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 June 27, 1999.
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20028
VALENCE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0214673
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
301 Conestoga Way, Henderson, Nevada 89015
------------------------------------------------
(Address of principal executive offices
including zip code)
(702) 558-1000
------------------------------------------------
(Registrant's telephone number, including area
code)
------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. 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 27,728,742 shares
- ------------------------------------ ------------------------------------
(Class) (Outstanding at August 2, 1999)
Page 1
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
FORM 10-Q
FOR THE QUARTER ENDED JUNE 27, 1999
INDEX
PAGES
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
June 27, 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 June 27, 1999
and for each of the three
month periods ended June 27, 1999 and June 28, 1998.....................4
Condensed Consolidated Statements of Cash Flows for the period from
March 3, 1989 (date of inception) to June 27, 1999 and for each of the
three month periods
ended June 27, 1999 and June 28, 1998...................................5
Notes to Condensed Consolidated Financial Statements....................6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 9
Item 3.Quantitative and Qualitative Disclosures About Market Risk.........14
PART II. OTHER INFORMATION
Item 1.Legal Proceedings..................................................15
Item 6.Exhibits and Reports on Form 8-K...................................16
SIGNATURE
Page 2
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
-----------
<TABLE>
<CAPTION>
June 27, 1999 March 28, 1999
------------------ ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,224 $ 2,454
Receivables 1,014 1,168
Prepaid and other current assets 62 153
------------------ ---------------
Total current assets 2,300 3,775
Property, plant and equipment, net 31,698 34,071
Investment in joint venture 869 555
------------------ ---------------
Total assets $ 34,867 $ 38,401
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 401 $ 423
Accounts payable 1,258 1,648
Accrued expenses 2,854 4,207
Accrued royalties and license fees 1,250 1,000
Advances and deposits 2,741 1,881
Grant payable 1,920 1,958
Accrued compensation 443 442
------------------ ---------------
Total current liabilities 10,867 11,559
Deferred revenue 2,500 2,500
Long-term debt, less current portion 4,232 4,402
Long-term debt to stockholder 7,944 3,769
------------------ ---------------
Total liabilities 25,543 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 June 27, 1999 and March 28, 1999,
respectively 4,621 4,514
(Liquidation value: $7,800)
Series B, $0.001 par value, Issued and outstanding: 7,500
shares at June 27, 1999 and March 28, 1999,
respectively 3,815 3,702
(Liquidation value: $7,613)
Stockholders' Equity
Common stock, $0.001 par value, authorized: 50,000,000 shares,
Issued and outstanding: 26,744,417 and 26,722,341 shares
at June 27, 1999 and March 28, 1999, respectively 27 27
Additional paid-in capital 167,713 166,457
Notes receivable from stockholder (4,862) (4,862)
Deficit accumulated during the development stage (162,145) (154,436)
Accumulated other comprehensive income 155 769
------------------ ---------------
Total stockholders' equity 888 7,955
------------------ ---------------
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' equity $ 34,867 $ 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)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
-----
Period from
March 3, 1989
(date of Three Months Ended
inception)
Through
June 27, 1999 June 27, 1999 June 28,1998
----------------- --------------- ---------------
<S> <C> <C> <C>
Revenue:
Research and development
contracts $ 21,605 $ - $ -
Costs and expenses:
Research and product
development 113,052 6,400 4,030
Marketing 3,695 58 29
General and administrative 47,475 1,293 938
Write-off of in-process
technology 8,212 - -
Investment in Danish subsidiary 3,489 - -
Special charges 18,872 - -
------------ ----------- ----------
Total costs and expenses 194,795 7,751 4,997
Operating loss (173,190) (7,751) (4,997)
Interest and other income 17,963 82 87
Interest expense (5,287) (354) (118)
Equity in earnings (loss) of
joint venture (1,631) 314 (287)
------------ ----------- ----------
Net loss $(162,145) (7,709) (5,315)
============
Beneficial conversion feature
on preferred stock (219) -
----------- ----------
Net loss available to
common stockholders $ (7,928) $(5,315)
============ ==========
Other comprehensive loss:
Net loss $ (7,709) $(5,315)
Change in foreign
currency translation
adjustments 614 (788)
------------ ----------
Comprehensive loss $ (7,095) $(6,103)
============ ==========
Net loss per share
available to common
stockholders, basic and
diluted $ (0.30) $ (0.21)
============ ==========
Shares used in computing
net loss per share
available to common
stockholders, basic and
diluted 26,736 25,348
============ ==========
</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)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
-----
<TABLE>
<CAPTION>
Period from
March 3, 1989
(date of Three Months Three Months
inception) Ended Ended
through June 27, June 28,
June 27, 1999 1999 1998
----------------- --------------- -----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (162,145) $ (7,709) $ (5,315)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 27,189 2,182 437
Write-off of equipment 14,792 - -
Write-off of in-process technology 6,211 - -
Compensation related to stock options 3,560 - -
Non-cash charge related to acquisition of
Danish subsidiary 2,245 - -
Equity in (earnings) losses of joint
venture 1,631 (314) 287
Amortization of debt discount 153 98 -
Changes in assets and liabilities:
Receivables 93 142 352
Prepaid expenses and other current assets (941) 90 925
Accounts payable 1,224 (372) 209
Accrued liabilities 1,292 (155) (223)
Deferred revenue 2,500 - -
------------- ------------- -------------
Net cash used in operating activities (102,196) (6,038) (3,328)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of long-term investments (665,789) - -
Maturities of long-term investments 661,545 - -
Capital expenditures (65,702) (601) (3,100)
Other (222) - -
------------- ------------- -------------
Net cash used in investing activities (70,168) (601) (3,100)
------------- ------------- -------------
Cash flows from financing activities:
Property and equipment grants 6,421 - -
Borrowings of long-term debt 25,452 5,450 -
Payments of long-term debt:
Product development loan (482) - -
Stockholder and director (6,173) - -
Other long-term debt (12,363) (129) (143)
Proceeds from issuance of common stock and
warrants, net of issuance costs 149,021 105 902
Proceeds from issuance of preferred stock,
Series A, net of issuance costs 7,075 - -
Proceeds from issuance of preferred stock,
Series B, net of issuance costs 7,125 - -
- -
------------- ------------- -------------
Net cash provided by financing activities 176,076 5,426 759
------------- ------------- -------------
Effect of foreign exchange rates on cash and
cash equivalents (2,488) (17) (49)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 1,224 (1,230) (5,718)
Cash and cash equivalents, beginning of period - 2,454 8,400
------------- ------------- -------------
Cash and cash equivalents, end of period $ 1,224 $ 1,224 $ 2,682
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 5
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in 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 27, 1999, its
consolidated results of operations for the period from March 3, 1989 (date
of inception) to June 27, 1999 and for each of the three-month periods
ended June 27, 1999 and June 28, 1998, and the consolidated cash flows for
each of the three-month periods ended June 27, 1999 and June 28, 1998, and
for the period from March 3, 1989 (date of inception) to June 27, 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.
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.
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 June 1999, the Company
completed private financing arrangements of $6 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 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 27, 1999 JUNE 28, 1998
------------- -------------
<S> <C> <C>
Net loss available
to common stockholders $ (7,928) $ (5,315)
Weighted average
shares outstanding 26,736 25,348
Earnings per share,
basic and diluted $ (0.30) $ (0.21)
</TABLE>
Shares excluded from the calculation of diluted EPS as their effect was
anti-dilutive were 6,955 and 4,558 for the three months ended June 27,
1999 and June 28, 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 June 27,
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 three
months ending June 27, 1999, $98 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 seek to represent a class of persons who
purchased the Company's common stock between May 7, 1992 and August 10,
1994. The Complaint seeks unspecified compensatory and punitive damages,
attorney's fees and costs.
On January 23, 1996, the Court dismissed, with prejudice, all claims
against the underwriters of the Company's public stock offerings, and one
claim against the Company and its present and former officers and
directors. On April 29, 1996, the Court dismissed with prejudice all
remaining claims against a present director and limited claims against a
former officer and director to the period when that person was an officer.
In December 1996, the Company and the individual defendants filed motions
for summary judgment, which the plaintiffs opposed. In November 1997, the
Court granted the Company's motion for summary judgment and entered a
judgment in favor of all defendants. Plaintiffs appealed to the Ninth
Circuit Court of Appeals, which heard argument in December 1998. In April
1999, the Ninth Circuit issued an opinion reversing the District Court's
order with respect to the grant of summary judgment in favor of the
Company and remanded the case back to the District Court. Although the
Company continues to believe that it has a meritorious defense in this
lawsuit, an unfavorable resolution of the lawsuit could have a material
adverse effect on the Company's financial condition and results of
operation.
Page 7
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
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 stayed pending settlement discussions, and no trial date has
been set.
In September 1998, Klockner Bartelt/Medipak, Inc. d/b/a/ Klockner Medipak
filed suit against the Company in the United States District Court for the
Middle District of Florida (File No. 98-1844-Civ-7-24E) alleging breach of
contract by the Company with respect to an agreement for the supply of
battery manufacturing equipment, and claimed damages of approximately
$2,500. On January 20, 1999, the Company filed a counterclaim against
Klockner alleging breach of contract, breach of express warranty, breach
of the implied warranty of merchantability, breach of the implied warranty
of fitness for a particular purpose, and rescission and restitution and
claimed compensatory damages to be determined at trial. The case has been
set for trial in March 2000.
The ultimate outcome of these actions cannot presently be determined.
Accordingly, no provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.
In addition to the litigation noted above, the Company is from time to
time subject to routine litigation incidental to its business. The Company
believes that the results of this routine litigation will not have a
material adverse effect on the Company's financial condition.
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 June 27, 1999 and March 28, 1999 is as follows:
<TABLE>
<CAPTION>
June 27, March 28,
1999 1999
----------- --------------
<S> <C> <C>
United States $ 5,318 $ 5,502
International (primarily Northern 26,380 28,569
Ireland)
----------- --------------
TOTAL $ 31,698 $ 34,071
=========== ==============
</TABLE>
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:
On June 29, 1999, the Company sold 481 shares of its common stock to an
institutional investor for an aggregate of $3 million.
On July 30, 1999, the Company sold 502 shares of its common stock to an
institutional investor raising an aggregate of $3 million.
Page 8
<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, the effect of the
Company's accounting policies and the other risks discussed 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, 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 in our Annual Report on Form 10-K and 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-month period ending June 27, 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, 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 $162,145,000 from its inception to June 27, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 27, 1999 (FIRST QUARTER OF FISCAL 2000) AND JUNE 28,
1998 (FIRST QUARTER OF FISCAL 1999).
As of June 27, 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 a reduction to expense. Sales
recorded as a reduction of expenses totaled $233,000 for materials and batteries
shipped through June 27, 1999. All remaining portions of these purchase orders
will be shipped and invoiced during the second quarter of fiscal year 2000. It
is anticipated that the Company will start recording sales invoices as revenue
during the second quarter of fiscal year 2000.
Research and development expenses were $6,400,000 and $4,030,000 during the
three-month periods ended June 27, 1999 and June 28, 1998, respectively. 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.
Marketing expenses were $58,000 and $29,000 for the first quarter of fiscal
years 2000 and 1999, respectively. The increased expenditures are primarily the
result of an increase in the work force combined with extensive travel for the
purpose of product presentation to potential customers.
General and administrative expenses were $1,293,000 and $938,000 for the first
three months of fiscal year 2000 and fiscal year 1999, respectively. The
increase between comparable periods is due primarily to higher expenditures for
legal services and international travel.
Page 9
<PAGE>
Interest and other income was $82,000 for the first quarter of fiscal 2000 as
compared to $87,000 for the same period in fiscal 1999. The decrease is due to
the decline in funds available for investment purposes offset by interest earned
on notes receivable from a stockholder.
Interest expense was $354,000 and $118,000 during the three month periods ending
June 27, 1999 and June 28, 1998, respectively. 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.
Joint venture income was $314,000 for the first quarter of fiscal 2000 as
compared to a loss of $287,000 for the comparable period in fiscal 1999. The
joint venture income is 50% of the net income earned by Hanil Valence Co., Ltd.
during the months of April through June of 1999 resulting primarily from a gain
on foreign currency translation.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $6,038,000 net cash for operating activities during the first
three months of fiscal year 2000 compared to using $3,328,000 during the first
three months of fiscal year 1999, an increase between comparable periods of
$2,710,000. 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 three months ended June 27, 1999, the Company used $601,000 net cash
from investing activities compared to $3,100,000 during the first three months
ended June 28, 1998, a decreased usage of $2,499,000 between comparable periods.
The usage in both periods was comprised solely of capital expenditures.
The Company provided $5,426,000 net cash from financing activities during the
first quarter of fiscal year 2000 compared to $759,000 during the first quarter
of fiscal year 1999. This increase of $4,667,000 resulted primarily from
additional borrowing on a line of credit from a principal stockholder.
As a result of the above, the Company had a net decrease in cash and cash
equivalents of $1,230,000 during the three months ended June 27, 1999, whereas
it had a net decrease in cash and cash equivalents of $5,718,000 during the
three months ended June 28, 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 June 27, 1999, the
Company had received grants aggregating (pound)4,080,000 reducing remaining
grants available to (pound)23,475,000 ($37,309,000 as of June 27, 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 $815,000) 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.
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.
Page 10
<PAGE>
The major components of construction in progress with their estimated costs and
start dates are as follows: mixing, coating, etching, laminating and slitting
equipment, $2,126,000, March 1997; assembly equipment, $8,953,000, March 1994;
extraction, packaging, and conditioning equipment, $862,000, August 1993; and
factory improvements and miscellaneous equipment, $717,000, June 1997. The
estimated completion date for these major categories of construction in progress
is the end of the second quarter of fiscal 2000. These statements are
forward-looking statements, and actual costs and completion dates are subject to
change due to a variety of risks and uncertainties, including the availability
of funds for completion, the risk that actual costs will be materially greater
due to unforeseen difficulties in completion of the projects, reliance on
manufacturers to deliver equipment in a timely manner and that performs as
intended, and other risks and uncertainties.
The Company expects that its existing funds will be sufficient to fund the
Company's operations through mid-September 1999. The Company needs to raise
additional debt or equity financing before the end of September in order to
continue operations at current levels and fund planned capital expenditures,
research and product development, and other endeavors. The Company is currently
in discussions with several potential financing sources invovling additional
equity sufficent 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.
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 six months now, and has identified and evaluated crucial areas
of concern regarding Year 2000 compliance. We define Year 2000 compliance to be,
with respect to information technology, that the information technology
accurately processes date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000 and leap year calculations,
to the extent that other information technology, used in combination with the
information technology being acquired, properly exchanges date/time data with
it. Fixes have begun on a majority of these areas. Other areas are still being
tested. Our goal is to have all Year 2000 issues resolved by December 31, 1999.
To that end, we have inventoried and assessed the Year 2000 readiness of the
following:
VENDORS/SERVICE PROVIDERS. We have distributed letters and questionnaires
to all vendors and service providers that are critical to the day-to-day
operations of Valence. We have received a letter of compliance from our fire
alarm company that our current fire alarm system is in compliance. We are
waiting for certification from our electric utility company, however we do have
a standby 1000 KW generator with enough fuel to run four weeks.
ENVIRONMENTAL, HEALTH, SAFETY AND SECURITY SYSTEMS. We have been advised
by Statewide Fire Electronics that the fire alarm systems within our plant are
Y2K compliant. However, they are dependent on our electric utility company,
Nevada Power.
Page 11
<PAGE>
A Nevada Power representative said that when Y2K approaches, they will be off
the national grid and will be on their 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.
Statewide Fire Protection Co., who makes and inspects our sprinklers, risers and
hydrant systems said that the system is not electrical and our fire system is in
compliance.
The Henderson Fire Department has advised us that it is Y2K compliant. As part
of their disruption preparations they are planning to have additional manpower
working and a spare fuel truck on site. In the event of a power outage, the Fire
Department will man local recreation centers with personnel equipped with
radios. In the event of an emergency, or if phone service is disrupted, we will
be able to go to the manned recreation center closest to Valence which is the
Black Mountain Recreation Center on Horizon.
The EMS system said that 911 is not currently compliant, but they will be
compliant by the end of June. The new system is a reverse calling system that
will be set up to warn neighbors in the event of a Chlorine release from Timet
or any other BMI Complex industries. The residential neighbors will receive an
electronic message that tells them to ` Shelter in Place' or any other necessary
instructions.
Our emergency lights will work on battery back-up long enough to allow employees
to evacuate the building.
We will be closed during Y2K but security guards will maintain the building.
Wells Fargo, our security provider, said we will be covered. The security
computer that regulates badge entry into the building has been backdated to
1993. We anticipate no issues with security. We are furnishing the guards with
extra chains and padlocks in the event the doors need to be secured manually.
Conclusion: There are no known areas of concern as related to EHS functions.
OPERATIONS AND PROCESS EQUIPMENT. In reviewing the compliance of all
operations and process equipment in the Henderson facility, no compliance issues
where found. Statements from equipment vendors were obtained to verify this.
PERSONAL COMPUTERS. All personal computer BIOSs' (basic input/output
systems) are being tested for Y2K compliance. Currently 100% of all Novell
network servers are Year 2000 compliant. Currently 95% 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 August / September 1999 at a cost of (pound)10k (approximately
$16,500).
LABORATORIES. The Maccor lab is in the process of being upgraded. Machines
are being upgraded and patched for compliance. The lab is 100% complete for BIOS
and operating system testing and fixes. The electrical chemistry lab is 98%
patched and tested. The data acquisition software run by these machines has been
tested and we have concluded that there is a minor Year 2000 bug. This may be
fixed by a slight program change or upgrading to a newer version of the
software. This does not affect the ending results of the data. The Northern
Ireland lab is 88% complete for BIOS and operating system testing and fixes.
Lantastic Network Version 5, which networks the Maccor cyclers, is not
compliant. Lantastic Version 8 has been purchased and is being installed
(currently 50% complete). Maccor has been contacted concerning their data
acquisition software compliance.
The dedicated PCs for QC lab equipment are also being BIOS checked.
Currently 6 are compliant, 4 were made compliant with the TSR, with another 2 to
be tested (83% compliant). All software that interfaces with instruments is
being checked, with 16% so far responding as compliant. One instrument is known
not to be compliant and will cease to function in September but we are currently
considering whether to backdate the system date. This is a feasible option since
we have not previously collected data with this instrument or taken advantage of
a reduced price upgrade offer by the manufacturer.
Page 12
<PAGE>
AUTOMATED MACHINERY. The manufacturing machinery is controlled primarily
by PLCs (Programmable Logic Controllers) and in some cases an industrial PC is
added as the MMI (Man Machine Interface). Not all PLCs are date aware (their
function also does not require it) and therefore would not be affected. We are
currently tracking 43 systems which fall in this category, 10 of which have
already been fully certified, 15 that are compliant but waiting for vendor
written certification, 15 awaiting replies, and 3 with known issues. The three
systems with known issues require a software upgrade which will cost
(pound)2,500 ($4,125) each.
IN-HOUSE SYSTEMS. One database has been tested and is known not to be
compliant. A programmer has been hired to rewrite the database in another
platform making it Year 2000 compliant. All other databases at the US facility
are Year 2000 compliant, and the Year 2000 Project Team is reviewing the
databases at the Northern Ireland facility. The accounting software is not
compliant and an upgrade has been received. The upgrade will be installed in
August 1999. The badge security system is not compliant and will need to be
replaced or fixed. At present, the system has been backdated to 1993 and there
are no apparent problems with this fix. There is no critical data or integration
that will be affected by this change. A task force has been assembled and will
look into issues that may have been overlooked and to help continue the efforts
to make our facilities compliant. Valence's phone system has been upgraded and
is now Year 2000 compliant. The e-mail system is not Year 2000 compliant. A
replacement has been purchased and is in the process of being implemented. The
Voice Mail system is not Year 2000 compliant and will be upgraded as soon as the
replacement e-mail software is installed. Microsoft Office 97 has been
implemented throughout the facility and is patched with all of Microsoft's
latest patches. A new backup system has been purchased and is being implemented
to replace a backup system that is Y2K compliant but will not be supported after
December 31, 1999.
COSTS TO ADDRESS THE YEAR 2000
Spending for modifications and updates is being expensed as incurred and is not
expected to have a material impact on our results of operations or cash flows.
The cost of our Year 2000 project is being funded through available funds. We
estimate that our total Year 2000 expenditures will not be material. Through the
end of calendar 1998, Valence had incurred $40,000 in connection with its Year
2000 compliance program, and is expected to incur approximately $50,000
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.
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
Page 13
<PAGE>
them from delivering their products to us on a timely basis.
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.
Page 14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1994, a series of class action lawsuits were filed in the United States
District Court for the Northern District of California against the Company and
certain of its present and former officers and directors. These lawsuits were
consolidated, and in September 1994 the plaintiffs filed a consolidated and
amended class action complaint. Following the Court's Orders on motions to
dismiss the complaint, which were granted in part and denied in part, the
plaintiffs filed an amended complaint in October 1995 ("Complaint"). The
Complaint alleges violations of the federal securities laws against the Company,
certain of its present and former officers and directors, and the underwriters
of the Company's public stock offerings, claiming that the defendants issued a
series of false and misleading statements, including filings with the Securities
and Exchange Commission, with regard to the Company's business and future
prospects. The plaintiffs seek to represent a class of persons who purchased the
Company's common stock between May 7, 1992 and August 10, 1994. The Complaint
seeks unspecified compensatory and punitive damages, attorney's fees and costs.
On January 23, 1996, the Court dismissed, with prejudice, all claims against the
underwriters of the Company's public stock offerings, and one claim against the
Company and its present and former officers and directors. On April 29, 1996,
the Court dismissed with prejudice all remaining claims against a present
director and limited claims against a former officer and director to the period
when that person was an officer. In December 1996, the Company and the
individual defendants filed motions for summary judgment, which the plaintiffs
opposed. In November 1997, the Court granted the Company's motion for summary
judgment and entered a judgment in favor of all defendants. Plaintiffs appealed
to the Ninth Circuit Court of Appeals, which heard argument in December 1998. In
April 1999, the Ninth Circuit issued an opinion reversing the District Court's
order with respect to the grant of summary judgment in favor of the Company and
remanded the case back to the District Court. Although the Company continues to
believe that it has a meritorious defense in this lawsuit, an unfavorable
resolution of the lawsuit could have a material adverse effect on the Company's
financial condition and results of operation.
In June 1998, the Company filed a lawsuit in the Superior Court of California,
Santa Clara County, against L&I Research, Inc., Powell Electrical Manufacturing
Company and others seeking relief based on rescission and damages for breach of
contract. In September 1998, Powell filed a cross-complaint against the Company
and others (File No. CV7745534) claiming damages of approximately $900,000. The
cross-complaint alleges breach of written contract, oral modification of written
contract, promissory estoppel, fraud, quantum meruit, and quantum valebant. 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 $900,000. The matter is presently stayed pending settlement
discussions, and no trial date has been set.
In September 1998, Klockner Bartelt/Medipak, Inc. d/b/a/ Klockner Medipak filed
suit against the Company in the United States District Court for the Middle
District of Florida (File No. 98-1844-Civ-7-24E) alleging breach of contract by
the Company with respect to an agreement for the supply of battery manufacturing
equipment, and claimed damages of approximately $2,500,000. On January 20, 1999,
the Company filed a counterclaim against Klockner alleging breach of contract,
breach of express warranty, breach of the implied warranty of merchantability,
breach of the implied warranty of fitness for a particular purpose, and
rescission and restitution and claimed compensatory damages to be determined at
trial. The case has been set for trial in March 2000.
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.
Page 15
<PAGE>
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 April 29, 1999 updating legal proceedings
disclosure.
2. Form 8-K filed June 29, 1999 announcing sale of common stock
to instituational investor.
3. Form 8-K filed July 30, 1999 announcing sale of common stock
to institutional investor.
Page 16
<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 11, 1999 By: /s/ Lev M. Dawson
-------------------------------
Lev M. Dawson
Chairman of the Board,
Chief Executive Officer, and
President
Date: August 11, 1999 By: /s/ Jay L. King
-------------------------------
Jay L. King
Vice President and Chief
Financial Officer
Page 17
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000885551
<NAME> Valence Technologies
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-26-2000
<PERIOD-START> MAR-29-1999
<PERIOD-END> JUN-27-1999
<EXCHANGE-RATE> 1
<CASH> 1,224
<SECURITIES> 0
<RECEIVABLES> 1,014
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,300
<PP&E> 52,166
<DEPRECIATION> (20,468)
<TOTAL-ASSETS> 34,867
<CURRENT-LIABILITIES> 10,867
<BONDS> 12,176
8,436
0
<COMMON> 162,878
<OTHER-SE> (162,145)
<TOTAL-LIABILITY-AND-EQUITY> 34,867
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (7,751)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (354)
<INCOME-PRETAX> (7,709)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,709)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,709)
<EPS-BASIC> (.30)
<EPS-DILUTED> (.30)
</TABLE>
