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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
(Mark One)
[X] Annual report to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended MARCH 31, 1996 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 (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION OR ORGANIZATION)
301 CONESTOGA WAY
HENDERSON, NEVADA 89015
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code is (702) 558-1000
___________
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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Common NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
$.001 par value
__________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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
405 of Regulation S-K (Section 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 [X]
The aggregate market value of the Registrant's voting stock held by non-
affiliates on June 20, 1996 (based upon the NASDAQ/NMS closing price on such
date) was $88,878,662.
As of June 20, 1996, there were 21,670,000 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the
Registrant's Annual Meeting of Stockholders to be held August 29, 1996 (Part
III), are incorporated by reference to the extent stated herein.
Exhibit Index on pages 18 and 19
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PART I
The discussion and analysis below, and throughout this report, contains
forward-looking statements within the meaning of Section 27A of the
Securities and Exchange Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934. Actual results could differ materially from those
projected or suggested in the forward-looking statements as a result of the
risk factors set forth below and elsewhere in this report.
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. 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 been progressing in the redesign and modifications to its
manufacturing equipment in Northern Ireland to support a 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 and its current research prototype
batteries do not meet all of the exacting specifications demanded by the
marketplace. 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 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 products 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.
In the event that the Company's research and development activities lead to
commercially viable products, to accelerate the introduction of its batteries
into the portable consumer electronics and telecommunications markets, the
Company's strategy is expected to be to provide 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. 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 been
unable to produce commercially-viable prototype batteries, based on its new
technology, to deliver to OEMs. 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 had established relationships with Motorola, Inc. ("Motorola") and
the Hewlett-Packard Company ("Hewlett-Packard"), initially covering the prior
generation of the Company's technology, which has since been substantially
abandoned. The Company believes that these potential customers will continue to
be interested in advanced rechargeable batteries from the Company, should the
Company's program 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 portable 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 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
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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 and other Japanese manufacturers have introduced 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 nine 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 will have to compete with the
other Bellcore licensees, who will 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.
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 of only
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 will constitute
an advance over most rechargeable battery technologies currently available in
the market, although its program is still in the research and development phase
and therefore substantial uncertainties exist. 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
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, an approximately 22%
loss in packaging 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
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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 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 test, 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 size batteries
because of the larger amount of ionic lithium contained in the battery, and
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,
automotive 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 research and development
commitments from Delphi and a 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.
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 a $50,000 monthly research and
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development access fee. 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, will pay a majority 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
provides 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, marine and air 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.
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.
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.
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 Energizer'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.
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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 has been prohibited from working with
Eveready on certain of its research and development efforts.
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 knowhow
developed by Bellcore. The Company is in the process of integrating the
Bellcore technology with the Company's lithium 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 to Delphi a limited
sublicense to the Bellcore technology for experimental use, and the right to
grant an option to Delphi for a sublicense to make, have made, use and sell
batteries for land, marine, and air vehicles, including electric vehicles, and
utility load-leveling applications.
RESEARCH AND PRODUCT DEVELOPMENT
The Company's research and product development expenses in fiscal years
1994, 1995 and 1996 were approximately $21,465,000, $14,762,000 and $8,047,000
respectively. During the same periods, the Company received reimbursements for
research and development activities and earned development contract revenues of
$7,295,000, $4,150,000 and nil, respectively.
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 13 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 anode, cathode and electrolyte
chemistry, formulation, 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 14 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 coating,
laminating, assembly and packaging lines that produce small quantities of
prototype batteries for internal testing and eventual 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.
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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 may add 50,000 square feet at some point in the
future. The Company, with its equipment suppliers, has designed and constructed
a high volume, automated assembly and packaging line 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 is working with its equipment suppliers to redesign and modify this
equipment to work with the Company's new 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.
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. Duracell Inc. has announced that it intends to
manufacture a nickel metal hydride battery. Sony produces a liquid electrolyte
lithium ion battery used in Sony's products, and sold to OEMs. Toshiba has
announced the formation of a joint venture with Asahi Chemical Industry Company
to manufacture liquid electrolyte lithium ion batteries. Toshiba has also
announced the availability of a notebook computer incorporating a liquid
electrolyte lithium ion battery. In addition, the Company believes that Saft
America Inc., Ray O Vac, 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 nine other companies have
taken licenses to Bellcore's battery technology, although their identity has not
been announced. Ultralife Batteries, Inc., who acquired Dowty Battery Company
in the United Kingdom in 1994, has announced shipment of prototype lithium ion
polymer batteries, and has announced plans to begin commercial shipments in
1996. 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, Alliant, and Ray O Vac in the U.S. and at other
companies in Japan. In May 1995, Moltech Corp. announced that it expected to
begin production shipments of its lithium polymer batteries in mid-to-late 1996.
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 C$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
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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 31, 1996, the Company held 107 patents and had 71 patent
applications pending in the United States. The Company was preparing 85
additional patent applications for filing in the United States. Of the issued
United States patents, the Company believes one patent, which expires in 2006,
was fundamental to the protection of the Company's prior lithium metal anode
technology, although it has no bearing on the Company's new battery technology.
This patent has been accepted for reexamination by the United States Patent and
Trademark Office, by request of a third party, who cited to the patent office
significant new, and previously reviewed prior art, allegedly showing
anticipation and/or obviousness. The Company also actively pursues foreign
patent protection in countries of interest to the Company. As of March 31,
1996, the Company had been granted 14 foreign patents and had 68 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, 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
-8-
<PAGE>
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. 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.
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 June 20, 1996, the Company had 78 full-time employees, of whom 11 held
Ph.D. degrees. Of these employees, 14 are fully subcontracted to Delphi, and 13
are shared with Delphi Of the total, 13 employees were engaged in research and
development, 14 in battery engineering, 38 in operations and 13 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 collective
bargaining agreement, and the Company considers its relations with its employees
to be good. In addition to the above employees, as of June 20, 1996, the
Company's Dutch subsidiary had 13 employees located in Northern Ireland.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 31, 1996, are
as follows:
Name Age Position
---- --- --------
Calvin L. Reed 53 Chairman of the Board, President, Chief
Executive Officer
William J. Masuda 47 Executive Vice President, Worldwide
Operations
David P. Archibald 55 Vice President and Chief Financial
Officer
Ralph J. Brodd 67 Vice President, Research and Development
Robert J. Horning 53 Vice President, Engineering
Bradley A. Perkins 38 Vice President, General Counsel and
Secretary
Mr. Reed joined the Company as President and Chief Operating Officer in
July 1991 and became a director of the Company in September 1991. In
October 1993, Mr. Reed was also appointed Chairman of the Board and Chief
Executive Officer. From April 1987 to June 1991, Mr. Reed was Vice President of
Operations at Seagate Technology, Inc. ("Seagate"), a disk drive manufacturer,
where he was responsible for the Singapore and the Scotts Valley, California
operations. From February 1982 to April 1987, Mr. Reed was Corporate Vice
President and General Manager of IMI/Corvus Systems, a disk drive and computer
peripheral manufacturer, where he was responsible for manufacturing,
engineering, management information systems and corporate facilities operations.
Mr. Masuda joined the Company as Vice President, Operations in April 1992. In
August of 1994, Mr. Masuda was made Executive Vice President, Worldwide
Operations. From September 1993 to May 1994, Mr. Masuda was an employee and
General Manager of Valence Technology Cayman Island Inc., a subsidiary of the
Company. From September 1989 to April 1992, Mr. Masuda was President and Chief
Executive Officer of Eagleson Industries, Inc., a subcontract manufacturer.
During that same period, Mr. Masuda was also Vice President of Operations for
Computer Memory Disk, a disk manufacturer and subsidiary of Furukawa Electric.
From June 1985 to September 1989, Mr. Masuda was with KSI Disc Products, Inc., a
disk manufacturer, as the Vice President of Operations from June 1985 to
February 1988 and as President and Chief Operating Officer from February 1988 to
September 1989.
Mr. Archibald joined the Company as Director of Finance in June 1995 and became
Vice President and Chief Financial Officer in February 1996. From February 1989
to May 1995, Mr. Archibald was Finance Director at Staveley Industries plc, a
manufacturer of high and low technology products. From June 1986 to December
1988, Mr. Archibald was controller for Handi-Kup, a division of James River
Corporation.
Dr. Brodd joined the Company as Consulting Staff Scientist and Director of
Marketing in April 1992. He briefly left the Company from November 1993 to
January 1994, to be Vice President of Technology at Bolder Technology,
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<PAGE>
Inc. In May 1995, he became Vice President, Marketing, and in May 1996 he became
Vice President, Research and Development. Prior to joining the Company, Dr.
Brodd was Manager, Lithium Power Sources at Gould, Inc., since April 1986. Dr.
Brodd holds a Ph.D. from the University of Texas.
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.
Mr. Perkins joined the Company as Associate General Counsel in November 1991,
and became Secretary in June 1993. In July 1993, Mr. Perkins was appointed Vice
President and General Counsel of the Company. From August 1988 to
November 1991, Mr. Perkins was Assistant General Counsel and Intellectual
Property Counsel with VLSI Technology, Inc., a semiconductor manufacturer. From
July 1987 to August 1988, Mr. Perkins was an intellectual property attorney with
Hewlett-Packard Company.
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.
ITEM 2
PROPERTIES
The Company's corporate offices and principal laboratories are in a facility
which it owns, with approximately 55,000 square feet, located in Henderson,
Nevada. The Company also has two facilities in San Jose, California, which it
no longer occupies, under a five-year lease commencing May 1, 1993 with Berg &
Berg Developers. Carl E. Berg, a director of the Company, is a general partner
of Berg & Berg Developers. The Company has sublet, through Berg & Berg
Developers, both facilities for the entire term remaining on the lease.
Additionally, the Company's Dutch subsidiary owns a manufacturing facility in
Mallusk, Northern Ireland, with approximately 80,000 square feet.
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 additional
space 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. The Company believes that it has
meritorious defenses and intends to defend the lawsuit vigorously.
-10-
<PAGE>
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the fourth
quarter of the fiscal year.
-11-
<PAGE>
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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 National Association of Securities Dealers Automated Quotation National
Market Systems (NASDAQ/NMS) under the symbol "VLNC." The high and low closing
sales prices during each quarter for Valence common stock on NASDAQ/NMS for
fiscal years 1995 and 1996 were as follows:
High Low
---- ---
FISCAL 1995
Quarter ended June 26, 1994 $15-1/4 $3-1/4
Quarter ended September 25, 1994 5-1/2 2-5/8
Quarter ended December 25, 1994 3-7/8 2-1/8
Quarter ended March 26, 1995 2-7/8 1-9/16
FISCAL 1996
Quarter ended June 25, 1995 $4-7/16 $1-3/4
Quarter ended September 24, 1995 6-1/2 3
Quarter ended December 24, 1995 6-1/4 3-3/4
Quarter ended March 31, 1996 5-7/8 3-3/4
The approximate number of record holders of the Company's Common Stock as of
June 20, 1996, was 814.
Valence has not paid any cash dividends since its inception and does not
anticipate paying cash dividends in the foreseeable future.
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<PAGE>
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)
_____
<TABLE>
<CAPTION>
Period from
March 3,
1989
(date of
inception) Year Ended
to ---------------------------------------------------------------------
March 31, March 31, March 26, March 27, March 28, March 31,
1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Research and development contracts $ 21,605 $ - $ 4,150 $ 7,295 $ 6,385 $ 3,775
-------- -------- -------- -------- -------- --------
Costs and expenses:
Research and development 58,224 8,047 14,762 21,465 10,262 2,723
Marketing 2,472 486 705 767 514
General and administrative 26,195 5,614 6,269 6,013 5,211 2,180
Write-off of in-process Technology 8,212 6,064
Investment in Danish subsidiary (2) 3,489 2,245
Special charges 18,872 18,872
-------- -------- -------- -------- -------- --------
Total costs and expenses 117,464 (20,211) 40,608 28,245 15,987 7,148
-------- -------- -------- -------- -------- --------
Operating loss (95,859) (20,211) (36,458) (20,950) (9,602) (3,373)
Interest income 11,169 3,549 3,606 2,547 1,435 25
Interest expense (2,948) (931) (777) (250) (296) (421)
-------- -------- -------- -------- -------- --------
Net loss $(87,638) $(17,593) $(33,629) $(18,653) $ (8,463) $ (3,769)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net loss per share - $ (0.83) $ (1.68) $ (1.08) $ (0.63) $ (0.37)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Shares used in computing net loss
per share (3) - 21,261 20,059 17,259 13,502 10,140
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
As of
----------- --------------------------------------------------------------
March 31, March 26, March 27, March 28, March 31,
1996 1995 1994 1993 1992
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $19,314 $16,602 $26,188 $37,053 $819
Restricted cash 1,875
Investments 37,537 57,869 71,312 31,779
Working capital (deficiency) 41,281 45,011 48,254 55,935 (4,995)
Total assets 70,247 92,007 121,036 77,236 3,323
Long-term debt 6,169 8,811 7,258 1,785 7,200
Accumulated deficit (87,638) (70,045) (36,416) (17,763) (9,300)
Total stockholders' equity (deficit) 53,010 66,784 99,629 69,010 (9,809)
</TABLE>
(1) See Note 11 of Notes to Consolidated Financial Statements
(2) See Note 12 of Notes to Consolidated Financial Statements
(3) See Note 2 of Notes to Consolidated Financial Statements
-13-
<PAGE>
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
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 $87,638,000 from its inception to
March 31,1996.
The discussion and analysis below contains trend analysis and other forward-
looking statements within the meaning of Section 27A of the Securities and
Exchange Act of 1933 and Section 21E of the Securities and Exchange Act of 1934.
Actual results could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth below and elsewhere
in this report.
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 31, 1996 (FISCAL 1996), MARCH 26, 1995 (FISCAL 1995)
AND MARCH 27, 1994 (FISCAL 1994)
During fiscal 1996, the Company continued development activities under a
research and development agreement with Delphi. That phase of a multi-year
agreement, which provided for the aggregate funding of up to $20,000,000, was
completed during the quarter ending September 25, 1994. Payments were generally
made in accordance with the achievement of certain milestones. No revenues were
recognized during fiscal 1996. Revenues of $4,150,000 and $7,000,000 were
recognized during fiscal 1995 and fiscal 1994, respectively regarding the
completed Delphi agreement.
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 $50,000 per month over the five-year term of the new agreement for
access to the Company's research and development (of which $650,000 was
recognized during fiscal 1996 as an offset to research and product development
expenses). In addition, Delphi is paying a majority of the facility's operating
costs over the term of the new five-year agreement. The Company is treating
both of these payments as an offset to research and product development
expenses.
In the first quarter of fiscal 1995, the Company announced its intent to refocus
its efforts on research and product development and to slowdown completion of
its volume manufacturing capacities. In the second quarter of fiscal 1995, the
Company also announced its intent to reduce its efforts related to
commercialization of a battery containing a lithium metal anode and instead
concentrate on the development of a lithium polymer battery containing an
alternate lithium anode. The Company produced significant cost savings as a
result of these activities.
Research and product development expenses were $8,047,000, $14,762,000 and
$21,465,000 during fiscal 1996, 1995 and 1994, respectively. The decrease
between comparable periods was primarily due to cost sharing with Delphi,
reductions in personnel and related costs concurrent with the Company's decision
to slow completion of its volume manufacturing capacities and refocus on other
aspects of research and product development.
Marketing expenses were $486,000, $705,000 and $767,000 for fiscal 1996, 1995
and 1994, respectively. The comparative decrease from fiscal 1994 and 1995 to
1996 is the result of a decrease in headcount.
-14-
<PAGE>
General and administrative expenses decreased to $5,614,000 in fiscal 1996 from
$6,269,000 in fiscal 1995, and $6,013,000 in fiscal 1994. The fiscal 1995 to
1996 decrease reflects a reduction in spending as well as cost sharing with
Delphi. Fiscal 1995 increase over fiscal 1994 was due to increased legal cost
associated with the shareholder class action lawsuit.
Consistent with the fiscal 1995 refocus on research and development, special
charges in fiscal 1995 were $18,872,000 ($0.94 per share) for which no tax
benefit is currently available. Such charges were made primarily to write-down
equipment the Company had acquired, or is contractually committed to acquire,
and which was originally intended for use in manufacturing batteries utilizing a
lithium metal anode. An additional component of the special charges was for
facilities consolidation costs.
During fiscal 1996, the Company incurred a one-time charge to operations of
$6,064,000 ($0.28 per share) for the write-off of in-process technology related
to the Technology Transfer Agreement with Bellcore. Technological feasibility
of the in-process technology acquired had not been established and there was no
alternate future use.
Interest income was $3,549,000, $3,606,000 and $2,547,000 in fiscal 1996, 1995
and 1994, respectively. This decrease is primarily a result of fewer funds
available for investment during fiscal 1996 due to ongoing losses. Fiscal
1995 increased over fiscal 1994 as the result of additional funds available
during fiscal 1995 after the Company's public offering in fiscal 1994.
Interest expense increased to $931,000 from $777,000 and $250,000 during fiscal
1996, 1995 and 1994, respectively. This increase is a result of additional
long-term debt acquired during fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $10,134,000 net cash for operating activities during fiscal
1996, whereas it used $18,836,000 during fiscal 1995 and $6,813,000 during
fiscal 1994, a decrease between fiscal 1996 and 1995 of $8,702,000. This net
decrease primarily resulted from a reduction in losses (before special charges)
partially offset by acquisition of the Bellcore technology. Fiscal 1995
increased over 1994 as the result of increased capital expenditures.
During fiscal 1996, the Company provided $21,280,000 net cash from investing
activities compared to a net provision of $4,599,000 during fiscal 1995, and
$55,981,000 used during fiscal 1994, an increase of $16,681,000 between
fiscal 1995 and 1996. The increase was a result of changes in investments to
support continuing losses and shortening of maturities to support fiscal 1997
capital expenditures budgets. There were $25,587,000 net maturities during
fiscal 1996, as compared to $13,443,000 net maturities during fiscal 1995.
In addition, capital expenditures decreased $6,488,000 during fiscal 1996, as
compared to fiscal 1995. The $55,981,000 used during fiscal 1994 was
$39,533,000 for net investments and $16,529,000 for capital expenditures.
The Company used $2,679,000 net cash from financing activities during fiscal
1996, versus providing $4,520,000 during fiscal 1995 and $51,995,00 during
fiscal 1994. This decrease resulted from inactive long-term debt borrowings, as
well as commencing repayment of existing debt. The increase in fiscal 1994 was
primarily the result of the Company's third public offering that raised proceeds
of $48,493,000.
As a result of the above, the Company had a net increase in cash and cash
equivalents of $7,967,000 during fiscal 1996, whereas it had a net decrease of
$9,586,000 during fiscal 1995, and a net decrease of $10,865,000 during fiscal
1994.
The Company's $2,000,000 working capital line of credit is available through
March 15, 1997. The working capital line collateralizes outstanding letters of
credit, which reduce borrowings otherwise available under the line. As of March
31, 1996, there are no outstanding letters of credit.
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, generally become
available over a five-year period through October 31, 1998. As of March 31,
1996, the Company had received grants aggregating L3,978,050 reducing remaining
grants available to L23,576,950 (US$35,983,000 as of March 31, 1996).
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.
-15-
<PAGE>
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 Company expects that its existing funds as of March 31, 1996, together with
the interest earned thereon, will be sufficient to fund the Company's operations
through the end of fiscal 1997. The Company anticipates that it may need
substantial additional funds in the future for capital expenditures, research
and product development, marketing and general and administrative expenses and
to pursue joint venture opportunities. 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.
Forward looking statements involve a number of risks and uncertainties
including, but 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 the Company's Securities and
Exchange Commission filings.
RECENT ACCOUNTING PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," which requires the Company to review for impairment
of long-lived assets, certain identifiable intangibles, and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In certain situations, an
impairment loss would be recognized. Statement No. 121 will become effective
for the Company's fiscal year 1997. The Company has studied the implications of
the statement, and based on its initial evaluation, does not expect it to have a
material impact on the Company's financial condition or results of operations.
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123) "Accounting for Stock-Based Compensation," which
establishes a fair value based method of accounting for stock-based compensation
plans. The Company is currently following the requirements of APB Opinion No.
25, "Accounting for Stock Issued to Employees," while it studies the
implications of SFAS No. 123 and evaluates the effect, if any, on the financial
condition and results of operations of the Company. SFAS No. 123 will be
effective for the Company's fiscal year 1997.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes thereto appear on
pages F-1 to F-18 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.
-16-
<PAGE>
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PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item, insofar as it relates to directors, will
be contained under the caption "Election of Directors" in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held August 29, 1996. The information relating to executive
officers of the Company is contained in Part I, Item 1 of this report.
ITEM 11
EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held August 29, 1996, under the caption "Executive
Compensation," and is hereby incorporated by reference thereto.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held August 29, 1996, under the caption "Security Ownership
of Certain Beneficial Owners and Management," and is hereby incorporated by
reference thereto.
ITEM 13
CERTAIN TRANSACTIONS
The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held August 29, 1996, under the caption "Certain
Transactions," and is hereby incorporated by reference thereto.
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) EXHIBITS -- See Exhibit Index on pages 18 and 19 of this
Form 10-K Annual Report.
(b) The Registrant filed no reports on Form 8-K during the fiscal
year ended March 31, 1996.
(c) See Exhibit Index on pages 18 and 19 of this Form 10-K Annual
Report.
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<PAGE>
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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.
10.1(1) Form of Indemnification Agreement entered into between the
Registrant and its Directors and Officers.
10.2(1)(+) 1990 Employee Stock Option Plan and related form of Incentive Stock
Option Grant and Supplemental Stock Option Grant.
10.3(1) Lease Agreement between the Company and Berg & Berg Developers for
the Premises at 6781 Via Del Oro, San Jose, California 95119.
10.4(1) Stock Purchase Agreement between Mead and the Company, effective
July 27, 1990.
10.5(1) Stock Assignment and License Agreement between Mead and the Company,
dated July 26, 1990.
10.6(1) Amendment No. 1 to Assignment and License Agreement, dated
December 6, 1991.
10.7(1) Contribution Agreement between Mead and Devres MS Co., dated
July 26, 1990.
10.8(1) Agreement between the Company, Innocell and Delco Remy Division --
General Motors, dated March 1, 1991.
10.9(1)(+) Employment Agreement with Dr. Dale R. Shackle, dated
April 30, 1991.
10.10(1)(+) Relocation Loan Agreement with Dr. Dale R. Shackle, dated
August 2, 1991.
10.11(1)(+) Employment Agreement with Mr. Calvin L. Reed, dated May 28, 1991.
10.12(1) Loan Agreement between the Company and Baccarat Electronics Inc.,
dated July 17, 1990.
10.13(1) Amendment No. 1 to Loan between the Company and Baccarat
Electronics, dated March 15, 1991.
10.14(1) Amendment No. 2 to Loan between the Company and Baccarat
Electronics, dated March 24, 1992.
10.15(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.
10.16(1) Settlement Agreement by and among the Company, Ultracell (Cayman
Islands), Innovision A/S, ERL, Innocell and JL ApS, dated
March 21, 1992.
10.17(1) Options to purchase an aggregate of 375,000 shares of the Common
Stock of the Company issued to Carl E. Berg by four individuals,
dated March 21, 1992.
10.18(1) Option to purchase shares of Innocell ApS issued to Ultracell
(Cayman Islands) by Jorgen S. Lundsgaard, dated March 21, 1992.
10.19(1) Letter Agreement by and between the Company and Jorgen S.
Lundsgaard, dated March 21, 1992.
10.20(1) Indemnification Agreement by and between the Company and Carl E.
Berg, dated March 21, 1992.
10.21(1) Promissory Note for $1,100,000 in favor of Carl E. Berg, dated
March 24, 1992.
10.22(1) Addendum to Promissory Note for $1,100,000, dated March 24, 1992.
10.23(2)(+) Employee Loan Agreement between the Company and William Masuda,
dated July 1, 1992.
10.24(2) Amendment No. 3 to Loan Agreement and Promissory Note between the
Company and Baccarat Electronics, Inc., dated August 17, 1992.
10.25(4)(*) Agreement between Motorola, Inc., and the Company, effective
November 30, 1992.
10.26(5)(*) Agreement between Hewlett-Packard Company, Valence Technology Cayman
Islands Inc. and the Company, dated as of January 18, 1994.
10.27(5)(*) Joint Venture Agreement between Goldtron Cayman Islands Inc. and
Valence Technology Cayman Islands Inc., dated as of March 15, 1994.
10.28(5)(*) License and Support Agreement between Goldtron Cayman Islands Inc.
and Valence Technology Cayman Islands Inc., dated as of
March 15, 1994.
10.29(5)(*) Battery Laminate Supply Agreement between Goldtron Cayman Islands
Inc. and Valence Technology Cayman Islands Inc., dated as of
March 16, 1994.
10.30(5)(*) Joint Development and License Agreement between Eveready Battery
Company, Inc., the Company and Valence Technology Cayman Islands
Inc., dated as of May 20, 1994.
10.31(5) Lease Agreement between the Company and Berg & Berg Developers for
the Premises at 6781 Via Del Oro and 160 Great Oaks, San Jose,
California 95119, dated as of May 1, 1993.
10.32(6) 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.
10.33(6)(*) Joint Research and Development Agreement between the Company and AC
Delco Systems Division of General Motors Corporation, dated as of
September 15, 1994.
-18-
<PAGE>
10.34(7)(*) Technology Transfer Agreement between the Company and Bell
Communications Research, Inc., dated as of June 29, 1995.
11.1 Calculation of net loss per share.
21.1 List of subsidiaries of the Company.
23.1 Consent of Independent Accountants.
- ------------------------------------------------------------------------
(1) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 33-46765), AS AMENDED.
(2) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 33-52888), AS AMENDED.
(3) INCORPORATED BY REFERENCE TO EXHIBIT 22.1 IN THE COMPANY'S REGISTRATION
STATEMENT ON FORM S-1 (FILE NO. 33-52888), AS AMENDED.
(4) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10-K FILED FOR FISCAL YEAR ENDED MARCH 28, 1993.
(5) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10-K FILED FOR FISCAL YEAR ENDED MARCH 27, 1994.
(6) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10-K FILED FOR FISCAL YEAR ENDED MARCH 26, 1995.
(7) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10Q FILED FOR FISCAL QUARTER ENDED JUNE 25, 1995.
(+) 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.
-19-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 26, 1996 By: /s/ Calvin L. Reed
--------------------------------
Calvin L. Reed
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
June 26, 1996 By: /s/ David P. Archibald
--------------------------------
David P. Archibald
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE>
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/ Calvin L. Reed Chairman, President and June 26,1996
- ------------------------- Chief Executive Officer
Calvin L. Reed
/s/ Carl E. Berg Director June 26,1996
- -------------------------
Carl E. Berg
/s/ Alan F. Shugart Director June 26,1996
- -------------------------
Alan F. Shugart
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGES
-----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of March 31, 1996 and March 26, 1995 . . . F-3
Consolidated Financial Statements for the period from
March 3, 1989 (date of inception) to March 31, 1996 and
for the years ending March 31, 1996, March 26, 1995 and
March 27, 1994:
Consolidated Statements of Operations . . . . . . . . . . . . . . . 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
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Valence Technology, Inc. and Subsidiaries
Henderson, Nevada
We have audited the accompanying consolidated financial statements of Valence
Technology, Inc. and subsidiaries (companies in the development stage) listed in
Item 14A of this Form 10-K. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Valence
Technology, Inc. and subsidiaries (companies in the development stage) as of
March 31, 1996 and March 26, 1995, and the consolidated results of their
operations and their cash flows for the period from March 3, 1989 (date of
inception) to March 31, 1996 and for each of the three years in the period ended
March 31, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
June 6, 1996
F-2
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED BALANCE SHEETS
(in thousands)
_____
<TABLE>
<CAPTION>
March 31, March 26,
1996 1995
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,569 $ 16,602
Short-term investments 26,492 42,989
Accounts receivable 545 1,089
Interest receivable 444 226
Prepaids and other current assets 299 517
------------ ------------
Total current assets 52,349 61,423
Investments 5,790 14,880
Property, plant and equipment, net 11,752 15,491
Other assets 356 213
------------ ------------
Total assets $ 70,247 $ 92,007
------------ ------------
------------ ------------
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 2,277 $ 3,150
Accounts payable 1,251 2,417
Accrued expenses 6,180 7,828
Related party payable -- 1,795
----------- -----------
Total current liabilities 11,068 16,412
Long-term debt, less current portion 6,169 8,811
----------- -----------
Total liabilities 17,237 25,223
----------- -----------
Commitments and Contingencies (Note 5,7, and 11.)
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value:
Authorized: 10,000 shares;
Issued and outstanding: none
Common stock, $0.001 par value:
Authorized: 50,000 shares;
Issued and outstanding: 21,665 and 20,107
shares at March 31, 1996 and
March 26, 1995, respectively 140,308 136,065
Deficit accumulated during the development stage (87,639) (70,045)
Cumulative translation adjustment 341 764
----------- -----------
Total stockholders' equity 53,010 66,784
----------- -----------
Total liabilities and stockholders' equity $ 70,247 $ 92,007
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
_____
<TABLE>
<CAPTION>
Period from
March 3,
1989
(date of Year Ended
inception) to -------------------------------------------------
March 31, March 31, March 26, March 27,
1996 1996 1995 1994
---------- --------- --------- ---------
Revenue:
<S> <C> <C> <C> <C>
Research and development contracts $ 21,605 $ - $ 4,150 $ 7,295
---------- --------- --------- ---------
Costs and expenses:
Research and development 58,224 8,047 14,762 21,465
Marketing 2,472 486 705 767
General and administrative 26,196 5,614 6,269 6,013
Purchase of technology 8,212 6,064
Investment in Danish subsidiary 3,489
Special charges 18,872 18,872
---------- --------- --------- ---------
Total costs and expenses 117,464 (20,211) 40,608 28,245
---------- --------- --------- ---------
Operating loss (95,859) (20,211) (36,458) (20,950)
Interest income 11,168 3,549 3,606 2,547
Interest expense (2,947) (931) (777) (250)
---------- --------- --------- ---------
Net loss $ (87,638) $ (17,593) $ (33,629) $ (18,653)
---------- --------- --------- ---------
---------- --------- --------- ---------
Net loss per share - $ (0.83) $ (1.68) $ (1.08)
---------- --------- --------- ---------
---------- --------- --------- ---------
Shares used in computing net loss per share - 21,261 20,059 17,259
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
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 31, 1996
(in thousands, except per share amounts)
_____
<TABLE>
<CAPTION>
Deficit
Common Stock, $0.001 Options to Accumulated
Par Value Per Share Purchase During the Cumulative
----------------------- Treasury Development Translation
Shares Amount Stock Stage Adjustment Totals
-------- -------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
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 34 34
Net loss $ (394) (394)
-------- -------- -------- -------- --------
Balances, March 31, 1990 7,870 39 (394) (355)
Issuance of common stock for cash in
September 1990 at $0.01 per share 500 5 5
Net loss (5,137) (5,137)
-------- -------- -------- -------- --------
Balances, March 31, 1991 8,370 44 (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 8,500 616 (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 30,155 30,155
November 1992 at $18.00 per share 3,380 57,031 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 87,898 (1,125) (17,763) 69,010
Issuance of common stock in public
offering in December 1993 at $14.00
per share, net of offering costs 3,680 48,492 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 -
Net loss (18,653) (18,653)
Translation adjustment $ 56 56
-------- -------- -------- -------- -------- --------
Balances, March 27, 1994 20,024 135,989 (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)
Translation adjustment 708 708
-------- -------- -------- -------- -------- --------
Balances, March 26, 1995 20,107 136,065 (70,045) 764 66,784
Exercise of stock options during year
at $0.25 to $4.00 per share 58 179 179
Bellcore Technology 1,500 4,063 4,063
Net loss (17,593) (17,593)
Translation adjustment (423) (423)
-------- -------- -------- -------- -------- --------
Balances, March 31, 1996 21,665 $140,307 $ - $(87,638) $ 341 $ 53,010
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amounts)
_____
<TABLE>
<CAPTION>
Period from
March 3,
1989
(date of Twelve Months Ended
inception) to --------------------------------------
March 31, March 31, March 26, March 27,
1996 1996 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(87,638) $(17,593) $(33,629) $(18,653)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 14,670 5,199 4,482 4,148
Write-off of equipment 14,767 16,489 18
Write-off of in-process technology 8,212 6,064
Compensation related to stock options 1,421 273 278 282
Noncash charge related to acquisition of Danish subsidiary 2,245
Changes in assets and liabilities:
Accounts receivable 544 544
Interest receivable (438) (220) 170 59
Notes receivable (143) (143)
Prepaid expenses and other current assets (1,258) 212 (573) (820)
Accounts payable 1,150 (1,166) (5,978) 6,633
Accrued liabilities (746) (3,304) 421 1,053
Deferred revenue (496) 467
-------- -------- -------- --------
Net cash used in operating activities (45,575) (10,134) (18,836) (6,813)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of in-process technology (2,001) (2,001)
Increase in long-term investments (397,089) (146,371) (43,076) (149,738)
Decrease in long-term investments 364,807 171,958 56,519 110,205
Capital expenditures (35,873) (2,306) (8,794) (16,529)
Other (222) (50) 81
-------- -------- -------- --------
Net cash provided by (used in) investing activities (70,378) 21,280 4,599 (55,981)
-------- -------- -------- --------
Cash flows from financing activities:
Property and equipment grants 4,294 356 2,449 1,489
Maturities of restricted cash 1,875
Borrowings of long-term debt 15,502 4,942 2,518
Payments of long-term debt:
Product development loan (482) (482)
Shareholder and director (6,173)
Other long-term debt (8,739) (3,214) (2,422) (2,860)
Proceeds from issuance of common stock, net of costs 136,511 179 33 48,973
-------- -------- -------- --------
Net cash provided by financing activities 140,913 (2,484) 4,520 51,995
-------- -------- -------- --------
Effect of foreign exchange rates on cash and cash equivalents (391) ( 500) 131 (66)
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents 24,569 7,967 (9,586) (10,865)
Cash and cash equivalents, beginning of period 16,602 26,188 37,053
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 24,569 $ 24,569 $ 16,602 $ 26,188
-------- -------- -------- --------
-------- -------- -------- --------
SUPPLEMENTAL DISCLOSURES:
Acquisition of property, plan and equipment through grants and
long-term debt $ 7,957 $ 2,458 $ 5,499
Acquisition of property and equipment through capitalized leases 1,459 1,459
Exercise of warrants in cancellation of indebtedness 572
Exercise of options to purchase treasury stock and retirement of
treasury stock 1,125 1,125
Interest paid 2,854 $ 924 769 225
Return of equipment for extinguishment of debt 301 301
Exchange of common stock for in-process 4,063 4,063
Disposal of equipment fully reserved for in prior years 1,639 1,639
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 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.
In fiscal 1993, the Company adopted a 52/53-week fiscal year, whereby each
fiscal year ends on the Sunday closest to March 31. All years presented are
52-week years except fiscal 1996 which is 53 weeks.
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.
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 ($24,569 at March 31, 1996) are
held by two banks and four major investment brokerage companies, and
primarily comprise money market funds and investment grade bank and
commercial paper.
INVESTMENTS:
At March 28, 1994, the Company adopted Financial Accounting Standards Board
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115), which addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. Because of the Company's positive intent
and ability to hold investments with original maturities greater than one
year to maturity or until called by the issuer, such securities have been
classified as "held to maturity" securities and reported at amortized cost.
Realized gains and losses on sales of all such investments are reported in
earnings and computed using the specific identification cost method. Held
to maturity securities with maturities less than one year from the balance
sheet date are classified as short-term and those with maturities greater
than one year from the balance sheet date are classified as long-term.
During fiscal year 1996, management classified certain short-term
investments as available-for-sale securities which are carried at market
value. Unrealized gains and losses, if material, are reported net of tax
as a separate component of stockholders' equity, until realized. The
difference between the cost basis and the market value of the Company's
investments was not material at March 31, 1996.
The adoption of SFAS No. 115, which is required to be adopted
prospectively, had no effect on the Company's financial position or results
of operations. Prior to fiscal 1995, all marketable securities were
carried at amortized cost (which approximated market).
F-7
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
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:
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.
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.
PATENTS:
Costs incurred in the application for patents are charged to expense as
incurred.
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, accounts receivable, 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. Estimated fair values for marketable securities,
which are separately disclosed elsewhere, are based on quoted market prices
for the same or similar instruments (see Investments above).
Continued
F-8
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
RECLASSIFICATIONS:
Certain amounts in the prior years' financial statements have been
reclassified to conform with fiscal 1996 presentation. These
reclassifications did not change previously reported capital, stockholders'
equity, income from operations, or net income.
NET LOSS PER SHARE:
Net loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding during the period; common stock
options and warrants have not been included since their inclusion would be
antidilutive.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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.
RECENT PRONOUNCEMENTS:
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which requires the Company to
review for impairment long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In certain situations, an impairment loss would be
recognized, Statement No. 121 will become effective for the Company's
fiscal year 1997. The Company has studied the implications of the
statement, and based on its initial evaluation, does not expect it to have
a material impact on the Company's financial conditions or results of
operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123) "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for stock-based
compensation plans. The Company is currently following the requirements of
APB Opinion No. 25, "Accounting for Stock Issued to Employees." while it
studies the implications of SFAS No. 123 and evaluates the effect, if any,
on the financial condition and results of operations of the Company. SFAS
No. 123 will be effective for the Company's fiscal year 1997.
3. INVESTMENTS:
The carrying and market values of investments are as follows at March 31, 1996
and March 26, 1995:
<TABLE>
<CAPTION>
March 31, 1996
-------------------------
Carrying Unrealized Unrealized Fair
Held-to-Maturity Value Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial Paper $16,438 $47 $(73) $16,412
Bank Paper 981 19 1,000
Collateralized Mortgage Obligations 9,586 25 (2) 9,609
Other 281 281
---------- ---------- ---------- ----------
Total Held-to Maturity Investments $27,286 $91 $(75) $27,302
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Continued
F-9
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
<TABLE>
<CAPTION>
March 31, 1996
-------------------------
Carrying Unrealized Unrealized Fair
Available-for-Sale Value Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government and Agency Obligations $ 4,996 $ 1 $ 4,997
---------- ---------- ---------- ----------
Total Available-for-Sale $ 4,996 $ 1 $ 4,997
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
March 26, 1995
-------------------------
Carrying Unrealized Unrealized Fair
Held-to-Maturity Value Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government and Agency Obligations $ 5,998 $ 7 $ (101) $ 5,904
Commercial Paper 29,610 28 (653) 28,985
Bank Paper 6,648 40 (102) 6,586
Collateralized Mortgage Obligations 11,681 (121) 11,560
Other 3,932 25 3,957
---------- ---------- ---------- ----------
Total Held-to Maturity Investments $ 57,869 $ 100 $ (977) $ 56,992
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
At March 31, 1996, scheduled maturities of investments are as follows:
<TABLE>
<CAPTION>
Held-to- Available-
Maturity for-Sale Total
---------- ---------- ----------
<S> <C> <C> <C>
Within one year $ 21,496 $ 4,996 $ 26,492
After one year through five years 5,790 5,790
---------- ---------- ----------
$ 27,286 $ 4,996 $ 32,282
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
March 31, March 26,
1996 1995
---------- ----------
<S> <C> <C>
Building and land $ 8,126 $ 8,375
Leasehold improvements 80
Machinery and equipment 10,642 12,715
Office and computer equipment 607 665
Construction in progress 4,961 5,357
---------- ----------
Total cost 24,336 27,192
Less capital grants (3,972) (4,996)
---------- ----------
Total cost, net of capital grants 20,364 22,196
Less accumulated depreciation and amortization (8,612) (6,705)
---------- ----------
Total cost, net of capital grants,
depreciation and amortization $ 11,752 $ 15,491
---------- ----------
---------- ----------
</TABLE>
During fiscal 1995, the Company wrote down the carrying value of property, plant
and equipment to its net realizable value. This amount of $16,489 is included
as a special charge in the consolidated statements of operations (see Note 14).
Continued
F-10
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
5. LONG-TERM DEBT:
March 31, March 26,
1996 1995
---------- ----------
Equipment term loans $ 2,819 $ 4,932
Facility loans 5,516 6,020
Unsecured term loan 283
Capitalized leases 111 726
---------- ----------
8,446 11,961
Loss amounts due within one year (2,277) (3,150)
---------- ----------
Long-term debt due after one year $ 6,169 $ 8,811
---------- ----------
---------- ----------
EQUIPMENT TERM LOANS:
The Company has three equipment term loans outstanding with an
institutional lender in the amount of $2,819. The term loans bear interest
at the bank's prime rate (8.25% at March 31, 1996) plus 1/4% to 1-1/2% and
are collateralized by certain of the Company's property and equipment.
Principal and accrued interest are payable in monthly installments which
expire from July 1996 to December 1997. Under the loans, the Company is
required to maintain certain financial ratios and meet other performance
covenants. At March 31, 1996, the Company was in compliance with the
covenants included in the equipment term loan agreements.
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 bears interest at
10.4% and is collateralized by the related building. The Company makes
monthly principal and interest payments of $14 monthly 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 $23 plus accrued
interest. The facility term loan bears interest at an annually adjustable
published interest rate index (8.375% at March 31, 1996) on the outstanding
principal of $3,410 at March 31, 1996. The loan is collateralized by the
related building.
WORKING CAPITAL FACILITIES:
The Company has a $2,000 working capital line of credit agreement with a
bank which expires March 1997 . The line of credit is collateralized by
the Company's assets. Under the working capital line of credit agreement:
(i) any borrowings from the Company's stockholder and director will be
subordinated to any borrowings from the bank; (ii) the Company will be
required to maintain certain specified financial ratios and meet other
performance criteria, and (iii) the Company will be restricted from paying
cash dividends. The line of credit has a variable interest rate which was
8.25% at March 31, 1996. During fiscal 1996, the Company did not have any
borrowings outstanding under this agreement.
LEASES AND OTHER LONG-TERM OBLIGATIONS:
Primarily all borrowings under capitalized leases were made pursuant to a
lease having an initial 36-month term and bear interest at 6.9%.
Continued
F-11
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
Principal payments on facility and term loans and future minimum lease
payments under capital lease obligations at March 31, 1996 are due as
follows:
<TABLE>
<CAPTION>
Facility and Capital Lease
Fiscal Year Term Loans Obligations
----------- ------------- -------------
<S> <C> <C>
1997 $ 2,166 $ 111
1998 1,561
1999 442
2000 442
2001 442
Thereafter 3,282
------------- -------------
$ 8,335 111
------------- -------------
------------- -------------
</TABLE>
6. 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 ($42,054 as of
March 31, 1996), to be available over a five-year period through October 31,
1998. As of March 31, 1996, the Company had received grants aggregating L3,978
($6,071) reducing remaining grants available to L23,577 ($35,983). 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 5).
As a condition to receiving funding from the IDB, the subsidiary must obtain 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.
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 to offset capital expenditures is
repayable if related equipment is sold, transferred or otherwise disposed of
during a four-year period after the date of grant. In addition, a portion of
funding received under the grants may also be repayable if the subsidiary fails
to maintain specified employment levels for the two-year period immediately
after the end of the five-year grant period. As a result of the temporary
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.
Continued
F-12
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
7. 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. At March 31, 1996, the
facilities were fully sub-leased by the lessor and the Company was released
from any further obligation.
Total rent expense for the period from March 3, 1989 (date of inception) to
March 31, 1996 and for the years ended March 31, 1996, March 26, 1995 and
March 27, 1994 were $1,346, $52, $522 and $627, respectively.
LITIGATION:
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. The Company believes that it has meritorious defenses and
intends to defend the lawsuit vigorously.
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.
8. 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 value (incentive
options) or 85% of fair market value (supplemental options) on the date of
grant as determined by the Board of Directors. The options are exercisable
as determined by the Board of Directors and are generally exercisable over
a five-year period, with 20% becoming exercisable after the first year, an
additional 20% becoming exercisable after the second year, and an
additional 5% becoming exercisable every three months thereafter. During
1995, the Company issued options exercisable over a five-year period with
5% of the options becoming exercisable every three months through the
option vesting period. During 1996, the Company issued options exercisable
over a two-year period with 12.5% of the options becoming
Continued
F-13
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
exercisable every three months through the option vesting period. During
1996, the Company issued options exercisable over a two-year period with
12.5% of the options becoming exercisable every three months through the
option vesting period, and options exercisable over a three-year period
with 8.3% of the options becoming exercisable every three months through
the option vesting 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 90
days of termination, are also canceled and returned to the Plan. At March
31, 1996, the Company had 237 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.
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.
Aggregate option and warrant activity is as follows:
<TABLE>
<CAPTION>
Outstanding Options and Warrants
---------------------------------------------------------
Price per
Shares Share Aggregate
------------ -------------- ------------
<S> <C> <C> <C>
Balances, March 31, 1992 2,259 $0.01-$1.00 $ 511
Granted 779 $0.25-$25.38 6,717
Exercised (289) $0.01-$0.25 (21)
Canceled (50) $0.25-$22.00 (340)
------------ ------------
Balances, March 28, 1993 2,699 $0.01-$25.38 6,867
Granted 536 $11.50-$23.00 7,303
Exercised (410) $0.01-$13.00 (481)
Canceled (398) $0.25-$25.38 (4,786)
------------ ------------
Balances, March 27, 1994 2,427 $0.01-$20.75 8,903
Granted 1,758 $1.88-$15.00 6,788
Exercised (83) $0.01-$4.00 (33)
Canceled (1,400) $0.25-$20.75 (11,229)
------------ ------------
Balances, March 26, 1995 2,702 $0.01-$4.00 4,429
Granted 498 $1.88-$5.00 2,345
Exercised (58) $0.25-$4.00 (179)
Canceled (140) $0.25-$4.00 (399)
------------ ------------
Balances, March 31, 1996 3,002 $0.01-$5.00 $ 6,196
------------ ------------
------------ ------------
</TABLE>
At March 31, 1996, there were 1,528 options and warrants exercisable at an
aggregate exercise price of $1,492.
In fiscal 1993, the Company's Board of Directors offered a stock option and
warrant exchange program to non-officer employees holding previously
granted stock options and warrants having an exercise price in excess of
$11.50 per share. Under the terms of the exchange program, non-officer
employees accepting the offer had their previously granted options and
warrants canceled and had new stock options having a new vesting start date
as of the program's offer date granted at an exercise price of $11.50 per
share, the fair
Continued
F-14
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
market value on that date. Otherwise, the terms of the program's grants
were identical to the terms of the stock options and warrants canceled upon
acceptance of the program. In connection with acceptances under the
program, an aggregate of 197 shares were canceled at an aggregate exercise
price of $3,719 and an aggregate of 197 shares were newly granted at an
aggregate exercise price of $2,266.
During fiscal 1995, the Company's Board of Directors offered another stock
option and warrant exchange program to non-officer employees holding
previously granted stock options and warrants having an exercise price in
excess of the current fair market value. Under the term of the exchange
program, non-officer employees accepting the offer had their previously
granted stock options and warrants canceled and had new stock options
having the same vesting start date granted at an exercise price of the fair
market value as of the grant date. Employees who accepted the offer cannot
exercise any vested new stock options for the six months from the date of
exchange. Otherwise, the terms of the program's grants are identical to
the terms of the stock options and warrants canceled upon acceptance of the
new stock options. In connection with acceptances under this program, an
aggregate of 750 shares were canceled at an aggregate exercise price of
$6,622 and an aggregate of 750 shares were newly granted at an aggregate
exercise price of $3,033.
In February 1996, the Board of Directors adopted a stock plan for outside
Directors (the "1996 Non-Employee Director's Stock Option Plan"), subject
to stockholder approval at the next annual stockholders meeting. 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
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. No options
granted under the 1996 Non-Employee Director's Stock Option Plan may be
exercised until the plan is approved by the stockholders. As of March 31,
1996, a total of 180 options have been granted to two directors under this
plan.
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 deemed to
have a nominal value at their date of issuance. At March 31, 1996, a total
of 1,223 warrants were outstanding with an exercise price of $4.00 per
share.
At March 31, 1996, the Company has reserved a total of 3,650 shares of
common stock for the exercise of stock options and warrants.
OPTION TO PURCHASE TREASURY STOCK:
In fiscal 1992, a director and principal stockholder, on behalf of the
Company, paid $131 to acquire a series of options to repurchase an
aggregate of 375 shares of the Company's common stock at an exercise price
of $5.00 per share (an aggregate of $1,875). The Company reimbursed the
director and principal
Continued
F-15
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
stockholder for all out-of-pocket expenses incurred in connection with the
purchase or exercise of these options.
This transaction was entered into as part of the purchase of the remaining
55% interest in the Company's Danish subsidiary held by others (see Note
12). A total of $1,125 (the deemed fair market value of the Company's
common stock as of the date of the transaction) was assigned to the options
to purchase treasury stock.
The Company exercised these options and retired the related repurchased
stock during fiscal 1994.
9. INCOME TAXES:
The components of the net deferred tax asset as of March 31, 1996 and March 26,
1995 were as follows:
<TABLE>
<CAPTION>
March 31, March 26,
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Deferred revenue $ - $ (62)
Accrued liabilities 1,094 1,083
Valuation allowance (1,094) (1,021)
------------ ------------
$ - $ -
------------ ------------
------------ ------------
Noncurrent assets:
Depreciation and amortization $ 7,114 5,933
Research and development
credit carryforwards 1,104 1,104
Net operating loss carryforwards (20,695) 15,771
Valuation allowance (28,913) (22,808)
------------ ------------
$ - $ -
------------ ------------
------------ ------------
</TABLE>
At March 31, 1996, the Company had federal and state net operating loss
carryforwards available to reduce future taxable income of approximately
$36,323 and $8,583, respectively.
The Company has additional tax net operating loss carryforwards of approximately
$16,724 arising from the exercise of employee stock options, which can be
utilized to reduce future taxable income. The tax benefit when realized will be
reflected in stockholders' equity.
The carryforwards expire between 2006 to 2010 for both federal and state
purposes, if not used before such time to offset future taxable income.
For federal and state 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 and state tax law.
10. 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.
Continued
F-16
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
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 $650 was recognized during
fiscal 1996 as an offset to research and product development expenses), as well
as Delphi contributing to a majority of the facility's operating costs over the
term of the new five year agreement.
11. 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 $100 of revenue from royalty-bearing products.
Further annual payments are required if revenue milestones are not met after the
fourth year of the agreement.
The entire purchase price was allocated to in-process technology as the
technological feasibility of the in-process technology had not been established
and had no alternative use. Accordingly, the entire $6,064 has been charged to
operations in the second quarter of fiscal 1996.
12. 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.
Continued
F-17
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------
13. 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 20% 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.
14. SPECIAL CHARGES:
In the first quarter 1995, the Company announced its intent to refocus its
efforts on research and product development and slowdown completion of its
volume manufacturing capacities. The Company also announced in the second
quarter of fiscal 1995 its intent to reduce efforts related to commercialization
of a battery containing a lithium metal anode and instead concentrate on the
development of a lithium polymer battery containing an alternate lithium anode.
Consistent with the refocus, special charges of $18,872 were made in fiscal 1995
for which no tax benefit is currently available.
Special charges for the year ended March 26, 1995 consist of the following:
Year Ended
March 26,
1995
----------
Write down of property, plant, and equipment $ 16,489
Provisions for vacated lease obligations 1,795
Provisions for employees separation costs 68
Other costs 520
----------
$ 18,872
----------
----------
F-18
<PAGE>
Exhibit 11.1
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
STATEMENT OF CALCULATION OF NET LOSS PER SHARE
(in thousands, except per share amounts)
-----
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------
March 31, March 26, March 27,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Actual weighted average shares of common
stock outstanding for the period $ 21,261 20,059 17,259
Net loss for period $(17,593) $(33,629) $(18,653)
Net loss per share for period $ (0.83) $ (1.68) $ (1.08)
</TABLE>
Dilutive common stock warrants and stock options have not been included in the
calculations of common and common equivalent shares to calculate net loss per
share, as their inclusion would be antidilutive.
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES OF VALENCE TECHNOLOGY, INC.
DEVRES CO.
Ohio corporation wholly owned by Valence Technology, Inc.
MHB JOINT VENTURE
Ohio partnership jointly owned by Valence Technology, Inc. and Devres, Co.
VALENCE TECHNOLOGY CAYMAN ISLANDS INC.
Cayman Islands corporation wholly owned by Valence Technology, Inc.
VALENCE TECHNOLOGY N.V.
Dutch Antilles corporation wholly owned by Valence Technology Cayman
Islands Inc.
VALENCE TECHNOLOGY B.V.
Dutch corporation wholly owned by Valence Technology N.V.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Valence Technology, Inc. and subsidiaries (companies in the development stage)
(the "Company") on Form S-8 (Files Nos. 33-48982 and 33-60562) of our report
dated June 6, 1996, on our audits of the consolidated financial statements
of the Company as of March 31, 1996, and March 26, 1995 and for the period of
March 3, 1989 (date of inception) to March 31, 1996 and for each of the three
years in the period ending March 31, 1996, which report is included in this
annual report on Form 10-K.
Coopers & Lybrand L.L.P
San Jose, California
July 1, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
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