SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended SEPTEMBER 30, 1996
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 1-8403
ENERGY CONVERSION DEVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1675 WEST MAPLE ROAD, TROY, MICHIGAN 48084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (810) 280-1900
----------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of October 31, 1996, there were 219,913 shares of Class A Common Stock
and 10,495,539 shares of Common Stock outstanding.
Page 1 of 21 pages
1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30,
1996 1995
REVENUES
Product sales $ 4,474,450 $ 3,613,880
Royalties 401,338 272,000
Revenues from research and development
agreements 713,438 2,350,659
Revenues from license and other agreements 1,368,645 3,700,000
Other 219,990 334,517
TOTAL REVENUES 7,177,861 10,271,056
EXPENSES
Cost of product sales 4,990,729 3,690,920
Cost of revenues from research and development
agreements 586,287 2,743,554
Product development and research 3,582,942 1,918,604
Patent defense 439,746
Patents 119,508 214,787
Operating, general and administrative 1,631,044 1,430,364
------------ -------------
TOTAL EXPENSES 11,350,256 9,998,229
------------ -------------
(LOSS) INCOME FROM OPERATIONS (4,172,395) 272,827
OTHER INCOME (EXPENSE):
Interest expense 06,540) (111,835)
Interest income 322,723 102,449
Other nonoperating income - net 58,179 49,793
------------ -------------
TOTAL OTHER INCOME 274,362 40,407
------------ -------------
NET (LOSS) INCOME $ (3,898,033) $ 313,234
============ =============
NET (LOSS) INCOME PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $ (.36) $ .04
============ =============
NET (LOSS) INCOME PER COMMON SHARE
ASSUMING FULL DILUTION $ (.36) $ .04
============ =============
See notes to consolidated financial statements.
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
1996 1996
(Unaudited) (Audited)
CURRENT ASSETS
Cash, including cash equivalents of
$28,910,000 as of September 30, 1996 and
$23,769,000 as of June 30, 1996 $ 29,806,065 $ 23,773,742
Investments -- 10,327,352
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$25,000 at September 30, 1996 and
$29,000 at June 30, 1996) 9,569,905 9,985,722
Amounts due from related parties 1,795,178 2,901,509
Inventories 3,702,049 3,275,135
Prepaid expenses and other current assets 631,385 362,558
TOTAL CURRENT ASSETS 45,504,582 50,626,018
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 312,588 312,588
Buildings and improvements 3,643,137 3,595,009
Machinery and other equipment 17,840,589 17,249,435
Capitalized lease equipment 5,736,416 5,802,806
-------------- ------------
27,532,730 26,959,838
Less accumulated depreciation and amortization (21,471,094) (21,260,424)
TOTAL PROPERTY, PLANT AND EQUIPMENT 6,061,636 5,699,414
JOINT VENTURES
United Solar Systems -- --
GM Ovonic -- --
Sovlux -- --
OTHER ASSETS 786,356 804,007
------------ ------------
TOTAL ASSETS $ 52,352,574 $ 57,129,439
============ ============
See notes to consolidated financial statements.
3
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
1996 1996
(Unaudited) (Audited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,025,114 $ 3,911,122
Salaries, wages and amounts withheld
from employees 1,353,882 1,175,102
Deferred revenues under business agreements 336,250 711,894
Current installments on capitalized lease
obligations and short-term debt 1,283,788 1,302,973
--------------- -----------
TOTAL CURRENT LIABILITIES 6,999,034 7,101,091
CAPITALIZED LEASE OBLIGATIONS 1,472,613 1,853,728
DEFERRED GAIN 570,686 686,351
NON-REFUNDABLE ADVANCE ROYALTIES 3,684,385 3,754,229
------------- -----------
TOTAL LIABILITIES 12,726,718 13,395,399
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock, par value
$.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Common Stock, par value $0.01 per share:
Authorized - 15,000,000 shares
Issued and outstanding - 10,495,139
shares at September 30, 1996 and
10,489,591 shares at June 30, 1996 104,951 104,896
Additional paid-in capital 200,964,491 200,757,697
Accumulated deficit (161,028,785) (157,130,752)
Treasury stock at cost - 23,000 shares (417,000)
TOTAL STOCKHOLDERS' EQUITY 39,625,856 43,734,040
------------- ------------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 52,352,574 $ 57,129,439
============== ==============
See notes to consolidated financial statements.
4
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
1996 1995
OPERATING ACTIVITIES:
Net (loss) income $ (3,898,033) $ 313,234
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 432,999 292,599
Creditable Royalties (69,844)
Warrants and options issued to consultants
and employees for services rendered and
employee stock options 113,250 113,250
Stock issued for services rendered 52,562 3,383
Amortization of deferred gain (11,499) (13,599)
Changes in working capital:
Accounts receivable and amounts due from
related parties 1,522,148 (1,020,671)
Inventories (426,914) 1,994
Prepaid expenses and other current assets (251,176) 10,111
Accounts payable and accrued expenses 292,772 (900,195)
Deferred revenues under business agreements (375,644) 699,792
NET CASH (USED IN) OPERATIONS (2,619,379) (500,102)
INVESTING ACTIVITIES:
Purchases of capital equipment (net) (899,387) (538,603)
Sales of investments 10,327,352 --
------------ -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,427,965 (538,603)
FINANCING ACTIVITIES:
Purchase of Treasury Stock (417,000)
Principal payments under current debt and
capitalized lease obligations (400,300) (368,187)
Proceeds from exercise of stock options and
warrants 41,037 1,041,244
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (776,263) 673,057
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 6,032,323 (365,648)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,773,742 6,259,451
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $29,806,065 $ 5,893,803
=========== ============
See notes to consolidated financial statements.
5
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
1996 1995
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 95,238 $111,835
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1996
NOTE A - Basis of Presentation
Information for the three months ended September 30, 1996 and 1995 is
unaudited but includes all adjustments which Energy Conversion Devices, Inc.
("ECD") considers necessary for a fair presentation of financial condition, cash
flows and results of operations.
In accordance with the instructions for the completion of the Quarterly
Report on Form 10-Q, certain information and footnotes necessary to comply with
Generally Accepted Accounting Principles ("GAAP") have been condensed or
omitted. These financial statements should be read in conjunction with ECD's
1996 Annual Report on Form 10-K, which contains a summary of ECD's accounting
principles and other footnote information.
The consolidated financial statements include the accounts of ECD and its
93.5%- owned subsidiary Ovonic Battery Company, Inc. ("Ovonic Battery"), a
company formed to develop and commercialize ECD's Ovonic nickel metal hydride
("NiMH") battery technology (collectively the "Company"). Due to cumulative
losses incurred by Ovonic Battery, no minority interest is recorded in the
consolidated financial statements.
ECD also has three investments accounted for by the equity method: (i)
United Solar Systems Corp. ("United Solar") (49.98%), ECD's photovoltaic (solar
energy) joint venture with Canon Inc. of Japan ("Canon"); (ii) Sovlux Co. Ltd.
("Sovlux") (50%), ECD's Russian joint venture with State Research and Production
Enterprise Kvant ("Kvant"); and (iii) GM Ovonic L.L.C. ("GM Ovonic") (40%),
Ovonic Battery's joint venture with General Motors Corporation ("General
Motors") to manufacture and sell the Company's proprietary NiMH batteries for
electric vehicle applications worldwide.
The Company's investments in its joint ventures, United Solar, Sovlux and
GM Ovonic, are recorded at zero. The Company will continue to carry its
investment in each of these joint ventures at zero until the venture becomes
profitable, at which time the Company will start to recognize over a period of
years its share, if any, of the then equity of each of the ventures, and will
recognize its share of each venture's profits or losses on the equity method of
accounting.
Upon consolidation, all intercompany accounts and transactions are
eliminated.
Certain items for the three months ended September 30, 1995 have been
reclassified to be consistent with the classification of items in the three
months ended September 30, 1996.
7
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In preparing financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reported period. Actual results could differ from those estimates. The Company
is impacted by other factors such as the continued receipt of contracts from the
U.S. government, its ability to protect and maintain the proprietary nature of
its technology, its continued product and technological advances and the
strength and ability of the Company's licensees and joint venture partners to
commercialize the Company's products and technologies.
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets," which requires adoption of the disclosure provisions no
later than fiscal years beginning after December 15, 1995. The new standard
requires the impairment of property and intangibles to be considered whenever
evidence suggests a lack of recoverability. In the three months ended September
30, 1996, the Company adopted this new standard. Adoption of the new standard
had no effect on the Company's financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation," which requires adoption of the disclosure provisions
no later than fiscal years beginning December 15, 1995 and adoption of the
recognition and measurement provisions for nonemployee transactions no later
than after December 15, 1995. The new standard defines a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period.
Pursuant to SFAS No. 123, companies are encouraged, but are not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," but would be required to disclose in
a note to the financial statements pro forma net income and, if presented,
earnings per share as if the Company had applied the new method of accounting.
The accounting requirements of SFAS No. 123 are effective for all employee
awards granted after the beginning of the fiscal year of adoption. In the three
months ended September 30, 1996, the Company determined that it will continue to
apply APB Opinion No. 25 to its stock-based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings per
share. This determination had no effect on the Company's financial statements.
8
<PAGE>
United Solar
In 1990, ECD and Canon entered into a joint venture agreement for the
formation of United Solar. The agreement provided that United Solar would be
owned 49.98% by ECD, 49.98% by Canon, with the balance held by Mrs. Haru
Reischauer, a member of the Board of Directors of ECD. ECD's principal
contributions to United Solar was a license in the field of photovoltaics. In
return for its contributions, ECD received 49.98% equity interest in United
Solar. In return for its 49.98% equity interest in United Solar, Canon has
invested over $50,000,000.
In 1992, a memorandum of understanding was signed by Canon and ECD stating
that should United Solar require additional funding beyond what Canon has
already agreed to invest, Canon would assist United Solar in finding means of
raising funds to continue the expansion of United Solar's operations to
profitability which would not result in the dilution of ECD's interest in United
Solar.
The following sets forth certain selected financial data regarding United
Solar that are derived from United Solar's unaudited financial statements:
UNITED SOLAR STATEMENTS OF OPERATIONS
Three Months Ended Three Months Ended
September 30, September 30,
1996 1995
(Unaudited) (Unaudited)
Revenues* $ 1,073,043 $ 1,547,373
------------ -----------
Operating Expenses
Cost of product sales 1,518,346 1,572,999
Research and development 666,563 484,500
General and administrative 478,919 660,835
Sales and marketing 349,449 341,786
------------ -----------
Total 3,013,277 3,060,120
Other Income (Expense) 11,916 9,269
Net (Loss) $ (1,928,318) $ (1,503,478)
============ ============
* Includes product sales and revenues earned under research contracts.
9
<PAGE>
UNITED SOLAR BALANCE SHEETS
September 30, June 30,
1996 1996
(Unaudited) (Unaudited)
Current Assets:
Cash and Cash Equivalents $ 9,252,780 $ 1,481,480
Accounts Receivable - Trade 402,998 395,551
Accounts Receivable - National Renewable
Energy Laboratory ("NREL") 188,556 217,810
Accounts Receivable - Stockholders 128,891 70,190
Inventory 2,676,667 2,257,458
Other Current Assets 305,315 332,002
------------ ------------
Total Current Assets 12,955,207 4,754,491
Property, Plant and Equipment (Net) 13,119,853 11,276,455
Other Assets 224,806 216,730
------------ ------------
Total Assets $ 26,299,866 $ 16,247,676
============ ============
Current Liabilities:
Short-term Bank Debt $ 17,000,000 $ 14,375,565
Accounts Payable - Trade and Stockholders 709,425 1,363,044
Accrued Expenses and Other 306,879 297,186
------------ ------------
Total Current Liabilities 18,016,304 16,035,795
Total Stockholders' Equity 8,283,562 211,881
------------ ------------
Total Liabilities and Stockholders'
Equity $ 26,299,866 $ 16,247,676
============ ============
Sovlux
In 1990, ECD established Sovlux, a joint venture with State Research and
Production Enterprise ("Kvant") in Russia, to manufacture photovoltaic and
battery products and systems in the countries comprising the former U.S.S.R. and
sell them worldwide (except for Japan and India). Sovlux is owned 50% by ECD and
50% by Kvant. In 1990, Kvant entered into machine-building contracts with ECD
for the construction of photovoltaic manufacturing equipment and battery
equipment. Kvant paid ECD a total of $10,450,000 for these machine-building
contracts. At June 30, 1993, ECD had completed these machines and shipped them
to Kvant.
The joint venture arrangements provide that Kvant contribute such
equipment in an installed and operational condition to the joint venture in
exchange for its 50% interest. ECD's contribution to the venture consists solely
of the technology necessary to support Sovlux's operations. No tangible assets
have been contributed to Sovlux by ECD. Through September 30, 1996, the
activities related to Sovlux have been limited to facility preparation at
certain Kvant facilities from which Sovlux will operate, the cost of which Kvant
has also assumed as part of its commitment to the venture, the training of
employees and other preproduction activities.
10
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There are no financial statements available for Sovlux since the December
31, 1993 financial statements set forth in ECD's Annual Report on Form 10-K for
the year ended June 30, 1995, as amended.
GM Ovonic
In June 1994, Ovonic Battery and General Motors formed a joint venture for
the manufacture and marketing of Ovonic NiMH batteries for electric vehicles.
General Motors has a 60% interest and Ovonic Battery has a 40% interest in
this joint venture. Ovonic Battery has contributed intellectual property,
licenses, production processes, know-how, personnel and engineering services
pertaining to Ovonic NiMH battery technology to the joint venture.
General Motors' contribution consists of operating capital, plant, equipment and
management personnel necessary for the volume production of batteries.
GM Ovonic is currently manufacturing production-intent batteries, is
conducting production scale-up engineering activities and is installing the
equipment necessary for the initial low volume production of battery packs
at a manufacturing plant in Troy, Michigan.
The following sets forth certain financial data regarding GM Ovonic
derived from GM Ovonic's unaudited financial statements:
GM OVONIC STATEMENTS OF OPERATIONS
(000's)
Three Months Ended
September 30,
1996 1995
(Unaudited) (Unaudited)
Revenues:
Sales $ 340 $ 238
Operating expenses
Cost of sales/Experimental testing 293 186
Outside engineering support 373 252
General and administrative expenses 573 254
------ ------
Total 1,239 692
------ ------
Net (Loss) $ (899) $ (454)
======= =======
GM OVONIC BALANCE SHEET
(000's)
September 30, June 30,
1996 1996
(Unaudited) (Unaudited)
Current Assets:
Accounts receivable $ 1,908 $ 1,500
Property, plant and equipment 6,034 4,342
-------- --------
Total Assets $ 7,942 $ 5,842
======== ========
Current Liabilities:
Accounts payable $ 2,790 $ 2,300
-------- --------
Total Current Liabilities 2,790 2,300
Notes Payable - Stockholders 16,802 12,915
Total Stockholders'(Deficit) (11,650) (9,373)
--------- ---------
Total Liabilities and Stockholders'
(Deficit) $ 7,942 $ 5,842
======== ========
11
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Accounts Receivable
The following tabulation shows the component elements of accounts
receivable from long-term contracts and other programs:
September 30, June 30,
1996 1996
U.S. Government:
Amounts billed $ 226,492 $ 743,482
Unbilled 745,440 453,394
----------- -----------
Total 971,932 1,196,876
----------- -----------
Commercial Customers:
Amounts billed 4,067,196* 2,768,736*
Unbilled
- due per contracts 5,326,709** 7,062,239**
- other 690,618 1,222,173
----------- -----------
Total 10,084,523 11,053,148
----------- -----------
Other 334,973 666,412
Allowance for Uncollectible Accounts (26,345) (29,205)
----------- -----------
TOTAL $11,365,083 $12,887,231
=========== ===========
* Includes related-party (United Solar and GM Ovonic) amounts of $1,554,060
and $1,041,445, respectively. Includes related-party (United Solar and GM
Ovonic) amounts of $241,118 and $1,860,064, respectively.
Unbilled receivables from commercial customers represent revenues
recognized for the present value of license payments to be received in future
periods. They also include revenues recognized on the percentage-of-completion
method of accounting related to machine-building contracts and amounts earned
under certain contracts, which amounts were billed in subsequent months.
Certain contracts with the U.S. government require a retention that is
paid upon completion of audit of the Company's indirect rates. There are no
material retentions at September 30, 1996 and June 30, 1996. Certain U.S.
government contracts remain subject to audit. Management does not believe that
adjustments which may result from an audit would be material to the financial
position or results of operations of the Company.
Inventories
Inventories of raw materials, work in process and finished goods for the
manufacture of negative electrodes, battery packs and other products, together
with supplies, are valued at the lower of cost (moving average) or market. Cost
elements included in inventory are materials, direct labor and manufacturing
overhead. Cost of sales are removed from inventory based on actual costs of
items shipped to customers.
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Inventories (principally those of Ovonic Battery) are as follows:
September 30, 1996 June 30, 1996
Finished products $ 387,422 $ 263,525
Work in process 1,945,365 1,902,396
Raw materials 1,331,278 1,075,401
Supplies 37,984 33,813
----------- -----------
$ 3,702,049 $ 3,275,135
=========== ===========
Product Sales
Product sales include negative electrodes, battery packs and
machine-building. Revenues related to machine-building contracts are recognized
on the percentage-of- completion method of accounting using the costs incurred
to date as a percentage of the total expected costs. All other product sales are
recognized when the product is shipped.
Royalties
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the sale of the respective licensed product. In
several instances, the Company has received cash payments for non-refundable
advance royalty payments which are creditable against future royalties under the
licenses. Advance royalty payments are deferred and recognized in revenues as
the creditable sales occur, the underlying agreement expires, or when the
Company has demonstrable evidence that no additional royalties will be
creditable and, accordingly, the earnings process is completed.
Business Agreements
A substantial portion of revenues are derived through business agreements
to develop and/or commercialize products based upon the Company's
proprietary technologies. Such agreements are of two types.
The first type of business agreement relates to licensing the Company's
proprietary technology. Licensing activities are tailored to provide each
licensee with the right to use the Company's technology, most of which is
patented, for a specific product application or, in some instances, for further
exploration of new product applications of such technologies. The terms of such
licenses, accordingly, are tailored to address a number of circumstances
relating to the use of such technology which have been negotiated between the
Company and the licensee. Such terms generally address whether the license will
be exclusive or nonexclusive, whether the licensee is limited to very narrowly
defined applications or to broader-based product manufacture or sale of products
using such technologies, whether the license will provide royalties for products
sold which employ
13
<PAGE>
such licensed technology and how such royalties will be measured, as well as
other factors specific to each negotiated arrangement. In some cases, licenses
relate directly to research and development that the Company has undertaken
pursuant to research and development agreements; in other cases, they relate to
product development and commercialization efforts of the licensee and other
agreements combine the efforts of the Company with those of the licensee.
License agreement fees are generally recognized as revenue at the time the
agreements are consummated, which is the completion-of-the-earnings process.
Typically, such fees are non-refundable, do not obligate the Company to incur
any future costs or require future performance by the Company and are not
related to future production or earnings of the licensee. License fees payable
in installments are recorded at the present value of the amounts to be received
taking into account the collectibility of the license fee. In some instances, a
portion of such license fees is contingent upon the commencement of production
or other uncertainties. In these cases, license fee revenues are not recognized
until commencement of production or the resolution of uncertainties.
In the second type of business agreement, the Company conducts specified
research and development projects related to one of its principal technology
specializations for an agreed-upon fee ("R&D agreements"). Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from R&D
agreements that contain specific performance criteria are recognized on a
percentage-of-completion basis which matches the contract revenues to the costs
incurred on a project based on the relationship of costs incurred to estimated
total project costs. Revenue from R&D agreements, where there are no specific
performance terms, are recognized in amounts equal to the amounts expended on
the programs. Generally, the agreed-upon fees for R&D agreements contemplate
reimbursing the Company for costs considered associated with project activities
including expenses for direct product development and research, patents,
operating, general and administrative expenses and depreciation. Accordingly,
expenses related to R&D agreements are recorded as cost of revenues from R&D
agreements.
Other Operating Revenues
Other operating revenues consist principally of third-party service
revenue realized by certain of the Company's service departments, including the
Production Technology and Machine Building Division and Central Analytical
Laboratory.
Other Nonoperating Income
Other nonoperating income-net consists of rental income and gains and
losses on sale of fixed assets.
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NOTE B - Royalties, Revenues from R&D Agreements and License and Other
Agreements
The Company has business agreements with third parties for which royalties
and revenues are included in the consolidated statements of operations. A
summary of the royalties and revenue from such agreements follows:
Three Months Ended September 30,
1996 1995
Royalties:
Battery Technology $ 303,338 $ 272,000
Optical Memory 98,000
------------- ------------
$ 401,338 $ 272,000
============= ============
Revenues from research and development agreements:
Photovoltaics $ 280,433 $ 557,733
Battery Technology 95,139 1,401,779
Microelectronics 234,458 215,673
Hydrogen 100,666 84,421
Other 2,742 91,053
------------- ------------
$ 713,438 $ 2,350,659
============= ============
License and Other Agreements:
Battery $ 1,288,000 $ 3,325,000
Microelectronics 80,645 375,000
------------- ------------
$ 1,368,645 $ 3,700,000
============= ============
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NOTE C - Non-Refundable Advance Royalties
At September 30 and June 30, 1996, the Company deferred recognition of
revenues relating to non-refundable advance royalty payments. Non-refundable
advance royalties consist of the following:
September 30, June 30,
1996 1996
Battery:
Matsushita Battery Industrial Co., Ltd. $1,125,000 $1,125,000
Hitachi Maxell, Ltd. 355,189 355,189
Daido Steel Co. Ltd. Of Japan 224,802 224,802
Optical Memory:
Matsushita Electric Ind'l Co. Ltd. 866,818 933,818
Hitachi, Ltd. 685,700 685,700
Sony Corporation 360,000 360,000
Polaroid Corporation 50,000 50,000
Plasmon PLC -- 2,844
Toshiba Corporation 16,876 16,876
---------- ----------
$3,684,385 $3,754,229
========== ==========
NOTE D - Net Income (Loss) Per Share
The Company uses the treasury stock method to calculate primary and
fully-diluted earnings per share. Common stock equivalents consist of stock
options and warrants. Weighted average number of shares outstanding and primary
earnings per share for the three months ended September 30, 1996 and 1995 are
computed as follows:
1996 1995
Weighted average number of shares outstanding 10,698,496 8,376,595
Pro Forma weighted average shares for Common
Stock Equivalents -- 1,606,059
------------ -----------
AVERAGE NUMBER OF SHARES
OUTSTANDING AND EQUIVALENTS 10,698,496 9,982,654
Net income (loss) as reported $(3,898,033) $ 313,234
Effect of application of modified treasury stock
method -- 92,093
----------- -----------
Adjusted net (loss) income $(3,898,033) $ 405,327
=========== ===========
NET (LOSS) INCOME PER SHARE $ (.36) $ .04
=========== ===========
Primary and fully-diluted net (loss) income per share are the same for
each of these periods.
16
<PAGE>
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
The Company had a net loss for the three months ended September 30, 1996
of approximately $3,898,000 compared to a net income of approximately $313,000
for the three months ended September 30, 1995. The loss is primarily due
to: (i) startup and expansion of negative electrode production equipment and
battery pack production; (ii) additional technical, manufacturing and
engineering support for GM Ovonic; (iii) ongoing electric vehicle battery
research and development with reduced revenues from funded programs; and (iv)
ongoing defense of the Company's battery technology patents.
Product sales, consisting of battery electrodes, battery packs and machine
building, increased 24% in the quarter ended September 30, 1996 compared to the
same quarter in the previous year due to increased sales of battery electrodes
and battery packs. Battery electrode and battery pack sales increased 154% from
$1,340,000 in the September 1995 quarter to $3,409,000 in the September 1996
quarter. Revenues from machine-building were $1,066,000 in the September 1996
quarter down from $2,274,000 in the same period last year, principally due to
the completion of photovoltaic manufacturing equipment purchased by United
Solar.
Royalties increased 47% from $272,000 in the three months ended September
30, 1996 to $401,000 in the three months ended September 30, 1996 primarily
due to higher levels of royalties from ECD's optical memory technology in 1996.
The 70% decrease in revenues from business agreements to $713,000 in the
three months ended September 30, 1996 from $2,351,000 in the three months ended
September 30, 1995 was due to substantially reduced revenues ($95,000 in the
September quarter compared to $1,100,000 in the September 1995 quarter) from the
United States Advanced Battery Consortium pending award of a follow-on contract
and the completion of a contract in the microelectronics field in the prior
year.
17
<PAGE>
Revenues from license and other agreements decreased 63% from $3,700,000
in the three months ended September 30, 1995 to $1,369,000 in the three months
ended September 30, 1996. 1995 revenues from license and other agreements
included license fees from Sanoh Industrial Co., Ltd. and Furukawa Battery Co.,
Ltd. In the three months ended September 30, 1996, ECD and Ovonic Battery
entered into a Battery License Agreement with Canon granting Canon
nonexclusive rights to manufacture and market Ovonic NiMH batteries for
certain applications. The Company recognized license fee revenue of $1,246,000
in connection with this agreement and will receive running royalties.
The decrease in other revenues was due to decreased billings in the
quarter ended September 30, 1996 for miscellaneous work performed for Ovonic
Battery licensees.
The decrease in cost of revenues from business agreements and the increase
in product development and research expense in the three months ended September
30, 1996 compared to the three months ended September 30, 1995 was principally
due to ongoing electric vehicle battery and other research and development with
reduced revenues from funded research and development programs.
The increase in cost of product sales from $3,691,000 in the three months
ended September 30, 1995 to $4,991,000 in the three months ended September 30,
1996 was principally due to the startup and expansion of negative electrode
production equipment and battery pack production.
The decrease in patent expenses from $215,000 in the three months ended
September 30, 1995 to $120,000 in the three months ended September 30, 1996 was
primarily due to lower patent and maintenance costs in 1996. Patent defense
expenses for 1996 were incurred in connection with the defense and prosecution
of litigation involving Matsushita Battery Industrial Co., Ltd. with respect to
Ovonic Battery's United States patents covering its proprietary technology for
NiMH batteries.
The increase in operating, general and administrative expenses from
$1,430,000 in the three months ended September 30, 1995 to $1,631,000 in the
three months ended September 30, 1996 was primarily due to increased
depreciation expenses in 1996.
The change from other income of $40,000 in the three months ended
September 30, 1995 compared to other income of $274,000 in the three months
ended September 30, 1996 was due principally to increased interest income in
1996.
Liquidity and Capital Resources
As of September 30, 1996, the Company had unrestricted consolidated cash
and cash equivalents, which consist of investments maturing in three months or
less, of approximately $29,806,000, an increase of approximately $6,032,000
from June 30, 1996. As of September 30, 1996, the Company had consolidated
working capital of approximately $38,506,000, compared with a consolidated
18
<PAGE>
working capital of $43,525,000 as of June 30, 1996. Investments, which consist
of commercial paper maturing in four to six months, decreased $10,327,000 in
the three months ended September 30, 1996.
During the three months ended September 30, 1996, approximately $2,619,000
cash was used in operations. The difference between the net loss of
approximately $3,898,000 and the net cash used in operations was principally due
to revenues from agreements in the three months ended September 30, 1996
pursuant to which certain payments will be received at a later date. In
addition, during this period approximately $899,000 of machinery and equipment
were purchased or constructed for the Company's operations. During the next 12
months, Ovonic Battery plans to purchase approximately $7,000,000 of machinery
and equipment. The machinery and equipment are principally for expansion of
Ovonic Battery's manufacturing capacity which will be financed with a portion of
the proceeds from the January 1996 registered public offering or from third-
party leasing arrangements.
Some business agreements related to R&D agreements have been entered into
by the Company with U.S. government agencies and with industry to develop the
Company's products and production technology. The technology developed, together
with the applicable patents, are generally owned by the Company. Generally, the
agreed-upon fees for these R&D agreements reimburse the Company for its direct
costs associated with these projects, together with a portion of indirect costs
(patents, operating, general and administrative expenses and depreciation).
The Company has entered into a third-party leasing arrangement with
Financing for Science International ("FSI") which provides lease financing for
certain equipment used by the Company. As of September 30, 1996, the Company had
financed equipment having an acquisition cost of $8,600,000 under this
arrangement. The Company's leases with FSI provide for a term of five years. The
required lease payments over this period equal the acquisition cost of the
leased equipment plus an interest factor. The Company has agreed to purchase
certain equipment leased from FSI upon the expiration of the applicable leases
for 10% of its acquisition cost. For other equipment, the Company has an option
to purchase the equipment for its then market value (but no less than 10% nor
more than 20% of its acquisition cost). The Company has an option to purchase
certain other leased equipment upon the expiration of the applicable leases for
its then fair market value.
While certain programs have limited terms, the equipment being utilized
for these programs has alternative future uses for other programs if, in fact,
the programs are not continued beyond their respective terms.
19
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 27. Financial Data Schedule
B. Reports on Form 8-K
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
(Registrant)
By: /s/ Nancy M. Bacon
-------------------------
Nancy M. Bacon
Senior Vice President--
Government Contracts and
Date: November 14, 1996 International Projects
By: /s/ Kenneth A. Pullis
-------------------------
Kenneth A. Pullis
Acting Chief Financial Officer
Date: November 14, 1996 and Treasurer
By: /s/ Stanford R. Ovshinsky
-------------------------
Stanford R. Ovshinsky
Date: November 14, 1996 President and Chief Executive Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the period September 30, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
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<RECEIVABLES> 11,365,083
<ALLOWANCES> (25,000)
<INVENTORY> 3,702,049
<CURRENT-ASSETS> 45,504,582
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<COMMON> 107,150
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