SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended DECEMBER 31, 1998
-----------------------------------------------------------
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from --------------------- to ------------------------
Commission file number 1-8403
-----------------------
ENERGY CONVERSION DEVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1675 WEST MAPLE ROAD, TROY, MICHIGAN 48084
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 280-1900
---------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
As of February 9, 1999 there were 219,913 shares of Class A Common Stock
and 13,010,693 shares of Common Stock outstanding.
Page 1 of 27 Pages
1
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------- --------------------
<TABLE>
<CAPTION>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES
Product sales $ 1,041,300 $ 2,668,711 $ 2,007,855 $ 5,243,208
Royalties 616,545 757,000 1,231,881 1,095,000
Revenues from product development
agreements 4,828,913 4,120,556 8,602,260 6,910,621
Revenues from license and other agreements 4,442,000 358,629 4,484,000 417,134
Other 940,260 843,575 1,720,647 1,542,953
------------- ----------- ----------- -----------
TOTAL REVENUES 11,869,018 8,748,471 18,046,643 15,208,916
EXPENSES
Cost of product sales 2,215,205 3,229,712 4,307,204 5,806,979
Cost of revenues from product
development agreements 4,885,649 4,287,450 8,916,986 7,061,302
Product development and research 2,996,934 2,948,356 5,903,085 6,043,641
Patents (including patent defense) 403,299 563,603 828,129 962,200
Operating, general and administrative 1,027,686 1,348,480 2,185,054 3,436,478
------------- ----------- ----------- -----------
TOTAL EXPENSES 11,528,773 12,377,601 22,140,458 23,310,600
------------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 340,245 (3,629,130) (4,093,815) (8,101,684)
OTHER INCOME (EXPENSE)
Gain on sale of Ovonic Battery Company stock 1,970,000 1,970,000
Equity in loss of joint venture (see Note A) (1,026,914) (2,115,914)
Interest expense (140,388) (37,118) (307,305) (82,114)
Interest income 326,058 121,644 681,551 311,340
Other nonoperating income (net) 196,724 37,785 307,213 68,573
------------- ----------- ----------- ------------
TOTAL OTHER INCOME 1,325,480 122,311 535,545 297,799
------------- ----------- ----------- ------------
NET INCOME (LOSS) $ 1,665,725 $(3,506,819) $(3,558,270) $(7,803,885)
============= =========== =========== ===========
BASIC NET INCOME (LOSS) PER SHARE $ .13 $ (.32) $ (.28) $ (.72)
============= =========== =========== ===========
DILUTED NET INCOME (LOSS) PER
SHARE $ .13 $ (.32) $ (.28) $ (.72)
============= =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ------------
(Unaudited) (See note below)
<S> <C> <C>
CURRENT ASSETS
Cash, including cash equivalents of
$24,656,000 as of December 31, 1998 and
$25,780,000 as of June 30, 1998 $ 24,825,749 $ 25,786,112
Accounts receivable (net of allowance for
uncollectible accounts of
$177,000 at December 31, 1998 and
$315,000 at June 30, 1998) 9,216,609 8,666,952
Amounts due from related parties 1,235,954 1,491,115
Inventories 711,251 1,074,097
Prepaid expenses and other current assets 133,891 374,590
------------ ------------
TOTAL CURRENT ASSETS 36,123,454 37,392,866
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 312,588 312,588
Buildings and improvements 3,666,411 3,666,411
Machinery and other equipment (including
construction in progress of
$874,000 at December 31, 1998 and
$785,000 at June 30, 1998) 17,544,819 16,870,261
Capitalized lease equipment 5,099,672 5,383,672
------------ ------------
26,623,490 26,232,932
Less accumulated depreciation and amortization (18,482,021) (17,641,505)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 8,141,469 8,591,427
Investments in EV Global and Unique Mobility 1,678,000 1,953,000
JOINT VENTURES
United Solar -- 2,115,914
GM Ovonic -- --
Sovlux -- --
OTHER ASSETS 1,273,466 1,307,609
------------ ------------
TOTAL ASSETS $ 47,216,389 $ 51,360,816
============ ============
</TABLE>
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>
December 31, June 30,
1998 1998
------------ -------
(Unaudited) (See Note Below)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,538,899 $ 4,443,189
Salaries, wages and amounts withheld
from employees 1,539,490 1,413,217
Deferred revenues under business agreements 1,250,070 417,082
Current installments on capitalized lease obligations 1,286,976 1,319,220
------------- -----------
TOTAL CURRENT LIABILITIES 7,615,435 7,592,708
CAPITALIZED LEASE OBLIGATIONS 3,336,392 3,967,496
DEFERRED GAIN 1,330,662 1,551,146
NON-REFUNDABLE ADVANCE ROYALTIES 3,916,384 3,434,120
------------- -----------
TOTAL LIABILITIES 16,198,873 16,545,470
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock, par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Common Stock, par value $0.01 per share:
Authorized - 20,000,000 shares Issued and outstanding -
12,668,593 shares at December 31, 1998 and
12,639,817 shares at June 30, 1998 126,686 126,398
Additional paid-in capital 227,547,356 227,092,920
Accumulated deficit (195,308,633) (191,750,363)
Treasury stock at cost - 109,400 shares
at December 31, 1998 and 42,000 shares (1,028,092) (608,808)
at June 30, 1998
Accumulated Other Comprehensive Loss (322,000) (47,000)
------------- -----------
TOTAL STOCKHOLDERS' EQUITY 31,017,516 34,815,346
------------- ------------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 47,216,389 $ 51,360,816
============ ============
</TABLE>
See notes to consolidated financial statements.
Note: Derived from the Company's Fiscal Year 1998 audited financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended December 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,558,270) $ (7,803,885)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 848,632 1,004,152
Equity in loss of United Solar 2,115,914 -
Gain on sale of Ovonic Battery stock (1,970,000) -
Creditable royalties 482,264 (37,084)
Options issued to executive for services rendered 226,500 226,500
Amortization of deferred gain (220,484) (15,352)
Changes in working capital
Accounts receivable and amounts due
from related parties (294,496) (483,192)
Inventories 362,846 (284,265)
Prepaid expenses and other current assets 274,842 7,469
Accounts payable and accrued expenses (778,017) 87,651
Deferred revenues under business agreements (167,012) (220,608)
------------ ------------
NET CASH USED IN OPERATIONS (2,677,281) (7,518,614)
INVESTING ACTIVITIES:
Purchases of capital equipment (net) (398,674) (522,711)
Purchase of investments - (3,085,435)
Sales of investments - 2,583,865
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (398,674) (1,024,281)
FINANCING ACTIVITIES:
Purchase of treasury stock (419,284) -
Principal payments under short-term and long term debt
and capitalized lease obligations (663,348) (678,293)
Proceeds from sale of stock of subsidiary 2,970,000 -
Proceeds from sale of stock upon exercise of stock
option and warrants 228,224 297,580
------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,115,592 (380,713)
NET DECREASE IN CASH AND CASH EQUIVALENTS (960,363) (8,923,608)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 25,786,112 14,270,145
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,825,749 $ 5,346,537
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
------------------
1998 1997
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 307,305 $ 82,114
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31, 1998
--------------------------------------------------------------
NOTE A - Basis of Presentation
- ------------------------------
Information for the three months and six months ended December 31, 1998
and 1997 is unaudited but includes all adjustments which Energy Conversion
Devices, Inc. ("ECD") considers necessary for a fair presentation of financial
condition, cash flows and results of operations.
These financial statements should be read in conjunction with ECD's 1998
Annual Report on Form 10-K which contains a summary of ECD's accounting
principles and other footnote information.
The consolidated financial statements include the accounts of ECD and its
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 $55.5 million. In May 1998, ECD and Canon each invested $2.5
million in United Solar to fund United Solar's continuing operations.
GAAP requires that ECD's $2.5 million cash investment, regardless of the
true value of United Solar, to 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
7
<PAGE>
of United Solar is decreased by the losses of UnitedSolar (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 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 cash investments until United Solar becomes profitable
(based upon its history of sustainable profits), at which time the Company will
start to recognize over a period of years its share, if any, of the then equity
of United Solar, and will recognize its share of United Solar's profits or
losses on the equity method of accounting.
On February 2, 1998, the Company and EV Global Motors Company, a Lee
Iacocca company, ("EV Global") entered into a Stock Purchase Agreement
("Agreement") which provided for the transfer to EV Global of 146,924 shares of
the Company's Common Stock and warrants to purchase 133,658 shares of the
Company's Common Stock. The Agreement also provided for the transfer to the
Company of 250,000 shares of EV Global Common Stock and 129,241 shares of Unique
Mobility, Inc. ("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.
The Company accounts for its investment in EV Global, a non-public
company, under the cost method of accounting. The Company accounts for its
investment in Unique Mobility 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
Mobility 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 December 31, 1998.
Upon consolidation, all intercompany accounts and transactions are
eliminated.
Certain items for the three months and six months ended December 31, 1997
have been reclassified to be consistent with the classification of items in the
three months and six months ended December 31, 1998.
In preparing financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reported period. Actual results could differ from those estimates. The Company
is impacted by other factors such as the continued receipt of contracts from the
U.S. government and industrial partners, its ability to protect and maintain the
proprietary nature of its technology, its continued product and technological
advances and the strength and ability of the Company's licensees and joint
venture partners 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 Six Months Ended
December 31, December 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Income (Loss) $ 1,665,725 $ (3,506,819) $ (3,558,270) $(7,803,885)
OTHER COMPREHENSIVE LOSSES:
Unrealized gains (losses) on securities 16,000 - (275,000) -
----------- ------------ ------------ -----------
COMPREHENSIVE INCOME (LOSS) $ 1,681,725 $ (3,506,819) $ (3,833,270) $(7,803,885)
=========== ============ ============ ===========
</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 and six months
ended December 31, 1998, ECD recorded $1,027,000 and $2,116,000, respectively,
as its share of the losses of United Solar.
The following sets forth certain selected financial data regarding United
Solar that are derived from United Solar's unaudited financial statements:
9
<PAGE>
<TABLE>
<CAPTION>
UNITED SOLAR STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues* $ 2,359,582 $ 3,278,188 $ 5,500,006 $ 6,023,491
Operating Expenses
Cost of product sales 2,683,129 4,432,581 6,367,713 8,744,887
Research and development 643,762 725,659 1,380,279 1,352,103
General and administrative 618,296 429,636 1,005,006 508,943
Sales and marketing 335,665 573,926 699,020 963,701
----------- ----------- ----------- -----------
Total 4,280,852 6,161,802 9,452,018 11,569,634
Other Income (Expense) (179,548) (491,311) (327,208) (634,248)
----------- ----------- ----------- -----------
Net Loss $ (2,100,818) $(3,374,925) $(4,279,220) $(6,180,391)
============ =========== =========== ===========
</TABLE>
* Includes product sales and revenues earned under research contracts.
UNITED SOLAR BALANCE SHEETS
---------------------------
December 31, June 30,
------------ --------
1998 1998
---- ----
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents $ 337,297 $ 4,091,047
Accounts receivable 1,872,267 1,748,857
Inventory 3,807,819 3,361,684
Other current assets 413,443 462,282
------------ ------------
Total Current Assets 6,430,826 9,663,870
Property, plant and equipment (net) 10,428,243 11,575,454
Other assets 219,773 183,763
------------- ------------
Total Assets $ 17,078,842 $ 21,423,087
============ ============
Current Liabilities:
Short-term bank debt $ 1,445,703 $ 1,445,703
Accrued expenses and other 2,954,719 2,609,402
------------ ------------
Total Current Liabilities 4,400,422 4,055,105
------------ ------------
Note Payable - Canon 2,500,000 2,500,000
Lease Payable 7,332,801 7,743,143
Total Stockholders' Equity 2,845,619 7,124,839
------------ ------------
Total Liabilities and Stockholders'
Equity $ 17,078,842 $ 21,423,087
============ ============
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.
10
<PAGE>
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, the Company formed Sovlux, a joint venture to manufacture the
Company's photovoltaic products in the countries of the former Soviet Union.
Sovlux is owned 50% by the Company and 50% by the State Research and Production
Enterprise Kvant and enterprises of the Russian Ministry of Atomic Energy
("Minatom"). Sovlux has not been able to commence production of photovoltaic
products due to Minatom's inability to provide the required operating capital
due to current economic conditions in Russia.
In 1998, the Company formed Sovlux Battery to produce NiMH batteries
and components for sale to Ovonic Battery and its licensees. Sovlux Battery is
owned 50% by the Company and 50% by the Chepetsky Mechanical Plant ("Chepetsky")
an enterprise of Minatom. The Company's contribution to the ventures consist
solely of technology.
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:
December 31, June 30,
1998 1998
---- ----
U.S. Government:
Amounts billed $ 1,461,941 $ 717,281
Unbilled 642,824 812,439
----------- -----------
Total 2,104,765 1,529,720
----------- -----------
Commercial Customers:
Amounts billed 3,662,015 5,480,895
Related party billed
- United Solar 171,541 169,847
- GM Ovonic 839,413 729,561
Royalties 1,282,191 1,157,619
License fees - 300,000
Due per contracts 2,084,599 353,954
Related party unbilled
- GM Ovonic 225,000 591,707
Other unbilled - 2,358
------------ -----------
Total 8,264,759 8,785,941
------------ -----------
Other 260,039 157,406
Allowance for Uncollectible Accounts (177,000) (315,000)
----------- -----------
TOTAL $10,452,563 $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 December 31, 1998 and June 30, 1998. Certain U.S.
government contracts remain subject to audit. Management believes that
adjustments, if any, which may result from an audit would not be material to the
financial position or results of operations of the Company.
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:
December 31, 1998 June 30, 1998
----------------- -------------
Finished products $ 1,320 $ 119,649
Work in process 392,612 511,582
Raw materials 317,319 442,866
----------- ----------
$ 711,251 $1,074,097
=========== ==========
Product Sales
Product sales include battery electrodes, revenues related to building of
battery packs, and revenues related to machine-building contracts. Revenues
related to machine-building contracts are recognized on the percentage-of-
completion method of accounting using the costs incurred to date as a percentage
of the total expected costs. All other product sales are recognized when the
product is shipped. In certain cases, cost of sales exceeds product sales due to
significant changes in products and manufacturing methods.
Royalties
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the sale of the
12
<PAGE>
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:
Six Months Ended December 31,
-----------------------------
1998 1997
---- ----
Product Sales:
Negative and positive electrodes $ 1,770,335 $ 4,892,405
Battery packs 237,520 202,503
Machine building - 148,300
----------- -----------
$ 2,007,855 $ 5,243,208
=========== ===========
Royalties:
Battery $ 1,196,147 $ 1,020,000
Optical Memory 35,734 75,000
----------- -----------
$ 1,231,881 $ 1,095,000
=========== ===========
Revenues from Product Development Agreements:
Photovoltaics $ 1,547,985 $ 728,401
Battery 5,689,081 4,893,564
Optical memory 1,263,224 675,358
Hydrogen 90,220 392,928
Other 11,750 220,370
----------- -----------
$ 8,602,260 $ 6,910,621
=========== ===========
License and Other Agreements:
Battery $ 4,484,000 $ 417,134
----------- -----------
$ 4,484,000 $ 417,134
=========== ===========
NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At December 31 and June 30, 1998, the Company deferred recognition of
revenues relating to nonrefundable advance royalty payments. Non-refundable
advance royalties consist of the following:
December 31, June 30,
1998 1998
------------ --------
Battery $1,838,802 $1,338,802
Optical Memory 2,077,582 2,095,318
---------- ----------
$3,916,384 $3,434,120
========== ==========
NOTE D - Net Income (Loss) Per Share
- ------------------------------------
Basic net income (loss) per common share is computed by dividing net
income (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 and six months ended December 31, 1998 and 1997 are computed as
follows:
15
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of shares 12,783,195 10,796,122 12,806,812 10,790,923
outstanding
Net income (loss) $1,665,725 $(3,506,819) $(3,558,270) $(7,803,885)
========== =========== =========== ===========
BASIC NET INCOME (LOSS) PER SHARE $ .13 $ (.32) $ (.28) $ (.72)
====== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ .13 $ (.32) $ (.28) $ (.72)
======= ======== ======== ========
</TABLE>
Basic and diluted loss per share were the same in the three and six
months ended December 31, 1997 and the six months ended December 31, 1998 due to
the losses recognized in each period. Basic and diluted income per share for the
three months ended December 31, 1998 were the same due to the fact that only
5,773 dilutive shares were added in the computation of diluted income per share.
Due to the Company's net loss in the six months ended December 31, 1998 and in
the three and six months ended December 31, 1997, 179 shares, 597,712 shares and
528,719 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 5,098,170 (for both 1998
periods) and 45,000 (for both 1997 periods) shares, respectively, were excluded
from the 1998 and 1997 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 Agreement 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.
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.
16
<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 six months ended December 31, 1998 are not necessarily indicative of results
to be expected in future periods.
Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 (the "Securities
Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange
Act") which are not historical facts and involve risks and uncertainties that
could cause actual results to differ materially from those expected and
projected. These forward-looking statements concern, among other things, the
Company's expectations, plans and strategies for the development and
commercialization of products based on its technologies and are generally
identified by the use of such terms as "intends," "expects," "plans,"
"projects," "estimates," "anticipates," "should" and "believes."
The Company's future business prospects are substantially dependent upon
the ability of the Company, its joint venture partners and licensees to develop,
manufacture and sell products based on the Company's technologies. Any revenues
or profits which may be derived by the Company from license and joint venture
agreements will be substantially dependent upon the willingness and ability of
the Company's licensees and joint venture partners to devote their financial
resources and manufacturing and marketing capabilities to commercialize products
based on the Company's technologies. Additional development efforts will be
required before certain products based on the Company's technologies can be
manufactured and sold commercially. There can be no assurance that certain
products based on the Company's technologies can be manufactured cost
effectively on a commercial scale, that such products will gain market
acceptance or that competing products and technologies will not render products
based on the Company's technologies obsolete or noncompetitive. There can be no
assurance that the Company's patents or other proprietary rights will be
determined to be valid or enforceable if challenged in court or administrative
proceedings or that the Company patents or other proprietary rights, even if
determined to be valid, will be broad enough in scope to enable the Company to
prevent third parties from producing products using similar technologies or
processes.
The Company cautions that the foregoing factors, as well as other factors
discussed in this Quarterly Report and in other documents and reports filed by
the Company with the Securities and Exchange Commission pursuant to the
requirements of the federal securities laws, could cause the actual facts and
conditions that may exist in the future to vary materially from the assumed
facts and conditions upon which the forward-looking
17
<PAGE>
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.
Results of Operations
Three Months ended December 31, 1998 Compared to Three Months Ended December
- ----------------------------------------------------------------------------
31, 1997
- --------
The Company had net income for the three months ended December 31, 1998 of
$1,666,000 compared to a net loss of $3,507,000 for the three months ended
December 31, 1997. The net income results from a $1,970,000 gain on the sale of
Ovonic Battery Stock and a $4,400,000 license fee from Sanyo Electric Co. Ltd.
("Sanyo") in 1998 partially offset by (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 the 1998 quarter in other income (expense) was a $1,027,000
equity in net loss of United Solar, as required under GAAP, related to ECD's
May 1998 $2,500,000 equity investment 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 December 31, 1998
compared to the same quarter in the previous year. Battery electrode sales
decreased 69% to $804,000 in the December 1998 quarter from $2,576,000 in the
December 1997 quarter, primarily due to one of the Company's principal customers
currently manufacturing its own electrode products. In order to expand its
capacity, the Company also temporarily suspended operations in its positive
powder manufacturing facility. Battery pack sales were $238,000 in the December
1998 quarter compared to $38,000 in the December 1997 quarter. There were no
revenues from machine building in the December 1998 quarter compared to $55,000
in the same period last year. The Company received a $2,000,000 contract to
build large-area microwave deposition equipment in February 1999.
Royalties decreased 19% to $617,000 in the three months ended December 31,
1998 from $757,000 in the three months ended December 31, 1997 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 1997, 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 have been affected by lower sales prices as licensees move aggressively
to increase market share.
The 17% increase in revenues from product development agreements to
$4,829,000 in the three months ended December 31, 1998 from $4,121,000 in the
three months ended December 31, 1997 was due primarily to increased revenues
from a program with General Motors to develop second and third generation Ovonic
batteries for electric and hybrid electric vehicle applications ($2,153,000 in
the quarter ended December 1998 compared to $1,719,000 in the same quarter in
the prior year) and from contracts
18
<PAGE>
with National Institute of Standards and Technology ("NIST") in the Company's
battery andoptical memory technologies ($1,789,000 in 1998 compared to $405,000
in 1997). Revenues from product development agreements for ECD's photovoltaic
technologies were also significantly higher.
The Company has $18,533,000 in revenues to be recognized in future periods
outstanding under product development agreements with U.S. government or other
agencies or companies, of which $5,234,000 is subject to the normal availability
of funding by the applicable agency. Based on these product development
agreements and on scheduled funding and performance, without giving effect to
any new product development agreements which may be entered into during the
remainder of the year ended June 30, 1998, $9,253,000 additional revenue is
expected to be recorded in revenues from product development agreements for
the remainder of the year ending June 30, 1999.
Revenues from license and other agreements increased from $359,000 in the
three months ended December 31, 1997 to $4,442,000 in the three months ended
December 31, 1998 due to a $4,400,000 license fee from Sanyo in 1998. The
license agreement provides for an up-front license fee of $4,400,000 and advance
royalties of $500,000. Royalties under this license agreement are payable on:
(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 vehicles manufactured in Japan for domestic and
export sale. 1997 revenues included $300,000 related to a technology transfer
agreement with Sovlux and the Chepetsky plant in Russia.
The Company spent a total of $7,883,000 in the quarter ended December 31,
1998 for product development and research (funded and unfunded) compared to
$7,236,000 in the same quarter in the prior year. This planned increase in
expenditures was primarily for continued development of the Company's family of
batteries and was funded entirely by the $708,000 increase in revenues from
product development agreements.
The increase in other revenues was due to increased billings in the three
months ended December 31, 1998 for work performed for Ovonic Battery licensees.
The decrease in cost of product sales from $3,230,000 in the three months
ended December 31, 1997 to $2,215,000 in the three months ended December 31,
1998 was principally 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 December 31, 1998 were $403,000,
a 28% decrease from the prior year. Patent expenses in both years 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.
The decrease in operating, general and administrative expenses from
$1,348,000 in the three months ended December 31, 1997 to $1,028,000 in the
three months ended
19
<PAGE>
December 31, 1998 was primarily due to increased allocations in 1998 to cost of
revenues from product development agreements.
The increase in other income from $122,000 in the three months ended
December 31, 1997 to other income of $1,325,000 in the three months ended
December 31, 1998 was due to a $1,970,000 gain on the sale of Ovonic Battery
Stock in 1998 to Sanyo and higher interest income, partially offset by the
$1,027,000 equity in net loss of United Solar and higher interest expense. The
$1,027,000 expense is related to ECD's $2,500,000 cash investment in United
Solar's future. Under GAAP, the Company must adjust its investment for its share
of the net earnings or losses of United Solar for each reporting period until
the Company's investment is reduced to zero or exceeds $2,500,000, regardless of
the true value of the investment.
Six Months Ended December 31, 1998 Compared to Six Months Ended December 31,
- ----------------------------------------------------------------------------
1997
- ----
The Company had a net loss for the six months ended December 31, 1998 of
$3,558,000 compared to a net loss of $7,804,000 for the six months ended
December 31, 1997. 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 net loss for
the six months ended December 31, 1998 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
1998. In addition, included in the six months ended December 31, 1998 quarter in
other income (expense) was a $2,116,000 equity in net loss of United Solar, as
required under GAAP, related to ECD's May 1998 $2,500,000 equity investment
in United Solar (see NOTE A of Notes to Consolidated Financial Statements and
Liquidity and Capital Resources).
Product sales decreased 62% in the six months ended December 31, 1998
compared to the six months ended December 31, 1997. Battery electrode sales
decreased to $1,770,000 in the six months ended December 31, 1998 from
$4,892,000 in the six months ended December 31, 1997, primarily due to one of
the Company's principal customers currently manufacturing its own electrode
products. 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 $203,000 to
$238,000 in the six months ended December 31, 1998. There were no revenues from
machine building in the six months ended December 31, 1998, down from $148,000
in the six months ended December 31, 1997. The Company received a $2,000,000
contract to build large-area microwave deposition equipment in February 1999.
Royalties increased 12% to $1,232,000 in the six months ended December 31,
1998 from $1,095,000 in the six months ended December 31, 1997, 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
20
<PAGE>
the Company receives reflect increased production efficiencies of our
licensees which have resulted in lower prices as licensees move aggressively
to increase market share.
The 24% increase in revenues from product development agreements to
$8,602,000 in the six months ended December 31, 1998 from $6,911,000 in the six
months ended December 31, 1997 was due to substantially increased revenues from
a program with General Motors to develop second and third generation Ovonic
batteries for electric and hybrid electric vehicle applications ($4,077,000 in
the six months ended December 1998 compared to $2,754,000 in the six months
ended December 31, 1997) and from contracts with NIST in the Company's battery
and optical memory technologies ($2,777,000 in 1998 compared to $548,000 in
1997). Revenues from product development agreements were also significantly
higher for ECD's photovoltaic technologies.
Revenues from license and other agreements increased from $417,000 in the
six months ended December 31, 1997 to $4,484,000 in the six months ended
December 31, 1998 due to a $4,400,000 license fee from Sanyo in 1998. License
fees in 1997 include $300,000 related to a technology transfer agreement with
Sovlux and the Chepetsky plant in Russia.
The Company spent a total of $14,820,000 in the six months ended December
31, 1998 for product development and research (funded and unfunded) compared to
$13,105,000 in the six months ended December 31, 1997. This planned increase in
expenditures was primarily for continued development of the Company's family of
batteries and was funded by the $1,692,000 increase in revenues from product
development agreements.
The increase in other revenues was due to increased billings in the six
months ended December 31, 1998 for work performed for Ovonic Battery licensees.
The decrease in cost of product sales to $4,307,000 in the six months
ended December 31, 1998 from $5,807,000 in the six months ended December 31,
1997 was principally 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 six months ended December 31, 1998 were $828,000, a
14% reduction from the prior year. Patent expenses in both years 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 technology
for NiMH batteries.
Operating, general and administrative expenses decreased to $2,185,000 in
the six months ended December 31, 1998 from $3,436,000 in the six months ended
December 31, 1997 and was primarily due to increased allocations in 1998 to cost
of revenues from product development agreements.
21
<PAGE>
The increase in other income from $298,000 in the six months ended
December 31, 1997 to other income of $536,000 in the six months ended December
31, 1998 was due to a $1,970,000 gain on the sale of Ovonic Battery Stock in
1998 and higher interest income, partially offset by the $2,116,000 equity in
net loss of United Solar and higher interest expense. The $2,116,000 expense is
related to ECD's $2,500,000 cash investment in United Solar's future. Under
GAAP, the Company must adjust its investment for its share of the net earnings
or losses of United Solar for each reporting period until the Company's
investment is reduced to zero or exceeds $2,500,000, regardless of the true
value of the investment.
Liquidity and Capital Resources
As of December 31, 1998, the Company had unrestricted consolidated cash,
cash equivalents and accounts receivable of $35,278,000, a decrease of $666,000
from June 30, 1998. As of December 31, 1998, the Company had consolidated
working capital of $28,508,000 compared with a consolidated working capital of
$29,800,000 as of June 30, 1998.
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. The Company is also developing its own capabilities
for volume manufacturing of battery electrodes. With the issuance of the basic
patents for NiMH batteries and phase-change memory in Japan, various new
agreements are under discussion. Tthe Company is in negotiations with new
strategic partners for financing to commercialize its Ovonic Unified
Memory technology.
During the six months ended December 31, 1998, $2,677,000 of cash was used
in operations. The difference between the net loss of $3,558,000 and the net
cash used in operations was due to the Company's share ($2,116,000) of the
losses of United Solar relating to the Company's investment of $2,500,000 cash
in United Solar's future, the $1,970,000 gain on the sale of Ovonic Battery
Stock, depreciation expense and creditable royalties received. The Company's
investment in United Solar provides funding for new opportunities in the
worldwide photovoltaic market served by United Solar's unique products and
which offer particular advantages to the satellite and telecommunications
industries. In addition, $399,000 of machinery and equipment was purchased or
constructed for the Company's operations during this period.
The Company has had two major electrode customers for its battery
electrode products, GP Batteries International Limited ("GP Batteries") and GM
Ovonic. GP Batteries is a licensee and pays royalties and is currently
manufacturing its own electrode products. The Company is adapting to its
customers' needs to buy materials as well as finished electrodes and is
adjusting 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
22
<PAGE>
sales of electrode products in fiscal year 1999 are currently projected to
decrease from fiscal 1998 levels, new positive and negative electrode materials
are being introduced 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 (DOE) valued at over $3.5
million, subject to availability of funding: (1) a $1.7 million, 50% cost-shared
cooperative agreement to develop and demonstrate an integrated system for the
production and storage of clean, renewable hydrogen fuel for transportation and
other applications in the developing world, and (2) a $1.9 million, 50%
cost-shared contract to develop and demonstrate a high-rate thin-film deposition
process to further reduce photovoltaic manufacturing costs. Revenues under these
contracts will be recognized 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 June 1999. This
program, which is funded on a monthly basis, builds upon the Company's earlier
investments to develop a family of batteries and is intended to provide next-
and future-generation NiMH batteries that will be manufactured by GM Ovonic.
Three contracts awarded in the Fall of 1997 to the Company under NIST
Advanced Technology Programs will also provide significant cash flows. One
contract was awarded to Ovonic Battery to develop the next generation of
high-energy density NiMH batteries using low-cost magnesium-based hydrogen
storage materials. The other two NIST contracts were awarded to ECD to support
development of a new, low-cost manufacturing system for DVD (digital versatile
disks) based on ECD's proprietary phase-change technology and for further
development of the optical memory phase-change products. Generally, the
agreed-upon fees for these product development agreements reimburse the Company
for its direct costs associated with these projects, together with a portion of
indirect costs (patents, operating, general and administrative expenses and
depreciation).
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, the Company plans to invest additional funds
in United Solar (up to an additional amount of $2,500,000).
Currently, the Company has a financing arrangement available for a
$5,000,000 line of credit with Standard Federal Bank bearing an interest rate of
prime plus 1/2% that expires on March 31, 1999. The Company does not expect to
use any of this available financing.
23
<PAGE>
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, 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 allow it to
forecast royalty revenues significantly higher or lower for the next 12 months.
In February 1999, the Company received a $2,000,000 contract to build
large-area microwave deposition equipment. The contract provides for progress
payments over the next 14 months. The Company is also negotiating
machine-building contracts with others that could provide revenues in the coming
year and beyond. This new contract for microwave deposition equipment provides
the platform for the commercialization of the Company's passive coatings
technology and equipment to manufacture products incorporating such technology.
Machine building is cyclical but an important part of the
Company's business. As of December 31, 1998, the Company had no backlog of
machine-building contracts.
Based upon the above information, the amount of cash to be received under
existing product development agreements in the year ending June 30, 1999 is
anticipated to be approximately $16,200,000 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 $2,300,000 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 may also
consider joint ventures, equity or debt financing in order to fund its growth in
certain strategic areas.
24
<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
25
<PAGE>
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 not yet established a contingency plan, but intends to
formulate one to address unavoided or unavoidable risks and expects to have the
contingency plan formulated by July 1999.
-26-
<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.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
-------------------------------
(Registrant)
By:/s/ Stephan W. Zumsteg
-------------------------------
Stephan W. Zumsteg
Date: February 16, 1999 Treasurer
By:/s/ Stanford R. Ovshinsky
-------------------------------
Stanford R. Ovshinsky
Date: February 16, 1999 President and Chief Executive Officer
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,825,749
<SECURITIES> 0
<RECEIVABLES> 10,452,563
<ALLOWANCES> (177,000)
<INVENTORY> 711,251
<CURRENT-ASSETS> 36,123,454
<PP&E> 26,623,490
<DEPRECIATION> (18,482,021)
<TOTAL-ASSETS> 47,216,389
<CURRENT-LIABILITIES> 7,615,435
<BONDS> 3,336,392
0
0
<COMMON> 128,885
<OTHER-SE> 30,888,631
<TOTAL-LIABILITY-AND-EQUITY> 47,216,389
<SALES> 2,007,855
<TOTAL-REVENUES> 18,046,643
<CGS> 4,307,204
<TOTAL-COSTS> 8,916,986
<OTHER-EXPENSES> 8,916,268
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307,305
<INCOME-PRETAX> (3,558,270)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,558,270)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,558,270)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
