SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the period ended MARCH 31, 1999
-----------------------------------------------------------
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 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 May 12, 1999 there were 219,913 shares of Class A Common Stock,
430,000 shares of Class B Common Stock and 12,632,706 shares of Common Stock
outstanding.
Page 1 of 32 Pages
1
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------- --------------------
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Product sales $ 1,123,552 $ 2,862,637 $ 3,131,407 $ 8,105,845
Royalties 715,939 730,355 1,947,820 1,825,355
Revenues from product development
agreements 4,117,937 3,892,027 12,741,733 10,802,648
Revenues from license and other agreements 232,000 642,000 4,716,000 1,059,134
Other 1,131,349 855,699 2,912,344 2,398,652
------------ ----------- ----------- -----------
TOTAL REVENUES 7,320,777 8,982,718 25,449,304 24,191,634
EXPENSES
Cost of product sales 1,609,154 3,366,676 5,916,358 9,173,655
Cost of revenues from product
development agreements 4,060,165 4,025,740 12,977,151 11,087,042
Product development and research 2,927,279 3,076,488 8,830,364 9,120,129
Patents (including patent defense) 449,780 468,496 1,277,909 1,430,696
Operating, general and administrative 2,553,961 1,853,748 4,739,015 5,290,226
------------ ----------- ----------- -----------
TOTAL EXPENSES 11,600,339 12,791,148 33,740,797 36,101,748
------------ ----------- ----------- -----------
(LOSS) FROM OPERATIONS (4,279,562) (3,808,430) (8,291,493) (11,910,114)
OTHER INCOME (EXPENSE)
Gain on sale of Ovonic Battery Company stock -- 1,970,000
Equity in loss from investment in United Solar
(see Note A) (992,000) (3,107,914)
Interest expense (129,365) (28,547) (436,670) (110,661)
Interest income 300,309 89,752 981,860 401,092
Other nonoperating income (net) 128,788 (31,772) 354,117 36,801
------------- ------------ ------------ -----------
TOTAL OTHER INCOME (EXPENSE) (692,268) 29,433 (238,607) 327,232
------------- ------------ ------------ ------------
NET (LOSS) $ (4,971,830) $ (3,778,997) $(8,530,100) $(11,582,882)
============= ============= ============ =============
BASIC NET (LOSS) PER SHARE $ (.38) $ (.35) $ (.66) $ (1.07)
============= ============= ============ =============
DILUTED NET (LOSS) PER
SHARE $ (.38) $ (.35) $ (.66) $ (1.07)
============= ============= ============ =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
March 31, June 30,
1999 1998
----------- ----------------
CURRENT ASSETS (Unaudited) (See note below)
Cash, including cash equivalents of
$24,275,000 as of March 31, 1999 and
$25,780,000 as of June 30, 1998 $ 24,280,126 $ 25,786,112
Accounts receivable (net of allowance for
uncollectible accounts of
$177,000 at March 31, 1999 and
$315,000 at June 30, 1998) 4,976,804 8,666,952
Amounts due from related parties 1,487,668 1,491,115
Inventories 616,371 1,074,097
Prepaid expenses and other current assets 180,618 374,590
------------- ------------
TOTAL CURRENT ASSETS 31,541,587 37,392,866
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 312,588 312,588
Buildings and improvements 3,732,925 3,666,411
Machinery and other equipment (including
construction in progress of
$311,000 at March 31, 1999 and
$785,000 at June 30, 1998) 18,068,845 16,870,261
Capitalized lease equipment 5,099,672 5,383,672
------------ ------------
27,214,030 26,232,932
Less accumulated depreciation and amortization (18,967,414) (17,641,505)
------------- -------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 8,246,616 8,591,427
Investments in EV Global and Unique 1,602,308 1,953,000
JOINT VENTURES
United Solar 658,000 2,115,914
GM Ovonic -- --
Sovlux -- --
OTHER ASSETS 1,271,404 1,307,609
----------- ------------
TOTAL ASSETS $ 43,319,915 $ 51,360,816
============ ============
See notes to consolidated financial statements.
Note: Derived from the Company's Fiscal Year 1998 audited financial statements.
3
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------- ----------------
(Unaudited) (See note below)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,156,802 $ 4,443,189
Salaries, wages and amounts withheld from employees 1,899,715 1,413,217
Deferred revenues under business agreements 1,322,815 417,082
Current installments on capitalized lease obligations 1,315,528 1,319,220
------------ -----------
TOTAL CURRENT LIABILITIES 8,694,860 7,592,708
CAPITALIZED LEASE OBLIGATIONS 2,984,564 3,967,496
DEFERRED GAIN 1,220,397 1,551,146
NONREFUNDABLE ADVANCE ROYALTIES 3,914,758 3,434,120
------------ -----------
TOTAL LIABILITIES 16,814,579 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
Class B Convertible Common Stock,
par value $0.01 per share
Authorized, Issued and Outstanding - 430,000 shares 4,300 --
Common Stock, par value $0.01 per share:
Authorized - 20,000,000 shares
Issued and outstanding - 12,701,593 shares at
March 31, 1999 and 12,639,817 shares at June 30, 1998 127,016 126,398
Additional paid-in capital 228,090,376 227,092,920
Accumulated deficit (200,280,463) (191,750,363)
Treasury stock at cost - 109,400 shares at
March 31, 1999 and 42,000 shares at June 30, 1998 (1,028,092) (608,808)
Accumulated Other Comprehensive Loss (410,000) (47,000)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 26,505,336 34,815,346
------------- ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 43,319,915 $ 51,360,816
============= =============
</TABLE>
See notes to consolidated financial statements.
Note: Derived from the Company's Fiscal Year 1998 audited financial statements.
4
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(8,530,100) $(11,582,882)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,342,818 1,441,960
Equity in loss from investment in United Solar 3,107,914 --
Gain on sale of Ovonic Battery stock (1,970,000) --
Creditable royalties 480,638 71,916
Options issued to executive for services rendered 339,750 339,750
Stock issued for services rendered 214,400 44,995
Amortization of deferred gain (330,749) (15,352)
Other options 25,000 --
Changes in working capital
Accounts receivable and amounts due
from related parties 3,693,595 1,881,643
Inventories 457,726 (207,254)
Prepaid expenses and other current assets 230,177 (612,459)
Accounts payable and accrued expenses 200,111 31,917
Deferred revenues under business agreements 905,733 (186,947)
----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 167,013 (8,792,713)
INVESTING ACTIVITIES:
Purchases of capital equipment (net) (998,007) (979,540)
Purchase of investments -- (3,085,435)
Investment in United Solar (1,650,000) --
Sales of investments -- 4,145,368
Other (12,308) --
------------ -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,660,315) 80,393
FINANCING ACTIVITIES:
Purchase of treasury stock (419,284) --
Principal payments under short-term and long-term debt
and capitalized lease obligations (986,624) (951,739)
Proceeds from sale of stock of subsidiary 1,970,000 --
Proceeds from sale of stock upon exercise of stock
option and warrants 423,224 670,553
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 987,316 (281,186)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,505,986) (8,993,506)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 25,786,112 14,270,145
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $24,280,126 $ 5,276,639
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
March 31,
-------------------
1999 1998
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 436,670 $ 110,661
The Company's non-cash investing and financing
activities were as follows:
Investment in EV Global/Unique $ -- $2,000,000
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 1999
-----------------------------------------------------------
NOTE A - Basis of Presentation
- ------------------------------
Information for the three months and nine months ended March 31, 1999 and
1998 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.
These financial statements should be read in conjunction with ECD's Annual
Report on Form 10-K for the year ended June 30, 1998 which contains a summary of
ECD's accounting principles and other footnote information.
The consolidated financial statements include the accounts of ECD and its
approximately 91% 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.
Generally Accepted Accounting Principles ("GAAP") require 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 $55,500,000. 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 March 31, 1999, the Company loaned United Solar $1,650,000. This
loan is convertible, at ECD's option, into additional shares of United Solar
stock.
GAAP requires that ECD's cash investments, (including loans and advances),
regardless of the true value of United Solar, be recorded on the balance sheet
as the value of ECD's 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 non-cash carrying value of United Solar is decreased by
the losses of United Solar (in proportion to
7
<PAGE>
ECD's ownership share of United Solar) and ECD is required to record a non-cash,
non-operating expense in the amount of the non-cash reduction in the carrying
value of United Solar.
The investment in United Solar will continue to be carried at an amount no
higher than the Company's total cash investments ($4,150,000 at March 31, 1999)
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.
In February 1998, the Company and EV Global Motors Company ("EV Global"),
a Lee Iacocca company, entered into a Stock Purchase Agreement ("Agreement")
which provided for the transfer to EV Global of 146,924 shares of ECD's Common
Stock and warrants to purchase 133,658 shares of ECD's Common Stock. The
Agreement also provided for the transfer to ECD of 250,000 shares of EV Global
Common Stock and 129,241 shares of Unique Mobility, Inc. ("Unique") 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 in accordance with Statement of Financial Accounting
Standards 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 investments are
marked-to-market, with the offset recorded to Accumulated Other Comprehensive
Loss, a component of Stockholders' Equity. Neither investment is considered
impaired as of March 31, 1999.
Upon consolidation, all intercompany accounts and transactions are
eliminated.
Certain items for the three months and nine months ended March 31, 1998
have been reclassified to be consistent with the classification of items in the
three months and nine months ended March 31, 1999.
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 in the manufacture of products based upon the Company's
technologies.
During the first quarter of the 1999 fiscal year, the Company adopted
Statement of Financial Accounting Standards Board Statement No. 130, Reporting
Comprehensive Income. This Statement requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in an
annual financial statement that
8
<PAGE>
is displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings include unrealized gains and losses on marketable
securities classified as available-for-sale. The Company's total comprehensive
income (loss) was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Loss $(4,971,830) $(3,778,997) $(8,530,100) $(11,582,882)
OTHER COMPREHENSIVE LOSSES:
Unrealized losses on securities (88,000) -- (363,000) --
------------- ------------- ------------- -------------
COMPREHENSIVE LOSS $(5,059,830) $(3,778,997) $(8,893,100) $(11,582,882)
============ ============ ============ =============
</TABLE>
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 March 31,
1999, ECD loaned United Solar $1,650,000. This loan is convertible, at ECD's
option, into additional shares of United Solar stock. In the three and nine
months ended March 31, 1999, ECD recorded $992,000 and $3,108,000, respectively,
as its share of the losses of United Solar as required by GAAP, regardless of
the true value of the investment.
9
<PAGE>
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
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues* $ 3,034,579 $ 2,608,023 $ 8,534,585 $ 8,631,514
Operating Expenses
Cost of product sales 3,461,165 3,151,074 9,828,878 11,942,349
Research and development 805,027 732,450 2,185,306 2,084,553
General and administrative 289,172 338,110 1,294,178 847,053
Sales and marketing 213,060 401,275 912,080 1,364,976
----------- ----------- ----------- -----------
Total 4,768,424 4,622,909 14,220,442 16,238,931
Other Income (Expense) (204,710) (175,389) (531,918) (728,133)
------------ ------------ ------------ ------------
Net Loss $(1,938,555) $(2,190,275) $(6,217,775) $(8,335,550)
============ ============ ============ ============
* Includes product sales and revenues earned under research contracts.
</TABLE>
UNITED SOLAR BALANCE SHEETS
---------------------------
March 31, June 30,
--------- --------
1999 1998
---- ----
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents $ 490,899 $ 4,091,047
Accounts receivable 2,174,983 1,748,857
Inventory 2,790,602 3,361,684
Other current assets 390,132 462,282
----------- -----------
Total Current Assets 5,846,616 9,663,870
Property, plant and equipment (net) 9,952,321 11,575,454
Other assets 222,412 183,763
----------- -----------
Total Assets $16,021,349 $21,423,087
=========== ===========
Current Liabilities:
Short-term bank debt $ 1,445,703 $ 1,445,703
Accrued expenses and other 2,361,214 2,609,402
------------ -----------
Total Current Liabilities 3,806,917 4,055,105
----------- -----------
Note Payable - Canon 2,500,000 2,500,000
Note Payable - ECD 1,650,000 --
Lease Payable 7,122,252 7,743,143
Total Stockholders' Equity 942,180 7,124,839
----------- -----------
Total Liabilities and Stockholders'
Equity $16,021,349 $21,423,087
=========== ===========
10
<PAGE>
GM Ovonic
In 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 the start-up phase and, as such, has a history of operating losses.
Sovlux
In 1990, ECD 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 ECD 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 continue production of photovoltaic products due to Minatom's
inability to provide the required operating capital as a result of current
economic conditions in Russia.
In 1998, ECD formed Sovlux Battery to produce NiMH batteries and
components for sale to Ovonic Battery and its licensees. Sovlux Battery is owned
50% by ECD and 50% by the Chepetsky Mechanical Plant ("Chepetsky"), an
enterprise of Minatom. ECD's contribution to the ventures consist solely of
technology.
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:
March 31, June 30,
1999 1998
--------- --------
U.S. Government:
Amounts billed $ 788,599 $ 717,281
Unbilled 679,141 812,439
---------- -----------
Total 1,467,740 1,529,720
---------- -----------
Commercial Customers:
Amounts billed 895,037 5,480,895
Related party billed
- United Solar 177,075 169,847
- GM Ovonic 916,593 729,561
Royalties 795,940 1,157,619
License fees 190,000 300,000
Due per contracts 1,599,315 353,954
Related party unbilled
- GM Ovonic 394,000 591,707
Other unbilled 47,033 2,358
---------- -----------
Total 5,014,993 8,785,941
---------- -----------
Other 158,739 157,406
Allowance for Uncollectible Accounts (177,000) (315,000)
----------- ------------
TOTAL $6,464,472 $10,158,067
=========== ===========
11
<PAGE>
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 March 31, 1999 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.
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:
March 31, 1999 June 30, 1998
-------------- -------------
Finished products $ 1,320 $ 119,649
Work in process 370,063 511,582
Raw materials 244,988 442,866
-------- ----------
$616,371 $1,074,097
======== ==========
Product Development and Research
Product development and research costs are recognized as losses as they are
incurred, and, as such, the Company's investments in its technologies are
recorded at zero. The technology investments are the basis by which the
Company is able to enter into license and joint venture agreements.
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.
12
<PAGE>
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.
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 is limited to specific territories,
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
13
<PAGE>
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 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.
14
<PAGE>
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:
Nine Months Ended March 31,
---------------------------
1999 1998
---- ----
Product Sales:
Negative and positive electrodes $ 2,439,036 $ 7,710,893
Battery packs 621,267 246,652
Machine building 71,104 148,300
----------- -----------
$ 3,131,407 $ 8,105,845
=========== ===========
Royalties:
Battery $ 1,889,518 $ 1,775,699
Optical Memory 58,302 49,656
----------- -----------
$ 1,947,820 $ 1,825,355
=========== ===========
Revenues from Product Development Agreements:
Photovoltaic $ 2,113,556 $ 1,431,412
Battery 8,618,077 7,543,006
Optical memory 1,877,228 963,037
Hydrogen 102,586 535,807
Other 30,286 329,386
----------- -----------
$12,741,733 $10,802,648
=========== ===========
License and Other Agreements:
Optical Memory $ 90,000 --
Battery 4,626,000 $ 1,059,134
----------- -----------
$ 4,716,000 $ 1,059,134
=========== ===========
NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At March 31, 1999 and June 30, 1998, the Company deferred recognition of
revenues relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
March 31, June 30,
1999 1998
--------- --------
Battery $ 1,838,802 $1,338,802
Optical Memory 2,075,956 2,095,318
----------- ----------
$ 3,914,758 $3,434,120
=========== ==========
15
<PAGE>
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 uses 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
and nine months ended March 31, 1999 and 1998 are computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of shares
outstanding 13,160,773 10,931,636 12,923,179 10,837,143
============ ============ ============ =============
Net loss $ (4,971,830) $ (3,778,997) $ (8,530,100) $(11,582,882)
============= ============= ============= =============
BASIC NET LOSS PER SHARE $ (.38) $ (.35) $ (.66) $ (1.07)
============= ============= ============= =============
DILUTED NET LOSS PER SHARE $ (.38) $ (.35) $ (.66) $ (1.07)
============= ============= ============= =============
</TABLE>
Basic and diluted loss per share were the same in the three and nine
months ended March 31, 1999 and 1998 due to the losses recognized in each
period. Due to the Company's net loss in the three and nine months ended March
31, 1999 and in the three and nine months ended March 31, 1998, 164,772 shares,
76,486 shares, 453,989 shares and 506,009 shares, respectively, which were
potentially dilutive, have been 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 5,552,614 shares (for both 1999 periods) and 105,196 shares (for both
1998 periods), respectively, were excluded from the 1999 and 1998 calculation of
weighted average number of 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.
Note E - License Agreements and Sale of Ovonic Battery Stock
- ------------------------------------------------------------
In October 1998, the Company entered into a cooperative venture agreement
and a patent license agreement with Sanyo Electric Co., Ltd. ("Sanyo"). Sanyo
has been granted a nonexclusive license under Ovonic Battery patents, which
includes the right to sublicense Sanyo affiliates. Under the terms of the
strategic agreement, Sanyo will be authorized to manufacture the following: (i)
NiMH batteries for two- and three-wheel vehicles in Japan and China for
worldwide sale, (ii) other-use large NiMH batteries in Japan, and (iii) NiMH
batteries for four or more wheel OEM vehicles manufactured in Japan for domestic
and export sale.
16
<PAGE>
The license agreement provided for an up-front payment of $4,400,000 and
advance royalties of $500,000. Sanyo also purchased for $2,970,000 a minority
common share position in Ovonic Battery. A gain on the sale of Ovonic Battery
stock in the amount of $1,970,000 was recorded for the three months ended
December 31, 1998 and the balance of the gain ($1,000,000) has been deferred
pending completion of certain terms related to the issuance of such stock to
Sanyo.
In the three months ended March 31, 1999, the Company signed two license
agreements. Under one agreement, the Company granted a nonexclusive license to
Ricoh Company Limited of Tokyo, Japan ("Ricoh"), the world's largest
manufacturer of rewritable compact disks. In addition to the currently produced
rewritable compact disk media, this royalty-bearing license covers all past and
future phase-change optical memory products, including rewritable DVD media,
produced by Ricoh, which became the 13th company to license this technology from
ECD.
In addition to the obligation of Ricoh to pay running royalties on future
sales of phase-change optical memory products, ECD received a nonrefundable
payment of $90,000 for the release of any past claims of ECD against Ricoh.
The second agreement is a license agreement with Japan Storage Battery
Co., Ltd. ("JSB"), a Japanese battery manufacturing company. The Company granted
a royalty-bearing, non-exclusive license to JSB to make, have made, import, use
and otherwise dispose of consumer hydride batteries and industrial hydride
batteries in certain parts of the world.
In consideration for the granting of this license, the Company will
receive a non-refundable payment of $100,000 and running royalties. In addition,
upon the attainment of a certain level of sales by JSB, the Company will receive
a further nonrefundable payment of $500,000 ($100,000 of which will be applied
as an advance royalty payment).
17
<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
and nine months ended March 31, 1999 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 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.
18
<PAGE>
Results of Operations
Three Months ended March 31, 1999 Compared to Three Months Ended March 31, 1998
- -------------------------------------------------------------------------------
The Company had a net loss for the three months ended March 31, 1999 of
$4,972,000 compared to a net loss of $3,779,000 for the three months ended March
31, 1998. The net loss results from (i) ongoing product development and
continued market development activities; (ii) losses related to electrode
production; (iii) ongoing protection of the Company's intellectual property and
(iv) development costs of the multi-state electronic memory. In addition,
included in other income (expense) for the 1999 quarter was a $992,000 loss
representing ECD's equity in the net loss from investment in United Solar, as
required under GAAP, related to ECD's equity investments in United Solar
(see NOTE A of Notes to Consolidated Financial Statements and Liquidity and
Capital Resources).
Product sales decreased 61% in the quarter ended March 31, 1999 compared
to the same quarter in the previous year. Battery electrode sales decreased 76%
to $669,000 in the March 1999 quarter from $2,819,000 in the March 1998 quarter,
primarily due to one of the Company's principal customers currently
manufacturing its own electrode products. The Company has continued its
development of advanced electrode materials that can be introduced to its
customers. In order to expand its capacity, the Company also temporarily
suspended operations in its positive powder manufacturing facility. Battery pack
sales were significantly higher, continuing a trend of increasing battery pack
sales, $384,000 in the March 1999 quarter compared to $44,000 in the March 1998
quarter. There were revenues from machine building of $71,000 in the March 1999
quarter compared to no revenues from machine building in the same period last
year. The Company received a contract to build large-area microwave deposition
equipment in February 1999 and recognized revenue of $63,000 in connection with
this contract for the three-month period ended March 31, 1999. The Company is
in negotiations with a number of companies for additional machine-building
contracts.
Royalties decreased to $716,000 in the three months ended March 31, 1999
from $730,000 in the three months ended March 31, 1998, primarily due to the
fact that the 1997 period included a catch-up adjustment for additional
royalties due to the basic patent issued in Japan in 1998 causing NiMH battery
sales in Japan to be royalty bearing. While the volume of NiMH batteries
currently being sold has increased substantially, the royalties the Company
receives reflect increased production efficiencies of its licensees which have
resulted in lower prices as licensees move aggressively to increase market
share.
The 6% increase in revenues from product development agreements to
$4,118,000 in the three months ended March 31, 1999 from $3,892,000 in the three
months ended March 31, 1998 was due primarily to increased revenues from
contracts with the National Institute of Standards and Technology ("NIST") in
the Company's battery and optical memory technologies ($1,409,000 in 1999
compared to $382,000 in 1998) and from a program with General Motors to develop
second- and third-generation Ovonic NiMH batteries for electric and hybrid
electric vehicle applications ($1,978,000 in the quarter ended March 31, 1999
compared to $1,953,000 in the same quarter in the prior year).
The Company has $14,744,000 in unrecognized revenues outstanding under
product development agreements with U.S. government or other agencies or
companies.
19
<PAGE>
Without giving effect to any new product development agreements which
may be entered into and based upon scheduled funding and performance,
$16,745,000 is expected to be recorded in revenues from product development
agreements for the year ending June 30, 1999.
Revenues from license and other agreements decreased from $642,000 in the
three months ended March 31, 1998 to $232,000 in the three months ended March
31, 1999. 1999 license fees included $190,000 in connection with the new license
agreements with Ricoh and JSB. 1998 revenues included $600,000 related to a
technology transfer agreement with Sovlux and the Chepetsky plant in Russia.
The Company spent a total of $6,987,000 in the quarter ended March 31,
1999 for product development and research (funded and unfunded) compared to
$7,102,000 in the same quarter in the prior year. Despite the decrease in
spending, revenues from product development agreements increased by $226,000.
The increase in other revenues was due to increased billings in the three
months ended March 31, 1999 for work performed for Ovonic Battery licensees and
for additional work performed by ECD's Production Technology and Machine
Building Division.
The decrease in cost of product sales from $3,367,000 in the three months
ended March 31, 1998 to $1,609,000 in the three months ended March 31, 1999 was
due to the reduced level of sales of battery electrodes. While the Company has
taken significant steps to reduce costs, the low sales volume compared to high
fixed costs results in the loss on product sales.
Patent expenses in the three months ended March 31, 1999 were $450,000, a
4% decrease from the same period in the prior year. Patent expenses in both
periods were incurred in connection with patent and maintenance costs as well as
the defense and prosecution of Ovonic Battery's U.S. patents covering its
proprietary NiMH battery technology and ECD's phase-change optical memory
technology.
The increase in operating, general and administrative expenses from
$1,854,000 in the three months ended March 31, 1998 to $2,554,000 in the three
months ended March 31, 1999 was primarily due to reduced allocations in 1999 to
cost of revenues from product development agreements, non-cash expenses
associated with a stock grant of Class B Common Stock to one of the Company's
executives, as approved by a vote of the Company's shareholders, increased costs
associated with stockholder relations and other increased costs in 1999.
The decrease in other income from $29,000 in the three months ended March
31, 1998 to other expense of $692,000 in the three months ended March 31, 1999
was due to ECD's $992,000 equity in the net loss from investment in United Solar
and higher interest expense partially offset by higher interest income. The
$992,000 expense charge was caused by ECD's cash investments in United Solar's
future growth. Under GAAP, ECD must adjust its investment for its share of the
net earnings or losses of United Solar for each reporting period until ECD's
investment is reduced to zero or exceeds ECD's total cash investment of
$4,150,000, at March 31, 1999, regardless of the true value of the investment.
20
<PAGE>
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998
- -----------------------------------------------------------------------------
The Company had a net loss for the nine months ended March 31, 1999 of
$8,530,000 compared to a net loss of $11,583,000 for the nine months ended March
31, 1998. The loss is primarily due to: (i) ongoing product development and
continued market development activities; (ii) losses related to electrode
production; (iii) ongoing protection of the Company's intellectual property and
(iv) development costs of the multi-state electronic memory. The amount of the
net loss for the nine months ended March 31, 1999 was partially offset by a
$1,970,000 gain on the sale of Ovonic Battery stock and a $4,400,000 license fee
from Sanyo in 1999. In addition, included in other income (expense) for the nine
months ended March 31, 1999 was a $3,108,000 expense representing ECD's equity
in the net loss from investment in United Solar, as required under GAAP, related
to ECD's equity investments in United Solar (see NOTE A of Notes to Consolidated
Financial Statements and Liquidity and Capital Resources).
Product sales decreased 61% in the nine months ended March 31, 1999
compared to the nine months ended March 31, 1998. Battery electrode sales
decreased to $2,439,000 in the nine months ended March 31, 1999 from $7,711,000
in the nine months ended March 31, 1998, primarily due to one of the Company's
principal customers currently manufacturing its own electrode products. The
Company has continued its development of advanced electrode materials that can
be introduced to its customers. In order to expand its capacity with the
installation of new equipment, the Company also temporarily suspended operations
in its positive powder manufacturing facility. Battery pack sales increased
from $247,000 to $621,000 in the nine months ended March 31, 1999, continuing
a trend of increasing battery pack sales. There were revenues from machine
building of $71,000 in the nine months ended March 31, 1999, down from $148,000
in the nine months ended March 31, 1998. The Company received a contract to
build large-area microwave deposition equipment in February 1999 and recognized
revenue of $63,000 in connection with this contract for the nine-month period
ended March 31, 1999. The Company is in negotiations with a number of companies
for additional machine-building contracts.
Royalties increased to $1,948,000 in the nine months ended March 31, 1999
from $1,825,000 in the nine months ended March 31, 1998, primarily due to higher
battery royalties resulting from the issuance of a basic patent in Japan in
1997. While the volume of NiMH batteries currently being sold has increased
substantially, the royalties the Company receives reflect increased production
efficiencies of its licensees which have resulted in lower prices as licensees
move aggressively to increase market share.
The 18% increase in revenues from product development agreements to
$12,742,000 in the nine months ended March 31, 1999 from $10,803,000 in the nine
months ended March 31, 1998 was due to substantially increased revenues from
contracts with NIST in the Company's battery and phase-change optical memory
technologies ($4,186,000 in 1999 compared to $605,000 in 1998) and from a
program with General Motors to develop second- and third-generation Ovonic NiMH
batteries for electric and hybrid electric vehicle applications ($6,060,000 in
the nine months ended March 1999 compared to $4,707,000 in the nine months ended
March 31, 1998). Revenues from product development agreements were also
significantly higher for ECD's photovoltaic technologies.
21
<PAGE>
Revenues from license and other agreements increased from $1,059,000 in
the nine months ended March 31, 1998 to $4,716,000 in the nine months ended
March 31, 1999 due to a $4,400,000 license fee from Sanyo in 1999 and $190,000
in license fees in 1999 in connection with the new license agreements with Ricoh
and JSB. License fees in 1998 include $900,000 related to a technology transfer
agreement with Sovlux and the Chepetsky plant in Russia.
The Company spent a total of $21,807,000 in the nine months ended March
31, 1999 for product development and research (funded and unfunded) compared to
$20,207,000 in the nine months ended March 31, 1998. This planned increase in
expenditures was primarily for continued development of the Company's family of
batteries and was funded by the $1,939,000 increase in revenues from product
development agreements.
The increase in other revenues was due to increased billings in the nine
months ended March 31, 1999 for work performed for Ovonic Battery licensees and
for additional work performed by ECD's Production Technology and Machine
Building Division.
The decrease in cost of product sales to $5,916,000 in the nine months
ended March 31, 1999 from $9,174,000 in the nine months ended March 31, 1998 was
due to the reduced level of battery electrode sales. While the Company has taken
significant steps to reduce costs, the low sales volume compared to high fixed
costs results in the loss on product sales.
Patent expenses in the nine months ended March 31, 1999 were $1,278,000, a
11% reduction from the same period in the prior year. Patent expenses in both
periods were incurred in connection with patent and maintenance costs as well as
the defense and prosecution of Ovonic Battery's U.S. patents covering its
proprietary NiMH battery technology and ECD's phase-change optical memory
technology.
Operating, general and administrative expenses decreased to $4,739,000 in
the nine months ended March 31, 1999 from $5,290,000 in the nine months ended
March 31, 1998 and was primarily due to increased allocations in 1999 to cost of
revenues from product development agreements, offset by costs associated with a
restricted stock grant to one of the Company's executives, increased costs
associated with stockholder relations and other increased costs in 1999.
The decrease in other income from $327,000 in the nine months ended March
31, 1998 to other expense of $239,000 in the nine months ended March 31, 1999
was due to a $3,108,000 expense representing the Company's equity in the net
loss from investment in United Solar and higher interest expense, partially
offset by a $1,970,000 gain on the sale of Ovonic Battery stock in 1999 and
higher interest income. The $3,108,000 expense is related to ECD's cash
investments in United Solar's future growth. Under GAAP, ECD must adjust its
investment for its share of the net earnings or losses of United Solar for each
reporting period until ECD's investment is reduced to zero or exceeds ECD's
total cash investment of $4,150,000 at March 31, 1999, regardless of the true
value of the investment.
22
<PAGE>
Liquidity and Capital Resources
As of March 31, 1999, the Company had unrestricted consolidated cash, cash
equivalents and accounts receivable of $30,745,000, a decrease of $5,200,000
from June 30, 1998. As of March 31, 1999, the Company had consolidated working
capital of $22,847,000 compared with a consolidated working capital of
$29,800,000 as of June 30, 1998.
ECD has formed a new joint venture with Tyler Lowrey, a recognized
authority in semiconductor memory technology and former vice chairman and chief
technology officer of Micron Technology, Inc. The joint venture, owned equally
by ECD and Mr. Lowrey, expects to pursue device manufacturing as well as
licensing of selected applications of ECD's Ovonic Unified Memory, a unique
thin-film nonvolatile solid-state memory. ECD is in negotiations with new
strategic partners for financing to commercialize its Ovonic Unified Memory
technology.
The Company's strategy is to finance its growth through strategic
alliances (joint ventures and license agreements) and with third parties who can
provide financial resources and marketing expertise for the Company's
technologies and products. With the issuance of the basic patents for NiMH
batteries and phase-change optical memory in Japan, various new agreements are
under discussion. Another important area of the Company's development is the use
of the Company's proprietary hydrogen storage technology for storing,
transporting and using hydrogen for a wide range of portable and stationary
applications, with vehicles being of prime importance. As a result of its
position, the Company is in negotiations with a number of potential partners to
commercialize its hydrogen storage technology.
During the nine months ended March 31, 1999, $167,000 of cash was provided
by operations. The difference between the net loss of $8,530,000 and the net
cash provided by operations was due to ECD's $3,108,000 share of the losses in
United Solar relating to the Company's investment of cash in United Solar's
future growth, the $1,970,000 gain on the sale of Ovonic Battery stock,
depreciation expense and creditable royalties received. ECD invested $1,650,000
in United Solar, providing funding for new opportunities in the worldwide
photovoltaic market served by United Solar's unique products which offer
particular advantages to the satellite and telecommunications industries. In
addition, $998,000 of machinery and equipment was purchased or constructed for
the Company's operations during this period. The Company also received
$2,970,000 related to the sale of Ovonic Battery Company stock.
The Company has had two major electrode customers for its battery
electrode products, GP Batteries International Limited ("GP Batteries") and GM
Ovonic. GP Batteries, a licensee, pays royalties and is currently manufacturing
its own electrode products. The Company is adapting to its customers' needs to
buy materials as well as finished electrodes. It has developed new electrode
materials that are being offered to customers and has adjusted its manufacturing
processes for electrodes to customer specifications.
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
23
<PAGE>
sales of electrode products in fiscal year 1999 are currently projected to
decrease from fiscal 1998 levels, new advanced positive and negative electrode
materials with enhanced performance are being optimized for manufacturing in
order to reduce costs and to demonstrate advanced materials to offer the
Company's customers an option in order to 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 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 the Department of Energy: (1) a 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 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 as the work is performed. Contracts with industry partners include a
multi-task, multi-million dollar program with General Motors to develop next
generation batteries for electric and hybrid electric vehicle applications which
is presently projected to conclude in the Summer of 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 Ovonic 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 contribute to 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 optical memory technology and for
further development of the phase-change optical memory 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).
During the next 12 months, the Company is considering the purchase of up
to $2,000,000 of machinery and equipment. The machinery and equipment would be
utilized principally for Ovonic Battery's manufacturing operation for the
introduction of its new line of materials for world markets. In addition to the
$2,500,000 investment in May 1998, ECD invested $1,650,000 during the quarter
ended March 31, 1999 in United Solar and plans to invest additional funds in
United Solar (up to an additional amount of $850,000).
The Company has a financing arrangement with Standard Federal Bank for a
$3,000,000 line of credit bearing an interest rate of prime that expires on
March 31, 2001. The Company does not expect to use any of this available
financing during the next 12 months.
The Company's strategy is to finance its growth through the formation of
strategic alliances to further commercialize its products. While the Company is
in negotiations
24
<PAGE>
concerning its NiMH battery, hydrogen storage, photovoltaic, Ovonic Unified
Memory, optical memory and production systems technologies with a number of
companies which could provide it with additional revenue under license and
other agreements in the coming year, it is unable to predict the amount, if
any, of such revenue.
The Company is not aware of events or circumstances that would
significantly alter royalty revenues for the next 12 months.
In February 1999, ECD received a contract to build large-area microwave
deposition equipment. This new contract provides the platform for the
commercialization of ECD's passive coatings technology and equipment to
manufacture products incorporating such technology. The receipt of this order
directly results from the research and development by the Company, the costs of
which were recorded as losses in prior years. The contract provides for
progress payments over the next 16 months. Through March 31, 1999 ECD has
recognized revenues of $63,000 in connection with this contract. ECD is also
negotiating machine-building contracts with others that could provide revenues
in the coming year and beyond. Machine building is cyclical but an important
part of ECD's business. While there is no other backlog of machine-building
contracts as of March 31, 1999, negotiations are in progress with a number of
companies for additional 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 $19,500,000 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 $2,360,000 compared to
$1,989,000 received in the year ended June 30, 1998.
Since license agreements are continuously being negotiated, fees from such
agreements 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, product development agreements and strategic alliances, the amount
and timing of revenues from such activities are uncertain. The Company is in
discussions with third parties to form joint ventures, and may also consider
equity or debt financing in order to fund its growth in certain strategic areas.
25
<PAGE>
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. In
July 1997, the Company installed a new computer system to help manage 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 to ensure that
there are no material disruptions in the Company's operations.
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 implement 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
26
<PAGE>
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 believes that the most reasonably likely worst case scenario is that a
small number of vendors will be unable to supply components for a short period
of time after January 1, 2000.
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 September 1999.
27
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
At the Annual Meeting of Stockholders (the "Meeting") of ECD held on
March 25, 1999, the following directors were elected for the ensuing year
and until their successors shall be duly elected and qualified:
For Withheld Authority
--- ------------------
Stanford R. Ovshinsky 17,077,222 185,210
Iris M. Ovshinsky 17,078,863 183,569
Robert C. Stempel 17,096,391 166,041
Kenneth Baker 17,111,833 150,599
Nancy M. Bacon 17,082,258 180,174
Umberto Colombo 16,980,782 281,650
Hellmut Fritzsche 17,112,338 150,094
Joichi Ito 16,983,202 279,230
Seymour Liebman 16,983,002 279,430
Tyler Lowrey 17,114,558 147,874
Walter J. McCarthy, Jr. 17,112,238 150,194
Florence I. Metz 17,113,058 149,374
Nathan J. Robfogel 17,113,028 149,404
Stanley K. Stynes 17,113,237 149,195
At the Meeting, the stockholders approved a proposal to increase ECD's
authorized capital stock from 20,500,000 to 20,930,000 and to amend ECD's
Certificate of Incorporation to authorize 430,000 shares of a new Class B
Common Stock, par value $.01 (with 11,043,405 For; 2,406,005 Against; 69,872
Abstentions; and 3,742,738 Broker Non-Votes).
In addition, the stockholders approved a proposal to amend ECD's
Certificate of Incorporation to change the date from September 14, 1999 to
September 30, 2005 on which shares of ECD's Class A Common Stock are deemed
converted into shares of ECD's Common Stock (with 11,116,002 For; 2,307,751
Against; 95,529 Abstentions; and 3,742,738 Broker Non-Votes).
Also approved at the Meeting was the appointment of Deloitte & Touche LLP
as independent accountants for the fiscal year ending June 30, 1999 (with
17,117,066 For; 118,735 Against; and 26,219 Abstentions).
28
<PAGE>
Item 5. Other Events
- ------- ------------
On May 10, 1999, ECD, Unique Mobility, Inc. ("Unique"), and EV Global
Motors Company ("EV Global") formed a German private company, Unique Mobility
Europa GmbH ("UME"), to manufacture battery-electric, hybrid-electric and fuel
cell-electric vehicles. UME is headquartered in Mittweida, near Leipzig, in the
Free State of Saxony, Germany.
UME's planned initial product offerings are expected to be a
battery-electric (zero emission) two-passenger cargo van and a six-passenger
commuter van. There is a need in Europe for affordable, pollution-free
vehicles. The vehicle design was developed in cooperation with Storz Design
of Zel am See, Austria, with engineering support by Design & Concepts
Engineering of Bosau, Germany.
Pursuant to an agreement with Handelsgruppe K.G.Techno-Einkauf GmbH & Co.
("TECHNO/TECAR"), TECHNO/TECAR will distribute the products of UME throughout
continental Europe. TECHNO/TECAR is a cooperation of the leading franchised
dealers of Audi, BMW, Fiat, Ford, DaimlerChrysler, Opel, Volvo and Volkswagen.
It is headed by two of Volkswagen's largest and most influential dealers: Mr.
Fritz Haberl (MAHAG Munich) and Mr. Bernhard Enning (Reckinghausen). Mr. Haberl
is the largest new car dealer in Europe and is Chairman of TECHNO/TECAR. Both
Messrs. Haberl and Enning have provided and have agreed to continue to provide
market and product planning consultation to UME.
UME has been initially capitalized with DM50,000 cash and a contribution
to surplus of 625,000 shares of Unique's common stock. Of the stock
contribution, 208,333 shares were contributed by each of ECD and Unique, 118,750
shares by EV Global and 89,584 shares by Haco Trading Ltd. ("HACO"), an
investment fund. The shares contributed by ECD and EV Global were previously
acquired in privately negotiated transactions. The shares contributed by Unique
were newly-issued shares. The shares contributed by HACO were purchased on the
open market. As a result of the initial capitalization, ownership of share
interests in UME are presently as follows: 33.6 percent for Unique; 33.2 percent
for ECD; 19.0 percent for EVG; and 14.2 percent for HACO.
EV Global has agreed, subject to certain conditions and contingent upon
maintaining a share interest of less than 19 percent, to make an additional
contribution to UME in the amount of either $503,910 in cash or, at EV Global's
option, 89,583 shares of Unique stock, in exchange for an additional share
interest in UME sufficient to raise its share interest to equal that then held
by Unique and ECD. ECD and Unique do not intend, nor do they have any
obligation, to make further capital contributions to UME.
An investment banking firm has been engaged to obtain additional funding
for UME by means of the private placement of up to $50 million from the sale of
equity or debt securities of UME and Unique stock held by UME. There can be no
assurance that financing can be completed on terms acceptable to UME.
In addition to the financing described above, UME intends to apply for
government financial support to fund a material portion of future operations and
capital requirements. Both the German federal government and the Free State of
Saxony have currently existing programs to provide grant money for pre-project
and product development costs, as well
29
<PAGE>
as investments for plant sites, buildings, production tooling and equipment.
However, there can be no assurance that the currently existing government grant
programs will be continued or that such grants will be available to UME.
Pursuant to a May 10, 1999 Shareholders Agreement by and among ECD,
Unique, EV Global and HACO, each shareholder has acknowledged that it is
entering into the transaction with the intention of using its expertise to
facilitate UME's success. To that end, each shareholder has agreed to cause UME
to enter into definitive agreements providing that: (i) ECD will have the
right to supply batteries and battery charging systems to UME, (ii) Unique will
grant a license and have the right to manufacture and supply electric and
hybrid-electric propulsion systems to UME, and (iii) EVG will have distribution
rights to the electric vans in North America.
30
<PAGE>
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.
31
<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: May 14, 1999 Treasurer
By:/s/ Stanford R. Ovshinsky
--------------------------------
Stanford R. Ovshinsky
Date: May 14, 1999 President and Chief Executive Officer
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period March 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 24,280,126
<SECURITIES> 0
<RECEIVABLES> 6,464,472
<ALLOWANCES> (177,000)
<INVENTORY> 616,371
<CURRENT-ASSETS> 31,541,587
<PP&E> 27,214,030
<DEPRECIATION> (18,967,414)
<TOTAL-ASSETS> 43,319,915
<CURRENT-LIABILITIES> 8,694,860
<BONDS> 2,984,564
0
0
<COMMON> 133,515
<OTHER-SE> 26,371,821
<TOTAL-LIABILITY-AND-EQUITY> 43,319,915
<SALES> 3,131,407
<TOTAL-REVENUES> 25,449,304
<CGS> 5,916,358
<TOTAL-COSTS> 12,977,151
<OTHER-EXPENSES> 14,847,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436,670
<INCOME-PRETAX> (8,530,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,530,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,530,100)
<EPS-PRIMARY> (.66)
<EPS-DILUTED> (.66)
</TABLE>
