $87,000.
The carryforwards expire between 2008 to 2019, 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.
11. DEVELOPMENT CONTRACT:
In March 1991, the Company, its Danish subsidiary, and Delphi
Automotive Systems Group of General Motors (Delphi, formerly known as
Delco Remy Division) entered into a development agreement whereby the
Company and its Danish subsidiary (the Contractors) agreed to carry out
research and development on batteries with an emphasis on vehicular and
load leveling/peak sharing applications. The original contract
consisted of an aggregate value of $20,000. In early fiscal 1995, the
Company received a contract from Delphi to provide follow on research
and product development, including the delivery of specified material,
for an aggregate of $900. As of March 26, 1995, the Contractors had
billed and received the entire $20,900 from Delphi.
Payments under the contract are nonrefundable and the Contractors have
granted to Delphi a worldwide, exclusive license to sell and
manufacture load leveling/peak sharing and vehicular batteries for a
certain period of time with a non-exclusive license thereafter. Delphi
shall pay a royalty on each unit manufactured and sold under its
license until the year 2008.
The contract also provides for the use and ownership of patents
developed under the contract, including termination provisions in the
event of certain circumstances.
In September 1994, the Company and Delphi signed a new five year
agreement to combine efforts in developing the Company's rechargeable
solid state lithium polymer battery technology. Under the agreement,
Delphi and the Company combined their research and development
activities in a new facility in Henderson, Nevada. The new facility is
owned by the Company, with Delphi paying a fee of $50 per month over
the five year term of the new agreement for access to the Company's
research and development (of which $100, $600, and $650 was recognized
F-17
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
during fiscal 1999, 1998, and 1997, respectively, as an offset to
research and product development expenses), as well as Delphi
contributing to a portion of the facility's operating costs over the
term of the new five year agreement.
In May 1998, the Company and Delphi announced the successful completion
of their collaboration on lithium polymer battery development. Delphi
will retain a license to use Company-developed lithium polymer
technology for vehicular and stationary load leveling / peak shaving
applications. The Company will retain a license to use Delphi-developed
lithium polymer technology in all other applications. The Company
anticipates that it will receive no further payments as a result of the
Delphi agreement.
12. PURCHASE OF TECHNOLOGY AND LICENSE AGREEMENT:
In July 1990, the Company entered into a stock purchase and license
agreement whereby the Company purchased all of the assets and certain
technology and patents from a third party. The Company has agreed to
pay a royalty to the third party on all sales of product manufactured
and sold in a specified territory. The third party agreed not to
compete with the Company and the agreement expires in 2006.
In June 1995, the Company entered into a non-exclusive license
agreement with Bell Communication Research, Inc. ("Bellcore") to
license Bellcore's plastic lithium battery technology. The Company
acquired the technology for a total purchase price of $6,064, which
consisted of 1,500 shares of Valence stock plus an initial payment of
$2,000. In addition to royalty payments, the Company is required to
make a $1,000 payment to Bellcore on the earlier of June 1, 1997 or
when the Company recognizes $10,000 of revenue from royalty-bearing
products. An additional $1,000 payment was due in June 1999, the fourth
year of the agreement, and the payment was made during fiscal 1999. The
Company was granted a "favored nations" clause in the original
contract.
13. INVESTMENT IN DANISH SUBSIDIARY:
In August 1990, the Company acquired a 45% interest in a Danish company
organized to perform research and development activities within the
field of solid state batteries. Concurrent with this acquisition, the
Company and this affiliate entered into a license and technical
agreement which, among other things, provided for an exchange of
technology between the affiliate, a geographical distribution of
manufacturing rights and an ongoing exchange of technical assistance.
The Company accounted for its initial 45% investment under the equity
method.
On March 30, 1992, the Company through its Cayman Islands Subsidiary
and a director and principal stockholder of the Company entered into a
series of transactions to acquire the remaining 55% interest in the
affiliate and repurchase shares of the Company's common stock (see Note
8). These transactions were entered into in connection with the
settlement of certain disputes between the Company and the affiliate
with respect to the affiliate's failure to enforce its contracts with
certain of its shareholders. As part of the settlement, the parties
also agreed to terminate certain technology development and license
agreements entered into in 1990 and 1991.
In fiscal 1996, the Company's Danish subsidiary was liquidated.
14. 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.
15. JOINT VENTURE AGREEMENTS:
In July 1996, the Company, through its Dutch subsidiary, and Hanil
Telecom Co., Ltd. ("Hanil Telecom") signed an agreement to establish a
joint venture company in Korea. All funds are to be provided to the
joint venture by Hanil Telecom. Hanil Telecom and the Company, through
its Dutch subsidiary, each hold a 50% stake of the company. Valence
will supply the technology, initial equipment and product designs and
technical support out of its Northern Ireland facility. Hanil Telecom
will market the joint venture's initial products for a period of
several years, depending on the market. The Company accounts for the
joint venture using the equity method. At March 28, 1999, the joint
venture had net equity and net income of approximately $5,056 and $539,
respectively. The proportionate share of the joint venture's income
(losses) are recorded in the statements of operations as non-operating
income (losses).
F-18
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except per share amounts)
Following is a summary of the operating results and financial position
of the joint venture:
Years ended March 31,
---------------------------------
1999 1998
-------- --------
Operations:
Net sales $ - $ -
Net income (loss) $ 539 $ (3,571)
Financial position:
Current assets $ 3,758 $ 3,802
Noncurrent assets 26,180 15,303
-------- --------
$ 29,938 $ 19,105
-------- --------
-------- --------
Current liabilities $ 5,474 $ 3,002
Noncurrent liabilities 19,408 12,117
Shareholders' equity 5,056 3,986
-------- --------
$ 29,938 $ 19,105
-------- --------
-------- --------
The Company and Alliant Techsystems Inc. ("Alliant") signed an
agreement in October 1996, to establish a joint venture company. The
Company is expected to supply the electrode laminate materials that are
key to manufacturing high performance batteries. The Company will
account for the joint venture using the equity method. At March 28,
1999, the Company's investment in the joint venture was nil, which is
equal to the cost basis of the technology contributed by the Company.
The net assets and operations of the joint venture were not material.
16. SEGMENT INFORMATION:
The Company conducts its business in one operating segment and uses
only one measurement of profitablity. Long-lived asset information by
geographic area at March 28, 1999 and March 29, 1998 is as follows:
1999 1998
--------------- -------------------
United States $ 5,502 $ 5,733
International (primarily Northern Ireland) 28,569 25,979
--------------- -------------------
TOTAL $ 34,071 $ 31,712
--------------- -------------------
--------------- -------------------
17. SUBSEQUENT EVENTS:
During the first quarter of fiscal 2000, the Company borrowed an
aggregate of $5,450 from a stockholder under the amended loan agreement
(Note 5). In conjunction with the borrowings, the Company issued
warrants to purchase 325 shares of common stock. The warrants were
valued using the Black Scholes valuation method and had a weighted
average fair value of $4.22 per warrant at the time of issuance. The
fair value of these warrants, totaling $1,372, 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 amended loan agreement.