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, 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 (248) 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, 1997, there were 219,913 shares of Class A Common Stock
and 10,610,663 shares of Common Stock outstanding.
Page 1 of 20 pages
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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,
1997 1996
-------------------------------
REVENUES
Product sales $ 2,574,497 $ 4,474,450
Royalties 338,000 401,338
Revenues from research and development
agreements 2,848,570 755,438
Revenues from license agreements --- 1,326,645
Other 699,378 219,990
-------------- ---------------
TOTAL REVENUES 6,460,445 7,177,861
EXPENSES
Cost of product sales 2,577,267 4,990,729
Cost of revenues from research and development
agreements 2,768,836 586,287
Product development and research 3,345,929 3,582,942
Patent defense 71,395 439,746
Patents 216,574 119,508
Operating, general and administrative 1,952,998 1,631,044
------------- --------------
TOTAL EXPENSES 10,932,999 11,350,256
------------ -------------
LOSS FROM OPERATIONS (4,472,554) (4,172,395)
OTHER INCOME (EXPENSE):
Interest expense (44,996) (106,540)
Interest income 189,696 322,723
Other nonoperating income - net 30,788 58,179
--------------- ---------------
TOTAL OTHER INCOME 175,488 274,362
-------------- --------------
NET LOSS $ (4,297,066) $ (3,898,033)
============ ============
NET LOSS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $ (.40) $ (.36)
============== ============
NET LOSS PER COMMON SHARE
ASSUMING FULL DILUTION $ (.40) $ (.36)
============== ============
See notes to consolidated financial statements.
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
1997 1997
------------- ---------
(Unaudited) (Audited)
CURRENT ASSETS
Cash, including cash equivalents of
$7,425,000 as of September 30, 1997 and
$14,265,000 as of June 30, 1997 $ 7,430,489 $ 14,270,145
Investments (including restricted investments
of $290,000 at September 30, 1997 and
June 30, 1997) 1,807,359 1,059,933
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$140,000 at September 30, 1997 and
June 30, 1997) 11,241,347 10,800,813
Amounts due from related parties 2,995,631 1,809,414
Inventories 1,581,118 1,626,065
Prepaid expenses and other current assets 498,688 404,204
------------ ------------
TOTAL CURRENT ASSETS 25,554,632 29,970,574
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 312,588 312,588
Buildings and improvements 3,787,527 3,785,827
Machinery and other equipment (including
construction in progress of approximately
$1,765,000 at September 30, 1997 and
$1,647,000 at June 30, 1997) 19,676,907 19,517,585
Capitalized lease equipment 5,689,706 5,699,048
------------ ------------
29,466,728 29,315,048
Less accumulated depreciation and amortization (22,956,687) (22,346,615)
TOTAL PROPERTY, PLANT AND EQUIPMENT 6,510,041 6,968,433
JOINT VENTURES
United Solar Systems -- --
GM Ovonic -- --
OTHER ASSETS 788,028 790,090
------------ ------------
TOTAL ASSETS $ 32,852,701 $ 37,729,097
============ ============
See notes to consolidated financial statements.
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
1997 1997
------------- --------
(Unaudited) (Audited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,238,134 $ 3,669,167
Salaries, wages and amounts withheld
from employees 1,567,890 1,144,446
Deferred revenues under business agreements 421,270 671,531
Current installments on capitalized lease
obligations 1,048,380 1,324,322
------------- -------------
TOTAL CURRENT LIABILITIES 6,275,674 6,809,466
CAPITALIZED LEASE OBLIGATIONS 511,716 585,795
DEFERRED GAIN 108,019 223,691
NON-REFUNDABLE ADVANCE ROYALTIES 3,674,486 3,691,486
------------- -------------
TOTAL LIABILITIES 10,569,895 11,310,438
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock, par
value $0.01 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 & outstanding - 10,609,663 shares
at September 30, 1997 and 10,603,251
shares at June 30, 1997 106,097 106,033
Additional paid-in capital 202,165,748 202,004,599
Accumulated deficit (179,382,430) (175,085,364)
Treasury stock at cost - 42,000 shares (608,808) (608,808)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 22,282,806 26,418,659
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 32,852,701 $ 37,729,097
============= =============
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,
1997 1996
-------------------
OPERATING ACTIVITIES:
Net loss $ (4,297,066) $ (3,898,033)
Adjustments to reconcile net (loss) to net
cash used in operating activities:
Depreciation and amortization 505,899 432,999
Creditable royalties (17,000) (69,844)
Employee stock options 113,250 113,250
Stock issued for services rendered -- 52,562
Amortization of deferred gain (11,499) (11,499)
Changes in working capital:
Accounts receivable and amounts due from
related parties (1,626,751) 1,522,148
Inventories 44,947 (426,914)
Prepaid expenses and other current assets (92,422) (251,176)
Accounts payable and accrued expenses (7,589) 292,772
Deferred revenues under business agreements (250,261) (375,644)
------------ ------------
NET CASH USED IN OPERATIONS (5,638,492) (2,619,379)
INVESTING ACTIVITIES:
Purchases of capital equipment (net) (151,680) (899,387)
Purchase of investments (2,692,653) --
Sales of investments 1,945,227 10,327,352
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (899,106) 9,427,965
FINANCING ACTIVITIES:
Purchase of treasury stock -- (417,000)
Principal payments under current debt and
capitalized lease obligations (350,021) (400,300)
Proceeds from exercise of stock options
and warrants 47,963 41,037
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (302,058) (776,263)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (6,839,656) 6,032,323
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,270,145 23,773,742
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,430,489 $29,806,065
============ ===========
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,
1997 1996
------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 44,996 $ 95,238
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1997
NOTE A - Basis of Presentation
Information for the three months ended September 30, 1997 ("fiscal 1998")
and 1996 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
1997 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 two major 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") and (ii) 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. In addition, ECD has
a 50%-owned joint venture ("Sovlux") in Russia (which had no significant
activity in the quarter ended September 30, 1997 due to current economic
conditions in Russia) and has agreed to form a new 45%-owned joint venture in
Europe with Sanoh Industrial Co. Ltd. ("Sanoh").
The Company's investments in its joint ventures 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 (based upon the venture's history of
sustainable profits), 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, 1996 have been
reclassified to be consistent with the classification of items in the three
months ended September 30, 1997.
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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 and industrial partners, 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 $55,000,000.
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, 1997 September 30, 1996
------------------ ------------------
(Unaudited) (Unaudited)
Revenues* $ 2,704,216 $ 1,074,959
Operating Expenses
Cost of product sales 4,312,307 1,518,346
Research and development 626,443 666,563
General and administrative 181,156 478,919
Sales and marketing 389,775 349,449
------------ ------------
Total 5,509,681 3,013,277
------------ ------------
Net Loss $ (2,805,465) $ (1,938,318)
============ ============
* Includes product sales and revenues earned under research contracts.
8
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UNITED SOLAR BALANCE SHEETS
September 30, June 30,
1997 1997
------------ -----------
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents $ 431,776 $ 2,342,628
Accounts receivable - trade 1,504,199 738,378
Accounts receivable - National Renewable
Energy Laboratory ("NREL") 359,687 242,938
Accounts receivable - stockholders 3,618,953 4,633,757
Inventory 3,362,777 4,015,379
Other current assets 329,399 322,232
------------- ------------
Total Current Assets 9,606,791 12,295,312
Property, plant and equipment (net) 13,423,169 13,676,080
Other assets 214,873 225,913
------------- ------------
Total Assets $ 23,244,833 $ 26,197,305
============= ============
Current Liabilities:
Short-term bank debt $ 9,850,000 $ 10,000,000
Accounts payable - trade and stockholders 2,955,759 3,001,352
Accrued expenses and other 425,330 376,743
------------- ------------
Total Current Liabilities 13,231,089 13,378,095
------------- ------------
Total Stockholders' Equity 10,013,744 12,819,210
------------- ------------
Total Liabilities and Stockholders'
Equity $ 23,244,833 $ 26,197,305
============= ============
GM Ovonic
In June 1994, Ovonic Battery and General Motors formed a joint venture for
the manufacture and commercialization 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. The
contribution by General Motors consists of operating capital, plant, equipment
and management personnel necessary for the volume production of batteries.
GM Ovonic is currently engaged in low-volume manufacturing of NiMH
batteries at its facility in Troy, Michigan. Production volume is expected to
increase in early 1998 at a larger facility.
There are no financial statements currently available for GM Ovonic. GM
Ovonic is in its developmental stage and, as such, has a history of operating
losses.
9
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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,
1997 1997
------------ ----------
U.S. Government:
Amounts billed $ 789,102 $ 572,193
Unbilled 640,632 797,558
----------- -----------
Total 1,429,734 1,369,751
----------- -----------
Commercial Customers:
Amounts billed 3,016,503 1,701,006
Related party billed
- United Solar 106,327 19,840
- GM Ovonic 1,517,735 1,072,546
Due per contracts 6,744,264 7,480,792
Related party unbilled
- GM Ovonic 1,371,569 717,028
Other unbilled 89,522 281,580
----------- -----------
Total 12,845,920 11,272,792
----------- -----------
Other 101,324 107,684
Allowance for Uncollectible Accounts (140,000) (140,000)
----------- -----------
TOTAL $14,236,978 $12,610,227
=========== ===========
Amounts due per contracts, related party unbilled and other unbilled 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 commercial
contracts, which are billed in subsequent months.
Certain contracts with the U.S. government require a retention that is
paid upon completion of an audit of the Company's indirect rates. There are no
material retentions at September 30, 1997 and June 30, 1997. Certain U.S.
government contracts remain subject to audit. Management believes that
adjustments, if any, which may result from an audit would not 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 is removed from inventory based on actual costs of items
shipped to customers.
10
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Inventories (principally those of Ovonic Battery) are as follows:
September 30, 1997 June 30, 1997
Finished products $ 60,852 $ --
Work in process 957,863 1,010,989
Raw materials 562,403 615,076
---------- ----------
$1,581,118 $1,626,065
========== ==========
Product Sales
Product sales include battery electrodes, revenues related to building of
battery packs, and revenues related to machine-building contracts. 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. In certain cases, cost of sales exceeds
product sales due to significant changes in products and manufacturing methods.
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.
For both ECD and Ovonic Battery royalties, there are royalty trust or
contingent fee arrangements whereby ECD is obligated to pay a trust 25% of
optical memory royalties received and a law firm 25% of Ovonic Battery royalties
received relative to consumer battery licenses entered into in 1995 in
settlement of an International Trade Commission action.
Business Agreements
A substantial portion of revenue is 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 business agreement relates to licensing the Company's
proprietary technologies. Licensing activities are tailored to provide each
licensee with the right to use the Company's technologies, most of which are
patented, for a specific product application or, in some instances, for further
exploration of new product applications of
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such technologies. The terms of such licenses, accordingly, are tailored to
address a number of circumstances relating to the use of such technologies 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
technologies 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 ("R&D") 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. There are
no current or future direct costs associated with license fees.
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, is 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.
Overhead Allocations
The Company allocates overhead to product development and research
expenses and to cost of revenues from R&D Agreements based on a percentage of
direct labor costs. For cost of revenues from R&D Agreements this allocation is
limited to the amount
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of revenues, after direct expenses, under the applicable agreements. Overhead is
allocated to cost of product sales through the application of overhead to
inventory costs.
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 the sale of fixed assets.
NOTE B - Product Sales, 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 revenues from such agreements follows:
Three Months Ended
September 30,
1997 1996
------------------------
Product Sales:
Negative and positive electrodes $2,316,828 $2,481,886
Battery packs 164,374 925,771
Machine building 93,295 1,066,793
---------- ----------
$2,574,497 $4,474,450
========== ==========
Royalties:
Battery Technology $ 300,000 $ 303,338
Optical Memory 38,000 98,000
---------- ----------
$ 338,000 $ 401,338
========== ==========
Revenues from research and development agreements:
Photovoltaics $ 75,248 $ 280,433
Battery Technology 2,096,789 137,139
Microelectronics 241,705 234,458
Hydrogen 184,877 100,666
Other 249,951 2,742
---------- ----------
$2,848,570 $ 755,438
========== ==========
Revenues from license agreements:
Battery $ -- $1,246,000
Microelectronics -- 80,645
---------- ----------
$ -- $1,326,645
========== ==========
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NOTE C - Non-Refundable Advance Royalties
At September 30 and June 30, 1997, 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,
1997 1997
------------- ----------
Battery $1,647,592 $1,647,592
Optical Memory 2,026,894 2,043,894
---------- ----------
$3,674,486 $3,691,486
========== ==========
NOTE D - Net 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, 1997 and 1996 are
computed as follows:
1997 1996
---------- ----------
Weighted average number of shares outstanding 10,785,775 10,698,496
Pro forma weighted average shares for common
stock equivalents -- --
----------- -----------
AVERAGE NUMBER OF SHARES
OUTSTANDING AND EQUIVALENTS 10,785,775 10,698,496
=========== ===========
Net loss as reported $(4,297,066) $(3,898,033)
=========== ===========
NET LOSS PER SHARE $ (.40) $ (.36)
=========== ===========
Primary and fully-diluted net loss per share are the same for each of
these periods.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
The Company had a net loss for the three months ended September 30, 1997
of approximately $4,297,000 compared to a net loss of approximately $3,898,000
for the three months ended September 30, 1996. The increased loss primarily
results from a $1,246,000 one time license fee from Canon in the prior year
quarter, partially offset by
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a narrowing of losses on product sales in the current quarter. License fees
are non-recurring and based upon developing new business relationships.
The loss in the quarter ended September 30, 1997 resulted from the
continued investment of funds for the development of the Company's products and
the associated operating, general and administrative expenses, as well as
business development expenses.
Product sales, consisting of battery electrodes, battery packs and machine
building, decreased 42% in the quarter ended September 30, 1997 compared to the
same quarter in the previous year, principally due to the completion of
manufacturing equipment purchased by United Solar, reduced level of
machine-building for GM Ovonic and reduced sales of battery packs as GM Ovonic
ramped-up its production. (See Note B - Product Sales, Royalties, Revenues from
R&D Agreements and License and Other Agreements.)
Royalties decreased 16% from $401,000 in the three months ended September
30, 1996 to $338,000 in the three months ended September 30, 1997 because of
reduced levels of royalties from ECD's optical memory technology in fiscal 1998,
due partially to lower selling prices and unfavorable exchange rates.
The increase in revenues from R&D agreements to $2,849,000 in the three
months ended September 30, 1997 from $755,000 in the three months ended
September 30, 1996 was due to substantially increased revenues from a new
multi-year, multi-task program with General Motors to develop batteries for
electric and hybrid battery applications ($1,035,000 in the quarter ended
September 30, 1997) and from the United States Advanced Battery Consortium
($730,000 in the quarter ended September 30, 1997).
Revenues from license agreements were $1,327,000 in the three months ended
September 30, 1996 while there were no revenues from license agreements in the
three months ended September 30, 1997. In the three months ended September 30,
1996, the Company entered into a royalty-bearing battery license agreement with
Canon granting Canon nonexclusive rights to manufacture and market Ovonic NiMH
batteries for certain applications. The Company is actively engaged in
implementing its strategy to form strategic alliances to further commercialize
its products. While revenues from license agreements are non-recurring, the
Company is negotiating with a number of companies which are expected to provide
additional license fees to the Company in the future.
The increase in other revenues was due to increased billings in the
quarter ended September 30, 1997 for miscellaneous work performed for Ovonic
Battery licensees.
The decrease in cost of product sales from $4,991,000 in the three months
ended September 30, 1996 to $2,577,000 in the three months ended September 30,
1997 was principally due to the completion of manufacturing equipment purchased
by United Solar, reduced level of machine building for GM Ovonic and reduced
sales of battery packs as GM Ovonic ramped-up its production.
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The increase in cost of revenues from R&D agreements and the decrease in
product development and research expense in the three months ended September 30,
1997 compared to the three months ended September 30, 1996 was principally due
to ongoing electric vehicle battery and other research and development, with
increased revenues from funded research and development programs.
The increase in patent expenses from $120,000 in the three months ended
September 30, 1996 to $217,000 in the three months ended September 30, 1997 was
primarily due to higher patent and maintenance costs in the three months ended
September 30, 1997. Patent defense expenses for the three months ended September
30, 1997 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
$1,631,000 in the three months ended September 30, 1996 to $1,953,000 in the
three months ended September 30, 1997 was primarily related to increased
salaries and depreciation to support Ovonic Battery operations.
The change from other income of $274,000 in the three months ended
September 30, 1996 compared to other income of $175,000 in the three months
ended September 30, 1997 was due principally to decreased interest income in the
three months ended September 30, 1997.
Liquidity and Capital Resources
As of September 30, 1997, the Company had unrestricted consolidated cash
and cash equivalents and investments, consisting of commercial paper maturing in
four to six months, of $9,238,000, a decrease of $6,092,000 from June 30, 1997.
In addition, the Company had accounts receivable at September 30, 1997 of
$14,237,000 compared to $12,610,000 at June 30, 1997. As of September 30, 1997,
the Company had consolidated working capital of $19,279,000, compared with a
consolidated working capital of $23,161,000 as of June 30, 1997.
The Company continues its strategies to commercialize its products through
strategic alliances by forming joint ventures or license agreements with third
parties who can provide financial resources and marketing expertise for the
Company's technologies and products. The Company is also developing its own
capabilities for volume manufacturing of battery electrodes.
During the three months ended September 30, 1997, $5,638,000 of cash was
used in operations. The difference between the net loss of $4,297,000 and the
net cash used in operations was principally due to an increase in accounts
receivable, partially offset by depreciation expense. In addition, during this
period $152,000 of machinery and equipment were purchased or constructed for the
Company's operations.
16
<PAGE>
During the next 12 months, Ovonic Battery is considering the purchase of
up to $1,900,000 of machinery and equipment. The machinery and equipment would
be utilized principally for Ovonic Battery's manufacturing operation.
The Company expects significant revenues and cash flows related to R&D
agreements, many of which already exist, that are entered into by the Company
with U.S. government agencies, including the contracts outlined below, and with
industry partners to develop the Company's products and production technology.
Contracts with industry partners include a multi-year, multi-task program with
General Motors to develop batteries for electric and hybrid battery
applications. This program, which is of significant value to the Company and
builds upon the Company's earlier investments to develop a family of batteries,
is intended to provide next- and future-generation NiMH batteries that will be
manufactured by GM Ovonic. 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).
Recently, the Company was awarded the following contracts:
a. A three-year contract awarded to Ovonic Battery by the National
Institute of Standards and Technology ("NIST") under the Advanced
Technology Program ("ATP") to develop the next generation of high
energy density NiMH batteries using low-cost magnesium-based hydrogen
storage materials. The total cost of this 36-month cost-share program
is $18,900,000, of which Ovonic Battery and its team members,
including Manufacturing Sciences Corporation, Oak Ridge National
Laboratory, Colorado School of Mines and Iowa State University, will
receive $8,200,000 in federal funds. The balance is to be provided by
the recipients with in-kind contributions. Ovonic Battery will
receive approximately $5,000,000 in cash during the course of this
program.
b. A two-year contract to support development of a new, low-cost
manufacturing system for DVD (digital versatile disks), a
high-storage-capacity optical memory product that is based on ECD's
proprietary Ovonic phase-change technology. The new disks will be
fully compatible with current DVD standards. Manufacturing throughput
for the new disks is expected to be greater than
conventionally-manufactured disks and at a considerably lower cost.
The contract was awarded by the U.S. Commerce Department through
NIST's ATP. The new manufacturing system will be used to produce both
prerecorded DVD-ROM media and phase-change rewritable DVD-RAM media.
ECD originated phase change technology, which is the standard selected
for use by the DVD Forum--a group of leading DVD product
manufacturers--for rewritable DVD-RAM media. The total cost of this
24-month cost-share program is $5,900,000, of which ECD will receive
approximately $2,000,000 in cash.
17
<PAGE>
c. A four-year contract awarded by NIST for the further development of
the aforementioned optical memory (phase-change) products. The total
cost of this 48-month program is $5,800,000, of which ECD will receive
$2,700,000 in cash.
d. A two-year contract awarded by Department of Energy via the State of
Florida to ECD for work on photovoltaics. This program will
concentrate on the development of manufacturing of photovoltaic metal
roofs. The total cost of this 24-month contract is $3,800,000, of
which ECD will receive $1,900,000 in cash.
The Company is actively pursuing its strategy to form strategic alliances
to further commercialize its products. It is in negotiations with a number of
companies which could provide additional license fees and other revenues to the
Company in the current year.
The Company recently has been issued a basic patent in Japan specifying
the fundamentals that make NiMH batteries commercially feasible. The issuance of
this patent is expected to result in the payment of additional retrospective
royalties, as well as higher running royalties in the future.
The Company is also actively negotiating additional machine-building
contracts that could provide revenues in the coming year and beyond. Machine
building is cyclical but a growing part of the Company's business.
The Company has entered into a leasing arrangement with a third-party
leasing company for the financing of certain equipment used by the Company. As
of September 30, 1997, the Company has remaining lease payments totaling
$1,530,000. The Company has agreed to purchase certain leased equipment upon the
expiration of the applicable leases for 10% of the lessor's 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. If the
Company exercises the option to purchase all of the equipment for leases
expiring during the next 12 months, the capital requirement ranges from $268,000
to $537,000.
While certain programs have a limited term, 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.
Management believes that funds generated from operations and existing cash
and investment balances will be adequate to support and finance planned growth,
capital expenditures and company-sponsored research and development programs
over the coming year. Additional sources of cash are, however, required to
sustain the Company for the long term and to build the business in the future.
18
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 27. Financial Data Schedule (Edgar version)
B. Reports on Form 8-K
None
19
<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/ Stephan W. Zumsteg
Stephan W. Zumsteg
Date: November 14, 1997 Treasurer
By: /s/ Stanford R. Ovshinsky
Stanford R. Ovshinsky
President and
Date: November 14, 1997 Chief Executive Officer
20
<PAGE>
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the period September 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 7,430,489
<SECURITIES> 1,807,359
<RECEIVABLES> 14,236,978
<ALLOWANCES> (140,000)
<INVENTORY> 1,581,118
<CURRENT-ASSETS> 25,554,632
<PP&E> 29,466,728
<DEPRECIATION> (22,956,687)
<TOTAL-ASSETS> 32,852,701
<CURRENT-LIABILITIES> 6,275,674
<BONDS> 511,716
0
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<COMMON> 108,296
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<TOTAL-LIABILITY-AND-EQUITY> 32,852,701
<SALES> 2,574,497
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<TOTAL-COSTS> 2,768,836
<OTHER-EXPENSES> 5,586,896
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,996
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