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, 1998
-----------------------------------------------------------
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
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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 November 13, 1998, there were 219,913 shares of Class A Common Stock
and 12,559,293 shares of Common Stock outstanding.
Page 1 of 24 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,
--------------------------------
1998 1997
---- ----
REVENUES
Product sales $ 966,555 $ 2,574,497
Royalties 615,336 338,000
Revenues from product development agreements 3,773,347 2,790,065
Revenues from license and other agreements 42,000 58,505
Other 780,387 699,378
----------- ------------
TOTAL REVENUES 6,177,625 6,460,445
EXPENSES
Cost of product sales 2,091,999 2,577,267
Cost of revenues from product development
agreements 4,031,337 2,773,852
Product development and research 2,906,151 3,095,285
Patent defense 67,845 71,395
Patents 356,985 327,202
Operating, general and administrative 1,157,368 2,087,998
----------- ------------
TOTAL EXPENSES 10,611,685 10,932,999
----------- ------------
LOSS FROM OPERATIONS (4,434,060) (4,472,554)
OTHER INCOME (EXPENSE):
Equity in loss of joint venture (1,089,000) --
Interest expense (166,917) (44,996)
Interest income 355,493 189,696
Other nonoperating income - net 110,489 30,788
----------- ------------
TOTAL OTHER INCOME (EXPENSE) (789,935) 175,488
----------- ------------
NET LOSS $(5,223,995) $ (4,297,066)
=========== ============
BASIC NET LOSS PER SHARE $ (.41) $ (.40)
=========== ============
DILUTED NET LOSS PER SHARE $ (.41) $ (.40)
=========== ============
See notes to consolidated financial statements.
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
September 30, June 30,
1998 1998
----------- -----------
(Unaudited) (Audited)
CURRENT ASSETS
Cash, including cash equivalents of
$21,926,000 as of September 30, 1998 and
$25,780,000 as of June 30, 1998 $21,931,190 $25,786,112
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$291,000 at September 30, 1998 and
$315,000 at June 30, 1998) 8,326,798 8,666,952
Amounts due from related parties 1,279,389 1,491,115
Inventories 1,251,661 1,074,097
Prepaid expenses and other current assets 225,333 374,590
----------- -----------
TOTAL CURRENT ASSETS 33,014,371 37,392,866
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 312,588 312,588
Buildings and improvements 3,666,411 3,666,411
Machinery and other equipment (including
construction in progress of approximately
$888,000 at September 30, 1998 and
$785,000 at June 30, 1998) 17,078,662 16,870,261
Capitalized lease equipment 5,383,672 5,383,672
----------- -----------
26,441,333 26,232,932
Less accumulated depreciation and amortization (18,004,579) (17,641,505)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 8,436,754 8,591,427
Investments in EV Global and Unique Mobility 1,662,000 1,953,000
JOINT VENTURES
United Solar 1,026,914 2,115,914
GM Ovonic -- --
Sovlux -- --
OTHER ASSETS 1,305,547 1,307,609
----------- -----------
TOTAL ASSETS $45,445,586 $51,360,816
=========== ===========
See notes to consolidated financial statements.
3
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, June 30,
1998 1998
------------- -----------
(Unaudited) (Audited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,063,427 $ 4,443,189
Salaries, wages and amounts withheld
from employees 1,750,121 1,413,217
Deferred revenues under business
agreements 374,727 417,082
Current installments on capitalized lease
obligations 1,315,932 1,319,220
----------- -----------
TOTAL CURRENT LIABILITIES 7,504,207 7,592,708
CAPITALIZED LEASE OBLIGATIONS 3,660,430 3,967,496
DEFERRED GAIN 1,440,927 1,551,146
NON-REFUNDABLE ADVANCE ROYALTIES 3,425,251 3,434,120
----------- -----------
TOTAL LIABILITIES 16,030,815 16,545,470
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 - 20,000,000 shares
Issued and outstanding - 12,668,345
shares at September 30, 1998 and
12,639,817 shares at June 30, 1998 126,683 126,398
Additional paid-in capital 227,434,108 227,092,920
Accumulated deficit (196,974,358) (191,750,363)
Treasury stock at cost - 73,000 shares
at September 30, 1998 and 42,000 shares
at June 30, 1998 (835,861) (608,808)
Accumulated Other Comprehensive Loss (338,000) (47,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 29,414,771 34,815,346
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $45,445,586 $51,360,816
=========== ===========
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,
-------------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net loss $ (5,223,995) $(4,297,066)
Adjustments to reconcile net (loss) to net
cash used in operating activities:
Depreciation and amortization 363,074 505,899
Equity in loss of United Solar 1,089,000 --
Creditable royalties (8,869) (17,000)
Options issued to executive for
services rendered 113,250 113,250
Amortization of deferred gain (110,218) (11,499)
Changes in working capital:
Accounts receivable and amounts
due from related parties 551,880 (1,626,751)
Inventories (177,564) 44,947
Prepaid expenses and other current assets 151,319 (92,422)
Accounts payable and accrued expenses (42,861) (7,589)
Deferred revenues under business agreements (42,355) (250,261)
------------- ------------
NET CASH USED IN OPERATIONS (3,337,339) (5,638,492)
INVESTING ACTIVITIES:
Purchases of capital equipment (net) (208,400) (151,680)
Purchase of investments -- (2,692,653)
Sales of investments -- 1,945,227
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (208,400) (899,106)
FINANCING ACTIVITIES:
Purchase of treasury stock (227,053) --
Principal payments under short-term and
long-term debt obligations and capitalized
lease obligations (310,354) (350,021)
Proceeds from sale of stock upon
exercise of stock options and warrants 228,224 47,963
------------- ------------
NET CASH USED IN FINANCING ACTIVITIES (309,183) (302,058)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (3,854,922) (6,839,656)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,786,112 14,270,145
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,931,190 $ 7,430,489
============ ============
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,
-----------------------
1998 1997
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 166,917 $ 44,996
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1998
---------------------------------------------------------------
NOTE A - Basis of Presentation
- ------------------------------
Information for the three months ended September 30, 1998 (fiscal 1999)
and 1997 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 1998 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 and hybrid electric vehicle applications worldwide.
In addition, ECD has a 50%-owned joint venture in Russia, Sovlux Co., Ltd.
(Sovlux).
The Company's investments in its joint ventures, other than United Solar,
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.
GAAP requires ECD to carry its pre-May 1998 investments in United Solar (as
well as ECD's other joint ventures) at zero, notwithstanding ECD's contributions
to United Solar of licenses in the field of photovoltaics and other property and
equipment in exchange for ECD's 49.98% interest in United Solar and
notwithstanding Canon's investments of $55.5 million. In May 1998, ECD and Canon
each invested $2.5 million in United Solar to fund United Solar's continuing
operations.
GAAP requires that ECD's $2.5 million cash investment be recorded on the
balance sheet as an investment in United Solar. At the same time, however,
GAAP requires that ECD make non-cash adjustments to its carrying value of United
Solar such that ECD's
7
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carrying value of United Solar is decreased by the losses of United Solar (in
proportion to ECD's ownership share of United Solar) and ECD is required to re-
cord a non-cash, non-operating expense in the amount of the non-cash reduction
in carrying value of United Solar.
The Company will suspend recording non-cash, non-operating expense or
income should the calculated investment in United Solar go below zero or above
$2.5 million. The investment in United Solar will continue to be carried at an
amount no higher than the Company's cash investment until United Solar becomes
profitable (based upon its 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 United Solar, and will recognize its share of United Solar's
profits or losses on the equity method of accounting.
On February 2, 1998, the Company and EV Global Motors Company ("EV
Global") entered into a Stock Purchase Agreement ("Agreement") which provided
for the transfer to EV Global of 146,924 shares of the Company's Common Stock
and warrants to purchase 133,658 shares of the Company's Common Stock. The
Agreement also provided for the transfer to the Company of 250,000 shares of EV
Global Common Stock and 129,241 shares of Unique Mobility, Inc. Common Stock.
The warrants are exercisable prior to February 2, 2003, with 73,462 shares
exercisable at $13.6125 and 60,196 shares exercisable at $16.6125.
The Company accounts for its investment in EV Global, a non-public
company, under the cost method of accounting. The Company accounts for its
investment in Unique Mobility, Inc. in accordance with SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities, and has classified this
security as available-for-sale. Unrealized gains or losses as a result of
changes in the market value of the Unique Mobility investments are
marked-to-market, with the offset recorded to Stockholders' Equity. Neither
investment is considered impaired as of September 30, 1998.
Upon consolidation, all intercompany accounts and transactions are
eliminated.
Certain items for the three months ended September 30, 1997 have been
reclassified to be consistent with the classification of items in the three
months ended September 30, 1998.
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.
8
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During the three months ended September 30, 1998, the Company adopted FASB
Statement No. 130, Reporting Comprehensive Income. Statement No. 130 requires
the reporting of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income. The Company's total
comprehensive loss was as follows:
Three Months Ended September 30,
--------------------------------
1998 1997
---- ----
Net Loss $(5,223,995) $(4,297,066)
OTHER COMPREHENSIVE LOSSES:
Unrealized loss on security (291,000) --
------------ ------------
COMPREHENSIVE LOSS $(5,514,995) $(4,297,066)
============ ============
United Solar
In 1990, ECD and Canon entered into a joint venture agreement for the
formation of United Solar. United Solar is owned 49.98% by ECD, 49.98% by Canon.
ECD has contributed to United Solar a license in the field of photovoltaics,
certain solar cell manufacturing and photovoltaic product development equipment,
leasehold improvements, furniture and fixtures, inventory and supplies. In
return for the contribution of these assets, ECD received 49.98% equity interest
in United Solar. In return for its 49.98% equity interest in United Solar, Canon
has invested $58,000,000, including the $2,500,000 investment in 1998 described
below.
In May 1998, ECD and Canon each invested $2,500,000 in United Solar to
fund United Solar's continuing operations. In the three months ended September
30, 1998, ECD recorded $1,089,000 as its share of the losses of United Solar.
The following sets forth certain selected financial data regarding United
Solar that are derived from United Solar's unaudited financial statements:
UNITED SOLAR STATEMENTS OF OPERATIONS
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
(Unaudited) (Unaudited)
Revenues* $ 3,140,424 $ 2,704,216
Operating Expenses
Cost of product sales 3,684,584 4,312,307
Research and development 736,517 626,443
General and administrative 386,710 181,156
Sales and marketing 363,355 389,775
----------- -----------
Total 5,171,166 5,509,681
Other Income (expenses) (147,660) --
------------ -----------
Net Loss $ 2,178,402) $(2,805,465)
============ ============
* Includes product sales and revenues earned under research contracts.
9
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UNITED SOLAR BALANCE SHEETS
---------------------------
September 30, June 30,
------------- --------
1998 1998
---- ----
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents $ 2,107,661 $ 4,091,047
Accounts receivable 1,693,193 1,748,857
Inventory 3,588,644 3,361,684
Other current assets 392,372 462,282
----------- -----------
Total Current Assets 7,781,870 9,663,870
Property, plant and equipment (net) 10,936,884 11,575,454
Other assets 225,295 183,763
----------- -----------
Total Assets $18,944,049 $21,423,087
=========== ===========
Current Liabilities:
Short-term bank debt $ 1,445,703 $ 1,445,703
Accrued expenses and other 2,512,165 2,609,402
----------- -----------
Total Current Liabilities 3,957,868 4,055,105
----------- -----------
Note Payable - Canon 2,500,000 2,500,000
Lease Payable 7,539,744 7,743,143
Total Stockholders' Equity 4,946,437 7,124,839
----------- -----------
Total Liabilities and Stockholders'
Equity $18,944,049 $21,423,087
=========== ===========
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.
There are no financial statements currently available for GM Ovonic. GM
Ovonic is in its initial start-up phase and, as such, has a history of operating
losses.
Sovlux
In 1990, the Company formed Sovlux, a joint venture to manufacture the
Company's photovoltaic products in the countries of the former Soviet Union.
Sovlux is owned 50% by the Company and 50% by the State Research and Production
Enterprise Kvant and enterprises of the Russian Ministry of Atomic Energy
("Minatom"). Sovlux has not been able to commence production of photovoltaic
products due to Minatom's inability to provide the required operating capital
due to current economic conditions in Russia.
In fiscal 1998, the Company formed Sovlux Battery to produce NiMH
batteries and components for sale to Ovonic Battery and its licensees. Sovlux
Battery is owned 50% by the Company and 50% by the Chepetsky Mechanical Plant
("Chepetsky") an enterprise of Minatom. The Company's contribution to the
ventures consist solely of technology.
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There are no financial statements currently available for Sovlux or Sovlux
Battery. Sovlux and Sovlux Battery are in their developmental stage and, as
such, have a history of operating losses.
Accounts Receivable
The following tabulation shows the component elements of accounts
receivable from long-term contracts and other programs:
September 30, June 30,
1998 1998
------------- -----------
U.S. Government:
Amounts billed $ 905,348 $ 717,281
Unbilled 711,248 812,439
----------- ------------
Total 1,616,596 1,529,720
----------- ------------
Commercial Customers:
Amounts billed 4,374,125 5,480,895
Related party billed
- United Solar 110,327 169,847
- GM Ovonic 716,716 729,561
Royalties 825,607 1,157,619
License fees 300,000 300,000
Due per contracts 1,262,833 353,954
Related party unbilled
- GM Ovonic 452,346 591,707
Other unbilled -- 2,358
----------- ------------
Total 8,041,954 8,785,941
----------- ------------
Other 238,637 157,406
Allowance for Uncollectible Accounts (291,000) (315,000)
------------ ------------
TOTAL $ 9,606,187 $10,158,067
=========== ===========
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, 1998 and June 30, 1998. 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.
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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.
Inventories (principally those of Ovonic Battery) are as follows:
September 30, 1998 June 30, 1998
------------------ -------------
Finished products $ 122,165 $ 119,649
Work in process 713,990 511,582
Raw materials 415,506 442,866
----------- -----------
$ 1,251,661 $ 1,074,097
=========== ===========
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 nonrefundable
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 whereby Ovonic Battery is obligated to pay
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.
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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, 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 product development 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 nonrefundable, 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, product development agreements, the
Company conducts specified commercialization and 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 product development 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
product development 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 product development 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
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<PAGE>
and depreciation. Accordingly, expenses related to product development
agreements are recorded as cost of revenues from product development agreements.
Overhead Allocations
The Company allocates overhead to product development and research
expenses and to cost of revenues from product development agreements based on a
percentage of direct labor costs. For cost of revenues from product development
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.
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 Product Development 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,
--------------------------------
1998 1997
---- ----
Product Sales:
Negative and positive electrodes $ 966,555 $ 2,316,828
Battery packs -- 164,374
Machine building -- 93,295
----------- -----------
$ 966,555 $ 2,574,497
=========== ===========
Royalties:
Battery Technology $ 599,845 $ 300,000
Optical Memory 15,491 38,000
----------- -----------
$ 615,336 $ 338,000
=========== ===========
Revenues from product development agreements:
Photovoltaics $ 718,168 $ 75,248
Battery Technology 2,506,534 2,038,284
Microelectronics 446,676 241,705
Hydrogen 90,220 184,877
Other 11,749 249,951
----------- -------------
$ 3,773,347 $ 2,790,065
=========== =============
Revenues from license and other agreements:
Battery $ 42,000 $ 58,505
=========== =============
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NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At September 30 and June 30, 1998, the Company deferred recognition of
revenues relating to nonrefundable advance royalty payments. Non-refundable
advance royalties consist of the following:
September 30, June 30,
1998 1998
------------- -----------
Battery $ 1,338,802 $ 1,338,802
Optical Memory 2,086,449 2,095,318
----------- -----------
$ 3,425,251 $ 3,434,120
=========== ===========
NOTE D - Net Loss Per Share
- ---------------------------
Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding. The Company used the
treasury stock method to calculate diluted earnings per share. Potential
dilution exists from stock options and warrants. Weighted average number of
shares outstanding and basic and diluted earnings per share for the three months
ended September 30, 1998 and 1997 are computed as follows:
1998 1997
-------- --------
Weighted average number of shares outstanding 12,830,539 10,785,775
Net loss $(5,223,995) $(4,297,066)
============ ============
BASIC NET LOSS PER SHARE $ (.41) $ (.40)
============ ============
DILUTED NET LOSS PER SHARE $ (.41) $ (.40)
============ ============
Basic and diluted loss per share were the same in each period due to the
losses recognized in each period. Due to the Company's net loss in 1998 and
1997, 50,198 and 456,302, respectively, of potentially dilutive shares were
excluded from the weighted average number of shares and from the calculations of
diluted loss per share, as inclusion of these securities would have been
antidilutive to the net loss per share. An additional 4,681,609 and 45,000
shares, respectively, were excluded from the 1998 and 1997 calculation of
weighted average number shares of potentially dilutive securities. Because of
the relationship between the exercise prices and the average market price of the
Company's stock during these periods, such excluded securities would have been
antidilutive regardless of the Company's net loss.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
The following discussion should be read in conjunction with the
accompanying Quarterly Financial Information and Notes thereto and the Company's
Annual Report on Form 10-K for the year ended June 30, 1998 and is qualified in
its entirety by the foregoing. The results of operations for the three months
ended September 30, 1998 are not necessarily indicative of results to be
expected in future periods.
Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 (the "Securities
Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange
Act") which are not historical facts and involve risks and uncertainties that
could cause actual results to differ materially from those expected and
projected. These forward-looking statements concern, among other things, the
Company's expectations, plans and strategies for the development and
commercialization of products based on its technologies and are generally
identified by the use of such terms as "intends," "expects," "plans,"
"projects," "estimates," "anticipates," "should" and "believes."
The Company's future business prospects are substantially dependent upon
the ability of the Company, its joint venture partners and licensees to develop,
manufacture and sell products based on the Company's technologies. Any revenues
or profits which may be derived by the Company from license and joint venture
agreements will be substantially dependent upon the willingness and ability of
the Company's licensees and joint venture partners to devote their financial
resources and manufacturing and marketing capabilities to commercialize products
based on the Company's technologies. Additional development efforts will be
required before certain products based on the Company's technologies can be
manufactured and sold commercially. There can be no assurance that certain
products based on the Company's technologies can be manufactured cost
effectively on a commercial scale, that such products will gain market
acceptance or that competing products and technologies will not render products
based on the Company's technologies obsolete or noncompetitive. There can be no
assurance that the Company's patents or other proprietary rights will be
determined to be valid or enforceable if challenged in court or administrative
proceedings or that the Company patents or other proprietary rights, even if
determined to be valid, will be broad enough in scope to enable the Company to
prevent third parties from producing products using similar technologies or
processes.
The Company cautions that the foregoing factors, as well as other factors
discussed in this Quarterly Report and in other documents and reports filed by
the Company with the Securities and Exchange Commission pursuant to the
requirements of the federal securities laws, could cause the actual facts and
conditions that may exist in the future to vary materially from the assumed
facts and conditions upon which the forward-looking statements contained herein
are based. The Company does not undertake any obligation
16
<PAGE>
to update or revise any forward-looking statement, made by it or on its behalf,
whether as a result of new information, future events or otherwise.
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended
- --------------------------------------------------------------------
September 30, 1997
- ------------------
The Company had a net loss from operations in the three months ended
September 30, 1998 of $4,434,000 compared to a net loss from operations of
$4,473,000 for the year ended September 30, 1997. The loss is primarily due to:
(1) costs of ongoing battery product development and continued market
development; (2) losses related to electrode production as the Company optimized
its product performance; (3) unreimbursed expenses of additional technical,
manufacturing and engineering support for GM Ovonic in furtherance of initial
NiMH battery production and ongoing technical assistance to other customers; and
(4) development costs of the multi-state electrical memory. In addition the
Company incurred nonoperating expenses of $790,000 in the three months ended
September 30, 1998 compared to non-operating income in the same period in the
prior year. Nonoperating income (expenses) includes principally interest income
and expense and in 1998 a $1,089,000 charge required under generally accepted
accounting principles representing the Company's share of the losses of United
Solar related to its investment in May, 1998 (see NOTE A of Note to Consolidated
Financial Statement).
Product sales consisting of positive and negative battery electrodes,
battery packs and machine building, decreased 62% to $967,000 in the three
months ended September 30, 1998 from $2,574,000 in the three months ended
September 30, 1997. Sales of negative and positive electrodes decreased
$1,350,000, primarily due to lower negative electrode prices and a low level of
orders and shipments. There were no battery pack sales in 1998 compared to
$164,000 in 1997 as GM Ovonic, formerly the Company's principal battery pack
customer, began its own production of battery packs. There were no
machine-building revenues in 1998 compared to $93,000 in 1997, principally due
to completion of the machine-building projects for GM Ovonic.
Royalties, substantially all of which relate to batteries, increased 82%
from $338,000 in the three months ended September 30, 1997 to $615,000 in the
three months ended September 30, 1998. This increase was a result of the
issuance in Japan of a basic NiMH battery patent in August 1997 to Ovonic
Battery causing NiMH battery sales in Japan to be royalty bearing, and due to
higher sales of NiMH batteries worldwide. (See NOTE B - Notes to Consolidated
Financial Statements.)
Revenues from product development agreements increased 35% from $2,790,000
in the three months ended September 30, 1997 to $3,773,000 in the three months
ended September 30, 1998 due to substantially increased revenues from a program
with General Motors to develop batteries for electric and hybrid electric
vehicle applications ($1,924,000 in 1998 compared to $1,035,000 in 1997), from
contracts with National Institute of Standards and Technology (NIST) in the
Company's battery and optical
17
<PAGE>
memory technologies ($998,000 in 1998 compared to $143,000 in 1997) and con-
tracts with National Renewable Energy Laboratory in photovoltaics ($718,000 in
1998 compared to $75,000 in 1997). These increases in 1998 were partially offset
by decreases in revenues from the United States Advanced Battery Consortium
($730,000 in 1997 compared to none in 1998) and decreases in revenues from other
technologies.
Other revenues increased by $81,000 from $699,000 in the three months
ended September 30, 1997 to $780,000 in the three months ended September 30,
1998, primarily due to increased billings for work performed for licensees of
Ovonic Battery.
The decrease in cost of product sales from $2,577,000 in the three months
ended September 30, 1997 to $2,092,000 in the three months ended September 30,
1998 was principally due to reduced level of sales in 1998. The negative margins
in 1998 were due to fixed costs related to reduced levels of production and
reductions in cost of product sales insufficient to offset the reduced level of
sales in 1998.
The increase in cost of revenues from product development agreements and
the decrease in product development and research expense in the three months
ended September 30, 1998 compared to the three months ended September 30, 1997
was principally due to ongoing electric vehicle battery and other product
development, as a result of increased revenues from product development
agreements. Total cost of funded and unfunded product development and research
expense increased 18% to $6,937,000 in the three months ended September 30, 1998
compared to $5,869,000 in the three months ended September 30, 1997.
The increase in patent expenses from $327,000 in the three months ended
September 30, 1997 to $357,000 in the three months ended September 30, 1998 was
primarily due to higher patent and maintenance costs in the three months ended
September 30, 1998. Patent defense expenses for the three months ended September
30, 1998 were basically flat compared to the three months ended September 30,
1997 due to the conclusion of significant patent defense activities.
The decrease in operating, general and administrative expenses from
$2,088,000 in the three months ended September 30, 1997 to $1,157,000 in the
three months ended September 30, 1998 was primarily related to increased
allocations to cost of revenues from product development agreements and
decreased depreciation expense in 1998.
The change from other income of $175,000 in the three months ended
September 30, 1997 compared to other expense of $790,000 in the three months
ended September 30, 1998 was due principally to the Company's share of the
losses of United Solar in 1998 and decreased interest income in the three months
ended September 30, 1998.
Liquidity and Capital Resources
As of September 30, 1998, the Company had unrestricted consolidated cash
and cash equivalents of $21,931,000, a decrease of $3,855,000 from June 30,
1998. In addition, the Company had accounts receivable at September 30, 1998 of
$8,327,000
18
<PAGE>
compared to $8,667,000 at June 30, 1998. As of September 30, 1998, the Company
had consolidated working capital of $25,500,000 compared with a consolidated
working capital of $29,800,000 as of June 30, 1998.
With the issuance of the basic patents for NiMH batteries and phase change
memory in Japan, various agreements are under discussion. On October 22, 1998,
Ovonic Battery entered into a cooperative venture agreement and a patent license
with Sanyo Electric Co., Ltd. ("Sanyo") of Osaka, Japan. The license agreement
provides for an up- front payment and royalties on (1) NiMH batteries for
two-and-three-wheel vehicles in Japan and China for worldwide sale, (2)
other-use large NiMH batteries in Japan and (3) NiMH batteries for four or more
wheel vehicles manufactured in Japan for domestic and export sale. Sanyo is also
purchasing a minority common share position in Ovonic Battery. The Company is to
receive a payment of $7,970,000 within 30 days from the date of the agreement.
The Company is pursuing 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, 1998, $3,337,000 of cash was
used in operations. The difference between the net loss of $5,224,000 and the
net cash used in operations was due to the Company's share ($1,089,000) of the
losses of United Solar, depreciation expense and a reduction in accounts
receivables. In addition, $208,000 of machinery and equipment was purchased or
constructed for the Company's operations during this period.
During the next 12 months, the Company is considering the purchase of up
to $750,000 of machinery and equipment. The machinery and equipment would be
utilized principally for Ovonic Battery's manufacturing operation.
At present, the Company has two major electrode customers for its battery
electrode products, GP Batteries International Limited (GP Batteries) and GM
Ovonic. GP Batteries is a licensee and pays royalties and is currently
negotiating electrode product specifications and pricing. These negotiations
could result in GP Batteries manufacturing its own electrode products. Sales of
electrode products to GM Ovonic are expected to increase as GM Ovonic ramps up
its production of battery packs at an expanded manufacturing facility. While
sales of electrode products in fiscal year 1999 are currently projected to
decrease, new positive and negative electrodes materials are being developed to
help increase sales in future periods. The Company has taken steps to reduce its
costs in a manner consistent with the expected lower volumes of electrode
product sales.
The Company expects significant revenues and cash flows related to product
development agreements, many of which already exist, that are entered into by
the
19
<PAGE>
Company with U.S. government agencies and with industry partners to develop the
Company's products and production technology. In October 1998, ECD was
awarded two contracts by Department of Energy (DOE) valued at over $3.5 million,
subject to funding: (1) a $1.7 million, 50% cost-shared cooperative agreement
to develop and demonstrate an integrated system for the production and
storage of clean, renewable hydrogen fuel for transportation and other
applications in the developing world, and (2) a $1.9 million, 50% cost-shared
contract to develop and demonstrate a high-rate thin-film deposition process
to further reduce photovoltaic manufacturing costs. Revenues under these
contracts will be recognized quarterly as the work is performed. Contracts with
industry partners include a multi-task, multi-million dollar program with
General Motors to develop batteries for electric and hybrid electric vehicle
applications which is presently projected to conclude in June 1999.This program,
which is funded on a monthly basis,builds upon the Company's earlier investments
to develop a family of batteries and is intended to provide next- and future-
generation NiMH batteries that will be manufactured by GM Ovonic.
Three contracts awarded in the Fall of 1997 to the Company under NIST
Advanced Technology Programs will also provide significant cash flows. One
contract was awarded 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 were awarded to ECD to support
development of a new, low-cost manufacturing system for DVD (digital versatile
disks) based on ECD's proprietary phase-change technology and for further
development of the optical memory phase-change products. Generally, the
agreed-upon fees for these product development 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).
Currently, the Company has two financing arrangements available: (1) a
$5,000,000 line of credit with Standard Federal Bank bearing an interest rate of
prime plus 1/2% that expires on March 31, 1999; and (2) $863,000 in unused
credit of an original $6,000,000 credit arrangement with Finova Capital
Corporation that expires on December 31, 1998. The Company does not expect to
use any of this available financing.
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, if any, of such revenue.
In August 1997, the Company was issued a basic patent in Japan specifying
the fundamentals that make NiMH batteries commercially feasible and causing NiMH
battery sales in Japan to be royalty bearing. The issuance of this patent has
resulted in higher royalty revenue and is expected to result in the payment of
higher running royalties in the future based upon current production rates and
selling prices of batteries produced in Japan by licensees. 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 next
12 months.
20
<PAGE>
The Company is also negotiating new 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 September 30, 1998, the
Company had no backlog of machine-building contracts.
Based upon the above information, the amount of cash to be received under
existing product development agreements in the year ending June 30, 1999 is
anticipated to be approximately $19,000,000 compared to $11,200,000 received
from product development agreements in the year ended June 30, 1998. The amount
of cash from royalties to be received in the year ending June 30, 1999 is
expected to be, based on historical trends, approximately $2,600,000 compared to
$1,989,000 received in the year ended June 30, 1998.
Since license fees are continuously being negotiated, they are difficult
to predict. The Company is unable to forecast the amount of cash to be received
from license fees in the year ending June 30, 1999.
Management believes that funds generated from operations and existing cash
and cash equivalents will be adequate to support and finance planned growth,
capital expenditures and company-sponsored product 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. While it is
the Company's intent to fund its operations from cash and cash equivalent
balances on hand and from activities such as product sales, licensing, royalties
and product development agreements, the amount and timing of revenues from such
activities are uncertain such that the Company may be required to seek
additional equity or debt financing.
Year 2000 Issue
Historically, many computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
program failing to properly recognize a year that begins with "20" instead of
"19." This, in turn, could result in major system failures or miscalculations
and is generally referred to as the "Year 2000 Issue."
The Company has formulated a Year 2000 Plan to address the Company's Year
2000 Issues. The Company's own internal systems are a primary area of focus. The
Company installed a new computer system in July 1997 to run its financial,
business reporting and data processing software applications. The providers of
the application software used in the new computer system have represented the
software to be Year 2000 compliant.
The Company is currently evaluating its other software applications,
including, but not limited to, its computerized laboratory manufacturing
equipment and imbedded chips to identify any Year 2000 Issues that may
significantly disrupt the Company's operations in a material manner.
21
<PAGE>
The Company's Year 2000 Plan is to:
o Inventory hardware, software and equipment
o Test and/or confirm hardware, software and equipment
considered Year 2000 compliant
o Identify Year 2000 issues
o Determine necessary measures to address issues
o Implement remedies
o Test and confirm
The above steps will overlap to a significant degree and the Company is
currently in various stages of each of these steps. The Company presently plans
to have identified all issues related to critical operations by the end of
calendar 1998 and have implemented remedies no later than June 1999.
The Company believes that most non-compliant software can be upgraded from
equipment manufacturers and software providers. It is currently estimated that
the cost of Year 2000 compliance will be less than $250,000, primarily for the
purchase of upgraded software and new or upgraded computers. This preliminary
estimate is based on presently available information and will be updated as the
Company continues to implement its Year 2000 Plan.
If the Company's new computer system fails with respect to the Year 2000
Issue or if any applications or embedded chips critical to the Company's
manufacturing process are overlooked, there could be a material adverse impact
on the business operations or financial performance of the Company.
Additionally, there can be no assurance that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the business
operations or financial performance of the Company. In particular, if third
party providers, due to the Year 2000 Issue, fail to provide the Company with
components, materials or energy which are necessary to timely complete
contractual requirements or to manufacture its products, then any such failure
could have a material adverse effect on the business operations and financial
performance of the Company.
The Company has not yet established a contingency plan, but intends to
formulate one to address unavoided or unavoidable risks and expects to have the
contingency plan formulated by July 1999.
22
<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
23
<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 16, 1998 Treasurer
By: /s/ Stanford R. Ovshinsky
---------------------------------
Stanford R. Ovshinsky
Date: November 16, 1998 President and Chief Executive Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period September 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,931,190
<SECURITIES> 0
<RECEIVABLES> 9,606,187
<ALLOWANCES> (291,000)
<INVENTORY> 1,251,661
<CURRENT-ASSETS> 33,014,371
<PP&E> 26,441,333
<DEPRECIATION> (18,004,579)
<TOTAL-ASSETS> 45,445,586
<CURRENT-LIABILITIES> 7,504,207
<BONDS> 3,660,430
0
0
<COMMON> 128,882
<OTHER-SE> 29,285,889
<TOTAL-LIABILITY-AND-EQUITY> 45,445,586
<SALES> 966,555
<TOTAL-REVENUES> 6,177,625
<CGS> 2,091,999
<TOTAL-COSTS> 4,031,337
<OTHER-EXPENSES> 4,488,349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 166,917
<INCOME-PRETAX> (5,223,995)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,223,995)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,223,995)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
