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 March 31, 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 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 May 12, 1997 there were 219,913 shares of Class A Common Stock and
10,594,751 shares of Common Stock outstanding.
Page 1 of 21 pages
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Product sales $ 3,287,378 $ 3,804,556 $ 12,140,674 $11,058,631
Royalties 302,642 358,238 1,119,074 980,723
Revenues from research and
development agreements 1,683,233 2,332,313 3,708,783 7,130,747
Revenues from license and
other agreements 42,000 375,000 4,452,645 10,474,262
Other 368,613 646,534 1,019,143 1,310,258
TOTAL REVENUES 5,683,866 7,516,641 22,440,319 30,954,621
EXPENSES
Cost of product sales 4,214,051 4,726,619 13,895,955 12,041,162
Cost of revenues from research
and development agreements 1,728,708 1,908,752 3,719,833 7,330,034
Product research and development 3,705,538 2,176,176 10,754,479 6,110,906
Patent Defense 1,274,766 1,070,012 2,431,311 1,823,085
Patent 108,234 144,930 332,541 327,724
Operating, general and
administrative 2,078,897 1,486,614 5,314,940 4,268,358
----------- ----------- ------------ -----------
TOTAL EXPENSES 13,110,194 11,513,103 36,449,059 31,901,269
----------- ----------- ------------ -----------
NET (LOSS) FROM OPERATIONS (7,426,328) (3,996,462) (14,008,740) (946,648)
OTHER INCOME (EXPENSE)
Gain on sale of Ovonic Battery
Company stock -- 4,500,000 -- 4,500,000
Interest expense (65,793) (107,985) (249,787) (340,880)
Interest income 305,124 350,620 995,210 530,027
Other nonoperating income (net) 58,605 11,994 217,311 86,810
TOTAL OTHER INCOME 297,936 4,754,629 962,734 4,775,957
----------- ----------- ----------- -----------
NET (LOSS) INCOME $ (7,128,392) $ 758,167 $(13,046,006) $ 3,829,309
============= ============ ============ ============
NET (LOSS) INCOME PER COMMON SHARE
AND COMMON EQUIVALENT SHARE $ (.66) $ .07 $ (1.22) $ .37
========== =========== ========== ===========
NET (LOSS) INCOME PER COMMON SHARE
ASSUMING FULL DILUTION $ (.66) $ .07 $ (1.22) $ .36
=========== =========== ========== ===========
See notes to consolidated financial statements.
</TABLE>
2
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
1997 1996
(Unaudited) (Audited)
CURRENT ASSETS
Cash, including cash equivalents of
$14,503,000 at March 31, 1997 and
$23,769,000 at June 30, 1996 $ 14,508,410 $ 23,773,742
Investments 3,611,165 10,327,352
Accounts receivable (net of allowance for
uncollectible accounts of $25,000 at
March 31, 1997 and $29,000 at June 30, 1996) 12,202,341 9,985,722
Amounts due from related parties 2,598,812 2,901,509
Inventories 2,457,190 3,275,135
Prepaid expenses and other current assets 772,820 362,558
TOTAL CURRENT ASSETS 36,150,738 50,626,018
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 312,588 312,588
Buildings and improvements 3,678,042 3,595,009
Machinery and other equipment 19,176,479 17,249,435
Capitalized lease equipment 5,708,390 5,802,806
------------- -------------
28,875,499 26,959,838
Less accumulated depreciation and amortization (21,851,420) (21,260,424)
PROPERTY, PLANT AND EQUIPMENT 7,024,079 5,699,414
JOINT VENTURES
United Solar Systems Corp. -- --
GM Ovonic L.L.C. -- --
Sovlux Co. Ltd. -- --
OTHER ASSETS 791,303 804.007
------------- -------------
TOTAL ASSETS $ 43,966,120 $ 57,129,439
============ ============
See notes to consolidated financial statements.
3
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
1997 1996
(Unaudited) (Audited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,352,357 $ 3,911,122
Salaries, wages and amounts withheld
from employees 1,403,068 1,175,102
Deferred revenues under business agreements 876,033 711,894
Current installments on capitalized lease
obligations and short-term debt 1,309,318 1,302,973
TOTAL CURRENT LIABILITIES 7,940,776 7,101,091
CAPITALIZED LEASE OBLIGATIONS 820,433 1,853,728
DEFERRED GAIN 339,356 686,351
NON-REFUNDABLE ADVANCE ROYALTIES 3,605,385 3,754,229
------------- -----------
TOTAL LIABILITIES 12,705,950 13,395,399
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued and outstanding - 219,913 shares 2,199 2,199
Common Stock, par value $0.01 per share:
Authorized - 15,000,000 shares Issued
and outstanding - 10,594,751 shares at
March 31, 1997 and 10,489,591 shares at
June 30, 1996 105,948 104,896
Additional paid-in capital 201,809,719 200,757,697
Accumulated deficit (170,176,758) (157,130,752)
Treasury stock at cost - 28,000 shares (480,938)
TOTAL STOCKHOLDERS' EQUITY 31,260,170 43,734,040
------------- -----------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 43,966,120 $ 57,129,439
============== ============
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended March 31,
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(13,046,006) $ 3,829,309
Adjustments to reconcile net (loss) income to
net cash (used in) by operating activities:
Depreciation and amortization 1,375,188 883,985
Gain on sale of Ovonic Battery Company stock -- (4,500,000)
Creditable royalties (148,844) (39,829)
Employee stock options 339,750 339,750
Stock issued for services rendered 119,203 59,463
Amortization of deferred gain (34,497) (34,497)
Loss on sale of equipment 1,508
Changes in working capital other than debt:
Accounts receivable and amounts due from related
parties, less amount due from sale of
Ovonic Battery Company stock in 1996 (1,913,922) (4,132,036)
Inventories 817,945 (647,030)
Prepaid expenses and other current assets (397,558) 100,765
Accounts payable and accrued expenses 669,201 (640,734)
Deferred revenues under business agreements 164,139 (294,983)
NET CASH (USED IN) OPERATIONS (12,053,893) (5,075,837)
INVESTING ACTIVITIES:
Purchases of capital equipment (net) (3,013,859) (1,428,899)
Purchases of investments -- (4,290,000)
Sales of investments 6,716,187
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 3,702,328 (5,718,899)
FINANCING ACTIVITIES:
Purchase of treasury stock (480,938)
Proceeds from sale of stock and exercise of stock
options and warrants 594,121 31,925,365
Proceeds from capital lease transactions 167,161
Principal payments under short-term and long-term
debt obligations and capitalized lease obligations (1,026,950) (1,194,879)
-------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (913,767) 30,897,647
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (9,265,332) 20,102,911
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,773,742 6,259,451
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,508,410 $ 26,362,362
============ =============
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
1997 1996
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $249,787 $340,880
See notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 1997
(Unaudited)
NOTE A - Basis of Presentation
Information for the three and nine months ended March 31, 1997 and 1996 is
unaudited but includes all adjustments which Energy Conversion Devices, Inc.
("ECD") considers necessary for a fair presentation of its 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
("Ni-MH") 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 the Russian Ministry of Atomic Energy and its
various enterprises ("MINATOM"); 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 Ni-MH 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 have been
eliminated.
7
<PAGE>
Certain items for the three months and nine months ended March 31, 1996
have been reclassified to be consistent with the classification of items in the
three months and nine months ended March 31, 1997.
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 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.
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
contribution 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 United Solar.
The following sets forth certain selected financial data regarding United
Solar that is derived from United Solar's financial statements:
UNITED SOLAR STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues* $ 1,739,851 $ 1,298,042 $ 4,341,840 $ 4,333,576
Operating Expenses
Cost of product sales 2,272,133 1,961,934 5,561,517 4,934,344
Research and development 719,890 664,055 2,178,841 2,119,513
General and administrative 776,526 399,010 1,685,290 1,241,854
Sales and marketing 409,316 394,656 1,197,302 1,211,518
Total 4,177,865 3,419,655 10,622,950 9,507,229
----------- ----------- ----------- -----------
Other Income (Expense) 13,257 (149,549) 103,020 (142,796)
----------- ----------- ----------- -----------
Net Loss $(2,424,757) $(2,271,162) $(6,178,090) $(5,316,449)
=========== =========== =========== ===========
* Includes product sales and revenues earned under research contracts.
8
<PAGE>
UNITED SOLAR BALANCE SHEETS
March 31, June 30,
1997 1996
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents $ 42,177 $ 1,481,480
Accounts receivable - Trade 641,684 395,551
Accounts receivable - NREL 251,197 217,810
Accounts receivable - Stockholders 230,097 70,190
Inventory 3,449,064 2,257,458
Other current assets 290,645 332,002
------------ ------------
Total Current Assets 4,904,864 4,754,491
Property, plant and equipment (Net) 13,591,012 11,276,455
Other assets 228,239 216,730
------------ ------------
Total Assets $ 18,724,115 $ 16,247,676
============ ============
Current Liabilities:
Short-term bank debt $ 10,000,000 $ 14,375,565
Accounts payable - Trade & Stockholders 4,262,564 1,363,044
Accrued expenses and other 427,762 297,186
------------ ------------
Total Current Liabilities 14,690,326 16,035,795
Total Stockholders' Equity 4,033,789 211,881
------------ ------------
Total Liabilities and Stockholders'
Equity $ 18,724,115 $ 16,247,676
============ ============
Sovlux
In 1990, ECD established Sovlux, a joint venture with 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). In July 1996, MINATOM agreed to become an equity partner in Sovlux.
Sovlux is owned 50% by ECD and 50% by Kvant and MINATOM.
No tangible assets have been contributed to Sovlux by ECD. Through March
31, 1997, 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 pre-production activities related to equipment
purchase from ECD.
There are no financial statements available for Sovlux since the December
31, 1993 unaudited 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 Ni-MH batteries for electric vehicles.
General Motors has a 60% interest and Ovonic Battery has a 40% interest in this
joint venture.
9
<PAGE>
Ovonic Battery has contributed intellectual property, licenses, production
processes, know-how, personnel and engineering services pertaining to Ovonic
Ni-MH 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 producing first generation batteries at its
manufacturing facility in Troy, Michigan, with the first module of
production-intent equipment being operational.
Financial statements of GM Ovonic for the three- and nine-month periods
ended March 31, 1997 are currently not available.
Accounts Receivable
The following tabulation shows the component elements of accounts
receivable from long-term contracts and other programs:
March 31, June 30,
1997 1996
U.S. Government:
Amounts billed $ 971,513 $ 743,482
Unbilled 791,087 453,394
----------- -----------
Total 1,762,600 1,196,876
----------- ------------
Commercial Customers:
Amounts billed 4,497,479* 2,768,531*
Unbilled
- due per contracts 7,291,102** 7,062,239**
- other 1,116,193 1,222,173
----------- -----------
Total 12,904,774 11,052,943
----------- -----------
Other 158,779 666,412
Allowance for uncollectible
accounts (25,000) (29,000)
----------- -----------
$14,801,153 $12,887,231
=========== ===========
* Includes related-party (principally GM Ovonic) amounts of $1,367,440 and
$1,041,445, respectively.
** Includes related-party (principally GM Ovonic) amounts of $1,231,372 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 subsequently.
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 March 31, 1997 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.
10
<PAGE>
Inventories
Inventories of raw materials, work in process and finished goods for the
manufacture of 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.
Inventories (principally those of Ovonic Battery) are as follows:
March 31, 1997 June 30, 1996
Finished products $ 77,677 $ 263,525
Work in process 1,230,950 1,902,396
Raw materials 1,148,563 1,075,401
Supplies -- 33,813
------------ -----------
$ 2,457,190 $ 3,275,135
============ ===========
Product Sales
Product sales include 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.
11
<PAGE>
Business Agreements
The Company's strategy is to develop products that have broad applications
and technological advantages over available alternatives and that are capable of
being produced commercially on an economically competitive basis. The Company
invents and develops materials, products and production technology for use in
the energy and information industries. It is engaged in manufacturing and
selling its proprietary products through joint ventures, licensing arrangements
and through its own internal production operations.
A substantial portion of the Company's revenues are derived through
business agreements for the development and/or commercialization of products
based upon the Company's proprietary technologies. Such agreements are of two
types.
The first type of 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 for 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 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 ("R&D Agreements");
in other cases, they relate to product development and commercialization efforts
of the licensee; 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 agreement, R&D Agreements, the Company conducts
specified research and development projects related to one of its principal
technology specializations for an agreed-upon fee. 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
12
<PAGE>
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
business 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 Non-operating Income
Other non-operating income - net consists of rental income and gains and
losses on sale of fixed assets.
NOTE B - Product Sales, Royalties and Revenues from R&D Agreements and
License and Other Agreements
The Company has business agreements with third parties for which sales,
royalties and other revenues are included in the consolidated statement of
operations. A summary of revenue from such agreements follows:
Nine Months Ended
March 31,
1997 1996
---- ----
Product Sales:
Negative and positive electrodes $ 8,273,418 $ 3,173,709
Battery packs 2,218,556 1,692,565
Machine building 1,648,700 6,192,357
------------ ------------
$ 12,140,674 $ 11,058,631
============ ============
Royalties:
Battery technology $ 915,001 $ 920,674
Optical memory technology 204,073 60,049
------------ ------------
$ 1,119,074 $ 980,723
============ ============
Revenues from R&D Agreements:
Photovoltaics $ 842,290 $ 2,376,237
Battery technology 1,480,794 3,293,835
Microelectronics 687,249 881,374
Hydrogen 488,590 435,630
Other 209,860 143,671
------------ ------------
$ 3,708,783 $ 7,130,747
============ ============
License and Other Agreements:
Battery $ 4,372,000 $ 9,349,262
Microelectronics 80,645 1,125,000
------------ ------------
$ 4,452,645 $ 10,474,262
============ ============
13
<PAGE>
NOTE C - Non-Refundable Advance Royalties
At March 31, 1997 and at June 30, 1996, the Company deferred recognition
of revenues relating to non-refundable advance royalty payments. Non-refundable
advance royalties consist of the following:
March 31, 1997 June 30, 1996
Battery $1,692,991 $1,704,991
Optical Memory 1,912,394 2,049,238
---------- ----------
$3,605,385 $3,754,229
========== ==========
NOTE D - Net (Loss) Income Per Common 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 and nine months ended March 31, 1997 and
1996 are computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted average number of shares
outstanding 10,745,713 10,015,088 10,714,176 8,957,381
Pro Forma weighted average shares for
Common Stock Equivalents --- 1,457,593 --- 1,399,382
---------- ---------- ---------- ----------
AVERAGE NUMBER OF SHARES
OUTSTANDING AND EQUIVALENTS 10,745,713 11,472,681 10,714,176 10,356,763
Net income (loss) as reported $(7,128,392) $ 58,167 $(13,046,006) $3,829,309
Effect of application of modified
treasury stock method --- --- --- ---
----------- ---------- ------------ ----------
Adjusted net (loss) income $(7,128,392) $ 758,167 $(13,046,006) $3,829,309
=========== ========== ============ ==========
NET (LOSS) INCOME PER SHARE $ (.66) $ .07 $ (1.22) $ .37
=========== ========== ============ ==========
</TABLE>
The difference between the primary earnings per share and the
fully-diluted earnings per share for the nine months ended March 31, 1996 is the
result of using the ending market value of $21.125 per share versus the average
market value of $18.416. This results in pro forma weighted average shares for
common stock equivalents of 1,628,781 and a fully-diluted earnings per share of
$.36.
14
<PAGE>
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Summary
The changes from net income in the periods ended March 31, 1996 to net
losses in the current periods are primarily a result of the sale of $4,500,000
of the stock of Ovonic Battery in the prior three and nine month periods and an
approximate $6,000,000 reduction in one-time license fees in the nine months
ended March 31, 1997.
The net loss for the three and nine months ended March 31, 1997 was as a
result of:
- increased Company-funded electric and hybrid vehicle battery development;
- costs related to start up and expansion of negative electrode production
equipment and initiation of positive electrode production and equipment;
- expenses of additional technical, manufacturing and engineering support
for the GM Ovonic manufacturing joint venture in furtherance of initial
Ni-MH battery production and ongoing technical assistance to other
customers;
- expenses for ongoing defense of the Company's battery technology
patents. On April 3, 1997, the Company announced that it anticipates the
satisfactory resolution of patent litigation brought by Matsushita
Battery Industrial Co., Ltd. This should result in a reduction in future
patent defense costs; and
- reduced revenues from license and other agreements in 1997.
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
The Company had a net loss for the three months ended March 31, 1997 of
$7,128,000 compared to net income of $758,000 for the three months ended March
31, 1996. This change results primarily from (i) a $4,500,000 gain on the sale
of Ovonic Battery Company stock in 1996; (ii) an increase of $1,349,000 in
spending for research and development from $4,085,000 in the 1996 quarter to
$5,434,000 in the 1997 quarter while outside funding from R&D Agreements
decreased by $649,000; and (iii) ongoing costs for the defense of the Company's
battery technology patents.
Product sales, consisting of battery electrodes, battery packs and
machine-building, decreased 14% in the quarter ended March 31, 1997 compared to
the same quarter in the previous year due to reduced machine-building activities
and reduced sales of battery packs, because battery packs previously sold to GM
Ovonic for General Motors electric vehicles are
15
<PAGE>
now being manufactured by GM Ovonic. Battery electrode sales increased 412% to
$2,815,000 in the three months ended March 31, 1997 from $550,000 in the three
months ended March 31, 1996 due to increased sales volume of both negative and
positive electrodes. Sales of battery packs decreased 89% to $137,000 in the
three months ended March 31, 1997 from $1,215,000 in the three months ended
March 31, 1996. Revenues from machine-building were $335,000 in the March 1997
quarter, down from $2,040,000 in the same period last year, principally due to
the completion of photovoltaic manufacturing equipment purchased by United Solar
and reduced machine-building activities in 1997 for Ovonic Battery.
The 28% decrease in revenues from R&D Agreements from $2,332,000 in the
three months ended March 31, 1996 to $1,683,000 in the three months ended March
31, 1997 was due to reduced revenues ($1,209,000 in the March 1997 quarter
compared to $1,782,000 in the March 1996 quarter) from the U.S. Department of
Energy ("DOE") and National Renewable Energy Laboratory ("NREL") programs and
from the United States Advanced Battery Consortium ("USABC").
The decrease in other revenues was due to decreased billings in the
quarter ended March 31, 1997 for miscellaneous work performed for Ovonic Battery
licensees.
The decrease in cost of revenues from R&D Agreements and the increase in
product development and research expense in the three months ended March 31,
1997 compared to the three months ended March 31, 1996 was principally due to
ongoing electric vehicle battery and other research and development with reduced
revenues from funded research and development programs.
Cost of product sales of $4,214,000 in the three months ended March 31,
1997 decreased 11% compared to the same 1996 quarter principally as a result of
reduced product sales, improved manufacturing efficiencies for battery
electrode, partially offset by a $425,000 addition to the lower of cost of
market valuation provision for inventories.
Patent defense expenses for 1997 and 1996 were incurred in connection with
the defense and prosecution of litigation with respect to Ovonic Battery's
United States patents covering its proprietary technology for Ni-MH batteries.
The increase in operating, general and administrative expenses from
$1,487,000 in the three months ended March 31, 1996 to $2,079,000 in the three
months ended March 31, 1997 was primarily due to increased administrative
expenses in 1997, including salaries, depreciation expense and rents and reduced
allocation of expenses to cost of revenues from R&D Agreements in 1997.
16
<PAGE>
The change from other income of $4,755,000 in the three months ended March
31, 1996 to other income of $298,000 in the three months ended March 31, 1997
was due principally to the $4,500,000 gain on the sale of Ovonic Battery stock
in 1996.
Nine Months Ended March 31, 1997 Compared to Nine Months Ended March 31, 1996
The Company had a net loss for the nine months ended March 31, 1997 of
$13,046,000 compared to net income of $3,829,000 for the nine months ended March
31, 1996. This change results primarily from (i) a $4,500,000 gain on the sale
of Ovonic Battery Company stock in 1996; (ii) an increase in spending for
research and development from $13,441,000 in year-to-date 1996 to $14,474,000 in
year-to-date 1997 while outside funding from R&D agreements decreased by
$3,422,000; (iii) a decrease in revenues from license and other agreements from
$10,474,000 in 1996 to $4,452,000 in 1997; and (iv) ongoing defense of the
Company's battery technology patents.
Product sales, consisting of battery electrodes, battery packs and
machine-building, increased 10% in the nine months ended March 31, 1997 compared
to the nine months ended March 31, 1996. Battery electrode sales increased 161%
to $8,274,000 in the nine months ended March 31, 1997 from $3,174,000 in the
nine months ended March 31, 1996 due to increased sales volume of both negative
and positive electrodes. Sales of battery packs increased 31% to $2,219,000 in
the nine months ended March 31, 1997 from $1,693,000 in the nine months ended
March 31, 1996. Revenues from machine-building were $1,648,000 in the nine
months ended March 31, 1997 down from $6,192,000 in the nine months ended March
31, 1996, principally due to the completion of photovoltaic manufacturing
equipment purchased by United Solar and reduced machine-building revenue in 1997
for Ovonic Battery.
The 48% decrease in revenues from R&D agreements from $7,131,000 in the
nine months ended March 31, 1996 to $3,709,000 in the nine months ended March
31, 1997 was due to reduced revenues ($2,323,000 in 1997 compared to $5,670,000
in 1996) from DOE, NREL and USABC.
In the nine months ended March 31, 1997, the Company entered into a
battery license agreement with Canon granting Canon nonexclusive rights to
manufacture and market Ovonic Ni-MH batteries for certain applications. The
Company recognized license fee revenue of $1,246,000 in connection with this
agreement and will receive running royalties. In December 1996, Ovonic Battery
signed an agreement with Sanoh Industrial Co., Ltd. ("Sanoh") to form a European
joint venture to manufacture and sell Ovonic Ni-MH batteries for
electrically-powered two- and three-wheeled vehicles. Ovonic Battery, 45% owner
in the joint venture, will provide the necessary licenses and technical
know-how. Sanoh, 55% owner in the joint venture, will provide the necessary
funding for the operations and capital expenses. Ovonic Battery, in addition to
its 45% equity, will receive total payments of up to $5,000,000, of which
$2,000,000 is recorded as license fees in the
17
<PAGE>
nine months ended March 31, 1997. Revenues from license and other agreements
were $10,474,000 in the nine months ended March 31, 1996 and included license
fees of $8,849,000 from Asia Pacific Investment Co. and Sanoh.
Also, in December, 1996 Ovonic Battery signed an agreement with LG
Chemical Ltd. of the Republic of Korea to manufacture and sell consumer Ni-MH
batteries. Ovonic Battery will receive total payments of up to $5,000,000, of
which $1,000,000 is recorded as license fees at March 31, 1997. In addition, the
Company will receive running royalties under this agreement.
The decrease in cost of revenues from R&D Agreements and the increase in
product development and research expense in the nine months ended March 31, 1997
compared to the nine months ended March 31, 1996 was principally due to ongoing
electric vehicle battery and other research and development with reduced
revenues from funded R&D Agreements.
The increase in cost of product sales to $13,896,000 in the nine months
ended March 31, 1997 from $12,041,000 in the nine months ended March 31, 1996
was principally due to the startup and expansion of negative electrode
production equipment and battery pack production.
Patent defense expenses for 1997 and 1996 were incurred in connection with
the defense and prosecution of litigation with respect to Ovonic Battery's
United States patents covering its proprietary technology for Ni-MH batteries.
The increase in operating, general and administrative expenses to
$5,315,000 in the nine months ended March 31, 1997 from $4,268,000 in the nine
months ended March 31, 1996 was primarily due to increased administrative
expenses in 1997, including salaries, depreciation and rents and reduced
allocations of expenses to cost of revenue from R&D Agreements in 1997.
The change from other income of $4,776,000 in the nine months ended March
31, 1996 compared to other income of $963,000 in the nine months ended March 31,
1997 was due principally to the $4,500,000 gain on the sale of Ovonic Battery
stock in 1996.
Liquidity and Capital Resources
As of March 31, 1997, the Company had unrestricted consolidated cash and
cash equivalents, which consist of investments maturing in three months or less,
of approximately $14,508,000, a decrease of approximately $9,265,000 from June
30, 1996. As of March 31, 1997, the Company had consolidated working capital of
approximately $28,210,000, compared with a consolidated working capital of
$43,525,000 as of June 30, 1996. Investments, which consist of commercial paper
maturing in four to six months, decreased $6,716,000 in the nine months ended
March 31, 1997.
18
<PAGE>
During the nine months ended March 31, 1997, approximately $12,054,000
cash was used in operations. The difference between the net loss of
approximately $13,046,000 and the net cash used in operations was principally
due to depreciation and amortization in the nine months ended March 31, 1997. In
addition, during this period approximately $3,013,000 of machinery and equipment
were purchased or constructed for the expansion of Ovonic Battery's
manufacturing capacity.
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 Finova
Capital Corporation ("Finova"), formerly Financing for Science International,
which provides lease financing for certain equipment used by the Company. As of
March 31, 1997, the Company had financed equipment having an acquisition cost of
$8,600,000 under this arrangement. The Company's leases with Finova provide for
a term of three to 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 Finova 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.
The Company has entered into licensing or joint venture agreements with
established industrial companies, such as General Motors, Canon, Sanoh,
Matsushita Electric Industrial Co., Ltd., Toshiba Corporation, Hitachi, Ltd.,
Hyundai Motor Co. Ltd. and others, for the manufacture and commercialization of
products incorporating the Company's technologies in its three core businesses:
Information Technology, Energy Generation and Energy Storage. The Company's
future revenues are largely dependent on the ability of the Company's licensees
and joint venture partners such as those indicated above to successfully
manufacture and market commercial products based on the Company's technologies.
19
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 27Financial Data Schedule (Edgar version)
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/ Kenneth A. Pullis
Kenneth A. Pullis
Date: May 14, 1997 Controller (Principal Accounting Officer)
By: /s/ Stephan W. Zumsteg
Stephan W. Zumsteg
Date: May 14, 1997 Treasurer
By: /s/ Stanford R. Ovshinsky
Stanford R. Ovshinsky
Date: May 14, 1997 President and Chief Executive Officer
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the period March 31, 1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,508,410
<SECURITIES> 3,611,165
<RECEIVABLES> 12,202,341
<ALLOWANCES> (25,000)
<INVENTORY> 2,457,190
<CURRENT-ASSETS> 36,150,738
<PP&E> 28,875,499
<DEPRECIATION> (21,851,420)
<TOTAL-ASSETS> 43,966,120
<CURRENT-LIABILITIES> 7,940,776
<BONDS> 820,433
0
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<COMMON> 108,147
<OTHER-SE> 31,152,023
<TOTAL-LIABILITY-AND-EQUITY> 43,966,120
<SALES> 12,140,674
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<CGS> 13,895,955
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<INTEREST-EXPENSE> 249,787
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<EPS-PRIMARY> (1.22)
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