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Technology Stocks : VALENCE TECHNOLOGY (VLNC) -- Ignore unavailable to you. Want to Upgrade?

To: Ray who wrote (5083)	11/15/1998 12:02:00 PM
From: FMK	Read Replies (1) \| Respond to of 27311

Hello Ray, Thanks for your post. Someone mentioned an apparent misconception that line 1's capacity was 1800 batteries per day. Your statement: The most recent number for output is 1800>> must have somehow been taken out of context and passed around. Lev Dawson recently stated that 1800 laptop batteries per day was the requirement to break even. Starting around February '97 I had some long conversations with Engineers and managers at Valence, one in particular. My purpose was to determine how to place a value on what their machinery was capable of producing. I was very persistent and demanded answers. The company was helpful enough to connect me with someone who could provide them. What I believe got me past some barriers was my engineering background. When Valence's engineers were explaining, they could tell from my questions that I was comprehending and therefore didn't give up on me. Over a time period I was able to acquire enough information that I became quite confident about my capacity calculations. One number I remember was the design capacity for assembly machine 1. The rate is 10 batteries per minute. It was stated also as just over 4.1 million batteries per year. At more than one point, there was confusion over whether the numbers meant batteries or cells. Over a time period, I began sharing information with several institutions, fund managers, large investors, etc. that were given specific information from the company. Most of them had been unable to accurately quantify the value of the machine's capacity. My conversations with Valence engineers provided me with such information. The most important single concept was to measure the value of the product in terms of the amount of energy it is capable of storing. The battery industry typically specifies voltage and "amp hours". Voltage varies depending on current draw and internal resistance. If you multiply the average terminal voltage by the amp hours, the result is watt-hours of stored energy that is the best yardstick for determining market value. KiloWatt hours (KWH) are the units you pay your utility company for. Perhaps 15 cents per KWH. Over the last several months, the question of batteries vs cells has arisen. I have repeatedly received clarification that the numbers being passed around apply to batteries, not cells. During the August 12 conference call, Lev stated that line 1 was producing 5 per minute "initially". At the time, he stated that line 1 could conservatively break the company even by itself at 3000 batteries per day. It is quite typical to run the machinery at a reduced speed to perfect the machine motions and techniques. Not only is it easier to observe what is happening, but if adjustments are a little off, you don't waste as much valuable raw materials while readjusting. You also have the operators who are "learning their footwork". Like typing- it pays to take time to learn where the keys are first and then pick up speed. I was pleased to hear recently that it would only take 1800 laptop batteries to break the company even. This time Lev mentioned a sales price of $2.50 per watt hour. Some were quick to determine that each laptop battery Lev was talking about would hold about 30 watt hours and should therefore sell for about $75. My estimate of 2500 good batteries per shift was based on the halfway point between the 5/min they were running on August 12 and the max design capacity of 10/minute. 7.5/min x 60 min/hr x 7.25 hrs/shift = 3262 batteries per shift. I would estimate the yield at 80%. result is 3252 x .8 or 2600 good batteries per shift. I rounded down to 2500. With time, I would expect that they can continue to improve machine speeds toward 10 per minute and yields to over 90%. To avoid inflating expectations, let's just work with the 2500 good batteries per shift. One of the challenges has been to convince a large customer that they can deliver sufficient quantities. The most obvious way to do this without spending more money on equipment is to add more shifts. I understand this has always been considered a 7 day per week 3-shift per day operation, typical for factories that have orders. It takes time to hire and train people to run and maintain the machinery, so it can't be done overnight, but I believe they have been working on adding the second shift. So what does the 1800 per day mean? To me it means that they could start line 1 up in the morning and go home after the afternoon coffee brake. They could do this all year with line 1 and revenue from the 1800 batteries per day would equal all the cash the company paid out for salaries, taxes, rent, R&D etc. The quarterly and annual reports that would show zero losses per share and zero earnings per share. (This is assuming they have no other production lines, no joint venture partners or royalty income etc- just the first assembly machine and for new hires for the other production lines to just draw paychecks) What if they worked the entire shift and then went home. They should then make about 2500 good batteries. 700 more per day more than required to break even. If we use the sales price of $75 per battery, it would mean an additional $52,500 per day, past the point of paying all the bills. So how much did it cost them to make these additional 700? We don't know exactly, but I think its pretty low. Remember the joint venture partners agreed to give away 50% of their profit and still put up all the money. Unit profit must therefore be quite high, perhaps twice what a normal factory would consider worthwhile. Another consideration is yield. During a recent conference call, Lev stated that Valence considered the venture worthwhile if they could achieve 30% yield. We also heard estimates that Sony and others making canister type batteries achieve about 50% yield. This means that only half of them are accepted. The rest are scrap. I believe Valence has stated that they were comfortably at the 75% area and improving. So I don't think 40% profit on these additional batteries is stretching it. 40% of the $52,500 daily revenue from the extra 700 batteries per day is about $21,000/day profit. Since it will be a 7 day per week operation, I have been counting about 350 days. $21,000/day x 350 equals $735,000 profit per year divided by 28 mln shares or about 26 cents per share earnings if line 1 works one full shift per day. Am I unrealistic? These are the numbers I have been using with my reasoning and assumptions behind them. I encourage anyone to make his own assumptions and do his own calculations. As I explained, I acquired much of this information starting back in February '97 and as I have posted, invested too much too soon. I believe I had every reason to do so, except for the timing. Now I am getting excited again because of the mounting evidence that major market forces are awakening. As I stated before, I wish I had all my chips back to play again now. However, I feel fortunate to have enough to participate in a meaningful way. I realize this got a little lengthy. I hope it helps you understand where I am coming from.