-----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, Ov2OlOQA6XFY/wimwImYKMWkR7LM2KpeRgxgJLYrHrKWOnBoNj7z3LlLODypGtfL fam+UNa3iS4QX9FHcl7KMQ== 0000912057-97-022199.txt : 19970630 0000912057-97-022199.hdr.sgml : 19970630 ACCESSION NUMBER: 0000912057-97-022199 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970330 FILED AS OF DATE: 19970627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALENCE TECHNOLOGY INC CENTRAL INDEX KEY: 0000885551 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] 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: 97631475 BUSINESS ADDRESS: STREET 1: 301 CONESTOGA WAY CITY: HENDERSON STATE: NV ZIP: 89015 BUSINESS PHONE: 7025581000 MAIL ADDRESS: STREET 1: 301 CONESTOGA WAY CITY: HENDERSON STATE: NV ZIP: 89015 10-K 1 FORM 10K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10K (Mark One) [ X ] Annual report to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended MARCH 30, 1997 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________ to ________________ Commission file number 0-20028 VALENCE TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0214673 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) NUMBER)
301 CONESTOGA WAY HENDERSON, NEVADA 89015 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Registrant's telephone number, including area code is (702) 558-1000 --------- Securities registered pursuant to Section 12(b) of the Act:
Title of Each Name of Each Exchange on Which Class Registered - ----------------- ---------------------------------------- Common NASDAQ
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.001 par value --------- 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 proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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 /X/ The aggregate market value of the Registrant's voting stock held by non-affiliates on June 2, 1997 (based upon the NASDAQ/NMS closing price on such date) was $154,572,413. As of June 2, 1997, there were 21,892,543 shares of the Registrant's Common Stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section as well as in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Item 1 Business OVERVIEW Valence is engaged in research and development to produce advanced rechargeable batteries based upon lithium ion and polymer technologies. The Company's objective is to become a leading provider of rechargeable batteries. The Company announced in July 1995, that it had obtained a license to a plastic lithium battery technology from Bell Communications Research, Inc. ("Bellcore"). Since that time, the Company has been working to integrate the Bellcore technology with its own lithium polymer battery technology. At the same time, the Company has continued the redesign and modifications to its manufacturing equipment in Northern Ireland to support the potential future commercial introduction of this new battery design. Widespread use of a variety of portable consumer electronics such as portable computers, cellular telephones, camcorders and handheld power tools, as well as continued demand from conventional applications such as automobiles, have resulted in large markets for rechargeable batteries. These new and conventional applications are placing growing demands on existing battery technologies to deliver increasing amounts of electricity through smaller and lighter batteries. In some cases, current battery capabilities are a major limitation to the introduction of enhanced electronic products. Valence is a development stage company and its current research prototype batteries do not meet all of the exacting specifications demanded by the marketplace. Except for insubstantial revenues from limited sales of prototype lithium polymer batteries, substantially all of the Company's revenues to date have been derived from a research and development contract with the Delphi Automotive Systems Group of General Motors Corporation ("Delphi" - formerly Delco-Remy Division), and the Company presently has no products available for sale. Prior to commencing volume production, the Company does not expect to receive any significant revenues from the sale of its products. To achieve profitable operations, the Company must successfully develop, manufacture and market its products. There can be no assurance that any products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed or achieve market acceptance. In the event that the Company's research and development activities lead to commercially viable products, to accelerate the introduction of its batteries into the portable consumer electronics and telecommunications markets, the Company's strategy is to provide prototype batteries to a limited number of potential OEM customers, with the expectation that, if the Company's prototype batteries meet customer requirements, batteries incorporating this technology will be incorporated into advance product designs. The Company expects that customers will require an extensive qualification period once the customer receives its first commercial product off a production line. In working with OEMs, the Company will seek to obtain technical assistance in designing its batteries for industry-specific applications. To date, the Company has only been able to deliver small quantities of handmade prototype batteries to OEMs. These prototype batteries do not meet all the requirements of these OEMs and are not necessarily representative of the batteries that will be produced off the Company's production equipment. There can be no assurance that the Company's discussions with OEMs will result in any such relationships or, if such relationships are initiated, that the relationships will achieve their goals. The Company believes that these potential customers will continue to be interested in advanced rechargeable batteries from the Company, should the Company succeed in meeting their exacting requirements. -2- THE BATTERY INDUSTRY There are two types of batteries, primary and rechargeable. A primary battery is used until discharged and then discarded. In contrast, after a rechargeable battery is discharged, it can be recharged to near full capacity and used again. Rechargeable batteries are generally usable in all primary battery applications as well as other applications, such as portable computers, cellular telephones, camcorders, automobiles and cordless tools and appliances. In the rechargeable battery market, the principal competitive technologies are NiCad, lead acid, nickel metal hydride, and liquid and solid electrolyte lithium metal and liquid lithium ion batteries. NiCad batteries are currently the most widely used batteries in portable electronics. Lead acid batteries are primarily used in automobiles and, to a lesser degree, are also used in a sealed form in certain portable electronic products. Nickel metal hydride batteries, which offer certain performance and environmental improvements over NiCad batteries, have been introduced into the market and compete directly with existing applications for NiCad batteries. Sony and other Japanese manufacturers are selling liquid electrolyte lithium ion batteries. Liquid electrolyte lithium ion batteries offer significant advantages in energy density and cycle life over conventional rechargeable battery technologies currently in use and are expected by the Company to be the technology of choice for high value added applications. Sony and other manufacturers are offering liquid electrolyte lithium ion batteries in the marketplace and to OEMs in significant volumes. Bellcore has licensed its plastic lithium ion battery technology to as many as eleven other companies, in addition to the Company, although their identities have not been announced. As OEMs frequently require extensive lead times to design new batteries into their products, the availability of these liquid and solid electrolyte lithium ion batteries from the Company's competitors could materially adversely affect the demand for, and market acceptance and penetration of the Company's products, if and when developed. Additionally, the Company will have to compete with the other Bellcore licensees, who will have access to essentially the same base technology as the Company. THE COMPANY'S LITHIUM POLYMER BATTERY TECHNOLOGY The Company's current research design is a hybrid of the Company's proprietary battery technology and the licensed Bellcore technology. The Company's current research design contains no metallic lithium, unlike earlier Company designs, but rather moves lithium ions from an anode to a cathode on discharge, and from the cathode to the anode on recharge. The lithium ions are stored in either the cathode or anode, and do not form metallic lithium. This type of system is often referred to as "rocking chair battery," because the lithium ions are "rocked" back and forth between the cathode and anode, and "lithium ion" because the lithium in the batteries is always in an ionic form rather than a metallic form. The Company's research prototype battery is composed of flexible solid plastic matrixes which are formed into an anode matrix layer, a separator matrix layer, and a cathode matrix layer. The anode matrix layer contains a carbon material capable of holding lithium ions. The separator matrix layer is composed primarily of the plastic matrix. The cathode matrix layer contains metal oxide material that stores lithium ions. After the matrix layers are formed and cut into the desired shape, they are laminated together to form a cell. The cell is interconnected to other like cells to form a battery. Plasticizer material in the cell matrix layers is then extracted, leaving voids throughout the matrix layers of the cells. Finally, liquid electrolyte is absorbed into the cell, filling the voids left by the extracted filler material, activating the cells and the battery. In conventional liquid electrolyte batteries, the liquid electrolyte that permeates the battery's components is sealed in a metal container to assure its contact with all the internal components of the battery. The liquid electrolyte in the Company's battery is contained within the solid polymer matrix that forms the anode, separator and cathode matrix layers. Because the liquid electrolyte is contained in the solid polymer matrix and is therefore in intimate contact with anode and cathode materials, it does not need to be held under pressure, and the battery can be packaged in a thin flexible plastic/foil packaging material, instead of a metal container, which reduces weight and volume. The Company believes that its lithium polymer battery technology may constitute an advance over most rechargeable battery technologies currently available in the market, although its program is still in the research and development phase and therefore substantial uncertainties exist, including whether the Company will be able to develop a commercial product. The Company believes that energy density is the most important performance characteristic for comparing battery technologies. The Company's research prototype lithium polymer batteries have demonstrated energy density generally superior to most other rechargeable technologies, except for some liquid electrolyte lithium ion batteries, although the Company has experienced variability in energy density in its research prototype designs. -3- Greater energy density will permit the use of batteries for a given size or weight with energy capacity significantly exceeding that of most batteries currently in use. Alternatively, greater energy density will enable the use of smaller and lighter batteries with energy capacity comparable to those currently marketed. In addition, form factor, or the shape of a battery, can affect the packaging efficiency of batteries. For example, some battery technologies are best suited to cylindrical shapes, but if cylinders must be stacked, approximately 22% loss in packaging efficiency results. Because the Company's research prototype battery is produced as a thin laminate, it can be shaped into a variety of form factors, including very thin batteries. The Company is currently evaluating the performance effects of various battery shapes with regard to energy density, recharge cycles and safety concerns. In addition, battery technologies vary in relative safety as a result of their differing chemical compositions. Most battery technologies incorporate a liquid electrolyte which, if leaked, may be dangerous. In addition, in the event of a short circuit or other physical damage to the battery, the liquid electrolyte may be free to flow to the reaction site and produce a continuous chemical reaction. This reaction may result in excess heat or a gas release and, if not properly released, may be explosive. The Company's lithium polymer battery technology appears to avoid these risks, because the liquid electrolyte in the Company's current research prototypes is held in the solid polymer matrix and should not be free to leak or freely flow to a reaction site. The Company has not completed safety testing and does not know whether the advantages inherent in the Company's technology will make the battery as safe or safer than other battery technology. As part of the Company's safety testing program, prototype batteries of various sizes, designs, and chemical formulations are subject to abuse testing, where the battery is subjected to conditions outside the expected normal operating conditions of the battery. While some prototype batteries have survived these tests, others have vented gases, containing vaporized solvents from the electrolyte, which have caught fire. Such results were generally expected and, until the testing is completed, the Company cannot make a valid determination as to the safety envelope in which the battery must be operated. Additionally, each new battery design requires new safety testing. There can, therefore, be no assurance that safety problems will not develop with respect to the Company's battery technology, that would prevent commercial introduction. The Company's products will incorporate materials containing lithium ions. While these materials are less reactive than metallic lithium, which is known in its metallic form to cause explosions and fires if not properly handled, it is possible that special handling will be required. Although the Company believes that its research prototype batteries designed for portable electronics applications do not present safety risks substantially different from those inherent in currently marketed non-lithium batteries or other liquid electrolyte lithium ion batteries, there can be no assurance that safety problems will not develop in the future. The Company is aware that if the amounts of active materials in the anode and cathode are not properly balanced and the charge / discharge regime is not properly managed, metallic lithium may be plated within the battery packaging. The plating of lithium in a lithium ion battery is a dangerous situation and other lithium ion battery manufacturers include special safety circuitry within the battery to prevent such a condition. The Company expects that such circuitry will have to be used by its customers. The Company is currently conducting research to determine whether its lithium polymer battery technology poses increased risks when used in larger sized batteries because of the greater amount of ionic lithium contained in the battery, and the increased amount of energy stored in the battery. The Company incorporates safety policies in its research and development activities and will do so in its manufacturing processes, designed to minimize safety risks, although there can be no assurance that an accident in its facilities will not occur. Any accident, whether occasioned by the use of a battery or in the Company's operations, could result in significant delays or claims for damages resulting from injuries, which would adversely affect the Company's operations and financial condition. MARKETS AND APPLICATIONS The Company believes that its battery technology, if it can lead to commercial products, will potentially be usable in a number of applications, including as a portable, rechargeable power source for portable electronics products, automotive SLI, electric vehicles and military equipment. To commercialize its products in the foregoing markets, the Company will be dependent upon obtaining assistance from OEMs into whose products the Company's future batteries will have to be incorporated. Other than certain research and development commitments from Delphi and a joint -4- research and development agreement with Eveready Battery Company ("Eveready"), to date the Company has not received any commitments either for the development of its technology or for the purchase of its products. There can be no assurance that the Company will succeed in establishing additional relationships or that the Company's products and technology will ever receive market acceptance. THIRD PARTY RELATIONSHIPS DELPHI In 1991, to leverage its limited resources and accelerate the introduction of its lithium polymer batteries, the Company entered into a research and development agreement with Delphi to develop lithium polymer batteries for the land, marine and air vehicular and load leveling markets. Under the agreement, the Company obtained a multi-year funding commitment of $20,000,000 and, if its batteries are successfully commercialized by Delphi, will receive ongoing royalties. Upon completion of the 1991 agreement, the Company and Delphi, in June 1994, extended the 1991 agreement until the end of 1994, for an additional fee of $900,000. Both the 1991 agreement and the June 1994 extension have been completed and the Company has received full payment under those agreements. In September 1994, the Company and Delphi entered into a new agreement for Joint Research and Development for a five year period which began in September 1994, with payments to Valence of a $50,000 monthly research and development access fee, of which $600,000 was recognized during fiscal year 1997 as an offset to research and product development expenses. Under this agreement the Company and Delphi agreed to co-locate their research and development efforts at an unoccupied lithium battery manufacturing facility located in Henderson, Nevada. As of June 1995, both parties had relocated to the facility and begun joint research efforts. Under the agreement, Delphi, in addition to the monthly research and development access fee, is paying a majority of the operating expenses of the facility. As with any large company, General Motors is constantly reviewing its research and development programs and their associated costs, and there can be no assurance that General Motors will not reduce the budget for this Delphi program, or eliminate the program in its entirety. Such an occurrence could significantly reduce or eliminate this source of funds to the Company, as well as their research and development contribution. Delphi is a leading manufacturer of SLI batteries in North America, producing batteries for new General Motors Corporation vehicles and the replacement market. Delphi is experienced in working with a number of currently-used battery technologies and is a leader in the research and development of innovative battery technologies. Under its agreements with the Company, Delphi provides fundamental research assistance and manufacturing expertise. The Company's work with Delphi has enhanced the Company's scientific and technical understanding of its lithium polymer battery. The Company has granted Delphi worldwide, exclusive licenses under the Company's patents and technical information to manufacture, use and sell lithium polymer batteries for commercial land, marine and air vehicles, electric vehicles, and for electric utility load leveling, the storage of energy produced at off peak periods for release during peak demand. Each license converts to a non-exclusive license four years after the first commercial sale of such a battery. Under the agreement, Delphi granted to the Company an exclusive license under Delphi's patents and technical information to manufacture, use and sell lithium polymer batteries, other than the vehicular and load leveling batteries exclusively licensed to Delphi, and a non-exclusive license under Delphi's patents and technical information to manufacture vehicular and load leveling batteries after the termination of Delphi's exclusive rights. The Company's exclusive license converts to a non-exclusive license four years after the first commercial sale of a battery by the Company. As additional compensation to the Company, Delphi agreed to pay royalties to the Company on each battery manufactured under Delphi's license until 2008. However, in procuring the right to sublicense Bellcore technology to Delphi, the Company agreed to pass on to Bellcore substantially all royalties received from Delphi. The Company hopes that its greatest benefit from the Delphi license will be the cost leverage from Delphi's potential substantial materials purchases from third party vendors. However, should Delphi decide to use different materials in their products, than those used by the Company, there would be less or no cost leverage from Delphi's purchases. Additionally, if General Motors decided to significantly delay commercialization or decided not to commercialize a product, then no such cost leverage would be available. -5- VALTRON TECHNOLOGY PTE. LTD. In March 1994, the Company and Goldtron Ltd. ("Goldtron") signed an agreement to establish a joint venture company in Singapore to manufacture, package and distribute advanced rechargeable solid polymer electrolyte batteries utilizing the Company's solid polymer technologies. Goldtron is a worldwide developer, manufacturer and distributor of electronic and telecommunications products, with extensive distribution channels in the Far East, as well as worldwide distribution capabilities. In light of the Company's refocus on research and development, the Company and Goldtron have put the Joint Venture on hold, awaiting development of a viable battery technology that Valtron may be able to manufacture. Since the joint venture was on hold, Goldtron has licensed a liquid lithium-ion technology and is in the process of commercializing that technology. There can be no assurance that when the Company desires to reactivate the joint venture, that Goldtron will still be interested in pursuing the Company's technology. If the joint venture is reactivated, it is anticipated that the Company will supply the new joint venture company with its proprietary laminates, from which the new joint venture company will manufacture batteries for certain agreed upon applications. The parties will evaluate potential products for marketing by the new joint venture company, including uninterruptable power supplies and personal lighting systems. Other battery applications may also be proposed by the new joint venture company. It should be noted, however, that selection of candidate product opportunities will be delayed by the parties pending further research and development activities by Valence. HANIL VALENCE CO., LTD. In July 1996, the Company, through its Dutch subsidiary, and Hanil Telecom Co., Ltd. ("Hanil Telecom") signed an agreement to establish a joint venture company in Korea to manufacture, package and distribute advanced rechargeable solid polymer electrolyte batteries utilizing the Company's solid polymer technologies for the Korean markets. Hanil Telecom is a subsidiary of Hanil Cement Mfg. Co., Ltd., a major conglomerate in Korea producing a wide variety of products for the Korean market. Hanil Valence Co., Ltd. ("Hanil Valence Co."), the joint venture company, will be located in a Korean facility and has a capitalization of $10 million. All funds are to be provided to the joint venture by Hanil Telecom. Hanil Telecom and the Company, through its Dutch subsidiary, each hold a 50% stake of the company. Additionally, Hanil Telecom will provide $40 million in loan guarantees to Hanil Valence Co. It is anticipated that the Company will supply Hanil Valence Co. with its proprietary laminates, from which Hanil Valence Co. will manufacture batteries for the Korean market. Additionally, Valence will supply the technology, initial equipment and product designs and technical support out of its Northern Ireland facility. Hanil Telecom will market the joint venture's initial products for a period of several years, depending on the market. The Company has no experience in manufacturing in Korea or selling into the Korean marketplace, and is dependent on its joint venture partner in these areas. ALLIANT / VALENCE, L.L.C. The Company and Alliant Techsystems Inc. ("Alliant") signed an agreement in October 1996, to establish a joint venture company utilizing the Company's battery technology and technology obtained under the Company's Bellcore license to develop and manufacture batteries for its U.S. military customers as well as for foreign military sales activities. Alliant / Valence, L.L.C. ("Alliant / Valence"), the joint venture company, will operate a battery fabrication facility at Alliant's Power Sources Center in Horsham, Pennsylvania. The Company is expected to supply the electrode laminate materials that are key to manufacturing high performance batteries. Alliant's Power Sources Center is a major producer of military and aerospace batteries. In January 1997, Alliant announced receipt of a $1.2 million contract award from the U.S. Army Communications Electronics Command ("CECOM") to develop and implement flexible manufacturing processes for lithium ion polymer batteries to be used by the Army. The work will be performed by Alliant / Valence. EVEREADY BATTERY COMPANY In May 1994, the Company signed a joint development and license agreement with Eveready for cross-licensing of all background technology, and certain foreground technology developed during a two-year period. Under the cross-license, Valence has access to Eveready's extensive battery technology portfolio to apply to Valence's advanced polymer batteries, including two patents that Eveready believes cover the Company's use of a manganese oxide, used in the Company's current research prototypes. Eveready has access to Valence's battery technology portfolio, including its proprietary solid state electrolyte, to make advanced polymer round cell batteries. Under certain conditions, including commercialization of round cell batteries by Eveready and meeting of certain requirements to purchase non-round cell -6- batteries from Valence, Eveready may produce non-round cell batteries. In addition, if Eveready commercializes batteries using Valence's background technology, Valence will receive royalties. In August 1994, Eveready, Delphi and Valence amended the Delphi / Valence agreement and the Eveready / Valence agreement to form a joint three-way steering committee for the parties' research and development efforts. Additionally, Valence sublicensed certain proprietary rights, including patents, trade secrets and technical know-how, it had received from each party to the other party, to form a three-way cross-license arrangement. In June 1995, when the Company took the license to the Bellcore technology, the Company was prohibited from sharing information regarding this technology to non-Bellcore licensees. To date, Eveready has not taken a license to the Bellcore technology, and the Company was prohibited from working with Eveready on certain of its research and development efforts. In May 1996, the joint research and development program ended, although the agreement remains in effect. BELL COMMUNICATIONS RESEARCH, INC. In June 1995, the Company entered into a non-exclusive license agreement with Bellcore, to license Bellcore's plastic lithium battery technology. Under this agreement, the Company received rights to patents, trade secrets and know-how developed by Bellcore. The Company is in the process of integrating the Bellcore technology with the Company's lithium polymer technology, and believes that the Bellcore technology provides solutions to several technical problems the Company was facing with regard to its technology. As part of the agreement, which includes license fees and royalty payments, Bellcore received a minority equity position in the Company of 1,500,000 shares of common stock. Additionally, the Company secured the right to grant, and has granted, to Delphi a sublicense to make, have made, use and sell batteries for land, marine, and air vehicles, including electric vehicles, and utility load-leveling applications. RESEARCH AND PRODUCT DEVELOPMENT The Company's research and product development expenses in fiscal years 1997, 1996 and 1995 were approximately, $11,259,000, $8,047,000 and $14,762,000, respectively. During the same periods, the Company received reimbursements for research and development activities and earned development contract revenues of nil, nil and $4,150,000, respectively. The Company's research personnel are divided into two groups: the battery research and development group and the battery engineering group. The Company's battery research and development group works on developing the existing technology, materials and processing methods and developing the Company's battery technology. The 14 people in this group have expertise in chemical engineering, process control, safety, and anode, cathode and electrolyte chemistry and physics, polymer chemistry and radiation chemistry, thin film technologies, coating technologies, and anode, cathode and electrolyte chemistry, formulation, analytical chemistry and material science. The battery engineering group designs products for eventual sale to customers. Its current objectives are to provide prototypes to prospective customers and to improve current designs and manufacturing methods. The principal objectives of this group also include making significant improvements in battery design to increase energy densities and cycling capabilities. The 14 people in this group have expertise in battery design, failure analysis, packaging engineering, process development and manufacturing engineering. MANUFACTURING The Company's research prototype battery is produced using thin film laminate technology. The cathode and anode ("electrodes") matrix layers, and separator matrix layer are manufactured utilizing coating techniques. These matrix layers may be either cut or stamped out into various engineered configurations, which are then laminated together to form cells. These cells can then be stacked and connected to form a functional battery, which is finally packaged and tested. Even if the Company's current research and development activities result in the design of batteries with commercially desirable characteristics, to be successful, the Company will have to manufacture in commercial quantities products with appropriate performance characteristics at competitive costs. At present, the Company has, at its Henderson, Nevada facility, manual coating, laminating, assembly and packaging lines that produce small quantities of prototype -7- batteries for internal testing and customer sampling. For coating the matrix layers, the Company is adapting existing manufacturing technologies and processes. However, further development of manufacturing technology may be delayed pending further research and development activities by the Company and the definition of manufacturable specifications with OEM customers. In September 1993, the Company signed an agreement to open an automated manufacturing plant in Mallusk, Northern Ireland. The Company currently occupies 80,000 square feet, and may add 50,000 square feet at some point in the future. The Company, with its equipment suppliers, has designed and constructed a high volume, automated assembly and packaging lines for the Northern Ireland facility. The Company's high volume manufacturing equipment was specifically designed for use with the Company's prior metallic lithium anode technology. The Company is working with its equipment suppliers to redesign and modify this equipment to work with the Company's new battery technology. The amount of redesign and modification that is required is substantial and there can be no assurance that such redesign and modifications will work or will be cost effective. If all or some of the equipment in Northern Ireland cannot be effectively redesigned and modified, the Company will have to procure new equipment at considerable expense and loss of time. The first automated assembly line has been delivered to the Northern Ireland facility. De-bugging of the line has gone much slower than expected. The line's reliability and yield are predictably low, although the Company believes that it will eventually reach its production goals. The Company expects this line to be qualified in the second half of calendar 1997, but there can be no assurance as to the timing or even the success of this qualification process. Upon qualification of the line, product samples are expected to be sent to potential customers for evaluation. While this line is initially slated to produce the Company's IMP36095 format cells (small telecommunication size), the Company plans to convert this line to produce its larger portable-computer cell format (approximately four inches by four inches). The conversion of the first automated line from the IMP format cell to the computer format cell will be coordinated with the expected summer 1997 delivery of the Company's first high-speed assembly line, which is also tooled to produce the IMP format cells. The Company has been unable to meet its prior schedules regarding delivery, installation, de-bugging and qualification of the Northern Ireland production equipment, due to unforeseen problems. As most of the production equipment is being custom manufactured for the Company, it is possible that further unforeseen problems will develop and cause delay in the Company's current schedules. Many of the manufacturing processes that are being implemented in this production equipment are being scaled up for the first time from the Company's laboratory scale prototype work. It is likely that some of these scaled up processes will require refinement, adjustment or redesign. Any of these possibilities could cause substantial delay in the qualification and/or production start-up of this equipment. Such delays could cause the Company to miss significant sales and marketing opportunities, as potential lithium polymer battery customers are forced to find other vendors to meet their needs. Additionally, even if the Company is able to qualify production equipment in this calendar year, the reliability and/or production yields may not allow the Company to provide sufficient qualification samples to potential customers. From its discussion with potential customers, the Company expects that customers will require an extensive qualification period once the customer receives its first commercial product off a production line. To date, the Company has not provided any such commercial product to any potential customer, and therefore, has not started any product qualification period. COMPETITION Competition in the battery industry is intense. The industry consists of major domestic and international companies, most of which have financial, technical, marketing, sales, manufacturing, distribution and other resources substantially greater than those of the Company. The Company believes that its lithium polymer batteries will compete in most segments of the rechargeable battery market. In the rechargeable battery market, the principal competitive technologies currently marketed are NiCad batteries, lead acid batteries, nickel metal hydride batteries and liquid electrolyte lithium ion batteries. Eveready, Sanyo Electric Co., Ltd., and Matsushita Industrial Co., Ltd., among others, currently manufacture NiCad batteries. Major lead acid manufacturers include Delphi, Johnson Controls, Exide Corp., Portable Energy Products, Inc., Hawker Energy Products and Yuasa Battery Co., Ltd. Manufacturers of nickel metal hydride batteries include Matsushita Industrial Co., Ltd., Toshiba, Eveready, Sanyo Electric Co. and Sony. Duracell Inc. has announced that it intends to -8- manufacture a nickel metal hydride battery. Sony produces a liquid electrolyte lithium ion battery used in Sony's products, and sold to OEMs. Toshiba has announced the formation of a joint venture with Asahi Chemical Industry Company to manufacture liquid electrolyte lithium ion batteries. Toshiba has also announced the availability of a notebook computer incorporating a liquid electrolyte lithium ion battery. In addition, the Company believes that Saft America Inc., Ray O Vac, Matsushita Industrial Co., Ltd., Moli Energy and Sanyo Electric Co., Ltd. have developed liquid electrolyte lithium ion batteries. The capabilities of many of these competing technologies have improved over the past year, which has resulted in a customer perception that the Company's lithium polymer technology may not offer as many advantages as previously anticipated. Sony has consistently been improving the energy density of its lithium ion battery over the last several years. Liquid electrolyte lithium ion batteries offer significant advantages in energy density and cycle life over the principal rechargeable battery technologies currently in use and are expected by the Company to be the emerging technology most competitive to the Company's technology. Sony or other manufacturers are offering liquid electrolyte lithium ion batteries in the marketplace and to OEMs in substantial volumes prior to the Company's commencement of volume production. As OEMs frequently require extensive lead times to design new batteries into their products, the availability of liquid electrolyte lithium ion batteries could materially adversely affect the demand for, and market acceptance and penetration of, the Company's products. In addition to currently marketed technologies, a number of companies are undertaking research in rechargeable battery technologies, including work on lithium polymer technology. Reportedly, as many as nine other companies have taken licenses to Bellcore's battery technology, although their identity has not been announced. Ultralife Batteries, Inc., which acquired Dowty Battery Company in the United Kingdom in 1994, has announced shipment of prototype lithium ion polymer batteries, and has announced plans to begin commercial shipments in 1997. Hydro-Quebec in Canada has signed an agreement with Yuasa Battery Co., Ltd. of Japan for technology transfer and the manufacture of lithium ion polymer batteries. Recently, Hydro-Quebec and Yuasa have announced the introduction of such a rechargeable lithium polymer battery. The Company believes that other research and development activities on lithium polymer batteries are taking place at W. R. Grace & Co., 3M, Alliant, and Ray O Vac in the U.S. and at other companies in Japan. In May 1995, Moltech Corp. announced that it expected to begin production shipments of its lithium polymer batteries in mid-to-late 1996. In October 1992, the United States Advanced Battery Consortium ("USABC") awarded the first $6,300,000 of a three-year $24,500,000 contract to a group consisting of W. R. Grace & Co., Johnson Controls and affiliated laboratories to develop a thin-film lithium polymer bipolar battery utilizing solid polymer electrolytes. At that time, the USABC also awarded a three-year $17,300,000 contract to Saft America Inc. to pursue a bipolar form of the lithium iron disulfide battery first developed at the Argonne National Laboratory. In December 1993, the USABC announced the grant of a two-year C$33,000,000 contract to a partnership formed by 3M, Hydro-Quebec and Argonne for the development of lithium polymer batteries for electric vehicles, for which a second phase was announced in February 1996, for C$27,400,000. The Company also believes that research is underway on zinc air, aluminum air, sodium sulphur, zinc bromine and nickel zinc battery technologies. No assurance can be given that such companies are not developing batteries similar or superior to the Company's lithium polymer batteries. PATENTS AND TRADE SECRETS The Company's ability to compete effectively will depend in part on its ability to maintain the proprietary nature of its technology and manufacturing processes through a combination of patent and trade secret protection, non-disclosure agreements and cross-licensing agreements. As of March 30, 1997, the Company held 144 United States patents and had 71 patent applications pending in the United States. The Company was preparing 100 additional patent applications for filing in the United States. The Company also actively pursues foreign patent protection in countries of interest to the Company. As of March 30, 1997, the Company had been granted 15 foreign patents and had 85 patent applications pending in foreign countries. Patent applications in the United States are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, the Company cannot be certain that it was the first creator of inventions covered by pending patent applications or the first to file patent applications on such inventions. There can be no assurance that the Company's pending patent applications will result in issued patents or that any of its issued patents will afford protection against a competitor. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures which differ from those of the United States, and thus there can be no assurance that foreign patent applications related to issued United States patents will -9- issue. Furthermore, if these patent applications issue, some foreign countries provide significantly less patent protection than the United States. The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. Accordingly, there can be no assurance that patent applications filed by the Company will result in patents being issued or that its patents, and any patents that may be issued to it in the future, will afford protection against competitors with similar technology. In addition, no assurances can be given that patents issued to the Company will not be infringed upon or designed around by others or that others will not obtain patents that the Company would need to license or design around. If existing or future patents containing broad claims are upheld by the courts, the holders of such patents could require companies to obtain licenses. If the Company is found to be infringing third party patents, there can be no assurance that licenses that might be required for the Company's products would be available on reasonable terms, if at all. In addition to potential patent protection, the Company relies on the laws of unfair competition and trade secrets to protect its proprietary rights. The Company attempts to protect its trade secrets and other proprietary information through agreements with customers and suppliers, proprietary information agreements with employees and consultants and other security measures. Although the Company intends to protect its rights vigorously, there can be no assurance that these measures will be successful. REGULATION Prior to the commercial introduction of the Company's batteries into a number of markets, the Company may seek to obtain approval of its products by one or more of the organizations engaged in testing product safety. Such approvals could require significant time and resources from the Company's technical staff and, if redesign were necessary, could result in a delay in the introduction of the Company's products. Pursuant to the regulations of the United States Department of Transportation ("DOT"), a permit is required to transport lithium across state lines. The International Air Transport Association ("IATA") similarly regulates the international shipment of lithium. At this time, lithium ion batteries, because they contain no metallic lithium, are not subject to these regulations and are being freely shipped. However, due to recent safety incidents, including fires, with the shipment of lithium-ion batteries produced by other manufacturers, the DOT has indicated that it is reviewing this position, and there can be no assurance that DOT or IATA will not decide to regulate the shipment of lithium ion batteries in the future. While, in such an event, the Company believes that DOT has granted permits for, and IATA has allowed, the transport of rechargeable lithium-based batteries in the past, there can be no assurance that DOT and IATA would permit the Company's batteries to be shipped or used by the general public, or that changes in such regulations, or in their enforcement, will not impose costly requirements or otherwise impede the transport of lithium. In addition, the DOT and IATA approval processes would require significant time and resources from the Company's technical staff and if redesign were necessary, could delay the introduction of the Company's products. The Nevada Occupational Safety and Health Administration and other regulatory agencies have jurisdiction over the operation of the Company's Henderson, Nevada manufacturing facilities, and similar regulatory agencies have jurisdiction over the Company's Mallusk, Northern Ireland manufacturing facilities. Because of the risks generally associated with the use of lithium, the Company expects rigorous enforcement. No assurance can be given that the Company will not encounter any difficulties in complying with applicable health and safety regulations. Historically, lithium battery manufacturers have suffered significant damage and losses to equipment, facilities and production from fires and other industrial accidents. There can be no assurance that the Company will not sustain such damage and losses. 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 polymer batteries. Although the Company believes its activities conform to current environmental regulations, there can be no assurance that changes in such regulations will not impose costly equipment or other requirements. Any failure by the Company to adequately control the discharge of hazardous wastes could also subject it to future liabilities. -10- HUMAN RESOURCES As of June 2, 1997, the Company had 91 full-time employees, of whom 13 held Ph.D. degrees. Of these employees, 16 are fully subcontracted to Delphi, and 11 are shared with Delphi. Of the total, 14 employees were engaged in research and development, 14 in battery engineering, 45 in operations and 18 in marketing, general and administrative functions. The Company's success will depend in large part on its ability to attract and retain skilled and experienced employees. None of the Company's employees are covered by a collective bargaining agreement, and the Company considers its relations with its employees to be good. In addition to the above employees, as of June 2, 1997, the Company's Dutch subsidiary had 46 employees located in Northern Ireland. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and their ages as of March 30, 1997, are as follows:
Name Age Position - -------------------------- --- ------------------------------------------------------------------------------- Calvin L. Reed 54 Chairman of the Board, President, Chief Executive Officer William J. Masuda 48 Executive Vice President, Worldwide Operations David P. Archibald 56 Vice President and Chief Financial Officer Ralph J. Brodd 68 Vice President, Marketing Robert J. Horning 54 Vice President, Engineering Tibor Kalnoki-Kis 56 Vice President and Chief Technical Officer James T. Larkin 48 Vice President, U.S. Operations Bradley A. Perkins 39 Vice President, General Counsel and Secretary
Mr. Reed joined the Company as President and Chief Operating Officer in July 1991 and became a director of the Company in September 1991. In October 1993, Mr. Reed was also appointed Chairman of the Board and Chief Executive Officer. From April 1987 to June 1991, Mr. Reed was Vice President of Operations at Seagate Technology, Inc. ("Seagate"), a disk drive manufacturer, where he was responsible for the Singapore and the Scotts Valley, California operations. From February 1982 to April 1987, Mr. Reed was Corporate Vice President and General Manager of IMI/Corvus Systems, a disk drive and computer peripheral manufacturer, where he was responsible for manufacturing, engineering, management information systems and corporate facilities operations. Mr. Reed currently serves as a director of one private company. Mr. Masuda joined the Company as Vice President, Operations in April 1992. In August of 1994, Mr. Masuda was made Executive Vice President, Worldwide Operations. From September 1993 to May 1994, Mr. Masuda was an employee and General Manager of Valence Technology Cayman Island Inc., a subsidiary of the Company. From September 1989 to April 1992, Mr. Masuda was President and Chief Executive Officer of Eagleson Industries, Inc., a subcontract manufacturer. During that same period, Mr. Masuda was also Vice President of Operations for Computer Memory Disk, a disk manufacturer and subsidiary of Furukawa Electric. From June 1985 to September 1989, Mr. Masuda was with KSI Disc Products, Inc., a disk manufacturer, as the Vice President of Operations from June 1985 to February 1988 and as President and Chief Operating Officer from February 1988 to September 1989. Mr. Archibald joined the Company as Director of Finance in June 1995 and became Vice President and Chief Financial Officer in February 1996. From February 1989 to May 1995, Mr. Archibald was Finance Director at Staveley Industries plc, a manufacturer of high and low technology products. From June 1986 to December 1988, Mr. Archibald was controller for Handi-Kup, a division of James River Corporation. Dr. Brodd joined the Company as Consulting Staff Scientist and Director of Marketing in April 1992. He briefly left the Company from November 1993 to January 1994, to be Vice President of Technology at Bolder Technology, Inc. In May 1995, he became Vice President, Marketing, in May 1996, he became Vice President, Research and Development and in February 1997, he returned to his previous position as Vice President, Marketing. Prior to joining the Company, Dr. Brodd was Manager, Lithium Power Sources at Gould, Inc., since April 1986. Dr. Brodd holds a Ph.D. from the University of Texas. Mr. Horning joined the Company as Director of Product Engineering in January 1993 and became Vice President, Engineering in September 1993. From April 1987 to January 1993, Mr. Horning was Manager of Engineering at Alliant Techsystems Inc. (formerly a subsidiary of Honeywell Inc.), Power Sources Center, a developer and -11- manufacturer of special purpose liquid electrolyte lithium batteries unrelated to the Company's current lithium polymer battery technology. From March 1984 to April 1987, Mr. Horning was Director of Product Engineering for Duracell Inc., a battery manufacturer. Mr. Horning holds a B.S. in Chemical Engineering and an M.B.A. from Drexel University. Mr. Larkin joined the Company as Director of Manufacturing in September 1992. He left the Company from September 1993 to November 1995, to be Vice President, Operations at RasterOps, through November 1994, and to be an independent consultant. In December 1995, he became Director of U.S. Operations, and in April 1997 he became Vice President, U.S. Operations. Prior to joining the Company, Mr. Larkin was Vice President, Operations at Dastek, a thin film head manufacturer for disk drives, from January 1990 to August 1992. Mr. Larkin joined Anacomp, a magnetic media products manufacturer in August 1983 and was Vice President and General Manager of the Data Disk Division from May 1987 to January 1990. Dr. Kalnoki-Kis joined the Company as Vice President and Chief Technical Officer in February 1997. From October 1978 to January 1997, Dr. Kalnoki-Kis was employed by Gould Electronics, Inc., a wholly owned subsidiary of Japan Energy, Inc. In 1995, he became President and General Manager of the Powerdex Division at Gould. Dr. Kalnoki-Kis holds a Ph.D. from the University of Maine. Mr. Perkins joined the Company as Associate General Counsel in November 1991, and became Secretary in June 1993. In July 1993, Mr. Perkins was appointed Vice President and General Counsel of the Company. From August 1988 to November 1991, Mr. Perkins was Assistant General Counsel and Intellectual Property Counsel with VLSI Technology, Inc., a semiconductor manufacturer. From July 1987 to August 1988, Mr. Perkins was an intellectual property attorney with Hewlett-Packard Company. Each officer serves at the discretion of the Board of Directors. There are no family relationships among any of the directors or officers of the Company. Item 2 Properties The Company's corporate offices and principal laboratories are in a facility which it owns, with approximately 55,000 square feet, located in Henderson, Nevada. The Company also has two facilities in San Jose, California, which it no longer occupies, under a five-year lease commencing May 1, 1993 with Berg & Berg Developers. Carl E. Berg, a director of the Company, is a general partner of Berg & Berg Developers. The Company has sublet, through Berg & Berg Developers, both facilities for the entire term remaining on the lease. Additionally, the Company's Dutch subsidiary owns a manufacturing facility in Mallusk, Northern Ireland, with approximately 80,000 square feet. The Company believes that its existing facilities will be adequate to meet the Company's needs for the foreseeable future. Should the Company need additional space, management believes that the Company will be able to secure it at reasonable rates. Item 3 Legal Proceedings In May 1994, a series of class action lawsuits was filed in the United States District Court for the Northern District of California against the Company and certain of its present and former officers and directors. These lawsuits were consolidated, and in September 1994 the plaintiffs filed a consolidated and amended class action complaint. Following the Court's Orders on motions to dismiss the complaint, which were granted in part and denied in part, the plaintiffs filed an amended complaint in October 1995 ("Complaint"). The Complaint alleges violations of the federal securities laws against the Company, certain of its present and former officers and directors, and the underwriters of the Company's public stock offerings, claiming that the defendants issued a series of false and misleading statements, including filings with the Securities and Exchange Commission, with regard to the Company's business and future prospects. The plaintiffs seek to represent a class of persons who purchased the Company's common stock between May 7, 1992 and August 10, 1994. The Complaint seeks unspecified compensatory and punitive damages, attorney's fees and costs. -12- On January 23, 1996, the Court dismissed, with prejudice, all claims against the underwriters of the Company's public stock offerings, and one claim against the Company and its present and former officers and directors. On April 29, 1996, the Court dismissed with prejudice all remaining claims against a present director and limited claims against a former officer and director to the period when that person was an officer. In December 1996, the Company and the individual defendants filed motions for summary judgment, which the plaintiffs opposed. In January 1997, the Court appointed a Special Master to hear the defendants' motions for summary judgment and submit recommendations to the Court with respect to their disposition. In March 1997, the Special Master held a hearing on the defendants' motions for summary judgment. To date, the Special Master is still considering the motions. At the time the Special Master was appointed, the Court also set a trial date in September, 1997. The plaintiffs have requested a jury trial and are expected to ask for a substantial sum in damages. If the plaintiffs prevail in their demands, damages awarded by the jury may exceed the assets of the Company. The Company believes that it has meritorious defenses and is defending the lawsuit vigorously. Item 4 Submission of Matters to a Vote of Security Holders An annual meeting of the stockholders of the Company was held on January 31, 1997. Company's stockholders elected the Board's nominees as directors by the votes indicated:
Nominee Votes For Votes Withheld - ---------------------- ------------ -------------- Calvin L. Reed 18,048,277 1,286,457 Carl E. Berg 18,046,110 1,288,624 Alan F. Shugart 18,047,477 1,287,257
The selection of Coopers & Lybrand as the Company's independent auditors was ratified with 18,976,410 votes in favor, 199,048 against and 159,276 abstentions. The proposal to amend the 1990 Stock Option Plan to increase the aggregate number of shares of common stock authorized for issuance by 750,000 shares and to add provisions with respect to Section 162(m) of the Internal Revenue Code of 1986, as amended was ratified with 16,598,945 votes in favor, 2,285,725 against and 206,014 abstentions. The proposal to adopt the 1996 Non-Employee Directors' Stock Option Plan and the issuance of 250,000 shares of common stock under the plan was ratified with 15,021,733 votes in favor, 3,827,938 against and 241,013 abstentions. -13- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters Since May 7, 1992, Valence's common stock, par value $0.001, has been traded on the National Association of Securities Dealers Automated Quotation National Market Systems (NASDAQ/NMS) under the symbol "VLNC." The high and low closing sales prices during each quarter for Valence common stock on NASDAQ/NMS for fiscal years 1996 and 1997 were as follows:
High Low --------- --------- Fiscal 1996 Quarter ended June 25, 1995 $ 4 7/16 $ 1 3/4 Quarter ended September 24, 1995 6 1/2 3 Quarter ended December 24, 1995 6 1/4 3 3/4 Quarter ended March 31, 1996 5 7/8 3 3/4 Fiscal 1997 Quarter ended June 30, 1996 $ 7 5/16 $ 4 1/8 Quarter ended September 29, 1996 6 1/16 3 5/8 Quarter ended December 29, 1996 5 7/8 4 1/8 Quarter ended March 30, 1997 7 4 3/16
The approximate number of record holders of the Company's Common Stock as of June 2, 1997, was 753. Valence has not paid any cash dividends since its inception and does not anticipate paying cash dividends in the foreseeable future. In June 1995, the Company entered into a non-exclusive license agreement with Bellcore, to license Bellcore's plastic lithium battery technology. Under this agreement, the Company received rights to patents, trade secrets and know-how developed by Bellcore. As part of the agreement, which includes license fees and royalty payments, Bellcore received a minority equity position in the Company of 1,500,000 shares of common stock. The Company issued such shares in reliance on Rule 506 of the Securities Act. -14- Item 6 Selected Consolidated Financial Data VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (COMPANIES IN THE DEVELOPMENT STAGE) SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share amounts) ---
Period from March 3, 1989 (date of inception) to March 30, March 30, March 31, March 26, March 27, March 28, 1997 1997 1996 1995 1994 1993 ------------- ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenue: Research and development contracts $ 21,605 $ - $ - $ 4,150 $ 7,295 $ 6,385 ------------- ----------- ----------- ----------- ----------- ----------- Costs and expenses: Research and development 69,483 11,259 8,047 14,762 21,465 10,262 Marketing 2,677 205 486 705 767 514 General and administrative 32,363 6,168 5,614 6,269 6,013 5,211 Write-off of in-process technology(1) 8,212 6,064 Investment in Danish subsidiary(2) 3,489 Special charges 18,872 18,872 ------------- ----------- ----------- ----------- ----------- ----------- Total costs and expenses 135,096 17,632 20,211 40,608 28,245 15,987 ------------- ----------- ----------- ----------- ----------- ----------- Operating loss (113,491) (17,632) (20,211) (36,458) (20,950) (9,602) Interest income 13,727 2,558 3,549 3,606 2,547 1,435 Interest expense (3,762) (814) (931) (777) (250) (296) Net loss $(103,526) $ (15,888) $ (17,593) $ (33,629) $ (18,653) $ (8,463) ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Net loss per share - $ (0.73) $ (0.83) $ (1.68) $ (1.08) $ (0.63) ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Shares used in computing net loss per share(3) - 21,684 21,261 20,059 17,259 13,502 ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- March 30, March 31, March 26, March 27, March 28, 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA: Cash and cash equivalents $ 27,832 $ 24,569 $ 16,602 $ 26,188 $ 37,053 Restricted cash 1,875 Investments 9,556 32,282 57,869 71,312 31,779 Working capital 22,105 41,281 45,011 48,254 55,935 Total assets 55,526 70,247 92,007 121,036 77,236 Long-term debt 5,217 6,169 8,811 7,258 1,785 Accumulated deficit (103,526) (87,638) (70,045) (36,416) (17,763) Total stockholders' equity 38,349 53,010 66,784 99,629 69,010
- ------------------------------ (1) See Note 11 of Notes to Consolidated Financial Statements (2) See Note 12 of Notes to Consolidated Financial Statements (3) See Note 2 of Notes to Consolidated Financial Statements -15- Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The Company was founded in 1989 to develop and commercialize advanced rechargeable batteries based on lithium and polymer technologies. Since its inception, the Company has been a development stage company primarily engaged in acquiring and developing its initial technology, manufacturing limited quantities of prototype batteries, recruiting personnel, and acquiring capital. To date, other than insubstantial revenues from limited sales of prototype batteries, the Company has not received any significant revenues from the sale of products. Substantially all revenues to date have been derived from a research and development contract with the Delphi Automotive Systems Group of General Motors Corporation ("Delphi" - formerly Delco-Remy Division). The Company has incurred cumulative losses of $103,526,000 from its inception to March 30, 1997. In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section as well as in the section entitled "Business." The following discussion should be read in conjunction with the five-year summary of selected financial data and the Company's consolidated financial statements and the notes thereto. All references to years represent fiscal years unless otherwise noted. RESULTS OF OPERATIONS FISCAL YEARS ENDED MARCH 30, 1997 (FISCAL 1997), MARCH 31, 1996 (FISCAL 1996) AND MARCH 26, 1995 (FISCAL 1995) During fiscal 1997, the Company continued development activities under a research and development agreement with Delphi. That phase of a multi-year agreement, which provided for the aggregate funding of up to $20,000,000, was completed during the quarter ending September 25, 1994. Payments were generally made in accordance with the achievement of certain milestones. No revenues were recognized during fiscal 1997 and fiscal 1996. Revenues of $4,150,000 were recognized during fiscal 1995 regarding the completed Delphi agreement. In September, 1994, the Company and Delphi signed a new five-year agreement to combine efforts in developing the Company's rechargeable solid state lithium polymer battery technology. Under the agreement, Delphi and the Company combined their research and development activities in a new facility in Henderson, Nevada. The new facility is owned by the Company, with Delphi paying a fee of $50,000 per month over the five-year term of the new agreement for access to the Company's research and development (of which $600,000 was recognized during fiscal 1997 as an offset to research and product development expenses). In addition, Delphi is paying a majority of the facility's operating costs over the term of the new five-year agreement. The Company is treating both of these payments as an offset to expenses. In the first quarter of fiscal 1995, the Company announced its intent to refocus its efforts on research and product development and to slowdown completion of its volume manufacturing capacities. In the second quarter of fiscal 1995, the Company also announced its intent to reduce its efforts related to commercialization of a battery containing a lithium metal anode and instead concentrate on the development of a lithium polymer battery containing an alternate lithium anode. The Company produced significant cost savings as a result of these activities. Research and product development expenses were $11,259,000, $8,047,000 and $14,762,000 during fiscal 1997, 1996 and 1995, respectively. The increase in fiscal 1997 versus fiscal 1996 reflects the Company's increased efforts to commercialize a product in fiscal 1998 or as soon thereafter as practicable. The decrease between fiscal 1995 and fiscal 1996 was primarily due to cost sharing with Delphi, reductions in personnel and related costs concurrent with the Company's decision to slow completion of its volume manufacturing capacities and refocus on other aspects of research and product development. -16- Marketing expenses were $205,000, $486,000 and $705,000 for fiscal 1997, 1996 and 1995, respectively. The comparative decrease from fiscal 1997 and 1996 to 1995 is the result of a decrease in payroll, travel and relocation expenses. General and administrative expenses increased to $6,168,000 in fiscal 1997 from $5,614,000 in fiscal 1996 and is comparable to the $6,269,000 spent in fiscal 1995. Fiscal 1997 increase over fiscal 1996 was due to increased legal costs associated with the shareholder class action lawsuit. The fiscal 1995 to 1996 decrease reflects a reduction in spending consistent with the research and development redirection as well as cost sharing with Delphi. Associated with the fiscal 1995 refocus on research and development, special charges in fiscal 1995 were $18,872,000 ($0.94 per share) for which no tax benefit is currently available. Such charges were made primarily to write-down equipment the Company had acquired, or is contractually committed to acquire, and which was originally intended for use in manufacturing batteries utilizing a lithium metal anode. An additional component of the special charges was for facilities consolidation costs. During fiscal 1996, the Company incurred a one-time charge to operations of $6,064,000 ($0.28 per share) for the write-off of in-process technology related to the Technology Transfer Agreement with Bellcore. Technological feasibility of the in-process technology acquired had not been established and there was no alternate future use. Interest income was $2,558,000, $3,549,000 and $3,606,000 in fiscal 1997, 1996 and 1995, respectively. This decrease is a result of lower interest rates and fewer funds available for investment during fiscal 1997 due to ongoing losses. Interest expense decreased to $814,000 from $931,000 and $777,000 during fiscal 1997, 1996 and 1995, respectively. This decrease is a result of a reduction in long-term debt associated with capital equipment leases. The increase in fiscal 1996 versus fiscal 1995 is the result of additional long-term debt acquired in fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES The Company used $9,971,000 net cash for operating activities during fiscal 1997, whereas it used $12,134,000 during fiscal 1996 and $18,836,000 during fiscal 1995, a decrease between fiscal 1997 and fiscal 1996 of $2,163,000. This net decrease primarily resulted from a reduction in losses and the write-off of the Bellcore technology acquisition. Net cash used in fiscal 1996 decreased by $8,702,000 from fiscal 1995 as the result of special charges in fiscal 1995 partially offset by acquisition of the Bellcore technology in fiscal 1996. During fiscal 1997, the Company provided $15,537,000 net cash from investing activities compared to a net provision of $23,281,000 during fiscal 1996, and $4,599,000 provided during fiscal 1995, a decrease of $7,744,000 between fiscal 1997 and 1996. The decrease was a result of lower losses and shortening of maturities to support fiscal 1998 capital expenditure budgets. There were $18,916,000 net maturities during fiscal 1997, as compared to $25,587,000 net maturities during fiscal 1996. In addition, capital expenditures increased $1,000,000 during fiscal 1997, as compared to fiscal 1996. The Company used $1,399,000 in fiscal 1997 as compared to $2,679,000 net cash from financing activities during fiscal 1996, versus providing $4,520,000 during fiscal 1995. This decrease resulted from reductions in long-term debt. In fiscal 1995 the Company provided funds by increasing its long-term borrowings by $4,942,000. As a result of the above, the Company had a net increase in cash and cash equivalents of $3,263,000 during fiscal 1997 and $7,967,000 during fiscal 1996, whereas it had a net decrease of $9,586,000 during fiscal 1995. The Company's $2,000,000 working capital line of credit is available through March, 1998. The working capital line collateralizes outstanding letters of credit, which reduce borrowings otherwise available under the line. As of March 30, 1997, there was one outstanding letter of credit in the amount of $25,000. During fiscal 1994, the Company, through its Dutch subsidiary, signed an agreement with the Northern Ireland Industrial Development Board (the "IDB") to open an automated manufacturing plant in Northern Ireland in exchange for capital and revenue grants from the IDB. The Company has also received offers from the IDB to receive additional grants. The grants available under the agreement and offers, for an aggregate of up to L27,555,000, generally become -17- available over a five-year period through October 31, 2001. As of March 30, 1997, the Company had received grants aggregating L4,035,000 reducing remaining grants available to L23,520,000 (US$38,373,000 as of March 30, 1997). As a condition to receiving funding from the IDB, the subsidiary must maintain a minimum of L12,000,000 in debt or equity financing from the Company. Aggregate funding under the grants is limited to L4,035,000 until the Company has recognized $4,000,000 in aggregate revenue from the sale of its batteries produced in Northern Ireland. Given that the Company has no agreements to supply batteries using its current technology, there are no assurances that the Company will be able to meet the agreement's revenue test. The amount of the grants available under the agreement and offers is primarily dependent on the level of capital expenditures made by the Company. Substantially all of the funding received under the grants is repayable to the IDB if the subsidiary is in default under the agreement and offers, which includes the permanent cessation of business in Northern Ireland. Funding received under the grants to offset capital expenditures is repayable if related equipment is sold, transferred or otherwise disposed of during a four year period after the date of grant. In addition, a portion of funding received under the grants may also be repayable if the subsidiary fails to maintain specified employment levels for the two year period immediately after the end of the five year grant period. The Company has guaranteed the subsidiary's obligations to the IDB under the agreement. There can be no assurance that the Company will be able to meet the requirements necessary for it to receive and retain grants under the IDB agreement and offers. The Company expects that its existing funds as of March 30, 1997, together with the interest earned thereon, will be sufficient to fund the Company's operations through calendar 1997. The Company anticipates that it may need substantial additional funds in the future (possibly as early as the third or fourth quarter of fiscal 1998) for capital expenditures, research and product development, marketing and general and administrative expenses and to pursue joint venture opportunities. The Company's cash requirements, however, may vary materially from those now planned because of changes in the Company's operations, including changes in OEM relationships or market conditions. There can be no assurance that funds for these purposes, whether from equity or debt financing agreements with strategic partners or other sources, will be available on favorable terms, if at all. Forward looking statements involve a number of risks and uncertainties including, but not limited to, market acceptance, changing economic conditions, risks in product and technology development, effect of the Company's accounting policies and other risk factors detailed in the Company's Securities and Exchange Commission filings. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and is effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 requires restatement of all prior-period earnings per share data presented after the effective date. SFAS 128 will not have a material impact on the Company's financial position, results of operations or cash flows. Item 8 Financial Statements and Supplementary Data The Company's Consolidated Financial Statements and notes thereto appear on pages F-1 to F-18 of this Form 10-K Annual Report. Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures There have been no changes in, or disagreements with accountants, on accounting and financial disclosures. -18- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART III Item 10 Directors of the Registrant The names of the Company's directors and certain information about them are set forth below; such information for executive officers of the Company is contained in Part I, Item 1 of the report. The directors of the Company and their ages as of June 2, 1997, are as follows:
Name Age Position held with the Company - -------------------------- --- ------------------------------------------------------------------------------- Calvin L. Reed 54 Chairman of the Board, President, Chief Executive Officer Carl E. Berg(1)(2) 59 Director Alan F. Shugart(1)(2) 66 Director
- ------------------------ (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Mr. Reed joined the Company as President and Chief Operating Officer in July 1991 and became a director of the Company in September 1991. In October 1993, Mr. Reed was also appointed Chairman of the Board and Chief Executive Officer. From April 1987 to June 1991, Mr. Reed was Vice President of Operations at Seagate Technology, Inc. ("Seagate"), a disk drive manufacturer, where he was responsible for the Singapore and the Scotts Valley, California operations. From February 1982 to April 1987, Mr. Reed was Corporate Vice President and General Manager of IMI/Corvus Systems, a disk drive and computer peripheral manufacturer, where he was responsible for manufacturing, engineering, management information systems and corporate facilities operations. Mr. Reed currently serves as a director of one private company. Mr. Berg helped found the Company and has served on the Board of Directors since September 1991. For more than the past five years, Mr. Berg has been a major Silicon Valley industrial real estate developer and a private venture capital investor. Mr. Berg also serves as a director of Integrated Device Technology, Inc., Videonics, Inc., and Systems Integrated Research. Mr. Shugart joined the Company as a director in March 1992. Mr. Shugart has been the Chief Executive Officer and a director of Seagate since its inception in 1979. Mr. Shugart also served as Seagate's President from 1979 to 1983 and from September 1991 to the present. Additionally, Mr. Shugart served as Chairman of the Board of Seagate from 1979 until September 1991, and from October 1992 to the present. Mr. Shugart currently serves as a director of Sandisk Corporation. BOARD COMMITTEES AND MEETINGS During the fiscal year ended March 30, 1997, the Board of Directors held five meetings. The Board has an Audit Committee, a Compensation Committee and a Non-Officer Stock Option Administration Committee. The Board at large serves as the Nominating Committee. The Audit Committee meets with the Company's independent accountants to review the results of the annual audit and discuss the financial statements; recommends to the Board the independent accountants to be retained and receives and considers the accountants' comments as to controls, adequacy of staff and management performance and procedures in connection with audit and financial controls. The Audit Committee did not meet during the 1997 fiscal year. It currently is composed of two non-employee directors: Messrs. Berg and Shugart. The Compensation Committee makes recommendations concerning salaries and incentive compensation, awards stock options to employees and consultants under the Company's stock option plans and otherwise determines compensation -19- levels and performs such other functions regarding compensation as the Board may delegate. The Compensation Committee is composed of two non-employee directors: Messrs. Berg and Shugart. It met three times during fiscal 1997. The Non-Officer Stock Option Administration Committee administers the Company's 1990 Stock Option Plan only for non-officer employees and makes grants to such employees not in excess of 14,500 shares to any individual. All option grants in excess of this limit and all grants to officers must be approved by the Compensation Committee or the Board at large. The Non-Officer Stock Option Committee is composed of Mr. Reed. During the fiscal year ended March 30, 1997, each Board member attended 75% or more of the aggregate of the meetings of the Board and of the committees on which he served, held during the period for which he was a director or committee member, respectively. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by Commission regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended March 30, 1997, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with. Item 11 Executive Compensation COMPENSATION OF DIRECTORS The Company's non-employee directors receive no cash compensation, but are eligible for reimbursement for their expenses incurred in connection with attendance at Board meetings in accordance with Company policy. Directors who are employees of the Company do not receive separate compensation for their services as directors, but are eligible to receive stock options under the Company's 1990 Stock Option Plan (the "1990 Plan"). Each non-employee director of the Company also receives stock option grants pursuant to the 1996 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Only non-employee directors of the Company or an affiliate of such directors (as defined in the Code) are eligible to receive options under the Directors' 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. On each anniversary of the director's election to the Board, the director will receive an annual stock option in the amount of 100,000 shares less the total amount of unvested shares remaining in the initial option and any annual options previously granted. The exercise price for this new option will be the fair market value on the day it is granted. This annual option will vest quarterly over a three year period. A director who had been granted an option prior to the adoption of the Directors' Plan will start receiving annual grants on the anniversary date of that director's prior grant. 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, and then receive annual options on the anniversary dates of that grant. No options granted under the Directors' Plan may be exercised until the plan is approved by the stockholders. During the last fiscal year, the Company granted options covering 20,000 shares to Carl Berg, at an exercise price per share of $5.94, and 46,668 shares to Alan Shugart, at an exercise price per share of $6.75, non-employee directors of the Company, under the Directors' Plan. The fair market value of such Common Stock on the dates of grant was $5.94 and -20- $6.75, respectively, per share (based on the closing sales price reported in the NASDAQ National Market for the date of grant). As of June 2, 1997, no options had been exercised under the Directors' Plan. EXECUTIVE COMPENSATION Executive officers are eligible to receive stock options under the 1990 Plan. In June 1996, the Compensation Committee of the Board passed a resolution which provides for the automatic granting of stock options to the officers of the Company. According to this resolution, each quarter, each officer receives a grant of options under the 1990 plan in an amount necessary to keep the amount of unvested options held by that officer at a predetermined level. These levels are 360,000 shares for the CEO, 180,000 shares for an executive vice president, and 120,000 shares for a vice president. The resolution was effective when passed, and the Company's officers have been receiving such grants since that time. The resolution further provided that in the event the Company ever grants a bonus to any officer, that one half of any such bonus would be held by the Company for use by the officer only for exercising his or her stock options. To date, no bonuses have been granted to any officer. -21- The following table shows for the fiscal years ended March 30, 1997, March 31, 1996 and March 26, 1995, certain compensation awarded or paid to, or earned by the Company's Chief Executive Officer and its other four most highly compensated executive officers at March 30, 1997 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
Long Term Annual Compensation Compensation Awards --------------- Other ------------ All Other Fiscal Salary Bonus Annual Options(1) Compensation Name and Principal Position Year ($) ($) ($) (#) ($) - ---------------------------------------- ------ -------- ----- --------- ------------ ------------ Calvin L. Reed 1997 250,000 -- -- 297,630 7,540(2) President and Chief 1996 250,000 -- -- 30,000 4,854(2,4) Executive Officer 1995 252,115 -- -- 150,000 49,923(2,3) William J. Masuda 1997 175,000 -- -- 136,550 -- Executive Vice President, 1996 175,000 -- -- -- 476(4) Worldwide Operations 1995 165,084 -- -- 100,000 -- R. Joseph Horning 1997 145,600 -- -- 44,442 -- Vice President, 1996 145,600 -- 12,500(5) 10,000 48,531(3) Engineering 1995 141,241 -- -- 136,000 -- Ralph J. Brodd 1997 134,834 -- 16,667(5) 59,017 2,084(4) Vice President, 1996 127,404 -- 13,035(5) 80,000 28,331(3,4) Marketing 1995 109,039 -- -- 15,000 -- Bradley A Perkins 1997 130,000 -- 13,520(5) 69,117 -- Vice President and 1996 130,000 -- 11,898(5) 10,000 7,679(3,4) General Counsel 1995 128,269 -- -- 97,000 --
- ------------------------ (1) The Company has no stock appreciation rights ("SARs"). (2) Life insurance premium payments. (3) Relocation expenses (moving expenses, tax gross-up payments related to sale of home, meals, relocation payment, travel expenses, etc.) related to the Company's move to Henderson, Nevada. (4) Patent award payments. Patent awards are granted to employees of the Company for inventions made by employees for which they have submitted invention disclosures to the Company, for which the Company has filed a patent application with the United States Patent and Trademark Office, or for which a patent has been issued by the United States Patent and Trademark Office. (5) Amounts forgiven under loans provided to the Named Executive Officer by the Company. -22- STOCK OPTION GRANTS AND EXERCISES The following tables show for the fiscal year ended March 30, 1997, certain information regarding options granted to, exercised by, and held at year end by the Named Executive Officers: OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable ---------------------------- Value Percent of at Assumed Annual Rates Total of Stock Price Options Appreciation Granted to for Option Term(3) Options Employees Exercise ------------------------ Granted in Fiscal Price Expiration Name (#)(1) Year(2) ($/Sh) Date 5% ($) 10% ($) - -------------------------------------------------- --------- ----------------- ----------- ----------- ---------- ------------ Calvin L. Reed 232,500 20.7% 5.88 6/7/06 859,762 2,178,804 11,250 1.0% 5.00 7/1/06 35,376 89,648 25,782 2.3% 5.88 9/30/06 95,339 241,608 28,098 2.5% 4.19 12/30/06 74,041 187,633 William J. Masuda 96,250 8.6% 5.88 6/7/06 355,923 901,978 5,625 0.5% 5.00 7/1/06 17,688 44,824 16,641 1.5% 5.88 9/30/06 61,537 155,946 18,034 1.6% 4.19 12/30/06 47,521 120,427 R. Joseph Horning 21,600 1.9% 5.88 6/7/06 79,875 202,418 3,250 0.3% 5.00 7/1/06 10,220 25,898 9,400 0.8% 5.88 9/30/06 34,760 88,089 10,192 0.9% 4.19 12/30/06 26,857 68,060 Bradley A. Perkins 42,950 3.8% 5.88 6/7/06 158,825 402,493 3,250 0.3% 5.00 7/1/06 10,220 25,898 18,285 1.6% 5.88 9/30/06 67,616 171,352 4,632 0.4% 4.19 12/30/06 12,206 30,932 Ralph Brodd 36,000 3.2% 5.88 6/7/06 133,124 337,363 3,250 0.3% 5.00 7/1/06 10,220 25,898 9,000 0.8% 5.88 9/30/06 33,281 84,341 10,767 1.0% 4.19 12/30/06 28,372 71,900
- ------------------------ (1) Options granted in fiscal 1997 generally vest over four years, with 1/16 of the shares vesting each quarter and with full vesting occurring on the fourth anniversary date. (2) Based on an aggregate of 1,125,558 options granted to employees, including the Named Executive Officers, in fiscal year 1997. (3) 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 annual 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. -23- The following table shows the number and value of the unexcercised options held by each of the Named Executive Officers on March 30, 1997: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUES
Value of Unexercised Number of Unexercised In-the-Money Options Options at FY-End (#) at FY-End ($)(1) ------------------------ ---------------------- Shares Acquired on Value Exercise Realized Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------- --------------- ----------- ----------- ----------- --------- ----------- Calvin L. Reed 0 0 626,084 360,000 3,434,889 513,965 William J. Masuda 0 0 150,711 180,000 679,782 289,625 R. Joseph Horning 0 0 81,271 120,000 250,822 288,793 Bradley A. Perkins 0 0 90,539 120,000 342,134 228,873 Ralph Brodd 0 0 68,707 120,000 295,029 300,376
- ------------------------ (1) Based on the fair market value of the Company's Common Stock as of March 30, 1997 ($6.75) minus the exercise price of the options multiplied by the number of shares underlying the option. EMPLOYMENT AGREEMENTS In May 1991, the Company entered into an agreement with Mr. Reed pursuant to which Mr. Reed joined the Company as its President and Chief Operating Officer for an annual salary of $250,000. The Company also granted Mr. Reed an option to purchase 700,000 shares of common stock at an exercise price of $0.25 per share, with 20% vested immediately and the remainder vesting over a four-year period. In January 1993, the Company entered into an employment agreement with Mr. Horning pursuant to which the Company retained Mr. Horning as its Director of Product Engineering for an annual salary of $125,000. The Company granted Mr. Horning an option to purchase 22,000 shares of common stock at an exercise price of $22.75 per share, vesting over a five-year period. In addition, the Company agreed to pay Mr. Horning's relocation expenses. The Company also loaned Mr. Horning $45,000 pursuant to a loan agreement, in which the Company forgave the loan at a rate of $15,000 per year of his employment. Mr. Horning became a Vice President of the Company in September 1993. In February 1997, the Company entered into an employment agreement with Dr. Kalnoki-Kis pursuant to which the Company retained Dr. Kalnoki-Kis as its Vice President and Chief Technical Officer at an annual salary of $175,000. The Company granted Dr. Kalnoki-Kis an option to purchase 150,000 shares of common stock at an exercise price of $5.88 per share, vesting over a four-year period. In addition, the Company agreed to pay Dr. Kalnoki-Kis's relocation expenses. The Company also loaned Dr. Kalnoki-Kis $200,000 pursuant to a loan agreement, in which the Company will forgive the principle and interest over the first four years of his employment. -24- OPTION REPRICING INFORMATION The following table shows certain information concerning option repricings received by any Named Officer during the last ten years. TEN YEAR OPTION/SAR REPRICINGS
Number Length of of Original Options/ Market Price Option Term SARs of Stock at Exercise Remaining at Repriced Time of Price at Time New Date of or Repricing or of Repricing Exercise Repricing or Amended Amendment or Amendment Price Amendment Name Date (#) ($) ($) ($) (years) - ----------------------------------------------- --------- ----------- ------------- ------------- ----------- --------------- R. Joseph Horning 01/18/93 22,000 11.50 22.75 11.50 4.75
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year ended March 30, 1997, the Compensation Committee consisted of Messrs. Shugart and Berg. In July 1990, Mr. Berg loaned the Company $520,000 for a seven year term at an interest rate of 10% per annum and the Company issued a warrant exercisable for an aggregate of 130,000 shares of common stock to Mr. Berg. This warrant was exercised on March 31, 1992 at $4.40 per share by cancellation of indebtedness under such loan. From July 1990 to March 1992 the Company issued additional warrants exercisable for an aggregate of 1,222,825 shares of common stock to Baccarat Electronics, Inc., an entity affiliated with Mr. Berg, at an exercise price of $4.00 per share, in consideration for a loan agreement in which such entity agreed to lend the Company an aggregate of up to $5,000,000 (the "Loan Agreement"). Under the terms of the Loan Agreement, the Company executed a promissory note payable in full in July 1995 with 9% interest per annum through July 1993 and the prime rate thereafter. In addition, to secure its obligations under the promissory note, the Company granted to the entity a security interest in all of the Company's assets. In August 1992, the Company entered into an amendment to the Loan Agreement which allows the Company to borrow, prepay and re-borrow up to the full $5,000,000 principal under the promissory note on a revolving basis and provided that the lender will subordinate its security interest to other lenders when the loan balance is at zero. In September 1992, the Company paid in full all interest and principal outstanding under the Loan Agreement. As of March 30, 1997, the Company had no outstanding balance under the Loan Agreement. The Company had two facilities in San Jose, California, which it no longer occupies, under a five-year lease commencing May 1, 1993 with Berg & Berg Developers. Carl E. Berg, a director of the Company, is a general partner of Berg & Berg Developers. The Company has sublet, through Berg & Berg Developers, both facilities for the entire term remaining on the lease, thereby releasing the Company from any further obligation. In September 1990, the Company issued an aggregate of 500,000 shares of common stock to four stockholders affiliated with the then majority holder of Innocell in exchange for payments aggregating $5,000. As partial consideration for the settlement of the Company's disagreements with the holders of the other 55% interest in Innocell and with the four stockholders, in March 1992, Mr. Berg obtained for a cash payment of $131,250 irrevocable options to repurchase an aggregate of 375,000 shares of common stock from the four stockholders exercisable at $5.00 per share. Because of certain Danish tax considerations, the four stockholders would not grant the options to the Company. Mr. Berg agreed to hold such options for the benefit of the Company. The Company exercised such options in October 1993 for an aggregate of $1,875,000. The Company has reimbursed Mr. Berg for all of his costs (including the $131,250 option payment) and indemnified him for any liability incurred in connection with this transaction. In connection with the acquisition of the options from the four stockholders, Mr. Berg obtained letters of credit aggregating $1,875,000 to support the option exercise price. The Company has paid $1,875,000 as substitute collateral for the collateral made available by Mr. Berg. -25- In March 1992, in connection with the acquisition of the remaining interests in its Danish subsidiary, the Company borrowed an additional $1,100,000 from Mr. Berg at the prime rate plus 2%, payable on the earlier of September 30, 1992 or 10 days after the closing of an underwritten public offering. Such amount plus interest was repaid in May 1992. During fiscal year 1993, the Company purchased $134,000 of computer equipment from Actrix Computers, Inc. During fiscal year 1994, the Company purchased an additional $114,129 of computer equipment from Actrix Computers, Inc. Mr. Berg is President and substantial owner of Actrix Computers, Inc. The Company believes that the prices it has paid for the computer equipment are comparable to prices generally available in the market. Item 12 Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding the ownership of the Company's common stock as of June 2, 1997 by: (i) each director and nominee for director; (ii) each of the executive officers in the Summary Compensation table; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent (5%) of its common stock. BENEFICIAL OWNERSHIP (1)
Beneficial Owner Number of Shares Percent of Total - ----------------------------------------------------------------------- ---------------- ----------------- Carl E. Berg(2) 4,069,489 17.59% 10050 Bandley Drive, Cupertino, CA 95014 Bell Communications Research, Inc. 1,500,000 6.85% 445 South Street, Morristown, NJ 07960 Calvin L. Reed(3) 658,507 2.92% William J. Masuda(3) 171,422 * Alan F. Shugart(3) 137,224 * Bradley A. Perkins(3) 101,815 * R. Joseph Horning(3) 92,979 * Ralph Brodd(3) 80,518 * All directors and executive officers as a group (10 persons)(4) 5,404,819 22.10%
- ------------------------ * Less than one percent (1%) (1) This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13G filed with the Securities and Exchange Commission (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 21,892,543 shares of common stock outstanding on June 2, 1997, adjusted as required by rules promulgated by the Commission. (2) Includes 150,000 shares held by Mr. Berg; 21,667 shares issuable upon exercise of options held by Mr. Berg that are exercisable within 60 days of June 2, 1997; 1,222,825 shares issuable upon exercise of warrants held by Baccarat Electronics, Inc., of which Mr. Berg is President and principal stockholder; 2,499,997 shares held by Baccarat Development Partnership for which Mr. Berg serves as the President of the corporate general partner; 105,000 shares held by Berg & Berg Enterprises, Inc. and 70,000 shares held by Berg & Berg Profit Sharing Plan U/A 1/1/80 FBO Carl E. Berg Basic Transfer Carl E. Berg, Trustee. Does not include 80,000 shares held in trust for Mr. Berg's children. Mr. Berg is not a trustee of the trust and he disclaims beneficial ownership of such shares. (3) All shares are issuable upon exercise of options that are exercisable within 60 days of June 2, 1997. (4) Includes 1,222,825 shares issuable upon exercise of warrants and 1,341,997 issuable upon exercise options. -26- Item 13 Certain Transactions In July 1992, the Company entered into a relocation loan agreement with Mr. Masuda, Executive Vice President, Worldwide Operations of the Company pursuant to which the Company agreed to lend up to $100,000 at an annual interest rate of 6% due and payable on December 31, 1992. Mr. Masuda repaid the loan in July 1993. See "Compensation Committee Interlocks and Insider Participation" for a description of certain transactions between the Company and Mr. Berg. LIMITATION OF LIABILITY AND INDEMNIFICATION The Company's Bylaws provide that the Company will indemnify its directors and executive officers and may indemnify its other officers, employees and other agents to the fullest extent permitted by Delaware law. The Company is also empowered under its Bylaws to enter into indemnification contracts with its directors and officers and to purchase insurance on behalf of any person whom it is required or permitted to indemnify. Pursuant to this provision, the Company has entered into indemnity agreements with each of its directors and officers. In addition, the Company's Second Restated Certificate of Incorporation provides that to the fullest extent permitted by Delaware law, the Company's directors will not be personally liable for monetary damages for breach of the directors' fiduciary duty of care to the Company and its stockholders. This provision in the Certificate of Incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available under Delaware law. Each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of law, for acts or omissions that the director believes to be contrary to the best interests of the Company or its stockholders, for any transaction from which the director derived an improper personal benefit, for acts or omissions involving a reckless disregard for the director's duty to the Company or its stockholders when the director was aware or should have been aware of a risk of serious injury to the Company or its stockholders, for acts or omissions that constitute an unexecuted pattern of inattention that amounts to an abdication of the director's duty to the Company or its stockholders, for improper transactions between the director and the Company and for improper distributions to stockholders and loans to directors and officers. This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. The Company has obtained directors and officers liability insurance with coverage of $2,000,000. In May 1994, a series of class action lawsuits was filed in the United States District Court for the Northern District of California against the Company and certain of its present and former officers and directors. These lawsuits were consolidated, and in September 1994 the plaintiffs filed a consolidated and amended class action complaint. Following the Court's Orders on motions to dismiss the complaint, which were granted in part and denied in part, the plaintiffs filed an amended complaint in October 1995 ("Complaint"). The Complaint alleges violations of the federal securities laws against the Company, certain of its present and former officers and directors, and the underwriters of the Company's public stock offerings, claiming that the defendants issued a series of false and misleading statements, including filings with the Securities and Exchange Commission, with regard to the Company's business and future prospects. The plaintiffs seek to represent a class of persons who purchased the Company's common stock between May 7, 1992 and August 10, 1994. The Complaint seeks unspecified compensatory and punitive damages, attorney's fees and costs. On January 23, 1996, the Court dismissed, with prejudice, all claims against the underwriters of the Company s public stock offerings, and one claim against the Company and its present and former officers and directors. On April 29, 1996, the Court dismissed with prejudice all remaining claims against a present director and limited claims against a former officer and director to the period when that person was an officer. In December 1996, the Company and the individual defendants filed motions for summary judgment, which the plaintiffs opposed. In January 1997, the Court -27- appointed a Special Master to hear the defendants' motions for summary judgment and submit recommendations to the Court with respect to their disposition. In March 1997, the Special Master held a hearing on the defendants' motions for summary judgment. To date, the Special Master is still considering the motions. At the time the Special Master was appointed, the Court also set a trial date in September, 1997. The plaintiffs have requested a jury trial and are expected to ask for a substantial sum in damages. If the plaintiffs prevail in their demands, damages awarded by the jury may exceed the assets of the Company. The Company believes that it has meritorious defenses and is defending the lawsuit vigorously. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company and its officers and directors have been informed that in the opinion of the Securities and Exchange Commission (the "Commission") such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Item 14 Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K (a) (1) FINANCIAL STATEMENTS--See Index to Consolidated Financial Statements on page F-1 of this Form 10-K Annual Report. (2) REPORT OF INDEPENDENT ACCOUNTANTS--See Index to Consolidated Financial Statements on F-1 of this Form 10-K Annual Report. (3) EXHIBITS--See Exhibit Index on pages 29 and 30 of this Form 10-K Annual Report. (b) The Registrant filed no reports on Form 8-K during the fiscal year ended March 30, 1997. (c) See Exhibit Index on pages 29 and 30 of this Form 10-K Annual Report.
-28- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT INDEX
EXHIBIT NO. 3.1 (1) Second Amended and Restated Certificate of Incorporation of the Registrant. 3.2 (1) Amended and Restated Bylaws of the Registrant. 10.1 (1) Form of Indemnification Agreement entered into between the Registrant and its Directors and Officers. 10.2 (1)( ) 1990 Employee Stock Option Plan and related form of Incentive Stock Option Grant and Supplemental Stock Option Grant. 10.3 (1) Lease Agreement between the Company and Berg & Berg Developers for the Premises at 6781 Via Del Oro, San Jose, California 95119. 10.4 (1) Stock Purchase Agreement between Mead and the Company, effective July 27, 1990. 10.5 (1) Stock Assignment and License Agreement between Mead and the Company, dated July 26, 1990. 10.6 (1) Amendment No. 1 to Assignment and License Agreement, dated December 6, 1991. 10.7 (1) Contribution Agreement between Mead and Devres MS Co., dated July 26, 1990. 10.8 (1) Agreement between the Company, Innocell and Delco Remy Division--General Motors, dated March 1, 1991. 10.9 (1)( ) Employment Agreement with Dr. Dale R. Shackle, dated April 30, 1991. 10.10(1)( ) Relocation Loan Agreement with Dr. Dale R. Shackle, dated August 2, 1991. 10.11(1)( ) Employment Agreement with Mr. Calvin L. Reed, dated May 28, 1991. 10.12(1) Loan Agreement between the Company and Baccarat Electronics Inc., dated July 17, 1990. 10.13(1) Amendment No. 1 to Loan between the Company and Baccarat Electronics, dated March 15, 1991. 10.14(1) Amendment No. 2 to Loan between the Company and Baccarat Electronics, dated March 24, 1992. 10.15(1) Settlement Agreement and General Release by and among Jorgen S. Lundsgaard, H. Hope, S. Hope, H&L, HII, Lithion, HTI, Devres and the Company, dated September 9, 1991. 10.16(1) Settlement Agreement by and among the Company, Ultracell (Cayman Islands), Innovision A/S, ERL, Innocell and JL ApS, dated March 21, 1992. 10.17(1) Options to purchase an aggregate of 375,000 shares of the Common Stock of the Company issued to Carl E. Berg by four individuals, dated March 21, 1992. 10.18(1) Option to purchase shares of Innocell ApS issued to Ultracell (Cayman Islands) by Jorgen S. Lundsgaard, dated March 21, 1992. 10.19(1) Letter Agreement by and between the Company and Jorgen S. Lundsgaard, dated March 21, 1992. 10.20(1) Indemnification Agreement by and between the Company and Carl E. Berg, dated March 21, 1992. 10.21(1) Promissory Note for $1,100,000 in favor of Carl E. Berg, dated March 24, 1992. 10.22(1) Addendum to Promissory Note for $1,100,000, dated March 24, 1992. 10.23(2)( ) Employee Loan Agreement between the Company and William Masuda, dated July 1, 1992. 10.24(2) Amendment No. 3 to Loan Agreement and Promissory Note between the Company and Baccarat Electronics, Inc., dated August 17, 1992. 10.25(4)(*) Agreement between Motorola, Inc., and the Company, effective November 30, 1992. 10.26(5)(*) Agreement between Hewlett-Packard Company, Valence Technology Cayman Islands Inc. and the Company, dated as of January 18, 1994. 10.27(5)(*) Joint Venture Agreement between Goldtron Cayman Islands Inc. and Valence Technology Cayman Islands Inc., dated as of March 15, 1994. 10.28(5)(*) License and Support Agreement between Goldtron Cayman Islands Inc. and Valence Technology Cayman Islands Inc., dated as of March 15, 1994. 10.29(5)(*) Battery Laminate Supply Agreement between Goldtron Cayman Islands Inc. and Valence Technology Cayman Islands Inc., dated as of March 16, 1994. 10.30(5)(*) Joint Development and License Agreement between Eveready Battery Company, Inc., the Company and Valence Technology Cayman Islands Inc., dated as of May 20, 1994.
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EXHIBIT NO. 10.31(5) Lease Agreement between the Company and Berg & Berg Developers for the Premises at 6781 Via Del Oro and 160 Great Oaks, San Jose, California 95119, dated as of May 1, 1993. 10.32(6) Purchase Agreement between the Company and Whittaker Technical Products, Inc. for the Premises at 301 Conestoga Way, Henderson, Nevada 89015, dated as of September 21, 1994. 10.33(6)(*) Joint Research and Development Agreement between the Company and AC Delco Systems Division of General Motors Corporation, dated as of September 15, 1994. 10.34(7)(*) Technology Transfer Agreement between the Company and Bell Communications Research, Inc., dated as of June 29, 1995. 10.35(8)(*) Joint Venture Agreement between the Company, through its Dutch subsidiary, and Hanil Telecom Co., Ltd., dated as of July 10, 1996. 10.36(8)(*) License and Support Agreement between the Company, through its Dutch subsidiary, and Hanil Valence Co., Ltd. 10.37(8)(*) Battery Laminate Supply Agreement between the Company, through its Dutch subsidiary, and Hanil Valence Co., Ltd. 10.38(8)(*) Letter Agreement from the Company, through its Dutch subsidiary, to Hanil Telecom Co., Ltd. 10.39(9)(*) Joint Venture Agreement between the Company and Alliant Techsystems. 10.40(9)(*) License and Support Agreement between the Company and Alliant / Valence, L.L.C. 10.41(9)(*) Battery Laminate Supply Agreement between the Company and Alliant / Valence, L.L.C. 11.1 Calculation of net loss per share. 21.1 List of subsidiaries of the Company. 23.1 Consent of Independent Accountants. 27.1 Financial Data Schedule
- ------------------------ (1) Incorporated by reference to the indicated exhibit in the Company's Registration Statement on Form S-1 (File No. 33-46765), as amended. (2) Incorporated by reference to the indicated exhibit in the Company's Registration Statement on Form S-1 (File No. 33-52888), as amended. (3) Incorporated by reference to Exhibit 22.1 in the Company's Registration Statement on Form S-1 (File No. 33-52888), as amended. (4) Incorporated by reference to the indicated exhibit in the Company's Form 10-K filed for fiscal year ended March 28, 1993. (5) Incorporated by reference to the indicated exhibit in the Company's Form 10-K filed for fiscal year ended March 27, 1994. (6) Incorporated by reference to the indicated exhibit in the Company's Form 10-K filed for fiscal year ended March 26, 1995. (7) Incorporated by reference to the indicated exhibit in the Company's Form 10Q filed for fiscal quarter ended June 25, 1995. (8) Incorporated by reference to the indicated exhibit in the Company's Form 10Q filed for fiscal quarter ended June 30, 1996. (9) Incorporated by reference to the indicated exhibit in the Company's Form 10Q filed for fiscal quarter ended September 29, 1996. ( ) Executive Compensation Plans and Arrangements. (*) Portions of the text have been omitted. A separate filing of such omitted text has been made with the Commission as part of Registrant's application for confidential treatment. -30- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VALENCE TECHNOLOGY, INC. June 27, 1997 By: /s/ CALVIN L. REED ------------------------------------------ Calvin L. Reed Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) June 27, 1997 By: /s/ DAVID P. ARCHIBALD ------------------------------------------ David P. Archibald Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ CALVIN L. REED Chairman, President and - ------------------------------ Chief June 27, 1997 Calvin L. Reed Executive Officer /s/ CARL E. BERG - ------------------------------ Director June 27, 1997 Carl E. Berg /s/ ALAN F. SHUGART - ------------------------------ Director June 27, 1997 Alan F. Shugart VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages ----- CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Accountants.................................................................................. F-2 Consolidated Balance Sheets as of March 30, 1997 and March 31, 1996................................................ F-3 Consolidated Financial Statements for the period from March 3, 1989 (date of inception) to March 30, 1997 and for the years ending March 30, 1997, March 31, 1996 and March 26, 1995: Consolidated Statements of Operations.......................................................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit)...................................................... F-5 Consolidated Statements of Cash Flows.......................................................................... F-6 Notes to Consolidated Financial Statements............................................................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders Valence Technology, Inc. and Subsidiaries Henderson, Nevada We have audited the accompanying consolidated financial statements of Valence Technology, Inc. and subsidiaries (companies in the development stage) listed in Item 14A of this Form 10-K. 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 generally accepted auditing standards. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Valence Technology, Inc. and subsidiaries (companies in the development stage) as of March 30, 1997 and March 31, 1996, and the consolidated results of their operations and their cash flows for the period from March 3, 1989 (date of inception) to March 30, 1997 and for each of the three years in the period ended March 30, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Jose, California May 2, 1997 F-2 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) ---
March 30, March 31, 1997 1996 ----------- ---------- ASSETS Current assets: Cash and cash equivalents $ 27,832 $ 24,569 Short-term investments 5,556 26,492 Accounts receivable 431 545 Interest receivable 126 444 Prepaids and other current assets 120 299 ----------- ---------- Total current assets 34,065 52,349 Investments 4,000 5,790 Property, plant and equipment, net 17,191 11,752 Other assets 270 356 ----------- ---------- Total assets $ 55,526 $ 70,247 ----------- ---------- ----------- ---------- LIABILITIES Current liabilities: Current portion of long-term debt $ 1,433 $ 2,277 Accounts payable 1,949 1,251 Accrued expenses 7,317 6,180 Accrued compensation 1,261 1,360 ----------- ---------- Total current liabilities 11,960 11,068 Long-term debt, less current portion 5,217 6,169 ----------- ---------- Total liabilities 17,177 17,237 ----------- ---------- Commitments and Contingencies (Notes 7 and 11.) STOCKHOLDERS' EQUITY Preferred stock, $0.001 par value: Authorized: 10,000 shares; Issued and outstanding: none Common stock, $0.001 par value: Authorized: 50,000 shares; Issued and outstanding: 21,745 and 21,665 shares at March 30, 1997 and March 31, 1996, respectively 140,580 140,307 Deficit accumulated during the development stage (103,526) (87,638) Cumulative translation adjustment 1,295 341 ----------- ---------- Total stockholders' equity 38,349 53,010 ----------- ---------- Total liabilities and stockholders' equity $ 55,526 $ 70,247 ----------- ---------- ----------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-3 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) ---
Period from March 3, 1989 Year Ended (date of inception) ---------------------------------- to March 30, March 31, March 26, March 30, 1997 1997 1996 1995 ------------------- ---------- ---------- ---------- Revenue: Research and development contracts $ 21,605 $ - $ - $ 4,150 ---------- ---------- ---------- ---------- Costs and expenses: Research and development 69,483 11,259 8,047 14,762 Marketing 2,677 205 486 705 General and administrative 32,363 6,168 5,614 6,269 Write-off of in-process technology 8,212 6,064 Investment in Danish subsidiary 3,489 Special charges 18,872 18,872 ---------- ---------- ---------- ---------- Total costs and expenses 135,096 17,632 20,211 40,608 ---------- ---------- ---------- ---------- Operating loss (113,491) (17,632) (20,211) (36,458) Interest income 13,727 2,558 3,549 3,606 Interest expense (3,762) (814) (931) (777) ---------- ---------- ---------- ---------- Net loss $ (103,526) $ (15,888) $ (17,593) $ (33,629) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net loss per share - $ (0.73) $ (0.83) $ (1.68) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Shares used in computing net loss per share - 21,684 21,261 20,059 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-4 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) for the cumulative period from March 3, 1989 (date of inception) to March 30, 1997 (in thousands, except per share amounts) ---
Common Stock, $0.001 Deficit Par Value Per Share Options to Accumulated Purchase During the Cumulative ---------------------- Treasury Development Translation Shares Amount Stock Stage Adjustment ----------- --------- ----------- ------------ ----------- Issuance of common stock to founders: March 1989 at $0.001 per share 4,500 $ 5 May 1989 at $0.01 per share 3,370 34 Net loss $ (394) ----------- --------- ------------ Balances, March 31, 1990 7,870 39 (394) Issuance of common stock for cash in September 1990 at $0.01 per share 500 5 Net loss (5,137) ----------- --------- ------------ Balances, March 31, 1991 8,370 44 (5,531) Exercise of warrants 130 572 Options purchased $ (1,125) Net loss (3,769) ----------- --------- ----------- ------------ ----------- Balances, March 31, 1992 8,500 616 (1,125) (9,300) Issuance of common stock in public offerings, net of offering costs: May and June 1992 at $8.00 per share 4,140 30,155 November 1992 at $18.00 per share 3,380 57,031 Exercise of Stock Options: July 1992 through March 1993 at $0.01 to $0,25 per share 289 21 Compensation related to exercised stock options 75 Net loss (8,463) ----------- --------- ----------- ------------ ----------- Balances, March 28, 1993 16,309 87,898 (1,125) (17,763) Issuance of common stock in public offering in December 1993 at $14.00 per share, net of offering costs 3,680 48,492 Exercise of stock options during year at $0.01 to $13.00 per share 410 481 Compensation related to exercised stock options 243 Exercise of options to purchase treasury stock and retirement of shares (375) (1,125) 1,125 Net loss (18,653) Translation adjustment $ 56 ----------- --------- ----------- ------------ ----------- Balances, March 27, 1994 20,024 135,989 (36,416) 56 Exercise of stock options during year at $0.01 to $4.00 per share 83 33 Compensation related to exercised stock options 43 Net loss (33,629) Translation adjustment 708 ----------- --------- ----------- ------------ ----------- Balances, March 26, 1995 20,107 136,065 (70,045) 764 Exercise of stock options during year at $0.25 to $4.00 per share 58 179 Common stock issued to purchase Bellcore technology 1,500 4,063 Net loss (17,593) Translation adjustment (423) ----------- --------- ----------- ------------ ----------- Balances, March 31, 1996 21,665 140,307 $ - (87,638) 341 Exercise of stock options during year at $1.88 to $4.31 per share 80 273 Net loss (15,888) Translation adjustment 954 ----------- --------- ----------- ------------ ----------- Balances, March 30, 1997 21,745 $ 140,580 $ - $ (103,526) $ 1,295 ----------- --------- ----------- ------------ ----------- ----------- --------- ----------- ------------ ----------- Totals --------- Issuance of common stock to founders: March 1989 at $0.001 per share $ 5 May 1989 at $0.01 per share 34 Net loss (394) --------- Balances, March 31, 1990 (355) Issuance of common stock for cash in September 1990 at $0.01 per share 5 Net loss (5,137) --------- Balances, March 31, 1991 (5,487) Exercise of warrants 572 Options purchased (1,125) Net loss (3,769) --------- Balances, March 31, 1992 (9,809) Issuance of common stock in public offerings, net of offering costs: May and June 1992 at $8.00 per share 30,155 November 1992 at $18.00 per share 57,031 Exercise of Stock Options: July 1992 through March 1993 at $0.01 to $0,25 per share 21 Compensation related to exercised stock options 75 Net loss (8,463) --------- Balances, March 28, 1993 69,010 Issuance of common stock in public offering in December 1993 at $14.00 per share, net of offering costs 48,492 Exercise of stock options during year at $0.01 to $13.00 per share 481 Compensation related to exercised stock options 243 Exercise of options to purchase treasury stock and retirement of shares - Net loss (18,653) Translation adjustment 56 --------- Balances, March 27, 1994 99,629 Exercise of stock options during year at $0.01 to $4.00 per share 33 Compensation related to exercised stock options 43 Net loss (33,629) Translation adjustment 708 --------- Balances, March 26, 1995 66,784 Exercise of stock options during year at $0.25 to $4.00 per share 179 Common stock issued to purchase Bellcore technology 4,063 Net loss (17,593) Translation adjustment (423) --------- Balances, March 31, 1996 53,010 Exercise of stock options during year at $1.88 to $4.31 per share 273 Net loss (15,888) Translation adjustment 954 --------- Balances, March 30, 1997 $ 38,345 --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-5 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) ---
Period from March 3, 1989 (date of Twelve Months Ended inception) ------------------------------------- to March 30, March 31, March 26, March 30, 1997 1997 1996 1995 ---------------- ----------- ----------- ----------- Cash flows from operating activities: Net loss $ (103,526) $ (15,888) $ (17,593) $ (33,629) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 19,845 3,536 5,199 4,482 Write-off of equipment 14,792 25 16,489 Write-off of in-process technology 6,211 4,064 Compensation related to stock options 1,421 273 278 Noncash charge related to acquisition of Danish subsidiary 2,245 Changes in assets and liabilities: Accounts receivable 658 114 544 Interest receivable (117) 321 (220) 170 Notes receivable (144) (1) (143) Prepaid expenses and other current assets (1,073) 185 212 (573) Accounts payable 1,848 698 (1,166) (5,978) Accrued liabilities 293 1,039 (3,304) 421 Deferred revenue (496) ---------------- ----------- ----------- ----------- Net cash used in operating activities (57,547) (9,971) (12,134) (18,836) ---------------- ----------- ----------- ----------- Cash flows from investing activities: Purchase of long-term investments (478,228) (81,139) (146,371) (43,076) Maturities in long-term investments 464,862 100,055 171,958 56,519 Capital expenditures (39,252) (3,379) (2,306) (8,794) Other (222) (50) ---------------- ----------- ----------- ----------- Net cash provided by (used in) investing activities (52,840) 15,537 23,281 4,599 ---------------- ----------- ----------- ----------- Cash flows from financing activities: Property and equipment grants 4,419 125 356 2,449 Borrowings of long-term debt 15,502 4,942 Payments of long-term debt: Product development loan (482) (482) Shareholder and director (6,173) Other long-term debt (10,536) (1,797) (3,214) (2,422) Proceeds from issuance of common stock, net of issuance costs 136,784 273 179 33 ---------------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 139,514 (1,399) (2,679) 4,520 ---------------- ----------- ----------- ----------- Effect of foreign exchange rates on cash and cash equivalents (1,295) (904) (500) 131 ---------------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 27,832 3,263 7,967 (9,586) Cash and cash equivalents, beginning of period 0 24,569 16,602 26,188 ---------------- ----------- ----------- ----------- Cash and cash equivalents, end of period $ 27,832 $ 27,832 $ 24,569 $ 16,602 ---------------- ----------- ----------- ----------- ---------------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES: Acquisition of property, plant and equipment through grants and long-term debt $ 7,957 $ 2,458 Acquisition of property and equipment through capitalized leases 1,459 Exercise of warrants in cancellation of indebtedness 572 Exercise of options to purchase treasury stock and retirement of treasury stock 1,125 Interest paid 3,668 $ 814 $ 924 769 Return of equipment for extinguishment of debt 301 301 Exchange of common stock for in-process technology 4,063 4,063 Disposal of equipment fully reserved for in prior year 3,318 1,679 1,639
The accompanying notes are an integral part of these consolidated financial statements. F-6 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- 1. Organization and Business of the Company: Valence Technology, Inc. (the "Company") is engaged in research and development to produce advanced rechargeable batteries based on lithium and polymer technologies. The Company's primary activities to date have been acquiring and developing its initial technology, implementing a production line, manufacturing limited quantities of prototype batteries, recruiting personnel and obtaining capital; such activities have resulted in losses since inception. The Company's current research prototype batteries do not meet all of the specifications demanded by the marketplace, and the Company presently has no products available for sale. To achieve profitable operations, the Company must successfully develop, manufacture and market its products. There can be no assurance that any products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed. The Company uses a 52/53-week fiscal year, ending on the Sunday closest to March 31. All years presented are 52-week years except fiscal 1996 which is 53 weeks. 2. Summary of Significant Accounting Policies: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. 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. Primarily all cash and cash equivalents are held by three banks and three major investment brokerage companies, and primarily comprise money market funds and investment grade bank and commercial paper. INVESTMENTS: Because of the Company's intent and ability to hold certain investments with original maturities greater than one year to maturity or until called by the issuer, such securities have been classified as "held to maturity" securities and reported at amortized cost. Realized gains and losses on sales of all such investments are reported in earnings and computed using the specific identification cost method. Held to maturity securities with maturities less than one year from the balance sheet date are classified as short-term and those with maturities greater than one year from the balance sheet date are classified as long-term. During fiscal year 1996, management classified certain short-term investments as available-for-sale securities which are carried at market value. Unrealized gains and losses, if material, are reported net of tax as a separate component of stockholders' equity, until realized. The difference between the cost basis and the market value of the Company's investments was not material at March 31, 1996. PROPERTY, PLANT AND EQUIPMENT GRANTS: Grants relating to the acquisition of property, plant and equipment are recorded upon satisfaction of the capital investment requirements underlying the grant and the receipt of grant funds. Such grants are deferred and amortized over the estimated useful lives of the related assets as a reduction of depreciation expense. F-7 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- DEPRECIATION AND AMORTIZATION: Property and equipment are stated at cost and depreciated on the straight-line method over their estimated useful lives, generally three to five years. Building improvements are amortized over the lesser of their estimated useful life, generally five years, or the remaining mortgage term. The Company assesses its ability to recover the net book value of its long-term assets. The carrying value of assets determined to be impaired is written down to net realizable value. LONG-LIVED ASSETS: Effective April 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. In certain situations, an impairment loss would be recognized. The adoption of SFAS 121 did not have a material impact on the Company's financial condition or results of operations. CONTRACT REVENUES: Research and development contract revenues are recognized over the performance period in accordance with the contract terms. Payments related to future performance are deferred and recorded as revenues as they are earned over specified future performance periods. RESEARCH AND DEVELOPMENT: Research and development costs are expensed as incurred. FOREIGN CURRENCY TRANSLATION: Exchange adjustments resulting from foreign currency transactions are generally recognized in operations, whereas adjustments resulting from the translation of financial statements are reflected as a separate component of stockholders' equity. Net foreign currency transaction gains or losses are not material in any of the years presented. INCOME TAXES: The Company utilizes the liability method to account for income taxes where deferred tax assets or liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. FAIR VALUE OF FINANCIAL INSTRUMENTS: Carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and other accrued liabilities, approximate fair value due to their short maturities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximates fair value. Estimated fair values for marketable securities, which are separately disclosed elsewhere, are based on quoted market prices for the same or similar instruments (see Investments above). F-8 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- RECLASSIFICATIONS: Certain amounts in the prior years' financial statements have been reclassified to conform with fiscal 1997 presentation. These reclassifications did not change previously reported capital, stockholders' equity, loss from operations, or net loss. NET LOSS PER SHARE: Net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period; common stock options and warrants have not been included since their inclusion would be antidilutive. STOCK COMPENSATION: Effective April 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based Compensation," which requires the Company to value stock-based compensation and to either record the value in the financial statements or to disclose the impact on the value and its impact of net income and earnings per share in the footnotes to the financial statements. The Company elected the disclosure alternative and continues to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees." Accordingly, the adoption of SFAS 123 did not have a material impact on the Company's financial condition or results of operations. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. RECENT PRONOUNCEMENTS: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and is effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 requires restatement of all prior-period earnings per share data presented after the effective date. SFAS 128 will not have an impact on the Company's financial position, results of operations or cash flows. F-9 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- 3. Investments: The carrying and market values of investments are as follows at March 30, 1997 and March 31, 1996:
March 30, 1997 ------------------------ Carrying Unrealized Unrealized Fair Value Gains Losses Value ----------- ----------- ----------- --------- Held-to-Maturity U.S. Government and Agency Obligations $ 2,510 $ $ (10) $ 2,500 Bank Paper 2,000 2,000 Collateralized Mortgage Obligations 3,046 1 (23) 3,024 Other 2,000 2,000 ----------- ----------- ----------- --------- Total Held-to Maturity Investments $ 9,556 $ 1 $ (33) $ 9,524 ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
March 31, 1996 ---------------------------- Carrying Unrealized Unrealized Fair Value Gains Losses Value ----------- --------------- ----------- --------- Available-for-Sale U.S. Government and Agency Obligations $ 4,996 $ 1 $ 4,997 -- ----------- ----------- --------- Total Available-for-Sale $ 4,996 $ 1 $ 4,997 -- -- ----------- ----------- --------- ----------- ----------- ---------
March 31, 1996 -------------------------- Carrying Unrealized Unrealized Fair Value Gains Losses Value --------- ------------- ----------- --------- Held-to-Maturity Commercial Paper $ 16,438 $ 47 $ (73) $ 16,412 Bank Paper 981 19 1,000 Collateralized Mortgage Obligations 9,586 25 (2) 9,609 Other 281 281 --------- --- ----------- --------- Total Held-to Maturity Investments $ 27,286 $ 91 $ (75) $ 27,302 --------- --- ----------- --------- --------- --- ----------- ---------
At March 30, 1997, scheduled maturities of investments are as follows:
Held-to- Maturity ----------- Within one year $ 5,556 After one year through five years 4,000 ----------- Total $ 9,556 ----------- -----------
F-10 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- 4. Property, Plant and Equipment:
March 30, 1997 March 31, 1996 -------------- -------------- Building and land $ 8,447 $ 8,126 Leasehold improvements 1,297 Machinery and equipment 7,755 10,642 Office and computer equipment 820 607 Construction in progress 16,050 4,961 ------- ------- Total cost 34,369 24,336 Less capital grants (3,962) (3,972) ------- ------- Total cost, net of capital grants 30,407 20,364 Less accumulated depreciation and amortization (13,216) (8,612) ------- ------- Total cost, net of capital grants, depreciation and amortization $ 17,191 $ 11,752 ------- ------- ------- -------
During fiscal 1995, the Company wrote down the carrying value of property, plant and equipment to its net realizable value. This amount of $16,489 is included as a special charge in the consolidated statements of operations (see Note 14). 5. Long-Term Debt:
March 30, 1997 March 31, 1996 -------------- -------------- Equipment term loans $ 1,091 $ 2,819 Facility loans 5,559 5,516 Capitalized leases 111 ------- ------- 6,650 8,446 Less amounts due within one year (1,433) (2,277) ------- ------- Long-term debt due after one year $ 5,217 $ 6,169 ------- ------- ------- -------
EQUIPMENT TERM LOANS The Company has three equipment term loans outstanding with an institutional lender in the amount of $1,091. The term loans bear interest at the bank's prime rate (8.5% at March 30, 1997) plus 1/4% to 1-1/2% and are collateralized by certain of the Company's property and equipment. Principal and accrued interest are payable in monthly installments which expire from July 1996 to December 1997. Under the loans, the Company is required to maintain certain financial ratios and meet other covenants, including restrictions on additional indebtedness and payments of dividends. At March 30, 1997, the Company was in violation of a covenant included in the equipment term loan agreements due to an establishment of certain joint ventures, but obtained a waiver from the institutional lender. FACILITY LOANS: During fiscal 1995, a bank provided the Company a $2,500 facility term loan under which drawdowns were available for the purchase and improvement of a facility in Henderson, Nevada. The facility term loan bears interest at 10.4% and is collateralized by the related building. The Company makes monthly principal and F-11 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- interest payments of $14 monthly through November 2001, and a final principal payment of $1,346 is due December 2001. The Company also has a 15 year facility loan for the Northern Ireland building payable in equal monthly principal payments of $25 plus accrued interest. The facility term loan bears interest at an annually adjustable published interest rate index (7.875% at March 30, 1997) on the outstanding principal of $3,620 at March 30, 1997. The loan is collateralized by the related building. WORKING CAPITAL FACILITIES: The Company has a $2,000 working capital line of credit agreement with a bank which expires March 1998. The line of credit is collateralized by the Company's assets. Under the working capital line of credit agreement: (i) any borrowings from the Company's stockholder and director will be subordinated to any borrowings from the bank; (ii) the Company will be required to maintain certain specified financial ratios and meet other performance criteria, and (iii) the Company will be restricted from paying cash dividends. The line of credit has a variable interest rate which was 8.5% at March 30, 1997. During fiscal 1997, the Company did not have any borrowings outstanding under this agreement. Principal payments on long term debt at March 30, 1997 are due as follows:
Facility and Fiscal Year Term Loans - ------------------------------------------------------------------------- ------------- 1998 1,433 1999 398 2000 410 2001 334 2002 1,607 Thereafter 2,468 ------ $ 6,650 ------ ------
6. Grant Agreement and Offers: During fiscal 1994, the Company, through its Dutch subsidiary, signed an agreement with the Northern Ireland Industrial Development Board (the IDB) to open an automated manufacturing plant in Northern Ireland in exchange for capital and revenue grants from the IDB. The Company has also received offers from the IDB to receive additional grants. The grants available under the agreement and offers provide for an aggregate of up to L27,555 ($44,956 as of March 30, 1997), to be available over a five-year period through October 31, 2001. As of March 30, 1997, the Company had received grants aggregating L4,035 ($6,583) reducing remaining grants available to L23,520 ($38,373). The IDB offers also provided a fully amortized 15-year mortgage to finance the purchase of a manufacturing plant, which the Company has utilized (see Note 5). As a condition to receiving funding from the IDB, the subsidiary must obtain a minimum of L12,000,000 in debt or equity financing from the Company. Aggregate funding under the grants is limited to L4,035,000 until the Company has recognized $4,000,000 in aggregate revenue from the sale of its batteries produced in Northern Ireland. The amount of the grants available under the agreement and offers is primarily dependent on the level of capital expenditures made by the Company. Substantially all of the funding received under the grants is repayable to the IDB if the subsidiary is in default under the agreement and offers, which includes the cessation of business in Northern F-12 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- Ireland; yet, the agreement does allow for a temporary cessation of operations without penalty to the Company. During fiscal 1995, the Company entered into such a temporary break in operations. Funding received under the grants to offset capital expenditures is repayable if related equipment is sold, transferred or otherwise disposed of during a four-year period after the date of grant. In addition, a portion of funding received under the grants may also be repayable if the subsidiary fails to maintain specified employment levels for the two-year period immediately after the end of the five-year grant period. As a result of the temporary cessation of Northern Ireland business activity, specified employment levels have not been maintained, but the IDB is not seeking repayment at this time. The Company has guaranteed the subsidiary's obligations to the IDB under the agreement. There can be no assurance that the Company will be able to meet the requirements necessary for it to receive and retain grants under the IDB agreement and offers. 7. Commitments and Contingencies: LEASES: The Company leased certain facilities under a noncancelable operating lease which had an expiration date of April 1998. The facilities were leased from a partnership whose general partner is a stockholder and director of the Company. Under the terms of the lease, the Company was responsible for utilities, taxes, insurance and maintenance. During fiscal years 1995 and 1996, the Company vacated the facilities. At March 30, 1997, the facilities were fully sub-leased by the lessor and the Company was released from any further obligation. Total rent expense for the period from March 3, 1989 (date of inception) to March 30, 1997 and for the years ended March 30, 1997, March 31, 1996 and March 26, 1995 were $1,390, $44, $52 and $522, respectively. LITIGATION: In May 1994, a series of class action lawsuits was filed in the United States District Court for the Northern District of California against the Company and certain of its present and former officers and directors. These lawsuits were consolidated, and in September 1994 the plaintiffs filed a consolidated and amended class action complaint. Following the Court's Orders on motions to dismiss the complaint, which were granted in part and denied in part, the plaintiffs filed an amended complaint in October 1995 ("Complaint"). The Complaint alleges violations of the federal securities laws against the Company, certain of its present and former officers and directors, and the underwriters of the Company's public stock offerings, claiming that the defendants issued a series of false and misleading statements, including filings with the Securities and Exchange Commission, with regard to the Company's business and future prospects. The plaintiffs seek to represent a class of persons who purchased the Company's common stock between May 7, 1992 and August 10, 1994. The Complaint seeks unspecified compensatory and punitive damages, attorney's fees and costs. On January 23, 1996, the Court dismissed, with prejudice, all claims against the underwriters of the Company's public stock offerings, and one claim against the Company and its present and former officers and directors. On April 29, 1996, the Court dismissed with prejudice all remaining claims against a present director and limited claims against a former officer and director to the period when that person was an officer. In December 1996, the Company and the individual defendants filed motions for summary judgment, which the plaintiffs opposed. In January 1997, the Court appointed a Special Master to hear the defendants' motions for summary judgment and submit recommendations to the Court with respect to their disposition. In March 1997, the Special Master held a hearing on the defendants' motions for summary judgment. To date, the Special Master is still considering the motions. At the time the Special Master was appointed, the Court also set a trial date in September, 1997. The plaintiffs have requested a jury trial and are expected to ask for a F-13 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- substantial sum in damages. If the plaintiffs prevail in their demands, damages awarded by the jury may exceed the assets of the Company. The Company believes that it has meritorious defenses and is defending the lawsuit vigorously. The ultimate outcome of these actions cannot presently be determined. Accordingly, no provision for any liability or loss that may result from adjudication or settlement thereof has been made in the accompanying consolidated financial statements. In addition to the litigation noted above, the Company is from time to time subject to routine litigation incidental to its business. The Company believes that the results of this routine litigation will not have a material adverse effect on the Company's financial condition. 8. Stockholders' Equity: 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 value (incentive options) or 85% of fair market value (supplemental options) on the date of grant as determined by the Board of Directors. The options are exercisable as determined by the Board of Directors and are generally exercisable over a five-year period, with 20% becoming exercisable after the first year, an additional 20% becoming exercisable after the second year, and an additional 5% becoming exercisable every three months thereafter. During 1995, the Company issued options exercisable over a five-year period with 5% of the options becoming exercisable every three months through the option vesting period. During 1996, the Company issued options exercisable over a two-year period with 12.5% of the options becoming exercisable every three months through the option vesting period. During 1996, the Company issued options exercisable over a two-year period with 12.5% of the options becoming exercisable every three months through the option vesting period, and options exercisable over a three-year period with 8.3% of the options becoming exercisable every three months through the option vesting period. The options expire no later than ten years from the date of grant. Unvested options are canceled and returned to the Plan upon an employee's termination. Vested options, not exercised within 90 days of termination, are also canceled and returned to the Plan. At March 30, 1997, the Company had 7 shares available for grant under the 1990 Plan. In fiscal 1993, the Board of Directors authorized the issuance of 210 stock warrants, which have the same terms as stock options granted under the 1990 Stock Option Plan, to employees of the Company's Danish subsidiary. Prior to adopting the 1990 Stock Option Plan, the Board of Directors had granted options to three employees of the Company to purchase a total of 850 shares of common stock. Additionally, in fiscal 1992 the Company granted options to purchase a total of 330 shares of common stock to certain directors and employees. These options vest over five years with 20% becoming exercisable after the first year, with an additional 20% becoming exercisable after the second year, and an additional 5% becoming exercisable every three months thereafter. The options expire ten years from the date of grant. F-14 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- The fair value of each option grant is estimated at the date of grant using the Black-Sholes pricing model with the following weighted average assumptions for grants in 1997 and 1996:
1997 1996 ----------- ----------- Risk-free Interest Rate 6.51% 5.82% Expected Life 4.76 years 4.66 years Volatility 78.00 80.71 Dividend Yield -- --
Aggregate option and warrant activity is as follows:
Outstanding Options and Warrants -------------------------- Weighted Avg. Number of Exercise Shares Price ----------- ------------- Balances, March 28, 1993 2,699 $ 2.54 Granted 536 $ 13.63 Exercised (410) $ 1.17 Canceled (398) $ 12.03 ----------- Balances, March 27, 1994 2,427 $ 3.67 Granted 1,758 $ 3.86 Exercised (83) $ 0.40 Canceled (1,400) $ 8.02 ----------- Balances, March 26, 1995 2,702 $ 1.64 Granted 498 $ 4.71 Exercised (58) $ 3.09 Canceled (140) $ 2.85 ----------- Balances, March 31, 1996 3,002 $ 2.06 Granted 1,126 $ 5.21 Exercised (80) $ 3.41 Canceled (20) $ 6.59 ----------- Balances, March 30, 1997 4,028 $ 3.14 ----------- -----------
At March 30, 1997 and March 31, 1996, vested options to purchase 1,950 and 1,528 shares, respectively, were unexercised. The weighted average fair value per share of those options granted in 1997 and 1996 was $3.73 and $2.67, respectively. The following table summarizes information about fixed stock options outstanding at March 30, 1997:
Options Outstanding Options Exercisable -------------------------------- -------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Life Exercise Number Exercise Prices Outstanding (years) Price Exercisable Price - -------------- ------------- ----------------- ----------- ------------- ----------- $ 0.01--$0.25 1,052 3.94 $ 0.15 1,046 $ 0.15 $ 1.00--$3.75 723 7.25 2.77 407 2.55 $ 3.81--$5.81 1,096 8.54 4.33 402 4.19 $ 5.88--$7.12 851 9.49 5.98 95 5.88
F-15 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- At March 30, 1997, the Company has reserved 4,650 shares of common stock for the exercise of stock options and warrants. The Company has adopted the disclosure-only provisions of the Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based Compensation." Accordingly, no compensation expense has been recognized for the Company's stock plans. Had compensation expense for the stock plans been determined based on the fair value at the grant date for options granted in 1997 and 1996 consistent with the provisions of SFAS 123, the pro forma net income would have been reported as follows:
1997 1996 ---------- ---------- Net loss--as reported $ (15,888) $ (17,593) Net loss--pro forma (16,787) (17,650) Net loss per share--as reported (0.73) (0.83) Net loss per share--pro forma (0.78) (0.83)
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 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. On the anniversary of the director's election to the Board, the director will receive an annual stock option in the amount of 100 shares less the total amount of unvested shares remaining in the initial option and any annual options previously granted. The exercise price for this new option will be the fair market value on the day it is granted. This annual option will vest quarterly over a three year period. A director who had been granted an option prior to the adoption of the 1996 Non-Employee Director's Stock Option Plan will start receiving annual grants on anniversary date of that director's prior grant. A director who had not received an option upon becoming a director will receive an initial stock option of 100 shares on the date of the adoption of the plan, and then receive annual options on the anniversary dates of that grant. As of March 30, 1997, a total of 247 options have been granted to two directors under this plan. OTHER WARRANTS: In connection with certain borrowings from a stockholder and director, the Company issued a total of 1,353 warrants for the purchase of common stock with exercise prices of between $4.00 and $6.40 per share, subject to certain adjustments. In fiscal 1992, a total of 130 warrants were exercised at an exercise price of $4.40 per share payable through the cancellation of $520 of indebtedness including accrued interest. The warrants expire on the earlier of the effective date of a reorganization of the Company, as defined, or July 31, 1997. The warrants were deemed to have a nominal value at their date of issuance. At March 30, 1997, a total of 1,223 warrants were outstanding with an exercise price of $4.00 per share. F-16 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- 9. Income Taxes: The components of the net deferred tax asset as of March 30, 1997 and March 31, 1996 were as follows:
March 30, 1997 March 31, 1996 -------------- -------------- Current assets: Accrued liabilities $ 696 $ 1,094 Valuation allowance (696) (1,094) ------- ------- $ - $ - ------- ------- ------- ------- Noncurrent assets: Depreciation and amortization $ 3,250 $ 7,114 Research and development credit carryforwards 719 1,104 Net operating loss carryforwards 18,530 20,695 Valuation allowance (22,449) (28,913) ------- ------- $ - $ - ------- ------- ------- -------
At March 30, 1997, the Company had federal operating loss carryforwards available to reduce future taxable income of approximately $47,496. The Company has additional tax net operating loss carryforwards of approximately $11,117 arising from the exercise of employee stock options, which can be utilized to reduce future taxable income. The tax benefit when realized will be reflected in stockholders' equity. The carryforwards expire between 2007 to 2012, if not used before such time to offset future taxable income. For federal and state 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 deferred tax assets at March 31, 1996, includes assets relating to California state taxes. As the Company no longer has a taxable presence in the state of California, the deferred tax assets related to state income taxes are no longer recoverable and have not been included in the deferred tax inventory at March 30, 1997. Additionally, the change in net operating loss carryforwards is due to a write-off of certain equipment in the Company's foreign subsidiary. 10. Development Contract: In March 1991, the Company, its Danish subsidiary, and Delphi Automotive Systems Group of General Motors (Delphi, formerly known as Delco Remy Division) entered into a development agreement whereby the Company and its Danish subsidiary (the Contractors) agreed to carry out research and development on batteries with an emphasis on vehicular and load leveling/peak sharing applications. The original contract consisted of an aggregate value of $20,000. In early fiscal 1995, the Company received a contract from Delphi to provide follow on research and product development, including the delivery of specified material, for an aggregate of $900. As of March 26, 1995, the Contractors had billed and received the entire $20,900 from Delphi. Payments under the contract are nonrefundable and the Contractors have granted to Delphi a worldwide, exclusive license to sell and manufacture load leveling/peak sharing and vehicular batteries for a certain period of time with a non-exclusive license thereafter. Delphi shall pay a royalty on each unit manufactured and sold under its license until the year 2008. F-17 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- The contract also provides for the use and ownership of patents developed under the contract, including termination provisions in the event of certain circumstances. In September 1994, the Company and Delphi signed a new five year agreement to combine efforts in developing the Company's rechargeable solid state lithium polymer battery technology. Under the agreement, Delphi and the Company combined their research and development activities in a new facility in Henderson, Nevada. The new facility is owned by the Company, with Delphi paying a fee of $50 per month over the five year term of the new agreement for access to the Company's research and development (of which $600 and $650 was recognized during fiscal 1997 and 1996, as an offset to research and product development expenses), as well as Delphi contributing to a majority of the facility's operating costs over the term of the new five year agreement. 11. Purchase of Technology and License Agreement: In July 1990, the Company entered into a stock purchase and license agreement whereby the Company purchased all of the assets and certain technology and patents from a third party. The Company has agreed to pay a royalty to the third party on all sales of product manufactured and sold in a specified territory. The third party agreed not to compete with the Company and the agreement expires in 2006. In June 1995, the Company entered into a non-exclusive license agreement with Bell Communication Research, Inc. ("Bellcore") to license Bellcore's plastic lithium battery technology. The Company acquired the technology for a total purchase price of $6,064, which consisted of 1,500 shares of Valence stock plus an initial payment of $2,000. In addition to royalty payments, the Company is required to make a $1,000 payment to Bellcore on the earlier of June 1, 1997 or when the Company recognizes $100 of revenue from royalty-bearing products. Further annual payments are required if revenue milestones are not met after the fourth year of the agreement. The entire purchase price was allocated to in-process technology as the technological feasibility of the in-process technology had not been established and had no alternative use. Accordingly, the entire $6,064 has been charged to operations in the second quarter of fiscal 1996. 12. Investment in Danish Subsidiary: In August 1990, the Company acquired a 45% interest in a Danish company organized to perform research and development activities within the field of solid state batteries. Concurrent with this acquisition, the Company and this affiliate entered into a license and technical agreement which, among other things, provided for an exchange of technology between the affiliate, a geographical distribution of manufacturing rights and an ongoing exchange of technical assistance. The Company accounted for its initial 45% investment under the equity method. On March 30, 1992, the Company through its Cayman Islands Subsidiary and a director and principal stockholder of the Company entered into a series of transactions to acquire the remaining 55% interest in the affiliate and repurchase shares of the Company's common stock (see Note 8). These transactions were entered into in connection with the settlement of certain disputes between the Company and the affiliate with respect to the affiliate's failure to enforce its contracts with certain of its shareholders. As part of the settlement, the parties also agreed to terminate certain technology development and license agreements entered into in 1990 and 1991. In fiscal 1996, the Company's Danish subsidiary was liquidated. F-18 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , Continued (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --- 13. 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 20% 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. 14. Special Charges: In the first quarter 1995, the Company announced its intent to refocus its efforts on research and product development and slowdown completion of its volume manufacturing capacities. The Company also announced in the second quarter of fiscal 1995 its intent to reduce efforts related to commercialization of a battery containing a lithium metal anode and instead concentrate on the development of a lithium polymer battery containing an alternate lithium anode. Consistent with the refocus, special charges of $18,872 were made in fiscal 1995 for which no tax benefit is currently available. Special charges for the year ended March 26, 1995 consist of the following:
Year Ended March 26, 1995 ----------- Write down of property, plant, and equipment $ 16,489 Provisions for vacated lease obligations 1,795 Provisions for employees separation costs 68 Other costs 520 ----------- $ 18,872 ----------- -----------
15. Joint Venture Agreements: In July 1996, the Company, through its Dutch subsidiary, and Hanil Telecom Co., Ltd. ("Hanil Telecom") signed an agreement to establish a joint venture company in Korea. All funds are to be provided to the joint venture by Hanil Telecom. Hanil Telecom and the Company, through its Dutch subsidiary, each hold a 50% stake of the company. Valence will supply the technology, initial equipment and product designs and technical support out of its Northern Ireland facility. Hanil Telecom will market the joint venture's initial products for a period of several years, depending on the market. The Company will account for the joint venture using the equity method. At March 30, 1997, the joint venture had net assets and a loss from operations of approximately $4,900 and $900, respectively. As the Company's investment in the joint venture was nil, which is equal to the cost basis of the technology contributed by the Company, the proportionate share of the joint venture's losses were not recorded. The Company and Alliant Techsystems Inc. ("Alliant") signed an agreement in October 1996, to establish a joint venture company. The Company is expected to supply the electrode laminate materials that are key to manufacturing high performance batteries. The Company will account for the joint venture using the equity method. At March 30, 1997, the Company's investment in the joint venture was nil, which is equal to the cost basis of the technology contributed by the Company. The net assets and operations of the joint venture were not material. F-19 EX-11.1 2 EXH. 11.1 Exhibit 11.1 VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES (companies in the development stage) STATEMENT OF CALCULATION OF NET LOSS PER SHARE (in thousands, except per share amounts) ---------
FISCAL YEAR ENDED ---------------------------------- MARCH 30, MARCH 31, MARCH 26, 1997 1996 1995 ---------- ---------- ---------- Actual weighted average shares of common stock outstanding for the period 21,684 21,261 20,059 Net loss for period $ (15,888) $ (17,593) $ (33,629) Net loss per share for period $ (0.73) $ (0.83) $ (1.68)
Dilutive common stock warrants and stock options have not been included in the calculations of common and common equivalent shares to calculate net loss per share, as their inclusion would be antidilutive. EX-21.1 3 EXH. 21.1 Exhibit 21.1 LIST OF SUBSIDIARIES OF VALENCE TECHNOLOGY, INC. DEVRES CO. Ohio corporation wholly owned by Valence Technology, Inc. MHB JOINT VENTURE Ohio partnership jointly owned by Valence Technology, Inc. and Devres, Co. VALENCE TECHNOLOGY CAYMAN ISLANDS INC. Cayman Islands corporation wholly owned by Valence Technology, Inc. VALENCE TECHNOLOGY N.V. Dutch Antilles corporation wholly owned by Valence Technology Cayman Islands Inc. VALENCE TECHNOLOGY B.V. Dutch corporation wholly owned by Valence Technology N.V. VALTRON TECHNOLOGY PTE. LTD. Singapore corporation 40% owned by Valence Technology Cayman Islands Inc. and 60% owned by Goldtron Ltd., through its Cayman Islands subsidiary. HANIL VALENCE CO., LTD. Korea corporation 50% owned by Valence Technology B.V. and 50% owned by Hanil Telecom Co., Ltd. ALLIANT / VALENCE, L.L.C. Delaware limited liability corporation 50% owned by Valence Technology, Inc. and 50% owned by Alliant Techsystems Inc. EX-23.1 4 EXH. 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Valence Technology, Inc. and subsidiaries (companies in the development stage) (the "Company") on Form S-8 (Files Nos. 33-48982 and 33-60562) of our report dated May 2, 1997, on our audits of the consolidated financial statements of the Company as of March 30, 1997 and March 31, 1996, and for the period of March 3, 1989 (date of inception) to March 30, 1997 and for each of the three years in the period ending March 30, 1997, which report is included in this annual report on Form 10-K. COOPERS & LYBRAND L.L.P. San Jose, California June 27, 1997 EX-27 5 EXH. 27.
5 YEAR MAR-30-1997 DEC-30-1996 MAR-30-1997 27,832 5,556 431 0 0 34,065 34,370 (17,178) 55,526 11,960 5,217 0 0 140,580 (103,526) 55,526 0 0 0 0 (4,462) 0 (389) (4,462) 0 (4,462) 0 0 0 (4,462) (0.21) (0.21)
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