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 DECEMBER 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 (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 February 9, 1998 there were 219,913 shares of Class A Common Stock
and 10,754,661 shares of Common Stock outstanding.
Page 1 of 21 Pages
1
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months EndedSix Months Ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES
Product sales $ 2,668,711 $ 4,378,846 $ 5,243,208 $ 8,853,296
Royalties 757,000 415,094 1,095,000 816,432
Revenues from research and development
agreements 4,164,685 1,354,112 7,013,255 2,109,550
Revenues from license and other
agreements 300,000 3,000,000 300,000 4,326,645
Other 858,075 430,540 1,557,453 650,530
----------- ----------- ----------- -----------
TOTAL REVENUES 8,748,471 9,578,592 15,208,916 16,756,453
EXPENSES
Cost of product sales 3,381,712 4,691,175 5,958,979 9,681,904
Cost of revenues from research and
development agreements 4,144,091 1,404,838 6,912,927 1,991,125
Product research and development 3,406,259 3,465,999 6,752,188 7,048,941
Patent defense 130,552 716,799 201,947 1,156,545
Patent 253,507 104,799 470,081 224,307
Operating, general and administrative 1,061,480 1,604,999 3,014,478 3,236,043
----------- ----------- ----------- -----------
TOTAL EXPENSES 12,377,601 11,988,609 23,310,600 23,338,865
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (3,629,130) (2,410,017) (8,101,684) (6,582,412)
OTHER INCOME (EXPENSE)
Interest expense (37,118) (77,454) (82,114) (183,994)
Interest income 121,644 367,363 311,340 690,086
Other nonoperating income (net) 37,785 100,527 68,573 158,706
----------- ----------- ----------- -----------
TOTAL OTHER INCOME 122,311 390,436 297,799 664,798
----------- ----------- ----------- -----------
NET LOSS $(3,506,819) $(2,019,581) $(7,803,885) $(5,917,614)
=========== =========== =========== ===========
BASIC NET LOSS PER COMMON SHARE $ (.32) $ (.19) $ (.72) $ (.55)
=========== =========== ============ ===========
DILUTED NET LOSS PER
COMMON SHARE $ (.32) $ (.19) $ (.72) $ (.55)
=========== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
1997 1997
CURRENT ASSETS (Unaudited) (Audited)
Cash, including cash equivalents of
$5,341,000 as of December 31, 1997 and
$14,265,000 as of June 30, 1997 $ 5,346,537 $ 14,270,145
Investments (including restricted investments
of $290,000 at December 31, 1997 and
June 30, 1997) 1,561,502 1,059,933
Accounts receivable (net of allowance for
uncollectible accounts of
$140,000 at December 31, 1997 and
June 30, 1997) 10,486,096 10,800,813
Amounts due from related parties 1,902,061 1,809,414
Inventories 1,910,330 1,626,065
Prepaid expenses and other current assets 400,860 404,204
------------ ------------
TOTAL CURRENT ASSETS 21,607,386 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
$659,000 at December 31, 1997 and
$1,647,000 at June 30, 1997) 20,057,280 19,517,585
Capitalized lease equipment 4,200,364 5,699,048
------------ ------------
28,357,759 29,315,048
Less accumulated depreciation and amortization (22,079,106) (22,346,615)
TOTAL PROPERTY, PLANT AND EQUIPMENT 6,278,653 6,968,433
JOINT VENTURES
United Solar -- --
GM Ovonic -- --
OTHER ASSETS 1,491,227 790,090
------------ ------------
TOTAL ASSETS $ 29,377,266 $ 37,729,097
============ ============
See notes to consolidated financial statements.
3
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1997 1997
(Unaudited) (Audited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,615,430 $ 3,669,167
Salaries, wages and amounts withheld
from employees 1,285,834 1,144,446
Deferred revenues under business agreements 450,922 671,531
Current installments on capitalized lease
obligations 840,824 1,324,322
TOTAL CURRENT LIABILITIES 6,193,010 6,809,466
CAPITALIZED LEASE OBLIGATIONS 391,000 585,795
DEFERRED GAIN 0 223,691
NON-REFUNDABLE ADVANCE ROYALTIES 3,654,402 3,691,486
------------- -------------
TOTAL LIABILITIES 10,238,412 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 and outstanding - 10,646,173
shares at December 31, 1997 and
10,603,251 shares at June 30, 1997 106,462 106,033
Additional paid-in capital 202,528,250 202,004,599
Accumulated deficit (182,889,249) (175,085,364)
Treasury stock at cost - 42,000 shares (608,808) (608,808)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 19,138,854 26,418,659
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 29,377,266 $ 37,729,097
============= =============
See notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended December 31,
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,803,885) $ (5,917,614)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 1,004,152 865,998
Creditable royalties (37,084) (136,844)
Employee stock options 226,500 226,500
Stock issued for services rendered -- 77,719
Amortization of deferred gain (15,352) (22,998)
Changes in assets and liabilities other than
property, plant and equipment:
Accounts receivable and amounts due
from related parties (483,192) (1,884,114)
Inventories (284,265) (413,888)
Prepaid expenses and other current assets 7,469 (631,437)
Accounts payable and accrued expenses 87,651 (424,926)
Deferred revenues under business agreements (220,608) (418,894)
------------ ------------
NET CASH USED IN OPERATIONS (7,518,614) (8,680,498)
INVESTING ACTIVITIES:
Purchases of capital equipment (net) (522,711) (1,619,201)
Purchase of investments (3,085,435) (1,957,453)
Sales of investments 2,583,865 10,327,352
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,024,281) 6,750,698
FINANCING ACTIVITIES:
Purchase of treasury stock -- (480,938)
Proceeds from exercise of stock options
and warrants 297,580 216,587
Principal payments under current debt and
capitalized lease obligations (678,293) (717,627)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (380,713) (981,978)
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,923,608) (2,911,778)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 14,270,145 23,773,742
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,346,537 $ 20,861,964
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
1997 1996
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $82,114 $ 183,994
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31, 1997
NOTE A - Basis of Presentation
Information for the six months ended December 31, 1997 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, as amended, 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.
The Company 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. Additionally, the Company has investments in: (i) Sovlux Co., Ltd.
("Sovlux") (50%) ECD's joint venture in Russia ; and (ii) Sanoh Ovonic Power
Systems Corporation (45%) Ovonic Battery's joint venture with Sanoh Industrial
Co. Ltd. ("Sanoh") to manufacture and sell NiMH batteries for two- and
three-wheeled electric vehicles in Europe.
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 and six months ended December 31, 1996
have been reclassified to be consistent with the classification of items in the
three months and six months ended December 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
7
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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 in the manufacture of products
based upon the Company's 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:
<TABLE>
<CAPTION>
UNITED SOLAR STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues* $ 3,278,188 $ 1,528,946 $ 6,023,491 $ 2,601,989
Operating Expenses
Cost of product sales 4,521,387 1,771,038 8,833,694 3,289,384
Research and development 759,152 792,388 1,385,595 1,458,951
General and administrative 257,236 367,389 438,392 908,764
Sales and marketing 574,159 438,537 963,934 787,986
----------- ----------- ----------- -----------
Total 6,111,934 3,369,352 11,621,615 6,445,085
Other Income (Expense) (455,929) 15,391 (497,016) 89,763
----------- ----------- ----------- -----------
Net Loss $(3,289,675) $(1,825,015) $(6,095,140) $(3,753,333)
=========== =========== =========== ===========
</TABLE>
* Includes product sales and revenues earned under research contracts.
8
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UNITED SOLAR BALANCE SHEETS
December 31, June 30,
1997 1997
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents $ 716,461 $ 2,342,628
Accounts receivable - trade 1,805,369 738,378
Accounts receivable - National Renewable
Energy Laboratory ("NREL") 560,929 242,938
Accounts receivable - stockholders 36,261 4,633,757
Inventory 2,633,131 4,015,379
Other current assets 475,145 322,232
----------- -----------
Total Current Assets 6,227,296 12,295,312
Property, plant and equipment (net) 12,595,857 13,676,080
Other assets 216,794 225,913
----------- -----------
Total Assets $19,039,947 $26,197,305
=========== ===========
Current Liabilities:
Short-term bank debt $ -- $10,000,000
Current maturities of capitalized lease
obligation 1,445,703
Accounts payable - trade and stockholders 2,140,908 3,001,352
Accrued expenses and other 674,966 376,743
----------- -----------
Total Current Liabilities 4,261,577 13,378,095
Lease Payable 8,089,416 --
Total Stockholders' Equity 6,688,954 12,819,210
----------- -----------
Total Liabilities and Stockholders'
Equity $19,039,947 $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 1998 at a larger facility.
There are no financial statements currently available for GM Ovonic. GM
Ovonic is in the early stages of commercialization 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:
December 31, June 30,
1997 1997
U.S. Government:
Amounts billed $ 910,907 $ 572,193
Unbilled 600,396 797,558
----------- -----------
Total 1,511,303 1,369,751
----------- -----------
Commercial Customers:
Amounts billed 5,054,181 1,701,006
Related party billed
- United Solar 117,169 19,840
- GM Ovonic 1,305,695 1,072,546
Due per contracts 4,596,744 7,480,792
Related party unbilled
- GM Ovonic 479,197 717,028
Other unbilled 15,293 281,580
----------- -----------
Total 11,568,279 11,272,792
----------- -----------
Other 153,837 107,684
Allowance for Uncollectible Accounts (140,000) (140,000)
----------- -----------
TOTAL $13,093,419 $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 December 31, 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:
December 31, 1997 June 30, 1997
Finished products $ 91,278 $ --
Work in process 1,136,057 1,010,989
Raw materials 682,995 615,076
---------- ----------
$1,910,330 $1,626,065
========== ==========
Product Sales
Product sales include battery electrodes, revenues related to building of
battery packs and 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 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,
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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 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.
12
<PAGE>
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:
Six Months Ended December 31,
1997 1996
Product Sales:
Negative and positive electrodes $4,892,405 $5,459,371
Battery packs 202,503 2,080,856
Machine building 148,300 1,313,069
---------- ----------
$5,243,208 $8,853,296
========== ==========
Royalties:
Battery Technology $1,020,000 $ 612,359
Optical Memory 75,000 204,073
---------- ----------
$1,095,000 $ 816,432
========== ==========
Revenues from R&D Agreements:
Photovoltaics $ 728,401 $ 544,031
Battery technology 4,996,198 653,648
Optical memory 675,358 463,406
Hydrogen 392,928 340,721
Other 220,370 107,744
---------- ----------
$7,013,255 $2,109,550
========== ==========
License and Other Agreements:
Battery $ 300,000 $4,246,000
Microelectronics -- 80,645
---------- ----------
$ 300,000 $4,326,645
========== ==========
NOTE C - Non-Refundable Advance Royalties
At December 31 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:
December 31, June 30,
1997 1997
Battery $1,647,592 $1,647,592
Optical Memory 2,006,810 2,043,894
---------- ----------
$3,654,402 $3,691,486
========== ==========
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NOTE D - Net Loss Per Share
In the three months and six months ended December 31, 1997, the Company
adopted FASB Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share. The Statement simplifies the standards for computing
earnings per share (for years in which there is net income). The adoption of
this Statement did not have any impact on the Company since there were net
losses in all of the current periods. Weighted average number of shares
outstanding and basic earnings per share for the three months and six months
ended December 31, 1997 and 1996 are computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
AVERAGE NUMBER OF SHARES
OUTSTANDING 10,796,122 10,696,383 10,790,923 10,697,399
=========== =========== =========== ===========
NET LOSS $(3,506,819) $(2,019,581) $(7,803,885) $(5,917,614)
=========== =========== =========== ===========
NET LOSS PER SHARE $ (.32) $ (.19) $ (.72) $ (.55)
=========== =========== =========== ===========
</TABLE>
Basic and diluted net loss per share are the same for each of these
periods. There are no common stock equivalents for any of the above periods.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three months ended December 31, 1997 Compared to Three Months Ended
December 31, 1996
The Company had a net loss for the three months ended December 31, 1997 of
$3,507,000 compared to a net loss of $2,020,000 for the three months ended
December 31, 1996. The loss is primarily due to (i) ongoing battery research and
development; (ii) losses related to electrode production; and (iii) ongoing
protection of the Company's technologies.
Product sales, consisting of battery electrodes, battery packs and machine
building, decreased 39% in the quarter ended December 31, 1997 compared to the
same quarter in the previous year. Battery electrode sales decreased 13% to
$2,576,000 in the December 1997 quarter from $2,978,000 in the December 1996
quarter, primarily due to lower sales prices. Battery pack sales decreased to
$38,000 in the December 1997 quarter from $1,155,000 in the December 1996
quarter because GM Ovonic (Ovonic Battery's principal customer of battery packs)
is now in production of battery packs. Revenues from machine building were
$55,000 in the December 1997 quarter, down from $246,000 in the same period last
year, principally due to the completion of machine-building projects for GM
Ovonic.
14
<PAGE>
Royalties increased 82% to $757,000 in the three months ended December 31,
1997 from $415,000 in the three months ended December 31, 1996 primarily due to
higher battery royalties because of the recently-issued basic patent in Japan
recognizing the fundamentals that make NiMH batteries commercially feasible. The
volume of NiMH batteries being sold is increasing substantially, but the
royalties the Company receives are adversely affected by lower sales prices and
unfavorable exchange rates with the Japanese yen. Lower levels of royalties from
ECD's optical memory technology also adversely affected royalties in 1997. The
Company has audit rights to verify the amounts of royalties being reported and
paid by licensees. The Company plans to enforce these audit rights. The amount
of additional royalty payments, if any, that will result from these audits is
undeterminable.
The 208% increase in revenues from research and development agreements to
$4,165,000 in the three months ended December 31, 1997 from $1,354,000 in the
three months ended December 31, 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 electric vehicle applications ($1,719,000 in
the quarter ended December 1997) and from a contract with the United States
Advanced Battery Consortium ("USABC") ($681,000 in the quarter ended December
31, 1997). Revenues from research and development agreements for ECD's optical
memory and photovoltaic technologies were also significantly higher.
The Company has $13,580,000 in unrecognized revenues outstanding under R&D
agreements with U.S. government or other agencies or companies, of which
$6,300,000 is subject to the normal availability of funding by the applicable
agency. Based on these R&D Agreements, and on scheduled funding and performance,
without giving effect to any new R&D agreements which may be entered into during
the remainder of the year ended June 30, 1998, $4,199,000 additional revenue is
expected to be recorded in Revenues from R&D Agreements for the remainder of the
year ending June 30, 1998.
Revenues from license and other agreements decreased from $3,000,000 in
the three months ended December 31, 1996 to $300,000 in the three months ended
December 31, 1997. 1996 revenues included license fees of $2,000,000 from Sanoh
and $1,000,000 from LG Chemical, Ltd. ("LG Chemical") in connection with license
agreements with those companies. 1997 revenues of $300,000 relate to a
technology transfer agreement with Sovlux and the Chepetsk Mechanical Plant in
Russia.
The Company spent a total of $7,550,000 in the quarter ended December 31,
1997 for research and development (funded and unfunded) compared to $4,871,000
in the same quarter in the prior year. This planned increase in expenditures was
primarily for continued development of the Company's family of batteries. The
increased spending of $2,679,000 for research and development was funded
entirely by the $2,811,000 increase in revenues from research and development
agreements.
The decrease in cost of product sales from $4,691,000 in the three months
ended December 31, 1996 to $3,382,000 in the three months ended December 31,
1997 was principally due to the reduced level of machine building for GM Ovonic
and reduced sales of battery packs as GM Ovonic ramped-up its production. The
Company is focusing its efforts to reduce product costs by: improving quality
control through increased automation, on-line gauging, improved process
monitoring and control, early identification of non-conforming material and
operator
15
<PAGE>
training; investing in equipment and equipment upgrades to minimize downtime and
increase capability; and improving the preventive maintenance program to reduce
unplanned downtime.
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 NiMH battery technology. The
reduction in expense relates to the successful conclusion of litigation
involving Matsushita Battery Industrial Co., Ltd. ("MBI") in December 1997.
The decrease in operating, general and administrative expenses from
$1,605,000 in the three months ended December 31, 1996 to $1,061,000 in the
three months ended December 31, 1997 was primarily due to increased allocations
in 1997 to cost of revenues from business agreements.
The decrease in other income from $390,000 in the three months ended
December 31, 1996 to other income of $122,000 in the three months ended December
31, 1997 was due principally to decreased interest income in 1997.
Six Months Ended December 31, 1997 Compared to Six Months Ended
December 31, 1996
The Company had a net loss for the six months ended December 31, 1997 of
$7,804,000 compared to a net loss of $5,918,000 for the six months ended
December 31, 1996. The loss is primarily due to (i) ongoing battery research and
development; (ii) losses related to electrode production; and (iii) ongoing
protection of the Company's technologies.
Product sales, consisting of battery electrodes, battery packs and machine
building, decreased 41% in the six months ended December 31, 1997 compared to
the six months ended December 31, 1996. Battery electrode sales decreased to
$4,892,000 in the six months ended December 31, 1997 from $5,459,000 in the six
months ended December 31, 1996, primarily due to lower prices. Battery pack
sales decreased 90% to $203,000 from $2,081,000 due to reduced level of battery
pack sales to GM Ovonic. Revenues from machine building were $148,000 in the six
months ended December 31, 1997 down from $1,313,000 in the six months ended
December 31, 1996, principally due to reduced machine-building sales to GM
Ovonic.
Royalties increased 34% to $1,095,000 in the six months ended December 31,
1997 from $816,000 in the six months ended December 31, 1996 primarily due to
higher battery royalties resulting because of a recently issued basic patent in
Japan. The volume of NiMH batteries being sold is increasing substantially, but
the royalties the Company receives are adversely affected by lower prices and
unfavorable exchange rates with the Japanese yen. Lower levels of royalties from
ECD's optical memory technology in 1997. The Company has audit rights to verify
the amounts of royalties being reported and paid by licensees. The Company plans
to enforce these audit rights. The amount of additional royalty payments, if
any, that will result from these audits is undeterminable.
The 232% increase in revenues from research and development agreements to
$7,013,000 in the six months ended December 31, 1997 from $2,110,000 in the six
months ended December 31, 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 electric vehicle
16
<PAGE>
applications ($2,754,000 in the six months ended December 1997) and from a
contract with the USABC ($1,411,000 in the six months ended December 31, 1997).
Revenues from research and development agreements were also significantly higher
for ECD's optical memory and photovoltaic technologies.
Revenues from license and other agreements decreased from $4,327,000 in
the six months ended December 31, 1996 to $300,000 in the six months ended
December 31, 1997. 1996 revenues included license fees of $2,000,000 from Sanoh,
$1,000,000 from LG Chemical and $1,246,000 from Canon in connection with license
agreements with these companies. 1997 license fees of $300,000 relate to a
technology transfer agreement with Sovlux and the Chepetsk Mechanical Plant in
Russia.
The Company spent a total of $13,665,000 in the six months ended December
31, 1997 for research and development (funded and unfunded) compared to
$9,040,000 in the six months ended December 31, 1996. The increased spending of
$4,625,000 for research and development was funded entirely by the $4,903,000
increase in revenues from research and development agreements.
The increase in other revenues was due to increased billings in the six
months ended December 31, 1997 for work performed for Ovonic Battery licensees.
The decrease in cost of product sales to $5,959,000 in the six months
ended December 31, 1997 from $9,682,000 in the six months ended December 31,
1996 was principally due to the reduced level of machine building for GM Ovonic
and reduced sales of battery packs as GM Ovonic ramped-up its production. To
reduce product costs, the Company is: improving quality control through
increased automation, on-line gauging, improved process monitoring and control,
early identification of non-conforming material and operator training; investing
in equipment and equipment upgrades to minimize downtime and increase
capability; and improving the preventive maintenance program to reduce unplanned
downtime.
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 NiMH batteries.
The reduction in expense relates to the successful conclusion of litigation
involving MBI in December 1997.
Operating, general and administrative expenses decreased to $3,014,000 in
the six months ended December 31, 1997 from $3,236,000 in the six months ended
December 31, 1996 was primarily due to increased allocations in 1997 to cost of
revenues from business agreements.
The change from other income of $665,000 in the six months ended December
31, 1996 compared to other income of $298,000 in the six months ended December
31, 1997 was due principally to decreased interest income in 1997.
17
<PAGE>
Liquidity and Capital Resources
As of December 31, 1997, the Company had unrestricted consolidated cash
and cash equivalents and investments, consisting of commercial paper maturing in
four to six months, of $6,908,000, a decrease of $8,422,000 from June 30, 1997.
In addition, the Company had current accounts receivable at December 31, 1997 of
$12,388,000 compared to $12,610,000 at June 30, 1997. As of December 31, 1997,
the Company had consolidated working capital of $15,414,000, 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 six months ended December 31, 1997, $7,519,000 of cash was used
in operations. The difference between the net loss of $7,804,000 and the net
cash used in operations was principally due to depreciation expense, partially
offset by increases in accounts receivable and inventories. In addition, during
this period $523,000 of machinery and equipment was purchased or constructed for
the Company's operations.
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 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 electric vehicle applications. This program,
which is currently funded on a monthly basis, 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. Three contracts awarded to the Company
by the National Institute of Standards and Technology ("NIST") under three
Advanced Technology Programs ("ATP") will also provide significant cashflow. One
contract is to Ovonic Battery to develop the next generation of high energy
density NiMH batteries using low-cost magnesium-based hydrogen storage
materials. The other two NIST contracts are to ECD to support development of a
new, low-cost manufacturing system for DVD (digital versatile disks) based on
the ECD's proprietary phase-change technology and for further development of the
aforementioned optical memory phase-change products. 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 is actively pursuing its strategy to form strategic alliances
to further commercialize its products. While the Company is in negotiations with
a number of companies which could provide additional revenue under license and
other agreements for the Company in the coming year, it is unable to predict the
amount of such revenue.
18
<PAGE>
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 higher running royalties in
the future. Other than the foregoing, the Company is not aware of other events
or circumstances that would allow it to forecast royalty revenues significantly
higher or lower for the coming year.
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 an important part of the Company's business. As of
December 31, 1997, the Company had no backlog of machine-building contracts.
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 December 31, 1997, the Company had remaining lease payments totaling
$1,110,000. 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.
Based upon the above information, the amount of cash to be received under
existing R&D Agreements for the remainder of the year ending June 30, 1998 is
anticipated to be approximately $4,000,000. The amount of cash for royalties to
be received for the remainder of the year ending June 30, 1998 is expected to
be, based on historical trends, approximately $900,000.
License fees are non-recurring, and while the Company is engaged in
negotiations with a number of companies, the outcome of these negotiations is
difficult to predict. Therefore, the Company is unable to predict the amount of
cash to be received for the remainder of the year.
Management believes that funds generated from operations and existing cash
and investment balances, along with agreements currently under negotiation, will
be adequate to support and finance planned growth, capital expenditures and
company-sponsored research and development programs over the coming year. It is
the Company's intent to use its cash and investments to fund its operations.
Additional sources of cash are, however, required to sustain the Company for the
long term and to build the business in the future.
19
<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.
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/ Stephan W. Zumsteg
Stephan W. Zumsteg
Date: February 17, 1998 Treasurer
By: /s/ Stanford R. Ovshinsky
Stanford R. Ovshinsky
Date: February 17, 1998 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 December 31, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 5,346,537
<SECURITIES> 1,561,502
<RECEIVABLES> 12,388,157
<ALLOWANCES> (140,000)
<INVENTORY> 1,910,330
<CURRENT-ASSETS> 21,607,386
<PP&E> 28,357,759
<DEPRECIATION> 22,079,106
<TOTAL-ASSETS> 29,377,266
<CURRENT-LIABILITIES> 6,193,010
<BONDS> 391,000
0
0
<COMMON> 108,661
<OTHER-SE> 19,030,193
<TOTAL-LIABILITY-AND-EQUITY> 29,377,266
<SALES> 5,243,208
<TOTAL-REVENUES> 15,208,916
<CGS> 5,958,979
<TOTAL-COSTS> 6,912,927
<OTHER-EXPENSES> 10,438,694
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,114
<INCOME-PRETAX> (7,803,885)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,803,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,803,885)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>