SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 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
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ENERGY CONVERSION DEVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
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(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 11, 1999, there were 219,913 shares of Class A Common Stock,
430,000 shares of Class B Common Stock and 12,734,498 shares of Common Stock
outstanding.
Page 1 of 29 pages
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------- --------------------
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended September 30,
--------------------------------
1999 1998
------------- -------------
REVENUES
Product sales $ 1,870,167 $ 966,555
Royalties 663,155 615,336
Revenues from product development agreements 3,917,554 3,773,347
Revenues from license and other agreements 400,000 42,000
Other 729,196 780,387
------------ -------------
TOTAL REVENUES 7,580,072 6,177,625
EXPENSES
Cost of product sales 2,350,697 2,091,999
Cost of revenues from product development
agreements 3,637,768 4,031,337
Product development and research 3,132,601 2,906,151
Patents 473,717 424,830
Operating, general and administrative 1,419,130 1,157,368
------------ -------------
TOTAL EXPENSES 11,013,913 10,611,685
------------ -------------
LOSS FROM OPERATIONS (3,433,841) (4,434,060)
OTHER INCOME (EXPENSE):
Equity interest in United Solar's net loss (560,000) (1,089,000)
Interest expense (98,793) (166,917)
Interest income 226,459 355,493
Other non-operating income - (net) 121,035 110,489
------------ -------------
TOTAL OTHER EXPENSE (311,299) (789,935)
------------ -------------
NET LOSS $(3,745,140) $(5,223,995)
============ =============
BASIC NET LOSS PER SHARE $ (.28) $ (.41)
============ =============
DILUTED NET LOSS PER SHARE $ (.28) $ (.41)
============ =============
See notes to consolidated financial statements.
2
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
September 30, June 30,
1999 1999
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash, including cash equivalents of
$14,913,000 as of September 30, 1999 and
$19,026,000 as of June 30, 1999 $14,951,933 $19,076,983
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$310,000 at September 30, 1999 and
$303,000 at June 30, 1999) 7,203,833 6,296,097
Amounts due from related parties 1,779,373 1,423,828
Inventories 600,379 589,245
---------- ------------
TOTAL CURRENT ASSETS 24,535,518 27,386,153
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 312,588 312,588
Buildings and improvements 3,757,199 3,733,816
Machinery and other equipment (including
construction in progress of approximately
$961,000 at September 30, 1999 and
$844,000 at June 30, 1999) 18,507,742 18,353,014
Capitalized lease equipment 4,985,142 4,988,672
----------- ------------
27,562,671 27,388,090
Less accumulated depreciation and amortization (19,979,868) (19,449,827)
----------- ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 7,582,803 7,938,263
Investments in EV Global and Innovative
Transportation Systems 2,239,716 2,239,716
JOINT VENTURES
United Solar 696,411 956,411
GM Ovonic -- --
Sovlux -- --
Ovonyx -- --
OTHER ASSETS 1,231,524 1,287,455
----------- ------------
TOTAL ASSETS $36,285,972 $39,807,998
=========== ============
See notes to consolidated financial statements.
3
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, June 30,
1999 1999
------------- ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,874,416 $ 4,707,158
Salaries, wages and amounts withheld
from employees 1,870,405 1,581,447
Deferred revenues under business
agreements 1,245,449 1,349,087
Current installments on long-term
liabilities 1,244,725 1,309,508
------------- ------------
TOTAL CURRENT LIABILITIES 9,234,995 8,947,200
LONG-TERM LIABILITIES 2,393,991 2,679,936
DEFERRED GAIN 999,867 1,110,132
NON-REFUNDABLE ADVANCE ROYALTIES 3,857,407 3,882,103
------------- ------------
TOTAL LIABILITIES 16,486,260 16,619,371
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 4,300
Common Stock, par value $0.01 per share:
Authorized - 20,000,000 shares
Issued & outstanding - 12,843,898
shares at September 30, 1999 and
12,841,270 shares at June 30, 1999 128,439 128,413
Additional paid-in capital 234,047,198 233,861,099
Accumulated deficit (209,273,092) (205,527,952)
Treasury stock at cost - 109,400 shares at
September 30, 1999 and at June 30, 1999 (1,028,092) (1,028,092)
Unearned compensation on Class B Convertible
Common Stock (4,081,240) (4,251,340)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 19,799,712 23,188,627
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 36,285,972 $ 39,807,998
============ =============
See notes to consolidated financial statements.
4
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Three Months Ended
September 30,
-----------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (3,745,140) $ (5,223,995)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 530,865 363,074
Equity interest in United Solar's net loss 560,000 1,089,000
Creditable royalties (24,696) (8,869)
Options issued to executive for services
rendered 113,250 113,250
Stock issued for services rendered 212,925 --
Amortization of deferred gain (110,265) (110,218)
Loss on disposal of capital equipment 2,707 --
Changes in working capital:
Accounts receivable and amounts due from
related parties (1,263,281) 551,880
Inventories (11,134) (177,564)
Other assets 55,931 151,319
Accounts payable and accrued expenses 456,216 (42,861)
Deferred revenues under business agreements (103,638) (42,355)
----------- -----------
NET CASH USED IN OPERATIONS (3,326,260) (3,337,339)
INVESTING ACTIVITIES:
Investment in United Solar (300,000) --
Purchases of capital equipment (net) (178,112) (208,400)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (478,112) (208,400)
FINANCING ACTIVITIES:
Purchase of treasury stock -- (227,053)
Principal payments under short-term and
long-term debt obligations and capitalized
lease obligations (350,728) (310,354)
Proceeds from sale of stock upon
exercise of stock options and warrants 30,050 228,224
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (320,678) (309,183)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (4,125,050) (3,854,922)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,076,983 25,786,112
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,951,933 $21,931,190
============ ============
See notes to consolidated financial statements.
5
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Three Months Ended
September 30,
----------------------------
1999 1998
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 98,793 $ 166,917
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1999
---------------------------------------------------------------
NOTE A - Basis of Presentation
- ------------------------------
Information for the three months ended September 30, 1999 (fiscal 2000)
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.
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 1999 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
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"). The
remaining shares of Ovonic Battery are owned by Honda Motor Company, Ltd.
("Honda"), Sanoh Industrial Company, Ltd. ("Sanoh") and Sanyo Electric Company,
Ltd. ("Sanyo"). Due to cumulative losses incurred by Ovonic Battery, no
minority interest is recorded in the consolidated financial statements. See
Note D for discussion of these ventures.
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, hybrid electric and fuel cell electric vehicle
applications worldwide. ECD also has a 50%-owned joint venture, Ovonyx, Inc.
("Ovonyx"), with Mr. Tyler Lowrey, a recognized authority in semiconductor
memory technology and the former vice chairman and chief technology officer of
Micron Technology, Inc., to commercialize ECD's Ovonic Unified Memory ("OUM").
In addition, ECD has a 50%-owned joint venture in Russia, Sovlux Co., Ltd.
("Sovlux").
Upon consolidation, all intercompany accounts and transactions are
eliminated.
Certain items for the three months ended September 30, 1998 have been
reclassified to be consistent with the classification of items in the three
months ended September 30, 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
7
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
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 its industrial partners and the U.S.
government, its ability to protect and maintain the proprietary nature of its
technology, its continued product and technological advances and the strength
and ability of the Company's licensees and joint venture partners to
commercialize the Company's products and technologies.
During the first quarter of the 1999 fiscal year, the Company adopted
Statement of Financial Accounting Standards ("SFAS") 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 is displayed with the same prominence as other
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 loss was as follows:
Three Months Ended
September 30,
-----------------------------
1999 1998
------------ ------------
Net Loss $(3,745,140) $(5,223,995)
OTHER COMPREHENSIVE LOSSES:
Unrealized losses on securities -- (291,000)
------------ ------------
COMPREHENSIVE LOSS $(3,745,140) $(5,514,995)
============ ============
Investments in EV Global Motors Company ("EV Global") and Innovative
- --------------------------------------------------------------------
Transportation Systems ("Innovative Transportation")
- ----------------------------------------------------
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 Innovative Transportation Systems, formerly known as Unique
Europa, on the equity basis of accounting in accordance with Accounting
Principles Board Opinion ("APB") No. 18, The Equity Method of Accounting for
Investments in Common Stock. The Company accounted for its previous investment
in Unique Mobility, Inc. ("Unique Mobility") in accordance with SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities, and 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 were
marked-to-market, with the offset recorded to Stockholders' Equity.
8
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
Accounts Receivable
- -------------------
The following tabulation shows the component elements of accounts
receivable from long-term contracts, royalties and other programs:
September 30, June 30,
1999 1999
------------ -------------
U.S. Government:
Amounts billed $ 1,179,747 $ 1,055,313
Unbilled 829,081 876,649
------------ -------------
Total 2,008,828 1,931,962
------------ -------------
Commercial Customers:
Amounts billed 2,420,284 910,848
Related party billed
- United Solar 234,557 184,200
- GM Ovonic 1,197,663 830,875
Royalties 850,625 1,430,731
License fees 400,000 --
Due per contracts 1,284,866 2,101,833
Related party unbilled
- United Solar 41,154 --
- GM Ovonic 306,000 408,753
Other unbilled 435,689 116,236
------------ -------------
Total 7,170,838 5,983,476
------------ -------------
Other 113,540 107,487
Allowance for Uncollectible Accounts (310,000) (303,000)
------------ ------------
TOTAL $ 8,983,206 $ 7,719,925
============ ============
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, for which amounts are billed in subsequent months.
Certain contracts with the U.S. government require a retention that is
paid upon completion of audit of the Company's indirect rates. There are no
material retentions at September 30, 1999 and June 30, 1999. 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.
9
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
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, June 30,
1999 1999
------------ ------------
Finished products $ 1,000 $ 1,000
Work in process 341,494 286,193
Raw materials 257,885 302,052
---------- ----------
$ 600,379 $ 589,245
========== ==========
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, costs of sales exceeds product
sales due to significant changes in products, manufacturing methods, and
sales volume.
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.
10
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
For both ECD and Ovonic Battery royalties, there are royalty trust or
contingent fee arrangements whereby the Company is obligated to pay to a trust
25% of optical memory royalties received and to 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.
Product Development, Patents and Technology
- -------------------------------------------
Product development and research costs are expensed as they are incurred
and, as such, the Company's investments in its technologies and patents are
recorded at zero in its financial statements, regardless of their values. The
technology investments are the bases by which the Company is able to enter
into license and joint venture agreements.
Business Agreements
- -------------------
A substantial portion of revenues are derived through business agreements
for the development and/or commercialization of products based upon the
Company's proprietary technologies. Such agreements are of two types.
The first type of business agreement relates to licensing the Company's
proprietary technology. Licensing activities are tailored to provide each
licensee with the right to use the Company's technology, most of which is
patented, for a specific product application or, in some instances, for further
exploration of new product applications of such technologies. The terms of such
licenses, accordingly, are tailored to address a number of circumstances
relating to the use of such technology which have been negotiated between the
Company and the licensee. Such terms generally address whether the license will
be exclusive or nonexclusive, whether the licensee is limited to very narrowly
defined applications or to broader-based product manufacture or sale of products
using such technologies, whether the license will provide royalties for products
sold which employ such licensed technology and how such royalties will be
measured, as well as other factors specific to each negotiated arrangement. In
some cases, licenses relate directly to product 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; and
other agreements combine the efforts of the Company with those of the licensee.
License agreement fees are generally recognized as revenue at the time
the agreements are consummated, which is the completion of the earnings process.
Typically, such fees are 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
11
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
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 product 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, are 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 expenses 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 research expenses
and to cost of revenues from research and 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, and changes in estimates of revenues recognized on certain customers
and contracts.
Other Non-Operating Income
- --------------------------
Other non-operating income-net consists of rental income and gains and
losses on sale of fixed assets.
12
<PAGE>
NOTE B - Product Sales, Royalties, Revenues from Product Development Agreements
- -------------------------------------------------------------------------------
and License and other Agreements
- --------------------------------
The Company has product sales and business agreements with third parties
for which royalties and revenues are included in the consolidated statements of
operations. A summary of all of the Company's revenues follows:
Three Months Ended
September 30,
----------------------------
1999 1998
------------ ------------
Product Sales:
Negative and positive electrodes $ 589,525 $ 966,555
Battery packs 552,861 --
Machine building 727,781 --
---------- ----------
$1,870,167 $ 966,555
========== ==========
Royalties:
Battery technology $ 648,900 $ 599,845
Optical Memory 14,255 15,491
---------- ----------
$ 663,155 $ 615,336
========== ==========
Revenues from product development agreements:
Photovoltaic $ 597,353 $ 718,168
Battery technology 1,978,811 2,506,534
Optical Memory 531,425 446,676
Hydrogen 746,704 90,220
Other 63,261 11,749
---------- ----------
$3,917,554 $3,773,347
========== ==========
License and other agreements:
Battery $ 400,000 $ 42,000
Optical Memory/Microelectronics -- --
---------- ----------
$ 400,000 $ 42,000
========== ==========
The following table presents revenues by country based on the location of
the customer:
Three Months Ended
September 30,
-----------------------------
1999 1998
------------ ------------
United States $5,920,435 $5,061,188
Japan 893,805 494,084
Hong Kong 8,700 517,378
Netherlands 562,500 --
Other countries 194,632 104,975
---------- ----------
$7,580,072 $6,177,625
========== ==========
13
<PAGE>
NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At September 30, 1999 and June 30, 1999, the Company deferred recognition
of revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
September 30, June 30,
1999 1999
------------ ------------
Battery $1,772,068 $1,792,068
Optical Memory 2,085,339 2,090,035
---------- ----------
$3,857,407 $3,882,103
========== ==========
NOTE D - Joint Ventures and Investments
- ---------------------------------------
Joint Ventures
- --------------
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.
Based upon the opinion of legal counsel, the Company believes that it has
no obligation to fund any losses that its joint ventures incur beyond the
Company's investment. Additionally, the Company has no financial or other
guarantees with respect to liabilities incurred by its joint ventures.
United Solar
GAAP requires ECD to carry its non-cash, 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 photovoltaic and other
property and equipment in exchange for ECD's 49.98% interest in United Solar and
notwithstanding Canon's investments of $55,000,000. In May 1998, ECD and Canon
each invested $2,500,000 in United Solar to fund United Solar's continuing
operations. In the year ended June 30, 1999, the Company loaned United Solar
$2,500,000. In the three months ended September 30, 1999, ECD advanced United
Solar an additional $300,000. These loans are 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 carrying
14
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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
record a non-cash, non-operating expense in the amount of the reduction in the
carrying value of United Solar.
The investment in United Solar will continue to be carried at an amount no
higher than ECD's total cash investments ($5,300,000 at September 30, 1999)
until United Solar becomes profitable (based upon its history of sustainable
profits), at which time ECD will start to recognize over a period of years its
share, if any, of the then equity of United Solar, and will recognize its
proportionate share of United Solar's profits or losses on the equity method of
accounting.
The following sets forth certain financial data regarding United Solar that
are derived from United Solar's financial statements.
UNITED SOLAR STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
----------------------------
1999 1998
------------ ------------
(Unaudited) (Unaudited)
Revenues $ 3,437,710 $ 3,140,424
Operating Expenses
Cost of sales 3,055,662 3,684,584
Product development 706,450 736,517
General and administrative 318,425 386,710
Sales and marketing 232,496 363,355
------------ ------------
Total 4,313,033 5,171,166
Other Income (Expense) (246,118) (147,660)
------------ ------------
Net Loss $(1,121,441) $(2,178,402)
============ ============
15
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
UNITED SOLAR BALANCE SHEETS
---------------------------
September 30, June 30,
1999 1999
------------ -----------
(Unaudited) (Unaudited)
Current Assets:
Cash and Cash Equivalents $ 250,652 $ 210,314
Accounts Receivable 2,772,831 3,025,485
Inventory 2,831,967 2,629,643
Other Current Assets 425,505 358,350
------------ ------------
Total Current Assets 6,280,955 6,223,792
Property, Plant and Equipment (Net) 9,024,790 9,465,050
Other Assets 240,982 219,351
------------ ------------
Total Assets $15,546,727 $15,908,193
============ ============
Current Liabilities:
Accounts Payable and Accrued Expenses $ 5,174,987 $ 4,197,061
Note Payable-ECD 2,500,000 2,500,000
------------ ------------
Total Current Liabilities 7,674,987 6,697,061
Note Payable-Canon 2,500,000 2,500,000
Lease Payable 6,690,082 6,908,033
Total Stockholders' Equity (1,318,342) (196,901)
------------ ------------
Total Liabilities and Stockholders' Equity $15,546,727 $15,908,193
============ ============
GM Ovonic
In 1994, Ovonic Battery and General Motors formed a joint venture, GM
Ovonic, for the manufacture and commercialization of Ovonic NiMH batteries for
electric and hybrid 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 of General Motors consists of operating
capital, plant, equipment and management personnel necessary for the production
of batteries.
There are no financial statements currently available for GM Ovonic. GM
Ovonic is in its developmental stage and, as such, has a history of operating
losses.
Ovonyx
In January 1999, ECD and Mr. Tyler Lowrey, the former vice chairman and
chief technology officer of Micron Technology, Inc., formed a joint venture,
Ovonyx, Inc. (owned 50% by each of ECD and Mr. Lowrey), to commercialize ECD's
Ovonic Unified Memory.
16
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
ECD has advanced Ovonyx $1,200,000 through September 30, 1999 ($593,000 in
the current quarter), representing expenses for its operations which commenced
on January 15, 1999. ECD has expensed the advances to Ovonyx, as incurred,
pending third-party funding.
Investments in EV Global and Innovative Transportation
In February 1998, the Company and 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 Common Stock and warrants to
purchase 133,658 shares of ECD 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 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.
On May 10, 1999, ECD, Unique Mobility and EV Global formed the German
private company, Unique Europa, headquartered in Mittweida, near Leipzig, in the
Free State of Saxony, Germany, to manufacture battery-electric, hybrid-electric
and fuel cell-electric vehicles. In October 1999, the private company changed
its name to Innovative Transportation Systems.
Innovative Transportation has been initially capitalized with a minor
amount of cash and a contribution of 625,000 shares of Unique Mobility Common
Stock. Of the stock contribution, 208,333 shares (79,092 of which were acquired
from EV Global in exchange for 34,723 shares of ECD) were contributed by ECD,
resulting in an initial share interest of 33.2%. ECD's share interest decreased
to 5.8% in October 1999 due to an additional cash investment by a shareholder.
There are no financial statements currently available for Innovative
Transportation.
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 commence production of photovoltaic products due to 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 consists solely of
technology.
17
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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.
NOTE E - Net Loss Per Share
- ---------------------------
Basic net loss per common share is computed by dividing the 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 are computed as follows:
1999 1998
------------ ------------
Weighted average number of
shares outstanding 13,382,719 12,830,539
Net loss $(3,745,140) $(5,223,995)
BASIC NET LOSS PER SHARE $ (.28) $ (.41)
============ ============
Weighted average number of
shares outstanding 13,382,719 12,830,539
Weighted average shares for
dilutive securities 0 0
------------ ------------
Average number of shares outstanding
and potential dilutive shares 13,382,719 12,830,539
Net loss $(3,745,140) $(5,223,995)
DILUTED NET LOSS PER SHARE $ (.28) $ (.41)
============ ============
Due to the Company's net losses, 1999 and 1998 weighted average shares of
potential dilutive securities of 233,540 and 50,198, respectively, were excluded
from the calculations of diluted loss per share as inclusion of these securities
would have been antidilutive to the net loss per share. Additional securities of
4,379,751 and 4,681,609, respectively, were excluded from the 1999 and 1998
calculations of weighted average shares of potential dilutive securities.
Because of the relationship between the exercise prices and the average market
price of ECD's Common Stock during these periods, these securities would have
been antidilutive regardless of the Company's net loss.
18
<PAGE>
NOTE F - Business Segments
- --------------------------
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. This Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company adopted the
provisions of this Statement in fiscal 1999.
The Company has two business segments: its subsidiary, Ovonic Battery, and
the parent company, ECD. Ovonic Battery is primarily involved in developing and
commercializing battery technology. ECD is primarily involved in photovoltaics,
hydrogen storage, microelectronics and machine building. General corporate
expenses (except for those expenses allocated to Ovonic Battery), interest
expense and interest income are classified in the ECD business segment.
The Company's operations by business segment were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
Ovonic Battery ECD Consolidated
-------------- ----------- ------------
Revenues*
Three months ended September 30, 1999 $4,868 $2,712 $7,580
Three months ended September 30, 1998 4,892 1,286 6,178
Identifiable Assets
Three months ended September 30, 1999 $13,358 $22,928 $36,286
Three months ended September 30, 1998 16,449 28,997 45,446
Operating Loss
Three months ended September 30, 1999 $(2,931) $(503) $(3,434)
Three months ended September 30, 1998 (3,797) (637) (4,434)
- ---------
* All revenues are derived from external customers.
19
<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, 1999, and is qualified in
its entirety by the foregoing. The results of operations for the three months
ended September 30, 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
20
<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, 1999 Compared to Three Months Ended
- --------------------------------------------------------------------
September 30, 1998
- ------------------
The Company had a net loss from operations in the three months ended
September 30, 1999, of $3,434,000 compared to a net loss from operations of
$4,434,000 for the three months ended September 30, 1998--an improvement of
$1,000,000. The improvement primarily relates to a $358,000 increase in revenues
from license and other agreements, a $538,000 improvement in profitability from
product development agreements, and a $645,000 lower loss on product sales,
partially offset by higher product development and research ($226,000) and
operating, general and administrative expenses ($262,000). 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
ECD's microelectronic nonvolatile, thin-film semiconductor devices (Ovonic
Unified Memory). In addition to the loss from operations, the Company incurred
non-operating expenses (net) of $311,000 in the three months ended September 30,
1999 compared to non-operating expenses (net) of $790,000 in the same period in
the prior year. Non-operating expense includes principally interest income and
expense and equity losses. The improvement primarily relates to improved
operating performance of United Solar. GAAP requires that the Company recognize
its investments in United Solar's ongoing operations as a loss. In 1999 and
1998, the Company incurred charges of $560,000 and $1,089,000, respectively,
required under GAAP. The losses represent the Company's share of the losses of
United Solar related to its investments in United Solar regardless of the value
of the investment (see NOTE A of Notes to Consolidated Financial Statements).
Product sales, consisting of positive and negative battery electrodes,
battery packs and machine building, increased 93% to $1,870,000 in the three
months ended September 30, 1999 from $967,000 in the three months ended
September 30, 1998. Sales of negative and positive electrodes decreased
$377,000, primarily due to one of the Company's principal negative electrode
licensees currently manufacturing its own electrode products as allowed
under its license from the Company. The Company has continued its development
of advanced electrode materials to be introduced to its customers. There were
battery pack sales of $553,000 and machine-building revenues of $727,000 in
1999 compared to no revenues for either one in 1998. The machine-building
revenues in 1999 were applicable to a contract to build large-area microwave
deposition equipment.
Royalties increased 8% from $615,000 in the three months ended September
30, 1998 to $663,000 in the three months ended September 30, 1999. 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
21
<PAGE>
lower prices as licensees move aggressively to increase market share. (See NOTE
B Notes to Consolidated Financial Statements.)
Revenues from product development agreements increased 4% from $3,773,000
in the three months ended September 30, 1998 to $3,918,000 in the three months
ended September 30, 1999. There were total increases in product development
agreements of $1,202,000 which were due to substantially increased revenues
from Shell Hydrogen related to the Company's proprietary hydrogen storage
technology ($313,000 in 1999 compared to none in 1998), the Department of Energy
($439,000 in 1999 compared to $90,000 in 1998) and contracts with National
Institute of Standards and Technology (NIST) in the Company's battery and
optical memory technologies ($1,275,000 in 1999 compared to $998,000 in 1998).
These increases in 1999 were partially offset by decreases in revenues from a
program with General Motors to develop batteries for electric and hybrid
electric vehicle applications ($1,003,000 in 1999 compared to $1,924,000 in
1998) and from contracts with Department of Energy and National Renewable Energy
Laboratory in photovoltaics ($582,000 in 1999 compared to $718,000 in 1998).
Revenues from license and other agreements increased from $42,000 in the
three months ended September 30, 1998 to $400,000 in the three months ended
September 30, 1999. The 1999 revenues consisted of $400,000 from Japan Storage
Battery Co., Ltd. ("Japan Storage").
Other revenues decreased by $51,000 from $780,000 in the three months
ended September 30, 1998 to $729,000 in the three months ended September 30,
1999, primarily due to decreased billings for work performed for licensees of
Ovonic Battery.
The increase in cost of product sales from $2,092,000 in the three months
ended September 30, 1998 to $2,351,000 in the three months ended September 30,
1999 was due to increased level of sales (machine building) in 1999. The reduced
loss on product sales from $1,125,000 to $481,000 is a result of cost-reduction
measures taken by the Company. The continuing losses on product sales result
from low sales of electrode products as compared to high fixed costs. The
Company has continued its development of advanced electrode materials to be
introduced to its customers.
The Company incurred expenses of $6,770,000 ($3,638,000 funded and
$3,132,000 unfunded) in the three months ended September 30, 1999 for product
development compared to expenses of $6,937,000 ($4,031,000 funded and $2,906,000
unfunded) in the three months ended September 30, 1998. The expenditures were
primarily for continued development of the Company's "family of batteries"
products as well as work performed on the OUM program.
Expenses were incurred in 1999 and 1998 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technology. These expenses increased to $474,000 in the three months ended
September 30, 1999 from $425,000 in the three months ended September 30, 1998.
22
<PAGE>
The increase in operating, general and administrative expenses from
$1,157,000 in the three months ended September 30, 1998 to $1,419,000 in the
three months ended September 30, 1999 was primarily related to decreased
allocations to cost of revenues from product development agreements and
increased depreciation expense in 1999.
The change from other expense (net) of $790,000 in the three months ended
September 30, 1998, compared to other expense (net) of $311,000 in the three
months ended September 30, 1999, was due principally to significantly improved
operating performance of United Solar in 1999, which reduced ECD's share of
United Solar's losses, and decreased interest income in the three months ended
September 30, 1999.
Liquidity and Capital Resources
As of September 30, 1999, the Company had unrestricted consolidated cash,
cash equivalents and accounts receivable of $23,935,000, a decrease of
$2,862,000 from June 30, 1999. As of September 30, 1999, the Company had
consolidated working capital of $15,301,000 compared with a consolidated working
capital of $18,439,000 as of June 30, 1999.
ECD's joint venture, Ovonyx, owned equally by ECD and Mr. Lowrey, expects
to pursue semiconductor device manufacturing as well as licensing of selected
applications of ECD's OUM, a unique thin-film nonvolatile solid-state memory.
On November 4, 1999, Ovonyx entered into a royalty-bearing agreement with
Lockheed Martin Space Electronics and Communications to commercialize ECD's OUM
to replace Flash, DRAM, FPGA and other electronic devices in radiation-hardened
space and military applications. Ovonyx and ECD are in negotiations with new
strategic partners for funding to commercialize ECD's OUM and to repay the
amounts advanced by ECD to Ovonyx ($1,200,000 through September 30, 1999).
The Company's strategy is to finance its growth through strategic
alliances (joint ventures and license agreements) with third parties who can
provide financial resources and marketing expertise for the Company's
technologies and products. As a result of 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. Hydrogen is clean,
abundant and considered the ultimate fuel. The barrier to the use of hydrogen
as a fuel has been a lack of a viable means to transport and store it. In
July 1999, ECD and Shell Hydrogen, a unit of Royal Dutch Shell Group, announced
the signing of a memorandum of understanding to explore the establishment of
a joint venture which would further develop and commercialize the Company's
proprietary solid hydrogen storage technology. Shell Hydrogen will provide
refueling and distribution expertise.
23
<PAGE>
In the three months ended September 30, 1999, the Company was informed by
one of its licensees, Japan Storage, that it had reached a certain level of
sales of its products and that the Company had earned an additional license fee
of $400,000 pursuant to certain terms contained in the previous license
agreement with Japan Storage.
During the three months ended September 30, 1999, $3,326,000 of cash was
used in operations. The difference between the net loss of $3,745,140 and the
net cash used in operations was due to a $866,000 increase in working capital
(other than cash), partially
offset by ECD's $560,000 share of the losses in United Solar relating to ECD's
investment of cash in United Solar's future growth and the Company's
depreciation expense. In the three months ended September 30, 1999, ECD advanced
$300,000 to United Solar (bringing its total investment to $5,300,000),
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, $178,000 of
machinery and equipment was purchased or constructed, principally for the
Company's battery operations, during this period.
In August 1999, Ovonic Battery signed an agreement with Rare Earth
High-Tech Co. Ltd. ("Rare Earth High-Tech") of Baotou Steel Company, Inner
Mongolia, China (subject to approvals by the Governments of the United States
and China and the finalization of financing arrangements) for a series of NiMH
battery projects with a potential value of $100 million. The Company is
negotiating with a number of financial institutions to provide financing for
this project. Rare Earth High-Tech has agreed to pay all costs associated with
this financing. Although no assurances can be given, the Company believes that
it and Rare Earth High-Tech will be successful in obtaining the required
financing and government approvals.
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 developing new electrode materials
that are being offered to customers and is adjusting its manufacturing processes
for producing electrodes to customer specifications.
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 are
recognized as the work is performed. Contracts with industry partners include
the program with Shell Hydrogen to further develop the Company's proprietary
solid hydrogen storage technology. The Company and Shell Hydrogen are presently
in
24
<PAGE>
negotiations for the establishment of a joint venture to develop and
commercialize this important technology.
Two contracts awarded in the Fall of 1997 to the Company under NIST
Advanced Technology Programs will also contribute to cash flows. One contract
($6,400,000) 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 NIST contract ($2,650,000) was awarded to ECD for
further development of the phase-change optical memory products and will
conclude in the Fall of 2000. 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 expects to purchase up to $500,000
of machinery and equipment. ECD advanced to United Solar $2,500,000 in May 1998,
$2,500,000 during the year ended June 30, 1999, and an additional $300,000
during the period July 1, 1999 to September 28, 1999. In addition, ECD advanced
an additional $100,000 during the period October 1, 1999 to November 14, 1999.
The Company has a financing arrangement with Standard Federal Bank for a
$3,000,000 line of credit bearing an interest rate at prime rate which 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 concerning its NiMH battery, hydrogen storage, photovoltaics,
OUM, phase-change 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 (for approximately $2,060,000)
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 conducted by ECD,
the costs of which were recorded as losses in prior years. The contract provides
for progress payments over the next 13 months. Through September 30, 1999, ECD
has recognized revenues of $1,054,000 in connection with this contract. Machine
building is a cyclical but an important part of ECD's business. While there is
no other backlog of machine-building contracts as of September 30, 1999,
negotiations are in progress with a number of companies for
25
<PAGE>
additional machine-building contracts that could provide revenues in the coming
year and beyond.
Based upon the above information, the amount of cash to be received under
existing product development agreements in the year ending June 30, 2000 is
anticipated to be approximately $12,049,000 compared to $19,164,000 received
from product development agreements in the year ended June 30, 1999. Based on
historical trends, the amount of cash from royalties to be received in the year
ending June 30, 2000 is expected to be approximately $3,022,000 compared to
$2,367,000 received in the year ended June 30, 1999.
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,
2000.
Management believes that funds generated from operations, new business
agreements and existing cash and cash equivalents will be adequate, other than
project financing needed for the Rare Earth High-Tech project, to support and
finance planned growth, capital expenditures and company-sponsored product
development programs over the coming year. Additional sources of cash are
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 near-term 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 to engage in machine-building and licensing agreements. It may also
consider equity or debt financing in order to fund its growth in certain
strategic areas.
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 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 has successfully completed its
own evaluation of the software.
The Company evaluated its other software applications, including, but not
limited to, its computerized laboratory manufacturing equipment and embedded
chips, to identify any Year 2000 Issues to ensure that there are no material
disruptions in the Company's operations.
26
<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 Company has substantially completed these steps.
Most non-compliant software was upgraded from equipment manufacturers and
software providers. The cost of Year 2000 compliance was less than $250,000 and
was comprised of the purchase of upgraded software and new or upgraded
computers.
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 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 prepared a contingency plan, which it is refining, that
addresses unavoided or unavoidable risks.
27
<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
28
<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 15, 1999 Treasurer
By: /s/ Stanford R. Ovshinsky
------------------------------------------
Stanford R. Ovshinsky
Date: November 15, 1999 President and Chief Executive Officer
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period September 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,951,933
<SECURITIES> 0
<RECEIVABLES> 8,983,206
<ALLOWANCES> (310,000)
<INVENTORY> 600,379
<CURRENT-ASSETS> 24,535,518
<PP&E> 27,562,671
<DEPRECIATION> (19,979,868)
<TOTAL-ASSETS> 36,285,972
<CURRENT-LIABILITIES> 9,234,995
<BONDS> 2,393,991
0
0
<COMMON> 134,938
<OTHER-SE> 19,664,774
<TOTAL-LIABILITY-AND-EQUITY> 36,285,972
<SALES> 1,870,167
<TOTAL-REVENUES> 7,580,072
<CGS> 2,350,697
<TOTAL-COSTS> 3,637,768
<OTHER-EXPENSES> 5,025,448
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,793
<INCOME-PRETAX> (3,745,140)
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</TABLE>
