-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PeToFUJl0vDHf8dP27s8XIknavPomSlxuLanr/VBzuHrZ8er6DuKQG703RkjYuRq hvX6EqBGtUIvKDfuM/3vgg== 0001011438-06-000486.txt : 20060629 0001011438-06-000486.hdr.sgml : 20060629 20060629155740 ACCESSION NUMBER: 0001011438-06-000486 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060629 DATE AS OF CHANGE: 20060629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALENCE TECHNOLOGY INC CENTRAL INDEX KEY: 0000885551 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 770214673 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20028 FILM NUMBER: 06933800 BUSINESS ADDRESS: STREET 1: 6504 BRIDGE POINT PARKWAY, SUITE 415 CITY: AUSTIN STATE: TX ZIP: 78730 BUSINESS PHONE: 5125272900 MAIL ADDRESS: STREET 1: 6504 BRIDGE POINT PARKWAY, SUITE 415 CITY: AUSTIN STATE: TX ZIP: 78730 10-K 1 form_10-k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2006 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 incorporation or organization) Identification No.) 12201 TECHNOLOGY BOULEVARD, SUITE 150 AUSTIN, TEXAS 78727 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (512) 527-2900 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, $.001 par value Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X] 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 and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer" or "large accelerated filer" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ] Accelerated Filer [X] Non-accelerated filer [ ] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the Registrant's common equity held by non-affiliates was $126,144,231 as of September 30, 2005, the last business day of the registrant's most recently completed second fiscal quarter and based upon the average bid and asked price of the Registrant's Common Stock. This calculation excludes approximately 46,547,687 shares of Common Stock held by directors, officers and holders of 5% or more of Registrant's outstanding Common Stock and such exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant. The number of shares outstanding of the Registrant's Common Stock as of June 2, 2006 was 94,120,271. VALENCE TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED MARCH 31, 2006 INDEX
PAGE Forward-Looking Statements...............................................................................1 PART I Item 1. Business.................................................................................................1 Item 1A. Risk Factors ............................................................................................8 Item 1B. Unresolved Staff Comments...............................................................................20 Item 2. Properties..............................................................................................20 Item 3. Legal Proceedings.......................................................................................20 Item 4. Submission of Matters to a Vote of Security Holders.....................................................20 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities....................................................................................21 Item 6. Selected Financial Data.................................................................................22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation....................23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..............................................33 Item 8. Financial Statements and Supplementary Data.............................................................34 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....................61 Item 9A. Controls and Procedures.................................................................................61 Item 9B. Other Information.......................................................................................63 PART III Item 10. Directors and Executive Officers of the Registrant......................................................64 Item 11. Executive Compensation..................................................................................66 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..........71 Item 13. Certain Relationships and Related Transactions..........................................................73 Item 14. Principal Accountant Fees and Services..................................................................74 PART IV Item 15. Exhibits and Financial Statement Schedules..............................................................75 Signatures..............................................................................................80
FORWARD-LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K (THIS "FORM 10-K" OR THIS "REPORT") CONTAINS STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE EXCHANGE ACT AND SECTION 27A OF THE SECURITIES ACT. THE WORDS "EXPECT," "ESTIMATE," "ANTICIPATE," "PREDICT," "BELIEVE," AND SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS FILING AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF VALENCE TECHNOLOGY, INC. (THE "COMPANY," "VALENCE," "WE," OR "US"), OUR DIRECTORS OR OFFICERS WITH RESPECT TO, AMONG OTHER THINGS (A) TRENDS AFFECTING OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS, (B) OUR PRODUCT DEVELOPMENT STRATEGIES, (C) TRENDS AFFECTING OUR MANUFACTURING CAPABILITIES, (D) TRENDS AFFECTING THE COMMERCIAL ACCEPTABILITY AND SALES OF OUR PRODUCTS AND (E) OUR BUSINESS AND GROWTH STRATEGIES. OUR STOCKHOLDERS ARE CAUTIONED NOT TO PUT UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THIS REPORT, FOR THE REASONS, AMONG OTHERS, DISCUSSED IN THE SECTIONS - "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION". WE UNDERTAKE NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE AFTER THE DATE HEREOF. PART I ITEM 1. BUSINESS OVERVIEW Valence Technology, Inc. was founded in 1989 and has commercialized the industry's first phosphate-based lithium-ion technology. Our mission is to drive the wide adoption of high-performance, safe, low-cost energy storage systems by drawing on the numerous benefits of our Saphion(R) battery technology, the experience of our management team and the significant market opportunity available to us. In February 2002, we unveiled our Saphion(R) technology, a lithium-ion technology which utilizes a phosphate-based cathode material. Traditional lithium-ion technology utilizes an oxide-based cathode material, which has limited its adoption to small applications such as notebook computers, cellular phones and personal digital assistants ("PDAs") due to safety concerns related to its use in large applications. We believe that Saphion(R) technology addresses the major weaknesses of this existing technology while offering a solution that is competitive in cost and performance. We believe that by incorporating a phosphate-based cathode material, our Saphion(R) technology is able to offer greater thermal and electrochemical stability than traditional lithium-ion technologies, which will facilitate its adoption in large application markets not traditionally served by lithium-ion batteries such as motive power, vehicular, portable appliances, telecommunications, and utility back-up systems. Currently, we offer our Saphion(R) technology in both cylindrical and polymer construction and have initiated the design of a prismatic cell. We believe offering Saphion(R) technology in multiple constructions will provide us greater flexibility in our response to the needs of the market. Key product introductions based on our Saphion(R) technology: o In February 2002, we launched the N-Charge(TM) Power System into several channels for sales and distribution, including national and regional retailers, top tier computer manufacturers, and national resellers. o In February 2004, we announced the second generation N-Charge(TM) Power System II, currently being sold through our existing sales and distribution channels. o In February 2004, we also introduced a prototype of the U-Charge(R) Power System family of large-format products. The U-Charge(R) Power System is in production in our China facilities and is designed to power a variety of motive applications from hybrid and electric vehicles to scooters and wheelchairs, and can also be used in stationary applications. o In March 2005, we announced availability of Saphion(R) powered batteries for Segway Inc.'s 2005 products. Our batteries doubled the range of Segway's Human Transporters compared to the nickel metal hydride batteries that were previously used. o In May 2005, we launched the industry's first commercially available phosphate-based lithium-ion power cell. Built with our proprietary Saphion(R) technology, this cell offers the high discharge rates required of power cells with the 1 safety features enabled by our phosphate-based cathode material. Our power cell is optimal for use in portable appliances, hybrid and electric vehicles. o In January 2006, we announced availability of eight new models of our large-format lithium-ion U-Charge(R) XP Power System batteries which feature built in battery management electronics and power rates of 500 to 1700 continuous watts, depending on the model. As part of our low-cost manufacturing strategy, we have successfully transitioned our powder manufacturing from Las Vegas, Nevada to Suzhou, China. This transition allows us to capitalize on lower manufacturing costs. Our research and development efforts are focused on the design of new products utilizing our Saphion(R) chemistry, the scale-up of our second generation Saphion(R) technology, the development of different cell constructions to optimize power and size for new applications, as well as developing future materials based on the Saphion(R) technology attributes. STRATEGY Our business strategy is focused on a mix of system, cell and licensing sales, and includes a manufacturing plan that leverages internal capabilities and partnerships with contract manufacturers. We plan to drive the adoption of our Saphion(R) technology by offering existing and new solutions that differentiate our own products and end-users' products by offering safety and performance characteristics previously unavailable to those end-users' products. Key elements of our strategy include: o DEVELOP AND MARKET DIFFERENTIATED BATTERY SOLUTIONS FOR A WIDE ARRAY OF APPLICATIONS THAT LEVERAGE THE TECHNOLOGICAL ADVANTAGES OF OUR SAPHION(R) TECHNOLOGY. Our product development and marketing efforts are focused on large-format battery solutions, such as our U-Charge(R) Power System and K-Charge(R) Power System and other custom battery solutions that require the performance and technological advantages of our Saphion(R) technology. These products are targeted for a broad range of applications in the motive, power and consumer appliance, telecommunication and utility industries and as a substitute for certain applications using lead-acid batteries. o EXECUTE ON OUR MANUFACTURING PLAN TO PROVIDE HIGH-QUALITY, COST-COMPETITIVE PRODUCTS. In fiscal 2004 we determined to move our manufacturing from Ireland to China and other low-cost manufacturing centers, using both internal and contract manufacturing capabilities. We have a facility in China, for the manufacture of the base powder used in our Saphion(R) cells and a facility for the manufacture of the large-format battery packs. We also have arrangements with contract manufacturers for cell production. We believe this manufacturing strategy will allow us to directly control our intellectual property and operations management as well as deliver high-quality products which meet the needs of a broad range of customers and applications. o IMPLEMENT A PHASED APPROACH TO OUR BUSINESS STRATEGY. Our business strategy has been implemented in three fluid phases, each building on the previous one: 1. Initial Phase: The initial phase of our strategy, now complete, focused on the first generation of our Saphion(R) technology in our patented polymer construction. During this phase, we introduced the N-Charge(TM) Power System which has been sold through national and regional retailers, top-tier computer manufacturers and national resellers. 2. Second Phase: The second phase of the business strategy is nearly complete. Throughout this phase our cell development has focused on commercializing a cylindrical battery construction, developing a large prismatic cell and introducing a power cell all utilizing our first generation of Saphion(R) material. Additionally, we have focused on completing the development of our second-generation Saphion(R) technology. Our systems development focused on creating energy storage systems for the stationary and motive markets and led to the launch of our U-Charge(R) Power System product family. This family of products is designed for motive applications such as hybrid and electric vehicles, scooters and wheelchairs and has the same dimensions as the most popular lead acid batteries but with significant increases in performance related to cycle life and weight. 3. Final Phase: The final phase of our business strategy will entail the commercial production of Saphion(R) technology-based energy solutions for the vehicular, portable appliance, telecommunications and utility industries, with continuing focus on marketing small-format Saphion(R) solutions through our developed sales channels. We believe our strategy will allow us to expand our market opportunity. Through the sales of products based on our differentiated Saphion(R) technology, and the establishment of Asian operations and partnerships to achieve the lowest 2 possible costs, we believe we are equipped to serve existing lithium-ion technology markets as well as open doors to new market opportunities. FISCAL 2006 HIGHLIGHTS AND RECENT EVENTS PRODUCT ACHIEVEMENTS o In June 2005, Clean-Tech selected the U-Charge(R) Power System to be the battery solution in their development of electric/fuel-cell hybrid all-terrain vehicles ("ATVs"). The U-Charge(R) Power Systems modular design enabled Clean-Tech to easily integrate them into their current battery platform. o In January 2006, we launched a U-Charge(R) Power system and fuel gauge product designed specifically for the electric wheelchair market. OPERATIONAL ACHIEVEMENTS o In May 2005, we announced the industry's first phosphate-based lithium-ion power cell. This cell is based on our Saphion(R) technology and offers a safe upgrade path for portable appliances and hybrid and electric vehicles that are currently using nickel metal hydride and nickel-cadmium technologies. o In July 2005, we hired a new President and Chief Executive Officer, James Akridge. Dr. Akridge has over 25 years of experience in the battery industry most recently as Chief Technology Officer at Sion Power Corporation. Previously, Dr. Akridge had worked for Energizer Holdings, Inc. for 20 years and has a Ph. D. in electrochemistry. o In September 2005, we hired a Chief Financial Officer, Thomas Mezger. Mr. Mezger has over 20 years experience in accounting, finance and operations both the U.S. and overseas most recently as Controller at Precision Castparts Corp. which was acquired by Cooper Cameron Corp. Previously, Mr. Mezger has worked for both large and small companies including over 18 years at Motorola, Inc. SAPHION(R) TECHNOLOGY: THE NEXT-GENERATION IN LITHIUM-ION TECHNOLOGY The driving force behind the introduction of lithium-ion technology to the rechargeable battery industry was consumer demand for high-energy, small battery solutions to power portable electronic devices. Lithium-ion cobalt-oxide technology was developed to meet that demand and represented a significant advancement in battery technology. Today, however, the challenge is to find ways to maintain costs and meet safety and environmental concerns, while increasing energy density. Additionally, as a result of the safety concerns associated with producing traditional lithium-ion cobalt-oxide technology in large-format applications, many markets today remain served by older technologies, such as lead-acid, nickel-cadmium, and nickel metal hydride, which offer low energy density and significant maintenance costs. Valence believe its Saphion(R) technology, which utilizes an environmentally friendly phosphate-based cathode in place of other less stable and most costly materials, addresses the current challenges facing the rechargeable battery industry and provides us with several competitive advantages. Key attributes of our Saphion(R) technology include: o INCREASED SAFETY. Valence believes that its Saphion(R) technology significantly reduces the safety risks associated with oxide-based lithium-ion technologies. The unique chemical properties of phosphates render them incombustible if mishandled during charging or discharging. As a result, we believe Saphion(R) technology is more stable under overcharge or short circuit conditions than existing lithium-ion technology and has the ability to withstand higher temperatures and electrical stress. The thermal and chemical stability inherent in our Saphion(R) technology enables the creation of large, high energy density lithium-ion solutions. o PERFORMANCE ADVANTAGES. Valence believes its Saphion(R) technology offers several performance advantages over the competing battery chemistries of lead-acid, nickel-cadmium, nickel metal hydride and traditional lithium-ion technologies, including high rate capability, long cycle life, long shelf life, and lower total cost of ownership. o HIGH ENERGY DENSITY. In its large-format application, our Saphion(R) technology exhibits an energy density which exceeds other battery chemistries utilized in this market such as lead-acid, nickel metal hydride and nickel-cadmium. o HIGH RATE CAPABILITY. In the power cell construction, our Saphion(R) technology offers an exceptional rate capability with sustained 10 to 15C discharges and low impedance of less than 20m Ohms. These two 3 characteristics result in a cell that provides larger bursts of power while generating less heat than energy cells. o INCREASED CYCLE LIFE. Current testing of Saphion(R) technology has yielded cycle life of 2000 cycles at 23(0)C to 70% of the battery's initial capacity, resulting in a longer life span. o NO MEMORY EFFECT AND MAINTENANCE-FREE. Saphion(R) technology does not exhibit the "memory effect" of nickel-cadmium and is maintenance-free. o LOWER COST. The phosphate material used in our Saphion(R) technology is estimated to be less expensive than the cobalt-oxide material used in competing lithium-ion technologies. As a result, Valence believes that as demand increases for Saphion batteries, resulting in larger production volumes, material costs should decrease. Finally, the lower maintenance costs, long cycle life and long service life associated with Saphion(R) technology lead to a lower total cost of ownership in numerous applications. o FLEXIBILITY. Due to the stability of Saphion(R) technology, it can be manufactured to fit small as well as large applications. Small applications include those utilized in the portable device applications, while large applications include high-energy, high power applications such as back-up power systems and vehicles. Additionally, Saphion(R) technology is available in both polymer and cylindrical construction. In the future, Valence plans to offer it in a prismatic construction. o ENVIRONMENTAL FRIENDLINESS. Rechargeable batteries that contain nickel metal hydride, nickel-cadmium, lead-acid, or other toxic metals raise environmental concerns. Saphion(R) technology incorporates an environmentally friendly, phosphate-based cathode material that lessons the disposal issues versus other types of batteries. COMPETITIVE STRENGTHS Competition in the battery industry is intense. In the rechargeable battery market, the principal competitive technologies currently marketed are lead-acid, nickel-cadmium, nickel metal hydride, liquid lithium-ion and lithium-ion polymer batteries. The industry consists of major domestic and international companies, which have substantial financial, technical, marketing, sales, manufacturing, distribution and other resources available to them. Our primary competitors who have announced availability of either lithium-ion or other competing rechargeable battery products include Sony, Matshushita Industrial Co., Ltd. (Panasonic), SAFT, A123 Sysems, Inc. and E-One Moli Energy among others. The performance characteristics of lithium-ion batteries, in particular, have consistently improved over time as the market leaders have improved the technology. Other contenders have recently emerged with a primary focus on price competition. In addition, a number of companies are undertaking research in other rechargeable battery technologies, including work on lithium-ion phosphate technology. Nevertheless, Valence is continually evolving our its Saphion technology to meet these and other competitive threats. Valence believes that it has important technological advantages over competitors in terms of ability to compete in the rechargeable battery market. Valence believes that our Saphion phosphate battery chemistry, construction and manufacturing processes enable Valence to serve a wide range of markets that do not currently use lithium-ion batteries. Valence is uniquely positioned for growth due to the following: o LEADING TECHNOLOGY. Phosphate-based Saphion(R) lithium-ion technology offers many performance advantages over competing battery technologies. Valence believes the safety advantages inherent to Saphion(R) technology enables the design of large-format lithium-ion energy systems. As the first company in the battery industry to commercialize phosphates, Valence believes it has a significant advantage in terms of time to market as well as chemistry and manufacturing expertise. o NEW MARKET OPPORTUNITIES. Valence believes that Saphion(R) technology enables the production of high energy density, large-format batteries without the safety concerns presented by oxide-based lithium-ion batteries. Consequently, Saphion(R) technology energy and power systems can be designed in a wide variety of products in markets not served by current lithium-ion technology. Valence intends to expand the market opportunity for lithium-ion by designing our Saphion(R) technology into a wide variety of products for the telecommunications, utility, motive power and vehicular markets. 4 o REFINED STRATEGIC FOCUS. We have transitioned to a company capitalizing on the results of Valence research and development by strengthening sales and marketing efforts. Valence is expanding our vision to become an energy solutions company, and plan to enter markets previously not served by lithium-ion solutions. PRODUCTS THE N-CHARGE(TM) POWER SYSTEM FAMILY The N-Charge(TM) Power System Family includes two generations of a universal, external battery for mobile devices featuring our Saphion(R) technology. It is a stand-alone tool that provides easy-to-use, anytime, anywhere power for a wide variety of portable electronic devices. Our N-Charge(TM) Power System is available in commercial quantities and is currently offered through major retailers, resellers and tier-one companies, as well as through our own direct sales organization. THE U-CHARGE(R) POWER SYSTEM FAMILY The U-Charge(R) Power System is a family of products based on Saphion(R) technology and designed to be a direct replacement for standard-sized lead-acid batteries. The batteries in this line of 12-volt energy storage systems offer twice the run-time and a third less weight than lead-acid, expanded calendar life, and greater cycle life with full depth of discharge, resulting in significantly lower total costs of ownership. U-Charge(R) Power Systems have been designed for applications such as electric vehicles, wheelchairs, scooters and other motive devices. SALES AND MARKETING At June 2, 2006, Valence had a sales and marketing team consisting of 14 persons, headed up by our President of Global Marketing and Sales. Our sales and marketing staff are located in Austin, Texas; Chicago, Illinois; Atlanta, Georgia; Mallusk, Northern Ireland and Shanghai, China. The N-Charge(TM) Power Systems are marketed and sold to national retailers, distributors and value-added resellers, and directly by our sales force and through our Web site. Sales are generally made by standard purchase order. The U-Charge(R) Power System is customized to a particular customer's application and can require a significant amount of attention and commitment, including potential capital outlays by prospective customers. The client evaluation and approval process is generally between six and twenty-four months. Valence anticipates sales will typically be made through separately negotiated supply agreements rather than standard purchase orders. Our U-Charge(R) Power Systems are expected to be sold in both standard and custom configurations. In addition, we expect to design and sell custom battery systems based on our Saphion(R) technology. Valence provides pack level design and engineering services to assist the customer in configuring a product that meets its needs. Sales of products are typically denominated in United States dollars. Consequently, sales historically have not been subject to currency fluctuation risk. MANUFACTURING During fiscal 2004 we closed our Northern Ireland manufacturing facility and now rely on contracts with third-party manufacturers for all of our cell manufacturing requirements. Our base Saphion(R) battery cathode powder is now manufactured in one of our Wholly Foreign Owned Enterprises ("WFOE's") in Suzhou, China. Polymer batteries are manufactured for us by Amperex Technology, Ltd. ("ATL") under a manufacturing contract, cylindrical batteries are manufactured for us by ATL and Tianjin Lishen Battery Joint-Stock Co., Ltd. ("Lishen"). Our products are assembled into complete systems using both contract manufacturers in China and the U.S. or our own assembly facilities in Suzhou, China. We have a multi-year contract with ATL. With these relationships we believe that we will have sufficient capacity to meet or exceed expected demands in fiscal 2007. RESEARCH AND PRODUCT DEVELOPMENT We conduct materials research and development at our Las Vegas, Nevada facility and product development at our China facilities. Our battery research and development group develops and improves the existing technology, materials and processing methods and develops the next generation of our battery technology. Our areas of expertise include: chemical engineering; process control; safety; anode, cathode, and electrolyte chemistry and physics; polymer and radiation chemistries; thin film technologies; coating technologies; analytical chemistry; and material science. Our research and development efforts over the past year and ongoing have focused on three areas: 5 o CONTINUING DEVELOPMENT OF SAPHION(R) TECHNOLOGY IN MULTIPLE CONSTRUCTIONS. Our first generation Saphion(R) material was successfully scaled in cylindrical construction in fiscal 2004. Throughout fiscal 2005 our development team focused on increasing capacity of the energy cell, offering other constructions such as a large prismatic cell and designing the power cell. In late fiscal 2005 our team implemented a product change which increased the capacity of the energy cell. We have continued to develop a prismatic cell which is targeted for launch in the summer of 2007 and officially launched the industry's first commercially available phosphate-based power cell in May 2005. o DEVELOPMENT OF SECOND GENERATION OF SAPHION(R) TECHNOLOGY. We are currently working on the development of an energy cylindrical cell and a power cylindrical cell using our second generation Saphion(R) technology. The potential applications for the energy cell include electric vehicles, motive applications, notebook computers, and consumer electronics. The potential applications for the power cell include consumer appliances, such as power tools and hybrid electric vehicles. The second generation energy cells are expected to ramp over the next few quarters, while the power cells are still under development. The second generation Saphion(R) technology is expected to deliver similar safety attributes with expected greater energy and power density capabilities than our first generation Saphion(R) technology and a cycle life similar to existing lithium-ion technologies. o LARGE-FORMAT APPLICATIONS FOR SAPHION(R) TECHNOLOGY. The benefits of Saphion(R) technology have led to interest across a broad spectrum of industries from potential customers for large-format solutions. In large-format applications, Saphion(R) technology provides kilowatts of safe, lithium-ion power that is long-lasting reliable and maintenance-free. It offers excellent cycle life and run-time, and as a result has attracted customers such as EV manufacturers, AEP, Tyco and Graham Field, who are currently evaluating the product. We intend to continuously improve our technology, and are currently focusing on improving the energy density of our products. We are working to advance these improvements into production. We also are working with new materials to make further improvements to the performance of our products. We believe the safety features of our technology and the ongoing improvements in the performance of our batteries will allow us to maintain our competitive advantage. CUSTOMERS Over the last three fiscal years, a limited number of our customers have accounted for a significant portion of our revenues. During fiscal 2006, three customers, Segway Inc., D&H Distributing Co., Inc., and PC Connection, Inc. contributed 53%, 12%, and 8%, respectively of our total revenues.. During fiscal 2005, three customers, D&H Distributing Co., Inc., PC Connection, Inc., and Best Buy Co., Inc. accounted for approximately 46% of our revenue. During fiscal 2004, Best Buy Co., Inc. accounted for approximately 30% of our total revenues. 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. Currently, we do not have any long-term agreements with any of our customers. INTELLECTUAL PROPERTY Our ability to compete effectively depends in part on our ability to maintain the proprietary nature of our technology and manufacturing processes through a combination of patent and trade secret protection, non-disclosure agreements and cross-licensing agreements. We rely on patent protection for certain designs and products. We hold approximately 146 United States patents, which have expiration dates through 2025 and have about 38 patent applications pending in the United States. We continually prepare new patent applications for filing in the United States. We also actively pursue patent protection in certain foreign countries. In addition to potential patent protection, we rely on the laws of unfair competition and trade secrets to protect our proprietary rights. We attempt to protect our trade secrets and other proprietary information through agreements with customers and suppliers, proprietary information agreements with employees and consultants and other security measures. REGULATIONS Before we commercially introduce our batteries into certain markets, we may be required, or may voluntarily determine to obtain approval of our materials and/or products from one or more of the organizations engaged in regulating product safety. These approvals could require significant time and resources from our technical staff, and, if redesign were necessary, could result in a delay in the introduction of our products in those markets. The United States Department of Transportation, or DOT, and the International Air Transport Association, or IATA, regulates the shipment of hazardous materials. The United Nations Committee of Experts for the Transportation of Dangerous Goods has adopted amendments to the international regulations for "lithium equivalency" tests to determine the aggregate lithium content of lithium-ion polymer batteries. In addition, IATA has adopted special size limitations for 6 applying exemptions to these batteries. Under IATA, our N-Charge(TM) Power System (65) and N-Charge(TM) Power System II are exempt from Class 9 designation for transportation. Our N-Charge(TM) Power System (130), the K-Charge(R) Power System and U-Charge(R) Power System currently fall within the level such that they are not exempt and require a Class 9 designation for transportation. We comply with all safety-packaging requirements worldwide and future DOT or IATA regulations or enforcement policies could impose costly transportation requirements. In addition, compliance with any new DOT or IATA approval process could require significant time and resources from our technical staff and if redesign were necessary, could delay the introduction of new products. The Nevada Occupational Safety and Health Administration and other regulatory agencies have jurisdiction over the operations of our Las Vegas, Nevada facility. Because of the risks generally associated with the use of flammable solvents and other hazardous materials, we expect rigorous enforcement of applicable health and safety regulations. In addition, we currently are regulated by the State Fire Marshall's office and local Fire Departments. Frequent audits or changes in their regulations may cause unforeseen delays and require significant time and resources from our technical staff. The Clark County Air Pollution Control District has jurisdiction over our Las Vegas, Nevada facility and annual audits and changes in regulations could impact current permits affecting production or time constraints placed upon personnel. Federal, state and local regulations impose various environmental controls on the storage, use and disposal of certain chemicals and metals used in the manufacture of lithium-ion batteries. There are similar national, provincial and local regulations in China. Although we believe that our activities conform to the current environmental regulations, any changes in these regulations may impose costly equipment or other requirements. Our failure to adequately control the discharge of hazardous wastes also may subject us to future liabilities. EMPLOYEES At June 2, 2006, we had a total of 37 regular full-time employees in the United States at our Austin, Texas headquarters and our Las Vegas, Nevada research and development facility. We had 23 total employees in the areas of administration, sales, marketing, legal, finance, management information systems, purchasing, quality control, shipping and receiving and environmental, health and safety. We had 14 total employees in the areas of research and development, product development and engineering. At June 2, 2006, our Cayman subsidiary had two regular full-time employees in the areas of engineering and sales located in the United Kingdom. In addition, at June 2, 2006, our China operations, consisting of two Wholly Foreign Owned Enterprises ("WFOE's"), had 300 regular full-time employees, 43 persons working through Foreign Enterprise Services, Co. ("FESCO") and three ex-patriates. None of our employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be good. WEBSITE AVAILABILITY OF OUR REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION We maintain a website with the address www.valence.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this annual report on Form 10-K. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file that material with, or furnish such material to, the Securities and Exchange Commission. 7 ITEM 1A. RISK FACTORS SEVERAL OF THE MATTERS DISCUSSED IN THIS REPORT 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 FORECASTED IN THIS REPORT 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. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY RISKS AND UNCERTAINTIES WE FACE. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS COULD SUFFER. IN THAT EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT IN OUR COMMON STOCK. THE RISKS DISCUSSED BELOW ALSO INCLUDE FORWARD-LOOKING STATEMENTS AND OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. RISKS RELATED TO OUR BUSINESS THERE IS DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN We have experienced significant operating losses in the current and prior years. At March 31, 2006, our principal sources of liquidity were cash and cash equivalents of $0.6 million and $5.4 million remaining under the $20 million backup equity funding commitment entered into in June 2005 with Mr. Carl Berg, our chairman of the board and principal stockholder. Subsequent to March 31, 2006 we have exhausted the $5.4 million remaining under Mr. Berg's funding commitment through a draw down of $4.5 million and receipt of net proceeds of $1.1 million from the sale of stock under a controlled equity offering agreement with Cantor Fitzgerald. Although Mr. Berg may continue to fund the Company's operations he is under no obligation to do so. We intend to improve our liquidity by the continued monitoring and reduction of manufacturing, facility and administrative costs. However, notwithstanding these efforts, we do not expect that our cash on hand and cash generated by operations will be sufficient to fund our operating and capital needs beyond the next three months.As a result of our limited cash resources and history of operating losses, our auditors have expressed in their report on our consolidated financial statements included herein that there is substantial doubt about our ability to continue as a going concern. We presently have no further commitments for financing by Mr. Berg or any other source. If we are unable to obtain financing from Mr. Berg or others on terms acceptable to us, or at all, we may be forced to cease all operations and liquidate our assets. WE HAVE ENCOUNTERED PROBLEMS IN OUR PRODUCTION PROCESSES THAT HAVE LIMITED OUR ABILITY AT TIMES TO PRODUCE SUFFICIENT BATTERIES TO MEET THE DEMANDS OUR CUSTOMERS. IF THESE ISSUES RECUR AND WE ARE UNABLE TO TIMELY RESOLVE THESE PROBLEMS, OUR INABILITY TO PRODUCE BATTERIES WILL HAVE A MATERIAL ADVERSE IMPACT ON OUR ABILITY TO GROW REVENUES AND MAINTAIN OUR CUSTOMER BASE. During the third and fourth quarter of fiscal 2006 we experienced problems in our production processes that limited our ability to produce a sufficient number of batteries to meet the demands of our customers. These production issues have had a negative impact on gross margins for the third and fourth quarters of fiscal 2006 as manufacturing yields have suffered. Any inability to timely produce batteries may have a material adverse impact on our ability to grow revenues and maintain our customer base. OUR LIMITED FINANCIAL RESOURCES COULD MATERIALLY AFFECT OUR BUSINESS, OUR ABILITY TO COMMERCIALLY EXPLOIT OUR TECHNOLOGY AND OUR ABILITY TO RESPOND TO UNANTICIPATED DEVELOPMENT, AND COULD PLACE US AT A DISADVANTAGE TO OUR COMPETITORS. Currently, we do not have sufficient capital resources, sales and gross profit to generate the cash flows required to meet our operating and capital needs. As a consequence, one of our primary objectives has been to reduce expenses and overhead, thus limiting the resources available to the development and commercialization of our technology. Our limited financial resources could materially affect our ability, and the pace at which, we are able to commercially exploit our Saphion(R) technology. For example, it could: o limit the research and development resources we are able to commit to the further development of our technology and the development of products that can be commercially exploited in our marketplace; o limit the sales and marketing resources that we are able to commit to the marketing of our technology; o have an adverse impact on our ability to attract top-tier companies as our technology and marketing partners; o have an adverse impact on our ability to employ and retain qualified employees with the skills and expertise necessary to implement our business plan; 8 o make us more vulnerable to failure to achieve our forecasted results, economic downturns, adverse industry conditions or catastrophic external events; o limit our ability to withstand competitive pressures and reduce our flexibility in planning for, or responding to, changing business and economic conditions; and o place us at a disadvantage to our competitors that have greater financial resources than we have. WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT AND MAY NEVER ACHIEVE OR SUSTAIN SIGNIFICANT REVENUES OR PROFITABILITY. We have incurred operating losses each year since our inception in 1989 and had an accumulated deficit of $494.2 million as of March 31, 2006. We have sustained recurring losses related primarily to the research and development and marketing of our products combined with the lack of sufficient sales to provide for these needs. We anticipate that we will continue to incur operating losses and negative cash flows during fiscal 2007. We may never achieve or sustain sufficient revenues or profitability in the future. IF WE CONTINUE TO EXPERIENCE SIGNIFICANT LOSSES WE MAY BE UNABLE TO MAINTAIN SUFFICIENT LIQUIDITY TO PROVIDE FOR OUR OPERATING NEEDS. We reported a net loss available to common stockholders of $32.9 million for the fiscal year ended March 31, 2006, a net loss available to common stockholders of $32.2 million for the fiscal year ended March 31, 2005 and a net loss available to common stockholders of $56.1 million for the fiscal year ended March 31, 2004. If we cannot achieve a competitive cost structure, achieve profitability and access the capital markets on acceptable terms, we will be unable to fund our obligations and sustain our operations and may be required to liquidate our assets. OUR WORKING CAPITAL REQUIREMENTS MAY INCREASE BEYOND THOSE CURRENTLY ANTICIPATED. We have planned for an increase in sales and, if we experience sales in excess of our plan, our working capital needs and capital expenditures would likely increase from that currently anticipated. Our ability to meet this additional customer demand would depend on our ability to arrange for additional equity or debt financing since it is likely that cash flow from sales will lag behind these increased working capital requirements. OUR INDEBTEDNESS AND OTHER OBLIGATIONS ARE SUBSTANTIAL AND COULD MATERIALLY AFFECT OUR BUSINESS AND OUR ABILITY TO INCUR ADDITIONAL DEBT TO FUND FUTURE NEEDS. We have and will continue to have a significant amount of indebtedness and other obligations. As of March 31, 2006, we had approximately $72.7 million of total consolidated indebtedness. Included in this amount are $39.2 million of loans outstanding to an affiliate, $15.6 million of accumulated interest associated with those loans and $17.9 million of principal and interest outstanding with a third party finance company. Our substantial indebtedness and other obligations could negatively impact our operations in the future. For example, it could: o limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes; o require us to dedicate a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the funds available to us for other purposes; o make us more vulnerable to failure to achieve our forecasted results, economic downturns, adverse industry conditions or catastrophic external events, limit our ability to withstand competitive pressures and reduce our flexibility in planning for, or responding to, changing business and economic conditions; and o place us at a disadvantage to our competitors that have relatively less debt than we have. ALL OF OUR ASSETS ARE PLEDGED AS COLLATERAL UNDER OUR LOAN AGREEMENTS. OUR FAILURE TO MEET THE OBLIGATIONS UNDER OUR LOAN AGREEMENTS COULD RESULT IN FORECLOSURE OF OUR ASSETS. All of our assets are pledged as collateral under various loan agreements with Mr. Berg or related entities. If we fail to meet our obligations pursuant to these loan agreements, these lenders may declare all amounts borrowed from them to be due and payable together with accrued and unpaid interest. If this were to occur, we would not have the financial resources to repay our debt and these lenders could proceed against our assets. 9 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. During the fiscal year ended March 31, 2006, Segway Inc., D&H Distributing Co., Inc., and PC Connection, Inc. contributed 53%, 12%, and 8%, of our revenues, respectively. 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 one or more 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; or o failure of a customer to make timely payment of our invoices. 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. OUR BUSINESS WILL BE ADVERSELY AFFECTED IF OUR SAPHION(R) TECHNOLOGY BATTERIES ARE NOT COMMERCIALLY ACCEPTED. We are researching and developing batteries based upon phosphate chemistry. Our batteries are designed and manufactured as components for other companies and end-user customers. Our success depends on the acceptance of our batteries and the products using our batteries in their markets. Technical issues may arise that may affect the acceptance of our products by our customers. Market acceptance may also depend on a variety of other factors, including educating the target market regarding the benefits of our products. Market acceptance and market share are also affected by the timing of market introduction of competitive products. If we, or our customers, are unable to gain any significant market acceptance for Saphion(R) technology-based batteries, our business will be adversely affected. It is too early to determine if Saphion(R) technology-based batteries will achieve significant market acceptance. IF WE ARE UNABLE TO DEVELOP, MANUFACTURE AND MARKET PRODUCTS THAT GAIN WIDE CUSTOMER ACCEPTANCE, OUR BUSINESS WILL BE ADVERSELY AFFECTED. The process of developing our products is complex and failure to anticipate our customers' changing needs and to develop products that receive widespread customer acceptance could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will eventually result in products that the market will accept. After a product is developed, we must be able to manufacture sufficient volumes quickly and at low costs. To accomplish this, we must accurately forecast volumes, mix of products and configurations that meet customer requirements, and we may not succeed. IF OUR PRODUCTS FAIL TO PERFORM AS EXPECTED, WE COULD LOSE EXISTING AND FUTURE BUSINESS, AND OUR ABILITY TO DEVELOP, MARKET AND SELL OUR BATTERIES COULD BE HARMED. If our products, when introduced, do not perform as expected, our reputation could be severely damaged, and we could lose existing or potential future business. This performance failure may have the long-term effect of harming our ability to develop, market and sell our products. OUR FAILURE TO COST-EFFECTIVELY MANUFACTURE OUR TECHNOLOGICALLY COMPLEX BATTERIES IN COMMERCIAL QUANTITIES WHICH SATISFY OUR CUSTOMERS' PRODUCT SPECIFICATIONS AND THEIR EXPECTATIONS FOR PRODUCT QUALITY AND DELIVERY COULD DAMAGE OUR CUSTOMER RELATIONSHIPS AND RESULT IN SIGNIFICANT LOST BUSINESS OPPORTUNITIES FOR US. To be successful, we must cost-effectively manufacture commercial quantities of our technologically complex batteries that meet our customer specifications for quality and timely delivery. To facilitate commercialization of our products, we will need to further reduce our manufacturing costs, which we intend to do through the effective utilization of manufacturing partners and continuous improvement of our manufacturing and development operations in our wholly foreign owned enterprises in China. We currently manufacture our batteries and assemble our products in China. We are dependent on the 10 performance of our manufacturing partners, as well as our own manufacturing operations to manufacture and deliver our products to our customers. We are currently experiencing production process issues which have limited our ability to produce a sufficient number of batteries to meet current demand. If we fail to correct these issues in a manner that allows us to meet customer demand, or if any of our manufacturing partners are unable to manufacture products in commercial quantities on a timely and cost-effective basis, we could lose our customers and adversely impact our ability to attract future customers. IN ADDITION TO BEING USED IN OUR OWN PRODUCT LINES, OUR BATTERY CELLS ARE INTENDED TO BE INCORPORATED INTO OTHER PRODUCTS. IF WE DO NOT FORM EFFECTIVE ARRANGEMENTS WITH OEMS TO COMMERCIALIZE THESE PRODUCTS, OUR PROFITABILITY COULD BE IMPAIRED. Our business strategy contemplates that we will be required to rely on assistance from OEMs to gain market acceptance for our products. We therefore will need to identify acceptable OEMs and enter into agreements with them. Once we identify acceptable OEMs and enter into agreements with them, we will 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. OEMs 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 power system and the commencement of volume shipments of the power systems to the customer, but also requires the cooperation and assistance of the OEMs for purposes of determining the requirements for each specific application. We may have technical issues that arise that may affect the acceptance of our product by OEMs. If we are unable to design, develop, and introduce products that meet OEMs' requirements, 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 OEMs or pack assemblers to successfully commercialize our products, which could impair our profitability. FAILURE TO IMPLEMENT AN EFFECTIVE LICENSING BUSINESS STRATEGY WILL ADVERSELY AFFECT OUR REVENUE, CASH FLOW AND PROFITABILITY. Our long-term business strategy anticipates achieving significant revenue from the licensing of our intellectual property assets, such as our Saphion(R) technology. We have not entered into any licensing agreements for our Saphion(R) technology. Our future operating results could be adversely affected by a variety of factors including: o our ability to secure and maintain significant licensees of our proprietary technology; o the extent to which our future licensees successfully incorporate our technology into their products; o the acceptance of new or enhanced versions of our technology; o the rate at which our licensees manufacture and distribute their products to OEMs; and o our ability to secure one-time license fees and ongoing royalties for our technology from licensees. Our future success will also depend on our ability to execute our licensing operations simultaneously with our other business activities. If we fail to substantially expand our licensing activities while maintaining our other business activities, our results of operations and financial condition will be adversely affected. THE FACT THAT WE DEPEND ON A SOLE SOURCE SUPPLIER OR A LIMITED NUMBER OF SUPPLIERS FOR KEY RAW MATERIALS MAY DELAY OUR PRODUCTION OF BATTERIES. We depend on a sole source supplier or a limited number of suppliers for certain key raw materials used in manufacturing and developing our power systems. 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. In the past, we have experienced delays in product development due to the delivery of nonconforming raw materials from our suppliers. If in the future we are unable to obtain high quality raw materials in sufficient quantities, on competitive pricing terms 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. 11 WE HAVE FOUR KEY EXECUTIVES, THE LOSS OF ANY OF WHICH COULD HARM OUR BUSINESS. 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. We do not have key man life insurance policies with respect to any of our key members of management. OUR ONGOING MANUFACTURING AND DEVELOPMENT OPERATIONS IN CHINA ARE COMPLEX AND HAVING THESE REMOTE OPERATIONS MAY DIVERT MANAGEMENT'S ATTENTION, LEAD TO DISRUPTIONS IN OPERATIONS AND DELAY IMPLEMENTATION OF OUR BUSINESS STRATEGY. We have relocated most of our manufacturing and development operations to China. We may not be able to find or retain suitable employees in China and we may have to train personnel to perform necessary functions for our manufacturing, senior management and development operations. This may divert management's attention, lead to disruptions in operations and delay implementation of our business strategy, all of which could negatively impact our profitability. WE EXPECT TO SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO AND DERIVE A SIGNIFICANT PORTION OF OUR LICENSING REVENUES FROM CUSTOMERS LOCATED OUTSIDE THE UNITED STATES. FOREIGN GOVERNMENT REGULATIONS, CURRENCY FLUCTUATIONS AND INCREASED COSTS ASSOCIATED WITH INTERNATIONAL SALES COULD MAKE OUR PRODUCTS AND LICENSES UNAFFORDABLE IN FOREIGN MARKETS, WHICH WOULD REDUCE OUR FUTURE PROFITABILITY. We expect that international sales of our product and licenses, as well as licensing royalties, represent a significant portion of our sales potential. International business 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, technology, or the transport of lithium or phosphate, which may reduce or eliminate our ability to sell or license in certain markets; o foreign governments may impose tariffs, quotas, and taxes on our batteries or our import of technology into their countries; o requirements or preferences of foreign nations for domestic products could reduce demand for our batteries and our technology; o fluctuations in currency exchange rates relative to the U.S. dollar could make our batteries and our technology unaffordable to foreign purchasers and licensees or more expensive compared to those of foreign manufacturers and licensors; o longer payment cycles typically associated with international sales and potential difficulties in collecting accounts receivable, which may reduce the future profitability of foreign sales and royalties; o import and export licensing requirements in Europe and other regions, including China, where we intend to conduct business, which may reduce or eliminate our ability to sell or license in certain markets; and o political and economic instability in countries, including China, where we intend to conduct business, which may reduce the demand for our batteries and our technology or our ability to market our batteries and our technology in those countries. These risks may increase our costs of doing business internationally and reduce our sales and royalties or future profitability. WE MAY NEED TO EXPAND OUR EMPLOYEE BASE AND OPERATIONS IN ORDER TO EFFECTIVELY DISTRIBUTE OUR PRODUCTS COMMERCIALLY, WHICH MAY STRAIN OUR MANAGEMENT AND RESOURCES AND COULD HARM OUR BUSINESS. To implement our growth strategy successfully, we will have to increase our staff in China, with personnel in manufacturing, engineering, sales, marketing, and product support capabilities, as well as third party and direct distribution channels. However, we face the risk that we may not be able to attract new employees to sufficiently increase our staff or product support capabilities, or that we will not be successful in our sales and marketing efforts. Failure in any of these areas could impair our ability to execute our plans for growth and adversely affect our future profitability. 12 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. 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 who have significantly greater financial resources than we do. 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. INTERNATIONAL POLITICAL EVENTS AND THE THREAT OF ONGOING TERRORIST ACTIVITIES COULD INTERRUPT MANUFACTURING OF OUR BATTERIES AND OUR PRODUCTS AT OUR OEM FACILITIES OR OUR OWN FACILITIES AND CAUSE US TO LOSE SALES AND MARKETING OPPORTUNITIES. The terrorist attacks that took place in the United States on September 11, 2001, along with the U.S. military campaigns against terrorism in Iraq, Afghanistan, and elsewhere, and continued violence in the Middle East have created many economic and political uncertainties, some of which may materially harm our business and revenues. International political instability resulting from these events could temporarily or permanently disrupt manufacturing of our batteries and products at our OEM facilities or our own facilities in Asia and elsewhere, and have an immediate adverse impact on our business. Since September 11, 2001, some economic commentators have indicated that spending on capital equipment of the type that use our batteries has been weaker than spending in the economy as a whole, and many of our customers are in industries that also are viewed as under-performing in the overall economy, such as the telecommunications, industrial, and utility industries. The long-term effects of these events on our customers, the market for our common stock, the markets for our products, and the U.S. economy as a whole are uncertain. Terrorist activities could temporarily or permanently interrupt our manufacturing, development, sales and marketing activities anywhere in the world. Any delays also could cause us to lose sales and marketing opportunities, as potential customers would find other vendors to meet their needs. The consequences of any additional terrorist attacks, or any expanded armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets or our business. IF WE ARE SUED ON A PRODUCT LIABILITY CLAIM, OUR INSURANCE POLICIES MAY NOT BE SUFFICIENT. Although we maintain general liability insurance and product liability insurance, our insurance may not cover all potential types of product liability claims to which manufacturers are exposed or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could harm our business. OUR PATENT APPLICATIONS MAY NOT RESULT IN ISSUED PATENTS, WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO COMMERCIALLY EXPLOIT OUR PRODUCTS. Patent applications in the United States are maintained in secrecy until the patents are issued or are published. 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 are the first creator of inventions covered by pending patent applications or the first to file patent applications on these inventions. We also cannot be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford protection against a competitor. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S. patents will be issued. Furthermore, if these patent applications issue, some foreign countries provide significantly less effective patent enforcement than in the United States. The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. Accordingly, we cannot be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may be issued to us in the near future will afford protection against competitors with similar technology. In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our operations. 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 13 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. We currently manufacture and export some of our products from China. The legal regime protecting intellectual property rights in China is weak. Because the Chinese legal system in general, and the intellectual property regime in particular, are relatively weak, it is often difficult to enforce intellectual property rights in China. In addition, there are other countries where effective copyright, trademark and trade secret protection may be unavailable or limited. Accordingly, 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 financial condition. We also are attempting to expand our intellectual property rights through our applications for new patents. We cannot be certain that our pending patent applications will result in issued patents or that our issued patents will afford us protection against a competitor. Our inability 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, AND IF ANY OF OUR PRODUCTS OR PROCESSES IS FOUND TO BE INFRINGING, WE MAY NOT BE ABLE TO PROCURE LICENSES TO USE PATENTS NECESSARY TO OUR BUSINESS AT REASONABLE TERMS, IF AT ALL. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We are currently engaged in one intellectual property proceeding which alleges the Company's SAPHION(R) I cathode material infringes two patents owned by the University of Texas. While the Company believes it has strong defenses to such allegations, an adverse decision could force us to do one or more of the following: o stop selling, incorporating, or using our products that use the SAPHION(R) I cathode material challenged intellectual property; o pay damages for the use of SAPHION(R) I cathode material; o obtain a license to sell or use the SAPHION(R) I cathode material, which license may not be available on reasonable terms, or at all; or o redesign those products or manufacturing processes that use the SAPHION(R) I cathode material, which may not be economically or technologically feasible. We may become involved in more litigation and proceedings in the future. In the future we may be subject to claims or an inquiry regarding our alleged unauthorized use of a third party's intellectual property. An adverse outcome in such future litigation could result in similar risks as noted above with respect to the third party's intellectual property. 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. IN THE PAST, WE HAVE SOLD OXIDE-BASED BATTERIES CONTAINING POTENTIALLY DANGEROUS MATERIALS, WHICH COULD EXPOSE US TO PRODUCT LIABILITY CLAIMS. In the event of a short circuit or other physical damage to an oxide-based 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. We could, therefore, be exposed to possible 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. 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. Battery pack assemblers using batteries incorporating 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 oxide-based products. 14 RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA SINCE OUR PRODUCTS ARE MANUFACTURED IN CHINA AND WE HAVE TRANSFERRED ADDITIONAL OPERATIONS TO CHINA, WE FACE RISKS IF CHINA LOSES NORMAL TRADE RELATIONS STATUS WITH THE UNITED STATES. We manufacture and export our products from China. Our products sold in the United States are currently not subject to U.S. import duties. On September 19, 2000, the United States Senate voted to permanently normalize trade with China, which provides a favorable category of United States import duties. In addition, on December 11, 2001, China was accepted into the World Trade Organization ("WTO"), a global international organization that regulates international trade. As a result of opposition to certain policies of the Chinese government and China's growing trade surpluses with the United States, there has been, and in the future may be, opposition to the extension of Normal Trade Relations ("NTR") status for China. The loss of NTR status for China, changes in current tariff structures or adoption in the United States of other trade policies adverse to China could have an adverse affect on our business. Furthermore, our business may be adversely affected by the diplomatic and political relationships between the United States and China. These influences may adversely affect our ability to operate in China. If the relationship between the United States and China were to materially deteriorate, it could negatively impact our ability to control our operations and relationships in China, enforce any agreements we have with Chinese manufacturers or otherwise deal with any assets or investments we may have in China. BECAUSE THE CHINESE LEGAL SYSTEM IN GENERAL, AND THE INTELLECTUAL PROPERTY REGIME IN PARTICULAR, ARE RELATIVELY WEAK, WE MAY NOT BE ABLE TO ENFORCE INTELLECTUAL PROPERTY RIGHTS IN CHINA AND ELSEWHERE. We currently manufacture and export our products from China. The legal regime protecting intellectual property rights in China is weak. Because the Chinese legal system in general, and the intellectual property regime in particular, are relatively weak, it is often difficult to enforce intellectual property rights in China. In addition, there are other countries where effective copyright, trademark and trade secret protection may be unavailable or limited. Accordingly, we may not be able to effectively protect our intellectual property rights outside of the United States. ENFORCING AGREEMENTS AND LAWS IN CHINA IS DIFFICULT OR MAY BE IMPOSSIBLE AS CHINA DOES NOT HAVE A COMPREHENSIVE SYSTEM OF LAWS. We are dependent on our agreements with our Chinese manufacturing partners. Enforcement of agreements may be sporadic and implementation and interpretation of laws may be inconsistent. The Chinese judiciary is relatively inexperienced in interpreting agreements and enforcing the laws, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate law exists in China, it may be impossible to obtain swift and equitable enforcement of such law, or to obtain enforcement of a judgment by a court of another jurisdiction. THE GOVERNMENT OF CHINA MAY CHANGE OR EVEN REVERSE ITS POLICIES OF PROMOTING PRIVATE INDUSTRY AND FOREIGN INVESTMENT, IN WHICH CASE OUR ASSETS AND OPERATIONS MAY BE AT RISK. China is a socialist state, which since 1949 has been, and is expected to continue to be, controlled by the Communist Party of China. Our existing and planned operations in China are subject to the general risks of doing business internationally and the specific risks related to the business, economic and political conditions in China, which include the possibility that the central government of China will change or even reverse its policies of promoting private industry and foreign investment in China. Many of the current reforms which support private business in China are unprecedented or experimental. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities of per capita wealth among citizens of China and between regions within China, could also lead to further readjustment of the government's reform measures. It is not possible to predict whether the Chinese government will continue to be as supportive of private business in China, nor is it possible to predict how future reforms will affect our business. THE GOVERNMENT OF CHINA CONTINUES TO EXERCISE SUBSTANTIAL CONTROL OVER THE CHINESE ECONOMY WHICH COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS. The government of China has exercised and continues to exercise substantial control over virtually every section of the Chinese economy through regulation and state ownership. China's continued commitment to reform and the development of a vital private sector in that country have, to some extent, limited the practical effects of the control currently exercised by the government over individual enterprises. However, the economy continues to be subject to significant government controls, which, if directed towards our business activities, could have a significant adverse impact on us. For example, if the government were to limit the number of foreign personnel who could work in the country, substantially increase taxes on 15 foreign businesses or impose any number of other possible types of limitations on our operations, the impact would be significant. CHANGES IN CHINA'S POLITICAL AND ECONOMIC POLICIES COULD HARM OUR BUSINESS. The economy of China has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development of China, we cannot predict the future direction of these economic reforms or the effects these measures may have on our business, financial position or results of operations. In addition, the Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development ("OECD"). These differences include: o economic structure, o level of government involvement in the economy, o level of development o level of capital reinvestment, o control of foreign exchange o methods of allocating resources, and o balance of payments position. As a result of these differences, our operations, including our current manufacturing operations in China, may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to the OECD member countries. BUSINESS PRACTICES IN CHINA MAY ENTAIL GREATER RISK AND DEPENDENCE UPON THE PERSONAL RELATIONSHIPS OF SENIOR MANAGEMENT THAN IS COMMON IN NORTH AMERICA AND THEREFORE SOME OF OUR AGREEMENTS WITH OTHER PARTIES IN CHINA COULD BE DIFFICULT OR IMPOSSIBLE TO ENFORCE. The business structure of China is, in some respects, different from the business culture in Western countries and may present some difficulty for Western investors reviewing contractual relationships among companies in China and evaluating the merits of an investment. Personal relationships among business principals of companies and business entities in China are very significant in the business culture. In some cases, because so much reliance is based upon personal relationships, written contracts among businesses in China may be less detailed and specific than is commonly accepted for similar written agreements in Western countries. In some cases, material terms of an understanding are not contained in the written agreement but exist as oral agreements only. In other cases, the terms of transactions which may involve material amounts of money are not documented at all. In addition, in contrast to Western business practices where a written agreement specifically defines the terms, rights and obligations of the parties in a legally-binding and enforceable manner, the parties to a written agreement in China may view that agreement more as a starting point for an ongoing business relationship which will evolve and require ongoing modification. As a result, written agreements in China may appear to the Western reader to look more like outline agreements that precede a formal written agreement. While these documents may appear incomplete or unenforceable to a Western reader, the parties to the agreement in China may feel that they have a more complete understanding than is apparent to someone who is only reading the written agreement without having attended the negotiations. As a result, contractual arrangements in China may be more difficult to review and understand. Also, despite legal developments in China over the past 20 years, adequate laws, comparable with Western standards, do not exist in all areas and it is unclear how many of our business arrangements would be interpreted or enforced by a court in China. OUR OPERATIONS COULD BE MATERIALLY INTERRUPTED, AND WE MAY SUFFER A LARGE AMOUNT OF LOSS, IN THE CASE OF FIRE, CASUALTY OR THEFT AT ONE OF OUR MANUFACTURING OR OTHER FACILITIES. Firefighting and disaster relief or assistance in China is substandard by Western standards. Consistent with common practice in China for companies of our size and/or the size of our business partners in China, neither we nor they, to our knowledge, maintain fire, casualty, theft insurance or business interruption insurance. In the event of any material damage to, or loss of, the manufacturing plants where our products are or will be produced due to fire, casualty, theft, severe weather, flood or other similar causes, we would be forced to replace any assets lost in those disaster without the benefit of insurance. Thus our financial position could be materially compromised or we might have to cease doing business. Also, consistent with customary business practices among enterprises in China, we do not carry business interruption insurance. 16 THE SYSTEM OF TAXATION IN CHINA IS UNCERTAIN AND SUBJECT TO UNPREDICTABLE CHANGE THAT COULD AFFECT OUR PROFITABILITY. Many tax rules are not published in China and those that are published can be ambiguous and contradictory leaving a considerable amount of discretion to local tax authorities. China currently offers tax and other preferential incentives to encourage foreign investment. However, the country's tax regime is undergoing review and there is no assurance that such tax and other incentives will continue to be made available. Currently, China levies a 10% withholding tax on dividends received from Chinese-foreign joint ventures. If we enter into a joint venture with a Chinese company as part of our strategy to reduce costs, such a joint venture may be considered a Chinese-foreign joint venture if the majority of its equity interests are owned by a foreign shareholder. A temporary exemption from this withholding tax has been granted to foreign investors. However, there is no indication when this exemption will end. IT IS UNCERTAIN WHETHER WE WILL BE ABLE TO RECOVER VALUE-ADDED TAXES IMPOSED BY THE CHINESE TAXING AUTHORITY. China's turnover tax system consists of value-added tax ("VAT"), consumption tax and business tax. Export sales are exempted under VAT rules and an exporter who incurs VAT on purchase or manufacture of goods should be able to claim a refund from Chinese tax authorities. However, due to a reduction in the VAT export refund rate of some goods, exporters might bear part of the VAT they incurred in conjunction with the exported goods. In 2003, changes to the Chinese value-added tax system were announced affecting the recoverability of input VAT beginning January 1, 2004. Our VAT expense will depend on the reaction of both our suppliers and customers. Continued efforts by the Chinese government to increase tax revenues could result in revisions to tax laws or their interpretation, which could increase our VAT and various tax liabilities. ANY RECURRENCE OF SEVERE ACUTE RESPIRATORY SYNDROME ("SARS"), AVIAN FLU, OR ANOTHER WIDESPREAD PUBLIC HEALTH PROBLEM, COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. A renewed outbreak of SARS, avian flu, or another widespread public health problem in China, where we have moved our manufacturing operations and may move additional operations, could have a negative effect on our operations. Our operations may be impacted by a number of health-related factors, including the following: o quarantines or closures of some of our manufacturing or other facilities which would severely disrupt our operations, or o the sickness or death of key officers or employees of our manufacturing or other facilities. Any of the foregoing events or other unforeseen consequences of public health problems in China could adversely affect our business and results of operations. OUR PRODUCTION AND SHIPPING CAPABILITIES COULD BE ADVERSELY AFFECTED BY ONGOING TENSIONS BETWEEN THE CHINESE AND TAIWANESE GOVERNMENTS. Key components of our products are manufactured in China and assembled in Taiwan into end products or systems. In the event that Taiwan does not adopt a plan for unifying with China, the Chinese government has threatened military action against Taiwan. As of yet, Taiwan has not indicated that it intends to propose and adopt a reunification plan. If an invasion by China were to occur, the ability of our manufacturing and assembly partners could be adversely affected, potentially limiting our production capabilities. An invasion could also lead to sanctions or military action by the United States and/or European countries which could further adversely affect our business. 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. Rapid and ongoing changes in technology and product standards could quickly render our products less competitive, or even obsolete. Other companies who are seeking to enhance traditional battery technologies, such as lead-acid and nickel-cadmium, 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 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 17 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. We have invested in research and development of next-generation technology in energy solutions. If we are not successful in developing and commercially exploiting new energy solutions based on new materials, or we experience delays in the development and exploitations of new energy solutions, compared to our competitors, our future growth and revenues will be adversely affected. 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 OEMs and other customers. We believe that our primary competitors are existing suppliers of cylindrical lithium-ion, nickel cadmium, nickel metal-hydride and in some cases, non-SLI lead-acid batteries. These suppliers include Sanyo, Matsushita Industrial Co., Ltd. (Panasonic), Sony, Toshiba, SAFT E-One Moli Energy, as well as numerous lead-acid manufacturers throughout the world. Most 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. 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 TRANSPORTATION OF BATTERIES MAY BE ENACTED WHICH COULD RESULT IN A DELAY IN THE PRODUCTION OF OUR BATTERIES OR THE IMPOSITION OF ADDITIONAL COSTS THAT COULD HARM OUR ABILITY TO BE PROFITABLE. At the present time, international, federal, state or local laws do not directly regulate the storage, use and disposal of the component parts 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. 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. The transportation of lithium and lithium-ion batteries is regulated both domestically and internationally. Under recently revised United Nations recommendations and as adopted by the International Air Transport Association ("IATA"), our N-Charge(TM) Power System (Model VNC-65) and N-Charge(TM) Power System II are exempt from a Class 9 designation for transportation, while our N-Charge(TM) Power System (Model VNC-130), our K-Charge(R) Power System and U-Charge(R) Power System currently fall within the level such that they are not exempt and require a Class 9 designation for transportation. The revised United Nations recommendations are not U.S. law until such time as they are incorporated into the Department of Transportation ("DOT") Hazardous Material Regulations. However, DOT has proposed new regulations harmonizing with the U.N. guidelines. At present it is not known if or when the proposed regulations would be adopted by the United States. While we fall under the equivalency levels for the United States and comply with all safety packaging requirements worldwide, future DOT or IATA regulations or enforcement policies could impose costly transportation requirements. In addition, compliance with any new DOT and IATA approval process could require significant time and resources from our technical staff and, if redesign were necessary, could delay the introduction of new products. GENERAL RISKS ASSOCIATED WITH STOCK OWNERSHIP CORPORATE INSIDERS OR THEIR 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 June 2, 2006, our officers, directors and their affiliates as a group beneficially owned approximately 47.5% of our outstanding common stock. Carl Berg, our chairman of the board, beneficially owns approximately 44.6% of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, which could 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 18 o oppose or support significant corporate transactions when these transactions further their interest as incumbent officers or directors, even if these interests diverge from their interests as stockholders per se and thus from the interests of other stockholders. SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT, WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND LIMIT THE PRICE THAT POTENTIAL ACQUIRERS MAY BE WILLING TO PAY FOR OUR COMMON STOCK. Our board of directors has the authority, without any action by the outside 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, may decrease the market price and may infringe upon the voting and other rights of the holders of our common stock. AT ANY GIVEN TIME WE MIGHT NOT MEET THE CONTINUED LISTING REQUIREMENTS OF THE NASDAQ SMALLCAP MARKET. Given the volatility of our stock and trends in the stock market in general, at any given time we might not meet the continued listing requirements of The Nasdaq SmallCap Market. Among other requirements, Nasdaq requires the minimum bid price of a company's registered shares to be $1.00. On June 2, 2006, the closing price of our common stock was $2.03. If we are not able to maintain the requirements for continued listing on The Nasdaq SmallCap Market, it could have a materially adverse effect on the price and liquidity of our common stock. OUR STOCK PRICE IS VOLATILE, WHICH COULD RESULT IN A LOSS OF YOUR INVESTMENT. The market price of our common stock has been and is likely to continue to be highly volatile. Factors that may have a significant effect 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. 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 sell 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 89,883,539 shares of common stock as of March 31, 2006. In addition, at March 31, 2006, we had 15,630,389 shares of our common stock reserved for issuance under warrants and stock options plans. In connection with the potential conversion of the Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock, issued on December 1, 2004, we may need to issue 19 up to 2,176,767 and 1,452,703 shares, respectively, of our common stock (based on a conversion price of $1.98 and $2.96, respectively). WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK, AND THEREFORE STOCKHOLDERS WILL BE ABLE TO RECOVER THEIR INVESTMENT IN OUR COMMON STOCK, IF AT ALL, ONLY BY SELLING THE SHARES OF OUR STOCK THAT THEY HOLD. Some investors favor companies that pay dividends on common stock. 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, a return on an investment in our stock likely depends on the ability to sell our stock at a profit. OUR BUSINESS IS SUBJECT TO CHANGING REGULATIONS RELATING TO CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE THAT HAS INCREASED BOTH OUR COSTS AND THE RISK OF NONCOMPLIANCE. Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the Commission, and Nasdaq, have recently issued new requirements and regulations and continue to develop additional regulations and requirements in response to recent laws enacted by Congress, most notably Section 404 of the Sarbanes-Oxley Act of 2002. Our efforts to comply with these new regulations have resulted in, and are likely to continue to result in, materially increased general and administrative expenses and a significant diversion of management time and attention from revenue-generating and cost-reduction activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our independent registered public accounting firm's audit of that assessment has required, and continues to require, the commitment of significant financial and managerial resources. There is no assurance that these efforts will be completed on a timely and successful basis. Because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. In the event that our Chief Executive Officer, Chief Financial Officer, or independent registered public accounting firm determine that our internal controls over financial reporting are not effective as defined under Section 404 of the Sarbanes-Oxley Act of 2002, there may be a material adverse impact in investor perceptions and a decline in the market price of our stock. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our corporate offices are located in a leased facility in Austin, Texas. We also have a leased research and development facility in Las Vegas, Nevada. Our two Wholly-Owned Foreign Entities in China lease three separate facilities, a 35,000 square meter powder manufacturing facility in Suzhou, China, a 58,000 square meter product assembly facility in Suzhou, China and a 7,500 square meter product development facility in Shanghai, China. ITEM 3. LEGAL PROCEEDINGS On February 14, 2006, Hydro-Quebec filed an action against us in the United States District Court for the Western District of Texas (Hydro-Quebec v. Valence Technology, Civil Action No. A06CA111). In its amended complaint filed April 13, 2006, Hydro-Quebec alleges that Saphion(R) Technology, the technology utilized in all of our commercial products, infringes U.S. Patent No. 5,910,382 and 6,514,640 exclusively licensed to Hydro-Quebec. Hydro-Quebec's complaint seeks injunctive relief and monetary damages. The action is in the initial pleading state and we have filed a response denying the allegations in the amended complaint. Our management believes the action by Hydro-Quebec is without merit and intends to vigorously defend the lawsuit, as well as all of its available legal remedies. We are subject to, from time to time, various claims and litigation in the normal course of business. In our opinion, all pending legal matters are either covered by insurance or, if not insured, will not have a material adverse impact on our consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is quoted on the Nasdaq SmallCap Market under the symbol "VLNC". The following table sets forth, for the periods indicated, the high and low sale prices of our common stock, as reported by published financial sources:
FISCAL 2005: HIGH LOW ------------- ------------ Quarter ended June 30, 2004 $4.86 $3.06 Quarter ended September 30, 2004 $3.69 $2.51 Quarter ended December 31, 2004 $3.90 $3.11 Quarter ended March 31, 2005 $3.30 $2.72 FISCAL 2006: Quarter ended June 30, 2005 $3.35 $1.96 Quarter ended September 30, 2005 $3.22 $2.42 Quarter ended December 31, 2005 $2.78 $1.38 Quarter ended March 31, 2006 $2.85 $1.45 FISCAL 2007: Quarter ended June 30, 2006 (through June 2, 2006) $2.78 $1.90
On June 2, 2006, the last reported sale price of our common shares of the Nasdaq SmallCap Market was $2.03 per share. On that date, we had 94,120,271 shares of common stock outstanding held of record. We have never declared or paid any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The following table includes, as of March 31, 2006, information regarding common stock authorized for issuance under our equity compensation plans:
NUMBER OF SECURITIES TO BE NUMBER OF SECURITIES ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE REMAINING AVAILABLE FOR OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER EQUITY PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS - ------------------------------------------------------------------------------------------------------------------------------- Equity compensation plans 6,120,275 $4.82 2,434,682 approved by security holders Equity compensation plans not approved by security holders (1) 2,925,000 $5.27 - ------------------------------- -------------------------------- Total 9,045,275 $4.97 2,434,682 =============================== ================================ (1) Options to purchase 1,500,000 shares were granted to Stephan Godevais in May 2001 pursuant to his employment agreement. The exercise price of his options is $6.52 per share. Mr. Godevais' employment with the Company terminated on July 13, 2005. All of the options granted to him are vested and will expire on September 30, 2006. Options to purchase 225,000 shares were granted to Joseph Lamoreux in June 2001 pursuant to his employment offer letter. The exercise price of his options is $7.18 per share. Mr. Lamoreux's employment with the Company terminated on September 5, 2005. All of the options granted to him are vested and will expire on July 12, 2006. Options to purchase 200,000 shares were granted to Terry Standefer in August 2001 pursuant to his employment offer letter. The exercise price of his options is $5.15 per share. Mr. Standefer's employment terminated on April 18, 2006. All of the options granted to him are vested and will expire on July 18, 2006. Options to purchase 1,000,000 shares were granted to Jim Akridge in July 2005 pursuant to his employment agreement. The exercise price of his options is $2.99 and they vest as follows: 100,000 shares vested immediately, 225,000 shares on the first anniversary date of his employment and the remaining 675,000 shares quarterly over the remaining three years.
21 RECENT SALES OF UNREGISTERED SECURITIES None, except as has been previously disclosed in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission. ITEM 6. SELECTED FINANCIAL DATA This section presents selected historical financial data of Valence Technology, Inc. You should read carefully the consolidated financial statements included in this report, including the notes to the consolidated financial statements. We derived the statement of operations data for the years ended March 31, 2004, 2005 and 2006 and balance sheet data as of March 31, 2005 and 2006 from the audited consolidated financial statements in this report. We derived the statement of operations data for the years ended March 31, 2002 and 2003 and the balance sheet data as of March 31, 2002, 2003 and 2004 from audited financial statements that are not included in this report.
Year Ended March 31, ------------ ------------ ----------- ----------- ------------- 2002 2003 2004 2005 2006 ------------ ------------ ----------- ----------- ------------- (in thousands, except per share amounts) STATEMENT OF OPERATIONS DATA: Revenue: Battery and system sales $ 1,671 $ 2,432 $ 8,483 $ 10,274 $ 16,490 Licensing and royalty revenue 3,203 125 963 391 724 ------------ ------------ ----------- ----------- ------------- Total revenues 4,874 2,557 9,446 10,665 17,214 Cost of sales 8,649 10,996 15,923 16,341 25,454 Gross margin loss (3,775) (8,439) (6,477) (5,676) (8,240) Operating expenses: Research and product development 9,681 9,293 8,638 7,682 5,112 Marketing 1,957 3,210 4,880 4,292 2,163 General and administrative 11,971 10,140 11,416 12,933 11,794 Depreciation and amortization 7,927 2,790 2,109 884 722 (Gain)/loss on disposal of assets 147 (20) (21) (5,257) (445) Asset impairment charge 31,884 258 13,660 87 170 Restructuring charge - - 926 - - Contract settlement charge, INI - - 3,046 957 - Contract settlement charge, other - - - 499 (108) Total operating expenses 63,567 25,671 44,654 22,077 19,408 ------------ ------------ ----------- ----------- ------------- Operating loss (67,342) (34,110) (51,131) (27,753) (27,648) ------------ ------------ ----------- ----------- ------------- Minority interest in joint venture - - 69 - - Cost of warrants - - (181) - - Interest and other income 2,049 381 345 585 475 Interest expense (4,327) (4,172) (4,059) (4,262) (5,551) ------------ ------------ ----------- ----------- ------------- Net loss (69,620) (37,901) (54,957) (31,430) (32,724) Dividends on preferred stock - - 162 171 172 Preferred stock accretion - - 940 578 28 ------------ ------------ ----------- ----------- ------------- Net loss available to common stockholders $ (69,620) $ (37,901) $ (56,059) $ (32,179) $ (32,924) ============ ============ =========== =========== ============= Net loss per share available to common stockholders $ (1.53) $ (0.65) $ (0.77) $ (0.40) $ (0.37) ============ ============ =========== =========== ============= Shares used in computing net loss per share available to common stockholders, basic and diluted 45,504 58,423 73,104 81,108 89,298 ============ ============ =========== =========== ============= 22 March 31, ------------ ------------ ----------- ----------- ------------- 2002 2003 2004 2005 2006 ------------ ------------ ----------- ----------- ------------- (in thousands) BALANCE SHEET DATA: Cash and cash equivalents $ 623 $ 6,616 $ 2,692 $ 2,500 $ 612 Working capital (deficit) (2,696) 4,023 (4,847) (1,651) (4,250) Total assets 30,531 36,154 21,056 10,231 11,632 Long-term debt, principal 34,639 38,865 39,407 34,656 51,112 Redeemable convertible preferred stock - - 8,032 8,582 8,610 Accumulated deficit (336,703) (374,604) (429,724) (461,328) (494,224) Total stockholders' deficit (15,863) (17,518) (56,794) (54,642) (76,212)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION THIS REPORT CONTAINS STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE EXCHANGE ACT AND SECTION 27A OF THE SECURITIES ACT. THE WORDS "EXPECT," "ESTIMATE," "ANTICIPATE," "PREDICT," "BELIEVE," AND SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS FILING AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF VALENCE TECHNOLOGY, INC. (THE "COMPANY," "VALENCE," "WE," OR "US"), OUR DIRECTORS OR OFFICERS WITH RESPECT TO, AMONG OTHER THINGS (A) TRENDS AFFECTING OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS, (B) OUR PRODUCT DEVELOPMENT STRATEGIES, (C) TRENDS AFFECTING OUR MANUFACTURING CAPABILITIES, (D) TRENDS AFFECTING THE COMMERCIAL ACCEPTABILITY AND SALES OF OUR PRODUCTS AND, (E) OUR BUSINESS AND GROWTH STRATEGIES. OUR STOCKHOLDERS ARE CAUTIONED NOT TO PUT UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THIS REPORT, FOR THE REASONS, AMONG OTHERS, DISCUSSED IN THE SECTIONS - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "RISK FACTORS." THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES, WHICH ARE PART OF THIS REPORT OR INCORPORATED BY REFERENCE TO OUR REPORTS FILED WITH THE COMMISSION. WE UNDERTAKE NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE AFTER THE DATE HEREOF. OVERVIEW We have commercialized the first phosphate-based lithium-ion technology and have brought to market our initial products utilizing this technology. Our mission is to drive the wide adoption of high-performance, safe, low-cost energy storage systems by drawing on the numerous benefits of our latest battery technology, Saphion(R), the experience of our management team and the significant market opportunity available to us. The introduction of lithium-ion technology to the market was the result of consumer demand for high-energy, small battery solutions to power portable electronic devices. The battery industry, consequently, focused on high-energy solutions at the expense of safety. Additionally, due to safety concerns, lithium-ion technology has been limited in adoption to small-format applications, such as notebook computers, cell phones, and personal digital assistant devices. Our Saphion(R) technology, a phosphate-based cathode material, addresses the need for a safe lithium-ion solution, especially in large-format applications. Our business plan and strategy focus on the generation of revenue from product sales, while minimizing costs through a manufacturing plan that utilizes partnerships with contract manufacturers and internal manufacturing efforts through our newly-formed Wholly Foreign Owned Enterprises ("WFOE's") in China. These WFOE's initiated operations in late fiscal 2005. We plan to drive the adoption of our Saphion(R) technology by offering existing and new solutions that differentiate our own products and end-users' products in both the large-format and small-format markets. In addition, we will seek to expand the fields of use of our Saphion(R) technology through licensing of our intellectual property related to our battery chemistries and manufacturing processes. To date, Valence has achieved the following successes implementing our business plan: o Proven the feasibility of our technology; o Launched new Saphion(R) technology-based products, including our N-Charge(TM) Power System family and introduced our U-Charge(R) Power System family of products, which is intended to be a direct replacement for existing lead acid battery solutions in the market today and serve emerging motive applications; o Established relationships with top-tier customers across many of the target markets for our products, while continuing to build our brand awareness in multiple channel; 23 o Closed and sold our high-cost manufacturing facility in Northern Ireland and established key manufacturing partnerships in Asia to facilitate low-cost, quality production; o Announced a joint technology development program with Segway Inc. to develop long-range battery packs using our Saphion(R) technology for Segway's human transporter product. Production of the Segway battery packs began in March 2005 and they are currently available through Segway's distribution channel; o Established three China facilities to serve as our powder production, research and development, and assembly facilities; and o Launched a phosphate-based lithium-ion power cell. Batteries designed with power cells can be discharged and charged more quickly than batteries designed with energy cells. This makes them ideal for applications that require powerful bursts rather than slow discharges of energy, such as portable appliances and future generations of hybrid and electric vehicles. Our new Saphion(R) power cell offers significant cycling, weight and longevity benefits over nickel metal hydride (NiMH) and nickel-cadmium (NiCad) battery technologies. In fiscal 2006 we were able to achieve several important goals in support of our business strategy. Total revenue grew by 61% as compared to the prior year to $17.2 million with battery and system sales growing 60%. We achieved improvement of our negative gross margin and expanded our development and channel launch of Saphion(R)-based products. We continued our efforts to transition our manufacturing and other operations to China through the establishment and commencement of initial operations of two wholly-owned subsidiaries in Suzhou, China. Our business headquarters is in Austin, Texas. Our materials research and development center is in Las Vegas, Nevada. Our European sales and OEM manufacturing support center is in Mallusk, Northern Ireland. Our manufacturing and product development centers are in Suzhou and Shanghai, China. BASIS OF PRESENTATION, CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our consolidated financial statements in conformity with generally accepted accounting principles in the United States. The preparation of our financial statements requires us to make estimates and assumptions that affect reported amounts. We believe our most critical accounting policies and estimates relate to revenue recognition, impairment of long-lived assets, exit costs, contract settlement charges, and joint venture dissolution. Our accounting policies are described in the Notes to Consolidated Financial Statements, Note 3, Summary of Significant Accounting Policies. The following further describes the methods and assumptions we use in our critical accounting policies and estimates. REVENUE RECOGNITION We generate revenues from sales of products including batteries and battery systems, and from licensing fees and royalties per technology license agreements. Product sales are recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, seller's price to the buyer is fixed and determinable, and collectibility is reasonably assured. Product shipments that are not recognized as revenue during the period shipped, primarily product shipments to resellers that are subject to right of return, are recorded as deferred revenue and reflected as a liability on our balance sheet. For reseller shipments where revenue recognition is deferred, we record revenue based upon the reseller-supplied reporting of sales to their end customers or their inventory reporting. For direct customers, we estimate a return rate percentage based upon our historical experience. We review this estimate on a quarterly basis. From time to time we provide sales incentives in the form of rebates or other price adjustments; these are recorded as reductions to revenue as incurred. Licensing fees are recognized as revenue upon completion of an executed agreement and delivery of licensed information, if there are no significant remaining vendor obligations and collection of the related receivable is reasonably assured. Royalty revenues are recognized upon licensee revenue reporting and when collectibility is reasonably assured. IMPAIRMENT OF LONG-LIVED ASSETS We perform a review of long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows that the assets are expected to generate. If long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value and is recorded in the period the determination was made. See Notes to Consolidated Financial Statements, Note 4, Impairment Charge, regarding impairment of tangible and intangible assets. 24 EXIT COSTS We incurred exit costs associated with the closure of our Northern Ireland manufacturing facility. In accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," we recognize liabilities for costs associated with exit or disposal activities at fair value in the period during which the liability is incurred. We estimate the liabilities related to exit or disposal activities including lease termination costs, compensation of terminated employees, inventory obsolescence, costs to prepare assets for disposal or sale, and other expenses based upon our analysis of individual transaction circumstances, agreements and commitments. Some agreements may be revised, or actual results may be different from costs reasonably estimated at the incurrence of the liability. In these cases, additional costs or reduced costs are recorded in the period incurred, and differences are disclosed in the footnotes to consolidated financial statements. Costs associated with exit or disposal activities are included in restructuring charges. CONTRACT SETTLEMENT CHARGE Since 1994, pursuant to a letter of offer, we received employment and capital grants from the Ireland Development Board, now known as Invest Northern Ireland ("INI"), for our former manufacturing facility in Mallusk, Northern Ireland, totaling (pound)9.0 million. Under certain circumstances, INI had the right to reclaim a portion of these grants and had a security interest in the facility's land, building, and equipment. On December 21, 2004, we entered into a settlement agreement with INI pursuant to which INI agreed to release us of all outstanding claims and other obligations owing to INI in connection with grants previously provided. Under the terms of the settlement agreement we agreed to pay INI (pound)3.0 million consisting of a (pound)2.0 million payment in cash and a (pound)1.0 million payment in common stock. In order to fund the (pound)1.0 million common stock payment we issued 539,416 shares of common stock, equivalent to $3.60 per share. In connection with this final settlement we recorded an additional charge of $957,000 during the third quarter of fiscal 2005. See Notes to Consolidated Financial Statements, Note 12, Settlement Agreement. JOINT VENTURE On July 9, 2003, Baoding Fengfan - Valence Battery Company, a joint venture between us and Fengfan Group, Ltd., or "Fengfan", was formed as a corporation in China. The purpose of the joint venture was to provide low-cost manufacturing of our Saphion(R) lithium-ion batteries. Under the terms of the joint venture agreement, we were to contribute 51% of the joint venture's registered capital, consisting of capital equipment, a nonexclusive license to its technology, and engineering expertise. Fengfan was to contribute 49% of the joint venture's registered capital, consisting of the cash required to fund the joint venture for the first two years, and also to acquire the land and facility needed for manufacturing operations. As a result of our 51% ownership of the joint venture, right to name the majority of the joint venture's Board of Directors and right to name the Chief Executive Officer as of March 31, 2004, our consolidated financial statements included the consolidation of the balance sheet, results of operations and cash flows of the joint venture. However, during the first quarter of fiscal 2005, a dispute arose between us and our joint venture partner, resulting in a loss of control over the joint venture and our initiation of an action to enforce our rights under the joint venture agreement and, commencing with that quarter we accounted for our investment in the joint venture under the cost method with no further recognition of assets, liabilities, operating results, and cash flows. On November 17, 2004, we entered into a settlement agreement, or the "JV Settlement Agreement", with Baoding Fengfan Group Limited Liability Company, Ltd., or "Fengfan", and Baoding Fengfan - Valence Battery Company, Ltd., or the "JV Company". Under the terms of the JV Settlement Agreement, the parties agreed to liquidate and dissolve the JV Company, terminate the JV Company contracts and fully settle any and all remaining obligations among the parties. We agreed to make compensation payments to the JV Company and to Fengfan totaling $224,417 and to make equipment purchases from the JV Company totaling $275,583. To date, we have made compensation payments of $157,092 and completed all of the equipment purchases. The $67,325 final compensation payment was made upon final dissolution of the JV legal entity by Fengfan. We recorded a contract settlement charge of $224,217 in the third quarter of fiscal 2005 for the compensation payments and capitalized equipment purchases as the payments were made. During 2006, we realized a credit of $108,075 related to the final dissolution of the Joint Venture. 25 RESULTS OF OPERATIONS FISCAL YEARS ENDED MARCH 31, 2006 (FISCAL 2006), MARCH 31, 2005 (FISCAL 2005) AND MARCH 31, 2004 (FISCAL 2004) The following table summarizes the results of our operations for the past three fiscal years:
Year Ended ----------------------------------------------------------------------------------- % % March 31, 2006 Change March 31, 2005 Change March 31, 2004 ----------------------------------------------------------------------------------- (dollars in thousands) Battery and system sales $ 16,490 60 % $ 10,274 21 % $ 8,483 Licensing and royalty revenue 724 85 % 391 (59)% 963 --------------- ---------- ------------- ------------- ------------- Total revenues 17,214 61 % 10,665 13 % 9,446 --------------- ---------- ------------- ------------- ------------- Gross margin loss (8,240) (45)% (5,676) 12 % (6,477) % of total revenue (48)% (53)% (69)% Other operating expenses 19,791 (23)% 25,791 (5)% 27,043 % of total revenue 115% 242% 286% Gain on disposal of assets (445) (91)% (5,257) 24,934% (21) % of total revenue 3% 49% 0% Impairment, restructuring, contract settlement charges 62 (96)% 1,543 (91)% 17,632 % of total revenue 0% 14% 187% --------------- ---------- ------------- ------------- ------------- Total operating expenses 19,408 (12)% 22,077 (51)% 44,654 --------------- ---------- ------------- ------------- ------------- % of total revenue 113% 207% 473% Operating loss (27,648) 0% (27,753) (46)% (51,131) % of total revenue (161)% (260)% (541)% --------------- ---------- ------------- ------------- ------------- Net loss $ (32,724) 4% $ (31,430) (44)% $ (56,059) =============== ========== ============= ============= ============= % of total revenue (190)% (295)% (593)%
REVENUES AND GROSS MARGIN - ------------------------- BATTERY AND SYSTEM SALES: Battery and systems sales totaled $16.5 million for the year ended March 31, 2006, as compared to $10.3 million for the year ended March 31, 2005, and $8.5 million for the year ended March 31, 2004. The increase in revenues in fiscal 2006 compared to fiscal 2005 was primarily attributable to sales of the Segway Inc. battery pack and other U-Charge products. We achieved the largest growth in fiscal 2005 sales in education channels, accounting for almost $2 million of our total product sales. Product shipments to resellers that are subject to right of return or monies received for exclusivity or future obligations are recorded on the balance sheet as deferred revenue. We had $0.5 million in deferred revenue on our balance sheet at March 31, 2006 as compared to $1.2 million on March 31, 2005. We expect sales of the N-Charge(TM) Power System to continue to grow moderately in fiscal 2007. We launched our large-format products in late 2004 with the K-Charge system and U-Charge family during fiscal 2005. In fiscal 2006, we launched our long range battery pack for use in Segway Inc. human transporter as well as further expansions of our U-Charge family of products. Segway accounted for 53% of our total product sales in 2006. LICENSING AND ROYALTY REVENUE: For fiscal years 2004 through 2006, license and royalty revenue was primarily derived from license fees and royalty payments, relating to our battery construction, from Amperex Technology Limited ("ATL") including a one-time license fee payment of $0.5 million in fiscal 2004 and on-going royalty payments as sales are made by ATL using our technology. We expect to continue to pursue a licensing strategy as our Saphion(R) technology receives greater market acceptance. GROSS MARGIN LOSS: Gross margin loss as a percentage of revenue was (48%) for the year ended March 31, 2006 as compared to a gross margin loss of (53%) for the fiscal year ended March 31, 2005 and a gross margin loss of (69%) for the year ended March 31, 2004. Although our gross margin loss has improved, we maintained a negative gross margin on our sales in all periods because of insufficient production and sales volumes to cover our indirect and fixed manufacturing operating costs. Fiscal years 2006 and 2005 margin improvements were offset by inventory valuation adjustments of $5.3 million and $1.2 million as of March 31, 2006 and 2005, related to valuation of our work in process cell inventory and lower of cost or market tests for our early launch and U.S.-sourced large-format products. We have successfully transitioned our battery manufacturing and N-Charge(TM) product assembly operations to contract manufacturers in Asia. As of April 2005, we 26 completed the transition of our powder manufacturing to our WFOE's in Suzhou, China. We also transitioned our additional manufacturing pack assembly operations to our facilities in Suzhou, China in fiscal 2006. During fiscal 2006, we had significant expenses due to issues with our powder manufacturing. We expect cost of sales to continue to decrease during fiscal 2007, as a percentage of sales, as production volumes continue to increase, as we continue to implement our lower-cost manufacturing strategy, and as we launch higher-margin products. OPERATING EXPENSES The following table summarizes our operating expenses during each of the past three fiscal years:
Year Ended ----------------------------------------------------------------------------------- % % March 31, 2006 Change March 31, 2005 Change March 31, 2004 ----------------------------------------------------------------------------------- (dollars in thousands) Operating expenses: Research and product development $ 5,112 (33)% $ 7,682 (11)% $ 8,638 Marketing 2,163 (50)% 4,292 (12)% 4,880 General and administrative 11,794 (9%)% 12,933 13% 11,415 Depreciation and amortization 722 (18)% 884 (58)% 2,109 Gain on disposal of assets (445) (91)% (5,257) 24,934% (21) Asset impairment charge 170 95% 87 (99)% 13,660 Restructuring charge - - - (100)% 926 Contact settlement charge, INI - (100)% 957 (69)% 3,046 Contact settlement charge, other (108) (122)% 499 100% - -------------- ------------ ------------ ----------- ------------- Total operating expenses $ 19,408 (12)% $ 22,077 (51)% $ 44,653 ============== ============ ============ =========== ============= % of total revenue 113% 207% 473%
We continued to focus on our operating expense management throughout fiscal 2006. Operating expenses as a percentage of revenue decreased to 113% in fiscal 2006 versus 207% in fiscal 2005 and 473% in fiscal 2004. The decrease is the result of increased revenues, as well as our focus on expense reductions during fiscal 2006, our final settlement with the INI, the gain on the sale of our Mallusk, Northern Ireland facility, and reduced impairment and depreciation expenses related to our assets as we finalized our transition plans. The decrease in operating expense as a percent of revenue was offset by relocation of manufacturing and development operations to China as well as settlements of other contracts. Of our operating expenses in fiscal 2005 and 2004, $2.1 million and $17.6 million, respectively, related to the changes in our business plan and subsequent closure of our Northern Ireland facility and the sale of our Henderson, Nevada facility, representing 20% and 187% of revenue in each of these fiscal years. RESEARCH AND PRODUCT DEVELOPMENT: Research and product development expenses consist primarily of personnel, equipment and materials to support our efforts to develop battery chemistry and products, as well as to improve our manufacturing processes. Research and product development expenses totaled $5.1 million in fiscal 2006, $7.7 million in fiscal 2005 and $8.6 million in fiscal 2004. We achieved year over year decreases in research and development in fiscal 2006 and 2005 of 33% and 11%, respectively. Decreases in research and development expenses were the result of cessation of process development work in our Northern Ireland facility and reductions in research headcount, temporary staff, and consulting expenses and material costs in our Henderson, Nevada facility. We expect to continue to achieve reductions in research and product development expenses as we improve our product development efficiency and transition portions of our development efforts to Asia. MARKETING: Marketing expenses consist primarily of costs related to sales and marketing personnel, public relations and promotional materials. After expanding our marketing expenses in fiscal 2004 to increase staffing, advertising and promotions to support brand awareness and expansion of sales channels for our products, we eliminated the lower performing of these programs and achieved 50% decrease in marketing expenses in fiscal 2006 as compared to fiscal 2005 while achieving a 60% growth in product revenue. Specifically, in fiscal 2006, we reduced expenses related to our N-Charge(TM) Power System lead generation and media advertising as well as reduced consulting related to the European market development. We expect marketing expenses to remain the same in fiscal 2007. We plan to continue to develop our indirect channels, selectively grow our worldwide sales team, launch additional Saphion(R) products, and continue our branding efforts. GENERAL AND ADMINISTRATIVE: General and administrative expenses consist primarily of salaries and other related costs for finance, human resources, facilities, accounting, information technology, legal, audit, insurance, and corporate-related expenses. General and administrative expenses of $11.794 million in fiscal 2006 represented a decrease over general and administrative expenses in fiscal 2005, largely due to cost management of facility, personnel, and administrative expenses 27 Fiscal 2005 general and administrative expenses of $12.933 million represented an increase of $1.518 million, or 13%, over fiscal 2004 expenses. The year over year increases in general and administrative expense in fiscal 2005 were caused by our ongoing relocation and establishment of manufacturing and development operations to China, increased costs of compliance with the Sarbanes-Oxley Act of 2002, and costs related to shutting down our Northern Ireland facility. OTHER COSTS RELATED TO OUR MANUFACTURING TRANSITION IMPAIRMENT CHARGE: There were impairment charges of $170,000 and $87,000 recorded during fiscal years 2006 and 2005, respectively. In 2006, we reduced the carrying value of certain software related to our manufacturing cost and accounting processes. In 2005, as a result of our decision to relocate manufacturing operations from our leased Henderson, Nevada facility to a newly-formed subsidiary in Suzhou, China, equipment and fixtures in the Nevada facility would not generate cash flows greater than their carrying value. Assets with carrying value of approximately $87,000 were written down in full to fair value, as we estimate that there will be no future cash flows from these assets. During the second quarter of 2004, we recorded an impairment charge of approximately $13.7 million. The charge was recorded pursuant to FASB Statement No. 144, "Accounting for Impairment of Disposal of Long-Lived Assets." During the second quarter of fiscal 2004, we decided to transfer manufacturing from our Northern Ireland facility to low-cost manufacturing in China and consequently determined that the carrying value of certain manufacturing assets at our Northern Ireland facility exceed expected future cash flows from these assets. Additionally, we determined that the future cash flows expected to be generated from certain technology we acquired from Telcordia in December 2000 did not exceed their carrying value. The impairment charge was recorded against property, plant, and equipment and intellectual property with a carrying value of $19.5 million to recognize these assets at their fair value. Fair value was determined based on estimated future cash flows to be generated by these assets, discounted at our market rate of interest of 8%. CONTRACT SETTLEMENT CHARGES: During fiscal 2005, we recorded contract settlement charges totaling $1.456 million relating to the following items: INI SETTLEMENT: Since 1994, pursuant to a letter of offer, we received employment and capital grants from the Ireland Development Board, now known as Invest Northern Ireland ("INI") for our former manufacturing facility located in Mallusk, Northern Ireland, totaling (pound)9 million. Under certain circumstances, INI had the right to reclaim a portion of these grants and had a security interest in the facility's land, building, and equipment. On December 21, 2004, we and INI entered into a settlement agreement pursuant to which INI agreed to release us of all outstanding claims and other obligations owing to INI in connection with grants previously provided to us. Under the terms of the settlement agreement we agreed to pay INI (pound)3 million consisting of a (pound)2 million payment in cash and a (pound)1 million payment in common stock. In order to fund the (pound)1 million common stock payment, we issued 539,416 shares of common stock, equivalent to $3.60 per share. In connection with this final settlement, we recorded an additional charge of $957,000 during the third quarter of fiscal 2005. JOINT VENTURE SETTLEMENT: On November 17, 2004, we entered into a settlement agreement with Baoding Fengfan Group Limited Liability Company, Ltd. ("Fengfan") and Baoding Fengfan - Valance Battery Company, Ltd. (collectively the "JV Company"). Under the terms of the JV Settlement Agreement, the parties agreed to liquidate and dissolve the JV Company, terminate the JV Company contracts and fully settle any and all remaining obligations among the parties. We agreed to make compensation payments to the JV Company and to Fengfan totaling approximately $224,417 and to make equipment purchases from the JV Company of approximately $275,583. To date, we have made compensation payments of $157,092 and completed all of the equipment purchases. The $67,325 final compensation payment was made upon final dissolution of the JV legal entity by Fengfan. We recorded a contract settlement charge of $224,217 in the third quarter of fiscal 2005 for the compensation payments and capitalized equipment purchases as the payments were made. In 2006, we realized a credit of $108,075 related to the final dissolution of the Joint Company. SUPPLIER CONTRACT TERMINATIONS: During the third quarter of fiscal 2005, as a result of our relocating our core operations to China and selection of lower-cost suppliers, we terminated two supplier contracts related to producing product and manufacturing capital equipment. In settlement of these contracts, we paid these suppliers termination fees which include the settlement expenses accrued in fiscal 2005 of approximately $275,000. RESTRUCTURING CHARGE: In the third fiscal quarter of 2004, we recorded restructuring charges of $926,000 related to the closing of our Northern Ireland facility. During the third quarter of fiscal 2004, we completed the transition of our battery production from our Northern Ireland manufacturing facility to our OEM supplier. Remaining payment obligations for factory equipment operating leases that extended beyond December 31, 2003 were approximately $231,000. These lease payment obligations provide no economic benefit to us, and contractual lease costs of approximately $231,000 were recorded as restructuring charges during the quarter ended December 31, 2003. 28 GAIN ON SALE OF ASSETS: Gain on sales of the facility and production and development equipment from our former Mallusk, Northern Ireland facility was $445,000 and $5.257 million in fiscal years 2006 and 2005. The majority of the gain is related to the sales of our Northern Ireland facility completed in fiscal 2005. Additionally, we determined that some equipment was not required in our manufacturing and development operations in Suzhou, China and was sold for fair value. DEPRECIATION AND AMORTIZATION, INTEREST EXPENSE AND OTHER EXPENSES DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense totaled $722,000, $884,000, and $2.109 million for fiscal years ended March 31, 2006, 2005 and 2004, respectively. The decrease in depreciation expenses resulted from the assets in our Northern Ireland facility being classified as held for sale and not depreciated beginning in the third quarter of fiscal 2005, the impact of the impairment charges to intellectual property and property, plant and equipment and the impact of the sale of our Henderson, Nevada facility. INTEREST EXPENSE: Interest expense relates to our long-term debt with a stockholder and third party, as well as mortgages on our Northern Ireland facility. We completed the sale of our Northern Ireland facility and paid off the mortgages on December 22, 2004. Interest expense was $5.551 million, $4.262 million and $4.059 million for the fiscal years 2006, 2005 and 2004, respectively. COST OF WARRANTS: In November 2003, we agreed to extend the time period in which a warrant holder was able to exercise their warrants. The warrant exercise period originally ended on July 27, 2003, and was extended to July 27, 2004, at which time the warrants terminated unexercised. The non-cash expense related to the exercise period extension of $181,000 was determined using the Black-Scholes model, with risk free rate of 1.04%, expected life of 0.75 years, and volatility of 69.88. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY At March 31, 2006, our principal sources of liquidity were cash and cash equivalents of $0.6 million and $5.4 million remaining under the $20 million backup equity funding commitment entered into in June 2005 with Mr. Carl Berg, our chairman of the board and principal stockholder. Subsequent to March 31, 2006 we have exhausted the $5.4 million remaining under Mr. Berg's funding commitment through a drawn down of $4.5 million and receipt of net proceeds of $1.1 million from the sale of stock under a controlled equity offering agreement with Cantor Fitzgerald. Although Mr. Berg may continue to fund the Company's operations he is under no obligation to do so. We intend to improve our liquidity by the continued monitoring and reduction of manufacturing, facility and administrative costs. However, notwithstanding these efforts, we do not expect our cash on hand and cash generated by operations will be sufficient to fund our operating and capital needs beyond the next three months. As a result of our limited cash resources and history of operating losses, our auditors have expressed in their report on our financial statements included herein that there is substantial doubt about our ability to continue as a going concern. We presently have no further commitments for financing by Mr. Berg or any other source. If we are unable to obtain financing from Mr. Berg or others on terms acceptable to us, or at all, we may be forced to cease all operations and liquidate our assets. Our cash requirements may vary materially from those now planned because of changes in our operations, including the failure to achieve expected revenues, greater than expected expenses, changes in OEM relationships, market conditions, the failure to timely realize our product development goals, and other adverse developments. These events could have a negative impact on our available liquidity sources during fiscal 2007. The following table summarizes our statement of cash flows for the fiscal years ended March 31, 2006, 2005 and 2004 (in thousands):
Year Ended -------------------------------------------------- March 31, 2006 March 31, 2005 March 31, 2004 -------------------------------------------------- Net cash flows provided by (used in): Operating activities $ (33,149) $ (33,125) $ (29,131) Investing activities (1,205) 7,021 (3,305) Financing activities 32,439 25,625 28,357 Effect of foreign exchange rates 27 287 155 --------------- --------------- ------------- Net increase (decrease) in cash and cash equivalents $ (1,888) $ (192) $ (3,924)
Our use of cash from operations during fiscal 2006, fiscal 2005 and fiscal 2004 was $33.149 million, $33.125 million and $29.131 million, respectively. The cash used for operating activities during all periods was primarily for operating losses and 29 working capital. Cash used for operating loss in fiscal 2005 was higher than in fiscal 2004 primarily from the impact of contract settlement agreements and increases in some of the operating expenses as described above in the section titled "Operating Expenses" offset by reductions in gross margin loss. In fiscal 2006, we spent net cash from investing activities of $1.205 million primarily on property, plant, and equipment for our China facilities. The cash provided from investing activities during fiscal 2005 related primarily to the sale of our Northern Ireland facility as described in the Notes to Consolidated Financial Statements, Note 7, Property, Plant, and Equipment, and offset by purchases of property, plant and equipment, primarily for enterprise software and manufacturing fixtures and our investment in our China subsidiaries. During fiscal 2005, the effect of deconsolidation of our China joint venture, as described in Notes to Consolidated Financial Statements, Note 19, Joint Venture, was to reduce cash by $913,000, as the assets, liabilities, and operating results of the joint venture are no longer being consolidated into our financial statements. During fiscal 2004, purchases of property, plant and equipment in our joint venture were offset by our sale of the Henderson, Nevada facility resulting in $3.305 million used in investing activities. We obtained net cash from financing activities of $32.439 million and $25.625 million during the fiscal 2006 and 2005, respectively. The 2006 financing included $20 million from Berg & Berg Enterprises, LLC (Berg & Berg), an affiliate of Carl Berg, the Company chairman of the board and managing member of Berg & Berg in equity lines, including $6 million in convertible notes to shareholder, and approximately $5.9 million in common stock sales. The 2005 financing included $25.0 million from Berg & Berg equity lines, net proceeds from the sale of common stock to a third party institutional investor, less cash used for the payoff of long-term debt related to the sale of our Northern Ireland facility. As a result of the above, we had a net decrease in cash and cash equivalents of $1.888 million during fiscal 2006, a net decrease of $0.192 million during fiscal 2005, and a net decrease of $3.924 million during fiscal 2004. At March 31, 2006, we had $4.3 million of Series C-1 Convertible Preferred Stock and $4.3 million of Series C-2 Convertible Preferred Stock outstanding, all of which is currently held by Berg & Berg. The Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock are convertible into common stock at $4.00 per share and were redeemable on December 15, 2005. Applicable provisions of Delaware corporate law restrict our ability to redeem the preferred stock. Berg & Berg has agreed that our failure to redeem the Series C-1 Convertible Preferred Stock and the Series C-2 Convertible Preferred Stock does mot constitute a default under the certificate of designations for either the Series C-1 Convertible Preferred Stock or the Series C-2 Convertible Preferred Stock and has waived the accrual of any default interest applicable. RELATED PARTY TRANSACTIONS In June 2005, Mr. Carl Berg, our chairman of the board and principal stockholder, agreed to provide a funding commitment of $20.0 million. On June 30, 2005, the Company drew down $2.5 million of this commitment. This draw took the form of a loan at a 5.0% annual interest rate and was repaid with proceeds from a July 2005 loan from a third party finance company. This funding commitment was reduced by $4.3 million upon the purchase of the Series C-2 Convertible Preferred Stock on July 14, 2005 by Berg & Berg. On December 14, 2005, Mr. Berg's funding commitment was further reduced by $4.3 million in connection with the purchase of the Company's Series C-1 Convertible Preferred Stock by Berg & Berg. In February and March 2006, the Company issued convertible promissory notes in favor of Berg & Berg in an aggregate principal amount of $6.0 million (the "Notes") The Notes accrued interest at the annual rate of 8.0% and matured on March 30 and June 30, 2006. The principal amount of the Notes, together with accrued interest, was converted into 2,965,870 shares of common stock of the Company, in accordance with their terms, on April 3, 2006. On April 3, 2006 West Coast Venture Capital purchased $1.0 million of our common stock. This represented an additional funding on the $20.0 million funding commitment previously made by Mr. Berg. The purchase price of $2.49 per share equaled the closing bid price of our common stock as of March 31, 2006. On May 11, 2006 West Coast Venture Capital purchased $1.5 million of our common stock. This represented an additional funding on the $20.0 million funding commitment previously made by Mr. Berg. The purchase price of $2.32 per share equaled the closing bid price of our common stock as of May 10, 2006. In June 2006, the Company issued convertible promissory notes in the aggregate principal amount of $2.0 million to Berg & Berg, which are due with interest in September 2006. These convertible promissory notes accrue interest at the annual rate of 8.0% and are convertible at any time prior to maturity, into shares of common stock of the Company at a conversion price equal to the closing bid price of the Company's common stock on the trading day immediately prior to the conversion date, provided that the conversion price cannot be lower $1.70, the closing bid price of the Company's common stock on June 20, 2006. 30 In June 2004, Mr. Berg agreed to provide an additional $20 million backup equity funding commitment. This additional funding commitment was in the form of an equity line of credit and allowed the Company to request Mr. Berg to purchase shares of common stock from time to time at the average closing bid price of the stock for the five days prior to the purchase date. As of March 31, 2006, the Company has drawn down $19 million of this commitment. This commitment can be reduced by the amount of net proceeds received from the sale of the building or equipment from the Company's Mallusk, Northern Ireland facility or the amount of net proceeds in a debt or equity transaction, and may be increased if necessary under certain circumstances. As of the date of this report, Mr. Berg has not requested that his commitment be reduced. In October 2001, the Company entered into a loan agreement (the "2001 Loan") with Berg & Berg. Under the terms of the agreement, Berg & Berg agreed to advance the Company funds of up to $20.0 million between the date of the agreement and December 31, 2003. Interest on the 2001 Loan accrues at 8.0% per annum, payable from time to time. On July 13, 2005, Berg & Berg agreed to extend the maturity date for the loan from September 30, 2006, to September 30, 2008, and the Company granted to Berg & Berg a 90-day option, effective October 1, 2006, to require that interest will accrue on the loan as compound interest rather than as simple interest. In July 1998, the Company entered into an amended loan agreement (the "1998 Loan") with Berg & Berg that allows the Company to borrow, prepay and re-borrow up to $10.0 million principal under a promissory note on a revolving basis. In November 2000, the 1998 Loan agreement was amended to increase the maximum amount to $15.0 million. As of December 31, 2005, the Company had an outstanding balance of $14.95 million under the 1998 Loan agreement. The loan bears interest at one percent over the lender's borrowing rate (approximately 9.0% at December 31, 2005). On July 13, 2005, the parties agreed to extend the loan's maturity date from September 30, 2006 to September 30, 2008, and the Company granted to Berg & Berg a 90-day option, effective October 1, 2006, to require that interest will accrue on the loan as compound interest. On January 1, 1998, the Company granted options to Mr. Dawson, the Company's then Chairman of the Board, Chief Executive Officer and President, an incentive stock option to purchase 39,506 shares, which was granted pursuant to the Company's 1990 Plan (the "1990 Plan"). Also, an option to purchase 660,494 shares was granted pursuant to the Company's 1990 Plan and an option to purchase 300,000 shares was granted outside of any equity plan of the Company, neither of which were incentive stock options (the "Nonstatutory Options"). The exercise price of all three options is $5.0625 per share, the fair market value on the date of the grant. The Compensation Committee of the Company approved the early exercise of the Nonstatutory Options on March 5, 1998. The options permitted exercise by cash, shares, full recourse notes or non-recourse notes secured by independent collateral. The Nonstatutory Options were exercised on March 5, 1998 with non-recourse promissory notes in the amounts of $3,343,750 ("Dawson Note One") and $1,518,750 ("Dawson Note Two") (collectively, the "Dawson Notes") secured by the shares acquired upon exercise plus 842,650 shares previously held by Mr. Dawson. As of March 31, 2006, principal and interest amounts of $3.50 million and $1.59 million were outstanding under Dawson Note One and Dawson Note Two, respectively, and under each of the Dawson Notes, interest from the issuance date accrues on unpaid principal at the rate of 5.77% per annum, or at the maximum rate permissible by law, whichever is less. On April 20, 2005, the Company's Board of Directors approved a resolution to extend the maturity dates of each of the Dawson Notes from September 5, 2005 to September 5, 2007. In accordance with the Dawson Notes, interest is payable annually in arrears and has been paid through March 4, 2005. As of March 31, 2006 and 2005, amounts of $3,550,313 and $1,613,458 were outstanding under Dawson Note One and Dawson Note Two, respectively. Under each of the Dawson Notes, interest from the Issuance Date accrues on unpaid principal at the rate of 5.69% per annum, or at the maximum rate permissible by law, whichever is less. In accordance with the Dawson Notes, interest is payable annually in arrears and has been paid through March 4, 2005. CAPITAL COMMITMENTS AND DEBT At March 31, 2006, we had commitments for capital expenditures for the next 12 months of approximately $100,000 relating to manufacturing equipment. We may require additional capital expenditures in order to meet greater demand levels for our products than are currently anticipated and/or to support our transition of operations to China. 31 At March 31, 2006, our cash obligations for short-term and long-term debt (principal & interest) consisted of (in thousands):
1998 long-term debt to Berg & Berg Enterprises, LLC $ 23,749 2001 long-term debt to Berg & Berg Enterprises, LLC 26,708 2005 long-term debt to SFT I, Inc. 20,114 2006 short-term note payable Berg & Berg Enterprises, LLC 6,073 --------------------- Total debt obligations $ 76,644 ---------------------
At March 31, 2006, our repayment obligations of short-term and long-term debt principal are (in thousands):
2007 2008 2009 2010 2011 Thereafter Total ---------- --------- ---------- ----------- ---------- ------------ ----------- Principal repayments $ 6,000 $ - $ 34,950 $ - $ 20,000 $ - $ 60,950
If not converted to common stock, the redemption obligation for the Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock is $8.6 million. The Series C-1 Convertible Preferred Stock may be converted, at any time, into shares of our common stock at the lower of $4.00 or the closing price of our common stock on the conversion date, provided the conversion price can be no lower than $1.98, the closing price of the common stock on December 13, 2005. The Series C-2 Convertible Preferred Stock may be converted, at any time, into shares of our common stock at the lower of $4.00 or the closing price of our common stock on the conversion date, provided the conversion price can be no lower than $2.96, the closing bid price of our common stock on July 13, 2005. The preferred shares are currently outstanding and subject to redemption or conversion at the holder's discretion. If cash flow from operations is not adequate to meet debt obligations, additional debt or equity financing will be required. There can be no assurance that we could obtain the additional financing. CONTRACTUAL OBLIGATIONS At March 31, 2006, our contractual obligations and payments due by period are as follows (in thousands):
Payments Due by Period --------------------------------------------------------------------------- Less than More than Total 1 Year 1-3 Years 3 - 5 Years 5 Years --------------------------------------------------------------------------- Long-term debt obligations $ 70,457 $ - $ 50,343 $ 20,114 $ - Notes payable 6,073 6,073 Operating lease obligations 1,570 769 606 195 - Purchase obligations 5,464 5,464 Redemption of convertible preferred stock 8,610 8,610 - - - Total ----------- ----------- ---------- ----------- ----------- $ 92,174 $ 20,916 $ 50,949 $ 20,309 $ - =========== =========== ========== =========== ===========
INFLATION Historically, our operations have not been materially affected by inflation. However, our operations may be affected by inflation in the future. RECENT ACCOUNTING PRONOUNCEMENTS In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The standard requires that abnormal amounts of idle capacity and spoilage costs should be excluded from the cost of inventory and expensed when incurred. The provision is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of this standard to have a material effect on our consolidated financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for 32 nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard did not have a material effect on our consolidated financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), SHARE-BASED PAYMENT ("SFAS 123R"), which revises SFAS 123. SFAS 123R also supersedes APB 25 and amends SFAS No. 95, STATEMENT OF CASH FLOWS. SFAS 123R eliminates the alternative to account for employee stock options under APB 25 and requires the fair value of all share-based payments to employees, including the fair value of grants of employee stock options to be recognized in the statement of operations, generally over the vesting period. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 107, which provides additional implementation guidance for SFAS 123R. Among other things, SAB 107 provides guidance on share-based payment valuations, income statement classification and presentations, capitalization of costs and related income tax accounting. SFAS 123R provides for adoption using either the modified prospective or modified retrospective transition method. We will adopt SFAS 123R on April 1, 2006 using the modified prospective transition method in which compensation cost is recognized beginning April 1, 2006 for all share-based payments granted on or after that date and for all awards granted to employees prior to April 1, 2006 that remain unvested on that date. We will continue to use the Black-Scholes option pricing model to determine the fair value of stock option awards. Adoption of SFAS 123R's fair value method will have an effect on results of operations, although it will not have a material impact on our overall financial position. The future impact of SFAS 123R cannot be predicted at this time because it will depends on levels of share-based payments granted. However, had SFAS 123R been adopted in prior periods, the effect would have approximated the SFAS 123 pro forma net loss and net loss per share disclosures as shown in Note 3 to the consolidated financial statements, SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as currently required, thereby reducing net operating cash flows and increasing net financing cash flows in periods after adoption. In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations ("FIN 47"). FIN 47 clarifies that an entity must record a liability for a "conditional" asset retirement obligation if the fair value of the obligation can be reasonably estimated. We do not expect the adoption of this standard to have a material effect on our consolidated financial position, results of operations or cash flows. In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS--A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. This statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement redefines restatements as the revising of previously issued financial statements to reflect the correction of an error. SFAS No. 154 requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. This statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of this standard to have a material effect on our consolidated financial position, results of operations or cash flows. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We considered the provisions of Financial Reporting Release No. 48, "Disclosures of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosures of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Commodity Instruments." We had no holdings of derivative financial or commodity instruments at March 31, 2006. We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. The following table presents the principal cash flows by year of maturity for our total debt obligations held at March 31, 2006 (in thousands):
Expected Maturity Date --------------------------------------------------------------------------------------------------- 2007 2008 2009 2010 2011 Thereafter Total ------------- ----------- ------------ ---------- ----------- -------------- --------------- Fixed rate debt $ 6,000 $ - $ 34,950 $ - $ - $ - $ 40,950 Variable rate debt $ - $ - $ - $ - $ 20,000 $ - $ 20,000
Based on borrowing rates currently available to us for loans with similar terms, the carrying value of our debt obligations approximates fair value. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm.................................................................35 Consolidated Balance Sheets as of March 31, 2006 and March 31, 2005.....................................................36 Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2006, 2005 and 2004 .........37 Consolidated Statements of Stockholders' Deficit for the years ended March 31, 2006, 2005 and 2004......................38 Consolidated Statements of Cash Flows for the years ended March 31, 2006, 2005 and 2004.................................39 Notes to Consolidated Financial Statements..............................................................................40
34 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Valence Technology, Inc. and Subsidiaries Austin, Texas We have audited the accompanying consolidated balance sheets of Valence Technology, Inc., and subsidiaries (the "Company") as of March 31, 2006 and 2005, and the related consolidated statements of operations and comprehensive loss, stockholders' deficit, and cash flows for each of the three years in the period ended March 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2006 and 2005, and the results of their operations and comprehensive loss and their cash flows for each of the three years in the period ended March 31, 2006, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recurring losses from operations, negative cash flows from operations and net stockholders' capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We have also audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of March 31, 2006, based on the criteria established in INTERNAL CONTROL - INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 28, 2006, expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an adverse opinion on the effectiveness of the Company's internal control over financial reporting. DELOITTE & TOUCHE LLP Austin, Texas June 28, 2006 35 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, 2006 March 31, 2005 ------------------ -------------------- Assets Current assets: Cash and cash equivalents $ 612 $ 2,500 Trade receivables, net of allowance of $99 and $115, respectively 2,376 1,464 Inventory 2,738 2,564 Prepaid and other current assets 2,566 920 ------------------ -------------------- Total current assets 8,292 7,448 Property, plant and equipment, net 3,052 2,383 Intellectual property, net 288 400 ------------------ -------------------- Total assets $ 11,632 $ 10,231 ================== ==================== Liabilities and Stockholders' Deficit Current liabilities: Convertible notes payable to stockholder $ $ - 6,000 Accounts payable 1,599 3,251 Accrued expenses 4,479 4,607 Deferred revenue 464 1,241 ------------------ -------------------- Total current liabilities 12,542 9,099 Long-term interest payable to stockholder 15,580 12,536 Long-term debt, net of debt discount 17,942 - Long-term debt to stockholder, net of debt discount 33,170 34,656 ------------------ -------------------- Total liabilities 79,234 56,291 ------------------ -------------------- Commitments and contingencies Redeemable convertible preferred stock, $0.001 par value, 1,000 shares authorized, 861 issued and outstanding at March 31, 2006 and 2005, respectively, liquidation value $8,610 8,610 8,582 Stockholders' deficit: Common stock, $0.001 par value, 200,000,000 shares authorized; 89,883,539 and 87,061,639 shares issued and outstanding as of March 31, 2006 and 2005, respectively 90 87 Additional paid-in capital 426,878 415,745 Deferred compensation (133) (89) Notes receivable from stockholder (5,164) (5,164) Accumulated deficit (494,224) (461,328) Accumulated other comprehensive loss (3,659) (3,893) ------------------ -------------------- Total stockholders' deficit (76,212) (54,642) ------------------ -------------------- Total liabilities, preferred stock and stockholders' deficit $ 11,632 $ 10,231 ================== ==================== The accompanying notes are an integral part of these consolidated financial statements.
36 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended ----------------------------------------------------- March 31, 2006 March 31, 2005 March 31, 2004 ---------------- ---------------- --------------- Revenue: Battery and system sales $ 16,490 $ 10,274 $ 8,483 Licensing and royalty revenue 724 391 963 ---------------- ---------------- --------------- Total revenues 17,214 10,665 9,446 Cost of sales 25,454 16,341 15,923 Gross margin loss (8,240) (5,676) (6,477) Operating expenses: Research and product development 5,112 7,682 8,638 Marketing 2,163 4,292 4,880 General and administrative 11,794 12,933 11,416 Depreciation and amortization 722 884 2,109 Gain on disposal of assets (445) (5,257) (21) Asset impairment charge 170 87 13,660 Restructuring charge - - 926 Contract settlement charge, INI - 957 3,046 Contract settlement charge, other (108) 499 - ---------------- ---------------- --------------- Total operating expenses 19,408 22,077 44,654 ---------------- ---------------- --------------- Operating loss (27,648) (27,753) (51,131) Minority interest in joint venture - - 69 Cost of warrants - - (181) Interest and other income 475 585 345 Interest expense (5,551) (4,262) (4,059) ---------------- ---------------- --------------- Net loss (32,724) (31,430) (54,957) ================ ================ =============== Dividends on preferred stock 172 171 162 Preferred stock accretion 28 578 940 ---------------- ---------------- --------------- Net loss available to common stockholders, basic and diluted $ (32,924) $ (32,179) $ (56,059) Other comprehensive loss: Net loss $ (32,724) $ (31,430) $ (54,957) Change in foreign currency translation adjustments 234 148 121 ---------------- ---------------- --------------- Comprehensive loss $ (32,490) $ (31,282) $ (54,836) ================ ================ =============== Net loss per share available to common stockholders $ (0.37) $ (0.40) $ (0.77) Shares used in computing net loss per share available ================ ================ =============== to common stockholders, basic and diluted 89,298 81,108 73,104 ================ ================ =============== The accompanying notes are an integral part of these consolidated financial statements.
37
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS) Notes Accumulated Additional Receivable Other Common Stock Paid-in Deferred from Accumulated Comprehensive Shares Amount Capital Compensation Stockholder Deficit Loss Totals --------- -------- ---------- -------------- ----------- ------------- ------------- -------- Balances, March 31, 2003 71,723 $ 72 $ 366,518 $ (181) $ (5,161) $ (374,604) $ (4,162) $ (17,518) Sale of stock to private investors 3,664 4 12,991 12,995 Exercise of stock options at $0.63 to $4.94 per share 247 416 416 Conversion of preferred stock 327 1,391 (1) 1,390 Issuance of common stock warrants 1,132 1,132 Issuance of warrants (940) (940) Stock compensation 36 693 729 Modification of stock option 738 (738) - Interest receivable from stockholder (277) (277) Payment of accrued interest on note receivable from stockholder 277 277 Dividends on preferred stock (162) (162) Net loss (54,957) (54,957) Change in translation adjustment 121 121 --------- -------- ---------- -------------- ----------- ------------- ------------- -------- Balances, March 31, 2004 75,961 $ 76 $ 382,282 $ (226) $ (5,161) $ (429,724) $ (4,041) $(56,794) --------- -------- ---------- -------------- ----------- ------------- ------------- -------- Sale of stock to private investors 10,243 10 31,890 31,900 Issuance of stock to INI 539 1 1,915 1,916 Exercise of stock options at $0.63 to $4.56 per share 319 - 571 571 Accretion of preferred stock (578) (578) Stock compensation 108 (305) (197) Modification of stock option (443) 442 (1) Interest receivable from stockholder (304) (304) Payment of accrued interest on note receivable from stockholder 301 301 Dividends on preferred stock (174) (174) Net loss (31,430) (31,430) Change in translation adjustment 148 148 --------- -------- ---------- -------------- ----------- ------------- ------------- -------- Balances, March 31, 2005 87,062 $ 87 $ 415,745 $ (89) $ (5,164) $ (461,328) $ (3,893) $(54,642) --------- -------- ---------- -------------- ----------- ------------- ------------- -------- Sale of stock to private investors 2,260 2 5,899 5,901 Exercise of stock options at $0.63 to $4.56 per share 562 1 789 790 Issuance of common stock warrants 2,037 2,037 Extension of expiring common stock 2,215 warrants 2,215 Accretion of preferred stock (28) (28) Stock compensation 287 287 Modification of stock option (66) (44) (110) Interest receivable from stockholder (281) (281) Payment of accrued interest on note 281 281 receivable from stockholder Dividends on preferred stock (172) (172) Net loss (32,724) (32,724) Change in translation adjustment 234 234 --------- -------- ---------- -------------- ----------- ------------- ------------- -------- Balances, March 31, 2006 89,884 $ 90 $426,878 $ (133) $ (5,164) $ (494,224) $ (3,659) $(76,212) ========= ======== ========== ============== =========== ============= ============= ======== The accompanying notes are an integral art of these consolidated financial statements.
38
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Year Ended ----------------- --------------- ----------------- March 31, 2006 March 31, 2005 March 31, 2004 ----------------- --------------- ----------------- Cash flows from operating activities: Net loss $ (32,724) $ (31,430) $ (54,957) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 923 884 2,109 Gain on disposal of assets (445) (5,257) (21) Bad debt expense (recoveries) - 17 (31) Accretion of debt discount and other 1,074 909 724 Asset impairment charge 170 87 13,660 Restructuring charge - - 926 Contract settlement payment to INI - (3,211) - Contract settlement charge, other (108) 957 3,046 Cost of warrants - - 181 Compensation related to the issuance of stock options 173 (197) 729 Interest income on shareholder note receivable (281) (3) - Reserve for obsolete inventory - 741 120 Minority interest in joint venture - - (69) Changes in operating assets and liabilities: Trade receivables (912) (3) (228) Inventory (174) 13 (1,376) Prepaid and other current assets (1,647) (589) 731 Accounts payable (1,652) 987 (413) Accrued expenses and long-term interest 3,230 3,322 4,160 Deferred revenue (777) (352) 1,578 ----------------- --------------- ----------------- Net cash used in operating activities (33,149) (33,125) (29,131) ----------------- --------------- ----------------- Cash flows from investing activities: Purchases of property, plant and equipment (1,871) (1,838) (5,990) Proceeds from disposal of property, plant and equipment 666 9,772 2,685 Effect of deconsolidation of joint venture - (913) - ----------------- --------------- ----------------- Net cash provided by (used in) investing activities (1,205) 7,021 (3,305) ----------------- --------------- ----------------- Cash flows from financing activities: Proceeds from convertible notes payable to stockholder 6,000 - - Proceeds from long-term debt, net of issuance costs 22,139 - 2,068 Payments of short term loans (2,500) - - Payments of long-term debt - (6,646) (959) Dividends paid (172) (172) (116) Proceeds from issuance of preferred stock, net - (28) 9,416 Interest received on notes from shareholder 281 - - Proceeds from stock option exercises 789 571 416 Proceeds from issuance of common stock and warrants, net of issuance costs 5,902 31,900 17,532 ----------------- --------------- ----------------- Net cash provided by financing activities 32,439 25,625 28,357 ----------------- --------------- ----------------- Effect of foreign exchange rates on cash and cash equivalents 27 287 155 ----------------- --------------- ----------------- Decrease in cash and cash equivalents (1,888) (192) (3,924) Cash and cash equivalents, beginning of year 2,500 2,692 6,616 ----------------- --------------- ----------------- Cash and cash equivalents, end of year $ 612 $ 2,500 $ 2,692 Supplemental Information: ================= =============== ================= Interest paid $ 1,070 $ 275 $ 345 Conversion of preferred stock to common stock - - 1,390 The accompanying notes are an integral part of these consolidated financial statements.
39 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND BUSINESS STRATEGY: Valence Technology, Inc. (with its subsidiaries, the "Company") was founded in 1989 and has commercialized the industry's first phosphate-based lithium-ion technology. The Company's mission is to drive the wide adoption of high-performance, safe, low-cost energy storage systems by drawing on the numerous benefits of its Saphion(R) battery technology, the experience of its management team, and the significant market opportunity available to it. In February 2002, the Company unveiled its Saphion(R) technology, a lithium-ion technology which utilizes a phosphate-based cathode material. The Company believes that Saphion(R) technology addresses the major weaknesses of existing technology while offering a solution that is competitive in cost and performance. The Company believes that by incorporating a phosphate-based cathode material, its Saphion(R) technology is able to offer greater thermal and electrochemical stability than traditional lithium-ion technologies, which will facilitate its adoption in large application markets not traditionally served by lithium-ion batteries such as motive power, vehicular, portable appliances, telecommunications, and utility back-up systems. Currently, the Company offers its Saphion(R) technology in both cylindrical and polymer construction and have initiated the design of a prismatic cell. The Company's business plan and strategy focuses on the generation of revenue from product sales, while minimizing costs through a manufacturing plan that utilizes partnerships with contract manufacturers and internal manufacturing efforts through its Wholly Foreign-Owned Enterprises ("WFOE's") in China. These WFOE's initiated operations in late fiscal 2005. The market for Saphion(R) technology will be developed by offering existing and new solutions that differentiate the Company's products and its customers' products in both the large-format and small-format markets through the Company's own product launches, such as the N-Charge(R) Power System, K-Charge(TM) Power System, and U-Charge(R) Power System, and through products designed by others. In addition, the Company expects to continue to pursue a licensing strategy as our Saphion(R) technology receives greater market acceptance. 2. GOING CONCERN AND LIQUIDITY AND CAPITAL RESOURCES: GOING CONCERN: The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred operating losses each year since its inception in 1989 and had an accumulated deficit of $494.2 million as of March 31, 2006. For the years ended March 31, 2006 and 2005, the Company sustained net losses of $32.9 and $32.2 million, respectively. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time. The Company's ability to continue as a going concern is contingent upon its ability to meet its liquidity requirements. If the Company is unable to arrange for debt or equity financing on favorable terms or at all the Company's ability to continue as a going concern is uncertain. These consolidated financial statements do not give effect to any adjustments to the amounts and classifications of assets and liabilities which might be necessary should the Company be unable to continue as a going concern. LIQUIDITY AND CAPITAL RESOURCES: At March 31, 2006, the Company's principal sources of liquidity were cash and cash equivalents of $612,000 and $5.4 million remaining on a $20.0 million funding commitment made by Mr. Carl Berg, chairman of the Company's board of directors and its principal stockholder on June 13, 2005. Of the original $20.0 million commitment, $8.6 million was applied to the purchase by Berg & Berg Enterprises, LLC ("Berg & Berg"), an affiliate of Mr. Berg, of the Company's Series C-2 Convertible Preferred stock and Series C-1 Convertible Preferred Stock in July 2005 and December 2005, respectively. These transactions are more fully discussed below. Mr. Berg's funding commitment was reduced by $1.0 and $1.5 million in connection with stock purchases made by West Coast Venture Capital, Inc. ("West Coast Venture Capital"), an affiliate of Mr. Berg on April 3, 2006 and May 11, 2006, respectively. In addition, the Company issued new convertible promissory notes on February 3, 2006 though March 9, 2006, totaling $6.0 million. The convertible notes bear interest at the annual rate of 8.0% and were converted by Berg & Berg into shares of common stock of the Company on April 3, 2006. In June 2006, the Company issued convertible promissory notes in the aggregate principal amount of $2.0 million to Berg & Berg, which are due with interest in September 2006. These convertible promissory notes accrue interest at the annual rate of 8.0% and are convertible at any time prior maturity, into shares of common stock of the Company at a conversion price equal to the closing bid price of the 40 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED): Company's common stock on the trading day immediately prior to the conversion date, provided that the conversion price cannot be lower than $1.70, the closing bid price of the Company's common stock on June 20, 2006. On July 13, 2005, the Company secured a $20.0 million loan from a third party finance company, the full amount of which has been drawn down. Under the terms of the loan agreement, which is guaranteed by Mr. Berg, interest is payable monthly and the entire principal balance is payable on July 13, 2010. The loan bears interest per annum at the greater of 6.75% or LIBOR plus 4.0%. In connection with the loan the Company purchased a rate cap agreement to protect against fluctuations in LIBOR for the full amount of the loan for a period of three years. The Company utilized $2.5 million of this loan to repay a June 30, 2005 draw from Mr. Berg under his funding commitment. At March 31, 2006, the Company had $4.3 million of Series C-1 Convertible Preferred Stock and $4.3 million of Series C-2 Convertible Preferred Stock outstanding, all of which is currently held by Berg & Berg. Pursuant to the terms of the two series of Convertible Preferred Stock, the preferred stock is currently subject to redemption by the Company. Berg & Berg has agreed that the Company's failure to redeem does not constitute a default under the certificate of designations for either the Series C-1 Convertible Preferred Stock or the Series C-2 Convertible Preferred Stock and has waived the accrual of any default interest applicable in such circumstances. In exchange the Company has agreed (i) that the Series C-1 Convertible Preferred Stock may be converted, at any time, into the Company's common stock at the lower of $4.00 or the closing price of the Company's common stock on the conversion date, provided the conversion price can be no lower than $1.98, the closing bid price of the Company's common stock on December 13, 2005 and (ii) the Series C-2 Convertible Preferred Stock may be converted, at any time, into the Company's common stock at the lower of $4.00 or the closing price of the Company's common stock on the conversion date, provided the conversion price can be no lower than $2.96, the closing bid price of the Company's common stock on July 13, 2005 The Company expects our sources of liquidity will not be sufficient for the twelve months following March 31, 2006. The Company anticipates product sales during fiscal 2007 from the N-Charge(TM) Power System and the Segway pack, which are subject to seasonal fluctuations and the sale of the U-Charge(R) Power System will be insufficient to cover the Company's operating expenses. The Company also anticipates some benefits from reductions in operating expenses and manufacturing costs; however, these benefits may not be sufficient to sustain the Company's operations and its ability to continue as a going concern. Management depends upon our ability to periodically arrange for additional equity or debt financing to meet our liquidity requirements. Unless our product sales are greater than management currently forecasts or there are other changes to our business plan, we will need to arrange for additional financing within the next three to six months to fund operating and capital needs. This financing could take the form of debt or equity. Given our historical operating results and the amount of our existing debt, as well as the other factors, we may not be able to arrange for debt or equity financing from third parties on favorable terms or at all. The Company's cash requirements may vary materially from those now planned because of changes in the Company's operations including the failure to achieve expected revenues, greater than expected expenses, changes in OEM relationships, market conditions, the failure to timely realize the Company's product development goals, and other adverse developments. These events could have a negative impact on the Company's available liquidity sources during the next 12 months. 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 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 the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenues and expenses for the period. Actual results could differ from those estimates. 41 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries. Intercompany balances and transactions are eliminated upon consolidation. 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. INVENTORY: Inventory is stated at the lower of cost (determined using the first-in, first-out method) or market. CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the Company to concentrations of credit risk are primarily accounts receivable and cash and cash equivalents. The Company provides an allowance for doubtful accounts based upon the expected collectibility of accounts receivable. Credit losses to date have been within the Company's estimates. Cash and cash equivalents are invested in deposits with a major financial institution. The Company has not experienced any losses on its deposits of cash and cash equivalents. Management believes that the financial institution is financially sound and, accordingly, minimal credit risk exists. FAIR VALUE OF FINANCIAL INSTRUMENTS: Financial instruments that potentially subject the Company to an interest and credit risk consist of cash and cash equivalents, trade receivables, accounts payable, and accrued expenses, the carrying value of which are a reasonable estimate of their fair values due to their short maturities. Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximate fair value. PROPERTY, PLANT AND EQUIPMENT: Property and equipment are stated at cost and depreciated on the straight-line method over their estimated useful lives, generally three to five years. Leasehold improvements are amortized over the lesser of their estimated useful life, generally five years, or the remaining lease term. Expenditures for renewals and betterments are capitalized; repairs and maintenance are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss thereon is reflected in operations. INTELLECTUAL PROPERTY: Intellectual properties acquired consist of patents and are recorded at cost based on the market value of the common stock used in their acquisition. The costs are amortized over the estimated remaining life of the patents. IMPAIRMENT OF LONG-LIVED ASSETS: The Company performs a review of long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows that the assets are expected to generate. If long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value and is recorded in the period the determination was made. 42 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): REVENUE RECOGNITION: Revenues are generated from sales of products including batteries and battery systems, and from licensing fees and royalties per technology license agreements. Product sales are recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, seller's price to the buyer is fixed and determinable, and collectibility is reasonably assured. Product shipments that are not recognized as revenue during the period shipped, primarily product shipments to resellers that are subject to right of return, are recorded as deferred revenue and reflected as a liability on the Company's balance sheet. For reseller shipments where revenue recognition is deferred, the Company records revenue based upon sales to ultimate customers. For direct customers, the Company estimates a return rate percentage based upon its historical experience, reviewed on a quarterly basis. Customer rebates and other price adjustments are recognized as incurred. Licensing fees are recognized as revenue upon completion of an executed agreement and delivery of licensed information, if there are no significant remaining vendor obligations and collection of the related receivable is reasonably assured. Royalty revenues are recognized upon sales of licensed products and when collectibility is reasonably assured. RESEARCH AND DEVELOPMENT: Research and development costs are expensed as incurred. WARRANTY: The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its basic limited warranty. The warranty terms and conditions generally provide for replacement of defective products. Factors that affect the Company's warranty liability include the number of units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy the Company's warranty obligation. Each quarter, the Company re-evaluates its estimates to assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. See Note 13, Commitments and Contingencies. SHIPPING AND HANDLING COSTS: In accordance with Emerging Issues Task Force No. 00-10, "Accounting for Shipping and Handling Fees and Costs", the Company recognizes as revenue amounts billed to customers related to shipping and handling with related expenses recorded as a component of cost of sales. ADVERTISING COSTS: Advertising costs are charged to expense as incurred. Advertising expenses for fiscal 2006, 2005 and 2004, were $87,000, $468,000 and $1.3 million, respectively. FOREIGN CURRENCY: The assets and liabilities of the Company's foreign subsidiaries have been translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Results of operations have been translated using the average exchange rate during the year. Resulting translation adjustments have been recorded as a separate component of stockholders' equity (deficit) as accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in the consolidated statement of operations as they occur. 43 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): STOCK-BASED COMPENSATION: The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," as amended by SFAS No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123," and consensus of the Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments with Variable Terms That Are Issued for Consideration Other Than Employee Services." The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of SFAS 123, as amended by SFAS 148. Had compensation expense for the stock plans been determined based on the fair value at the grant date for options granted in fiscal years 2006, 2005 and 2004 consistent with the provisions of SFAS 123, as amended by SFAS 148, the pro forma net loss would have been reported as follows (in thousands):
FISCAL YEAR ENDING MARCH 31, 2006 2005 2004 ---------------------------------------------- Net loss available to stockholders - as reported $ (32,924) $ (32,179 $ (56,059) Add: stock-based compensation expense, net of related taxes (2,388) (4,117) (5,426) ---------------------------------------------- Net loss available to stockholders - pro forma $ (35,312) (36,296) (61,485) ============================================== Net loss available to stockholders per share, basic and $ (0.37) $ (0.40) $ (0.77) diluted - as reported Net loss available to stockholders per share, basic and diluted - pro forma $ (0.40) $ (0.45) $ (0.84) The fair value of each option grant is estimated at the date of grant using the Black-Scholes pricing model with the following weighted average assumptions for grants in fiscal years 2006, 2005 and 2004: FISCAL YEAR ENDING MARCH 31, 2006 2005 2004 ---------------------------------------------- Risk-free interest rate 4.17% 3.69% 2.84% Expected life 5.0 years 5.0 years 5.0 years Volatility 92.73% 101.58% 106.74% Dividend yield None None None
COMPREHENSIVE INCOME/LOSS: Comprehensive income/loss is the change in stockholder's equity (deficit) from foreign currency translation gains and losses. 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 reporting and tax reporting bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. 44 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): NET LOSS PER SHARE: Net loss per share is computed by dividing the net loss by the weighted average shares of common stock outstanding during the periods. The dilutive effect of the options and warrants to purchase common stock are excluded from the computation of diluted net loss per share, since their effect is antidilutive. The antidilutive instruments excluded from the diluted net loss per share computation were as follows at:
MARCH 31, 2006 2005 2004 ---------------------------------------------- Shares reserved for conversion of Series C preferred stock 3,629,470 2,152,500 2,026,000 Common stock options 9,045,276 9,264,000 8,694,000 Warrants to purchase common stock 2,955,643 1,889,000 2,469,000 ---------------------------------------------- Total 15,630,389 13,305,500 13,189,000 ==============================================
NEW ACCOUNTING STANDARDS: In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The standard requires that abnormal amounts of idle capacity and spoilage costs should be excluded from the cost of inventory and expensed when incurred. The provision is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its consolidated financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), SHARE-BASED PAYMENT ("SFAS 123R"), which revises SFAS 123. SFAS 123R also supersedes APB 25 and amends SFAS No. 95, STATEMENT OF CASH FLOWS. SFAS 123R eliminates the alternative to account for employee stock options under APB 25 and requires the fair value of all share-based payments to employees, including the fair value of grants of employee stock options to be recognized in the statement of operations, generally over the besting period. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 107, which provides additional implementation guidance for SFAS 123R. Among other things, SAB 107 provides guidance on share-based payment valuations, income statement classification and presentations, capitalization of costs and related income tax accounting. SFAS 123R provides for adoption using either the modified prospective or modified retrospective transition method. We will adopt SFAS 123R on April 1, 2006 using the modified prospective transition method in which compensation cost is recognized beginning April 1, 2006 for all share-based payments granted on or after that date and for all awards granted to employees prior to April 1, 2006 that remain unvested on that date. We will continue to use the Black-Scholes option pricing model to determine the fair value of stock option awards. Adoption of SFAS 123R's fair value method will have an effect on results of operations, although it will not have a material impact on our overall financial position. The future impact of SFAS 123R cannot be predicted at this time because it will depends on levels of share-based payments granted. However, had SFAS 123R been adopted in prior periods, the effect would have approximated the SFAS 123 pro forma net loss and net loss per share disclosures as shown in Note 3 to the consolidated financial statements, SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as currently required, thereby reducing net operating cash flows and increasing net financing cash flows in periods after adoption. 45 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): NEW ACCOUNTING STANDARDS (CONTINUED): In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations ("FIN 47"). FIN 47 clarifies that an entity must record a liability for a "conditional" asset retirement obligation if the fair value of the obligation can be reasonably estimated. The Company does not expect the adoption of this standard to have a material effect on its consolidated financial position, results of operations or cash flows. In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS--A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. This statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement redefines restatements as the revising of previously issued financial statements to reflect the correction of an error. SFAS No. 154 requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. This statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its consolidated financial position, results of operations or cash flows. 4. IMPAIRMENT CHARGE: An impairment charge of $170,000 was recorded during the fiscal quarter ended September 30, 2005, pursuant to FASB Statement No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." The charge relates to certain portions of the Company's information systems that are no longer in use. An impairment charge of $87,000 was recorded during the fiscal quarter ended September 30, 2004, pursuant to FASB Statement No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." As a result of the Company's decision to relocate manufacturing operations from its leased Henderson, Nevada facility to a newly-formed subsidiary in Suzhou, China, equipment fixtures in the Nevada facility will not generate cash flows greater than their carrying value. Assets with a carrying value of approximately $87,000 were written down in full to fair value, as the company estimates that there will be no future cash flows from these assets. An impairment charge of approximately $13.7 million was recorded during the fiscal quarter ended September 30, 2003. The charge was recorded pursuant to FASB Statement No 144, "Accounting for Impairment of Disposal of Long-Lived Assets." During the second quarter of fiscal 2004 the Company completed qualification of its OEM manufacturer in China, ATL, for Saphion(R) products. In addition, the Company announced the formation of a manufacturing joint venture in China with Fengfan Group, Ltd. The Company has transitioned all manufacturing from its Northern Ireland facility to China and other low-cost manufacturing regions as of December 31, 2003, and has ceased all manufacturing operations in its Northern Ireland facility as of the end of calendar 2003. The Company also experienced progress on the development of cylindrical battery construction technology and now expects greater emphasis on the licensing of cylindrical technology to the detriment of the licensing of stacked technology (which was the technology acquired from Telcordia in December 2000). As a result of these developments, the Company determined that the future cash flows expected to be generated from its Northern Ireland facility and stacked technology intellectual property acquired in the Telcordia transaction in December 2000 did not exceed their carrying value. This determination resulted in the net impairment charge against property, plant, and equipment and intellectual property to record these assets at their fair value. The Company determined that assets with a carrying amount of approximately $19.5 million should be written down by approximately $13.7 million to their fair value. Fair value was based on estimated future cash flows to be generated by these assets, discounted at the Company's market rate of interest of 8%. 46 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVENTORY: Inventory consisted of the following at (in thousands):
MARCH 31, -------------------------------------------- 2006 2005 ----------------------- -------------------- Raw materials $ 891 $ 464 Work-in-process 1,422 880 Finished goods 425 1,220 ----------------------- -------------------- Inventory $ 2,738 $ 2,564 ======================= ==================== Included in inventory at March 31, 2006 and 2005 were valuation allowances of $5.3 million and $1.2 million, respectively to reduce their carrying values to lower of cost or market. 6. PREPAID AND OTHER CURRENT ASSETS: Prepaid and other current assets consisted of the following at (in thousands): MARCH 31, -------------------------------------------- 2006 2005 ----------------------- -------------------- Other receivables $ 897 $ 9 Deposits 183 123 Prepaid insurance 268 221 Other prepaids 1,218 567 ----------------------- -------------------- Prepaids and other current assets $ 2,566 $ 920 ======================= ==================== 7. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment, net of accumulated depreciation and amortization and impairment, consisted of the following at (in thousands): MARCH 31, -------------------------------------------- 2006 2005 ----------------------- -------------------- Leasehold improvements $ 738 $ 456 Machinery and equipment 7,854 7,678 Office and computer equipment 2,032 1,237 Construction in progress 84 65 ----------------------- -------------------- Property, plant and equipment, gross 10,708 9,436 Less: accumulated depreciation and amortization (5,624) (5,191) Less: impairment (2,032) (1,862) ----------------------- -------------------- Property, plant and equipment, net $ 3,052 $ 2,383 ======================= ====================
47 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INTELLECTUAL PROPERTY Intellectual property consisting of stacked battery construction technology acquired from Telcordia Technologies, Inc., in December 2000 is amortized over five years. Intellectual property, net of accumulated amortization and impairment, consisted of the following at (in thousands):
MARCH 31, -------------------------------------------- 2006 2005 ----------------------- -------------------- Intellectual property, gross $ 13,602 $ 13,602 Less: accumulated amortization (4,820) (4,708) Less: impairment (8,494) (8,494) ----------------------- -------------------- Intellectual property, net $ 288 $ 400 ======================= ==================== Amortization expense was approximately $113, $114 and $781 for the fiscal years ended March 31, 2006, 2005 and 2004, respectively. Amortization expense on intellectual property at March 31, 2006 will be approximately $114, $114 and $59 for fiscal years 2007, 2008 and 2009, respectively. 9. ACCRUED EXPENSES: Accrued expenses consisted of the following at (in thousands): MARCH 31, -------------------------------------------- 2006 2005 ----------------------- -------------------- Accrued compensation $ 374 $ 664 Professional services 431 167 Warranty reserve 1,509 1,067 Other accrued expenses 2,165 2,709 ----------------------- -------------------- Accrued expenses $ 4,479 $ 4,607 ======================= ====================
10. CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER: On February 3, 2006, the Company issued convertible promissory notes in favor of Berg & Berg Enterprises, LLC ("Berg & Berg"), an affiliate of Carl Berg, the Company's chairman of the board and managing member of Berg & Berg, in the principal amounts of $1.0 million and $2.0 million, respectively. Additionally, on February 15, 2006 and March 9, 2006, the Company issued convertible promissory notes in favor of Berg & Berg each in the principal amount of $1.5 million (collectively, the "Notes"). The Notes issued on February 3, 2006 were convertible into common shares at approximately $2.00 per share and the Notes issued on February 15, 2006 and March 9, 2006, each in the principal amount of $1.5 million, were converted into common shares at approximately $2.00 and $2.21 per share, respectively. The notes and accrued interest were converted into a total of 2,965,870 common shares of the Company on April 3, 2006. The issuance of these shares of common stock was exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended. Under Rule 144 of the Securities Act, these shares are restricted from trading by West Coast Venture Capital for one year from the date of issuance, unless registered, and then may be traded only in compliance with the volume restrictions and other applicable restrictions. 48 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. LONG-TERM DEBT: Long-term debt consisted of the following at (in thousands):
MARCH 31, -------------------------------------------- 2006 2005 ----------------------- -------------------- 2005 Loan $ 20,000 $ - Less: unaccreted debt discount (2,058) - ----------------------- -------------------- Long-term debt, less current portion $ 17,942 $ - ======================= ==================== Principal payments of long-term debt are as follows (in thousands):
Fiscal ----------- ---------- ---------- ------------ --------- ------------ ------------ 2007 2008 2009 2010 2011 Thereafter Total ----------- ---------- ---------- ------------ --------- ------------ ------------ 2005 loan $ - $ - $ - $ - $ 20,000 $ - $ 20,000 1998 loan $ - $ - $ - $ - $ - $ - $ - ----------- ---------- ---------- ------------ --------- ------------ ------------ Total long-term debt $ - $ - $ - $ - $ 20,000 $ - $ 20,000 =========== ========== ========== ============ ========= ============ ============
Long-term debt to stockholder consisted of the following at (in thousands):
MARCH 31, -------------------------------------------- 2006 2005 ----------------------- -------------------- 2001 Loan $ 20,000 $ 20,000 1998 Loan 14,950 14,950 Less: unaccreted debt discount (1,780) (294) ----------------------- -------------------- Long-term debt to stockholder $ 33,170 $ 34,656 ======================= ==================== Principal payments of long-term debt to stockholder are as follows (in thousands):
Fiscal ----------- ---------- ---------- ------------ --------- ------------ ------------ 2007 2008 2009 2010 2011 Thereafter Total ----------- ---------- ---------- ------------ --------- ------------ ------------ 2001 loan $ - $ - $ 20,000 $ - $ - $ - $ 20,000 1998 loan - - 14,950 - - - 14,950 ----------- ---------- ---------- ------------ --------- ------------ ------------ Total debt to stockholder $ - $ - 34,950 $ - $ - $ - $ 34,950 =========== ========== ========== ============ ========= ============ ============
49 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. LONG-TERM DEBT (CONTINUED): In June 2005, the Company obtained a $20.0 million funding commitment from Mr. Carl Berg, the Company's chairman of the board and principal stockholder. On June 30, 2005, the Company drew down $2.5 million from this commitment in the form of a loan, which was repaid in full by the Company on July 13, 2005, including interest at an annual rate of 5.0%. The amount of Mr. Berg's funding commitment was reduced in connection with the purchase of the Series C-2 Convertible Preferred Stock in July 2005 by Berg & Berg Enterprises LLC ("Berg & Berg"), the purchase of the Series C-1 Convertible Preferred Stock in December 2005 by Berg & Berg, and the convertible notes payable to stockholder discussed in Footnote 10. On July 13, 2005, the Company secured a $20.0 million loan (the "2005 Loan") from a third party finance company, the full amount of which has been drawn down. The loan is guaranteed by Mr. Berg. The loan matures in a lump sum on July 13, 2010. Interest is due monthly based on a floating interest rate. The interest rate is calculated as the greater of 6.75% or the sum of LIBOR Rate, rounded to the nearest 1/16th of 1.0%, plus 4.0% (8.375% as of December 31, 2005). The loan may not be prepaid in whole or in part on or prior to July 12, 2007. The loan may be prepaid during the period beginning on July 13, 2007 through July 12, 2009, with a 1.0% prepayment premium, and on July 13, 2009 and thereafter with no prepayment premium. In connection with the loan, the Company purchased a rate cap agreement to protect against fluctuations in LIBOR for the full amount of the loan for a period of three years. The Company used $2.5 million of the proceeds from the loan to repay a June 30, 2005 draw from Mr. Berg's funding commitment. In connection with the loan both the third party finance company and Mr. Berg received warrants to purchase 600,000 shares of the Company's common stock at a price of $2.74 per share. The warrants are exercisable beginning on the date they were issued and will expire on July 13, 2008. The fair value assigned to these warrants, totaling approximately $2.037 million, has been reflected as additional consideration for the debt financing, recorded as a discount on the debt and will be accreted as interest expense over the life of the loan. The warrants were valued using the Black-Scholes valuation method using the assumptions of a life of 36 months, 96.45% volatility, and a risk free rate of 3.88%. Also in connection with the loan, the Company incurred a loan commitment fee and attorney's fees which, in addition to the interest rate cap agreement, have been recorded as a discount on the debt and will be accreted as interest expense over the life of the loan. Through March 31, 2006, a total of approximately $292,000 has been accreted and included as interest expense. Interest payments on the loan are currently being paid on a monthly basis. In October 2001, the Company entered into a loan agreement ("2001 Loan") with Berg & Berg. Under the terms of the agreement, Berg & Berg agreed to advance the Company funds of up to $20 million between the date of the agreement and September 30, 2003. Interest on the 2001 Loan accrues at 8.0% per annum, payable from time to time. On July 13, 2005, Berg & Berg agreed to extend the maturity date for the loan principal and interest from September 30, 2006 to September 30, 2008. On November 8, 2002, the Company and Berg & Berg amended an affirmative covenant in the agreement to acknowledge the Nasdaq SmallCap Market as an acceptable market for the listing of the Company's Common Stock. 50 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. LONG-TERM DEBT (CONTINUED): In conjunction with the 2001 Loan, Berg & Berg received a warrant to purchase 1,402,743 shares of the Company's common stock at the price of $3.208 per share. The warrants were exercisable beginning on the date they were issued and expire on August 30, 2005. The fair value assigned to these warrants, totaling approximately $2.768 million has been reflected as additional consideration for the debt financing, recorded as a discount on the debt and accreted as interest expense over the life of the loan. The warrants were valued using the Black-Scholes method using the assumptions of a life of 47 months, 100% volatility, and a risk-free rate of 5.5%. Through March 31, 2006, a total of $2.473 million has been accreted and included as interest expense. The amounts charged to interest expense on the outstanding balance of the loan for the fiscal years ended March 31, 2006, 2005 and 2004 were $1.622 million, $1.622 million, and $1.627 million, respectively. Interest payments on the loan are currently being deferred, and are recorded as long-term interest. The accrued interest amounts for the 2001 Loan were $6.708 million and $5.086 million as of March 31, 2006 and 2005, respectively. In July 1998, the Company entered into an amended loan agreement ("1998 Loan") with Berg & Berg that allows the Company to borrow, prepay and re-borrow up to $10 million principal under a promissory note on a revolving basis. In November 2000, the 1998 Loan agreement was amended to increase the maximum amount to $15 million. As of March 31, 2006, the Company had an outstanding balance of $14.95 million under the 1998 Loan agreement. The loan bears interest at one percent over lender's borrowing rate (approximately 9.0% at March 31, 2006). On July 13, 2005, Berg & Berg agreed to extend the maturity date for the loan principal and interest from September 30, 2006 to September 30, 2008. On November 8, 2002, the Company and Berg & Berg amended an affirmative covenant in the agreement to acknowledge the Nasdaq SmallCap Market as an acceptable market for the listing of the Company's Common Stock. The accrued interest amounts for the 1998 Loan were $8.8 million and $7.45 million as of March 31, 2006 and 2005, respectively. In fiscal 1999, the Company issued warrants to purchase 594,031 shares of common stock to Berg & Berg in conjunction with the 1998 Loan agreement, as amended. 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, using the assumptions of a life of 36 months, 96.45% volatility. And a risk free rate of 3.88% The fair value of these warrants, totaling approximately $2.159 million, has been reflected as additional consideration for the debt financing, recorded as a discount on the debt and accreted as interest expense to be amortized over the life of the line of credit. As of March 31, 2006, a total of $2.159 million has been accreted. The amounts charged to interest expense for each of the fiscal years ended on March 31, 2006, 2005 and 2004 were $1.349 million. Interest payments on the loan are currently being deferred, and are recorded as long-term interest. All of our assets are pledged as collateral under the 2001 Loan and the 1998 Loan to stockholder. 12. SETTLEMENT AGREEMENT: Since 1994, pursuant to a letter of offer, the Company received employment and capital grants from the Ireland Development Board, now known as Invest Northern Ireland ("INI") for its Mallusk, Northern Ireland manufacturing facility, totaling (pound)9.0 million. Under certain circumstances, INI had the right to reclaim a portion of these grants and had a security interest in the facility's land, building and equipment. On December 21, 2004, the Company and INI entered into a settlement agreement pursuant to which INI agreed to release the Company of all outstanding claims and other obligations owing to INI in connection with grants previously provided to the Company. Under the terms of the settlement agreement the Company agreed to pay INI (pound)3 million consisting of a (pound)2 million payment in cash and a (pound)1 million payment in common stock. In order to fund the (pound)1 million common stock payment the Company issued 539,416 shares of common stock, equivalent to $3.60 per share. In connection with this final settlement, the Company recorded an additional charge of $957, 000 during the third quarter of fiscal 2005. 51 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. COMMITMENTS AND CONTINGENCIES: LEASES: Total rent expense for the years ended March 31, 2006, 2005 and 2004 was approximately $847,000, $936,000 and $885,000, respectively. Future minimum payments on leases for fiscal years following March 31, 2006 are (in thousands): 2007 $ 769 2008 466 2009 140 2010 137 2011 58 Thereafter - ------------------- Total minimum payments $ 1,570 =================== On December 12, 2003, the Company closed the sale of its Henderson, Nevada building and land with net book value of $2.664 million for net proceeds of $2.685 million. A gain of $21,000 was recorded on the sale. The Company is leased the facility month-to-month for $20,000 per month. WARRANTIES: The Company has established a warranty reserve in connection with the sale of N-Charge(TM) Power Systems covering a 12-month warranty period during which the Company would provide a replacement unit to any customers returning a purchased product because of a product performance issue. The Company has also established a warranty reserve in relation to the sale of its K-Charge(TM) Power Systems and its U-Charge(R) Power Systems, and its other large-format power systems. In addition, the Company has established a reserve for its 30-day right of return policy under which a direct customer may return a purchased N-Charge(TM) Power System. The Company has estimated its right of return liability as 5% of the previous month's direct N-Charge(TM) Power System sales. Product warranty liabilities are as follows at (in thousands): MARCH 31, -------------------------------------------- 2006 2005 ----------------------- -------------------- Beginning balance $ 1,067 $ 490 Less: claims (746) (695) Less: returns (2) (33) Add: accruals 1,190 1,305 ----------------------- -------------------- Ending balance $ 1,509 $ 1,067 ======================= ==================== LITIGATION: On February 14, 2006, Hydro-Quebec filed an action against Valence Technology, Inc. in the United States District Court for the Western District of Texas (Hydro-Quebec v. Valence Technology, Civil Action No. A06CA111). In its amended complaint filed April 13, 2006, Hydro-Quebec alleges that Saphion(R) Technology, the technology utilized in all of the Company's commercial products, infringes U.S. Patent No.'s 5,910,382 and 6,514,640 exclusively licensed to Hydro-Quebec. Hydro-Quebec's amended complaint seeks injunctive relief and monetary damages. The action is in the initial pleading state and the Company has filed a response denying the allegations. The Company's management believes the action by Hydro-Quebec is without merit and intends to vigorously defend the lawsuit, as well as all of its available legal remedies. The Company is subject to, from time to time, various claims and litigation in the normal course of business. In the opinion of management, all pending legal matters are either covered by insurance or, if not insured, will not have a material adverse impact on the Company's consolidated financial statements. 52 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. REDEEMABLE CONVERTIBLE PREFERRED STOCK: On June 2, 2003, the Company issued 1,000 shares of Series C Convertible Preferred Stock and warrants to purchase the Company's common stock for $10,000 per share, raising net proceeds of $9.416 million. On January 22, 2004, the holder of the Series C Convertible Preferred Stock converted 139 of its 1,000 shares with the principal amount of $1.39 million, including accrued and unpaid dividends, into 327,453 shares of the Company's common stock at the conversion price of $4.25 per share. On November 30, 2004, the Company entered into an amendment and exchange agreement to exchange all outstanding 861 shares of the Company's Series C Convertible Preferred Stock, representing $8.6 million of principal. The Series C Convertible Preferred Stock was exchanged for 431 shares of Series C-1 Convertible Preferred Stock, with a stated value of $4.3 million, and 430 shares of Series C-2 Convertible Preferred Stock, with a stated value of $4.3 million. When issued, the Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock were convertible into common stock at $4.00 per share. Each series carries a 2% annual dividend rate, payable quarterly in cash or shares of common stock, and were redeemable on December 15, 2005. The Company has the right to convert the preferred stock if the average of the dollar-volume weighted average price of the Company's common stock for a ten-day trading period is at or above $6.38 per share. If the preferred shares are not redeemed in accordance with their terms, the holder of the preferred stock shall have the option to require the Company to convert all or part of the redeemed shares at a price of 95% of the lowest closing bid price of the Company's common stock during the three days ending on and including the conversion date. The preferred shares are currently outstanding and subject to redemption or conversion at the holder's discretion. Pursuant to assignment agreements entered into between the Company and Berg & Berg Enterprises, LLC ("Berg & Berg") on July 14, 2005 and December 14, 2005, Berg & Berg purchased all of the outstanding Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock from its original holder. Pursuant to the terms of the assignment agreement, Berg & Berg agreed that the failure of the Company to redeem the preferred stock on December 15, 2005 did not constitute a default under the certificate of designations and has waived the accrual of any default interest applicable in such circumstance. In exchange, the Company has agreed (i) that the Series C-1 Convertible Preferred Stock may be converted, at any time, into the Company's common stock at the lower of $4.00 per share or the closing bid price of the Company's common stock on December 13, 2005 ($1.98) and (ii) that the Series C-2 Convertible Preferred Stock may be converted, at any time, into the Company's common stock at the lower of $4.00 per share or the closing bid price of the Company's common stock on July 13, 2005 ($2.96). In connection with the issue of the original issuance of the Series C Convertible Preferred Stock, in June 2003, the Company issued to the Series C Convertible Preferred Stock original holder a warrant to purchase 352,900 shares of the Company's common stock. The warrant is exercisable at a purchase price of $5.00 per share and expires in June 2008. The warrant was valued using the Black-Scholes valuation model. The warrant was recorded to additional paid in capital at its relative fair value to the Series C Convertible Preferred Stock at $933,000. Accretion to the remaining redemption value of $8.61 million was recorded over the eighteen-month period of the Series C Convertible Preferred Stock ending December 2, 2004. 15. STOCKHOLDERS' DEFICIT: STOCK OPTIONS AND WARRANTS: The Company has a stock option plan (the "1990 Plan") under which options granted may be incentive stock options or supplemental stock options. Options are to be granted at a price not less than fair market value (incentive options) or 85% of fair market value (supplemental options) on the date of grant. The options vest as determined by the Board of Directors and are generally exercisable over a five-year period. Unvested options are canceled and returned to the 1990 Plan upon an employee's termination. Generally, vested options, not exercised within three months of termination, are also canceled and returned to the Plan. The 1990 Plan terminated on July 17, 2000, and as such, options may not be granted after that date. Options granted prior to July 17, 2000 expire no later than ten years from the date of grant. 53 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. STOCKHOLDERS' DEFICIT (CONTINUED): STOCK OPTIONS AND WARRANTS (CONTINUED): In February 1996, the Board of Directors adopted a stock plan for outside Directors (the "1996 Non-Employee Director's Stock Option Plan"). The plan provides that new directors will receive an initial stock option of 100,000 shares of common stock upon their election to the Board. The exercise price for this initial option will be the fair market value on the day it is granted. This initial option will vest one-fifth on the first and second anniversaries of the grant of the option, and quarterly over the next three years. A director who had not received an option upon becoming a director will receive an initial stock option of 100,000 shares on the date of the adoption of the plan. During fiscal 2005 and 2006, no shares were granted under this plan. At March 31, 2006, the Company had 21,260 shares available for grant under the 1996 Non-Employee Director's Stock Option Plan. In October 1997, the Board of Directors adopted the 1997 Non-Officer Stock Option Plan (the "1997 Plan"). The Company may grant options to non-officer employees and consultants under the 1997 Plan. Options are to be granted at a price not less than fair market value (incentive options) on the date of grant. The options vest as determined by the Board of Directors, generally quarterly over a three- or four-year period. The options expire no later than ten years from the date of grant. Unvested options are canceled and returned to the 1997 Plan upon an employee's termination. Vested options, not exercised within three months of termination, also are canceled and returned to the 1997 Plan. During fiscal 2005 and 2006, a total of 21,000 and 60,000 shares, respectively, were granted under this plan. At March 31, 2006, the Company had 750,781 shares available for grant under the 1997 Plan. In January 2000, the Board of Directors adopted the 2000 Stock Option Plan (the "2000 Plan"). The Company may grant incentive stock options to employees and non-statutory stock options to non-employee members of the Board of Directors and consultants under the 2000 Plan. Options are to be granted at a price not less than fair market value on the date of grant. In the case of an incentive stock option granted to an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any affiliate, the option is to be granted at a price not less than 110% of the fair market value on the date of grant. The options are exercisable as determined by the Board of Directors, generally over a four-year period. The options expire no later than ten years from the date of grant. Unvested options are canceled and returned to the 2000 Plan upon an employee's termination. Vested options, not exercised within three months of termination, also are canceled and returned to the 2000 Plan. During fiscal year 2005 and 2006, a total of 1,778,000 and 917,500 shares, respectively, were granted under this plan. At March 31, 2006, the Company had 1,662,641 shares available for grant under the 2000 Plan. Aggregate option activity is as follows (shares in thousands): Outstanding Options ----------------------------------------- Number of Weighted Average Shares Exercise Price ----------------------- ----------------- Balance at March 31, 2004 8,605 $5.73 ----------------------- Granted 1,799 $3.12 Exercised (315) $1.72 Canceled (825) $7.99 ----------------------- Balance at March 31, 2005 9,264 $5.17 ----------------------- Granted 1,978 $2.74 Exercised (542) $1.52 Canceled (1,655) $4.36 ----------------------- Balance at March 31, 2006 9,045 $4.97 ======================= At March 31, 2006 2005 and 2004 vested options to purchase 6,812,201, 6,869,531 and 5,699,000 shares, respectively, were unexercised. 54 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. STOCKHOLDERS' DEFICIT (CONTINUED): STOCK OPTIONS AND WARRANTS (CONTINUED): The following table summarizes information about fixed stock options outstanding at March 31, 2006 (shares in thousands):
Options Outstanding Options Exercisable ---------------------------------------------------------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (years) Price Exercisable Price -------------------------- ------------ -------------- ------------ ---------------- ----------- $ 0.63 - $ 0.83 59 6.22 $ 0.70 47 $ 0.71 $ 1.30 - $ 1.99 982 5.73 $ 1.60 590 $ 1.52 $ 2.03 - $ 2.99 2,395 7.30 $ 2.70 1,050 $ 2.55 $ 3.02 - $ 4.62 1,605 5.45 $ 3.67 1,233 $ 3.75 $ 4.75 - $ 7.12 2,930 4.34 $ 6.16 2,896 $ 6.16 $ 7.16 - $10.06 749 3.95 $ 7.80 749 $ 7.81 $11.31 - $15.75 100 2.89 $ 11.73 100 $ 13.04 $17.12 - $23.56 123 4.03 $ 20.25 123 $ 20.29 $29.28 - $34.62 103 3.85 $ 32.93 103 $ 32.86 ------------ -------------- ------------ ---------------- ----------- $ 0.63 - $34.62 9,045 5.43 $ 4.97 6,891 $ 5.67 ------------ -------------- ------------ ---------------- -----------
At March 31, 2006, the Company has reserved approximately 14,592,310 shares of common stock for the exercise of outstanding stock options and warrants and future grants. 16. SIGNIFICANT CUSTOMERS: Revenues from three significant customers represented 53%, 12%, and 8% or a total of 73% of total revenues for the year ended March 31, 2006 and a total of 77% of the trade accounts receivable at March 31, 2006. Revenues from three significant customers represented a total of 46% of total revenues for the year ended March 31, 2005 and a total of 41% of the trade accounts receivable at March 31, 2005. Revenues from one significant customer represented a total of 30% of total revenues for the year ended March 31, 2004 and a total of 37% of the trade accounts receivable at March 31, 2004. 17. INCOME TAXES: There was no recorded income tax benefit related to the losses of fiscal years 2006, 2005 or 2004 due to the uncertainty of the Company generating taxable income to utilize its net operating loss carryforwards. The provision for income taxes differs from the amount computed by applying the federal statutory rate of 34% to the loss before income taxes as follows: 55 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. INCOME TAXES (CONTINUED):
FISCAL YEAR ENDING MARCH 31, 2006 2005 2004 ---------------------------------------------- Federal tax benefit at statutory rate $ (11,126) $ (10,665) $ (18,685) Rate differential - foreign (19) (74) 888 Impact of foreign rate change - 1,159 - State tax provision (935) (96) (371) Expenses not deductible for tax (157) (61) (39) Research and experimentation credit (146) - (306) Foreign losses not available as a carryfoward 4,893 3,924 6,001 Change in valuation allowance 7,490 5,813 12,512 ---------------------------------------------- Tax provision (benefit) $ - - - ============================================== The components of the net deferred tax asset were as follows at (in thousands): MARCH 31, ------------------------------------------ 2006 2005 --------------------- -------------------- Current assets: Accrued liabilities $ 2,641 $ 995 Valuation allowance (2,641) (995) --------------------- -------------------- $ - $ - ===================== ==================== Non-current assets: Depreciation and amortization $ 1,236 $ 1,397 Research and experimentation credit carryforwards 1,899 1,753 Net operating loss carryforwards - Federal 70,069 64,581 Net operating loss carryforwards - Foreign 46,108 45,923 Stock compensation 103 - Impairment reserve 865 782 Imputed interest 1,207 1,207 Valuation allowance (121,487) (115,643) --------------------- -------------------- $ - $ - ===================== ====================
At March 31, 2006, the Company had federal net operating loss carryforwards available to reduce future taxable income of approximately $202.5 million. The valuation allowance increased by approximately $7.5 million during the year ended March 31, 2006 primarily due to operating losses not benefited. A portion of the valuation allowance relates to tax benefits for stock option deductions included in the net operating loss carryforward which when realized will be allocated directly to contributed capital. The carryforwards expire from 2008 to 2025, if not used before such time to offset future taxable income. For federal tax purposes, the Company's net operating loss carryforwards are subject to certain limitations on annual utilization because of changes in ownership, as defined by federal tax law. The Company also has foreign operating loss carryforwards available to reduce future foreign income of approximately $153.3 million. 18. EMPLOYEE BENEFIT PLAN: The Company has a 401(k) plan (the "Plan") as allowed under Section 401(k) of the Internal Revenue Code. The Plan provides for the tax deferral of compensation by all eligible employees. All United States employees meeting certain minimum age and service requirements are eligible to participate under the Plan. Under the Plan, participants may voluntarily defer up to 25% of their paid compensation, subject to specified annual limitations. The Plan does not provide for, and the Company has not made, contributions under the Plan. 56 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. JOINT VENTURE: On July 9, 2003, Baoding Fengfan - Valence Battery Company, a joint venture (the "JV Company") between the Company and Fengfan Group, Ltd. ("Fengfan") was formed as a corporation in China. The purpose of the joint venture was to provide low-cost manufacturing of the Company's Saphion(R) lithium-ion batteries. Under the terms of the joint venture agreement, the Company was to contribute 51% of the joint venture's registered capital, consisting of capital equipment, a nonexclusive license to its technology, and engineering expertise. Fengfan was to contribute 49% of the joint venture's registered capital, consisting of the cash required to fund the joint venture for the first two years, and also to acquire the land and facility needed for manufacturing operations. As a result of the Company's 51% ownership of the joint venture, its right to name the majority of the joint venture's board of directors, and its right to name the Chief Executive Officer, as of March 31, 2004, the Company's consolidated financial statements included the consolidation of the balance sheet, results of operations, and cash flows of the joint venture. However, during the first quarter of fiscal 2005, a dispute arose between us and our joint venture partner, resulting in a loss of control over the joint venture and our initiation of an action to enforce our rights under the joint venture agreement, and commencing with that quarter we accounted for our investments in the joint venture under the cost method with no further recognition of assets, liabilities, operating results and cash flows. On November 17, 2004, the Company, Fengfan and the JV Company entered into a settlement agreement (the "JV Settlement Agreement"). Under the terms of the JV Settlement Agreement, the parties agreed to liquidate and dissolve the JV Company, terminate the JV Company contracts and fully settle any and all remaining obligations among the parties. The Company agreed to make compensation payments to the JV Company and to Fengfan totaling $224,417 and to make equipment purchases from the JV Company totaling $275,583. To date, the Company has made compensation payments of $157,092 and completed all of the equipment purchases. The $67,325 final compensation payment will be made upon final dissolution of the JV legal entity by Fengfan. The Company recorded a contract settlement charge of $224,417 in the third quarter of fiscal 2005 for the compensation payments and capitalized equipment purchases as the payments were made. 20. FACILITY CLOSING: In the third quarter of fiscal 2003, the Company ceased production at its Northern Ireland facility and commenced the transfer of manufacturing to ATL and other third party manufacturers. All inventory remaining at the conclusion of manufacturing operations was determined to be obsolete and unusable by any of the Company's battery manufacturing sources. Raw materials inventory obsolescence expense of approximately $178,000 and work in process inventory obsolescence expense of approximately $517,000 were recorded as restructuring charges during the quarter ended December 31, 2003. Remaining payment obligations for factory equipment operating leases that extended beyond December 31, 2003 were approximately $231,000. These lease payment obligations provide no economic benefit to the Company, and contractual lease costs of approximately $231,000 were recorded as restructuring charges during the quarter ended December 31, 2003. When the Northern Ireland manufacturing transition was initiated, an incentive payment plan was established for certain employees. The employees earned the bonus, which was paid in January 2004, if they were in good standing on December 31, 2003. The cost of this bonus plan was $352,000 and was charged to general and administrative expense during the quarter ended December 31, 2003. 21. RELATED PARTY TRANSACTIONS: In June 2005, Mr. Carl Berg, our chairman of the board and principal stockholder, agreed to provide a funding commitment of $20.0 million. On June 30, 2005, the Company drew down $2.5 million of this commitment. This draw took the form of a loan at a 5.0% annual interest rate and was repaid with proceeds from a July 2005 loan from a third party finance company. This funding commitment was reduced by $4.3 million upon the purchase of the Series C-2 Convertible Preferred Stock on July 14, 2005 by Berg & Berg. On December 14, 2005, Mr. Berg's funding commitment was further reduced by $4.3 million in connection with the purchase of the Company's Series C-1 Convertible Preferred Stock by Berg & Berg. In February and March 2006, the Company issued convertible promissory notes in favor of Berg & in an aggregate principal amount of $6.0 million (the "Notes"). The Notes accued interest at the annual rate of 8.0% and matured on March 30 and June 30, 2006. The principal amount of the Notes, together with accrued interest, was converted into 2,965,870 shares of common stock of the Company, in accordance with their terms on April 3, 2006. 57 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. RELATED PARTY TRANSACTIONS (CONTINUED): In June 2006, the Company issued convertible promissory notes in the aggregate principal amount of $2.0 million to Berg & Berg, which are due with interest in September 2006. These convertible promissory notes accrue interest at the annual rate of 8.0% and are convertible at any time prior to maturity, into shares of common stock of the Company at a conversion price equal to the closing bid price of the Company's common stock on the trading day immediately prior to the conversion date, provided that the conversion price cannot be lower than $1.70, the closing bid price of the Company's common stock on June 20, 2006. On April 3, 2006 West Coast Venture Capital purchased $1.0 million of the Company's common stock. This represented an additional funding on the $20.0 million funding commitment previously made by Mr. Berg. The purchase price of $2.49 per share equaled the closing bid price of the Company's common stock as of March 31, 2006. On May 11, 2006 West Coast Venture Capital purchased $1.5 million of the Company's common stock. This represented an additional funding on the $20.0 million funding commitment previously made by Mr. Berg. The purchase price of $2.32 per share equaled the closing bid price of the Company's common stock as of May 10, 2006. In June 2004, Mr. Berg agreed to provide an additional $20 million backup equity funding commitment. This additional funding commitment was in the form of an equity line of credit and allowed the Company to request Mr. Berg to purchase shares of common stock from time to time at the average closing bid price of the stock for the five days prior to the purchase date. As of March 31, 2006, the Company has drawn down $19 million of this commitment. This commitment can be reduced by the amount of net proceeds received from the sale of the building or equipment from the Company's Mallusk, Northern Ireland facility or the amount of net proceeds in a debt or equity transaction, and may be increased if necessary under certain circumstances. As of the date of this report, Mr. Berg has not requested that his commitment be reduced. In October 2001, the Company entered into a loan agreement (the "2001 Loan") with Berg & Berg. Under the terms of the agreement, Berg & Berg agreed to advance the Company funds of up to $20.0 million between the date of the agreement and December 31, 2003. Interest on the 2001 Loan accrues at 8.0% per annum, payable from time to time. On July 13, 2005, Berg & Berg agreed to extend the maturity date for the loan from September 30, 2006, to September 30, 2008, and the Company granted to Berg & Berg a 90-day option, effective October 1, 2006, to require that interest will accrue on the loan as compound interest rather than as simple interest. In July 1998, the Company entered into an amended loan agreement (the "1998 Loan") with Berg & Berg that allows the Company to borrow, prepay and re-borrow up to $10.0 million principal under a promissory note on a revolving basis. In November 2000, the 1998 Loan agreement was amended to increase the maximum amount to $15.0 million. As of December 31, 2005, the Company had an outstanding balance of $14.95 million under the 1998 Loan agreement. The loan bears interest at one percent over the lender's borrowing rate (approximately 9.0% at December 31, 2005). On July 13, 2005, the parties agreed to extend the loan's maturity date from September 30, 2006 to September 30, 2008, and the Company granted to Berg & Berg a 90-day option, effective October 1, 2006, to require that interest will accrue on the loan as compound interest. On January 1, 1998, the Company granted options to Mr. Dawson, the Company's then Chairman of the Board, Chief Executive Officer and President, an incentive stock option to purchase 39,506 shares, which was granted pursuant to the Company's 1990 Plan (the "1990 Plan"). Also, an option to purchase 660,494 shares was granted pursuant to the Company's 1990 Plan and an option to purchase 300,000 shares was granted outside of any equity plan of the Company, neither of which were incentive stock options (the "Nonstatutory Options"). The exercise price of all three options is $5.0625 per share, the fair market value on the date of the grant. The Compensation Committee of the Company approved the early exercise of the Nonstatutory Options on March 5, 1998. The options permitted exercise by cash, shares, full recourse notes or non-recourse notes secured by independent collateral. The Nonstatutory Options were exercised on March 5, 1998 with non-recourse promissory notes in the amounts of $3,343,750 ("Dawson Note One") and $1,518,750 ("Dawson Note Two") (collectively, the "Dawson Notes") secured by the shares acquired upon exercise plus 842,650 shares previously held by Mr. Dawson. As of March 31, 2006, principal and interest amounts of $3.50 million and $1.59 million were outstanding under Dawson Note One and Dawson Note Two, respectively, and under each of the Dawson Notes, interest from the issuance date accrues on unpaid principal at the rate of 5.77% per annum, or at the maximum rate permissible by law, whichever is less. On April 20, 2005, the Company's Board of Directors approved a resolution to extend the maturity dates of each of the Dawson Notes from September 5, 2005 to September 5, 2007. In accordance with the Dawson Notes, interest is payable annually in arrears and has been paid through March 4, 2005. 58 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. RELATED PARTY TRANSACTIONS (CONTINUED): As of March 31, 2006 and 2005, amounts of $3,550,313 and $1,613,458 were outstanding under Dawson Note One and Dawson Note Two, respectively. Under each of the Dawson Notes, interest from the Issuance Date accrues on unpaid principal at the rate of 5.69% per annum, or at the maximum rate permissible by law, whichever is less. In accordance with the Dawson Notes, interest is payable annually in arrears and has been paid through March 4, 2005. On March 28, 2006 the Company entered into a tri-party agreement with Berg & Berg and another corporation to jointly develop and improve certain manufacturing processes. In consideration for this agreement, the Company will issue $250,000 in common stock to the other corporation and may provide equipment and other resources in consideration for research and development costs and intellectual property rights although the Company is not obligated to do so. 22. SEGMENT AND GEOGRAPHIC INFORMATION: The Company's chief operating decision makers are its Chairman and Chief Executive Officers, who review operating results to make decisions about resource allocation and to assess performance. The Company's chief operating decision makers view results of operations as a single operating segment and the development and marketing of the Company's Saphion(R) technology. The Company's Chairman and Chief Executive Officer have organized the Company functionally to develop, market, and manufacture Saphion(R) products. The Company conducts its business in two geographic regions. Long-lived asset information by geographic area is as follows at (in thousands):
MARCH 31, ----------------------------------------- 2006 2005 -------------------- -------------------- - ------------------------------------------------------------------------------------------------------- United States $ 648 $ 987 International 2,692 1,796 -------------------- -------------------- Total $ 3,340 $ 2,783 ==================== ==================== Revenues by geographic area are as follows at (in thousands): FISCAL YEAR ENDING MARCH 31, ---------------------------------------------- 2006 2005 2004 ---------------------------------------------- United States $ 15,796 $ 9,656 $ 7,229 International 1,418 1,009 2,217 ---------------------------------------------- Total $ 17,214 $ 10,665 $ 9,446 ==============================================
23. QUARTERLY FINANCIAL DATA (UNAUDITED):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Fiscal Year Year Ended March 31, 2006 ----------- ----------- ----------- ----------- ------------ - ---------------------------------------------- Revenue $ 3,405 $ 5,518 $ 4,819 $ 3,472 $ 17,214 Gross margin loss (1,922) (1,826) (1,152) (3,340) (8,240) Operating loss (7,260) (6,698) (5,670) (8,020) (27,648) Net loss available to common stockholders (8,196) (8,053) (7,106) (9,569) (32,924) Basic and diluted EPS(1) (0.09) (0.09) (0.08) (0.11) (0.37) Year Ended March 31, 2005 - ---------------------------------------------- Revenue $ 2,837 $ 2,915 $ 2,547 $ 2,366 $ 10,665 Gross margin loss (1,086) (716) (1,758) (2,116) (5,676) Operating loss (8,000) (5,946) (5,474) (8,333) (27,753) Net loss available to common stockholders (9,218) (7,170) (6,609) (9,182) (32,179) Basic and diluted EPS(1) (0.12) (0.09) (0.08) (0.11) (0.40)
59 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED): (1) The sum of Basic and Diluted EPS for the four quarters may differ from the annual EPS due to the required method of computing weighted average number of shares in the respective periods. 24. SUBSEQUENT EVENTS: On April 3, 2006, West Coast Venture Capital purchased $1.0 million of the Company's common stock. This represented a funding on the $20.0 million funding commitment previously made by Berg & Berg. The proceeds will be used to fund corporate operating needs and working capital. Under the terms of the purchase, the Company issued 401,606 shares of its common stock in a private placement transaction exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. West Coast Venture Capital purchased these shares at $2.49 per share. The purchase price per share equaled the closing bid price of the Company's common stock as of March 31, 2006. Under Rule 144 of the Securities Act, these shares are restricted from being traded by West Coast Venture Capital for a period of one year from the date of issuance, unless registered, and thereafter may be traded only in compliance with the volume restrictions imposed by this rule and other applicable restrictions. On April 13, 2006, the Company entered into a Controlled Equity Offering Sales Agreement (the "Agreement") with Cantor Fitzgerald & Co., as sales agent (the "Sales Agent"). In accordance with the terms of the Sales Agreement, the Company may issue and sell up to 10,000,000 shares of its common stock, par value $0.001 per share, from time to time through the Sales Agent. Sales of the Company's common stock, if any, may be made in privately negotiated transactions or any other method permitted by law deemed to be an "at the market" offering as defined by Rule 415 of the Securities Act of 1933, as amended, including but not limited to sales made directly on the NASDAQ SmallCap Market, or sales made to or through any other existing trading market for the common stock or through a market marker. The Sales Agent will make all sales using its commercially reasonable efforts consistent with its normal trading and sales practices in accordance with the terms of the Agreement. The Sales Agent shall be entitled to six percent (6%) of the gross proceeds received from the sales of the Company's common stock. Through June 9, 2006 we have sold 467,920 shares of our common stock pursuant to the Agreement and the Company has received net proceeds of approximately $1,066,000. On May 11, 2006, West Coast Venture Capital purchased $1.5 million of the Company's common stock. This represented a funding on the $20.0 million funding commitment previously made by Berg & Berg. The proceeds were used to fund corporate operating needs and working capital. Under the terms of the purchase, the Company issued 646,552 shares of its common stock in a private placement transaction exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. West Coast Venture Capital purchased these shares at approximately $2.32 per share. The purchase price per share equaled the closing bid price of the Company's common stock as of May 10, 2006. Under Rule 144 of the Securities Act, these shares are restricted from being traded by West Coast Venture Capital for a period of one year from the date of issuance, unless registered, and thereafter may be traded only in compliance with the volume restrictions imposed by this rule and other applicable restrictions. In June 2006, the Company issued convertible promissory notes in the aggregate principal amount of $2 million to Berg & Berg, which are due with interest in September 2006. These Convertible promissory notes accrue interest at the annual rate of 8.0% and are convertible at any time prior to maturity, into shares of common stock of the Company at a conversion price equal to the closing bid price of the Company's common stock on the trading day immediately prior to conversion date, provided that the conversion price cannot be lower than $1.70, the closing bid price of the Company's common stock on June 20, 2006. 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES EVALUATION AND CONCLUSION OF DISCLOSURE CONTROLS AND PROCEDURES The Company conducted an evaluation, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of March 31, 2006. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as of the end of the period covered by this report were not effective as a result of a material weakness in internal controls as of March 31, 2006 as discussed below. MANAGEMENT'S REPORT ON INTERNAL CONTROL Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company's internal control over financial reporting was not effective as of March 31, 2006. Management's assessment identified the following material weakness in internal control over financial reporting: Management determined there was an insufficient number of personnel with appropriate technical accounting and SEC reporting expertise to perform a timely financial close process, adhere to certain control disciplines, and to evaluate and properly record certain non-routine and complex transactions. This resulted in audit adjustments, which are material in the aggregate and necessary to present the annual audited consolidated financial statements in accordance with generally accepted accounting principles. In light of the actual audit adjustments required and the effect on the account balances and related disclosures in the financial statements management determined there is a more than a remote likelihood that material misstatement could occur and not be detected in the Company's interim or annual audited consolidated financial statements. Based on this evaluation, management concluded that the Company's internal control over financial reporting was not effective as of March 31, 2006 because of the material weakness described in the preceding paragraph. A material weakness in internal controls is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements would not be prevented or detected on a timely basis. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of March 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein. /s/ James R. Akridge - ----------------------------------------- James R. Akridge Principal Executive Officer 61 /s/ Thomas F. Mezger - ----------------------------------------- Thomas F. Mezger Principal Financial Officer REMEDIATION PLANS In order to address and correct the deficiencies identified above, management has taken and will continue to take corrective actions including: 1) strengthening the expertise and minimum competency requirements for critical accounting and financial reporting positions, and 2) where appropriate, replacing and/or adding personnel with the appropriate expertise to our accounting and financial reporting functions in the Company's operating and corporate segments to review and monitor transactions, accounting processes and control activities more effectively. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There was no significant change in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2006 that has materially affected, or is reasonably likely to affect, our internal control over financial reporting. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERAL CONTROL OVER FINANCIAL REPORTING To the Board of Directors and Shareholders of Valence Technology, Inc. and subsidiaries Austin, Texas We have audited management's assessment, included in the accompanying Management's Report on Internal Control, that Valence Technology, Inc. and its subsidiaries (the "Company") did not maintain effective internal control over financial reporting as of March 31, 2006, because of the effect of the material weakness identified in management's assessment based on criteria established in INTERNAL CONTROL - INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 62 A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management's assessment: The Company had an insufficient number of personnel with the appropriate technical accounting and SEC reporting expertise within the accounting function to perform a timely financial close process, to adhere to certain control disciplines within the accounting and financial reporting function, and to effectively evaluate and determine the appropriate accounting for non-routine and/or complex accounting transactions. This deficiency resulted in audit adjustments, that were material in the aggregate, which were necessary in order to present the 2006 annual financial statements in accordance with generally accepted accounting principles. Due to the actual misstatements identified and the pervasive effect that this weakness has on the account balances and related disclosures in the financial statements there is a more than a remote likelihood that a material misstatement in the Company's interim or annual financial statements could occur and not be detected. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended March 31, 2006, of the Company and this report does not affect our report on such financial statements. In our opinion, management's assessment that the Company did not maintain effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained, in all material respects, effective internal control over financial reporting as of March 31, 2006, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended March 31, 2006, of the Company and our report dated June 28, 2006 expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph concerning substantial doubt about the Company's ability to continue as a going concern on those consolidated financial statements. DELOITTE & TOUCHE LLP Austin, Texas June 28, 2006 ITEM 9B. OTHER INFORMATION None. 63 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following tables set forth certain information with respect to our directors, officers and significant employees as of June 2, 2006. The following persons serve as our directors:
DIRECTORS AGE PRESENT POSITION - --------- --- ---------------- Carl E. Berg (2)............................. 68 Director and Chairman of the Board James R. Akridge............................. 59 Director Vassilis G. Keramidas (1).................... 67 Director Bert C. Roberts (1).......................... 63 Director Alan F. Shugart (1)(2)....................... 75 Director and Chairman of the Audit Committee (1) Member of the Audit Committee (2) Member of the Compensation Committee The following persons serve as our executive officers: EXECUTIVE OFFICERS AGE PRESENT POSITION - ------------------ --- ---------------- James R. Akridge............................ 59 Chief Executive Officer and President Dean F. Bogues.............................. 48 President of the Americas and Europe ChunTai Guo................................. 50 President of Asia-Pacific Operations Thomas F. Mezger............................ 53 Chief Financial Officer and Assistant Secretary Roger A. Williams........................... 58 General Counsel and Assistant Secretary
Our executive officers are appointed by and serve at the discretion of the Board. There are no family relationships between any director and any executive officer. CARL E. BERG. Mr. Berg helped found us and has served on the Board since September 1991 and currently serves as the Chairman of the Board. Mr. Berg has been a major Silicon Valley industrial real estate developer and private venture capital investor. Mr. Berg also serves as the Chairman of the Board, Chief Executive Officer and director of Mission West Properties, Inc., a real estate investment company; and as a director of Monolithic Systems, Inc., and Focus Enhancements, Inc. Mr. Berg holds a Bachelor of Arts degree in Business Administration from the University of New Mexico, Albuquerque. JAMES R. AKRIDGE. Dr. Akdridge joined us in July 2005 as our Chief Executive Officer and President and a director. From November 1999 to July 2005, Dr. Akridge served as a Chief Technology Officer at Sion Power Corporation ("Sion"), makers of rechargeable lithium sulfur batteries, where he had responsibility for all research and development operations, global intellectual property licensing, technology partnerships and joint ventures. Prior to Sion, Dr. Akridge worked for 20 years at Energizer Holdings, Inc., a battery manufacturer. Dr. Akridge held various management positions at Energizer in research, development and operations, highlighted by the successful transition of a lithium-ion technology from the laboratory to production and managing the transfer of various technologies to the Asia-Pacific region. Dr. Akridge holds bachelor's and master's degrees in chemistry from California State University-Fresno and a Ph.D. in electrochemistry from University of California-Santa Barbara. He also has postdoctoral research experience in x-ray crystallography at the University of Colorado-Boulder. VASSILIS G. KERAMIDAS. Dr. Keramidas joined us as a director in August 2004. Dr. Keramidas currently serves as the Managing Director of Keramidas International Associates LLC, which provides consulting services in connection with the generation, management, commercialization and disposition of intellectual property, technology commercialization and strategic research planning, and as a director of Twenty First Century Battery, Ltd. From 1997 to 2003, Dr. Keramidas served as Vice President of Formative Technologies at Telcordia Technologies (formerly Bellcore) where he launched the company's first international commercialization effort, and from 1984 to 1997, he served in Director and Executive Director of Research positions with Bellcore. Prior to that, Dr. Keramidas worked as a Researcher and Research Director at Bell Laboratories from 1973 to 1983. Dr. Keramidas holds a Bachelor's Degree in Physics from Rockford College, a Bachelor's Degree in Electrical 64 Engineering from the University of Illinois, A Master's Degree in Physics from John Carroll University and a Ph.D. in Solid State Science (Applied Physics) from the Materials Research Laboratory of Pennsylvania State University. For his contributions to his field and his technical leadership, Dr. Keramidas has been elected a Fellow of the Institute of Electrical and Electronic Engineers. BERT C. ROBERTS, JR. Mr. Roberts originally joined us as a director in 1992 and served until 1993 prior to rejoining us as a director in 1998. Mr. Roberts served as the Outside Chairman of WorldCom, Inc. from 1998 until December 2002. On July 21, 2002, WorldCom, Inc. and substantially all of its active U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. Mr. Roberts served as Chairman of MCI, a telecommunications company from 1996 until 1998, Chairman and Chief Executive Officer from 1992 to 1996, and Chief Executive Officer in 1991 after having served as President and Chief Operating Officer since 1985. Mr. Roberts serves on the board of the Prostate Cancer foundation and is on the advisory board of several high-technology companies. Mr. Roberts holds a Bachelor of Science in Engineering from Johns Hopkins University. ALAN F. SHUGART. Mr. Shugart joined us as a director in March 1992. Mr. Shugart is the Chairman, President and Chief Executive Officer of Al Shugart International, a venture capital and public relations company that he established in 1998. Mr. Shugart was the Chief Executive Officer and director of Seagate Technology, Inc., a technology development and manufacturing company, since its inception in 1979 until July 1998. Mr. Shugart also served as Seagate's President from 1979 to 1983 and from September 1991 to July 1998. Additionally, Mr. Shugart served as Chairman of the Board of Seagate from 1979 until September 1991 and from October 1992 to July 1998. Mr. Shugart currently serves as a director of Sandisk Corporation (a manufacturer of digital flash memory chips) and Cypress Semiconductor Corporation (a provider of high-performance solutions for personal, network access, enterprise, metro switch and core communications-system applications). Mr. Shugart holds a Bachelor of Science in Engineering - Physics from the University of Redlands. DEAN F. BOGUES. Mr. Bogues joined us in December 2004 and serves as our President of the Americas and Europe. From 1999 to 2004, Mr. Bogues served as Director of Enterprise Sales for Dell Inc., a computer and peripherals company, where he directed sales of server and storage products in the government, education, and healthcare markets. From 1993 to 1999 Mr. Bogues was General Manager of the Datacenter Solutions Division for American Power Conversion Corp., a manufacturer of uninterruptible power supplies, where he built and led a new worldwide business consisting of industry-breakthrough modular, fault-tolerant, network-managed power protection systems. From 1979 to 1993, Mr. Bogues served in various positions with Hewlett-Packard, a computer and electronics company. Mr. Bogues holds a Bachelor of Science in Electrical Engineering from Worcester Polytechnic Institute. CHUNTAI GUO. Dr. Guo joined us in December 2005 and serves as our President of Asia-Pacific Operations. From 2000 to 2005, Dr. Guo served as General Manager and Chief Technology Officer at TCL Hyperpower Battery Inc. Dr. Guo has over 27 years experience in academia and the battery industry. He is co-founder of the Shubilla & Hyperpower Battery Companies. THOMAS F. MEZGER. Mr. Mezger joined us in September 2005 and serves as our Chief Financial Officer and Assistant Secretary. From January 2003 to April 2005, he served as Controller-Asia Pacific for Precision Castparts Corporation/Cooper Cameron Corporation, a supplier for the aerospace, oil and gas, water treatment and chemical industry. Headquartered in Kuala Lumpur, Mr. Mezger was responsible for the accounting and finance of subsidiaries of Precision Castparts in Malaysia, Singapore and China including the implementation of Sarbanes-Oxley compliance programs. From January 2002 through June 2002, Mr. Mezger served as Vice President and Chief Financial Officer for MCK Communications, Inc., a company that sold and services equipment for the telecommunications industry. From 1998 to 2002, Mr. Mezger serviced as Vice President of Operations and Chief Financial Officer for Enhanced Messaging Systems., a wireless and satellite networking equipment manufacturer, where he was responsible for production and financial operations. Mr. Mezger started his career at Motorola, Inc., a mobility products company, where he spent over 18 years in the U.S. and Hong Kong, involved in or managing various aspects of accounting, finance, credit, collection, policies and procedures and sales order processing. ROGER WILLIAMS. Mr. Williams joined us in April 2001 and serves as our General Counsel and Assistant Secretary. Mr. Williams has been a practicing intellectual property attorney for 31 years, having practiced in both private and corporate positions. From 1991 to 2001, Mr. Williams served as Chief Patent Counsel and Associate General Counsel for the pharmaceutical company G.D. Searle & Co. Mr. Williams has his Juris Doctorate degree from Drake University Law School and a Bachelor of Science in Chemistry from Western Illinois University. He is a member of the California and Indiana Bars. AUDIT COMMITTEE FINANCIAL EXPERT On behalf of the Board, the Audit Committee is responsible for providing an independent, objective review of our auditing, accounting and financial reporting process, public reports and disclosures, and system of internal controls regarding financial accounting. We currently do not have a financial expert on our audit committee. 65 CODE OF ETHICS We have adopted a Code of Ethics and Business Conduct applicable to all of our employees, including our Chief Executive Officer, Principal Financial Officer, Principal Accounting Officer and all other senior financial executives, and to our directors when acting in their capacity as directors. Our Code of Ethics and Business Conduct is designed to set the standards of business conduct and ethics and to help directors and employees resolve ethical issues. The purpose of our code of Ethics and Business Conduct is to ensure to the greatest possible extent that our business is conducted in a consistently legal and ethical manner. Employees may submit concerns or complaints regarding audit, accounting, internal controls or other ethical issues on a confidential basis by means of a toll-free telephone call or an anonymous email. We investigate all concerns and complaints. Copies of our Code of Business Conduct and Ethics are available to investors upon written request. Any such request should be sent by mail to Valence Technology, Inc., 12201 Technology Boulevard, Suite 150, Austin, Texas 78727, Attn: General Counsel or should be made by telephone by calling General Counsel at (888) 825-3623. We intend to disclose on our website amendments to, or waivers from, any provision of our Code of Ethics and Business Conduct that apply to our Chief Executive Officer, Principal Financial Officer, Principal Accounting Officer and persons performing similar functions and amendments to, or waivers from, any provision which relates to any element of our Code of Ethics and Business Conduct described in Item 406(b) of Regulations S-K. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires our directors, officers (including a person performing a principal policy-making function) and persons who own more than 10% of a registered class of our equity securities to file with the Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities of ours. Directors, officers and 10% holders are required by Commission regulations to send us copies of all of the Section 16(a) reports they file. Based solely upon a review of the copies of the forms sent to us and the representations made by the reporting persons to us, we believe that, other than as described below, during the fiscal year ended March 31, 2006, our directors, officers and 10% holders complied with all filing requirements under Section 16(a) of the Exchange Act. Chuntai Guo was appointed as an officer subject to Section 16(a) on February 3, 2006, and filed a delinquent Form 3 on March 29, 2006. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth, as to the Chief Executive Officer and each of our four most highly compensated executive officers whose compensation exceeded $100,000 during fiscal 2006 (referred to as the named executive officers), information concerning all compensation paid for services to us in all capacities for each of the three years ended March 31 indicated below: 66
Long-Term Compensation Annual Compensation Awards ---------------------------------- ------------------------- Securities Underlying Name and Principal Position Fiscal Year Salary Bonus Options ----------------------------- ------------ ---------- ---------- ------------------------- James R. Akridge (1) 2006 $176,000 $ 95,625 1,000,000 President and Chief Executive 2005 $ - $ - - Officer 2004 $ - $ - - Dean F. Bogues 2006 $200,000 $120,000 - President of the Americas and 2005 $ 42,308 $ - 220,000 Europe 2004 $ - $ - - ChunTai Guo (2) 2006 $ 66,667 $ - 150,000 President of Asia-Pacific 2005 $ - $ - - Operations 2004 $ - $ - - Thomas F. Mezger (3) 2006 $ 98,904 $ - 175,000 Chief Financial Officer and 2005 $ - $ - - Assistant Secretary 2004 $ - $ - - Roger A. Williams 2006 $180,000 $ - - General Counsel and 2005 $180,000 $ - 70,000 Assistant Secretary 2004 $180,000 $ - - - -------------------- (1) Mr. Stephan B. Godevais resigned as our President and Chief Executive Officer on July 13, 2005 and resigned as our Chairman of the Board on August 3, 2005. On July 13, 2005, Dr. James R. Akridge was hired as our President and Chief Executive Officer and will receive an annual salary of $250,000. Dr. Akridge was granted options to purchase 1,000,000 shares of our common stock in connection with his hire. (2) On December 1, 2005, Dr. ChunTai Guo was hired as our Vice President of Business Development for Asia (later appointed to President of Asia-Pacific Operations on February 3, 2006) and will receive an annual salary of $200,000. Dr. Guo was granted options to purchase 150,000 shares of our common stock in connection with his hire. (3) Mr. Kevin W. Mischnick resigned as our principal accounting officer and Assistant Secretary on September 13, 2005. Mr. Thomas F. Mezger was hired as our Chief Financial Officer and Assistant Secretary on September 9, 2005 and will receive an annual salary of $185,000. Mr. Mezger was granted options to purchase 175,000 shares of our common stock in connection with his hire.
67 OPTION GRANTS IN LAST FISCAL YEAR The following table shows for the fiscal year ended March 31, 2006, certain information regarding options granted to, exercised by, and held at year-end by the named executive officers:
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term (2) ------------------------------------------------------------------ ---------------------------- Percent of Number of Total Securities Options Underlying Granted to Exercise Options Employees for Base Granted in Fiscal Price Expiration Name (#) Year (1) ($/sh) Date 5% 10% - -------------------------- -------------- -------------- -------------- --------------- ------------ ------------- James R. Akridge 1,000,000 50.56% $2.99 7/13/2015 $1,880,395 $4,765,290 Dean F. Bogues - - - - - - ChunTai Guo 150,000 7.58% $1.99 12/12/2019 $ 187,725 $ 475,732 Thomas F. Mezger 175,000 8.85% $2.77 9/13/2015 $ 304,857 $ 772,567 Roger A. Williams - - - - - - - ------------------ (1) Options to purchase an aggregate of 1,978,000 shares were granted to employees in fiscal year 2006. (2) The potential realizable value is calculated based on the term of the option at its time of grant, 10 years, compounded annually. It is calculated by assuming that the stock price on the date of grant appreciates at the indicated rate, compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the optionee is possible unless the stock price increases over the option term, which will benefit all stockholders. These amounts are calculated pursuant to applicable requirements of the Commission and do not represent a forecast of the future appreciation of our common stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table shows (i) the number of shares acquired and value realized from option exercises by each of the named executive officers during the fiscal year ended March 31, 2006 and (ii) the number and value of the unexercised options held by each of the named executive officers on March 31, 2006: 68
Number of Securities Underlying Value of Unexercised Unexercised Options at Fiscal In-the-Money Options at Fiscal Year End (#) Year End ($) (1) ---------------------------------- -------------------------------- Shares Acquired On Value Exercise Realized Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable - -------------------------- -------------- ------------- ------------- ----------------- ------------- --------------- James R. Akridge - - 100,000 900,000 - - Dean F. Bogues - - 55,000 165,000 - - ChunTai Guo - - 9,375 140,625 $4,688 $70,312 Thomas F. Mezger - - - 175,000 - - Roger A. Williams - - 224,104 49,530 $73,707 - - --------------- (1) Based on the last reported sales price of our common stock on the Nasdaq SmallCap Market on March 31, 2006 ($2.49), less the exercise price of the options multiplied by the number of shares underlying the option.
EMPLOYMENT AGREEMENTS DR. JAMES R. AKRIDGE - CHIEF EXECUTIVE OFFICER Effective July 13, 2005, we entered into an employment agreement with James R. Akridge pursuant to which we retained Dr. Akridge as President and Chief Executive Officer at a salary of $250,000 per year. The Board reviews his salary on July 1 of each year, or from time to time at the sole discretion of the Board, and may increase, but not decrease, his salary at the sole discretion of the Board. Under his employment agreement, we granted Dr. Akridge stock options to purchase an aggregate of 1,000,000 shares of common stock at an exercise price of $2.99 per share. The options vest as follows: 100,000 vests on July 13, 2005, 225,000 vests on the first anniversary date of his employment and the remaining 675,000 vests quarterly over the remaining three years. We agreed to nominate Dr. Akridge to the Board for the entire period of his employment as President and Chief Executive Officer and to use our best efforts to cause our stockholders to cast their votes in favor of his continued election to the Board. Dr. Akridge agreed to resign from the Board when he no longer serves as President and Chief Executive Officer. Dr. Akridge is entitled to a lump sum payment of $125,000 and continued group health insurance coverage or paid monthly premiums for group health insurance benefits (under the applicable provisions of COBRA) for six months following termination, if within the first two years of the employment agreement, any of the following occurs: o A liquidation or change in control occurred (excluding an acquisition by Carl Berg or his affiliated companies of more than 50% of our voting stock, which will not constitute a change of control); or o We terminate Dr. Akridge's employment for any reason other than for Good Cause (as defined in the employment agreement). MR. DEAN F. BOGUES - PRESIDENT OF THE AMERICAS AND EUROPE Effective January 4, 2005, we entered into an employment agreement with Dean F. Bogues pursuant to which we retained Mr. Bogues as Vice President of Sales and Marketing at a salary of $200,000 per year and is eligible for a bonus under a sales incentive compensation program with a target bonus payment of 50% of this annual base salary. In July 2005 was appointed to our President of the Americas and Europe. 69 Under his employment agreement, we granted Mr. Bogues stock options to purchase an aggregate of 220,000 shares of common stock at an exercise price of $3.21 per share. The options vest as follows: 25% vests on the first anniversary date of his employment and the remaining 75% vests quarterly over the remaining three years. Mr. Bogues is entitled to a lump sum payment of $100,000 and continued group health insurance coverage or paid monthly premiums for group health insurance benefits (under the applicable provisions of COBRA) for six months following termination, if within the first two years of the employment agreement, any of the following occurs: o A liquidation or change in control occurred (excluding an acquisition by Carl Berg or his affiliated companies of more than 50% of our voting stock, which will not constitute a change of control); o We terminate Mr. Bogues' employment for any reason other than for Good Cause (as defined in the employment agreement); or o Mr. Bogues resigns for Good Reason (as defined in the employment agreement). DR. CHUNTAI GUO - PRESIDENT OF ASIA-PACIFIC OPERATIONS Effective December 1, 2005, we entered into an employment agreement with ChunTai Guo pursuant to which we retained Dr. Guo as Vice President of Business Development of Asia at a salary of $200,000 per year. On February 3, 2006, Dr. Guo was appointed to our President of Asia-Pacific Operations. Under his employment letter, we granted Dr. Guo stock options to purchase an aggregate of 150,000 shares of common stock at an exercise price of $1.99 per share. The options vest as follows: 25% vests on the first anniversary date of his employment and the remaining 75% vests quarterly over the remaining three years. Dr. Guo may be entitled to a lump sum payment of $16,667 under specific circumstances (as defined in the employment agreement). MR. THOMAS F. MEZGER - CHIEF FINANCIAL OFFICER AND ASSISTANT SECRETARY Effective September 9, 2005, we entered into an employment offer letter with Thomas F. Mezger pursuant to which we retained Mr. Mezger as Chief Financial Officer and Assistant Secretary at a salary of $185,000 per year. Under his employment letter, we granted Mr. Mezger stock options to purchase an aggregate of 175,000 shares of common stock at an exercise price of $2.77 per share. The options vest as follows: 25% vests on the first anniversary date of his employment and the remaining 75% vests quarterly over the remaining three years. Mr. Mezger is entitled to a lump sum payment of $46,250 and all options shall vest and become exercisable immediately if we terminate Mr. Mezger's employment for any reason other than for Good Cause (as defined in the employment letter). DIRECTORS' COMPENSATION Our non-employee directors are eligible to receive cash compensation of $1,000 fee for each regularly scheduled Board meeting and are eligible for reimbursement for their expenses incurred in connection with attendance at Board meetings in accordance with Company policy. Directors who are employees do not receive separate compensation for their services as directors, but are eligible to receive stock options under the 2000 Stock Option Plan. Each of our non-employee directors also receives stock options grants pursuant to the 1996 Non-Employee Directors' Stock Option Plan ("Directors' Plan) or the 2000 Stock Option Plan. Only non-employee directors or an affiliate of those directors as defined in the Internal Revenue Code (the "Code") are eligible to receive options under the Directors' Plan. The plan provides that new directors will receive initial stock options to purchase 100,000 shares of common stock upon election to the Board. The per share exercise price for these options will be the fair market value of a share of our common stock on the day the options are granted. These options will vest in equal quarterly installments over four years. A director who had not received options upon becoming a director, received stock options to purchase 100,000 shares on the date of the adoption of the Directors' Plan. 70 COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION During the fiscal year ended March 31, 2006, the Compensation Committee consisted of Messrs. Shugart and Berg. Neither of them is an employee or a former employee of ours. During fiscal 2006, none of our executive officers served on the compensation committee (or equivalent), or the board of directors, of another entity whose executive officer(s) served on the Compensation Committee of our Board. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS EQUITY COMPENSATION PLANS The following table summarizes information about the equity securities authorized for issuance under our compensation plans as of March 31, 2006. For a description of these plans, please see Note 15, Stockholders' Equity (Deficit), in our consolidated financial statements.
NUMBER OF SECURITIES TO BE NUMBER OF SECURITIES ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE REMAINING AVAILABLE FOR OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER EQUITY PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS - ------------------------------------------------------------------------------------------------------------------------------------ Equity compensation plans 6,120,275 $4.82 2,434,682 approved by security holders Equity compensation plans not approved by security holders (1) 2,925,000 $5.27 - ------------------------------- -------------------------------- Total 9,045,275 $4.97 2,434,682 =============================== ================================ - ------------------ (1) Options to purchase 1,500,000 shares were granted to Stephan Godevais in May 2001 pursuant to his employment agreement. The exercise price of his options is $6.52 and they vest over four years. All 1,500,000 shares vested as of July 13, 2005, the date his employment ended. Options to purchase 225,000 shares were granted to Joseph Lamoreux in June 2001 pursuant to his employment offer letter. The exercise price of his options is $7.18 and they vest over four years. All 225,000 shares vested as of September 5, 2005, the date his employment ended. Options to purchase 200,000 shares were granted to Terry Standefer in August 2001 pursuant to his employment offer letter. The exercise price of his options is $5.15 and they vest over four years. All 200,000 shares vested as of April 18, 2006, the date his employment ended. Options to purchase 1,000,000 shares were granted to Jim Akridge in July 2005 pursuant to his employment agreement. The exercise price of his options is $2.99 and they vest as follows: 100,000 shares immediately, 225,000 shares on the first anniversary date of his employment and the remaining 675,000 shares quarterly over the remaining three years.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding beneficial ownership of our common stock as of June 2, 2006, by: o Each of our directors, o Each of the named executive officers,' o All directors and executive officers as a group, and o All other stockholders known by us to beneficially own more than 5% of the outstanding common stock. Beneficial ownership is determined in accordance with the rules of the Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of the date as of which this information is provided, and not subject to repurchase as of that date, are deemed outstanding. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the notes to this table, and except pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares shown as beneficially owned by them. 71 Percentage ownership is based on 94,120,271 shares of common stock outstanding on June 2, 2006. Unless otherwise indicated, the address for each of the stockholders listed below is c/o Valence Technology, Inc., 12201 Technology Boulevard, Suite 150, Austin Texas 78727.
Beneficial Ownership(1) ------------------------------------ Beneficial Owner Number of Percent of Shares (#) Total (%) - ------------------------------------------------------------------------ -------------- --------------- Carl E. Berg; Berg & Berg Enterprises, LLC; and West Coast Venture Capital, Inc. (2) 10050 Bandley Drive, Cupertino, CA 95014 44,719,041 44.6% 1981 Kara Ann Berg Trust, Clyde J. Berg, Trustee; and Clyde J. Berg 10050 Bandley Drive, Cupertino, CA 95014 (3) 8,604,270 9.1% Vassilis G. Keramidas (4) 54,940 * Bert C. Roberts, Jr. (5) 607,083 * Alan F. Shugart (6) 601,643 * James R. Akridge (7) 325,000 * Dean F. Bogues (8) 82,500 * Thomas F. Mezger - * Roger A. Williams (9) 239,384 * All directors and executive officers as a group (8 persons) (10) 46,629,592 47.5% *Indicates less than one percent. - ------------------- (1) This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G filed with the Commission. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentage ownership is based on 94,120,271 shares of common stock outstanding on June 2, 2006, adjusted as required by rules promulgated by the Commission. (2) Includes 350,000 shares held directly by Mr. Berg; 963,263 shares issuable upon exercise of options and warrants held by Mr. Berg that are exercisable within 60 days of June 2, 2006; 1,525,506 shares held by Berg & Berg Enterprises 401 K Plan FBO Carl E. Berg Basic Transfer, of which Mr. Berg is the Trustee; 94,000 shares held by Berg & Berg Profit Sharing Plan U/A 1/1/80 FBO Carl E. Berg Basic Transfer, of which Mr. Berg is the Trustee; 1,536,415 shares issuable upon exercise of warrants and 21,984,475 shares held by Berg & Berg Enterprises LLC ("Berg & Berg"), of which Mr. Berg is the sole manager; 14,635,911 shares held by West Coast Venture Capital, Inc. ("West Coast Venture Capital"). Mr. Berg has sole voting and dispositive power with respect to 2,939,022 shares and shared voting and dispositive power with respect to 38,156,801 shares. Berg & Berg has no sole voting and dispositive power with respect to any shares and has shared voting and dispositive power with respect to 23,520,890 shares. West Coast Venture Capital has no sole voting and dispositive power with respect to any shares and has shared voting and dispositive power with respect to 14,635,911 shares. Amount also includes the potential conversion of the Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock, issued on December 1, 2004, of an additional 2,176,767 and 1,452,703 shares, respectively, into common stock (based on a conversion price of $1.98 and $2.96, respectively). (3) Based on information contained in a Schedule 13G filed jointly by 1981 Kara Ann Berg Trust, Clyde J. Berg, Trustee and Clyde J. Berg with the SEC on February 14, 2003. The Trust has no sole voting and dispositive power with respect to any shares and has shared voting and dispositive power with respect to 8,129,270 shares. Clyde J. Berg has sole voting and dispositive power with respect to 475,000 shares and shared voting and dispositive power with respect to 8,129,270 shares. (4) Includes 2,857 shares held by Mr. Keramidas and 52,083 shares issuable upon exercise of options that are exercisable within 60 days of June 2, 2006. 72 (5) Includes 100,000 shares held by Mr. Roberts, 100,000 shares held indirectly through various entities, 10,000 shares held by his spouse and 397,083 shares issuable upon exercise of options that are exercisable within 60 days of June 2, 2006. (6) Includes 202,000 shares held by Mr. Shugart and 399,643 shares issuable upon exercise of options that are exercisable within 60 days of June 2, 2006. (7) Includes 325,000 shares issuable upon exercise of options that are exercisable within 60 days of June 2, 2006. (8) Includes 82,500 shares issuable upon exercise of options that are exercisable within 60 days of June 2, 2006. (9) Includes 12,000 shares held by Mr. Williams and 227,384 shares are issuable upon exercise of options that are exercisable within 60 days of June 2, 2006. (10) Includes 3,983,372 shares issuable upon exercise of options and warrants that are exercisable within 60 days of June 2, 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Other than as described in Item 11 and below, there were no related party agreements or business transactions in fiscal 2006 that would require disclosure under this Item 13. In June 2005, Mr. Carl Berg, our chairman of the board and principal stockholder, agreed to provide a funding commitment of $20.0 million. On June 30, 2005, the Company drew down $2.5 million of this commitment. This draw took the form of a loan at a 5.0% annual interest rate and was repaid with proceeds from a July 2005 loan from a third party finance company. This funding commitment was reduced by $4.3 million upon the purchase of the Series C-2 Convertible Preferred Stock on July 14, 2005 by Berg & Berg. On December 14, 2005, Mr. Berg's funding commitment was further reduced by $4.3 million in connection with the purchase of the Company's Series C-1 Convertible Preferred Stock by Berg & Berg. In February and March 2006, the Company issued convertible promissory notes in favor of Berg & Berg in an aggregate principal amount of $6.0 million (the "Notes"). The Notes accrued interest at the annual rate of 8.0% and together with accrued principal amount of $6.0 million (the "Notes"). The Notes accrued interest at the annual rate of 8.0% and together with accrued interest were converted into 2,965,870 shares of common stock of the Company, in accordance with their terms, on April 3, 2006. On April 3, 2006 West Coast Venture Capital purchased $1.0 million of our common stock. This represented an additional funding on the $20.0 million funding commitment previously made by Mr. Berg. The purchase price of $2.49 per share equaled the closing bid price of our common stock as of March 31, 2006. On May 11, 2006 West Coast Venture Capital purchased $1.5 million of our common stock. This represented an additional funding on the $20.0 million funding commitment previously made by Mr. Berg. The purchase price of $2.32 per share equaled the closing bid price of our common stock as of May 10, 2006. In June 2006, the Company issued convertible promissory notes in the aggregate principal amount of $2.0 million to Berg & Berg, which are due with interest in September 2006. These convertible promissory notes accrue interest at the annual rate of 8.0% and are convertible at any time prior to maturity, into shares of common stock of the Company at a conversion price equal to the closing bid price of the Company's common stock on the trading day immediately prior to the conversion date, provided that the conversion price cannot be lower than $1.70, the closing bid price of the Company's common stock on June 20, 2006. In June 2004, Mr. Berg agreed to provide an additional $20 million backup equity funding commitment. This additional funding commitment was in the form of an equity line of credit and allowed the Company to request Mr. Berg to purchase shares of common stock from time to time at the average closing bid price of the stock for the five days prior to the purchase date. As of March 31, 2006, the Company has drawn down $19 million of this commitment. This commitment can be reduced by the amount of net proceeds received from the sale of the building or equipment from the Company's Mallusk, Northern Ireland facility or the amount of net proceeds in a debt or equity transaction, and may be increased if necessary under certain circumstances. As of the date of this report, Mr. Berg has not requested that his commitment be reduced. In October 2001, the Company entered into a loan agreement (the "2001 Loan") with Berg & Berg. Under the terms of the agreement, Berg & Berg agreed to advance the Company funds of up to $20.0 million between the date of the agreement and December 31, 2003. Interest on the 2001 Loan accrues at 8.0% per annum, payable from time to time. On July 13, 2005, 73 Berg & Berg agreed to extend the maturity date for the loan from September 30, 2006, to September 30, 2008, and the Company granted to Berg & Berg a 90-day option, effective October 1, 2006, to require that interest will accrue on the loan as compound interest rather than as simple interest. In July 1998, the Company entered into an amended loan agreement (the "1998 Loan") with Berg & Berg that allows the Company to borrow, prepay and re-borrow up to $10.0 million principal under a promissory note on a revolving basis. In November 2000, the 1998 Loan agreement was amended to increase the maximum amount to $15.0 million. As of December 31, 2005, the Company had an outstanding balance of $14.95 million under the 1998 Loan agreement. The loan bears interest at one percent over the lender's borrowing rate (approximately 9.0% at December 31, 2005). On July 13, 2005, the parties agreed to extend the loan's maturity date from September 30, 2006 to September 30, 2008, and the Company granted to Berg & Berg a 90-day option, effective October 1, 2006, to require that interest will accrue on the loan as compound interest. On January 1, 1998, the Company granted options to Mr. Dawson, the Company's then Chairman of the Board, Chief Executive Officer and President, an incentive stock option to purchase 39,506 shares, which was granted pursuant to the Company's 1990 Plan (the "1990 Plan"). Also, an option to purchase 660,494 shares was granted pursuant to the Company's 1990 Plan and an option to purchase 300,000 shares was granted outside of any equity plan of the Company, neither of which were incentive stock options (the "Nonstatutory Options"). The exercise price of all three options is $5.0625 per share, the fair market value on the date of the grant. The Compensation Committee of the Company approved the early exercise of the Nonstatutory Options on March 5, 1998. The options permitted exercise by cash, shares, full recourse notes or non-recourse notes secured by independent collateral. The Nonstatutory Options were exercised on March 5, 1998 with non-recourse promissory notes in the amounts of $3,343,750 ("Dawson Note One") and $1,518,750 ("Dawson Note Two") (collectively, the "Dawson Notes") secured by the shares acquired upon exercise plus 842,650 shares previously held by Mr. Dawson. As of March 31, 2006, principal and interest amounts of $3.50 million and $1.59 million were outstanding under Dawson Note One and Dawson Note Two, respectively, and under each of the Dawson Notes, interest from the issuance date accrues on unpaid principal at the rate of 5.77% per annum, or at the maximum rate permissible by law, whichever is less. On April 20, 2005, the Company's Board of Directors approved a resolution to extend the maturity dates of each of the Dawson Notes from September 5, 2005 to September 5, 2007. In accordance with the Dawson Notes, interest is payable annually in arrears and has been paid through March 4, 2005. As of March 31, 2006, amounts of $3,550,313 and $1,613,458 were outstanding under Dawson Note One and Dawson Note Two, respectively. As of March 31, 2005, amounts of $3,550,313 and $1,613,458 were outstanding under Dawson Note One and Dawson Note Two, respectively. Under each of the Dawson Notes, interest from the Issuance Date accrues on unpaid principal at the rate of 5.69% per annum, or at the maximum rate permissible by law, whichever is less. In accordance with the Dawson Notes, interest is payable annually in arrears and has been paid through March 4, 2005. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth the aggregate fees billed to us for fiscal 2006 and 2005 by Deloitte & Touche LLP:
March 31, Percentage of services ------------------------------- -------------------------------- 2006 2005 2006 2005 ------------------------------- -------------------------------- Audit fees $ 592,271 $ 396,238 55% 44% Audit-related fees 38,934 30,374 4% 3% Tax fees 31,467 65,022 3% 7% All other fees 406,063 400,128 39% 46% ------------------------------- -------------------------------- Total fees $ 1,068,735 $ 891,762 100% 100% ------------------------------- --------------------------------
"Audit Fees" billed during fiscal 2006 and 2005 were for professional services rendered for the audit of our financial statements. "Audit-Related Fees" billed during fiscal 2006 and 2005 were for services related to accounting consultation and reviews of a Form S-3 filed with the Securities and Exchange Commission. "Tax Fees" billed during fiscal 2006 and 2005 were for professional services rendered for tax compliance, tax advice and tax planning. "All Other Fees" billed in fiscal 2006 were for testing internal controls under the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and billed in fiscal 2005 were for consulting services related to the preparation of our documentation of internal controls under the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. 74 The Audit Committee has adopted a policy for the pre-approval of all audit and non-audit services to be performed for us by our independent registered public accounting firm. The Audit Committee has considered the role of Deloitte & Touche LLP in providing audit, audit-related and tax services to us and has concluded that such services are compatible with Deloitte and Touche LLP's role as our independent registered public accounting firm. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: (1) Financial Statements: The following consolidated financial statements of Valence Technology, Inc. and Subsidiaries contained under Item 8 of this Form 10-K are incorporated herein by reference: Consolidated Balance Sheets as of March 31, 2006 and 2005 Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2006, 2005 and 2004 Consolidated Statements of Stockholders' Deficit for the years ended March 31, 2006, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended March 31, 2006, 2005 and 2004 (2) Financial Statement Schedules: All financial statement schedules have been omitted because they are not applicable or are not required, or because the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. (3) Exhibits:
EXHIBIT NO. DESCRIPTION 3.1 (1) Second Restated Certificate of Incorporation of the Company 3.2 (2) Amendment to the Second Restated Certificate of Incorporation of the Company 3.3 (3) Certificate of Designations, Preferences and Rights of Series C-1 Convertible Preferred Stock 3.4 (3) Certificate of Designations, Preferences and Rights of Series C-2 Convertible Preferred Stock 3.4 Third Amended and Restated Bylaws of the Company 4.1 (5) Warrant dated January 4, 2002 to Berg & Berg Enterprises, LLC 4.2 (6) Warrant to Purchase Common Stock, issued June 2, 2003 (to Riverview Group LLC) 4.3 (1) Loan Agreement between the Company and Baccarat Electronics, Inc., dated July 17, 1990 4.4 (1) Amendment No. 1 to Loan Agreement between the Company and Baccarat Electronics, Inc., dated March 15, 1991 (subsequently transferred to Berg & Berg Enterprises, LLC) 4.5 (1) Amendment No. 2 to Loan Agreement between the Company and Baccarat Electronics, Inc., dated March 24, 1992 (subsequently transferred to Berg & Berg Enterprises, LLC) 4.6 (1) Amendment No. 3 to Loan Agreement between the Company and Baccarat Electronics, Inc., dated August 17, 1992 (subsequently transferred to Berg & Berg Enterprises, LLC) 4.7 (7) Amendment No. 4 to Loan Agreement between the Company and Baccarat Electronics, Inc., dated September 1, 1997 (subsequently transferred to Berg & Berg Enterprises, LLC) 75 EXHIBIT NO. DESCRIPTION 4.8 (8) Amendment No. 5 to Loan Agreement between the Company and Baccarat Electronics, Inc., dated July 17, 1998 (subsequently transferred to Berg & Berg Enterprises, LLC) 4.9 (7) Amendment No. 6 to Loan Agreement between the Company and Baccarat Electronics, Inc., dated November 27, 2000 (subsequently transferred to Berg & Berg Enterprises LLC) 4.10 (9) Second Amended Promissory Note dated November 27, 2000 issued by the Company to Baccarat Electronics, Inc. (subsequently transferred to Berg & Berg Enterprises, LLC) 4.11 (4) Amendment No. 7 to Original Loan Agreement between the Company and Berg & Berg Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated October 10, 2001 4.12 (9) Amendment No. 8 to Original Loan Agreement and Amendment to Second Amended Promissory Note between the Company and Berg & Berg Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated February 11, 2002 4.13 (10) Loan Agreement dated October 5, 2001 between the Company and Berg & Berg Enterprises, LLC 4.14 (10) Security Agreement dated October 5, 2001 between the Company and Berg & Berg Enterprises, LLC 4.15 (10) Promissory Note dated October 5, 2001 issued by the Company to Berg & Berg Enterprises, LLC 4.16 (11) Amendment to Loan Agreements with Berg & Berg dated November 8, 2002 (Amendment No. 1 to October 5, 2001 Loan Agreement and Amendment No. 9 to 1990 Baccarat Loan Agreement) 4.17 (12) Amendment to Loan Agreements with Berg & Berg dated October 23, 2004 (Amendment No. 2 to October 5, 2001 Loan Agreement and Amendment No. 10 to 1990 Baccarat Loan Agreement) 4.18 (22) Warrant to Purchase Common Stock, issued July 13, 2005 (SFT I, Inc.) 4.19 (22) Warrant to Purchase Common Stock, issued July 13, 2005 (Berg & Berg Enterprises, LLC) 4.20 (24) Option Agreement, dated as of July 13, 2005, by and between Valence Technology, Inc. and James R. Akridge 10.1 (13) 1990 Stock Option Plan as amended on October 3, 1997 10.2 (14) 1996 Non-Employee Directors' Stock Option Plan as amended on October 3, 1997 10.3 (15) Valence Technology, Inc. Amended and Restated 2000 Stock Option Plan 10.4 (17) Form of Indemnification Agreement entered into between the Company and its Directors and Officers 10.5 (16) Registration Rights Agreement with West Coast Venture Capital, Inc.(the 1981 Kara Ann Berg Trust) dated January 13, 2001 10.6 (18) Joint Venture Contract with Fengfan Group Limited Liability Company dated July 8, 2003 10.7 (18) Contract for Technology Investment with Baoding Fengfan Group Limited Liability Company and Baoding Fengfan - Valence Battery Co., Ltd., Dated July 8, 2003 10.8 (18) Export Sales Contract with Baoding Fengfan-Valence Battery Co., Ltd., dated July 8, 2003 10.9 (18) Equipment Contribution Contract with Baoding Fengfan Group Limited Liability Company dated July 8, 2003 76 10.10 (19) Purchase and Sale Agreement and Escrow Instructions between Valence Technology Nevada, Inc. and Mars Partners, dated August 8, 2003 10.11 (21) Equity Line of Credit Term Sheet, dated June 11, 2004 between the Company and Carl E. Berg 10.12 (21) Employment Agreement with Dean F. Bogues, dated December 2, 2004 10.28 (3) Securities Purchase Agreement, dated November 30, 2004 10.29 (3) Amendment and Exchange Agreement, dated November 30, 2004 10.15 (22) Loan Agreement dated July 13, 2005, by and between Valence Technology, Inc. and SFT I, Inc. 10.16 (22) Registration Rights Agreement dated July 13, 2005 by and between Valence Technology, Inc. and SFT I, Inc. 10.17 (22) Amendment No. 12 and Amendment No. 4, to Loan Agreements, dated as of July 13, 205 10.18 (22) Assignment Agreement, dated July 14, 2005, by and between Valence Technology, Inc. and Berg & Berg Enterprises, LLC. 10.19 (23) Letter Agreement, effective July 13, 2005, by and between Valence Technology, Inc. and James R. Akridge 10.20 (24) Letter Agreement, dated August 8, 2005, by and between Valence Technology, Inc. and Berg & Berg Enterprises, LLC 10.21 (25) Letter Agreement, effective September 9, 2005, by and between Valence Technology, Inc. and Thomas F. Mezger 10.22 (26) Assignment Agreement, dated December 14, 2005, by and between Valence Technology, Inc. and Berg & Berg Enterprises, LLC 10.23 (27) Employment Agreement between Valence Technology (Suzhou) Co., Ltd. And Mr. Guo Chuntai. 10.24 (28) Controlled Equity Offering Sales Agreement, dated April 13, 2006, by and between Valence Technology, Inc. and Cantor Fitzgerald & Co. 10.25 Summary of Board of Directors Compensation 10.26 Summary of Executive Officers' Compensation 21.1 List of subsidiaries of the Company 23.1 Consent of Independent Registered Public Accounting Firm 24.1 (29) Power of Attorney 31.1 Certification of James R. Akridge, Principal Executive Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934 31.2 Certification of Thomas F. Mezger, Principal Financial Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934 32.1 Certification of James R. Akridge, Principal Executive Officer and Thomas F. Mezger, Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
FOOTNOTES (1) Incorporated by reference to the exhibit so described in the Company's Registration Statement on Form S-1 (File No. 33-46765), as amended, filed with the Securities and Exchange Commission on March 27, 1992 (2) Incorporated by reference to the exhibit so described in the Company's Schedule 14A filed with the Securities and Exchange Commission on January 28, 2000 (3) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K dated November 30, 2004, filed with the Securities and Exchange Commission on December 1, 2005 (4) Incorporated by reference to the exhibit so described in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002, filed with the Securities and Exchange Commission on July 1, 2002 (5) Incorporated by reference to the exhibit so described in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2001, filed with the Securities and Exchange Commission on February 19, 2002 (6) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K dated June 2, 2003, and filed with the Securities and Exchange Commission on June 3, 2003 (7) Incorporated by reference to the exhibit so described in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2003, filed with the Securities and Exchange Commission on June 30, 2003 (8) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K dated July 27, 1998, and filed with the Securities and Exchange Commission on August 4, 1998 (9) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K dated December 11, 1998, and filed with the Securities and Exchange Commission on December 21, 1998 (10) Incorporated by reference to the exhibit so described in the Company's Registration Statement on Form S-8 (File No. 333-74595) filed with the Securities and Exchange Commission on March 17, 1999 (11) Incorporated by reference to the exhibit so described in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002, filed with the Securities and Exchange Commission on November 14, 2002 (12) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K, dated November 3, 2004, filed with the Securities and Exchange Commission on November 5, 2004 (13) Incorporated by reference to the exhibit so described in the Company's Registration Statement on Form S-8 (File No 333-43203) filed with the Securities and Exchange Commission on December 24, 1997 (14) Incorporated by reference to the exhibit so described in the Company's Registration Statement on Form S-8 (File No. 333-74595) filed with the Securities and Exchange Commission on March 17, 1999 (15) Incorporated by reference to the exhibit so described in the Company's Registration Statement on Form S-8 (File No. 333-101708) filed with the Securities and Exchange Commission on December 6, 2002 78 (16) Incorporated by reference to the exhibit so described in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001, filed with the Securities and Exchange Commission on July 2, 2001 (17) Incorporated by reference to the exhibit so described in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000, filed with the Securities and Exchange Commission on June 29, 2000 (18) Incorporated by reference to the exhibit so described in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003, filed with the Securities and Exchange Commission on November 14, 2003 (19) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K, dated December 12, 2003, filed with the Securities and Exchange Commission on December 17, 2003 (20) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K, dated November 9, 2004, filed with the Securities and Exchange Commission on November 12, 2004 (21) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K, dated December 2, 2004, filed with the Securities and Exchange Commission on January 10, 2005 (22) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange Commission on July 15, 2005 (23) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange Commission on July 18, 2005 (24) Incorporated by reference to the exhibit so described in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005, filed with the Securities and Exchange Commission on August 9, 2005 (25) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K, dated September 9, 2005, filed with the Securities and Exchange Commission on September 14, 2005 (26) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K, dated December 14, 2005, filed with the Securities and Exchange Commission on December 16, 2005 (27) Incorporated by reference to the exhibit so described in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2005, filed with the Securities and Exchange Commission on February 9, 2006 (28) Incorporated by reference to the exhibit so described in the Company's Current Report on Form 8-K, dated April 13, 2006, filed with the Securities and Exchange Commission on April 13, 2006 (29) Included in signature page 79 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VALENCE TECHNOLOGY, INC. Dated: June 29, 2006 /s/ James R. Akridge -------------------------------------------- James R. Akridge President and Chief Executive Officer 80 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints James R. Akridge and Thomas F. Mezger, and each of them, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated.
Name Position Date - --------------------------------------------- ------------------------------------------ ----------------------- President and Chief Executive Officer (Principal Executive Officer) and /s/ James R. Akridge Director June 29, 2006 - --------------------------------------------- James R. Akridge Chief Financial Officer (Principal /s/ Thomas F. Mezger Financial and Accounting Officer) June 29, 2006 - --------------------------------------------- Thomas F. Mezger /s/ Carl E. Berg Director and Chairman of the Board June 29, 2006 - --------------------------------------------- Carl E. Berg /s/ Vassilis G. Keramidas Director June 29, 2006 - --------------------------------------------- Vassilis G. Keramidas /s/ Bert C. Roberts, Jr. Director June 29, 2006 - --------------------------------------------- Bert C. Roberts, Jr. /s/ Alan F. Shugart Director June 29, 2006 - --------------------------------------------- Alan F. Shugart
81 EX-3.(II) 2 exhibit_3-5.txt EXHIBIT 3.5 THIRD AMENDED AND RESTATED BYLAWS OF VALENCE TECHNOLOGY, INC. A DELAWARE CORPORATION MARCH 31, 2006 March 31, 2006 TABLE OF CONTENTS ARTICLE I OFFICES 3
Section 1. REGISTERED OFFICE...............................................................................3 Section 2. OTHER OFFICES...................................................................................3 ARTICLE II CORPORATE SEAL...................................................................3 Section 3. CORPORATE SEAL..................................................................................3 ARTICLE III STOCKHOLDERS' MEETINGS......................................................... 3 Section 4. PLACE OF MEETINGS...............................................................................3 Section 5. ANNUAL MEETING..................................................................................3 Section 6. SPECIAL MEETINGS................................................................................5 Section 7. NOTICE OF MEETINGS..............................................................................5 Section 8. QUORUM..........................................................................................5 Section 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS....................................................6 Section 10. VOTING RIGHTS...................................................................................6 Section 11. BENEFICIAL OWNERS OF STOCK......................................................................6 Section 12. LIST OF STOCKHOLDERS............................................................................6 Section 13. ORGANIZATION....................................................................................7 ARTICLE IV DIRECTORS.......................................................................7 Section 14. NUMBER AND TERM OF OFFICE.......................................................................7 Section 15. POWERS..........................................................................................8 Section 16. VACANCIES.......................................................................................8 Section 17. RESIGNATION.....................................................................................8 Section 18. REMOVAL.........................................................................................8 Section 19. MEETINGS........................................................................................8 Section 20. QUORUM AND VOTING...............................................................................9 Section 21. ACTION WITHOUT MEETING..........................................................................9 Section 22. FEES AND COMPENSATION.......................................................................... 9 Section 23. COMMITTEES.....................................................................................10 Section 24. ORGANIZATION...................................................................................11 ARTICLE V OFFICERS.......................................................................11 Section 25. OFFICERS DESIGNATED............................................................................11 Section 26. TENURE AND DUTIES OF OFFICERS..................................................................11 Section 27. DELEGATION OF AUTHORITY........................................................................12 Section 28. RESIGNATIONS...................................................................................12 Section 29. REMOVAL........................................................................................12 ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION..................................................13 Section 30. EXECUTION OF CORPORATE INSTRUMENTS.............................................................13 Section 31. VOTING OF SECURITIES OWNED BY THE CORPORATION..................................................13 ARTICLE VII SHARES OF STOCK.................................................................13 Section 32. FORM AND EXECUTION OF CERTIFICATES.............................................................13 Section 33. LOST CERTIFICATES..............................................................................13 Section 34. TRANSFERS......................................................................................14 Section 35. FIXING RECORD DATES............................................................................14 Section 36. REGISTERED STOCKHOLDERS........................................................................15 ARTICLE VIII OTHER SECURITIES OF THE CORPORATION 15 Section 37. EXECUTION OF OTHER SECURITIES..................................................................15 ARTICLE IX DIVIDENDS........................................................................15 Section 38. DECLARATION OF DIVIDENDS.......................................................................15 Section 39. DIVIDEND RESERVE...............................................................................15 ARTICLE X FISCAL YEAR.......................................................................16 Section 40. FISCAL YEAR....................................................................................16 ARTICLE XI INDEMNIFICATION..................................................................16 Section 41. INDEMNIFICATION OF DIRECTORS, OFFICERS EMPLOYEES AND OTHER AGENTS..............................16 ARTICLE XII NOTICES.........................................................................18 Section 42. NOTICES........................................................................................19 ARTICLE XIII AMENDMENTS.....................................................................20 Section 43. AMENDMENTS.....................................................................................20 ARTICLE XIV LOANS TO OFFICERS...............................................................20 Section 44. LOANS TO OFFICERS..............................................................................20 ARTICLE XV MISCELLANEOUS....................................................................20 Section 45. ANNUAL REPORT..................................................................................20
THIRD AMENDED AND RESTATED BYLAWS OF VALENCE TECHNOLOGY, INC. A DELAWARE CORPORATION MARCH 31, 2006 OFFICES REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. (Del. Code Ann., tit. 8, ss. 131) OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business in San Jose, California, at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. (Del. Code Ann., tit. 8, ss. 122(8)) CORPORATE SEAL CORPORATE SEAL. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. (Del. Code Ann., tit. 8, ss. 122(3)) STOCKHOLDERS' MEETINGS PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as maybe designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. (Del. Code Ann., tit. 8, ss. 211(a)) ANNUAL MEETING. The annual meeting of the stockholders of the corporation shall be held each year on a date and at a time designated by the Board of Directors. At the meeting, directors shall be elected and any other proper business may be transacted. (Del. Code Ann., tit. 8, ss. 211(b)) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date of the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear in the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the Securities and Exchange Act of 1934, as amended. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (Del. Code Ann., tit. 8, ss.211(b)) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of Directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 5. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a Director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a Director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 5. At the request of the Board of Directors, any person nominated by a stockholder for election as a Director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting and the defective nomination shall be disregarded. (Del. Code Ann., tit. 8, ss.ss. 212, 214) SPECIAL MEETINGS. (a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board, (ii) the President, (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) or (iv) by the holders of shares entitled to cast no less than ten percent (10%) of the votes at the meeting, as they or he shall fix; provided, however, that following registration of any of the classes of equity securities of the corporation pursuant to the provisions of the Securities Exchange Act of 1934, as amended, special meetings of the stockholders may only be called by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized Directors. If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board, the President, any Vice President, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws, that a meeting will be held not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. NOTICE OF MEETINGS. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour an purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (Del. Code Ann., tit. 8, ss.ss. 222, 229) QUORUM. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. Any shares, the voting which at said meeting has been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at such meeting. In the absence of a quorum any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the voting power represented at any meeting at which a quorum is present shall be valid and binding upon the corporation; provided, however, that Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of Directors. Where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority (plurality, in the case of the election of Directors) of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. (Del. Code Ann., tit. 8, ss. 216) ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares represented thereat. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (Del. Code Ann., tit. 8, ss. 222(c)) VOTING RIGHTS. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Except as may be otherwise provided in the Certificate of Incorporation or these Bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent, which proxy shall be filed with the Secretary at or before the meeting at which it is to be used. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. All elections of Directors shall be by written ballot, unless otherwise provided in the Certificate of Incorporation. (Del. Code Ann., tit. 8, ss.ss. 211(e), 212(b)) BENEFICIAL OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the General Corporation Law of Delaware, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of this subsection (c) shall be a majority or even-split in interest. (Del. Code Ann., tit. 8, ss. 217(b)) Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon. (Del. Code Ann., tit. 8, ss. 217(a)) LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof, and may be inspected by any stockholder who is present. (Del. Code Ann., tit. 8, ss. 219(a)) ORGANIZATION. At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, the most senior Vice President present, or in the absence of any such officer, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies, and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless, and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. DIRECTORS NUMBER AND TERM OF OFFICE. The number of directors constituting the Board shall not be less than four or more than seven. The exact number shall be determined from time to time by resolution of the Board. Except as provided in Section 16, the Directors shall be elected by the stockholders at their annual meeting in each year and shall hold office until the next annual meeting and until their successors shall be duly elected and qualified. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the Directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. No reduction of the authorized number of Directors shall have the effect of removing any Director before the Director's term of office expires, unless such removal is made pursuant to the provisions of Section 18 hereof. (Del. Code Ann., tit. 8, ss.ss. 141(b), 211(b), (c)) POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. (Del. Code Ann., tit. 8, ss. 141(a)) VACANCIES. Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes shall be filled by either (i) the affirmative vote of the holders of a majority of the voting power of the then-outstanding shares of voting stock of the corporation entitled to vote generally in the election of directors (the "Voting Stock") voting together as a single class; or (ii) by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any Director, or if the stockholders fail at any meeting of stockholders at which Directors are to be elected (including any meeting referred to in Section 21 below) to elect the number of Directors then constituting the whole Board of Directors. (Del. Code Ann., tit. 8, ss. 223(a), (b)) RESIGNATION. Any Director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more Directors shall resign from the Board of Directors, effective at a future date, a majority of the Directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. (Del. Code Ann., tit. 8, ss.ss. 141(b), 223(d)) REMOVAL. At a special meeting of stockholders called for the purpose in the manner hereinabove provided, subject to any limitations imposed by law or the Certificate of Incorporation, the Board of Directors, or any individual Director, may be removed from office, (a) with cause, and a new Director or Directors elected by a vote of stockholders holding a majority of the outstanding shares entitled to vote at an election of Directors; or (b) without cause by an affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of such outstanding shares. (Del. Code Ann., tit. 8, ss. 141(k)) MEETINGS. Annual Meeting. The annual meeting of the Board of Directors shall be held immediately after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. Regular Meetings. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been determined by the Board of Directors. (Del. Code An., tit. 8, ss. 141(g)) Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the President or a majority of the Directors. (Del. Code Ann., tit. 8, ss. 141(g)) Telephone Meetings. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (Del. Code Ann., tit. 8, ss. 141(i) ) Notice of Meetings. Written notice of the time and place of all special meetings of the Board of Directors shall be given at least one (1) day before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any Director by attendance thereat, except when the Director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (Del. Code Ann., tit. 8, ss. 229) Waiver of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the Meeting, each of the Directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in any written waiver of notice or consent unless so required by the Certificate of Incorporation or these Bylaws. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (Del. Code Ann., tit. 8, ss. 229) Quorum and Voting. Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 42 hereof, for which a quorum shall be one-third of the exact number of Directors fixed from time to time in accordance with Section 14 hereof, but not less than one (1), a quorum of the Board of Directors shall consist of a majority of the exact number of Directors fixed from time to time in accordance with Section 14 of these Bylaws, but not less than one (1); provided, however, at any meeting whether a quorum be present or otherwise, a majority of the Directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (Del. Code Ann., tit. 8, ss. 141(b)) At each meeting of the Board of Directors at which a quorum is present all questions and business shall be determined by a vote of a majority of the Directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. (Del. Code Ann., tit. 8, ss. 141(b)) ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, an such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. (Del. Code Ann., tit. 8, ss. 141(f)) FEES AND COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefore. (Del. Code Ann., tit. 8, ss. 141(h)) COMMITTEES. Executive Committee. The Board of Directors may by resolution passed by a majority of the whole Board of Directors, appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and specifically granted by the Board of Directors, shall have and may exercise when the Board of Directors is not in session all powers of the Board of Directors in the management of the business and affairs of the corporation, including, without limitation, the power and authority to declare a dividend or to authorize the issuance of stock, except such committee shall not have the power or authority to amend the Certificate of Incorporation, to adopt an agreement of merger or consolidation, to recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, to recommend to the stockholders of the corporation a dissolution of the corporation or a revocation of a dissolution or to amend these Bylaws. (Del. Code Ann., tit. 8, ss. 141(c)) Other Committees. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time to time appoint such other committees as maybe permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors, and to the extent permitted by law and by resolution of the Board of Directors, shall have and may exercise all of the powers of the Board of Directors in the management and business affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it, but in no event shall such committee have the powers denied to the Executive Committee in these Bylaws. (Del. Code Ann., tit. 8, ss. 141(c)) Term. The members of all committees of the Board of Directors shall serve a term coexistent with that of the Board of Directors which shall have appointed such committee. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Section 23, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (Del. Code Ann., tit. 8, ss. 141(c)) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 23 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any Director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any Director by attendance thereat, except when the Director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. (Del. Code Ann., tit. 8, ss. 141(c), 229) ORGANIZATION. At every meeting of the Directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or if the President is absent, the most senior Vice President, or, in the absence of any such officer, a chairman of the meeting chosen by a majority of the Directors present, shall preside over the meeting. The Secretary, or in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. OFFICERS OFFICERS DESIGNATED. The officers of the corporation shall be the Chairman of the Board of Directors, the President, one or more Vice Presidents, the Secretary and the Chief Financial Officer or Treasurer, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The order of the seniority of the Vice Presidents shall be in the order of their nomination, unless otherwise determined by the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. (Del. Code Ann., tit. 8, ss.ss. 122(5), 142(a), (b)) TENURE AND DUTIES OF OFFICERS. General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors maybe removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (Del. Code Ann., tit. 8, ss. 141(b), (e)) Duties of Chairman of the Board of Directors. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. If there is no President, or if the Board of Directors shall so designate, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 27. (Del. Code Ann., tit. 8, ss. 142(a)) Duties of President. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. Unless the Board of Directors shall designate otherwise, the President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (Del. Code Ann., tit. 8, ss. 142(a)) Duties of Vice Presidents. The Vice Presidents, in the order of their seniority, may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their Office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (Del. Code Ann., tit. 8, ss. 142(a)) Duties of Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors, and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders, and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform, other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (Del. Code Ann., tit. 8, ss. 142(a)) Duties of Chief Financial Officer or Treasurer. The Chief Financial Officer or Treasurer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner, and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer or Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer or Treasurer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct any Assistant Treasurer to assume and perform the duties of the Chief Financial Officer or Treasurer in the absence or disability of the Chief Financial Officer or Treasurer, and each Assistant Treasurer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (Del. Code Ann., tit. 8, ss. 142(a)) DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer (Del. Code Ann., tit. 8, ss. 142(b)) REMOVAL. Any officer may be removed from office at any time, either with or without cause, by the vote or written consent of a majority of the Directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. (Del. Code Ann., tit. 8, ss.ss. 103(a), 142(a), 158) Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, or the President or any Vice President, and by the Secretary or Chief Financial Officer or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. (Del. Code Ann., tit. 8, ss.ss. 103(a), 142(a), 158) All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. (Del. Code Ann., tit. 8, ss.ss. 103(a), 142(a), 158). VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the President, or any Vice President. (Del. Code Ann., tit. 8, ss.123) SHARES OF STOCK FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Where such certificate is countersigned by a transfer agent other than the corporation or its employee, or by a registrar other than the corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the designations, preferences, limitations, restrictions on transfer and relative rights of the shares authorized to be issued. (Del. Code Ann., tit. 8, ss. 158) LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. (Del. Code Ann., tit. 8, ss. 167) TRANSFERS. (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (Del. Code Ann., tit. 8, ss. 201, tit. 6, ss. 8-401(1)) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. (Del. Code Ann., tit. 8, ss. 160 (a)) FIXING RECORD DATES. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date as been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (Del. Code Ann., tit. 8, ss. 213) REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. (Del. Code Ann,, tit. 8, ss.ss. 213(a), 219) OTHER SECURITIES OF THE CORPORATION EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 33), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. DIVIDENDS DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. (Del. Code Ann., tit. 8, ss.ss. 170, 173) DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. (Del. Code Ann., tit. 8, ss. 171) FISCAL YEAR FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. INDEMNIFICATION INDEMNIFICATION OF DIRECTORS, OFFICERS EMPLOYEES AND OTHER AGENTS. Directors and Executive Officers. The corporation shall indemnify its Directors and executive officers to the fullest extent not prohibited by the Delaware General Corporation Law; provided, however, that the corporation may limit the extent of such indemnification by individual contracts with its Directors and executive officers; and, provided, further, that the corporation shall not be required to indemnify any Director or executive officer in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the corporation or its Directors, officers, employees or other agents unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation or (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law. Other Officers, Employees and Other Agents. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. Good Faith. For purposes of any determination under this Bylaw, a Director or executive officer shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, to have had no reasonable cause to believe that his conduct was unlawful if his action is based on information, opinions, reports and statements, including financial statements' and other financial data, in each case prepared or presented by: one or more officers or employees of the corporation whom the Director or executive officer believed to be reliable and competent in the matters presented; counsel, independent accountants or other persons as to matters which the Director or executive officer believed to be within such person's professional competence; and with respect to a Director, a committee of the Board upon which such Director does not serve, as to matters within such Committee's designated authority, which committee the Director believes to merit confidence; so long as, in each case, the Director or executive officer acts without knowledge that would cause such reliance to be unwarranted. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, that he had reasonable cause to believe that his conduct was unlawful. The provisions of this paragraph (c) shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth by the Delaware General Corporation Law. Expenses. The corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by any Director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Bylaw, no advance shall be made by the corporation if a determination is reasonably and promptly made (1) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to the proceeding, or (2) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to Directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the Director or executive officer. Any right to indemnification or advances granted by this Bylaw to a Director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent Jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. The corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Non-Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its Directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a Director, officer employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Insurance. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw. Amendments. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Director and executive officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply: The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. References to a "director," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to any employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Bylaw. Notices Notices. Notice to Stockholders. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. (Del. Code Ann., tit. 8, ss. 222) Notice to Directors. Any notice required to be given to any Director may be given by the method stated in subsection (a), or by facsimile, telex or telegram, except that such notice other than which is delivered personally shall be sent to such address as such Director shall have filed in writing with the Secretary, or in the absence of such filing, to the last known post office address of such Director. Address Unknown. If no address of a stockholder or Director be known notice may be sent to the office of the corporation required to be maintained pursuant to Section 2 hereof. Affidavit of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or Directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. (Del. Code Ann.; tit. 8, ss. 222) Time Notices Deemed Given. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all Directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. Failure to Receive Notice. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any Director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such Director to receive such notice. Notice to Person with Whom Communication Is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. Notice to Person with Undeliverable Address. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve month period, have been mailed addressed to such person at his address as shown on the records of the Corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. (Del. Code Ann, tit. 8, ss. 230) AMENDMENTS AMENDMENTS. The Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least a majority of the voting of all the then-outstanding shares of the Voting Stock. In furtherance and not in limitation the power conferred by statute, the Board of Directors is expressly authorized to adopt, amend, supplement or repeal the Bylaws. (Del. Code Ann., tit. 8, ss.ss. 199(a), 122(6)) LOANS TO OFFICERS LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, whenever, in the Judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation; PROVIDED, HOWEVER, that the corporation may not lend money to, or guarantee any obligation of, or otherwise assist any director or executive officer of the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this Section 44 shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. (Del. Code Ann, tit. 8, ss. 143) MISCELLANEOUS ANNUAL REPORT. (a) Subject to the provisions of Section 45(b) below, the Board of Directors shall cause an annual report to be sent to each stockholder of the corporation not later than one hundred twenty (120) days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accounts or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. When there are more than 100 stockholders of record of the corporation's shares as determined by Section 605 of the California Corporations Code, additional information as required by Section 1501(b) of the California Corporations Code shall also be contained in such report, provided that if the corporation has a class of securities registered under Section 12 of the United States Securities Exchange Act of 1934, that Act shall take precedence. Such report shall be sent to stockholders at least fifteen (15) days prior to the next annual meeting of stockholders after the end of the fiscal year to which it relates. If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the stockholders of the corporation is hereby expressly waived. EX-10 3 exhibit_10-25.txt EXHIBIT 10.25 VALENCE TECHNOLOGY, INC. SUMMARY OF BOARD OF DIRECTORS COMPENSATION 2006 Each director who is a non-employee receives compensation as set forth below, in accordance with the compensation program for non-employee directors approved by the Board of Directors.
Annual Retainer Not applicable In Person Board, Shareholder or Committee Meeting Reimbursement for reasonable travel and lodging Meeting expenses Audit Committee Chair Fee Not applicable Equity Compensation Upon appointment to the Board of Directors, each non-employee director is entitled to receive an option grant to purchase 100,000 shares of our common stock. These options will vest one-fifth on the first and second anniversaries of the date of grant of the options, and equal quarterly installments over the next three years and are exercisable at the fair market value of the underlying stock on the grant date. In addition, members of the Board of Directors are eligible to receive a $1,000 fee for each official quarterly board meeting. This meeting fee is paid in the form of stock options at the market price of the Company's common stock. Other Compensation Upon appointment to the Board of Directors, each non- employee director is entitled to receive $10,000 as a training fee.
EX-10 4 exhibit_10-26.txt EXHIBIT 10.26 VALENCE TECHNOLOGY, INC. EXECUTIVE OFFICERS' COMPENSATION FOR 2006 ANNUAL CASH COMPENSATION BASE COMPENSATION. Set forth below are the base salaries effective for 2006 of our named executive officers. These salaries are reviewed by the Compensation Committee of the Board of Directors annually and are subject to increase.
NAME TITLE BASE SALARY - ---- ----- ----------- James R. Akridge (1) Chief Executive Officer and President $250,000 Dean Bogues (1) President of the Americas and Europe $200,000 Dr. ChunTai Guo (1) President of Asia-Pacific Operations $200,000 Thomas F. Mezger (1) Chief Financial Officer and Assistant $185,000 Secretary Roger A. Williams General Counsel and Assistant $180,000 Secretary - ------------------- (1) Please refer to the employment agreements of these executive officers, each of which has been filed with the Securities and Exchange Commission, for the other terms and conditions of their employment. Bonuses awarded for 2004 in accordance with the foregoing were as follows: NAME TITLE 2004 BONUS - ---- ----- ---------- James R. Akridge Chief Executive Officer and President $95,625 Dean Bogues President of the Americas and Europe $120,000 Dr. ChunTai Guo President of Asia-Pacific Operations n/a Thomas F. Mezger Chief Financial Officer and Assistant n/a Secretary Roger A. Williams General Counsel and Assistant n/a Secretary
LONG TERM INCENTIVES STOCK OPTIONS AND RESTRICTED STOCK. Executive officers, together with our other employees, are eligible to receive grants of awards under our 2000 Stock Option Plan and 1990 Stock Option Plan as amended on October 3, 1997. These awards may be in the form of stock options and/or restricted stock grants. The number of options or restricted shares granted to an executive officer is based upon a number of factors, including, but not limited to, his or her position, salary and performance, the number and/or value of his or her in-the-money outstanding unexercisable options, as well as the performance and goals of the Company. EX-21 5 exhibit_21-1.txt EXHIBIT 21.1 VALENCE TECHNOLOGY, INC. LIST OF SUBSIDIARIES VALENCE TECHNOLOGY (NEVADA), INC,. a Nevada corporation wholly owned by Valence Technology, Inc. VALENCE TECHNOLOGY CAYMEN ISLANDS INC., a Cayman Islands corporation wholly owned by Valence Technology, Inc. VALENCE TECHNOLOGY N.V., a Dutch Antilles corporation wholly owned by Valence Technology Cayman Islands Inc. VALENCE TECHNOLOGY INTERNATIONAL, INC, a Cayman Islands corporation wholly owned by Valence Technology Cayman Islands Inc. VALENCE TECHNOLOGY B.V., a Dutch corporation wholly owned by Valence Technology N.V. VALENCE TECHNOLOGY (Suzhou) Co., Ltd., a China Corporation, wholly owned by Valence Technology, Inc. VALENCE ENERGY-TECH (Suzhou) Co., Ltd., a China Corporation, wholly owned by Valence Technology, Inc. EX-23 6 exhibit_23-1.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-127914, 333-101708, 333-66398, 333-74595, 333-67693, 333-43203, 333-21669, 333-21671, 033-94522, 033-60562 and 033-48982 on Form S-8 and Registration Statement Nos. 333-107135, 333-67942, 333-122827 and 127885 on Form S-3 of our reports dated June 28, 2006 relating to the consolidated financial statements of Valence Technology, Inc. (which report expressed an unqualified opinion on the consolidated financial statements and included an explanatory paragraph concerning substantial doubt about the Company's ability to continue as a going concern on those consolidated financial statements) and of our report on internal control over financial reporting (which report expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of a material weakness)appearing in this Annual Report on Form 10-K of Valence Technology, Inc. for the year ended March 31, 2006. /s/ Deloitte & Touche LLP ----------------------------------------- Austin, Texas June 28, 2006 EX-31 7 exhibit_31-1.txt EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER OF VALENCE TECHNOLOGY, INC. I, James R. Akridge, certify that: 1. I have reviewed this annual report on Form 10-K of Valence Technology, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting , to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 29, 2006 /s/ James R. Akridge - ------------------------------------ By: James R. Akridge Title: Principal Executive Officer EX-31 8 exhibit_31-2.txt EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER OF VALENCE TECHNOLOGY, INC. I, Thomas F. Mezger, certify that: 1. I have reviewed this annual report on Form 10-K of Valence Technology, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting , to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 29, 2006 /s/ Thomas F. Mezger - ------------------------------------------ By: Thomas F. Mezger Title: Principal Financial Officer EX-32 9 exhibit_32-1.txt EXHIBIT 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), each of the undersigned officers of Valence Technology, Inc. (the "Company") does hereby certify with respect to the Annual Report of the Company on Form 10-K for the period ended March 31, 2006 (the "Report") that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in this Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: June 29, 2006 By: /s/ James R. Akridge -------------------------------------- Name: James R. Akridge Title: Chief Executive Officer, President and Chairman of the Board Date: June 29, 2006 By: /s/ Thomas F. Mezger -------------------------------------- Name: Thomas F. Mezger Title: Chief Financial Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----