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

To: William Epstein who wrote (11498)	5/27/1999 8:12:00 PM
From: Zeev Hed	Read Replies (2) \| Respond to of 27311

William, actually tax losses are taken on first come first used, all of it as soon as you have earnings, their are limitations on how long you can carry these forward, but that is about it, so within the first quarter of profitability at the rate of even $100 MM /quarter (which I still think is high) the tax break will evaporate. Their are tax breaks that Ireland give to companies like VLNC that reduce the normal tax rate of 35% on US corporations (it depends a lot where the "marketing arm is and what they manage to negotiate with the IRS as fair arm length transactions between the marketing arm and the manufacturing arm), but in any event there is a believe a minimum of 20% plus state taxes which vary between 5% to 10% between the various states, so at least a tax rate of 25% should be expected. Another little "problem", which is a nice problem, but yet a problem, to generate a billion in sales, one would typically need $300 MM in working capital (inventories, accts receivable less accts payable). In VLNC case, it might be a little higher since the process requires a quarantine of 30 days, increasing inventories to at least 45 days of production or 125 MM of finished goods, best case, and if the margins are indeed what is suggested, than you'll nee another $25 MM only of materials and materials in process, and accts receivables at 45 days adds another $125 MM. These numbers are on the low side, but in any event that money will have to come from somewhere, eventually it will come from earnings, but until earnings kick in, there is some cash that is needed to oil the machine. The main questions are how "rational" are the assumptions of 1 Billion in sales in three years, that comes roughly to about 1.5 MM laptop batteries per year, which I believe is close to 10% of what the laptop market is expected to be. And of course, how rational are the 30% profits margins after taxes. In the first year of full operation, one should be happy with 5% margins, but since there will be no taxes, probably around 10% or so. At maturity, I would doubt that after taxes margin much in excess of 10% will be forthcoming, this high for the best run companies in the US, and so far, VLNC cannot claim to be in that category. Things could change, however. Zeev