<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998.
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 0-20028
VALENCE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0214673
- ------------------------------------ -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 Conestoga Way, Henderson, Nevada 89015
----------------------------------------------------------------------
(Address of principal executive offices including zip code)
(702) 558-1000
----------------------------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No (2) Yes X No
--- --- --- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.001 par value 25,665,800 shares
---------------------------------- -----------------------------------
(Class) (Outstanding at November 2, 1998)
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 1998
INDEX
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
September 27, 1998 and March 29, 1998. . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the period from March 3, 1989
(date of inception) to September 27, 1998 and for each
of the three and six month periods ended September 27,
1998 and September 28, 1997 . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the period from March 3, 1989 (date of inception)
to September 27, 1998 and for each of the six month periods
ended September 27, 1998 and September 28, 1997. . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . 14
Item 3. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 15
SIGNATURE
</TABLE>
2
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VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
-----------
<TABLE>
<CAPTION>
September 27, March 29,
1998 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,724 $ 8,400
Accounts receivable 1,078 1,429
Prepaids and other current assets 99 880
------------- ------------
Total current assets 7,901 10,709
Property, plant and equipment, net 34,025 31,712
Investment in joint venture - 285
Other assets - 188
------------- ------------
Total assets $ 41,926 $ 42,894
------------- ------------
------------- ------------
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 2,584 $ 399
Accounts payable 2,004 2,353
Accrued expenses 4,094 5,207
Accrued royalties and license fees 500 1,000
Advances 700 700
Accrued compensation 548 817
------------- ------------
Total current liabilities 10,430 10,476
Deferred revenue 2,500 2,500
IDB grant 2,056 2,006
Long-term debt, less current portion 4,790 4,950
------------- ------------
Total liabilities 19,776 19,932
------------- ------------
Contingencies (Note 4).
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value:
Authorized: 10,000,000 shares;
Issued and outstanding: 7,500 shares and
0 shares at September 27, 1998 and
March 29, 1998 respectively 5,975 -
Common stock, $0.001 par value:
Authorized: 50,000,000 shares;
Issued and outstanding: 25,538,000 and
25,068,000 shares at September 27, 1998
and March 29, 1998, respectively 156,095 153,583
Notes receivable from stockholder (4,862) (4,862)
Deficit accumulated during the development stage (137,254) (128,012)
Accumulated other comprehensive income 2,196 2,253
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Total stockholders' equity 22,150 22,962
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Total liabilities and stockholders'
equity $ 41,926 $ 42,894
------------- ------------
------------- ------------
</TABLE>
3
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
(unaudited)
------------
<TABLE>
<CAPTION>
Period from
March 3, 1989
(date of inception) Three Months Ended Six Months Ended
Through ---------------------------- ----------------------------
September 27, September 27, September 28, September 27, September 28,
1998 1998 1997 1998 1997
------------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Research and
development
contracts $ 21,605 $ - $ - $ - $ -
-------------------
Costs and expenses:
Research and product
development 93,219 4,708 4,427 8,738 8,462
Marketing 3,579 18 129 47 250
General and
administrative 41,686 1,319 1,462 2,257 2,798
Write-off of
in-process
technology 8,212 - - - -
Investment in
Danish
Subsidiary 3,489 - - - -
Special charges 18,872 - - - -
------------------- -------------- ------------ ------------- -------------
Total costs and
expenses 169,057 6,045 6,018 11,042 11,510
------------------- -------------- ------------ ------------- -------------
Operating loss (147,452) (6,045) (6,018) (11,042) (11,510)
Other income 2,200 2,200 - 2,200 -
Interest income 15,036 48 321 135 774
Interest expense (4,538) (130) (148) (248) (299)
Equity in losses of
joint venture (2,500) - (150) (287) (300)
------------------- -------------- ------------ ------------- -------------
Net loss $ (137,254) $ (3,927) $ (5,995) $ (9,242) $(11,335)
------------------- -------------- ------------ ------------- -------------
-------------------
Other comprehensive income
(loss):
Change in foreign currency
translation adjustments 731 (865) (57) (472)
-------------- ------------ ------------- -------------
Comprehensive loss $ (3,196) $ (6,860) $ (9,299) $(11,807)
-------------- ------------ ------------- -------------
-------------- ------------ ------------- -------------
Net loss per share, basic and
diluted $ (0.15) $ (0.26) $ (0.36) $ (0.51)
-------------- ------------ ------------- -------------
-------------- ------------ ------------- -------------
Shares used in
computing net loss per share,
basic and diluted 25,524 22,721 25,436 22,263
-------------- ------------ ------------- ------------
-------------- ------------ ------------- ------------
</TABLE>
4
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<TABLE>
<CAPTION>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
------
Period from
March 3, 1989
(date of inception) Six Months Six Months
through Ended Ended
September 27, September 27, September 28,
1998 1998 1997
----------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (137,254) $ (9,242) $ (11,335)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 22,481 862 756
Write-off of equipment 14,792 - -
Write-off of in-process technology 6,211 - -
Compensation related to stock options 3,196 - 554
Noncash charge related to acquisition
of Danish subsidiary 2,245 - -
Equity in losses of joint venture 2,500 287 300
Changes in assets and liabilities:
Accounts receivable 13 353 (738)
Interest receivable 58 58 18
Notes receivable - - 78
Prepaid expenses and other current assets (977) 909 5
Accounts payable 1,901 (351) (989)
Accrued liabilities (434) (1,881) (86)
Deferred revenue 2,500 - -
----------------- --------------- ---------------
Net cash used in operating activities (82,768) (9,005) (11,437)
----------------- --------------- ---------------
Cash flows from investing activities:
Purchase of long-term investments (665,789) - (156,869)
Maturities in long-term investments 661,545 - 165,001
Capital expenditures (60,316) (4,769) (6,836)
Other (222) - -
----------------- --------------- ---------------
Net cash provided by (used in) investing activities (64,782) (4,769) 1,296
----------------- --------------- ---------------
Cash flows from financing activities:
Property and equipment grants 6,419 2,000 -
Borrowings of long-term debt 17,528 2,026 -
Payments of long-term debt:
Product development loan (482) - -
Shareholder and director (6,173) - -
Other long-term debt (11,837) - (958)
Proceeds from issuance of warrants and common
stock, net of issuance costs 144,511 1,411 4,891
Proceeds from issuance of preferred stock,
net of issuance costs 7,075 7,075 -
----------------- --------------- ---------------
Net cash provided by
financing activities 157,091 12,512 3,933
----------------- --------------- ---------------
Effect of foreign exchange rates on cash and cash
equivalents (2,817) (414) 472
Increase (decrease) in cash and cash equivalents 6,724 (1,676) (5,736)
Cash and cash equivalents, beginning of period - 8,400 27,832
----------------- --------------- ---------------
Cash and cash equivalents, end of period $ 6,724 $ 6,724 $ 22,096
----------------- --------------- ---------------
----------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
--------
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------
These interim condensed consolidated financial statements are unaudited but
reflect, in the opinion of management all normal recurring adjustments
necessary to present fairly the financial position of Valence Technology,
Inc. and Subsidiaries (the Company) as of September 27, 1998, its
consolidated results of operations and cash flows for the period from March
3, 1989 (date of inception) to September 27, 1998 and for each of the
three-month and six-month periods ended September 27, 1998 and September 28,
1997. Because all the disclosures required by generally accepted accounting
principles are not included, these interim condensed consolidated financial
statements should be read in conjunction with the audited financial
statements and notes thereto in the Company's Annual Report on Form 10-K as
of and for the year ended March 29, 1998. The year end condensed
consolidated balance sheet data as of March 29, 1998 was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
The Company's current research prototype batteries do not meet all of the
specifications demanded by the marketplace, and the Company presently has no
products available for sale. To achieve profitable operations, the Company must
successfully develop, manufacture and market its products. There can be no
assurance that any products can be developed or manufactured at an acceptable
cost and with appropriate performance characteristics, or that such products
will be successfully marketed.
The results of operations and cash flows for the three-month and six-month
periods ended September 27, 1998 are not necessarily indicative of results of
operations and cash flows for any future period.
2. BASIS OF PRESENTATION
---------------------
The accompanying interim condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company has
negative working capital and has sustained recurring losses related primarily to
the development and marketing of its products. Management is actively pursuing
additional equity and debt financing. In July 1998, the Company completed
private financing arrangements of up to $25 million, subject to completion of
certain milestones (Note 5). There can be no assurance that the Company will
meet the required milestones to draw down the full $25 million, or that the
Company could successfully consummate any new debt or equity issuances. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. The effects of any such
adjustments, if necessary, could be material.
3. NET LOSS PER SHARE
------------------
Basic Earnings Per Share (EPS) is computed as net loss divided by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur from common shares
issuable through stock options and warrants. Common equivalent shares are
excluded from the computation of net loss per share if their effect is
anti-dilutive.
6
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VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
-------
The following is a reconciliation of the numerator (net loss) and denominator
(number of shares) used in the basic and diluted EPS calculation:
<TABLE>
<CAPTION>
Three Months Ended, Six Months Ended,
------------------------------------------- -------------------------------------------
September 27, 1998 September 28, 1997 September 27, 1998 September 28, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Loss per share:
Net loss $(3,927) $(5,995) $(9,242) $(11,335)
Weighted average
shares outstanding 25,524 22,721 25,436 22,263
Earnings per share,
basic and diluted $ (0.15) $ (0.26) $ (0.36) $ (0.51)
</TABLE>
Shares excluded from the calculation of diluted EPS as their effect was anti-
dilutive were 3,724 and 3,815 for the six months ended September 27, 1998 and
September 28, 1997, respectively.
4. CONTINGENCIES
-------------
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. In April 1996, the
Court dismissed with prejudice all remaining claims against a present director
and limited claims against a former officer and director to the period when that
person was an officer. In December 1996, the Company and the individual
defendants filed motions for summary judgment, which the plaintiffs opposed. In
November 1997, the Court granted the Company's motion for summary judgment and
entered a judgment in favor of all defendants. Plaintiffs have appealed and the
case is pending before the United States Court of Appeals for the Ninth Circuit.
The ultimate outcome of these actions cannot presently be determined.
Accordingly, no provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.
In addition to the litigation noted above, the Company is from time to time
subject to routine litigation incidental to its business. The Company believes
that the results of this routine litigation will not have a material adverse
effect on the Company's financial condition.
5. PREFERRED STOCK
---------------
In July 1998, the Company completed private financing arrangements of up to $25
million. The Company issued 7,500 shares of Series A convertible preferred
stock at $1,000 per share, raising gross proceeds of $7.5 million. The Series A
7
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
-------
convertible preferred stock accretes at an annual rate of 6% per year, and is
convertible into common stock based upon defined conversion formulas. The
Company has a commitment from an investor to purchase an additional 7,500 shares
of Series A convertible preferred stock upon completion of certain milestones.
In connection with the equity financing, the Company issued warrants to
purchase 535,261 shares of common stock. The warrants are exercisable at
purchase prices of $4.9375 and $6.7838 per share for 87,500 and 447,761
warrants respectively, and expire in July 2003. The warrants were valued at
$1.1 million and were recorded as a component of common stock.
6. LINE OF CREDIT
--------------
The Company also obtained a $10 million line of credit from a principal
shareholder. Under the terms of the line of credit, the Company borrowed $2.5
million and could borrow up to an additional $7.5 million, or less if the
Company secures a new line of credit, through July 1999. The line of credit
bears interest at one percent over the lender's principal line of credit and is
payable August 30, 2002.
In conjunction with the debt financing, the Company issued warrants to purchase
149,254 shares of common stock. The warrants issued had a fair value of
approximately $6.7838 per warrant at the time of issuance. The fair value of
these warrants has been reflected as additional consideration for the debt
financing, recorded as a discount on the debt and accreted as interest
expense to be amortized over the life of the line of credit.
7. COMPREHENSIVE INCOME
--------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 (SFAS No. 130), Reporting Comprehensive Income. SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner resources.
8. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION"
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS 131 generally supersedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise." Under SFAS 131, operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that is used internally.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997, and restatement of comparative information for earlier years
is required. However, SFAS 131 is not required to be applied to interim
financial statements in the initial year of application. The Company has not
determined the impact, if any, on the reporting of segment information.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion and analysis below, and throughout this report, contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Such forward
looking statements involve a number of risks and uncertainties including, but
not limited to, availability of working capital, 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. Actual results could differ
materially from those projected or suggested in the forward-looking statements
as a result of the risk factors set forth herein and in the Company's Annual
Report on Form 10-K as of and for the year ended March 29, 1998.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying condensed
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K as of and for the year ended March 29,
1998. The results for the three and six month period ending September 27, 1998
are not necessarily indicative of the results to be expected for the entire
fiscal year ending March 28, 1999.
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
("Delphi," formerly the Delco Remy Division), an operating group of the General
Motors Corporation. The Company has incurred cumulative losses of $137,254,000
from its inception to September 27, 1998.
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, availability of working capital, market acceptance, changing
economic conditions, risks in product and technology development, effect of the
Company's accounting policies and other risk factors detailed in this section.
Readers should also carefully review the factors set forth in other reports or
documents filed from time to time with the Securities and Exchange Commission,
particularly the quarterly reports on Form 10-Q and any other current reports on
Form 8-K.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 27, 1998 (SECOND QUARTER AND FIRST
HALF OF FISCAL 1999) AND SEPTEMBER 28, 1997 (SECOND QUARTER AND FIRST HALF OF
FISCAL 1998)
During the three and six month periods ended September 27, 1998 and September
28, 1997, the Company continued development activities under a research and
development agreement with Delphi. Payments were generally made in accordance
with the achievement of certain milestones. No revenues were recognized during
the first three and six month periods of fiscal 1999 and fiscal 1998.
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. In addition,
Delphi paid a majority of the facility's operating costs over the term of the
new five year agreement and did so through August 1998. The Company is
treating both of these payments as an offset to research and development
expense.
In May 1998, the Company and Delphi announced the completion of their
collaboration on lithium polymer battery development. Delphi will retain a
license to use Company-developed lithium polymer technology for vehicular and
stationary load leveling / peak shaving applications. The Company will
retain a license to use Delphi-developed lithium polymer technology in all
other applications. After August 1998, the Company will receive no further
payments as a result of the Joint Research and Development agreement with
Delphi. As part of the early termination of the collaboration agreement,
Delphi paid the Company $2.2 million. The Company has no future obligations
under the termination agreement and has recorded the payment as a component
of other income.
9
<PAGE>
Research and development expenses were $4,708,000 and $8,738,000 during the
three and six month periods ended September 27, 1998 as compared to $4,427,000
and $8,642,000 during the same period of fiscal 1998. The comparable periods
performance has remained stable in absolute dollars as the Company continued
to develop its products in fiscal year 1999.
Marketing expenses were $18,000 and $47,000 for the second quarter and first
half of fiscal year 1999, respectively, as compared to $129,000 and $250,000
during similar periods of fiscal year 1998. The decrease in marketing
expense is primarily due to a reduction in workforce.
General and administrative expenses decreased to $1,319,000 and $2,257,000
during the second quarter and first half of fiscal year 1999, down from
$1,462,000 and $2,798,000 during the fiscal year 1998 comparable periods. The
decrease results from reduced legal fees associated with the shareholder class
action lawsuit and lower headcount.
Other income for the three and six months ended September 27, 1998 increased
$2.2 million as a result of the termination payment from Delphi.
Interest income decreased to $48,000 and $135,000 during the second quarter and
first half of fiscal year 1999, as compared to $321,000 and $774,000 during the
prior fiscal year's same periods. The decrease is due to the decline in
funds available for investment purposes.
Interest expense was $130,000 and $248,000 during the three and six month
periods ended September 27, 1998 as compared to $148,000 and $299,000 during the
same period of fiscal 1998. This decrease is a result of principal maturities
of debt, offset partially by the drawdown on the line of credit during the
second quarter of fiscal year 1999.
Joint venture expenses were $0 and $287,000 for the second quarter and first
half of fiscal year 1999, respectively, as compared to $150,000 and $300,000
during similar periods of fiscal year 1998. Joint venture expenses represent
50% of the start up costs associated with the Hanil Valence operations. The
Company's investment in the joint venture is $0, so the Company is no longer
recording their pro rata share of the losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $9,005,000 net cash for operating activities during fiscal year
1999's first six months compared to using $11,437,000 during the first six
months of fiscal year 1998, a decrease between comparable periods of $2,432,000.
This decrease resulted primarily from collection of accounts receivable and
proceeds from insurance advance.
During the six months ended September 27, 1998, the Company used $4,769,000
net cash from investing activities compared to providing $1,296,000 during
the first six months of fiscal year 1998, an increased usage of $6,065,000
between comparable periods. The increase primarily was a result of the
benefit of maturities of long term investments during the six months ended
September 28, 1997 which offset the use of funds for equipment purchases.
The Company provided $12,512,000 net cash from financing activities during
fiscal year 1999's first six months compared to $3,933,000 during the
first six months of fiscal year 1998. This increase resulted from proceeds of
issuance of preferred stock and initial borrowing on line of credit from
principal shareholder.
As a result of the above, the Company had a net decrease in cash and cash
equivalents of $1,676,000 during the six months ended September 27, 1998,
whereas it had a net decrease of $5,736,000 during the same period of fiscal
year 1998.
During fiscal year 1994, the Company, through its Dutch subsidiary, signed an
agreement with the Northern Ireland Industrial Development Board (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, 2001. As of September 27, 1998, the
Company had received grants aggregating L4,035,000 reducing remaining grants
available to L23,520,000 ($40,038,000 as of September 27, 1998).
As a condition to receiving funding from the IDB, the subsidiary must maintain a
minimum of L12,000,000 in debt or equity financing from the Company. Aggregate
funding under the grants is limited to L4,035,000 until the Company has
recognized $4,000,000 in aggregate revenue from the sale of its batteries
produced in Northern Ireland. Given that the Company has no agreements to
supply batteries using its current technology, there are no assurances that the
Company will be able to meet the agreement's revenue test.
The amount of the grants available under the agreement and offers is primarily
dependent on the level of capital expenditures made by the Company.
Substantially all of the funding received under the grants is repayable to the
IDB if the subsidiary is in default under the agreement and offers, which
includes the permanent cessation of business in Northern Ireland. Funding
received under the grants to offset capital expenditures is repayable if related
equipment is sold, transferred or otherwise
10
<PAGE>
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 September 27, 1998, together
with the interest earned thereon, will be sufficient to fund the Company's
operations through December, 1998.
On July 27, 1998, the Company completed private financing arrangements of up to
$25,000,000, under which it had drawn down $2,500,000 in debt and $7,500,000 of
convertible preferred stock. Under the terms of the agreements, the Company
sold 7,500 shares of a newly designated Series A Convertible Preferred Stock for
gross proceeds of $7,500,000. Simultaneously, the Company arranged a guaranteed
line of credit from Carl E. Berg, a director and prinicpal shareholder of the
Company, in an amount up to $10,000,000, under which it has already drawn down
$2,500,000. Upon the Company's achieving certain milestones, the Company may
draw down the balance of the funds.
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.
These factors raise substantial doubts about the Company's ability to continue
as a going concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The effects
of such adjustments, if necessary, could be material.
RECENT ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION"
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS 131 generally supersedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise." Under SFAS 131, operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that is used internally.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997, and restatement of comparative information for earlier years
is required. However, SFAS 131 is not required to be applied to interim
financial statements in the initial year of application. The Company has not
determined the impact, if any, on the reporting of segment information.
YEAR 2000 COMPLIANCE
The Company is in the process of formulating and implementing a program
designed to ensure that all software used in connection with the Company's
information systems, research and development testing and other equipment
will manage and manipulate data involving the transition of dates from 1999
to 2000 without functional or data abnormality and without inaccurate results
related to such dates. The Company currently anticipates that this program
will not require additional manpower, although there can be no assurances
that this will be the case or that the Company will not incur significant
additional costs in connection with such program. Currently, the Company does
not have a contingency plan in place should the Company be unsuccessful in
its efforts to become Year 2000 compliant. However, the Company intends to
create such a contingency plan during the second half of fiscal 1999.
The Company's information systems are not currently Year 2000 compliant,
although some of the individual hardware and software components recently
have been upgraded and tested for compliance. Additionally, the Company's
financial and accounting system is not Year 2000 compliant. The Company
intends to upgrade the system in fiscal 1999 to make the system Year 2000
compliant. The Company's systems incorporate certain third-party software
that may not be Year 2000 compliant. There can be no assurances that the
customers and suppliers of the Company will be in compliance with Year 2000
requirements.
Any failure of systems maintained by the Company or the Company's customers
and suppliers to be Year 2000 compliant could cause the Company to incur
significant expenses to remedy any problems or could have a material adverse
effect on the Company, its financial condition and its results of operations.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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. In April 1996, the
Court dismissed with prejudice all remaining claims against a present director
and limited claims against a former officer and director to the period when that
person was an officer. In December 1996, the Company and the remaining
individual defendants filed motions for summary judgment, which the plaintiffs
opposed. In November 1997, the Court granted the Company's motion for summary
judgment and entered a judgment in favor of all defendants. Plaintiffs have
appealed and the case is pending before the United States Court of Appeals for
the Ninth Circuit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 27, 1998, the company completed the private sale of 7,500 shares of
Series A Convertible Preferred Stock ("Series A Preferred") to a single private
institutional investor, for an aggregate purchase price of $7.5 million. The
sale was exempt from registration under the Securities Act of 1933, as amended,
pursuant to Rule 506 under such Act.
The shares of Series A Preferred are convertible into shares of Common Stock
(the "Conversion Shares"), at the option of the holder, on the earliest of (i)
September 27, 1998; (ii) the effectiveness of a registration statement for the
resale of the Conversion Shares; or (iii) certain defined events resulting in a
material adverse change to the Company. The initial conversion price (the
"Fixed Conversion Price") with respect to any conversion which occurs prior to
July 27, 1999 (or, if the Company has not signed and announced a material
contract or contracts for the sale of batteries on or before January 27, 1999,
with respect to any conversion after January 27, 1999 will be $6.03. For
conversions following July 27, 1999 (or January 27, 1999, if a material contract
has not been signed prior to that date), the conversion price will be the lower
of the Fixed Conversion Price or the Variable Conversion Price. The "Variable
Conversion Price " means 101% of the average of the two lowest closing bid
prices of the Common Stock for the number of trading days set forth in the
schedules below:
If the Company has signed and announced a material contract for the sale of
batteries on or before January 27, 1999:
<TABLE>
<CAPTION>
Conversion Date: Number of Days in Period:
---------------- -------------------------
<S> <C>
Before August 27, 1999 10
August 27, 1999-September 27, 1999 11
September 27, 1999-October 27, 1999 12
October 27, 1999-November 27, 1999 13
November 27, 1999-December 27, 1999 14
After December 27, 1999 15
</TABLE>
If the Company has not signed and announced a material contract for the sale of
batteries on or before January 27, 1999:
<TABLE>
<CAPTION>
Conversion Date: Number of Days in Period:
---------------- -------------------------
<S> <C>
Before February 27, 1999 10
February 27, 1999-March 27, 1999 11
March 27, 1999-April 27, 1999 12
April 27, 1999-May 27, 1999 13
May 27, 1999-June 27, 1999 14
After June 27, 1999 15
</TABLE>
The number of shares of Common Stock, in the aggregate, which may be issued
pursuant to the conversion of Series A Preferred is 5,071,913. The Company has
agreed to seek stockholder authorization at its next annual meeting to issue
shares above this limit, to the extent such additional shares are necessary due
to the Variable Conversion Price.
The purchaser has agreed to purchase up to $7.5 million of additional shares of
Series A Preferred, on the same terms and conditions, subject to the achievement
of certain milestones by the Company.
12
<PAGE>
The purchaser also received warrants to purchase up to 447,761 shares of Common
Stock at an exercise price of $6.7838 per share.
In connection with the sale price of Series A Preferred, the Company paid Gemini
Capital LLC, the placement agent, a fee of $375,000. The placement agent also
received warrants to purchase up to 87,500 shares of Common Stock at an exercise
price of $4.9375 per share. Both the purchaser and the placement agent will be
entitled to receive additional warrants if additional shares of Series A
Preferred are sold.
Concurrently with the sale of Series A Preferred, Baccarat Electronics. Inc.
("Baccarat"), an affiliate of Carl Berg, a director of the Company, loaned the
Company $2.5 million. Baccarat has agreed to loan the Company up to an
additional $7.5 million on specified terms. In connection with the loan,
Baccarat received warrants to purchase up to 149,254 shares of Common Stock at
an exercise price of $6.7838 per share, and will be entitled to additional
warrants if further amounts are loaned to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
Exhibit 27 Financial Data Schedule
b. REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K on August 3, 1998
announcing the initial closing of the financing.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
VALENCE TECHNOLOGY, INC.
(Registrant)
Date: November 10, 1998 By: /s/ Lev M. Dawson
-----------------------------------------------
Lev M. Dawson
Chairman of the Board, Chief Executive Officer,
President and Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------------------------------------------------------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-30-1998
<PERIOD-END> SEP-27-1998
<CASH> 6,724
<SECURITIES> 0
<RECEIVABLES> 1,078
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,901
<PP&E> 55,940
<DEPRECIATION> (21,915)
<TOTAL-ASSETS> 41,926
<CURRENT-LIABILITIES> 10,430
<BONDS> 4,790
0
5,975
<COMMON> 156,095
<OTHER-SE> (137,254)
<TOTAL-LIABILITY-AND-EQUITY> 41,926
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (8,842)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (248)
<INCOME-PRETAX> (9,242)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,242)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,242)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
