SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 26, 1999.
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20028
VALENCE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 770214673
------------------------------ ------------------------------
(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)
(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. 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 31,564,272 shares
----------------------------------- -----------------------------------
(Class) (Outstanding at November 1, 1999)
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 26, 1999
INDEX
PAGES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
September 26, 1999 and March 28, 1999.................................3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the period from March 3, 1989
(date of inception) to September 26, 1999 and for each of the
three and six month periods ended September 26, 1999 and
September 27, 1998....................................................4
Condensed Consolidated Statements of Cash Flows for the
period from March 3, 1989 (date of inception) to September
26, 1999 and for each of the six month periods ended
September 26, 1999 and September 27, 1998.............................5
Notes to Condensed Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................22
SIGNATURE
Page 2
<PAGE>
<TABLE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
-----
<CAPTION>
September 26, March 28,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,212 $ 2,454
Receivables 1,336 1,168
Prepaid and other current assets 34 153
----------- -----------
Total current assets 4,582 3,775
Property, plant and equipment, net 32,110 34,071
Investment in joint venture 0 555
----------- -----------
Total assets $ 36,692 $ 38,401
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 409 $ 423
Accounts payable 959 1,648
Accrued expenses 2,215 4,207
Accrued royalties and license fees 1,500 1,000
Advances and deposits 3,039 1,881
Grant payable 1,985 1,958
Accrued compensation 372 442
----------- -----------
Total current liabilities 10,479 11,559
Deferred revenue 2,500 2,500
Long-term debt, less current portion 4,227 4,402
Long-term debt to stockholder 8,107 3,769
----------- -----------
Total liabilities 25,313 22,230
----------- -----------
Commitments and contingencies (Note 5)
Mandatorily redeemable convertible preferred stock
Authorized: 10,000,000 shares
Series A, $0.001 par value, Issued and
outstanding: 7,500 shares at September 26,
1999 and March 28, 1999 4,727 4,514
(Liquidation value: $8,025)
Series B, $0.001 par value, Issued and outstanding:
4,500 and 7,500 shares at September 26, 1999 and
March 28, 1999, respectively 2,352 3,702
(Liquidation value: $4,702)
Stockholders' Equity:
Common stock, $0.001 par value, authorized: 50,0000,000 shares,
Issued and outstanding: 29,552,987 and 26,722,341
shares at September 26, 1999 and March 28, 1999,
respectively 30 27
Additional paid-in capital 179,912 166,457
Notes receivable from stockholder (4,862) (4,862)
Deficit accumulated during the development stage (171,959) (154,436)
Accumulated other comprehensive income 1,179 769
----------- -----------
Total stockholders' equity 4,300 7,955
----------- -----------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity $ 36,692 $ 38,401
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 3
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
(unaudited)
-----
<CAPTION>
Period from
March 3, 1989
(date of inception) Three Months Ended Six Months Ended
Through -------------------------------- --------------------------------
September 26, September 26, September 27, September 26, September 27,
1999 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C>
Revenue:
Research and development
contracts $ 21,605 $ - $ - $ - $ -
Battery and laminate sales 389 389 - 389 -
---------- ---------- ---------- ---------- ----------
Total revenue 21,994 389 - 389 -
Costs and expenses:
Research and product
development 120,197 7,145 4,708 13,545 8,738
Marketing 3,747 52 18 110 47
General and administrative 49,222 1,747 1,319 3,040 2,257
Write-off of in-process
technology 8,212 - - - -
Investment in Danish subsidiary 3,489 - - - -
Special charges 18,872 - - - -
---------- ---------- ---------- ---------- ----------
Total costs and expenses 203,739 8,944 6,045 16,695 11,042
Operating loss (181,745) (8,555) (6,045) (16,306) (11,042)
Interest and other income 18,053 90 2,248 172 2,335
Interest expense (5,767) (480) (130) (834) (248)
Equity in earnings (loss) of
joint venture (2,500) (387) - (555) (287)
---------- ---------- ---------- ---------- ----------
Net loss $ (171,959) (9,332) (3,927) (17,523) (9,242)
==========
Beneficial conversion feature
on preferred stock (212) (75) (431) (75)
Net loss available to common
stockholders $ (9,544) $ (4,002) $ (17,954) $ (9,317)
========== ========== ========== ==========
Other comprehensive loss:
Net loss $ (9,332) $ (3,927) $ (17,523) $ (9,242)
Change in foreign currency
translation adjustments 1,024 731 410 (57)
---------- ---------- ---------- ----------
Comprehensive loss $ (8,308) $ (3,196) $ (17,113) $ (9,299)
========== ========== ========== ==========
Net loss per share available to
common Stockholders, basic and
diluted $ (0.34) $ (0.16) $ (0.66) $ (0.37)
========== ========== ========== ==========
Shares used in computing net loss
per share available to common
stockholders, basic and diluted 27,865 25,524 27,301 25,436
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 4
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
-----
<CAPTION>
Period from
March 3, 1989 Six Months Six Months
(date of inception) Ended Ended
through September 26, September 27,
September 26, 1999 1999 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (171,959) $ (17,523) $ (9,242)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 29,355 4,348 862
Write-off of equipment 14,792 - -
Write-off of in-process technology 6,211 - -
Compensation related to stock options 3,560 - -
Noncash charge related to acquisition
of Danish subsidiary 2,245 - -
Equity in (earnings) losses of
joint venture 2,500 555 287
Amortization of debt discount 315 260 14
Changes in assets and liabilities:
Receivables (206) (157) 411
Prepaid expenses and other current assets (912) 119 909
Accounts payable 901 (695) (351)
Accrued liabilities 1,002 (445) (1,881)
Deferred revenue 2,500 - -
-------------- ---------- ---------
Net cash used in operating (109,696) (13,538) (8,991)
-------------- ---------- ---------
Cash flows from investing activities:
Purchase of long-term investments (665,789) - -
Maturities of long-term investments 661,545 - -
Capital expenditures (66,928) (1,827) (4,769)
Other (222) - -
-------------- ---------- ---------
Net cash used in investing (71,394) (1,827) (4,769)
-------------- ---------- ---------
Cash flows from financing activities:
Property and equipment grants 6,421 - 2,000
Borrowings of long-term debt 25,452 5,450 2,169
Payments of long-term debt:
Product development loan (482) - -
Stockholder and director (6,173) - -
Other long-term debt (12,464) (230) (158)
Proceeds from issuance of common stock
and warrants, net of issuance costs 159,865 10,949 -
Proceeds from issuance of preferred stock,
Series A, net of issuance costs 7,075 - 2,447
Proceeds from issuance of preferred stock,
Series B, net of issuance costs 7,125 - 6,040
-------------- ---------- ---------
Net cash provided by financing activities 186,819 16,169 12,498
-------------- ---------- ---------
Effect of foreign exchange rates on cash
and cash equivalents (2,517) (46) (414)
-------------- ---------- ---------
Increase (decrease) in cash and cash
equivalents 3,212 758 (1,676)
Cash and cash equivalents, beginning of period - 2,454 8,400
-------------- ---------- ---------
Cash and cash equivalents, end of period $ 3,212 $ 3,212 $ 6,724
============== ========== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 5
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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 26, 1999,
its consolidated results of operations for the period from March 3, 1989
(date of inception) to September 26, 1999 and for each of the three and
six-month periods ended September 26, 1999 and September 27, 1998, and the
consolidated cash flows for each of the six-month periods ended September
26, 1999 and September 27, 1998, and for the period from March 3, 1989
(date of inception) to September 26, 1999. 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 28, 1999. The year end condensed consolidated balance sheet data as
of March 28, 1999 was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles.
We have produced prototype and production quality products that we believe
have performance characteristics that are suitable for a broad market.
However, additional development will be required to enable us to
consistently produce battery systems with these characteristics. The
Company presently has a limited quantity of 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.
2. BASIS OF PRESENTATION:
The accompanying interim condensed consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
The Company has negative working capital and has sustained recurring
losses related primarily to the development and marketing of its products.
Management is actively pursuing additional equity and debt financing from
both institutional and corporate investors. In October 1999, the Company
completed private financing arrangements of $4.5 million (Note 8).
Management has implemented certain budgetary controls and is actively
pursuing capital grant advances from the Northern Ireland Industrial
Development Board. However, the Company's fiscal 2000 operating plan
places significant reliance on obtaining outside financing. There can be
no assurance that any new debt or equity issuances could be successfully
consummated. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. The effects of any such adjustments, if necessary, could be
substantial.
3. EARNINGS PER SHARE:
Earnings per share ("EPS") is computed by dividing net loss available to
common stockholders by the weighted average number of common shares
outstanding for that period. Diluted EPS is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
Dilutive potential common shares consist of incremental common shares
issuable upon conversion of preferred stock and exercise of stock options
and warrants for all periods.
Page 6
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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
SEPT. 26, 1999 SEPT. 27, 1998 SEPT. 26, 1999 SEPT. 27, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss available
to common stockholders $ (9,544) $ (4,002) $ (17,954) $ (9,317)
Weighted average
shares outstanding 27,865 25,524 27,301 25,436
Earnings per share,
basic and diluted $ (0.34) $ (0.16) $ (0.66) $ (0.37)
</TABLE>
Shares excluded from the calculation of diluted EPS as their effect was
anti-dilutive were 6,690 and 3,724 for the three and six months ended
September 26, 1999 and September 27, 1998, respectively.
4. LONG-TERM DEBT TO STOCKHOLDER:
In July 1997, the Company entered in to an amended loan agreement with a
stockholder which allows the Company to borrow, prepay and re-borrow up to
the full $10,000 principal under the promissory note on a revolving basis
and provided that the lender will subordinate its security interest to
other lenders when the loan balance is at zero. The loan bears interest at
one percent over lender's borrowing rate (approximately 9.00% at September
26, 1999) and is available through August 30, 2002.
During the first quarter of fiscal 2000, the Company borrowed an aggregate
of $5,450 from a stockholder under the amended loan agreement bringing the
outstanding loan balance to $9,950 as of June 27, 1999. In conjunction
with the borrowings, the Company issued warrants to purchase 325 shares of
common stock. The warrants were valued using the Black Scholes valuation
method and had a weighted average fair value of $4.22 per warrant at the
time of issuance. The fair value of these warrants, totaling $1,372, has
been reflected as additional consideration for the debt financing,
recorded as a discount on the debt, and accreted as interest expense to be
amortized over the life of the amended loan agreement. For the six months
ending September 26, 1999, $260 was charged to interest expense.
5. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
In May 1994, a series of class action lawsuits were filed in the United
States District Court for the Northern District of California against the
Company and certain of its present and former officers and directors.
These lawsuits were consolidated, and in September 1994, the plaintiffs
filed a consolidated and amended class action complaint. Following the
Court's Orders on motions to dismiss the complaint, which were granted in
part and denied in part, the plaintiffs filed an amended complaint in
October 1995 ("Complaint"). The Complaint alleges violations of the
federal securities laws against the Company, certain of its present and
former officers and directors, and the underwriters of the Company's
public stock offerings, claiming that the defendants issued a series of
false and misleading statements, including filings with the Securities and
Exchange Commission, with regard to the Company's business and future
prospects. The plaintiffs 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.
Page 7
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except per share amounts)
(unaudited)
On January 23, 1996, the Court dismissed, with prejudice, all claims
against the underwriters of the Company's public stock offerings, and one
claim against the Company and its present and former officers and
directors. On April 29, 1996, the Court dismissed with prejudice all
remaining claims against a present director and limited claims against a
former officer and director to the period when that person was an officer.
In December 1996, the Company and the individual defendants filed motions
for summary judgment, which the plaintiffs opposed. In November 1997, the
Court granted the motions for summary judgment and entered judgment in
favor of all defendants. Plaintiffs appealed to the Ninth Circuit Court of
Appeals, which heard argument in December 1998. In April 1999, the Ninth
Circuit issued an opinion reversing the District Court's order with
respect to the grant of summary judgment and remanded the case back to the
District Court. Although the Company continues to believe that it has a
meritorious defense in this lawsuit, an unfavorable resolution of the
lawsuit could have a material adverse effect on the Company's financial
condition and results of operation.
In June 1998, the Company filed a lawsuit in the Superior Court of
California, Santa Clara County, against L&I Research, Inc., Powell
Electrical Manufacturing Company and others seeking relief based on
rescission and damages for breach of contract. In September 1998, Powell
filed a cross-complaint against the Company and others (File No.
CV7745534) claiming damages of approximately $900. The cross-complaint
alleges breach of written contract, oral modification of written contract,
promissory estoppel, fraud, quantum meruit, and quantum valebant. On
December 10, 1998, the Company filed a first amended complaint for breach
of contract, breach of express warranty, breach of implied warranty of
merchantability, breach of implied warranty of fitness for particular
purpose, and breach of the implied covenant of good faith and fair
dealing. On or about December 23, 1998, Powell filed a first amended
complaint again seeking damages of approximately $900. The matter is
presently set for non-binding arbitration in January 2000, and no trial
date has been set.
In September 1998, Klockner Bartelt/Medipak, Inc. d/b/a/ Klockner Medipak
filed suit against the Company in the United States District Court for the
Middle District of Florida (File No. 98-1844-Civ-7-24E) alleging breach of
contract by the Company with respect to an agreement for the supply of
battery manufacturing equipment, and claimed damages of approximately $2.5
million. On January 20, 1999, the Company filed a counterclaim against
Klockner alleging breach of contract, breach of express warranty, breach
of the implied warranty of merchantability, breach of the implied warranty
of fitness for a particular purpose, and rescission and restitution and
claimed compensatory damages to be determined at trial. The case has been
set for trial in March 2000.
The ultimate outcome of these actions cannot presently be determined.
Accordingly, no provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.
In addition to the litigation noted above, the Company is from time to
time subject to routine litigation incidental to its business. The Company
believes that the results of this routine litigation will not have a
material adverse effect on the Company's financial condition.
6. SEGMENT INFORMATION:
The Company conducts its business in one operating segment and uses only
one measurement of profitability. Long-lived asset information by
geographic area at September 26, 1999 and March 28, 1999 is as follows:
<TABLE>
<CAPTION>
September 26, March 28, 1999
------------- --------------
<S> <C> <C>
United States $ 5,202 $ 5,502
International (primarily Northern Ireland) 26,908 28,569
------------ --------------
TOTAL $32,110 $ 34,071
============ ==============
</TABLE>
Page 8
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except per share amounts)
(unaudited)
7. RECENT ACCOUNTING PRONOUNCEMENTS:
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and
hedging activities. SFAS 133 requires that all derivatives be recognized
at fair value in the balance sheet, and that the corresponding gains or
losses be reported either in the statement of operations or as a component
of comprehensive income, depending on the type of hedging relationship
that exists. SFAS 133 will be effective for fiscal years beginning after
June 15, 2000. Currently, the Company does not hold derivative instruments
or engage in hedging activities.
8. SUBSEQUENT EVENTS:
During October 1999, Castle Creek Investments, LDC elected to convert all
7.5 shares of their Series A Convertible Participating Preferred Stock.
These 7.5 shares of Series A stock, including the accreted redemption
value through the date of conversion, converted to 1,335 shares of Valence
Technology, Inc. common stock.
On October 18, 1999, the Company obtained a loan in the amount of $1.5
million from a major stockholder. The loan is in the form of a demand note
such that the holder can request payment after January 31, 2000 or convert
the loan and accrued interest to common stock. The conversion rate is
$5.05, which equals the ten-day average closing stock price prior to the
loan date. The interest rate is 9% per annum.
On October 28, 1999, the Company sold 677 shares of its common stock to an
institutional investor raising an aggregate of $3 million.
On November 3, 1999, Castle Creek Investments, LDC elected to convert one
thousand shares of their Series B Convertible Participating Preferred
Stock. These shares of Series B stock, including the accreted redemption
value through the date of conversion, converted to 226 shares of Valence
Technology, Inc. common stock.
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions and variations of
such words are intended to identify forward-looking statements. Such statements
appear in a number of places in this report and include statements regarding our
intent, belief or current expectations with respect to, among other things, the
progress of our research and development activities, trends affecting our
liquidity position, including, but not limited to, our access to additional
equity or debt financing and our rate of expenditures, our plans to address the
Year 2000 problem, our joint venture relationships, the status of the
development of our products and their anticipated performance and customer
acceptance and our business and liquidity strategies. We caution you not to put
undue reliance on such forward-looking statements. Such forward-looking
statements are not guarantees of our future performance and involve risks and
uncertainties. Our actual results may differ materially from those projected in
this report, for the reasons, among others, our limited available working
capital, uncertain market acceptance of our products, changing economic
conditions, risks in product and technology development, and the other risks
discussed herein and in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. In addition to the risks and uncertainties discussed
above, in this report, and in our Annual Report on Form 10-K, our other filings
with the Securities and Exchange Commission contain additional information
concerning risks and uncertainties that may cause actual results to differ
materially from those projected or suggested in our forward-looking statements.
You should carefully review the risk factors discussed herein, in our Annual
Report on Form 10-K and in the other documents we have filed with the Securities
and Exchange Commission.
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 28,
1999. The results for the three and six-month periods ended September 26, 1999
are not necessarily indicative of the results to be expected for the entire
fiscal year ending March 26, 2000.
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 immaterial revenues from limited sales of prototype
batteries and laminate, 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, which expired in May 1998. The Company has incurred
cumulative losses of $171,959,000 from its inception to September 26, 1999.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 26, 1999 (SECOND QUARTER AND FIRST
HALF OF FISCAL 2000) AND SEPTEMBER 27, 1998 (SECOND QUARTER AND FIRST HALF OF
FISCAL 1999).
As of September 26, 1999, from an accounting and reporting standpoint, the
Company is still classified as a "Development Stage" company. As a "Development
Stage" company, sales invoices principally related to joint venture partners
have not been recorded as revenue but have been recorded as reductions to
expense. Sales recorded as a reduction of expenses totaled $233,000 for
materials and batteries shipped through June 27, 1999. Sales of batteries and
laminate during the second quarter of fiscal 2000, which ended September 26,
1999, in the amount of $ 389,000, were recorded as sales.
Research and development expenses were $7,145,000 and $13,545,000 during the
three and six-month periods ended September 26, 1999 as compared to $4,708,000
and $8,738,000 during the same period of fiscal 1999. The increased expenditures
reflect the Company's efforts to commercialize a product, including increases in
purchasing, machine design engineering, testing, and production raw materials
for debugging equipment coupled with the loss of expense offsets previously
provided by Delphi.
Page 10
<PAGE>
Marketing expenses were $52,000 and $110,000 for the second quarter and first
half of fiscal year 2000, respectively, as compared to $18,000 and $47,000
during similar periods of fiscal year 1999. The increased expenditures are
primarily the result of an increase in marketing department staffing combined
with extensive travel meeting with potential customers for the purpose of
product presentation.
General and administrative expenses increased to $1,747,000 and $3,040,000
during the second quarter and first half of fiscal year 2000, respectively, from
$1,319,000 and $2,257,000 for comparable periods in fiscal 1999. The increase
between comparable periods is due primarily to higher expenditures for legal
services, completion of the senior management team, and increased international
travel to complete product commercialization.
Interest and other income decreased to $90,000 and $172,000 for the second
quarter and first half of fiscal 2000, respectively, as compared to $2,248,000
and $2,335,000 for the corresponding periods in fiscal 1999. The decrease is due
to the settlement payment of $2.2 million from Delphi received during the second
quarter of fiscal 1999.
Interest expense increased to $480,000 and $834,000 during the second quarter
and first half of fiscal year 2000, respectively, from $130,000 and $248,000 for
the comparable periods in fiscal 1999. This increase is a result of expenses
associated with the utilization of a line of credit from a principal
stockholder, which includes accrued interest and accretion of debt discount.
The Company recognized joint venture losses of $387,000 and $0 for the second
quarter for fiscal 2000 and fiscal 1999, respectively. As well as a loss of
$555,000 for the first half of fiscal 2000 as compared to a loss of $287,000
for the comparable period in fiscal 1999. These losses are due primarily to
start-up costs and foreign currency valuations. The Company's joint venture
income or loss is 50% of the net income or loss incurred by Hanil Valence Co.,
Ltd., with losses recorded up to the Company's investment in the joint venture.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $13,538,000 net cash for operating activities during the first
six months of fiscal year 2000 compared to using $8,991,000 during the first six
months of fiscal year 1999, an increase between comparable periods of
$4,547,000. This increase resulted primarily from the intensification of efforts
to complete product development, expand and train production staff, expand
marketing staff and efforts, and completing engineering efforts on production
facilities.
During the six months ended September 26, 1999, the Company used $1,827,000 net
cash from investing activities compared to $4,769,000 during the six months
ended September 27, 1998, a decreased usage of $2,942,000 between comparable
periods. The usage in both periods was comprised solely of capital expenditures.
The Company provided $16,169,000 net cash from financing activities during the
first half of fiscal year 2000 compared to $12,498,000 during the first half of
fiscal year 1999. This increase of $3,671,000 resulted from additional borrowing
on a line of credit from a principal stockholder and the sale of common stock to
institutional investors.
As a result of the above, the Company had a net increase in cash and cash
equivalents of $758,000 during the six months ended September 26, 1999, whereas
it had a net decrease in cash and cash equivalents of $1,676,000 during the six
months ended September 27, 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 (pound)27,555,000, generally become available
over a five-year period through October 31, 2001. As of September 26, 1999, the
Company had received grants aggregating (pound)4,080,000 reducing remaining
grants available to (pound)23,475,000 ($38,565,000 as of September 26, 1999).
As a condition to receiving funding from the IDB, the subsidiary must maintain a
minimum of (pound)12,000,000 in debt or equity financing from the Company.
Aggregate funding under the grants was limited to (pound)4,080,000 until the
Company had recognized $4,000,000 in aggregate revenue from the sale of its
batteries produced in Northern Ireland. An amendment to the agreement with the
IDB permits the Company to receive (pound)500,000 (approximately $821,000) after
achieving sales of batteries manufactured by the Northern Ireland operation of
at least $1,500,000. An additional (pound)500,000 is available when the total
related sales reach $2,500,000.
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The amount of the grants available under the agreement and offers is primarily
dependent on the level of capital expenditures made by the Company.
Substantially all of the funding received under the grants is repayable to the
IDB if the subsidiary is in default under the agreement and offers, which
includes the permanent cessation of business in Northern Ireland. Funding
received under the grants to offset capital expenditures is repayable if related
equipment is sold, transferred or otherwise disposed of during a four year
period after the date of grant. In addition, a portion of funding received under
the grants may also be repayable if the subsidiary fails to maintain specified
employment levels for the two year period immediately after the end of the five
year grant period. The Company has guaranteed the subsidiary's obligations to
the IDB under the agreement.
There can be no assurance that the Company will be able to meet the requirements
necessary for it to receive and retain grants under the IDB agreement and
offers.
The major components of construction in progress with their estimated costs and
start dates are as follows: mixing, coating, etching, laminating and slitting
equipment, $2,588,000, March 1997; assembly equipment, $10,377,000, March 1994;
extraction, packaging, and conditioning equipment, $891,000, August 1993; and
factory improvements and miscellaneous equipment, $736,000, June 1997. The
estimated completion date for these major categories of construction in progress
is the end of fiscal year 2000. These statements are forward-looking statements,
and actual costs and completion dates are subject to change due to a variety of
risks and uncertainties, including the availability of funds for completion, the
risk that actual costs will be materially greater due to unforeseen difficulties
in completion of the projects, reliance on manufacturers to deliver equipment in
a timely manner and that performs as intended, and other risks and
uncertainties.
The Company expects that its existing funds and financings listed in the
subsequent events section of this report (Note 8) will be sufficient to fund the
Company's operations through mid-December 1999. The Company needs to raise
additional debt or equity financing before the end of December in order to
continue operations at current levels and fund planned capital expenditures,
research and product development, and other endeavors. We anticipate that after
taking into account projected revenues and receipt of funds from other sources,
we will need to raise a minimum of $25 million in either a debt or equity
financing to fund capital expenditures, research and product development,
marketing and general and administrative expenses and to pursue joint venture
opportunities through the remainder of fiscal 2000 and through the first quarter
of fiscal 2001. The Company is currently in discussions with several potential
financing sources involving additional equity sufficient to fund its operations
for three to six months, after which it will require additional financing. 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.
Castle Creek Investments, LDC was the holder of 7,500 shares of Series A and
7,500 shares of Series B of the Company's Convertible Participating Preferred
Stock. During September 1999, they elected to convert approximately $3 million
of Series B, including accreted redemption value through the conversion date, to
the Company's common stock. The conversion amounted to 699,807 shares of Valence
Technology, Inc. common stock.
YEAR 2000 COMPLIANCE
Many existing software programs, computers and other types of equipment were not
designed to accommodate the Year 2000 and beyond. If not corrected, these
computer applications and equipment could fail or create erroneous results. For
Valence, this could disrupt purchasing, manufacturing, sales, finance and other
support, thereby causing potential lost sales and additional expenses.
OUR STATE OF READINESS
Our Year 2000 ("Y2K") project encompasses both information and non-information
systems within Valence as well as the investigation of the readiness of our
strategic suppliers/vendors. We have created a Year 2000 Project Team that is
responsible for planning and monitoring all Year 2000 activities and reporting
to our executive management. It has been reviewing Valence's Year 2000 status
for approximately nine months now, and has identified and evaluated crucial
areas of concern regarding Year 2000 compliance. We define Year 2000 compliance
to be, with respect to information technology, that the information technology
accurately processes date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000 and leap year calculations,
to the extent that other information technology, used in combination with the
information technology being acquired, properly exchanges date/time data with
it. Fixes have begun on a majority of these areas. Other areas are still being
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tested. Our goal is to have all Year 2000 issues resolved by December 31, 1999.
To that end, we have inventoried and assessed the Year 2000 readiness of the
following:
VENDORS/SERVICE PROVIDERS. We have distributed letters and questionnaires
to all vendors and service providers that are critical to the day-to-day
operations of Valence. Of these letters and questionnaires, 24% have responded
as being compliant. Letters have been distributed a second time to vendors and
service providers that either did not respond initially or responded as not to
be in compliant at that time. The second letter elicited information necessary
to change key vendors.
ENVIRONMENTAL, HEALTH, SAFETY AND SECURITY SYSTEMS. We have been advised
by Statewide Fire Electronics that the fire alarm systems within our plant are
Y2K compliant. These systems are dependent on our electric utility company,
Nevada Power, but are equipped with 24-hour back-up battery.
A Nevada Power representative informed the Company that when Y2K approaches, it
will be off the national grid and will be on its own power. Two generating
stations power Nevada Power, one is coal powered and the other is gas powered.
The Company believes that Nevada Power has a sufficient amount of coal for the
coal-powered station. The other station, which is gas powered, will be dependent
on Southwest Gas.
If there is a disruption in electrical service, our back-up generator will
provide light and ventilation to critical areas of our US facility as well as
providing power for our telephone system.
Our sprinklers, risers, and hydrant systems are not electrical and our fire
system is in compliance. Should it become necessary, our emergency lights are
powered by battery back-up for sufficient time to allow our employees to
evacuate the facility.
The Henderson Fire Department has advised the Company that it is Y2K compliant.
As part of its disruption preparations, it is planning to have additional
manpower working and a spare fuel truck on site. In the event of a power outage,
the Fire Department will staff local recreation centers with personnel equipped
with radios. In the event of an emergency, or if phone service is disrupted, we
will be able to go to the manned recreation center closest to Valence which is
the Black Mountain Recreation Center on Horizon.
We will be closed during Y2K but security guards, which are on duty when the
facility is closed, will continue to maintain the building. The security
computer that regulates badge entry into the building has been backdated to 1993
and has been operating adequately. We are furnishing the guards with extra
chains and padlocks in the event the doors need to be secured manually and are
providing bottled drinking water for their use. We anticipate no security
issues.
Conclusion: There are no known areas of concern as related to EHS functions.
OPERATIONS AND PROCESS EQUIPMENT. In reviewing the compliance of all
operations and process equipment in the Henderson facility, no compliance issues
where found. Statements from equipment vendors were obtained to verify this
conclusion.
PERSONAL COMPUTERS. All personal computer BIOSs' (basic input/output
systems) are being tested for Y2K compliance. Currently 100% of all Novell
network servers are Year 2000 compliant. Currently 100% of all user workstations
are known to have a Y2K BIOS. Currently 75% of the personal computers that
operate equipment have been tested. Only 2% of these have a Y2K compliant BIOS.
We have patched the computers that are not Year 2000 compliant with a TSR, a
software program that loads at computer startup, that will report the correct
date and time to the operating system. This method has been tested and provides
acceptable results.
All Northern Ireland primary engineering drawing software is fully compliant as
well as our general office software, which has been upgraded to Microsoft Office
97, which is compliant. Our Fourth Shift manufacturing system in its current
16-bit database form is not compliant. An upgrade to the 32-bit database is
planned for late November 1999 at a cost of (pound)10k (approximately $16,400).
LABORATORIES. The Maccor lab has been completely upgraded and patched for
Y2K compliance. The electrical chemistry lab has been completely upgraded and
patched for Y2K compliance with the exception of the data acquisition software.
The data acquisition software run by these machines has been tested and we have
concluded that there is a minor Y2K bug. Because data is not calculated by date,
this does not affect the ending results of the data. The US quality control
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lab is 100% compliant. The Northern Ireland lab is 100% complete for BIOS and
operating system testing and fixes. Lantastic Network Version 5, which networks
the Maccor cyclers, is not compliant. Lantastic Version 8 has been purchased and
is being installed (currently 75% complete).
The Northern Ireland dedicated PCs for QC lab equipment have also been
BIOS checked and are now all compliant. All software that interfaces with
instruments is being checked, with 80% so far responding as compliant. One
instrument was found not to be compliant and has been replaced.
AUTOMATED MACHINERY. The manufacturing machinery is controlled primarily
by PLCs (Programmable Logic Controllers) and in some cases an industrial PC is
added as the MMI (Man Machine Interface). Not all PLCs are date aware (their
function also does not require it) and therefore would not be affected. We are
currently tracking 40 systems which fall in this category, 35 of which have
already been fully certified and 5 with known issues. The five systems with
known issues require a software upgrade which will cost (pound)2,500 ($4,100)
each. Automated equipment has been tested for date rollover, and found to be
compliant, in the following sections: liquids, mixing, lamination, bi-cell
assembly, stack and connect, packaging, folding, and conditioning. The coating
and final test sections are being tested at this time.
IN-HOUSE SYSTEMS. One database has been tested and is known not to be
compliant. A programmer has been hired to rewrite the database in another
platform making it Y2K compliant with an estimated completion in November 1999.
All other databases at the US facility are Y2K compliant, and the Year 2000
Project Team is reviewing the databases at the Northern Ireland facility. The
accounting software has been upgraded to the compliant version of the software.
The badge security system is not compliant and will need to be replaced or
fixed. At present, the system has been backdated to 1993 and there are no
apparent problems with this fix. There is no critical data or integration that
will be affected by this change. A task force has been assembled and will look
into issues that may have been overlooked and to help continue the efforts to
make our facilities compliant. Valence's telephone system has been upgraded and
is now compliant. The e-mail system has been replaced with a compliant version.
The Voice Mail system is not Y2K compliant. A new voice mail system has been
purchased and will be installed prior to year-end. Microsoft Office 97 has been
implemented throughout the facility and is patched with Microsoft's latest
patches. A new backup system has been purchased and is being implemented to
replace a backup system that is Y2K compliant but will not be supported after
December 31, 1999.
COSTS TO ADDRESS THE YEAR 2000
Spending for modifications and updates is being expensed as incurred and is not
expected to have a material impact on our results of operations or cash flows.
The cost of our Year 2000 project is being funded through available funds. We
estimate that our total Year 2000 expenditures will not be material. Through the
end of fiscal 1999, Valence had incurred $40,000 in connection with its Year
2000 compliance program, and is expected to incur approximately $60,000
additional during fiscal 2000.
RISK ANALYSIS
Like most business enterprises, we are dependent upon our own internal computer
technology and rely upon the timely performance of our suppliers/vendors. A
large-scale Year 2000 failure could impair our ability to timely complete our
research and development, or deliver batteries with the exacting specifications
that will be required by our customers, thereby causing potential lost sales and
additional expenses, which would have a material adverse effect on Valence, its
financial condition and its results of operations. Our Year 2000 project seeks
to identify and minimize this risk and includes testing of our in-house
applications, purchased software and embedded systems to ensure that all such
systems will function before and after the Year 2000. We are continually
refining our understanding of the risk the Year 2000 poses to our
suppliers/vendors based upon information obtained through our surveys. This
refinement will continue through the rest of 1999.
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CONTINGENCY PLANS
Our Year 2000 project anticipates the development of contingency plans for
business critical systems and manufacturing equipment as well as for
suppliers/vendors to attempt to minimize disruption to our operations in the
event of a Year 2000 failure. We have not yet developed these plans, but will be
formulating plans to address a variety of failure scenarios, including failures
of our in-house applications, as well as failures of suppliers/vendors. Valence
does not have an estimated completion date for its contingency plans.
CAUTIONARY STATEMENT
Year 2000 issues are widespread and complex. While we believe we will address
them on a timely basis, we cannot assure that we will be successful or that
these problems will not materially adversely affect our business or results of
operations. To a large extent, we depend on the efforts of our suppliers and
other organizations with which we conduct transactions to address their Year
2000 issues, over which we have no control. The statements regarding the
expected outcome and timing of Year 2000 efforts are forward-looking statements.
Actual results could differ materially from our expectations due to unforeseen
problems arising in connection with completion of our Year 2000 program, the
risk that we will fail to identify a Year 2000 problem critical to the
operations of Valence, or that our vendors/suppliers will suffer problems that
will inhibit them from delivering their products to us on a timely basis.
RISK FACTORS AND FORWARD LOOKING INFORMATION
WE HAVE AN IMMEDIATE NEED FOR ADDITIONAL CAPITAL. We have an immediate need for
additional capital, which if we don't obtain, would cause us to reduce our
developmental efforts and impair our ability to commercialize our products. At
September 26, 1999, we had cash and cash equivalents of $3,212,000. Subsequent
to September 26, 1999 and as of November 10, 1999, we obtained an additional $3
million of equity financing and $1.5 million of debt financing from a
stockholder. We anticipate that, after taking into account projected revenues
and receipt of funds from other sources, we will need to raise a minimum of $25
million in either a debt or equity financing to fund planned capital
expenditures, research and product development, marketing and general and
administrative expenses and to pursue joint venture opportunities through the
remainder of fiscal 2000 and through the first quarter of fiscal 2001. Our cash
requirements, however, may vary materially from those now planned because of
changes in our operations, including changes in OEM relationships or market
conditions. There can be no assurance that funds for these purposes, whether
from equity or debt financing agreements with strategic partners or other
sources, will be available on favorable terms, if at all. These factors raise
substantial doubts about our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The effects of such adjustments, if
necessary, could be material.
WE ARE A DEVELOPMENT STAGE COMPANY WITH A LIMITED QUANTITY OF PRODUCTS CURRENTLY
AVAILABLE FOR SALE. We are a development stage company and cannot anticipate
when, or if, we will ever have significant revenues from a product. We have
derived our revenues primarily from a research and development contract with
Delphi Automotive Systems Group, which we completed in May 1998. We presently
have limited quantities of commercially developed and manufactured products
available for sale. These factors raise substantial doubt about our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty, and such
adjustments, if necessary, could be substantial.
OUR CURRENT AVAILABLE CAPITAL AND FUTURE REVENUES, IF ANY, WILL NOT BE
SUFFICIENT TO MEET OUR FUTURE OPERATING NEEDS. We have generally incurred
operating losses since inception in 1989 and had an accumulated deficit of
$171,959,000 as of September 26, 1999. We cannot assure you that we will ever
achieve or sustain significant revenues or profitability in the future. We have
negative working capital and have sustained recurring losses related primarily
to the research and development and marketing of our products. We expect to
incur significant losses in the future, as we continue our product development,
begin to build inventory and continue our marketing efforts. We will need to
secure additional financing in order to continue operations past 1999 unless we
begin to generate significant operating revenue. We will have to continue to
devote a significant amount of management time to obtaining financing.
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WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING, IN WHICH CASE WE WOULD NEED
TO REDUCE DEVELOPMENTAL EFFORTS AND MAY NOT BE ABLE TO COMMERCIALIZE OUR
PRODUCTS. If we are unable to achieve profitability or we are unable to secure
additional financing on acceptable terms, we will be unable to continue to fund
our operations. We are actively pursuing capital grant advances from the
Northern Ireland Industrial Development Board, and our success in these efforts
depends on our achieving cumulative revenues from the sale of batteries of $4
million. We may not achieve such cumulative revenue over the short-term, if at
all. Additionally, a lack of capital may require us to license to third parties
rights to commercialize products or technologies that we might otherwise seek to
develop ourselves, and to scale back or eliminate our research and product
development programs. The unavailability of adequate funds would have a material
adverse effect on our business, financial condition, and results of operations.
WE NO LONGER HAVE A COLLABORATIVE PARTNER TO ASSIST US IN DEVELOPMENT OF OUR
BATTERIES, WHICH MAY LIMIT OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR
PRODUCTS. We have received substantially all our revenues to date from a
research and development agreement with Delphi Automotive Systems Group, which
we completed in May 1998. The Delphi agreement was for joint development in the
automotive market. Although we have held discussions with original equipment
manufacturers (OEMs) in the portable consumer electronics and telecommunications
markets about possible strategic relationships as a means to accelerate
introduction of our batteries into these markets, we cannot assure you that we
will be able to enter into any such alliances. The use of alliances for our
development, product design, volume purchase and manufacturing and marketing
expertise can reduce the need for development and use of internal resources.
Further, even if we could collaborate with a desirable partner, there is a
chance that the partnership may not be successful. The success of any strategic
alliance that we enter into depends on, among other things, the general business
condition of the partner, its commitment to the strategic alliance and the
skills and experience of its employees.
BECAUSE OUR BATTERIES ARE ONLY SOLD WHEN INCORPORATED INTO OTHER PRODUCTS, WE
WILL NEED TO RELY ON ORIGINAL EQUIPMENT MANUFACTURERS TO COMMERCIALIZE OUR
PRODUCTS. To be successful, our batteries must gain broad market acceptance. In
addition, our success will depend significantly on our ability to meet OEM
customer requirements by developing and introducing on a timely basis new
products and enhanced or modified versions of its existing products. OEMs often
require unique configurations or custom designs for battery systems which must
be developed and integrated in the OEM's product well before the product is
launched by the OEM. Thus, there is often substantial lead-time between the
commencement of design efforts for a customized battery system and the
commencement of volume shipments of the battery system to the OEM (referred to
as the "design in time"). If we are unable to design, develop and introduce
products that meet OEMs' and other customers' exacting requirements on a timely
basis, our business, results of operations and financial condition could be
materially adversely affected. To determine the requirements of each specific
application, we will be dependent upon OEMs and other intermediaries such as
battery pack designers into whose products our batteries will be incorporated.
There is a possibility that we will not receive adequate assistance from OEMs to
successfully commercialize our products. Furthermore, the perceived safety risks
associated with lithium, an element used in our batteries, may impede acceptance
of our batteries by OEMs or end users.
WE DO NOT YET HAVE THE SALES STAFF, SUPPORT CAPABILITIES AND DISTRIBUTION
CHANNELS TO DISTRIBUTE OUR PRODUCTS ON A COMMERCIAL SCALE. To implement our
strategy successfully, we may have to develop a sizeable sales staff and product
support capabilities, as well as third party and direct distribution channels.
We cannot assure you that we will be able to establish sales and product support
capabilities, or be successful in our sales and marketing efforts.
WE MAY NOT BE ABLE TO COST-EFFECTIVELY MANUFACTURE OUR BATTERIES. To be
successful, we must manufacture commercial, high-quality quantities of our
products at competitive costs. We have produced prototype and production quality
products that we believe have performance characteristics that are suitable for
a broad market. However, additional development will be required to enable us to
consistently produce battery systems with these characteristics. In addition, to
achieve broad commercialization of our products, we will need to reduce
manufacturing costs of our battery systems. Our batteries may not be
manufacturable in long-run commercial quantities to the performance
specifications demanded by customers. We must still be able to competitively
manufacture these batteries. Our current manufacturing technology might need to
be more fully developed before we will be able to manufacture our batteries in
commercial quantities. Any failure to achieve acceptable yields of commercial
quality batteries in commercial quantities, and thereby reduce
unit-manufacturing costs, could have a material adverse effect on our business,
results of operations and financial condition.
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WE ARE IN THE EARLY STAGE OF MANUFACTURING, AND IF WE ARE UNABLE TO DEVELOP
MANUFACTURING CAPABILITIES IN A COST EFFECTIVE MANNER, WE WILL NOT BE ABLE TO
GENERATE PROFITS; OUR BUSINESS ALSO FACES CERTAIN MANUFACTURING RISKS, POTENTIAL
CAPACITY CONSTRAINTS AND RISKS RELATING TO PROPOSED EXPANSION. To date, we have
not manufactured batteries on a commercial scale. Any failure to achieve
acceptable yields of commercial quality batteries in commercial quantities, and
thereby to reduce our unit manufacturing costs, could have a material adverse
effect on our business, results of operations and financial condition. Until
recently, our batteries only have been manufactured on our pilot manufacturing
line, which is able to produce prototype cells in quantities sufficient to
enable customer sampling and testing and product development. We are currently
in the early stages of transitioning production to an automated high volume
production line that will work with our newest battery technology in our
manufacturing facility in Mallusk, Northern Ireland. The redesign and
modification of the manufacturing facility, including its customized
manufacturing equipment, will continue to require substantial engineering work
and expenses and is subject to significant risks, including risks of cost
overruns and significant delays. In addition, in order to rapidly scale up the
manufacturing capacity, we will need to begin fabrication of a second automated
production line before completing full qualification of the first line. In
automating, redesigning and modifying the manufacturing processes, we have been,
and will continue to depend on, several developers of automated production
lines, which have limited experience in producing equipment for the manufacture
of batteries. A key determinant of our current and future production capacity
and profitability is the production yield of our manufacturing process. The
redesign and modification of our manufacturing facility and the development and
implementation of automated production lines will entail significant risks and
will require a substantial investment of our capital. As part of our
manufacturing ramp-up, we will need to hire and train a substantial number of
new manufacturing workers. The availability of skilled and unskilled workers in
Northern Ireland, the site of our manufacturing facility, is limited due to a
relatively low unemployment rate. We may not successfully develop improved
processes, design required production equipment, enter into acceptable contracts
for the fabrication of such equipment, obtain timely delivery of such equipment,
implement multiple production lines or successfully operate the Mallusk
facility. We may not be able to successfully automate our production on a timely
basis, if at all, and such automation may not result in greater manufacturing
capacity or lower manufacturing costs than our pilot production line. Customer
relationships could be damaged if we fail to begin volume manufacturing on a
timely basis. Such failure could cause lost opportunities and have a material
adverse effect on our business, results of operations and financial condition.
WE ARE EXPERIENCING DELAYS IN QUALIFYING OUR MANUFACTURING FACILITIES. We have
been unable to meet our prior schedules regarding delivery, installation,
de-bugging and qualification of the Northern Ireland facility production
equipment. As most of the production equipment is being specially manufactured
for us, further problems may develop and cause further delay in our current
schedules. We are improving and bringing many of the manufacturing processes
that we are implementing in this production equipment up to date for the first
time from our laboratory scale prototype work. We may need to further refine the
improved processes, which could cause substantial delays in the qualification
and use of this equipment. Furthermore, if we are able to refine our process, we
may not be able to produce the required amount of qualification samples to
potential customers. From our discussions with potential customers, we expect
that customers will require an extensive qualification period once the customer
receives its first commercial product off a production line.
WE DEPEND ON OUR SUPPLIERS FOR CERTAIN KEY RAW MATERIALS TO DEVELOP AND
MANUFACTURE OUR BATTERIES. We depend on sole or limited source suppliers for
certain key raw materials used in our products. We generally purchase sole or
limited source raw materials pursuant to purchase orders placed from time to
time and have no long-term contracts or other guaranteed supply arrangements
with our sole or limited source suppliers. Our suppliers may not be able to meet
our requirements relative to specifications and volumes for key raw materials,
and we may not be able to locate alternative sources of supply. We may not be
able to purchase raw materials at an acceptable cost. In addition, the raw
materials which we utilize must be of a very high quality, and we have at times
in the past experienced delays in product development due to the delivery of
nonconforming raw materials from our suppliers.
OUR RECHARGEABLE BATTERIES MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN MARKET
ACCEPTANCE. To achieve market acceptance, our batteries must offer significant
price and/or performance advantages over other current and potential alternative
battery technologies in a broad range of applications. Our rechargeable
batteries may not be able to achieve or sustain any such advantages. Even if our
rechargeable batteries provide meaningful price or performance advantages, there
is a risk our batteries may not be able to achieve or maintain market acceptance
in any potential market application. The success of our products also will
depend upon the level of market acceptance of OEMs' and other customers' end
products that incorporate our batteries, a circumstance over which we have
little or no control. If our rechargeable batteries do not achieve and maintain
significant price and/or performance advantages over other technologies and
achieve significant and sustained market acceptance, or if customers'
applications which incorporate our products do not achieve lasting market
acceptance, our business, results of operations and financial condition could be
materially adversely affected. If we do manufacture our batteries in commercial
quantities and they fail to perform as expected, our reputation could be
severely damaged, which
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would have a material adverse effect on our ability to market our batteries even
if the defect were corrected.
THERE HAS BEEN, AND CONTINUES TO BE, A RAPID EVOLUTION OF BATTERY TECHNOLOGIES.
The battery industry has experienced, and is expected to continue to experience,
rapid technological change. Various companies are seeking to enhance traditional
battery technologies, such as lead acid and NiCad, and other companies have
recently introduced or are developing rechargeable batteries based on nickel
metal hydride ("NiMH"), lithium and other emerging and potential technologies.
Competing technologies that outperform our batteries could be developed and
successfully introduced and, as a result, there is a risk that our products may
not be able to compete effectively in our targeted market segments.
OUR SUCCESS DEPENDS HEAVILY ON OUR SENIOR MANAGEMENT PERSONNEL AND ON OUR
ABILITY TO ATTRACT AND RETAIN KEY EMPLOYEES. Our business success is highly
dependent upon the active participation of our senior management personnel. We
do not have written employment contracts with any key employees and do not
maintain key man life insurance policies for any of our employees. We believe
that our future prosperity will depend in large part on our ability to attract
and retain highly skilled technical, managerial, and marketing personnel who are
familiar with and experienced in the battery industry. Competition for such
personnel, in particular for product development and product implementation
personnel, is intense, and we compete in the market for such personnel against
numerous companies, including larger, more established competitors with
significantly greater financial resources than us. We have at times experienced
difficulty in recruiting qualified personnel, and we cannot be certain that we
will be successful in attracting and retaining skilled personnel. Our inability
to attract and retain other qualified employees could have a material adverse
effect on our business.
OUR COMPETITORS MAY DEVELOP BATTERIES SIMILAR OR SUPERIOR TO OURS OR OTHERWISE
COMPETE MORE SUCCESSFULLY THAN WE DO. Competition in the battery industry is
intense. The industry consists of major domestic and international companies,
most of which have financial, technical, marketing, sales, manufacturing,
distribution and other resources substantially greater than ours. Although we
believe that our batteries will compete in most segments of the rechargeable
battery market, there is a risk that other companies may develop batteries
similar or superior to ours. In addition, many of these companies have name
recognition, established positions in the market, and long standing
relationships with OEMs and other customers. While these competitors are engaged
in significant development work on various battery systems (including
electrochemistries such as NiCad, NiMH and lithium), we believe that much of
this effort is focused on achieving higher energy densities for low power
applications such as portable electronics. One or more new, higher energy
rechargeable battery technologies could be introduced which could be directly
competitive with, or be superior to, our technology. We believe that our primary
competitors are existing suppliers of Lithium Ion, competing polymer and, in
some cases, NiMH batteries. These include Matsushita Industrial Co., Ltd., Sony,
Toshiba, SAFT America, Inc. ("SAFT") and PolyStor Corp. All of these companies
are very large and have substantial resources and market presence. We expect
that we will compete against manufacturers of other types of batteries in the
targeted application segments on the basis of performance, cost and ease of
recycling, and there is a risk that we may not be able to compete successfully
against manufacturers of other types of batteries in any of the targeted
applications. In addition, in the rechargeable battery market there are a
variety of competing technologies. The capabilities of many of these competing
technologies have improved over the past year, which has resulted in a customer
perception that our technology may not offer as many advantages as previously
anticipated.
WE FACE A RISK THAT OUR PENDING PATENT APPLICATIONS WILL NOT RESULT IN ISSUED
PATENTS AND THAT OUR ISSUED PATENTS WILL NOT PROVIDE PROTECTION AGAINST
COMPETITORS. Our ability to compete successfully will depend on whether we can
protect our proprietary technology and manufacturing processes. We rely on a
combination of patent and trade secret protection, non-disclosure agreements,
and cross-licensing agreements. Nevertheless, such measures may not be adequate
or safeguard the proprietary technology underlying our batteries. In addition,
employees, consultants, and others who participate in the development of our
products may breach their non-disclosure agreements with us, and we may not have
adequate remedies for any such breach. Moreover, notwithstanding our efforts to
protect our intellectual property, our competitors may be able to develop
products that are equal or superior to our products without infringing on any of
our intellectual property rights. In addition, we may not be able to effectively
protect our intellectual property rights in certain countries. If existing or
future patents containing broad claims are upheld by the courts, the holders of
such patents could require companies to obtain licenses. If we are found to be
infringing third party patents, there is a risk that we may not be able to
obtain licenses to such products on reasonable terms, if at all. Our failure to
protect our proprietary technology may materially adversely affect our financial
condition and results of operations. Patent applications in the United States
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries by several months, we cannot be certain that we were the first
creator of inventions covered by pending patent applications or the first to
file patent applications on such inventions. Therefore, our pending patent
applications may not result in issued patents and any of our issued patents may
not afford protection against a competitor.
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<PAGE>
OUR BATTERIES CONTAIN POTENTIALLY DANGEROUS MATERIAL, WHICH COULD EXPOSE US TO
LIABILITY. Battery technologies vary in relative safety as a result of their
differing chemical compositions. In the event of a short circuit or other
physical damage to the battery, a reaction may result with excess heat or a gas
being released and, if not properly released, may be explosive. We have designed
our batteries to avoid this risk, but if we are unsuccessful, we could be
exposed to product liability litigation. In addition, our products will
incorporate potentially dangerous materials, including lithium ions. While these
materials are less reactive than other potentially dangerous materials found in
other types of batteries such as metallic lithium, which is known in its
metallic form to cause explosions and fires if not properly handled, it is
possible that these materials will require special handling. It is possible that
safety problems may develop in the future. We are aware that if the amounts of
active materials in our batteries are not properly balanced and if the
charge/discharge system is not properly managed, a dangerous situation may
result. Other battery manufacturers using technology similar to ours include
special safety circuitry within the battery to prevent such a condition. We
expect that our customers will have to use such circuitry.
WE HAVE NOT COMPLETED SAFETY TESTING OUR BATTERIES AND WILL NOT BE ABLE TO MAKE
COMMERCIAL SALES OF OUR BATTERIES UNTIL WE SUCCESSFULLY COMPLETE SUCH TESTS. We
have conducted extensive safety testing of our batteries and are in the process
of submitting batteries to Underwriters Laboratories for certification. As part
of our safety testing program, prototype batteries of various sizes, designs and
chemical formulations are subject to abuse testing, where the battery is
subjected to conditions outside the expected normal operating conditions of the
battery. While some prototype batteries have survived these tests, others have
vented gases containing vaporized solvents and have caught fire. Such results
were generally expected, and until we have completed testing we cannot make a
valid determination as to the conditions in which the battery must be operated.
Additionally, each new battery design requires new safety testing. Therefore,
safety problems may develop with respect to our battery technology that could
prevent or delay commercial introduction.
SAFETY RISKS IN OUR FACILITIES COULD CREATE PRODUCTION DELAYS. We incorporate
safety policies designed to minimize safety risks in our research and
development activities and will also do so in our manufacturing processes. There
is a risk, however, that an accident in our facilities will occur. Any accident,
whether with the use of a battery or in our operations, could result in
significant delays or claims for damages resulting from injuries, which would
adversely affect our operations and financial condition.
THE STRICT REGULATORY ENVIRONMENT IN WHICH WE OPERATE MAY DELAY SHIPMENTS AND
IMPOSE ADDITIONAL COSTS ON US. Prior to the commercial introduction of our
batteries into a number of markets, we may need to seek approval of our products
by one or more of the organizations engaged in testing product safety and/or
agencies regulating transportation. There is a risk that such agencies would not
permit our batteries to be shipped or used by the general public, and that
changes in regulations, or in their enforcement, will impose costly requirements
or otherwise impede the transport of lithium. If we are able to obtain such
approvals, they could require significant time and resources from our technical
staff, cause delays in shipments and, if redesign were necessary, result in
further delays in the introduction of our products. Because of the risks
generally associated with the use of lithium, we expect rigorous agency
enforcement. Federal, state and local regulations impose various environmental
and health and safety controls on the storage, use, and disposal of certain
chemicals and metals used in the manufacture of lithium polymer batteries.
Although we believe our activities conform to current environmental regulations,
there is a risk that changes in such environmental regulations will impose
costly equipment or other requirements. Any failure by us to adequately control
the discharge of hazardous wastes could also subject us to future liabilities.
WE ARE INVOLVED IN LAWSUITS THAT COULD NEGATIVELY IMPACT OUR BUSINESS. We are
subject to litigation arising from time to time in the course of our business.
We currently have three substantial lawsuits in which we are involved. The first
is a class action lawsuit by a class of persons who purchased our Common Stock
between May 7, 1992 and August 10, 1994, alleging that we violated federal
securities laws and seeking unspecified damages. The second involves a claim by
a manufacturer of one of our pieces of manufacturing equipment that we owe it
approximately $2,500,000; in this action, we have filed a counterclaim against
the manufacturer seeking damages to be determined at trial. The third is a
contract claim that we instituted against several parties; one party has filed a
counterclaim against us and third parties claiming damages of approximately
$900,000 based on breach of a contract, and this matter is presently stayed
pending settlement discussions. Although we believe that we have meritorious
defenses to these suits, if any of them is resolved unfavorably to us it could
have a material adverse effect on our financial condition.
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<PAGE>
THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS. We use a number of computer software programs
and operating systems in our internal operations, including applications used in
financial business systems and various administration functions. To the extent
that these software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000," some level of
modification or even possible replacement of such source code or applications
will be necessary. Given our current information, we currently do not anticipate
that such "Year 2000" costs will have a material impact upon us. We have
requested information regarding "Year 2000" compliance from suppliers and
providers of all of our mission critical software systems and have obtained some
responses. Based on the information we currently have, all mission critical
systems appear to be "Year 2000" compliant. We are currently contacting major
vendors and customers to obtain "Year 2000" compliance certificates. The failure
of any of our key suppliers or customers to be "Year 2000" compliant could have
a material adverse effect on our business, financial condition and results of
operations.
POLITICAL INSTABILITY IN NORTHERN IRELAND MAY DELAY PROGRESS IN OUR NORTHERN
IRELAND FACILITY. The current political instability in Northern Ireland, which
to date has had no negative impact on our manufacturing plant, could delay our
manufacturing of batteries. Such delays could also cause us to lose significant
sales and marketing opportunities, as they would force our potential customers
to find other vendors to meet their needs.
CORPORATE INSIDERS OR AFFILIATES WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL
OVER MATTERS REQUIRING STOCKHOLDER APPROVAL. As of September 26, 1999, our
officers, directors, and their affiliates as a group beneficially owned
approximately 22.99% of the outstanding Common Stock. As a result, these
stockholders will be able to exercise significant control over all matters
requiring stockholder approval, including the election of directors and the
approval of significant corporate transactions.
ANTI-TAKEOVER PROVISIONS IN OUR CORPORATE CHARTER OR THOSE WHICH APPLY TO US BY
VIRTUE OF THE APPLICATION OF DELAWARE GENERAL CORPORATION LAW WILL MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE A MAJORITY INTEREST OF OUR OUTSTANDING
VOTING STOCK. Our Board of Directors has the authority to issue up to 50,000,000
shares of undesignated preferred stock and to determine the price, rights,
preferences, and privileges of those shares without any further vote or action
by the stockholders. As of October 31, 1999, holders of the Series A Preferred
Stock had converted all outstanding shares of the Series A Preferred Stock. The
rights of the holders of our capital stock are subject to the rights of the
holders of the Series B Preferred Stock and will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. While we have no present intention to issue any
additional shares of preferred stock, such issuance, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock. In addition, we are subject
to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits us from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change of
control of Valence. Furthermore, our classified Board of Directors and certain
other provisions of our Certificate of Incorporation may have the effect of
delaying or preventing changes in control or management, which could adversely
affect the market prices of our Common Stock and Series A and Series B Preferred
Stock.
IF THE ISSUANCE OF OUR PREFERRED STOCK VIOLATED NASDAQ'S LISTING MAINTENANCE
REQUIREMENTS, OR IF WE OTHERWISE FAIL TO CONTINUE TO MEET NASDAQ'S LISTING
MAINTENANCE REQUIREMENTS, NASDAQ MAY DELIST OUR COMMON STOCK. In late January
1999, NASDAQ released its guidance on "future priced securities" and the
necessity of the issuer to comply with NASDAQ's listing maintenance requirements
in issuing these securities. We believe that the issuances of our Series A
Preferred Stock and Series B Preferred Stock do not violate these criteria, and
that we are in compliance with NASDAQ's listing maintenance criteria. However,
in the event that NASDAQ were to determine that the issuance of our Series A
Preferred Stock and/or Series B Preferred Stock was in violation of the NASDAQ
listing maintenance requirements, or if we are otherwise unable to continue to
meet NASDAQ's listing maintenance requirements, NASDAQ may delist us. Such
delisting could have a material adverse effect on the price of our Common Stock
and on the levels of liquidity currently available to our stockholders. We may
not be able to satisfy these requirements on an ongoing basis.
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<PAGE>
CONVERSION OF PREFERRED STOCK AND SALES OF COMMON STOCK BY CC INVESTMENTS MAY
DEPRESS THE PRICE OF OUR COMMON STOCK AND SUBSTANTIALLY DILUTE YOUR STOCK. If CC
Investments were to exercise all of the warrants it holds and convert all of the
shares of preferred stock it owns, as of October 31, 1999 it would have acquired
approximately 1,925,000 shares of our Common Stock. The number of shares into
which the preferred stock converts increases at 6% per year. If CC Investments
exercises the warrants or converts our preferred stock into shares of Common
Stock and sells the shares into the market, such sales could have a negative
effect on the market price of our Common Stock and would dilute your holdings in
our Common Stock. Additionally, dilution or the potential for dilution could
materially impair our ability to raise capital through the future sale of equity
securities.
OUR STOCK PRICE IS VOLATILE, AND WE DO NOT PAY, OR EXPECT TO PAY, DIVIDENDS TO
THE HOLDERS OF OUR COMMON STOCK. The market price of the shares of our Common
Stock has been and is likely to continue to be highly volatile. Factors such as
the fluctuation in our operating results, announcements of technological
innovations or new commercial products by us or our competitors, governmental
regulation, developments, our patent or other proprietary rights or our
competitors' developments, our relationships with current or future
collaborative partners, and general market conditions may have a significant
effect on the market price of the Common Stock. We have never paid any cash
dividends and do not anticipate paying cash dividends on the Common Stock in the
foreseeable future.
POSSIBLE VARIABLE CONVERSION OF SERIES B PREFERRED STOCK. After July 27, 1999,
the Series B Preferred Stock is convertible into a larger amount of shares if
our Common Stock trades at a price below $6.03 in six out of ten consecutive
trading days. For example, if on October 31, 1999 our Common Stock in the
previous ten trading days had been trading at or above $6.03, the 4,500
remaining shares of Series B Preferred Stock would be convertible into
approximately 785,157 shares of our Common Stock. If, however, on that date the
average of the lowest six closing bid prices of our Common Stock over the
previous ten trading days (referred in the table below as the "average price")
had been a lower price, then the Series B Preferred Stock would have converted
into a greater number of shares. As of October 31, 1999, CC Investments had
converted all of the Series A and $3 million of the Series B Preferred Stock.
The following table illustrates the effect noted above:
AVERAGE PRICE NUMBER OF SHARES INTO WHICH THE 4,500 SHARES OF
SERIES B PREFERRED WOULD CONVERT
$6.03 785,157
$5.00 946,899
$4.00 1,183,624
$3.00 1,578,165
The effect of this variable conversion rate, if it becomes applicable, will be
to depress further the market price of our Common Stock and to dilute further
stockholder holdings in our Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's exposure to market risk since
March 28, 1999.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
27 Financial Data Schedule
b. REPORTS ON FORM 8-K
1. Form 8-K filed June 29, 1999 announcing sale of common stock to
institutional investor.
2. Form 8-K filed July 30, 1999 announcing sale of common stock to
institutional investor.
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<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, 1999 By: /s/ Lev M. Dawson
-----------------------------------
Lev M. Dawson
Chairman of the Board,
Chief Executive Officer, and President
Date: November 10, 1999 By: /s/ Jay L. King
-----------------------------------
Jay L. King
Vice President and
Chief Financial Officer
Page 23
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-26-2000
<PERIOD-START> JUN-28-1999
<PERIOD-END> SEP-26-1999
<CASH> 3,212
<SECURITIES> 0
<RECEIVABLES> 1,336
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,582
<PP&E> 55,057
<DEPRECIATION> (22,947)
<TOTAL-ASSETS> 36,692
<CURRENT-LIABILITIES> 10,479
<BONDS> 12,334
7,079
0
<COMMON> 175,080
<OTHER-SE> (171,959)
<TOTAL-LIABILITY-AND-EQUITY> 36,692
<SALES> 389
<TOTAL-REVENUES> 389
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (8,944)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (480)
<INCOME-PRETAX> (9,544)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,544)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,544)
<EPS-BASIC> (.34)
<EPS-DILUTED> (.34)
</TABLE>
