<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 June 28, 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
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(Registrant's telephone number, including area code)
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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 25,520,447 shares
- ------------------------------- ------------------------------------
(Class) (Outstanding at August 3, 1998)
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
FORM 10-Q
FOR THE QUARTER ENDED JUNE 28, 1998
INDEX
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
June 28, 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 June 28, 1998 and for each of the
three months ended June 28, 1998 and June 29, 1997. . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the period from March 3, 1989 (date of inception)
to June 28, 1998 and for each of the three months
ended June 28, 1998 and June 29, 1997 . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . .13
SIGNATURES
</TABLE>
2
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VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(COMPANIES IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
_____
<TABLE>
<CAPTION>
June 28, March 29,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,682 $ 8,400
Accounts receivable 1,126 1,429
Prepaids and other current assets 83 880
------------ ------------
Total current assets 3,891 10,709
Property, plant and equipment, net 33,563 31,712
Investment in joint venture - 285
Other assets - 188
------------ ------------
Total assets $ 37,454 $ 42,894
------------ ------------
------------ ------------
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 396 $ 399
Accounts payable 2,562 2,353
Accrued expenses 4,809 5,207
Accrued royalties and license fees 1,250 1,000
Advances 700 700
Accrued compensation 660 817
------------ ------------
Total current liabilities 10,377 10,476
Deferred revenue 2,500 2,500
IDB Grant 2,006 2,006
Long-term debt, less current portion 4,810 4,950
------------ ------------
Total liabilities 19,693 19,932
------------ ------------
Contingencies (Note 3).
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: 25,493 and 25,068 shares at
June 28, 1998 and March 29, 1998, respectively 154,485 153,583
Notes receivable from shareholder (4,862) (4,862)
Deficit accumulated during the development stage (133,327) (128,012)
Cumulative translation adjustment 1,465 2,253
------------ ------------
Total stockholders' equity 17,761 22,962
------------ ------------
Total liabilities and stockholders' equity $ 37,454 $ 42,894
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
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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
through -------------------------
June 28, June 28, June 29,
1998 1998 1997
------------------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Research and
development
contracts $ 21,605 $ - $ -
-------------
Costs and expenses:
Research and product
development 88,511 4,030 4,035
Marketing 3,561 29 121
General and
administrative 40,367 938 1,336
Write-off of
in-process
technology 8,212 - -
Investment in
Danish
subsidiary 3,489 - -
Special charges 18,872 - -
------------- ----------- -----------
Total costs and
expenses 163,012 4,997 5,492
------------- ----------- -----------
Operating loss (141,407) (4,997) (5,492)
Interest income 14,988 87 453
Interest expense (4,408) (118) (151)
Equity in losses of
joint venture (2,500) (287) (150)
------------- ----------- -----------
Net loss $ (133,327) $ (5,315) $ (5,340)
------------- ----------- -----------
------------- ----------- -----------
Other comprehensive income
(loss):
Foreign currency translation
adjustments (788) 393
----------- -----------
Comprehensive loss $ (6,103) $ (4,947)
----------- -----------
Net loss per share, basic and
diluted $ (0.21) $ (0.24)
----------- -----------
----------- -----------
Shares used in
computing net loss per share,
basic and diluted 25,348 21,805
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(COMPANIES IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amounts)
(unaudited)
_____
<TABLE>
<CAPTION>
Period from
March 3, 1989 Three Months Three Months
(date of inception) Ended Ended
through June 28, June 29,
June 28, 1998 1998 1997
--------------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (133,327) $ (5,315) $ (5,340)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 22,056 437 373
Write-off of equipment 14,792 - -
Write-off of in-process technology 6,211 - -
Compensation related to stock options 3,196 - 234
Noncash charge related to acquisition
of Danish subsidiary 2,245 - -
Equity in (earnings) losses of joint venture 2,500 287 150
Changes in assets and liabilities:
Accounts receivable (46) 294 (62)
Interest receivable 58 58 53
Notes receivable - - 39
Prepaid expenses and other current assets (961) 925 (78)
Accounts payable 2,461 209 (254)
Accrued liabilities 1,224 (223) (1,937)
Deferred revenue 2,500 - -
---------- ---------- -----------
Net cash used in operating activities (77,091) (3,328) (6,822)
---------- ---------- -----------
Cash flows from investing activities:
Purchase of long-term investments (665,789) - (3,119)
Maturities in long-term investments 661,545 - 4,950
Capital expenditures (58,647) (3,100) (3,739)
Other (222) - -
---------- ---------- -----------
Net cash used in investing activities (63,113) (3,100) (1,908)
---------- ---------- -----------
Cash flows from financing activities:
Property and equipment grants 4,419 - -
Borrowings of long-term debt 15,502 - -
Payments of long-term debt:
Product development loan (482) - -
Shareholder and director (6,173) - -
Other long-term debt (11,980) (143) (435)
Proceeds from issuance of common stock,
net of costs 144,052 902 -
---------- ---------- -----------
Net cash provided by (used in)
financing activities 145,338 759 (435)
---------- ---------- -----------
Effect of foreign exchange rates on cash and cash
equivalents (2,452) (49) (393)
Increase (decrease) in cash and cash equivalents 2,682 (5,718) (9,558)
Cash and cash equivalents, beginning of period - 8,400 27,832
---------- ---------- -----------
Cash and cash equivalents, end of period $ 2,682 $ 2,682 $ 18,274
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
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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)
_____
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 June 28, 1998 and March 29, 1998, its
consolidated results of operations and cash flows for the period from March 3,
1989 (date of inception) to June 28, 1998 and for each of the three-month
periods ended June 28, 1998 and June 29, 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 periods ended June
28, 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 income (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,
---------------------------------
June 28, 1998 June 29, 1997
------------- -------------
<S> <C> <C>
Loss per share:
Net loss $(5,315) $(5,340)
Weighted average
shares outstanding 25,348 21,805
------- -------
Earnings per share,
basic and diluted $ (0.21) $ (0.24)
</TABLE>
Shares excluded from the calculation of diluted EPS as their effect was
anti-dilutive were 4,558 and 3,881 for the three months ended June 28, 1998
and June 29, 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. SUBSEQUENT EVENTS
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
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.
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.
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)
_____
In connection with the debt and 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 for 87,500 and 447,761 warrants,
respectively, and expire in July 2003.
6. 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.
7. 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 month period ending June 28, 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 $133,327,000
from its inception to June 28, 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 MONTHS ENDED JUNE 28, 1998 AND JUNE 29, 1997.
During the three months ended June 28, 1998, 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 months of both 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 (of which $150,000 was
recognized during the first three months of both fiscal 1998 and fiscal 1997, 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 and is anticipated to do 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
9
<PAGE>
polymer technology in all other applications. After September 1998, the Company
anticipates that it will receive no further payments as a result of the Joint
Research and Development agreement with Delphi. It is anticipated that Delphi
will continue to pay $50,000 per month through August 1998.
Research and development expenses were $4,030,000 during the three months ended
June 28, 1998 as compared to $4,035,000 during the same period of fiscal 1998.
The comparable periods performance was primarily due to costs incurred to
proceed with manufacturing product in calendar year 1999.
Marketing expenses were $29,000 for the first quarter of fiscal year 1999, as
compared to $121,000 during the similar period of fiscal year 1998. The
comparative decrease is the result of a decrease in headcount.
General and administrative expenses decreased to $938,000 during the first
quarter of fiscal year 1999, down from $1,336,000 during the fiscal year 1998
comparable period. The decrease results from reduced legal fees associated with
the shareholder class action lawsuit and lower headcount.
Interest income decreased to $87,000 during the first quarter of fiscal year
1999, as compared to $453,000 during the prior fiscal year's same period. The
difference is a result of a decline in funds available for investment purposes.
Interest expense was $118,000 during the first quarter of fiscal year 1999, as
compared to $151,000 during the prior fiscal year's comparable period. This
decrease is a result of principal maturities of debt.
Joint venture expenses were $287,000 for the first quarter of fiscal year 1999
as compared to $150,000 for the first quarter of fiscal year 1998. Joint
venture expenses represent 50% of the start up costs associated with the Hanil
Valence operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $3,328,000 net cash for operating activities during fiscal year
1999's first three months compared to using $6,822,000 during the first three
months of fiscal year 1998, a decrease between comparable periods of $3,494,000.
This decrease primarily resulted from a payment to Bellcore of $2,000,000 in
fiscal 1998; offset by an increase in accounts payable of $463,000 year to year
and cash collections of $1,359,000.
During the three months ended June 28, 1998, the Company used $3,100,000 net
cash from investing activities compared to $1,908,000 used during the first
three months of fiscal year 1998, an increase of $1,192,000 between comparable
periods. The increase primarily was a result of funds required for
equipment purchases.
The Company provided $759,000 net cash from financing activities during fiscal
year 1999's first three months compared to using $435,000 during the first three
months of fiscal year 1998. This increase resulted from proceeds of stock
option exercises and lower debt payments.
As a result of the above, the Company had a net decrease in cash and cash
equivalents of $5,718,000 during the fiscal year 1999's first three months,
whereas it had a net decrease of $9,558,000 during the same period of fiscal
year 1998.
The Company's $2,000,000 working capital line of credit was available through
June 15, 1998. The working capital line collateralizes outstanding letters of
credit, which reduce borrowings otherwise available under the line.
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 June 28, 1998, the Company had
received grants aggregating L4,035,000 reducing remaining grants available to
L23,520,000 (US. $39,062,000 as of June 28, 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.
10
<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 June 28, 1998, together with
the interest earned thereon, will be sufficient to fund the Company's operations
through August, 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 form 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 computer
systems and 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 significant
manpower, although there can be no assurances that this will be the case or that
the Company will not incur additional costs in connection with such program.
There can be no assurances that the vendors of the Company will be in
compliance, and the Company has no control over whether such vendors will be in
compliance, with year 2000 requirements. Any failure on the
11
<PAGE>
part of the Company to ensure that its software complies with year 2000
requirements or any similar failure on the part of the Company's vendors could
have a material adverse effect on the Company, its financial condition and its
results of operations.
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
12
<PAGE>
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.
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 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
Exhibit 10.51 Termination Agreement between the Company, Valence
Technology Cayman Islands, Inc., and the Delphi Energy
and Engine Management Systems Group of the General
Motors Corporation. *
Exhibit 27.1 Financial Data Schedule
b. REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended June
28, 1998. The Company filed a current report on Form 8-K on August 3,
1998 announcing the initial closing of the financing.
* Confidential treatment has been requested for portions of this document.
13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
<S> <C>
10.51 Termination Agreement between the Company, Valence Technology
Cayman Islands, Inc., and the Delphi Energy and Engine Management
Systems Group of the General Motors Corporation*
27.1 Financial Data Schedule
</TABLE>
*Confidential treatment has been requested for portions of this document.
14
<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: August 12, 1998 By: /s/ David Archibald
----------------------------------------------
David Archibald
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<PAGE>
EXHIBIT 10.51
TERMINATION AGREEMENT
THIS AGREEMENT is effective as of the last date of signature hereon
("Effective Date") by and between (1) THE DELPHI ENERGY AND ENGINE AND ENERGY
MANAGEMENT SYSTEMS GROUP OF THE GENERAL MOTORS CORPORATION, a company
incorporated under the laws of the State of Delaware, U.S.A., having offices
at 4800 South Saginaw Street, Flint, MI ("Delphi"), (2) VALENCE TECHNOLOGY,
INC., a company incorporated under the laws of the State of Delaware, U.S.A.,
having offices at 301 Conestoga Way, Henderson NV ("Valence US"), and (3)
VALENCE TECHNOLOGY CAYMAN ISLANDS, INC., a company incorporated under the
laws of the Cayman Islands and having as its registered office at P.O. Box
309 South Church Street, Grand Cayman, Cayman Islands, British West Indies
("Valence Caymans") [Valence US and Valence Cayman are collectively referred to
herein as "Valence"].
WHEREAS, the Parties entered into a first contract, effective March 1,
1991, (Development Contract) to jointly develop lithium-polymer, Vehicular,
and Load Leveling/Peak Shaving Batteries ("Batteries");
WHEREAS, the Parties subsequently entered into a second contract,
effective September 15, 1994 ("Relocation Contract") to collocate their
respective technical staffs at a facility in Henderson NV ("Facility") for a
period of five (5) years (until September 1999) in order to continue the
joint development, which Facility was to be purchased and maintained by
Valence with the understanding that Delphi would pay seventy-five percent
(75%) of the ordinary operating expenses of the Facility ("Shared Expenses");
WHEREAS, on or about June 1995, the Parties entered into a Bundled
Services Agreement whereby Valence would provide certain personnel services
to Delphi for which Delphi would pay a specified amount of money (Bundled
Services Expenses);
WHEREAS, five (5) experimental 2.2 KWH Load Leveling/Peak Shaving
Batteries had been built and successfully met the goals for such batteries,
which batteries also demonstrated performance levels suitable for use as
hybrid-type EV Batteries; and
WHEREAS, the Parties now wish to conclude the joint development effort
so that each can adapt the developed technology to, and focus their resources
on, their own markets, independently of the other.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein set forth, the Parties mutually agree as follows:
1. Terms in this Termination Agreement which are capitalized, and not
otherwise defined herein, shall have the same definitions as they have in the
Development, and the Relocation Contracts.
2. The Development and Relocation Contracts will terminate as of the
Effective Date.
3. The Target for Delphi to begin producing hybrid-type EV Batteries,
and starting the clock running on all of its exclusive licenses, except for
SLI batteries, will be [*].
1.
<PAGE>
4. All of Delphi's exclusive licenses, except for SLI batteries, will
terminate on December 31, 2003, whether or not the Target is met; PROVIDED,
HOWEVER, that should Delphi begin producing Batteries, other than SLI
batteries, for sale before [*], Delphi's exclusive licenses for Batteries
other than SLI batteries, will terminate [*] from the first commercial sale
of such Battery. Delphi's exclusive license for SLI batteries will terminate
[*] from the first commercial sale thereof, or [*], whichever is earlier.
5. All Delphi employees and equipment will, at Delphi's expense,
vacate the Facility within about [*] of the Effective Date, except as
provided in paragraph 6 below. Delphi will leave those areas of the Facility
that it has occupied in clean condition, and meeting all local electrical and
plumbing building codes.
6. The laboratory equipment listed on Attachment A (Equipment) is
personality which is owned by Delphi, but which will remain at the Facility
for use by Valence until (a) such time as Valence has replaced it, or (b) [*],
whichever is earlier. While Equipment remains at the Facility, Delphi
laboratory technicians will have free access to, and use of, Equipment during
normal business hours, and without separate charge, to conduct such tests as
Delphi might require. Valence will allow such access and use of Equipment by
Delphi technicians as conveniently as is practically possible, but in no
event will it be delayed for more than [*] from the time Delphi requests such
access/use. Valence will (1) [*]; and (2) will return Equipment to Delphi in
the same condition as it was in when Delphi vacated the Facility, less normal
wear and tear. Each Party will be responsible for its own employees and any
contractors it has at the Facility using Equipment, and will indemnify the
other against any claims by such persons who may be injured while at Facility
using Equipment.
7. Delphi will pay to Valence:
(a) Two Million Two Hundred Thousand Dollars ($2,200,000) within
[*] of the Effective Date of this Agreement; as well as
(b) Bundled Services Expenses and Shared Expenses that accrue up
to the date all Delphi employees and equipment (except as provided in
paragraph 6) have vacated the Facility. The Bundled Service Agreement will
terminate as of that date.
8. After the Effective Date, Valence will be responsible for, and will
pay all remaining expenses related to, equipment leased for its own use or
for the joint use of the Parties.
9. Except as set forth in Paragraph 10 below, the licenses and
sublicenses of the Parties as set forth in the Development and Relocation
Contracts will remain in effect for the lives thereof, and are applicable
only to patented inventions and technical information that were conceived
before the Effective Date. Delphi's sublicense under Bellcore's lithium
battery technology is not affected by this Termination Agreement, and will
remain in effect for the life thereof.
10. Delphi's exclusive license under Vehicular Batteries
notwithstanding, Valence will hereafter have a license under [*] including
the right to sublicense only its joint venture company Alliant/Valence L.L.C.
(Horsham, PA) (1) [*]; (2) [*]; and (3) [*].
2.
<PAGE>
11. Delphi presently intends to directly or indirectly (i.e., via a
contracting agency) retain those Bundled Service employees (heretofore provided
by Valence) as are listed on Attachment B.
12. The Parties will collaborate on a Press Release announcing
conclusion of the joint development program and will otherwise cooperate with
one another to effect a reasonably seamless and efficient separation of their
operations, allowing each to continue its lithium-polymer battery work
separately.
13. Each Party hereby releases the other from any and all claims or
causes of action arising in connection with the Development and Relocation
Contracts, except as may subsequently occur in connection with Sections 5.1,
5.2 and 5.3, and Articles VII and XII of the Development Contract, or Section
3 of the Relocation Contract which survive this termination of those
Contracts.
<TABLE>
<S> <C>
ACCEPTED AND AGREED:
VALENCE TECHNOLOGY, INC. DELPHI ENERGY AND ENGINE
MANAGEMENT SYSTEMS
By: ______________________________________ By: ______________________________________
Signature of authorized representative Signature of authorized representative
Printed Name: ____________________________ Printed Name: ____________________________
Title: ____________________________ Title: ___________________________________
Date: ____________________________________ Date: ___________________________________
VALENCE TECHNOLOGY CAYMAN ISLANDS, INC.
By: ___________________________________
Signature of authorized representative
Printed Name: __________________________
Title: __________________________
Date: __________________________________
</TABLE>
3.
<PAGE>
ATTACHMENT A
LAB EQUIPMENT
- - [*]
- - [*]
- - [*]
- - [*]
- - [*]
- - [*]
- - [*]
- - [*]
- - [*]
- - [*]
4.
<PAGE>
ATTACHMENT B
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
5.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-30-1998
<PERIOD-END> JUN-28-1998
<CASH> 2,682
<SECURITIES> 0
<RECEIVABLES> 1,126
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,891
<PP&E> 52,876
<DEPRECIATION> (19,313)
<TOTAL-ASSETS> 37,454
<CURRENT-LIABILITIES> 10,377
<BONDS> 4,810
0
0
<COMMON> 154,485
<OTHER-SE> (133,327)
<TOTAL-LIABILITY-AND-EQUITY> 37,454
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (4,997)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (118)
<INCOME-PRETAX> (5,315)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,315)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,315)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
