SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 30, 2000
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 Number)
incorporation or organization)
301 Conestoga Way, Henderson, Nevada 89015
--------------------------------------------------------------------------------
(Address of principal executive offices) (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 37,867,898 shares
--------------------------------- ------------------------------------
(Class) (Outstanding at November 6, 2000)
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
INDEX
<CAPTION>
PAGES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 2000 and March
31, 2000...............................................................................3
Condensed Consolidated Statements of Operations and Comprehensive Loss
for the period from March 3, 1989 (date of inception) to September 30,
2000 and for each of the three and six month periods ended September
30,
2000 and September 26, 1999............................................................4
Condensed Consolidated Statements of Cash Flows for the period from
March 3, 1989 (date of inception) to September 30, 2000 and for each of
the six month periods ended September 30, 2000 and September 26, 1999..................5
Notes to Condensed Consolidated Financial Statements...................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................27
Item 6. Exhibits and Reports on Form 8-K......................................................27
SIGNATURE......................................................................................28
</TABLE>
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>
September 30, 2000 March 31, 2000
--------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $8,851 $24,556
Receivables 3,645 1,869
Grant receivable 1,874 0
Inventory 4,309 1,641
Prepaid and other current assets 583 1,597
--------------------- ------------------
Total current assets 19,262 29,663
Property, plant and equipment, net 29,129 28,508
Investment in joint venture 0 345
--------------------- ------------------
Total assets $48,391 $58,516
===================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $385 $402
Accounts payable 3,615 6,060
Accrued expenses 3,389 2,882
Accrued royalties and license fees 2,598 2,000
Grant payable 1,786 1,923
Accrued compensation 572 389
--------------------- ------------------
Total current liabilities 12,345 13,656
Deferred revenue 2,500 2,500
Long-term debt, less current portion 3,457 3,937
Long-term debt to stockholder 8,757 8,432
--------------------- ------------------
Total liabilities 27,059 28,525
--------------------- ------------------
Commitments and contingencies (Note 6)
Mandatorily redeemable convertible preferred stock
Authorized: 10,000,000 shares
Series B, $0.001 par value, Issued and outstanding: 3,500
shares at September 30, 2000 and March 31, 2000, respectively 2,251 2,146
(Liquidation value: $3,868)
Stockholders' Equity
Common stock, $0.001 par value, authorized: 100,000,000 shares,
Issued and outstanding: 37,856,112 and 36,838,631 shares
at September 30, 2000 and March 31, 2000, respectively 38 37
Additional paid-in capital 269,349 256,086
Notes receivable from stockholder (4,862) (4,862)
Deficit accumulated during the development stage (242,078) (223,582)
Accumulated other comprehensive income (loss) (3,366) 166
--------------------- ------------------
Total stockholders' equity 19,081 27,845
--------------------- ------------------
Total liabilities, mandatorily redeemable convertible
Preferred stock and stockholders' equity $48,391 $58,516
===================== ==================
</TABLE>
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 Six Months Ended
inception) ------------------ -----------------
Through September 30, September 26 September 30, September 26,
September 30, 2000 2000 1999 2000 1999
Revenue: ------------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Research and development
contracts $ 21,605 $ - $ $ - $ -
Battery and laminate sales 5,619 2,101 389 4,101 389
------------------ ------------- ------------ ------------- -------------
Total revenue 27,224 2,101 389 4,101 389
Cost of sales 12,329 6,750 - 12,329 -
IDB Revenue grants (1,927) (1,927) - (1,927) -
------------------ ------------- ------------ ------------- -------------
Net cost of sales 10,402 4,823 - 10,402 -
------------------ ------------- ------------ ------------- -------------
Gross Margin 16,822 (2,722) 389 (6,301) 389
------------------ ------------- ------------ ------------- -------------
Cost and Expenses:
Research and product development 104,474 1,580 4,895 2,836 9,197
Marketing 4,294 258 52 360 110
General and Administrative 55,166 1,841 1,774 3,182 3,040
Depreciation and amortization 39,750 2,740 2,223 5,233 4,348
Write-off of in-process technology 8,212 - - - -
Investment in Danish subsidiary 3,489 - - - -
Factory start-up costs 3,171 - - - -
Special charges 18,872 - - - -
------------------ ------------- ------------ ------------- -------------
Total costs and expenses 237,428 6,419 8,944 11,611 16,695
Operating loss (220,606) (9,141) (8,555) (17,912) (16,306)
Stockholder lawsuit settlement (30,061) - - - -
Interest and other income 18,816 415 90 714 172
Interest expense (7,727) (524) (480) (953) (834)
Equity in loss of joint
venture (2,500) - (387) (345) (555)
------------------ ------------- ------------ ------------- -------------
Net loss $ (242,078) (9,250) (9,332) (18,496) (17,523)
==================
Beneficial conversion feature on
preferred stock (52) (212) (105) (431)
------------- ------------ ------------- -------------
Net loss available to common
stockholders $ (9,302) $ (9,544) $ (18,601) $ (17,954)
============= ============ ============= =============
Other comprehensive loss:
Net loss $ (9,250) $ (9,332) $ (18,496) $ (17,523)
Change in foreign currency
translation
adjustments (1,276) 1,024 (3,532) 410
------------- ------------ ------------- -------------
Comprehensive loss $ (10,526) $ (8,308) $ (22,028) $ (17,113)
============= ============ ============= =============
Net loss per share available to
common stockholders, basic and
diluted $ (0.25) $ (0.34) $ (0.50) $ (0.66)
============= ============ ============= =============
Shares used in computing net loss per
share available to common
stockholders, basic and diluted $ 37,811 $ 27,865 $ 37,334 $ 27,301
============= ============ ============= =============
</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 Six Months Six Months
(date of inception) Ended Ended
through September 30, September 26,
September 30, 2000 2000 1999
------------------- ------------- -------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (242,078) $ (18,496) $ (17,523)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 39,750 5,233 4,348
Write-off equipment 15,375 - -
Write-off of in-process technology 6,211 - -
Compensation related to stock options 3,891 - -
Non-cash charge related to acquisition of Danish subsidiary 2,245 - -
Non-cash charge from stockholder lawsuit settlement 29,450 - -
Equity in losses of joint venture 2,500 345 555
Amortization of debt discount 967 326 260
Changes in assets and liabilities:
Receivables (2,630) (1,863) (157)
Prepaid expenses and other current assets (1,468) 1,008 119
Inventory (4,309) (2,668) -
Accounts payable 3,939 (2,142) (695)
Accrued liabilities 724 1,311 (445)
Grant receivable (1,926) (1,926) -
Deferred revenue 2,500 - -
---------- ---------- ----------
Net cash used in operating activities (144,859) (18,872) (13,538)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of long-term investments (665,789) - -
Maturities of long-term investments 661,545 - -
Capital expenditures (80,152) (8,544) (1,827)
Sale of equipment 1,269 - -
Other (222) - -
---------- ---------- ----------
Net cash used in investing activities (83,349) (8,544) (1,827)
---------- ---------- ----------
Cash flows from financing activities:
Property and equipment grants 6,421 - -
Borrowings of long-term debt 25,452 - 5,450
Payments of long-tem debt:
Product development loan (482) - -
Stockholder and director (6,173) - -
Other long-term debt (12,965) (297) (230)
Proceeds from issuance of common stock and warrants,
of issuance costs 214,501 13,369 10,949
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 used in investing activities 240,954 13,072 16,169
Effect of foreign exchange rates on cash and cash
equivalents (3,895) (1,361) (46)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 8,851 (15,705) 758
Cash and cash equivalents, beginning of period - 24,556 2,454
---------- ---------- ----------
Cash and cash equivalents, end of period $ 8,851 $ 8,851 $ 3,212
========== ========== ==========
</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
(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 as of September 30, 2000, its consolidated results of
operations for the period from March 3, 1989 (date of inception) to
September 30, 2000 and for each of the three and six-month periods ended
September 30, 2000 and September 26, 1999, and the consolidated cash flows
for each of the six-month periods ended September 30, 2000 and September
26, 1999, and for the period from March 3, 1989 (date of inception) to
September 30, 2000. As used in this Form 10-Q, the term "Company" refers to
Valence Technology, Inc. and subsidiaries. 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 in the
Company's Annual Report on Form 10-K as of and for the year ended March 31,
2000. The results for the six-month period ended September 30, 2000 are not
necessarily indicative of the results to be expected for the entire fiscal
year ending March 31, 2001. The year end condensed consolidated balance
sheet data as of March 31, 2000 was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and
cash equivalents are on deposit in multiple banks and with an investment
counsel, and are primarily comprised of money market funds and government
securities.
INVENTORIES:
Inventories are stated at the lower of cost or market. The Company utilizes
the first-in, first-out inventory method, commonly known as FIFO.
PROPERTY, PLANT AND EQUIPMENT GRANTS:
Grants relating to the acquisition of property, plant and equipment are
recorded upon satisfaction of the capital investment requirements
underlying the grant and the receipt of grant funds. Such grants are
deferred and amortized over the estimated useful lives of the related
assets as a reduction of depreciation expense.
Page 6
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(unaudited)
REVENUE GRANTS:
During fiscal 1994, the Company signed an agreement with the Northern
Ireland Industrial Development Board, or 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. Under the terms of the existing agreements, the
Company has qualified and applied for revenue grants, through September 30,
2000, totaling (pound)1,267,000 ($1,927,000). These funds are made
available to reduce the cost of labor in Northern Ireland and have been
accounted for as a reduction to cost of sales.
DEPRECIATION AND AMORTIZATION:
Property and equipment are stated at cost and depreciated on the straight
line method over their estimated useful lives, generally three to five
years. Building improvements are amortized over the lesser of their
estimated useful life, generally five years, or the remaining lease term.
The Company assesses its ability to recover the net book value of its long
term assets. The carrying value of assets determined to be impaired is
written down to net realizable value. In the period assets are retired or
otherwise disposed of, the costs and accumulated depreciation or
amortization are removed from the accounts, and any gain or loss on
disposal is included in results of operations.
LONG-LIVED ASSETS:
The Company periodically assesses the recoverability of property, plant and
equipment and evaluates such assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Asset impairment (including intangible assets) is
determined to exist if estimated future cash flows, undiscounted and
without interest charges, are less than the carrying amount of the asset.
If it is determined that an impairment loss has occurred, the impairment
loss is measured as the difference between the amount of the discounted
cash flows and the carrying amount of the asset. The Company had no
impairment losses for the three-month period ended September 30, 2000.
DEFERRED REVENUE:
Deferred revenue relates to payments received from the Company's joint
venture partner in Hanil Valence Co., Ltd. This amount will be recognized
as income once significant product shipments commence from the joint
venture. The Company anticipates that production by the joint venture will
be sufficient to recognize a portion of this deferred revenue in fiscal
2001.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
FOREIGN CURRENCY TRANSLATION:
Exchange adjustments resulting from foreign currency transactions are
generally recognized in operations, whereas adjustments resulting from the
translation of financial statements are reflected as a separate component
of stockholders' equity.
INCOME TAXES:
The Company utilizes the liability method to account for income taxes where
deferred tax assets or liabilities are determined based on the differences
between the financial statements and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to affect
Page 7
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(unaudited)
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, receivables, accounts payable, and
other accrued liabilities, approximate fair value due to their short
maturities. Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of its debt obligations
approximates fair value.
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
---------------------- --------------------
<S> <C> <C>
Raw materials $ 2,974 $ 423
Work-in-process 1,335 1,218
---------------------- --------------------
Total $ 4,309 $ 1,641
====================== ====================
</TABLE>
4. EARNINGS PER SHARE:
Earnings per share, or 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.
The following is a reconciliation of the numerator (net loss) and
denominator (number of shares) used in the basic and diluted EPS
calculation (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
SEPT. 30, 2000 SEPT. 26, 1999 SEPT. 30, 2000 SEPT. 26, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss available
to common stockholders $ (9,302) $ (9,544) $ (18,601) $ (17,954)
Weighted average
shares outstanding 37,811 27,865 37,334 27,301
Earnings per share,
basic and diluted $ (0.25) $ (0.34) $ (0.50) $(0.66)
</TABLE>
Shares excluded from the calculation of diluted EPS as their effect was
anti-dilutive were 5,272,302 and 6,690,000 for the three and six-month
periods ended September 30, 2000 and September 26, 1999, respectively.
5. LONG-TERM DEBT TO STOCKHOLDER:
In July 1997, the Company entered into an amended loan agreement with a
stockholder which allows the Company to borrow, prepay and re-borrow up to
the full $10,000,000 principal under the promissory note on a revolving
basis and provided that the lender will subordinate its security interest
to other lenders when new debt is obtained after the stockholder's loan is
prepaid to zero. The loan bears interest at one percent
Page 8
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(unaudited)
over lender's borrowing rate (approximately 9% at September 30, 2000) and
is available through August 30, 2002. As of September 30, 2000, a total of
$1,427,699 has been charged to interest expense.
In conjunction with the amended loan agreement, the Company issued warrants
to purchase 594,031 shares of common stock. The warrants were valued using
the Black Scholes valuation method and had an average weighted fair value
of approximately $3.63 per warrant at the time of issuance. The fair value
of these warrants, totaling approximately $2,158,679, has been reflected as
additional consideration for the debt financing, recorded as a discount on
the debt which is amortized as interest expense over the term of the line
of credit. As of September 30, 2000, a total of $965,985 has been charged
to interest expense.
6. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
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. In April 2000, we prevailed on a
motion for summary adjudication against Powell's claims for oral
modification, promissory estoppel, and fraud. On July 7, 2000 we entered
into a settlement agreement which specified that the Company pay Powell the
sum of $370,000. Payment was made on July 17, 2000, and on July 20, 2000
the court entered a formal dismissal with prejudice pursuant to the terms
of the settlement.
7. 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 30, 2000 and
March 31, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
---------------------- --------------------
<S> <C> <C>
United States $ 4,770 $ 4,851
International (primarily Northern Ireland) 24,359 23,657
---------------------- --------------------
Total long-lived assets $ 29,129 $ 28,508
====================== ====================
</TABLE>
8. 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, or 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
Page 9
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(unaudited)
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.
SECURITIES AND EXCHANGE COMMISSION STAFF ACCOUNTING BULLETIN NO. 101,
"REVENUE RECOGNITION IN FINANCIAL STATEMENTS"
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
or SAB 101. SAB 101 clarifies existing accounting principles related to
revenue recognition in financial statements. The Company is required to
comply with the provisions of SAB 101 by the fourth quarter of 2000.
Management has not yet completed an analysis of the impact that SAB 101
will have on the Company's current revenue recognition practices.
9. SUBSEQUENT EVENTS:
The Company has entered into agreements to purchase all intellectual
property rights associated with lithium-ion polymer technology from
Telcordia Technologies, Inc. (formerly Bellcore) in exchange for 3 million
newly issued shares of the Company's common stock. The transaction is
subject to Federal Trade Commission approval, as well as other customary
closing conditions. The transaction with Telcordia is expected to close in
December 2000. Separately, the Company paid $2,000,000 in outstanding
payables to Telcordia.
Page 10
<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
status of the development of our products and their anticipated performance and
customer acceptance, trends affecting the commercializaton and sale of our
products, the status of the construction of our manufacturing facilities, the
acquisition, integration and exploitation of the Telecordia intellectual
property, trends affecting our liquidity position, including, but not limited
to, our access to additional equity or debt financing and our rate of
expenditures, our joint venture relationships, 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, risks in the manufacture of our products, the effect of the
Company's accounting policies and the other risks discussed below under the
caption titled "Risk Factors," and in our Annual Report on Form 10-K and our
other reports 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 31,
2000. The results for the six-month period ended September 30, 2000 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending March 31, 2001.
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.
In the first three-month period of fiscal 2001, the Company recorded its first
significant commercial sales. Previously, other than immaterial revenues from
limited sales of prototype batteries, the Company had not received any
significant revenues from the sale of products. Before the first three-month
period of fiscal 2001, substantially all revenues were derived from a research
and development contract with the Delphi Automotive Systems Group, formerly the
Delco Remy Division, an operating group of the General Motors Corporation. This
research and development contract expired in May 1998. The Company has incurred
cumulative losses of $242,078,000 from its inception to September 30, 2000.
RECENT DEVELOPMENTS
The Company has executed agreements to acquire all rights in lithium-ion solid
state polymer battery technology from Telcordia Technologies, Inc. (formerly
Bellcore). If the transactions which are reflected by these agreements are
completed, they will give the Company all of Bellcore's rights with respect to
lithium-ion, solid state polymer batteries and the Company will become the
licensor under Bellcore's existing license agreements. The assets included in
the acquisition include 42 U.S. patents, 14 U.S. patents pending, more than 200
foreign patents, issued and pending, and 15 Bellcore licenses with battery
manufacturers throughout the world. The closing of the agreements with Telcordia
is subject to significant conditions, including Hart-Scott-Rodino approval, some
of which
Page 11
<PAGE>
are outside the control of the Company. We can therefore offer no assurance that
the transactions reflected in these agreements will be completed. The Company
does not anticipate that the acquisition will have a material affect, positive
or negative, on its operations during fiscal 2001.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE AND SIX MONTHS
ENDED SEPTEMBER 26, 1999 (SECOND THREE-MONTH PERIOD AND FIRST SIX-MONTH PERIOD
OF FISCAL 2001 COMPARED WITH SECOND THREE-MONTH PERIOD AND FIRST SIX-MONTH
PERIOD OF FISCAL 2000)
REVENUE. Revenue from battery and laminate sales totaled $2,101,000 and
$4,101,000 for the second three-month period and first six-month period of
fiscal 2001, respectively. The Company recorded sales revenue of $389,000 for
both of the corresponding periods of fiscal 2000. This is the second three-month
period of significant sales revenue this fiscal year and continues the Company's
movement from research and development to manufacturing.
COST OF SALES. The cost of sales for the second three-month period and first
six-month period of fiscal 2001 was $4,823,000 and $10,402,000, respectively.
During the second three-month period of fiscal 2001, the Company qualified for
revenue grant funding, through September 30, 2000 of [pound]1,267,000
($1,927,000) from the IDB, which was offset against the cost of sales as a
reduction of direct labor. The Company did not record cost of sales in the
second three-month period or first six-month period of fiscal 2000 as the
Company was primarily a research and development enterprise.
RESEARCH AND PRODUCT DEVELOPMENT. Research and development expenses were
$1,580,000 and $2,836,000 during the three and six-month period ended September
30, 2000 as compared to $4,895,000 and $9,197,000 for the corresponding periods
of fiscal 2000. The decreased expenditures reflect the Company's transition from
research and development to manufacturing.
MARKETING. Marketing expenses were $258,000 and $360,000 for the second
three-month period and first six-month period of fiscal year 2001, respectively,
as compared to $52,000 and $110,000 for the corresponding periods of fiscal
2000. 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. General and administrative expenses were $1,841,000
and $3,182,000 for the second three-month period and first six-month period of
fiscal year 2001, respectively, versus $1,774,000 and $3,040,000 for the
corresponding periods of fiscal 2000. The increase between corresponding periods
is due primarily to higher expenditures for international travel and legal
services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $2,740,000 and
$5,233,000 for the second three-month period and first six-month period of
fiscal year 2001, respectively. For the corresponding periods of fiscal 2000,
depreciation and amortization was $2,223,000 and $4,348,000. Increased capital
expenditures in previous periods has caused depreciation to rise accordingly.
INTEREST AND OTHER INCOME. Interest and other income was $415,000 and $714,000
for the second three-month period and first six-month period of fiscal 2001,
respectively, as compared to $90,000 and $172,000 for the corresponding periods
in fiscal 2000. The increase primarily results from additional funds being
available for investment.
INTEREST EXPENSE. Interest expense was $524,000 and $953,000 during the second
three-month period and first six-month period of fiscal 2001, respectively, as
compared to $480,000 and $834,000 for the corresponding periods in fiscal 2000.
This increase is a result of interest accrued on long term debt. The debt
reached its current level at the end of the first three-month period of fiscal
2000.
Page 12
<PAGE>
EQUITY IN LOSSES OF JOINT VENTURE. Joint venture loss was $0 and $345,000 for
the second three-month period and first six-month period of fiscal 2001,
respectively. Losses for corresponding periods of fiscal 2000 were $387,000 and
$555,000. These joint venture losses are primarily due to pre-production costs,
interest expense and foreign currency translation adjustments.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $18,872,000 net cash for operating activities during the first
six-month period of fiscal year 2001 compared to using $13,538,000 during the
first six-month period of fiscal year 2000, an increase between corresponding
periods of $5,334,000. This increase resulted primarily from the intensification
of efforts to complete product development, expand and train production staff,
expand marketing staff and efforts, and complete engineering efforts on
production facilities. Additionally, the overall account payable balance was
reduced by over $2.4 million during the first six-month period due to timing of
payments.
During the six-month period ended September 30, 2000, the Company used
$8,544,000 for investing activities, as compared to $1,827,000 during the first
six-month period of fiscal 2000, an increased usage of $6,717,000 between
corresponding periods. The usage in both periods was comprised solely of capital
expenditures.
The Company provided $13,072,000 net cash from financing activities during the
first six-month period of fiscal year 2001 compared to $16,169,000 during the
first six-month period of fiscal year 2000. This decrease of $3,097,000 resulted
primarily from decreased borrowings in fiscal year 2001.
As a result of the above, the Company had a net decrease in cash and cash
equivalents of $15,705,000 during the six-month period ended September 30, 2000,
whereas it had a net increase in cash and cash equivalents of $758,000 during
the six-month period ended September 26, 1999.
During June 2000 the Company entered into separate private placement funding
arrangements with Acqua Wellington Value Fund Ltd., an institutional investor,
and Carl E. Berg, a principal stockholder and director of the Company, for an
equity investment commitment totaling $25 million. Acqua Wellington funded $12.5
million on June 29, 2000 by the purchase of 846,665 shares of common stock and a
warrant to purchase 169,333 shares, exercisable at $18.45 per share. The
remaining $12.5 million is in the form of a binding commitment from Mr. Berg for
funding through the fiscal year end. The draw down of Mr. Berg's commitment is
at the Company's option. As of September 30, 2000, the Company has not utilized
this commitment.
During fiscal year 1994, the Company signed an agreement with the Northern
Ireland Industrial Development Board, or 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)25.6 million (approximately $37.9 million), generally become
available over a five year period through October 31, 2001. As of September 30,
2000, the Company had received grants aggregating (pound)4.1 million
(approximately $6.1 million), reducing remaining grants available to (pound)21.5
million (approximately $31.8 million).
As a condition to receiving funding from the IDB, the subsidiary must maintain a
minimum of (pound)12.0 million (approximately $17.7 million) in debt or equity
financing from the Company. Aggregate funding under the grants was limited to
(pound)4.1 million (approximately $6.1 million) until the Company had recognized
$4.0 million 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 $739,000) after achieving sales of
batteries manufactured by the Northern Ireland operation of at least $1.5
million. An additional (pound)500,000 (approximately $739,000) is available when
the total related sales reach $2.5 million. The Company has qualified for and
applied to receive both of these grants. The Company expects to receive both of
these grants within the next three-month period.
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. Default
includes ceasing to do business
Page 13
<PAGE>
permanently 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 following are the major categories of construction in progress with their
costs to date and start dates:
<TABLE>
<CAPTION>
CONSTRUCTION CATEGORY COSTS TO DATE START DATES
------------------------------------------ ------------- ------------
<S> <C> <C>
Assembly equipment....................... $9,715,000 March 1994
Mixing, coating, etching, laminating and
slitting equipment....................... $2,485,000 March 1997
Factory improvements and miscellaneous
equipment................................ $727,000 June 1997
</TABLE>
The estimated completion date for these major categories of construction in
progress is the end of the final three-month period of fiscal 2001. 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.
At September 30, 2000, we had cash and cash equivalents of $8,851,000. In
addition, we have the ability to draw down up to $12.5 million under the Berg
financing and anticipate the availability of a portion of our IDB grant funds
during fiscal 2001. The majority of senior management efforts required to
establish a licensing business have been anticipated and planned for in hiring
efforts and budgeting. There will be an approximately proportional increase in
patent maintenance costs. After taking into account our cash and cash
equivalents, projected revenues and receipt of funds from IDB grants and from
the Berg financing, we believe that we will have sufficient financing through
fiscal 2001 to complete funding of planned capital expansion, research and
product development, marketing, general and administrative expenses and the
costs of integrating the Telcordia licensing activities. Our cash requirements,
however, may vary materially from those now planned because of changes in our
operations, including changes in relationships with original equipment
manufacturers (manufacturers who produce complex equipment from components
usually bought from other manufacturers), market conditions, joint venture and
business opportunities or our failure to receive sufficient IDB grant funds. In
such event, we may need to raise additional funding through debt or equity
financing through fiscal 2001. We cannot assure you that additional funds for
these purposes, whether from equity or debt financing agreements, will be
available on favorable terms, if at all.
Page 14
<PAGE>
RISK FACTORS
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward-looking
statements that involve risks and uncertainties. Factors associated with the
forward-looking statements that could cause actual results to differ from those
projected or forecast are included in the statements below. In addition to other
information contained in this report, you should carefully consider the
following cautionary statements and risk factors.
RISKS RELATED TO OUR BUSINESS
WE ARE IN THE EARLY STAGES OF MANUFACTURING AND IF WE FAIL TO MANUFACTURE
COMMERCIAL QUANTITIES OF BATTERIES TO CUSTOMER SPECIFICATIONS COST-EFFECTIVELY,
WE COULD LOSE CUSTOMERS AND BUSINESS.
Until recently, we had only manufactured our batteries on our pilot
manufacturing line, which can produce prototype batteries in large enough
quantities to allow customer sampling, testing and product development. In order
to manufacture commercial quantities of our batteries according to customer
specifications and on a commercial scale, we must further develop our
manufacturing facilities and reduce our unit manufacturing costs. If we fail to
substantially increase yields of our batteries and reduce unit-manufacturing
costs, we will not be able to offer our batteries at a competitive price, we
will lose our current customers and fail to attract future customers.
FAILURE TO SCALE UP OUR MANUFACTURING FACILITY WILL HARM OUR CUSTOMER RELATIONS
AND THREATEN FUTURE PROFITS.
We are currently in the early stages of transitioning production to an automated
production line that will work with our newest battery technology in our
manufacturing facility in Mallusk, Northern Ireland. We have begun to
manufacture batteries on a commercial scale to fulfill our first significant
purchase orders. The redesign and modification of the Mallusk manufacturing
facility, including its customized manufacturing equipment, will continue to
require substantial engineering work and capital expenses and is subject to
significant risks, including risks of cost overruns and significant delays. In
addition, in order to scale up the manufacturing capacity, we will need to begin
qualification of additional automated production lines. In automating,
redesigning and modifying the manufacturing processes, we continue to depend on,
several developers of automated production lines, all of whom have limited
experience in producing equipment for the manufacture of batteries. If we fail
to develop and implement a large scale manufacturing facility capable of
cost-effectively producing commercial quantities of batteries according to
customer specifications, it will harm our ability to serve the needs of our
customers and threaten our future sales and profits.
THE LIMITED NUMBER OF SKILLED AND UNSKILLED WORKERS IN NORTHERN IRELAND COULD
AFFECT THE SUCCESS OF OUR IMPROVEMENTS IN THE MANUFACTURING FACILITY.
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 is limited because of a relatively low
unemployment rate. As a result, we face the risk that we may not:
o successfully hire and train the new manufacturing workers necessary
for the ramp-up of our Mallusk, Northern Ireland manufacturing
facility;
o successfully develop improved processes;
o design required production equipment;
o enter into acceptable contracts for the fabrication of required
production equipment;
o obtain timely delivery of required production equipment;
Page 15
<PAGE>
o implement multiple production lines; or
o successfully operate the Mallusk facility.
Our failure to successfully automate our production on a timely basis, if at
all, could damage our reputation, relationships with future and existing
customers, cause us to lose business and potentially prevent us from
establishing the commercial viability of our products.
CONTINUED DELAYS IN QUALIFYING OUR MANUFACTURING FACILITIES COULD SIGNIFICANTLY
DELAY OUR BRINGING COMMERCIAL QUANTITIES OF PRODUCT TO MARKET AND INTERFERE WITH
OUR ABILITY TO GENERATE THE REVENUE AND CASH THAT WE NEED TO SUSTAIN OUR
BUSINESS.
We may be unable to meet our schedules regarding delivery, installation,
de-bugging and qualification of our Northern Ireland facility production
equipment, and face the prospect of further delays or problems related to
facility qualification because:
o we do not control the design and delivery of most of the production
equipment which is specifically manufactured for us;
o we are modifying and bringing many of the manufacturing processes of
this production equipment up to date for the first time and may need
to refine these processes;
o even if we are able to refine our process, we may not be able to
produce the amount of qualification samples required by our customers;
and
o our customers generally require an extensive qualification period once
they receive their first commercial product off a production line.
These delays would impair our ability to bring our batteries to market,
adversely affect revenue growth and our cash position and harm our competitive
position and economic growth.
OUR ABILITY TO MANUFACTURE LARGE VOLUMES OF BATTERIES IS LIMITED AND MAY PREVENT
US FROM FULFILLING EXISTING ORDERS.
At the present time our ability to sell and ship product is limited. We
currently have several outstanding unfilled purchase orders for our batteries
and are actively soliciting additional purchase orders. We presently have
limited quantities of batteries available for sale and do not currently have the
necessary equipment in operation to manufacture a commercially adequate volume
of products. We are currently installing additional automated equipment at our
facilities in Mallusk, Northern Ireland. If, as we anticipate, this production
facility is fully operational by the third quarter of calendar 2001, we will
have the capacity to manufacture and ship batteries in high volumes.
In 1993, we were ultimately unable to fulfill a purchase order for batteries
which incorporated a previous technology due to our inability to produce our
batteries on a commercial scale. If we cannot rapidly increase our production
capabilities to make sufficient quantities of commercially acceptable batteries,
we may not be able to fulfill existing purchase orders in a timely manner, if at
all. In addition, we may not be able to procure additional purchase orders,
which could cause us to lose existing and future customers, purchase orders,
revenue and profits.
WE MAY HAVE A NEED FOR ADDITIONAL CAPITAL.
At September 30, 2000, we had cash and cash equivalents of $8,851,000. In
addition, we have the ability to draw up to $12.5 million under the Berg
financing and anticipate the availability of a portion of our IDB grant funds
during fiscal 2001. The majority of senior management efforts required to
establish a licensing business have been anticipated and planned for in hiring
efforts and budgeting. There will be an approximately proportional increase in
Page 16
<PAGE>
patent maintenance costs. After taking into account our cash and cash
equivalents, projected revenues and receipt of funds from IDB grants and from
the Berg financing, we believe that will have sufficient financing through
fiscal 2001 to complete funding of planned capital expansion, research and
product development, marketing, general and administrative expenses and the
costs of integrating the Telcordia licensing activities. Our cash requirements,
however, may vary materially from those now planned because of changes in our
operations, including changes in original equipment manufacturer relationships,
market conditions, joint venture and business opportunities or our failure to
receive sufficient IDB grant funds. In such event, we may need to raise
additional funding through debt or equity financing through fiscal 2001. We
cannot assure you that additional funds for these purposes, whether from equity
or debt financing agreements, will be available on favorable terms, if at all.
If we need capital and cannot raise additional funds, it may delay further
development and production of our batteries or otherwise delay our execution of
our business plan, all of which may have a material adverse affect on our
operations and financial condition.
WE HAVE A HISTORY OF LOSSES, HAVE AN ACCUMULATED DEFICIT AND MAY NEVER ACHIEVE
OR SUSTAIN SIGNIFICANT REVENUES OR PROFITABILITY.
We have incurred operating losses each year since inception in 1989 and had an
accumulated deficit of $242,078,000 as of September 30, 2000. We have working
capital of $6,917,000 as of September 30, 2000, and have sustained recurring
losses related primarily to the research and development and marketing of our
products. We expect to continue to incur operating losses and negative cash
flows through fiscal 2001, as we continue our product development, begin to
build inventory and continue our marketing efforts. We may never achieve or
sustain significant revenues or profitability in the future.
IF OUR BATTERIES FAIL TO PERFORM AS EXPECTED, WE COULD LOSE EXISTING AND FUTURE
BUSINESS WHICH WOULD HARM OUR LONG-TERM ABILITY TO MARKET AND SELL OUR
BATTERIES.
If we manufacture our batteries in commercial quantities and they fail to
perform as expected, our reputation could be severely damaged, and we could lose
existing or potential future business. Even if the performance failure was
corrected, this performance failure might have the long-term effect of harming
our ability to market and sell our batteries.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR OUR REVENUES AND OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED IF WE WERE TO LOSE THE
BUSINESS OF ANY ONE OF THEM.
To date, our existing purchase orders in commercial quantities are from a
limited number of customers. We anticipate that sales of our products to a
limited number of key customers will continue to account for a significant
portion of our total revenues. We do not have long-term agreements with any of
our customers, and do not expect to enter into any long-term agreements in the
near future. As a result, we face the substantial risk that any of the following
events could occur:
o reduction, delay or cancellation of orders from a customer;
o development by a customer of other sources of supply;
o selection by a customer of devices manufactured by one of our
competitors for inclusion in future product generations;
o loss of a customer or a disruption in our sales and distribution
channels; and
o failure of a customer to make timely payment of our invoices.
Page 17
<PAGE>
If we were to lose one or more customers, or if we were to lose revenues due to
a customer's inability or refusal to continue to purchase our batteries, our
business, results of operations and financial condition could be harmed.
COMPETITION FOR PERSONNEL, IN PARTICULAR FOR PRODUCT DEVELOPMENT AND PRODUCT
IMPLEMENTATION PERSONNEL, IS INTENSE, AND WE MAY HAVE DIFFICULTY ATTRACTING THE
PERSONNEL NECESSARY TO EFFECTIVELY OPERATE OUR BUSINESS.
We believe that our future success 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, as well as
skilled personnel to operate our facility in Northern Ireland. If we cannot
attract and retain experienced sales and marketing executives, we may not
achieve the visibility in the marketplace that we need to obtain purchase
orders, which would have the result of lowering our sales and earnings. We
compete in the market for personnel against numerous companies, including
larger, more established competitors with significantly greater financial
resources than us. We have experienced difficulty in recruiting qualified
personnel in the past, and we cannot be certain that we will be successful in
attracting and retaining the skilled personnel necessary to operate our business
effectively in the future.
BECAUSE OUR BATTERIES ARE PRIMARILY SOLD AND THEN INCORPORATED INTO OTHER
PRODUCTS, WE RELY ON ORIGINAL EQUIPMENT MANUFACTURERS AND BATTERY PACK
ASSEMBLERS TO COMMERCIALIZE OUR PRODUCTS.
We rely heavily on assistance from original equipment manufacturers and battery
pack assemblers to gain market acceptance for our products. We will therefore
need to meet these companies' requirements by developing and introducing new
products and enhanced, or modified, versions of our existing products on a
timely basis. Original equipment manufacturers and battery pack assemblers often
require unique configurations or custom designs for batteries, which must be
developed and integrated into their product well before the product is launched.
This development process not only requires 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 customer, but also
requires the cooperation and assistance of the original equipment manufacturers
or battery pack assemblers for purposes of determining the battery requirements
for each specific application. If we are unable to design, develop and introduce
products that meet original equipment manufacturers' and battery pack
assemblers' requirements, we may not be able to fulfill our obligations under
existing purchase orders, we may lose opportunities to enter into additional
purchase orders and our reputation may be damaged. As a result, we may not
receive adequate assistance from original equipment manufacturers or battery
pack assemblers to successfully commercialize our products, which could impair
our profitability.
THE FACT THAT WE DEPEND ON A SOLE SOURCE SUPPLIER FOR OUR ANODE RAW MATERIALS
AND A LIMITED NUMBER OF SUPPLIERS FOR OTHER KEY RAW MATERIALS MAY DELAY OUR
PRODUCTION OF BATTERIES.
We depend on a sole source supplier for our anode, or negative electrode, raw
material and we utilize a limited number of suppliers for other key raw
materials used in manufacturing and developing our batteries. We generally
purchase 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. As a result, 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 at an
acceptable cost. We have in the past experienced delays in product development
due to the delivery of nonconforming raw materials from our suppliers, and if in
the future we are unable to obtain high quality raw materials in sufficient
quantities and on a timely basis, it may delay battery production, impede our
ability to fulfill existing or future purchase orders and harm our reputation
and profitability.
OUR BATTERIES MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN MARKET ACCEPTANCE
To achieve market acceptance, our batteries must offer significant performance
or other measurable advantages at a cost-effective rate as compared to other
current and potential alternative battery technologies in a broad range of
applications. Our batteries may not be able to achieve or sustain these
advantages. Even if our batteries provide meaningful price or performance
advantages, there is a risk our batteries may not be able to achieve or maintain
Page 18
<PAGE>
market acceptance in any potential market application. Failure to realize these
performance advantages with our products could hurt our ability to attract
customers in the future.
WE HAVE FOUR KEY EXECUTIVES. THE LOSS OF A SINGLE EXECUTIVE OR THE FAILURE TO
HIRE AND INTEGRATE CAPABLE NEW EXECUTIVES COULD HARM OUR BUSINESS.
Our success is highly dependent upon the active participation of four key
executives. We do not have written employment contracts or key man life
insurance policies with respect to any of these key members of management.
Without qualified executives, we face the risk that we will not be able to
effectively run our business on a day-to-day basis or execute our long-term
business plan.
THE COMPANY HAS EXECUTED AGREEMENTS WITH TELCORDIA TECHNOLOGIES, INC. TO ACQUIRE
TELCORDIA'S RIGHTS RELATING TO LITHIUM-ION SOLID STATE POLYMER BATTERY
TECHNOLOGY. THE COMPANY CANNOT GUARANTEE THE COMPLETION OF THE TRANSACTIONS
INTENDED BY THESE AGREEMENTS.
The Company has executed agreements to acquire all rights in lithium-ion solid
state polymer battery technology from Telcordia Technologies, Inc. (formerly
Bellcore). If the transactions which are reflected by these agreements are
completed, they will give the Company all of Bellcore's rights with respect to
lithium-ion, solid state polymer batteries and the Company will become the
licensor under Bellcore's existing license agreements. The assets included in
the acquisition include 42 U.S. patents, 14 U.S. patents pending, more than 200
foreign patents, issued and pending, and 15 Bellcore licenses with battery
manufacturers throughout the world. The closing of the agreements with Telcordia
is subject to significant conditions, including Hart-Scott-Rodino approval, some
of which are outside the control of the Company. We can therefore offer no
assurance that the transactions reflected in these agreements will be completed.
The Company has entered into the agreements with Telcordia with the expectation
that the combination of the technology rights acquired from Bellcore with the
Company's current portfolio of over 260 U.S. patents, issued and pending, its
advanced research and development and its manufacturing plant will result in
substantial benefits for the Company. These include the potential to offer the
new combination of the Company's products and services to other manufacturers
who have tried without success to utilize the Bellcore lithium polymer
technology.
Achieving these anticipated business benefits will depend in a large part on the
Company's ability to successfully integrate licensing operations with its other
business activities in an efficient, effective and timely manner. The degree to
which the Company can successfully integrate licensing into its operations will
depend on a number of factors, including the Company's management of the
existing Bellcore licenses. The integration of these licensing operations
following the completion of the transactions will require the dedication of
management and other personnel resources which may temporarily distract from the
day-to-day business of the Company. We cannot assure you that successful
integration will occur.
IF WE CANNOT PROTECT OR ENFORCE OUR EXISTING INTELLECTUAL PROPERTY RIGHTS OR IF
OUR PENDING PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, WE MAY LOSE THE
ADVANTAGES OF OUR RESEARCH AND MANUFACTURING SYSTEMS.
Our ability to compete successfully will depend on whether we can protect our
existing proprietary technology and manufacturing processes. We rely on a
combination of patent and trade secret protection, non-disclosure agreements and
cross-licensing agreements. These measures may not be adequate to safeguard the
proprietary technology underlying our batteries. 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 in the
event of their breaches. In addition, 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. Moreover, we may not be able to effectively
protect our intellectual property rights outside of the United States.
We have established a program for intellectual property documentation and
protection in order to safeguard our technology base. We intend to vigorously
pursue enforcement and defense of our patents and our other proprietary rights.
We could incur significant expenses in preserving our proprietary rights, and
these costs could harm our
Page 19
<PAGE>
financial condition. We are also attempting to expand our intellectual property
rights through our applications for new patents. Patent applications in the
United States are maintained in secrecy until the patents that are applied for
are ultimately issued. 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 our issued patents may not afford protection against a competitor.
Our failure to protect our existing proprietary technologies or to develop new
proprietary technologies may substantially impair our financial condition and
results of operations.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS BROUGHT AGAINST US COULD BE TIME
CONSUMING AND EXPENSIVE TO DEFEND.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. While we currently are
not engaged in any intellectual property litigation or proceedings, we may
become involved in these proceedings in the future. In the future we may be
subject to claims or inquiries regarding our alleged unauthorized use of a third
party's intellectual property. An adverse outcome in litigation could force us
to do one or more of the following:
o stop selling, incorporating or using our products that use the
challenged intellectual property;
o pay significant damages to third parties;
o obtain from the owners of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms, or at all; or
o redesign those products or manufacturing processes that use the
infringed technology, which may not be economically or technologically
feasible.
Whether or not an intellectual property litigation claim is valid, the cost of
responding to it, in terms of legal fees and expenses and the diversion of
management resources, could be expensive and harm our business.
OUR BATTERIES CONTAIN POTENTIALLY DANGEROUS MATERIALS, WHICH COULD EXPOSE US TO
PRODUCT LIABILITY CLAIMS.
In the event of a short circuit or other physical damage to a battery, a
reaction may result with excess heat or a gas being generated and released. If
the heat or gas is not properly released, the battery may be flammable or
potentially explosive. Our batteries that were based on an earlier technology,
have, in the past, smoked, caught fire and vented gas. If we are unsuccessful in
our efforts to reduce these risks in our current design, we could be exposed to
product liability litigation. In addition, our batteries incorporate potentially
dangerous materials, including lithium. It is possible that these materials may
require special handling or 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 dangerous condition. We expect that our customers will have to use a
similar type of circuitry in connection with their use of our products.
WE ARE ENGAGED IN ONGOING SAFETY TESTING OF OUR BATTERIES TO MEET CUSTOMER
REQUIREMENTS AND MAY NOT BE ABLE TO INCREASE COMMERCIAL SALES OF OUR BATTERIES
IF OUR PRODUCTS ARE NOT SUCCESSFUL IN THESE TESTS.
We have conducted safety testing of our batteries and have submitted batteries
to Underwriters Laboratories for certification, which is required by a number of
original equipment manufacturers prior to placing a purchase order with us.
Underwriters Laboratories has granted a preliminary acceptance of an earlier
generation of our batteries, pending a manufacturing site audit. Those
batteries, while similar to the batteries we are selling today, are not of the
current design and composition. Our current batteries must be submitted for
Underwriters Laboratories' approval, and Underwriters Laboratories has not yet
begun a scheduled audit of our Northern Ireland manufacturing facility.
Page 20
<PAGE>
As part of our safety testing program, prototype batteries of various sizes,
designs and chemical formulations are subject to abuse testing, in which the
battery is subjected to conditions outside expected normal operating conditions.
Each new battery design will continue to require new safety testing. In
addition, safety problems may develop with respect to our current and future
battery technology that could prevent or delay commercial introduction of our
products.
ACCIDENTS AT OUR FACILITIES COULD DELAY PRODUCTION AND ADVERSELY AFFECT OUR
OPERATIONS.
An accident in our facilities could occur and, whether due to the production of
our batteries or otherwise resulting from our facilities' operations, could
result in significant manufacturing delays or claims for damages resulting from
personal or property injuries, all of which would adversely affect our
operations and financial condition.
OPERATIONAL PROBLEMS AT OUR SINGLE MANUFACTURING FACILITY COULD HARM OUR
BUSINESS.
Our revenues are dependent upon the continued operation of our single
manufacturing facility in Northern Ireland. The operation of a manufacturing
plant involves many risks, including potential damage from fire or natural
disasters. In addition, we have obtained permits to conduct our business as
currently operated at the facility. We cannot assure you that these permits
would continue to be effective at the current location if the facility were
destroyed and rebuilt, or that we would be able to obtain similar permits to
operate at another location. The occurrence of these or any other operational
problems at our Northern Ireland facility could harm our business.
WE DO NOT FULLY CONTROL THE OPERATION OF OUR JOINT VENTURES' OPERATIONS,
STRATEGIES AND FINANCIAL DECISIONS, AND WE CANNOT ASSURE YOU THAT OUR PRODUCTS
WILL BE MARKETED SUCCESSFULLY THROUGH THESE VENTURES.
At the present time, we have investment interests in two operating joint
ventures. We established a joint venture company in Korea, Hanil Valence Co.,
Ltd., to manufacture, package and distribute advanced rechargeable solid polymer
batteries. We supply Hanil Valence Co. with its proprietary laminates (film and
laminate materials), from which Hanil Valence Co. will manufacture batteries for
the Korean market. In addition, we will supply technology, initial equipment and
product designs and technical support for the Hanil Valence Co. joint venture
out of our Northern Ireland facility. We cannot be certain that the Hanil
Valence Co. joint venture will be profitable, and if this joint venture does not
remain in business, we would need to find other business partners and/or
contract with third parties for purposes of manufacturing, selling and
distributing rechargeable batteries in the Korean market.
We also established a joint venture company, Alliant/Valence, L.L.C., to market
our battery technology and technology obtained under our non-exclusive license
with Telcordia Technologies (formerly Bellcore) and to develop and to
manufacture batteries for our U.S. military customers, as well as for foreign
military sales activities. In connection with this joint venture, Alliant Power
Sources Company, an Alliant operating company, has ordered both battery
component material and finished battery cells from Valence to be used in the
construction of several different specialized batteries for military and
aerospace applications.
We do not control or manage either of these joint ventures. Consequently, we
must rely on the management skills of our venture partners to successfully
operate these ventures. Our joint venture partners may have economic, businesses
or legal interests or goals that conflict with ours. In addition, we may have
significant disagreements with our venture partners regarding strategic or
operational issues that could have material adverse affect on the ventures'
business or financial conditions. We may be required to fulfill the obligations
of our joint venture partners if they are unable to meet their obligations.
We also depend to a significant degree on local partners in our joint ventures
to provide us with regulatory and marketing expertise and familiarity with the
local business environment. Any disruption in our relationship with these
parties could make it more difficult to market our products in the geographic
regions or to the customers to which the joint venture relates. Unsuccessful
ventures could also significantly damage our reputation, making it more
difficult to obtain purchase orders for our batteries.
Page 21
<PAGE>
WE DO NOT HAVE A COLLABORATIVE PARTNER TO ASSIST US IN DEVELOPMENT OF OUR
BATTERIES, WHICH MAY LIMIT OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR
PRODUCTS.
The use of alliances for our development, product design, volume purchase and
manufacturing and marketing expertise could reduce the need for development and
use of internal resources. We have received substantially all our revenues to
date from a research and development agreement for joint development in the
automotive market with Delphi Automotive Systems Group, which we completed in
May 1998. Although we have held discussions with original equipment
manufacturers 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 may choose not to, or may
not be able to, enter into any such alliances. Further, even if we could
collaborate with a desirable partner, the partnership may not be successful. The
success of any strategic alliance that we may 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. Without a
collaborative partner to assist us in development of our batteries, our ability
to develop and commercialize our products may be limited.
WE EXPECT TO SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO CUSTOMERS LOCATED
OUTSIDE THE UNITED STATES. FOREIGN GOVERNMENT REGULATIONS, CURRENCY FLUCTUATIONS
AND INCREASED COSTS ASSOCIATED WITH INTERNATIONAL SALES COULD MAKE OUR PRODUCTS
UNAFFORDABLE IN FOREIGN MARKETS, WHICH WOULD REDUCE OUR FUTURE PROFITABILITY.
The largest of our initial product orders is with an international customer. We
expect that international sales will represent an increasingly significant
portion of our product sales. International sales can be subject to many
inherent risks that are difficult or impossible for us to predict or control,
including:
o changes in foreign government regulations and technical standards,
including additional regulation of rechargeable batteries or the
transport of lithium, which may reduce or eliminate our ability to
sell in certain markets;
o foreign governments may impose tariffs, quotas and taxes on our
batteries;
o requirements or preferences of foreign nations for domestic products
could reduce demand for our batteries;
o fluctuations in currency exchange rates relative to the U.S. dollar
could make our batteries unaffordable to foreign purchasers or more
expensive compared to those of foreign manufacturers;
o longer payment cycles typically associated with international sales
and potential difficulties in collecting accounts receivable may
reduce the future profitability of foreign sales;
o import and export licensing requirements in Northern Ireland or Korea
may reduce or eliminate our ability to sell in certain markets; and
o political and economic instability in Northern Ireland or Korea may
reduce the demand for our batteries or our ability to market our
batteries in foreign countries.
These risks may increase our costs of doing business internationally and reduce
our sales or future profitability.
POLITICAL INSTABILITY IN NORTHERN IRELAND COULD INTERRUPT MANUFACTURING OF OUR
BATTERIES AT OUR NORTHERN IRELAND FACILITY AND CAUSE US TO LOSE SALES AND
MARKETING OPPORTUNITIES.
Northern Ireland has experienced significant social and political unrest in the
past and we cannot assure you that these instabilities will not continue in the
future. Any political instability in Northern Ireland could temporarily or
permanently interrupt our manufacturing of batteries at our facility in Mallusk,
Northern Ireland. Any delays could also cause us to lose sales and marketing
opportunities, as potential customers would find other vendors to meet their
needs.
Page 22
<PAGE>
RISKS ASSOCIATED WITH OUR INDUSTRY
IF COMPETING TECHNOLOGIES THAT OUTPERFORM OUR BATTERIES WERE DEVELOPED AND
SUCCESSFULLY INTRODUCED, THEN OUR PRODUCTS MIGHT NOT BE ABLE TO COMPETE
EFFECTIVELY IN OUR TARGETED MARKET SEGMENTS.
The battery industry has experienced rapid technological change which we expect
to continue. Rapid and ongoing changes in technology and product standards could
quickly render our products less competitive, or even obsolete. Various
companies are seeking to enhance traditional battery technologies, such as lead
acid and nickel cadmium. Other companies have recently introduced or are
developing batteries based on nickel metal hydride, liquid lithium ion and other
emerging and potential technologies. These competitors are engaged in
significant development work on these various battery systems and 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. The capabilities of many of
these competing technologies have improved over the past several years.
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 PRINCIPAL COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES THAN WE
DO AND THEY MAY THEREFORE DEVELOP BATTERIES SIMILAR OR SUPERIOR TO OURS OR
OTHERWISE COMPETE MORE SUCCESSFULLY THAN WE DO.
Competition in the rechargeable 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. 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 original equipment manufacturers and other
customers. We believe that our primary competitors are existing suppliers of
liquid lithium ion, competing polymer and, in some cases, nickel metal hydride
batteries. These suppliers include Sanyo, Matsushita Industrial Co., Ltd.
(Panasonic), Sony, Toshiba and SAFT America, Inc. 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 our targeted
application segments, which include laptops, cellular telephones and personal
digital assistant products, on the basis of performance, size and shape, cost
and ease of recycling. There is also a risk that we may not be able to compete
successfully against manufacturers of other types of batteries in any of our
targeted applications.
LAWS REGULATING THE MANUFACTURE OR TRANSPORT OF BATTERIES MAY BE ENACTED WHICH
COULD RESULT IN A DELAY IN THE PRODUCTION OF OUR BATTERIES OR THE IMPOSITION OF
ADDITIONAL COSTS THAT WOULD HARM OUR ABILITY TO BE PROFITABLE.
At the present time, international, federal, state or local law does not
directly regulate the storage, use and disposal of the component parts of our
batteries or the transport of our batteries. However, laws and regulations may
be enacted in the future which could impose environmental, health and safety
controls on the storage, use, and disposal of certain chemicals and metals used
in the manufacture of lithium polymer batteries as well as regulations governing
the transport of our batteries. Satisfying any future laws or regulations could
require significant time and resources from our technical staff and possible
redesign which may result in substantial expenditures and delays in the
production of our product, all of which could harm our business and reduce our
future profitability.
GENERAL RISKS ASSOCIATED WITH STOCK OWNERSHIP
CORPORATE INSIDERS OR AFFILIATES WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL
OVER MATTERS REQUIRING STOCKHOLDER APPROVAL THAT MIGHT NOT BE IN THE BEST
INTERESTS OF OUR STOCKHOLDERS AS A WHOLE.
As of September 30, 2000, our officers, directors, and their affiliates as a
group beneficially owned approximately 20.7% of our outstanding common stock.
Carl Berg, one of our directors, owns a substantial portion of that amount. 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, which could
Page 23
<PAGE>
delay or prevent someone from acquiring or merging with us. The interest of our
officers and directors, when acting in their capacity as stockholders, may lead
them to:
o vote for the election of directors who agree with the incumbent
officers' or directors' preferred corporate policy; or
o oppose or support significant corporate transactions when these
transactions further their interests as incumbent officers or
directors, even if these interests diverge from their interests as
shareholders per se and thus from the interests of other shareholders.
SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT,
WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND LIMIT THE PRICE POTENTIAL
ACQUIRERS MAY BE WILLING TO PAY FOR YOUR SHARES.
Our board of directors has the authority, without any action by the
stockholders, to issue additional shares of our preferred stock, which shares
may be given superior voting, liquidation, distribution and other rights as
compared to those of our common stock. The rights of the holders of our capital
stock 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. The issuance of
additional shares of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. These provisions may have the effect of delaying, deferring or preventing
a change in control, may discourage bids for our common stock at a premium over
its market price and may decrease the market price, and infringe upon the voting
and other rights of the holders, of our common stock.
CONVERSION OF PREFERRED STOCK AND SALES OF COMMON STOCK BY CC INVESTMENTS LDC
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 September 30, 2000, it would
then own approximately 1,090,402 shares of our common stock. This amount
includes 642,641 shares of our common stock that CC Investments would acquire
upon their conversion of the shares of Series B Preferred Stock it currently
holds. Our Series B Preferred Stock has a variable conversion rate and is
convertible into a larger amount of shares when our common stock trades at a
price below $6.03 in six out of ten consecutive trading days. In addition, the
number of shares into which the preferred stock converts increases at 6% per
year. If CC Investments exercises additional warrants or converts its preferred
stock into shares of our common stock and sells the shares into the market,
these sales could depress the market price of our common stock and would dilute
your holdings in our common stock. Additionally, dilution or the potential for
dilution could harm our ability to raise capital through the future sale of
equity securities.
OUR STOCK PRICE IS VOLATILE. The market price of the shares of our common stock
has been and is likely to continue to be highly volatile. Factors that may have
a significant affect on the market price of our common stock include the
following:
o fluctuation in our operating results;
o announcements of technological innovations or new commercial products
by us or our competitors;
o failure to achieve operating results projected by securities analysts;
o governmental regulation;
o developments in our patent or other proprietary rights or our
competitors' developments;
o our relationships with current or future collaborative partners; and
o other factors and events beyond our control.
Page 24
<PAGE>
In addition, the stock market in general has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.
As a result of this potential stock price volatility, investors may be unable to
resell their shares of our common stock at or above the cost of their purchase
prices. In addition, companies that have experienced volatility in the market
price of their stock have been the object of securities class action litigation.
If we were the subject of securities class action litigation, this could result
in substantial costs, a diversion of our management's attention and resources
and harm to our business and financial condition.
FUTURE SALES OF CURRENTLY OUTSTANDING SHARES COULD ADVERSELY AFFECT OUR STOCK
PRICE.
The market price of our common stock could drop as a result of sales of a large
number of shares in the market or in response to the perception that these sales
could occur. In addition these sales might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. We had outstanding 38,514,069 shares of common stock, based
upon shares outstanding as of November 6, 2000 and the conversion of all of our
Series B Preferred Stock. Of these shares, most will be registered and freely
tradable. Included in this total are 102,300 shares, issued to a wholly owned
subsidiary, awaiting final distribution instructions, to complete our obligation
in accordance with the settlement of a class action lawsuit. In addition, we
have filed registration statements on Form S-8 under the Securities Act that
cover 2,125,107 shares of common stock pursuant to outstanding but unexercised
vested options to acquire our common stock.
WE DO NOT INTEND TO PAY DIVIDENDS AND THEREFORE YOU WILL ONLY BE ABLE TO RECOVER
YOUR INVESTMENT IN OUR COMMON STOCK, IF AT ALL, BY SELLING THE SHARES OF OUR
STOCK THAT YOU HOLD.
Some investors favor companies that pay dividends. We have never declared or
paid any cash dividends on our common stock. We currently intend to retain any
future earnings for funding growth and we do not anticipate paying cash
dividends on our common stock in the foreseeable future. Because we may not pay
dividends, your return on an investment in our shares likely depends on your
ability to sell our stock at a profit.
Page 25
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has long term debt, principally in the form of two building
mortgages, one of which has a balloon payoff in fiscal 2002. One note bears
interest at a fixed rate of 10.4% and the other note bears interest at an
annually adjustable published interest rate index (7.375% at September 30,
2000).
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its debt obligations approximates fair
value. At September 30, 2000, the weighted average interest rate on the
Company's long term debt is 8.442%.
The table below presents principal amounts by fiscal year for the Company's
long-term debt.
<TABLE>
<CAPTION>
2001 2002 2003 2004 2005 Thereafter Total
--------- --------- --------- --------- --------- ----------- ----------
(in thousands)
Liabilities:
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt......... $ 83 $ 1272 $ -- $ -- $ -- $ -- $ 1355
Variable rate debt...... 118 248 267 287 309 1258 2487
</TABLE>
Page 26
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 affect on the Company's financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS:
(i) 27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
(i) None
Page 27
<PAGE>
SIGNATURES
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 14, 2000 By: /S/ JAY L. KING
------------------------------------------
Jay L. King
Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Exhibit
-------------- -------
27 Financial Data Schedule
Page 28
