SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the period ended MARCH 31, 2000
-----------------------------------------------------------
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 May 12, 2000, there were 219,913 shares of Class A Common Stock,
430,000 shares of Class B Common Stock and 14,306,388 shares of Common Stock
outstanding.
Page 1 of 31 Pages
1
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------ --------------------
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Product sales $ 790,188 $ 1,123,552 $ 4,037,583 $ 3,131,407
Royalties 795,820 715,939 2,533,854 1,947,820
Revenues from product development
agreements 1,719,362 4,117,937 7,629,111 12,741,733
Revenues from license and other agreements 1,000,000 232,000 3,178,000 4,716,000
Other 3,172,051 1,131,349 4,448,864 2,912,344
------------- ------------ ------------- -----------
TOTAL REVENUES 7,477,421 7,320,777 21,827,412 25,449,304
EXPENSES
Cost of product sales 1,936,503 1,609,154 6,574,991 5,916,358
Cost of revenues from product
development agreements 1,816,234 4,060,165 7,714,197 12,977,151
Product development and research 4,225,171 2,927,279 11,562,991 8,830,364
Patents 356,800 449,780 1,250,159 1,277,909
Operating, general and administrative 2,210,692 2,553,961 4,978,196 4,739,015
------------- ------------ ------------- -----------
TOTAL EXPENSES 10,545,400 11,600,339 32,080,534 33,740,797
------------- ------------ ------------- -----------
LOSS FROM OPERATIONS (3,067,979) (4,279,562) (10,253,122) (8,291,493)
OTHER INCOME (EXPENSE)
Gain on sale of Ovonic Battery Company
stock - - - 1,970,000
Equity interest in United Solar's net loss (658,000) (992,000) (1,956,000) (3,107,914)
Interest expense (88,396) (129,365) (304,652) (436,670)
Interest income 366,640 300,309 785,542 981,860
Other nonoperating income (net) 132,967 128,788 377,868 354,117
------------- ------------ ------------- -----------
TOTAL OTHER EXPENSE (246,789) (692,268) (1,097,242) (238,607)
------------- ------------ ------------- -----------
NET LOSS $ (3,314,768) $(4,971,830) $(11,350,364) $(8,530,100)
============= ============ ============= ============
BASIC NET LOSS PER SHARE $ (.24) $ (.38) $ (.84) $ (.66)
============= ============ ============= ============
DILUTED NET LOSS PER SHARE $ (.24) $ (.38) $ (.84) $ (.66)
============= ============ ============= ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash, including cash equivalents of
$19,564,000 as of March 31, 2000 and
$19,026,000 as of June 30, 1999 $ 19,569,417 $ 19,076,983
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$310,000 at March 31, 2000 and
$303,000 at June 30, 1999) 4,146,915 6,296,097
Amounts due from related parties 4,345,809 1,423,828
Inventories 409,566 589,245
------------- -------------
TOTAL CURRENT ASSETS 28,471,707 27,386,153
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 312,588 312,588
Buildings and improvements 3,828,864 3,733,816
Machinery and other equipment (including
construction in progress of approximately
$610,000 at March 31, 2000 and
$844,000 at June 30, 1999) 18,685,821 18,353,014
Capitalized lease equipment 4,982,140 4,988,672
------------- -------------
27,809,413 27,388,090
Less accumulated depreciation and amortization (21,061,237) (19,449,827)
------------- -------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 6,748,176 7,938,263
Investments in EV Global and Innovative Transportation Systems 2,239,716 2,239,716
JOINT VENTURES
United Solar - 956,411
GM Ovonic - -
Ovonyx - -
Ovonic Media - -
Sovlux - -
OTHER ASSETS 1,223,059 1,287,455
------------- -------------
TOTAL ASSETS $ 38,682,658 $ 39,807,998
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,503,855 $ 4,707,158
Salaries, wages and amounts withheld
from employees 1,438,810 1,581,447
Deferred revenues under business
agreements 1,410,821 1,349,087
Current installments on long-term
liabilities 1,285,667 1,309,508
------------- --------------
TOTAL CURRENT LIABILITIES 8,639,153 8,947,200
LONG-TERM LIABILITIES 1,735,980 2,679,936
DEFERRED GAIN 779,337 1,110,132
NON-REFUNDABLE ADVANCE ROYALTIES 3,790,005 3,882,103
------------- --------------
TOTAL LIABILITIES 14,944,475 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 - 30,000,000 shares
Issued & outstanding - 13,754,388
shares at March 31, 2000 and
12,841,270 shares at June 30, 1999 137,544 128,413
Additional paid-in capital 245,241,588 233,861,099
Accumulated deficit (216,878,316) (205,527,952)
Treasury stock at cost - 109,400 shares at
March 31, 2000 and at June 30, 1999 (1,028,092) (1,028,092)
Unearned compensation on Class B Convertible
Common Stock (3,741,040) (4,251,340)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 23,738,183 23,188,627
------------- --------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 38,682,658 $ 39,807,998
============= ==============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (11,350,364) $ (8,530,100)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,640,615 1,342,818
Equity interest in United Solar's net loss 1,956,000 3,107,914
Gain on sale of Ovonic Battery stock - (1,970,000)
Creditable royalties (92,098) 480,638
Stock and options issued for services rendered 787,002 554,150
Amortization of deferred gain (330,795) (330,749)
Loss on disposal of capital equipment 4,958 25,000
Changes in working capital
Accounts receivable and amounts due
from related parties (772,799) 3,693,595
Inventories 179,679 457,726
Other assets 64,396 230,177
Accounts payable and accrued expenses (345,940) 200,111
Deferred revenues under business agreements 61,734 905,733
-------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATIONS (8,197,612) 167,013
INVESTING ACTIVITIES:
Purchases of capital equipment (net) (455,485) (998,007)
Investment in United Solar (999,589) (1,650,000)
Other - (12,308)
-------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (1,455,074) (2,660,315)
FINANCING ACTIVITIES:
Purchase of treasury stock - (419,284)
Principal payments under short-term and long-term debt
and capitalized lease obligations (967,797) (986,624)
Proceeds from sale of stock of subsidiary - 1,970,000
Proceeds from stock option exercises 10,712,917 423,224
Proceeds from issuance of warrants 400,000 -
-------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,145,120 987,316
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 492,434 (1,505,986)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,076,983 25,786,112
-------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,569,417 $ 24,280,126
============== ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
March 31,
----------------------
2000 1999
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 304,652 $ 436,670
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 2000
-----------------------------------------------------------
NOTE A - Basis of Presentation
- ------------------------------
Information for the three months and nine months ended March 31, 2000
(fiscal 2000) and 1999 (fiscal 1999) 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") for annual financial
statements 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"), Sanyo Electric Company, Ltd. ("Sanyo") and Sanoh Industrial Company,
Ltd. ("Sanoh"). Due to cumulative losses incurred by Ovonic Battery, no minority
interest is recorded in the consolidated financial statements.
ECD has a number of strategic alliances and has four 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") (in April, ECD purchased Canon's share of United Solar
as part of an agreement with Bekaert Corporation, a wholly owned subsidiary of
N.V. Bekaert S.A. ("Bekaert"), in a transaction more fully described in Note D);
(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; (iii) Ovonyx, Inc. ("Ovonyx"), a 41.7%-owned
joint venture with Mr. Tyler Lowrey, a recognized authority in semiconductor
memory technology and the former vice chairman and chief technology officer of
Micron Technology, Inc., Intel Corporation ("Intel") and other investors, to
commercialize ECD's Ovonic Unified Memory ("OUM"); and (iv) Ovonic Media L.L.C.
("Ovonic Media"), a joint venture owned 51% by General Electric Company through
its GE Plastics business unit and 49% by ECD. In addition, ECD has a 50%-owned
joint venture in Russia, Sovlux Co., Ltd. ("Sovlux"). See Note D for discussion
of all of ECD's ventures.
7
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
Investments in EV Global Motors Company ("EV Global") and Innovative
- --------------------------------------------------------------------
Transportation Systems A.G. ("Innovative Transportation")
- ---------------------------------------------------------
The Company accounts for its investments in EV Global, a non-public
company, and Innovative Transportation, the successor to Unique Europa GmbH
("Unique Europa"), on the cost method basis of accounting in accordance with
Accounting Principles Board Opinion ("APB") No. 18, The Equity Method of
Accounting for Investments in Common Stock
Upon consolidation, all intercompany accounts and transactions are
eliminated.
Certain items for the three months and nine months ended March 31, 1999
have been reclassified to be consistent with the classification of items in the
three months and nine months ended March 31, 2000.
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 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.
The Company's total comprehensive loss was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net Loss $(3,314,768) $(4,971,830) $(11,350,364) $(8,530,100)
OTHER COMPREHENSIVE LOSSES:
Unrealized losses on securities - (88,000) - (363,000)
------------ ------------ ------------- ------------
COMPREHENSIVE LOSSES $(3,314,768) $(5,059,830) $(11,350,364) $(8,893,100)
============ ============ ============= ============
</TABLE>
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:
March 31, June 30,
2000 1999
----------- ------------
U.S. Government:
Amounts billed $ 761,461 $1,055,313
Unbilled 463,866 876,649
----------- -----------
Total 1,225,327 1,931,962
----------- -----------
Commercial Customers:
Amounts billed 850,826 910,848
Related party billed
- United Solar 2,333,357 184,200
- Ovonyx 1,021,003 -
- GM Ovonic 553,330 830,875
Royalties 1,163,345 1,430,731
License fees 128,000 -
Due per contracts 117,899 2,101,833
Related party unbilled
- United Solar 291,719 -
- GM Ovonic 146,400 408,753
Other unbilled 717,115 116,236
----------- -----------
Total 7,322,994 5,983,476
----------- -----------
Other 254,403 107,487
Allowance for Uncollectible Accounts (310,000) (303,000)
----------- -----------
TOTAL $8,492,724 $7,719,925
=========== ===========
Amounts due per contracts, related party unbilled, and other unbilled from
commercial customers represent 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 March 31, 2000 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:
March 31, June 30,
2000 1999
------------ ------------
Finished products $ 13,340 $ 1,000
Work in process 274,970 286,193
Raw materials 121,256 302,052
--------- ---------
$ 409,566 $ 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 and some battery packs 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.
Royalties
- ---------
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the sale of the respective licensed product. In
several instances, the Company has received cash payments for nonrefundable
advance royalty payments which are creditable against future royalties under the
licenses. Advance royalty payments are deferred and recognized in revenues as
the creditable sales occur, the underlying agreement expires, or when the
Company has demonstrable evidence that no additional royalties will be
creditable and, accordingly, the earnings process is completed.
For ECD royalties there is a royalty trust whereby ECD is obligated to pay
to the trust 25% of optical memory royalties received and for certain Ovonic
Battery royalties there is a contingent fee arrangement whereby Ovonic Battery
is obligated to pay to a law
10
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
firm 25% (subject to a cap) 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 of production
or other uncertainties. In these cases, license fee revenues are not
11
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
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 reimbursement of expenses
paid by the Company for providing services to certain related parties and
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 the amortization of deferred
gains and rental income.
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:
Nine Months Ended
March 31,
-------------------------
2000 1999
----------- -----------
Product Sales:
Negative and positive electrodes $ 1,224,904 $ 2,439,036
Battery packs 1,364,799 621,267
Machine building 1,447,880 71,104
----------- -----------
$ 4,037,583 $ 3,131,407
=========== ===========
Royalties:
Battery technology $ 2,430,335 $ 1,889,518
Optical memory 103,519 58,302
----------- -----------
$ 2,533,854 $ 1,947,820
=========== ===========
Revenues from Product Development Agreements:
Photovoltaic $ 1,172,193 $ 2,113,556
Battery technology 3,847,257 8,618,077
Optical memory 905,583 1,877,228
Hydrogen 1,596,580 102,586
Other 107,498 30,286
----------- -----------
$ 7,629,111 $12,741,733
=========== ===========
License and Other Agreements:
Optical memory - $ 90,000
Battery technology $ 3,178,000 4,626,000
----------- ------------
$ 3,178,000 $ 4,716,000
=========== ============
The following table presents revenues by country based on the location of
the customer:
Nine Months Ended
March 31,
-------------------------
2000 1999
----------- -----------
United States $15,426,582 $18,016,308
Japan 5,207,603 6,132,568
Hong Kong - 748,482
Netherlands 750,000 -
Other countries 443,227 551,946
----------- -----------
$21,827,412 $25,449,304
=========== ===========
13
<PAGE>
NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At March 31, 2000 and June 30, 1999, the Company deferred recognition of
revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
March 31, June 30,
2000 1999
------------ ------------
Battery $ 1,732,074 $ 1,792,068
Optical Memory 2,057,931 2,090,035
----------- -----------
$ 3,790,005 $ 3,882,103
=========== ===========
NOTE D - Joint Ventures and Investments
- ---------------------------------------
Intellectual property resulting from the Company's investments in
its technologies are valued at zero in the balance sheet. Intellectual property
provides the foundation for the creation of the important strategic alliances
whereby the Company provides intellectual property and joint venture partners
provide cash.
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
In April 2000, ECD and Bekaert entered into a strategic alliance in the
field of photovoltaic (solar) products. The joint venture entails an investment
by Bekaert in a new manufacturing plant with an annual capacity of 25 megawatts
(MW) to be designed and built by ECD, a sales and marketing expansion program
and the purchase of Canon's interest in United Solar for a total investment by
Bekaert of $84,000,000.
The new ECD-Bekaert strategic alliance will operate through two related
companies, United Solar, which will be owned 81% by ECD and 19% by Bekaert, and
a new assembly,
14
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
marketing and sales company, Bekaert-ECD Solar Systems LLC ("Bekaert-ECD"),
which will be owned 60% by Bekaert and 40% by United Solar. The combined
operations of United Solar and Bekaert-ECD are expected to initially result in
ECD and Bekaert each having a 50% economic benefit. In April 2000, at the
closing of the aforementioned transactions, ECD received a total of $7,000,000
from United Solar and Bekaert-ECD. Of this amount, $5,000,000 was an advance on
the 25 MW machine-building order and $2,000,000 was a repayment by United Solar
to ECD of previous loans made by ECD to United Solar. Effective April 1, 2000,
ECD will be consolidating United Solar in ECD's financial statements.
As part of ECD's acquisition of Canon's interest in United Solar, ECD
issued 700,000 shares of ECD Common Stock to Canon. The acquisition, which
resulted in ECD's ownership in United Solar to increase from 49.98% to 81%, will
be recorded under the purchase method of accounting. The Company will allocate
the purchase price for this acquisition to the net assets of United Solar.
Preliminary estimates indicate that the value of the net assets acquired exceed
the purchase price resulting in negative goodwill, which will result in a
reduction of consolidated expenses. The Company, under GAAP, will allocate this
negative goodwill to reduce United Solar's long-term assets and applicable
depreciation expense. Any remaining negative goodwill will then be amortized
over seven years on a straight-line basis. The table below reflects unaudited
pro forma combined results of the Company and United Solar for the nine months
ended March 31, 2000, and March 31, 1999, as if this acquisition had taken place
at the beginning of fiscal 2000 and fiscal 1999:
Nine Months Ended
March 31,
---------------------------
2000 1999
------------ ------------
Total Revenues $ 31,197,539 $ 33,983,889
Net Loss $(12,983,610) $(11,639,961)
Net Loss Per Share $ (.96) $ (.81)
The following sets forth certain financial data regarding United Solar
that are derived from United Solar's financial statements.
15
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
UNITED SOLAR STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 3,056,668 $ 3,034,580 $ 9,370,127 $ 8,534,585
Operating Expenses
Cost of product sales 3,393,496 3,461,166 9,415,151 9,828,878
Research and development 620,508 805,027 2,004,237 2,185,306
General and administrative 379,289 289,172 1,097,399 1,294,178
Sales and marketing 254,036 213,060 749,453 912,080
------------ ------------ ------------ ------------
Total 4,647,329 4,768,425 13,266,240 14,220,442
Other Expense (219,755) (204,710) (535,055) (531,918)
------------ ------------ ------------ ------------
Net Loss $(1,810,416) $(1,938,555) $(4,431,168) $(6,217,775)
============ ============ ============ ============
</TABLE>
UNITED SOLAR BALANCE SHEETS
---------------------------
March 31, June 30,
2000 1999
------------ ------------
(Unaudited) (Unaudited)
----------- -----------
Current Assets:
Cash and Cash Equivalents $ 162,087 $ 210,314
Accounts Receivable 2,458,916 3,025,485
Inventory 3,911,701 2,629,643
Other Current Assets 371,626 358,350
------------ ------------
Total Current Assets 6,904,330 6,223,792
Property, Plant and Equipment (Net) 8,133,138 9,465,050
Other Assets 236,885 219,351
------------ ------------
Total Assets $15,274,353 $15,908,193
============ ============
Current Liabilities:
Accounts Payable and Accrued Expenses $ 5,156,455 $ 3,646,215
Note Payable-ECD 5,500,000 2,500,000
----------- ------------
Total Current Liabilities 10,656,455 6,146,215
Note Payable-Canon 2,500,000 2,500,000
Lease Payable 6,745,967 7,458,879
Total Stockholders' Equity (4,628,069) (196,901)
------------ ------------
Total Liabilities and Stockholders' Equity $15,274,353 $15,908,193
============ ============
16
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 vehicles (EVs) and hybrid electric vehicles (HEVs) and fuel cell
electric vehicles (FCEVs). 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 (initially owned 50% by ECD and the balance owned by Mr. Lowrey together
with an affiliate of Mr. Lowrey), to commercialize ECD's Ovonic Unified Memory.
In February 2000, Ovonyx formed a strategic alliance with Intel in which Intel
Capital, and other investors, made an equity investment in Ovonyx. Additionally,
Ovonyx granted Intel a non-exclusive royalty-bearing license and began a joint
development program utilizing one of Intel's wafer fabrication facilities. As a
result, ECD currently owns 41.7% of Ovonyx.
ECD recorded revenues from Ovonyx of $2,521,000 through March 31, 2000
($681,000 in the current quarter), representing services performed for its
operations which commenced on January 15, 1999. ECD has received payment for
$1,500,000 for these services as of March 31, 2000, and the remaining balance is
included in accounts receivable.
There are no financial statements currently available for Ovonyx.
Ovonic Media
In March 2000, ECD and General Electric formed a strategic alliance, the
first activity of which resulted in the creation of a joint venture, Ovonic
Media, LLC. This joint venture is owned 51% by General Electric Company through
its GE Plastics business unit and 49% by ECD. ECD has contributed intellectual
property and licenses and will contribute other assets to the joint venture. GE
will make cash and other contributions to the joint venture. ECD received a
multi-million dollar contract from Ovonic Media to design, develop, demonstrate
and commercialize ECD's proprietary continuous web roll-to-roll
17
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
technology for the ultra-high-speed manufacture of optical media products
primarily rewritable DVDs.
There are no financial statements currently available for Ovonic Media.
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. Pursuant to the terms of the warrant agreement,
EV Global elected to exchange, in March 2000, the warrants for 49,888 shares of
ECD Common Stock.
In May 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 business and assets of Unique
Europa were restructured in a new company, Innovative Transportation.
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 cash investment by an additional shareholder.
Innovative Transportation is in its formative stage and, as such, 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, an enterprise of Minatom.
ECD's contribution to the ventures consists solely of technology.
18
<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 Income (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 uses the
treasury stock method to calculate diluted earnings per share. Potential
dilution exists from stock options and warrants. Weighted average number of
shares outstanding and basic and diluted earnings per share for the three months
and nine months ended March 31 are computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Weighted average number of
shares outstanding 13,880,425 13,160,773 13,549,799 12,923,179
============ ============ ============ ============
Net loss $(3,314,768) $(4,971,830) $(11,350,364) $(8,530,100)
============ ============ ============= ============
BASIC NET LOSS PER SHARE $ (.24) $ (.38) $ (.84) $ (.66)
============ ============ ============= ============
DILUTED NET LOSS PER SHARE $ (.24) $ (.38) $ (.84) $ (.66)
============ ============ ============== ============
</TABLE>
Basic and diluted net loss per share were the same in the three and nine
months ended March 31, 2000 and March 31, 1999 due to the losses recognized in
each period. Due to the Company's net losses, the weighted average shares of
potential dilutive securities for 2000 of 1,423,746 (three months) and 421,187
(nine months) and for potential dilutive securities for 1999 of 164,772 (three
months) and 76,486 (nine months) 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. An additional 400,000 (for both 2000 periods) and
5,552,614 shares (for both 1999 periods) were excluded from the calculations of
weighted average number of shares of potentially 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.
19
<PAGE>
NOTE F - Business Segments
- --------------------------
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 March 31, 2000 $ 3,875 $ 3,602 $ 7,477
Three months ended March 31, 1999 5,807 1,514 7,321
Nine months ended March 31, 2000 $ 14,046 $ 7,781 $ 21,827
Nine months ended March 31, 1999 20,780 4,669 25,449
Identifiable Assets
Nine months ended March 31, 2000 $ 9,502 $ 29,181 $ 38,683
Nine months ended March 31, 1999 12,343 30,977 43,320
Operating Income (Loss)
Three months ended March 31, 2000 $ (3,634) $ 566 $ (3,068)
Three months ended March 31, 1999 (1,104) (3,176) (4,280)
Nine months ended March 31, 2000 $ (9,311) $ (942) $(10,253)
Nine months ended March 31, 1999 (5,927) (2,364) (8,291)
- ----------
* All revenues are derived from external customers.
NOTE G - Subsequent Event
- -------------------------
On May 2, 2000, ECD and Texaco announced that Texaco will purchase a 20
percent equity position in the Company for $67.3 million during the quarter
ended June 30, 2000, and that Texaco and ECD intend, as soon as practicable, to
enter into joint ventures to promote the development and commercialization of
Ovonic Solid Hydrogen Storage Systems and Ovonic Regenerative Fuel Cell
technology. ECD will provide each venture with a license of ECD's Intellectual
Property relating to the respective field and Texaco will provide funding to
some agreed level.
20
<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
and nine months ended March 31, 2000 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 strategic alliances, including its joint venture
partners and licensees to develop, manufacture and sell products based on the
Company's technologies and the willingness and ability of the Company's
licensees and joint venture partners to devote their financial resources and
manufacturing and marketing capabilities to commercialize products based on the
Company's technologies. Additional development efforts will be required before
certain products based on the Company's technologies can be manufactured and
sold commercially. There can be no assurance that certain products based on the
Company's technologies can be manufactured cost effectively on a commercial
scale, that such products will gain market acceptance, or that competing
products and technologies will not render products based on the Company's
technologies obsolete or noncompetitive. There can be no assurance that the
Company's patents or other proprietary rights will be determined to be valid or
enforceable if challenged in court or administrative proceedings or that the
Company patents or other proprietary rights, even if determined to be valid,
will be broad enough in scope to enable the Company to prevent third parties
from producing products using similar technologies or processes.
The Company cautions that the foregoing factors, as well as other factors
discussed in this Quarterly Report and in other documents and reports filed by
the Company with the Securities and Exchange Commission pursuant to the
requirements of the federal securities laws, could cause the actual facts and
conditions that may exist in the future to vary materially from the assumed
facts and conditions upon which the forward-looking statements contained herein
are based. The Company does not undertake any obligation to update or revise any
forward-looking statement, made by it or on its behalf, whether as a result of
new information, future events or otherwise.
21
<PAGE>
Results of Operations
Three Months Ended March 31, 2000 compared to Three Months Ended March 31, 1999
- -------------------------------------------------------------------------------
The Company had a net loss from operations in the three months ended March
31, 2000, of $3,068,000 compared to a net loss from operations of $4,280,000 for
the three months ended March 31, 1999. The change resulted from an increase in
revenues to $7,477,000 in 2000 from $7,321,000 in 1999, plus a $1,055,000
reduction in expenses. The revenue increase primarily resulted from an increase
in other revenues of $2,041,000, higher revenues from license and other
agreements ($768,000) plus an $80,000 increase in royalties, partially offset by
lower revenues from product development agreements ($2,399,000) and lower
product sales ($333,000). Other revenues increased from $1,131,000 in the three
months ended March 31, 1999 to $3,172,000 in the three months ended March 31,
2000.
A large portion of the losses in 2000 was due to the fact that, in
accordance with GAAP, ECD must report its activities to further advancements in
its technologies as a loss. These investments in its technologies have led to
historic new strategic alliances over the past six months with Intel, General
Electric, Texaco, Bekaert, Lockheed Martin Space Electronics &
Communications ("Lockheed Martin") and China's Baotou Steel. The ECD/Ovonic
Battery programs in its Ovonic NiMH battery technology have led to a new family
of batteries not only for HEVs, EVs and FCEVs, but also for a new universal
battery platform that has included a much-needed addition to the Starter Lighter
Ignition Battery field where especially high voltages are required. ECD's
continued investments in United Solar and its solid hydride development programs
are reported as losses. Losses related to electrode production and the ongoing
protection of the Company's intellectual property also contributed to the 2000
losses. In addition to the loss from operations, other expense improved $445,000
to $247,000 in the three months ended March 31, 2000 compared to a loss of
$692,000 in the same period in the prior year.
Product sales, consisting of positive and negative battery electrodes,
battery packs and machine building, decreased 30% to $790,000 in the three
months ended March 31, 2000 from $1,124,000 in the three months ended March 31,
1999. Machine-building revenues increased to $325,000 in 2000, compared to
$71,000 in 1999, while revenues from battery pack sales were $360,000 in 2000,
compared to $384,000 in 1999, and sales of electrodes decreased $564,000. The
machine-building revenues in both years were applicable to a contract with
Southwall Technologies, Inc. ("Southwall Technologies") to build large-area
microwave deposition equipment to supply product for the fast-growing
anti-reflective film market for cathode ray tubes (CRTs) and liquid crystal
displays (LCDs). Sales of negative and positive electrodes decreased 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, developed products for HEV
batteries, as well as materials for hydrogen storage and fuel cell programs.
22
<PAGE>
Royalties increased 11% from $716,000 in the three months ended March 31,
1999 to $796,000 in the three months ended March 31, 2000. While the volume of
NiMH batteries currently being sold has increased substantially, the royalties
the Company receives continue to reflect increased production efficiencies of
its licensees which have resulted in lower prices as licensees move aggressively
to increase market share. (See NOTE B - Notes to Consolidated Financial
Statements.)
Revenues from product development agreements decreased 58% from $4,118,000
in the three months ended March 31, 1999, to $1,719,000 in the three months
ended March 31, 2000. The reduction resulted primarily from the successful
conclusion of programs with General Motors to develop batteries for electric and
hybrid electric vehicle applications (none in 2000 compared to $1,978,000 in
1999) and with the National Institute of Standards & Technology ("NIST") for a
new, low-cost manufacturing system for digital versatile disks ("DVDs") based on
ECD's proprietary phase-change optical memory technology (none in 2000 versus
$365,000 in 1999).
Revenues from license and other agreements increased from $232,000 in the
three months ended March 31, 1999 to $1,000,000 in the three months ended March
31, 2000. The 2000 license fees included $1,000,000 from Sanyo which had
previously been deferred from the October 1998 agreement. The 1999 license fees
included $190,000 from Ricoh Company Limited of Japan and Japan Storage Battery
Co., Ltd. ("Japan Storage").
Other revenues increased by $2,041,000 from $1,131,000 in the three months
ended March 31, 1999 to $3,172,000 in the three months ended March 31, 2000,
primarily due to revenues from Ovonyx of $2,521,000 related to services
provided to Ovonyx ($1,840,000 of which relates to prior periods).
The increase in cost of product sales from $1,609,000 in the three months
ended March 31, 1999 to $1,936,000 in the three months ended March 31, 2000 was
due to an increased level of machine-building revenues in 2000. The increased
loss on product sales from $486,000 to $1,146,000 is a result of low sales
volume, primarily of negative electrodes. While the Company has taken
significant steps to reduce costs, the low sales volume, combined with high
fixed costs, results in the loss on product sales. The Company has continued its
development of advanced electrode materials to be introduced to its customers.
The Company incurred expenses for product development of $6,041,000
($1,816,000 funded and $4,225,000 unfunded) in the three months ended March 31,
2000, compared to expenses of $6,987,000 ($4,060,000 funded and $2,927,000
unfunded) in the three months ended March 31, 1999. The expenditures continued
the development of the Company's core technologies: NiMH batteries, hydrogen
storage, energy generation, and information storage and retrieval devices.
23
<PAGE>
Expenses were incurred in 2000 and 1999 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technology. These expenses decreased to $357,000 in the three months ended March
31, 2000 from $450,000 in the three months ended March 31, 1999.
The decrease in operating, general and administrative expenses from
$2,554,000 in the three months ended March 31, 1999 to $2,211,000 in the three
months ended March 31, 2000 was primarily related to increased allocations in
2000 to product development research expenses.
The improvement in other expense to $247,000 in the three months ended
March 31, 2000, compared to ($692,000) in the three months ended March 31, 1999,
was due principally to lower equity losses related to United Solar in 2000 and
increased interest income. The Company incurred reduced charges for equity
losses of $658,000 in 2000 compared to $992,000 in 1999. GAAP requires that the
Company recognize its investments in United Solar's ongoing operations as a
loss. 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 NOTES A and D of Notes to Consolidated Financial Statements for
further discussions of United Solar and the Company's accounting for United
Solar).
Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31, 1999
- -----------------------------------------------------------------------------
The Company had a net loss from operations in the nine months ended March
31, 2000, of $10,253,000 compared to a net loss from operations of $8,291,000
for the nine months ended March 31, 1999. The change resulted from a reduction
in revenues to $21,827,000 in 2000 from $25,449,000 in 1999, partially offset by
a $1,660,000 reduction in operating expenses. The revenue reduction primarily
resulted from lower revenues from product development agreements ($5,113,000)
and lower revenues from license and other agreements ($1,538,000), partially
offset by an increase of $906,000 in product sales and a $586,000 increase in
royalties. Revenues from license agreements in 2000 included $1,778,000 from a
license agreement with Toshiba Battery Company Ltd. ("Toshiba Battery") for the
HEV technology, $1,000,000 from Sanyo and $400,000 from Japan Storage, compared
to a $4,400,000 license fee in 1999 from Sanyo. Other revenues increased from
$2,912,000 in the nine months ended March 31, 1999 to $4,449,000 in the nine
months ended March 31, 2000.
A large portion of the losses in 2000 was due to the fact that, in
accordance with GAAP, ECD must report its activities to further advancements in
its technologies as a loss. These investments in its technologies have led to
historic new strategic alliances over the past six months with Intel, General
Electric, Texaco, Bekaert, Lockheed Martin and China's Baotou Steel. The
ECD/Ovonic Battery programs in Ovonic NiMH battery technology has led to a new
family of batteries not only for HEVs, EVs and FCEVs, but also for a new
universal battery platform that has included a much-needed addition to the
Starter Lighter Ignition Battery field where especially high voltages are
required. ECD's continued investments in United Solar and its solid hydride
development programs are all reported as losses. Losses related to electrode
production and the ongoing protection of the
24
<PAGE>
Company's intellectual property also contributed to the 2000 losses. In addition
to the loss from operations, the Company incurred other expenses (net) of
$1,097,000 in the nine months ended March 31, 2000 compared to other expense
(net) of $239,000 in the same period in the prior year.
Product sales, consisting of positive and negative battery electrodes,
battery packs and machine building, increased 29% to $4,038,000 in the nine
months ended March 31, 2000 from $3,131,000 in the nine months ended March 31,
1999. Battery pack sales increased to $1,365,000 in 2000 from $621,000 in 1999
and machine-building revenues increased to $1,448,000 in 2000 from $71,000 in
1999. The machine-building revenues in both years were applicable to a contract
to build large-area microwave deposition equipment. Sales of negative and
positive electrodes decreased $1,214,000, 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, developed products for HEV batteries as well as materials for
hydrogen storage and fuel cell programs.
Royalties increased 30% from $1,948,000 in the nine months ended March 31,
1999 to $2,534,000 in the nine months ended March 31, 2000. While the volume of
NiMH batteries currently being sold has increased substantially, the royalties
the Company receives continues to reflect increased production efficiencies of
its licensees which have resulted in lower prices as licensees move aggressively
to increase market share. (See NOTE B - Notes to Consolidated Financial
Statements.)
Revenues from product development agreements decreased 40% from
$12,742,000 in the nine months ended March 31, 1999 to $7,629,000 in the nine
months ended March 31, 2000. There were increases in product development
agreements due to substantially increased revenues from the Shell Hydrogen
program (which concluded in 2000) ($750,000 in 2000 compared to none in 1999)
and the hydrogen storage program with the Department of Energy ("DOE") ($767,000
in 2000 compared to $103,000 in 1999). These increases in 2000 were more than
offset by decreases in revenues resulting from the successful conclusion of
programs with General Motors to develop batteries for electric and hybrid
electric vehicle applications ($1,002,000 in 2000 compared to $6,055,000 in
1999) and with NIST for a new, low-cost manufacturing system for DVDs based on
ECD's proprietary phase-change optical memory technology ($194,000 in 2000
compared to $1,062,000 in 1999). Contracts with DOE and National Renewable
Energy Laboratory ("NREL") in photovoltaics also had decreased revenues
($1,103,000 in 2000 compared to $2,114,000 in 1999).
Revenues from license and other agreements decreased from $4,716,000 in
the nine months ended March 31, 1999 to $3,178,000 in the nine months ended
March 31, 2000. The 1999 license fees included $4,400,000 from Sanyo. The 2000
revenues included a $1,778,000 license fee from Toshiba Battery, $1,000,000 from
Sanyo, which
25
<PAGE>
had previously been deferred from the agreement entered into with Sanyo in
October 1998, and $400,000 from Japan Storage.
Other revenues increased by $1,537,000 from $2,912,000 in the nine months
ended March 31, 1999 to $4,449,000 in the nine months ended March 31, 2000,
primarily due to revenues from Ovonyx of $2,521,000 related to services
provided to Ovonyx ($666,000 of which relates to 1999), partially offset by
lower billings to GM Ovonic.
The increase in cost of product sales from $5,916,000 in the nine months
ended March 31, 1999 to $6,575,000 in the nine months ended March 31, 2000 was
due to an increased level of machine-building revenues in 2000. The reduced loss
on product sales from $2,785,000 to $2,537,000 is a result of cost-reduction
measures taken by the Company. While the Company has taken significant steps to
reduce costs, the low sales volume, primarily of negative electrodes, combined
with high fixed costs, results in the loss on product sales. The Company has
continued its development of advanced electrode materials to be introduced to
its customers.
The Company incurred expenses for product development of $19,277,000
($7,714,000 funded and $11,563,000 unfunded) in the nine months ended March 31,
2000 compared to expenses of $21,807,000 ($12,977,000 funded and $8,830,000
unfunded) in the nine months ended March 31, 1999. The expenditures continued
the development of the Company's core technologies: NiMH batteries, hydrogen
storage, energy generation, and information storage and retrieval devices.
Expenses were incurred in 2000 and 1999 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technology. These expenses decreased to $1,250,000 in the nine months ended
March 31, 2000 from $1,278,000 in the nine months ended March 31, 1999.
The increase in operating, general and administrative expenses from
$4,739,000 in the nine months ended March 31, 1999 to $4,978,000 in the nine
months ended March 31, 2000 was primarily related to decreased allocations to
cost of revenues from product development agreements and increased depreciation
expense in 2000.
Other expense (net) was $239,000 in the nine months ended March 31, 1999,
compared to other expense (net) of $1,097,000 in the nine months ended March 31,
2000. In 1999, a $1,970,000 gain was recognized related to the sale of Ovonic
Battery stock to Sanyo. Due primarily to better operating performance at United
Solar, the Company incurred reduced charges for equity losses of $1,956,000 in
2000 compared to $3,108,000 in 1999. GAAP requires that the Company recognize
its investments in United Solar's ongoing operations as a loss. 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 NOTES A and D of Notes to Consolidated Financial Statements for further
discussions of United Solar and the Company's accounting for United Solar).
26
<PAGE>
Liquidity and Capital Resources
As of March 31, 2000, the Company had unrestricted consolidated cash, cash
equivalents and accounts receivable of $28,062,000, an increase of $1,265,000
from June 30, 1999. As of March 31, 1999, the Company had consolidated working
capital of $19,833,000 compared with a consolidated working capital of
$18,439,000 as of June 30, 1999.
The Company's strategy is to finance its operations and 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. Over the past several months, the Company has entered
into a number of historic business agreements which will bring the Company's
short-term cash reserves to approximately $90 million and have a significant
positive impact on future cash flows. As part of its long-standing strategy,
the Company has made investments in its technology which have resulted in
enabling intellectual property and products. It has entered into strategic
alliances and joint ventures with some of the world's leading corporations,
listed below, which form the basis of a fundamental restructuring of the
Company. Highlights are:
o On May 2, 2000, ECD and Texaco announced that Texaco will purchase a 20
percent equity position in the Company for $67.3 million during the
quarter ended June 30, 2000, and that Texaco and ECD intend, as soon as
practicable, to enter into joint ventures to promote the development
and commercialization of Ovonic Solid Hydrogen Storage Systems and
Ovonic Regenerative Fuel Cell technology. ECD will provide each venture
with a license of ECD's intellectual property relating to the
respective field and Texaco will provide funding to some agreed level.
o In April 2000, ECD and Bekaert entered into a strategic alliance
whereby Bekaert invested $84 million in United Solar, which will result
in a fivefold capacity expansion and a sales and marketing expansion
program. The capacity expansion resulted in an order to ECD for
production equipment valued at approximately $50 million with an
annual capacity of 25 MW.
o A strategic alliance was formed with General Electric, the first
activity of which resulted in the creation of a joint venture, Ovonic
Media, LLC, in March 2000. ECD received a multi-million dollar contract
from Ovonic Media to design, develop, demonstrate and commercialize
ECD's proprietary continuous web roll-to-roll technology for the
ultra-high-speed manufacture of optical media products, primarily
rewritable DVDs.
o Ovonyx formed a strategic alliance with Intel in February 2000, which
entails an investment by Intel in Ovonyx, to commercialize ECD's
proprietary non-volatile semiconductor memory technology ("OUM"). OUM
memory technology promises to enable significantly faster write and
erase speeds and higher cycling endurance than conventional memory
types. It has been used in rewritable CD
27
<PAGE>
and DVD disks and may have potential as a replacement for such memory
types as Flash, SRAM and DRAM. The alliance with Intel also
includes the granting of a non-exclusive royalty-bearing license
agreement and a joint development program utilizing Intel's wafer
fabrication facilities.
o On April 25, 2000, Ovonic Battery, after having received all necessary
government approvals, officially started the first (valued at $25.2
million) in a series of NiMH projects in China . These projects, first
announced in August 1999, with Rare Earth High-Tech Co., Ltd. of Baotou
Steel Company, Inner Mongolia, China, create joint ventures, of which
Ovonic Battery initially has a 19% interest, which provide an important
entry for the Company into the vast Chinese market and have potential
revenue to Ovonic Battery in excess of $100 million.
These new business agreements have both near-term and long-term impact on
the Company's capital resources. The Bekaert, Ovonyx and General Electric
agreements will all result in reduced cash expenditures as the Company's
business partners assume the responsibility for funding operations.
In the nine months ended March 31, 2000, the Company entered into a new
license agreement ($1,778,000 in license fees plus future royalties) with
Toshiba Battery for its HEV technology. In addition, Japan Storage, a licensee,
notified the Company 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. Also, the Company recognized a license fee of $1,000,000 earned in
connection with the previously signed license agreement with Sanyo.
During the nine months ended March 31, 2000, $8,198,000 of cash was used
in operations. The difference between the net loss of $11,350,000 and the net
cash used in operations was principally due to ECD's $1,956,000 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. As a result of Bekaert's
investment in United Solar, ECD will no longer be funding United Solar. In
addition, $455,000 of machinery and equipment was purchased or constructed,
principally for the Company's battery operations, during this period.
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. ECD has been awarded
government contracts with various governmental agencies (DOE, NREL, NIST, etc.)
and with various industry partners. Generally, the agreed-upon fees for these
product development agreements reimburse the Company for its direct costs
associated with these projects,
28
<PAGE>
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.
The Company has a financing arrangement with Standard Federal Bank, a
member of the ABN AMRO Group, 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.
As previously noted, the Company's strategy is to finance its operations
and growth through the formation of strategic alliances to further commercialize
its products. The agreements discussed above will provide significant cash flows
in the future. While the Company is in negotiations with a number of companies
related to its technologies, which will accelerate the commercialization of its
products worldwide and 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.
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 $2,800,000 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.
Due to the recent increase in its stock price, the Company has received,
since January 1, 2000, approximately $10.8 million in proceeds from the exercise
of employee stock options. While there are additional employee stock options
which may be exercised, the Company is unable to predict the amount nor the
timing of such exercises.
Management believes that funds generated from operations, new business
agreements 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.
29
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------- --------------------------------
A. Exhibits
Exhibit 23.1 Consent of United Solar's Independent Auditors
Exhibit 27 Financial Data Schedule (Edgar version)
Exhibit 99.1 United Solar financial statements
(a) Years Ended December 31, 1999 and 1998
(b) Quarters Ended March 31, 2000 and December 31, 1999
(Unaudited)
B. Reports on Form 8-K
None
30
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
-------------------------------
(Registrant)
By: /s/ Stephan W. Zumsteg
-------------------------------
Stephan W. Zumsteg
Date: May 15, 2000 Treasurer
By: /s/ Stanford R. Ovshinsky
-------------------------------
Stanford R. Ovshinsky
Date: May 15, 2000 President and Chief Executive Officer
31
The Board of Directors
United Solar Systems Corp.:
We consent to the inclusion of our report dated March 15, 2000 except for note
12 which was as of April 4, 2000, with respect to the consolidated balance
sheets of United Solar Systems Corp. and subsidiary as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the two-year period
ended December 31, 1999, which report appears in the Form 10-Q of Energy
Conversion Devices, Inc. dated May 15, 2000.
/s/ KPMG LLP
Detroit, Michigan
May 15, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period March 31, 2000 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 19,569,417
<SECURITIES> 0
<RECEIVABLES> 8,492,724
<ALLOWANCES> (310,000)
<INVENTORY> 409,566
<CURRENT-ASSETS> 28,471,707
<PP&E> 27,809,413
<DEPRECIATION> (21,061,237)
<TOTAL-ASSETS> 38,682,658
<CURRENT-LIABILITIES> 8,639,153
<BONDS> 1,735,980
0
0
<COMMON> 144,043
<OTHER-SE> 23,594,140
<TOTAL-LIABILITY-AND-EQUITY> 38,682,658
<SALES> 4,037,583
<TOTAL-REVENUES> 20,827,412
<CGS> 6,574,991
<TOTAL-COSTS> 7,714,197
<OTHER-EXPENSES> 17,791,346
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 304,652
<INCOME-PRETAX> (11,350,364)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,350,364)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,350,364)
<EPS-BASIC> (.84)
<EPS-DILUTED> (.84)
</TABLE>
EXHIBIT 99.1
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Consolidated Financial Statements
Years Ended December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Table of Contents
Page
Independent Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity (Deficit) 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
United Solar Systems Corp.:
We have audited the accompanying consolidated balance sheets of United Solar
Systems Corp. and subsidiary (the "Company") (a joint venture between Canon
Inc. and Energy Conversion Devices, Inc.) as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Solar Systems Corp. and subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Detroit, Michigan
March 15, 2000, except as to note 12,
which is as of April 4, 2000
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
------------ ------------
Current assets:
Cash and cash equivalents (note 3) $ 155,256 335,224
Accounts receivable:
Trade (less allowance for doubtful accounts
of $112,140 in 1999 and $35,000 in 1998) 1,695,819 1,339,209
in 1998)
Stockholders (note 6) 91,145 --
Contracts (notes 6 and 9) 422,954 533,057
Inventories (note 4) 3,618,156 3,807,819
Prepaid expenses 380,440 388,705
Other current assets 16,780 3,969
----------- -----------
Total current assets 6,380,550 6,407,983
Machinery and equipment, net (notes 5, 6 and 7) 8,558,180 10,428,243
Other assets 234,703 219,773
----------- -----------
$15,173,433 17,055,999
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable - stockholder (note 6) $ 3,400,000 --
Current maturities of capital lease
obligations (note 7) 926,315 864,469
Accounts payable:
Trade 2,318,064 1,597,777
Stockholders (note 6) 504,078 395,926
Accrued expenses (note 6) 1,354,908 868,057
Deferred revenue -- 35,000
----------- -----------
Total current liabilities 8,503,365 3,761,229
Capital lease obligations, less current
maturities (note 7) 6,987,721 7,914,036
Notes payable - stockholder (note 6) 2,500,000 2,500,000
----------- -----------
Total liabilities 17,991,086 14,175,265
Stockholders' equity (deficit):
Common stock (note 1):
Series A, par value $0.01; authorized
3,000,000 shares; issued and outstanding
2,924,558.85 shares 29,245 29,245
Series B, par value $0.01; authorized
3,000,000 shares; issued and outstanding
2,924,558.85 shares 29,245 29,245
Series C, par value $0.01; authorized 500
shares; issued and outstanding 200 shares 2 2
----------- -----------
Total common stock 58,492 58,492
Additional paid-in capital 58,939,336 58,939,336
Accumulated deficit (61,815,481 (56,117,094)
----------- ------------
Total stockholders' equity (deficit) (2,817,653) 2,880,734
------------ ------------
Commitments and contingencies (note 7)
$ 15,173,433 17,055,999
============ ===========
See accompanying notes to consolidated financial statements.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Consolidated Statements of Operations
Years ended December 31, 1999 and 1998
1999 1998
------------ ------------
Revenues (notes 6 and 9) $ 12,826,730 10,540,830
Cost of sales 12,500,854 12,366,009
------------ -----------
Gross income (loss) 325,876 (1,825,179)
------------ -----------
Research and development expenses (notes 6 and 9) 3,059,506 2,777,544
General and administrative expenses (note 6) 1,239,278 1,663,578
Sales and marketing expenses 972,024 1,460,242
------------ -----------
Total operating expenses 5,270,808 5,901,364
------------ -----------
Operating loss (4,944,932) (7,726,543)
Other income (expense):
Interest income 13,423 102,415
Interest expense (765,284) (798,122)
Loss on sale/disposal of equipment -- (175,876)
Foreign exchange loss (2,032) (163,117)
Other, net 438 3,328
------------ -----------
Net loss before tax expense (5,698,387) (8,757,915)
Income tax expense (note 8) -- --
------------ -----------
Net loss $ (5,698,387) (8,757,915)
============== ============
See accompanying notes to consolidated financial statements.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc.
and
Energy Conversion Devices, Inc.)
Consolidated Statements of
Stockholders' Equity (Deficit)
Years ended December 31, 1999 and 1998
<TABLE>
Common Common Common Additional
Stock Stock Stock paid-in Accumulated
Series A Series B Series C capital deficit Total
-------- -------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 26,452 26,452 2 53,945,093 (47,359,179) 6,638,820
Issuance of common stock, 279,320
shares each of Class A and Class B 2,793 2,793 -- 4,994,243 -- 4,999,829
Net loss -- -- -- -- (8,757,915) (8,757,915)
--------- -------- -------- ---------- ------------ -----------
Balance at December 31, 1998 29,245 29,245 2 58,939,336 (56,117,094) 2,880,734
Net loss -- -- -- -- (5,698,387) (5,698,387)
--------- -------- -------- ---------- ------------ -----------
Balance at December 31, 1999 $ 29,245 29,245 2 58,939,336 (61,815,481) (2,817,653)
========= ======== ======== =========== ============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Consolidated Statements of Cash Flows
Years ended December 31, 1999 and 1998
<TABLE>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,698,387) (8,757,915)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on sale/disposal of equipment -- 175,876
Depreciation 1,945,857 2,176,442
Changes in assets and liabilities:
Accounts receivable - trade (356,610) 466,160
Accounts receivable - stockholders (91,145) 36,261
Accounts receivable - contracts 110,103 27,872
Inventories 189,663 (1,174,688)
Prepaid expenses 8,265 51,762
Other current assets (12,811) 30,709
Other assets (14,930) (2,979)
Accounts payable - trade 720,287 112,101
Accounts payable - stockholders 108,152 (259,306)
Accrued expenses 486,851 228,091
Deferred revenue (35,000) --
------------- -----------
Net cash used in operating activities (2,639,705) (6,889,614)
------------- -----------
Cash flows used in investing activities:
Capital expenditures (75,794) (211,464)
Proceeds from sale of assets -- 26,760
-------------- -----------
Net cash used in investing activities (75,794) (184,704)
-------------- -----------
Cash flows from financing activities:
Proceeds from notes payable - stockholder 3,400,000 2,500,000
Principal payments under capital lease obligations (864,469) (806,748)
Issuance of common stock -- 4,999,829
-------------- -----------
Net cash provided by financing activities 2,535,531 6,693,081
-------------- -----------
Net decrease in cash and cash equivalents (179,968) (381,237)
Cash and cash equivalents at beginning of year 335,224 716,461
-------------- -----------
Cash and cash equivalents at end of year $ 155,256 335,224
============== ===========
</TABLE>
Supplemental disclosure of noncash activities:
Cash paid for interest during the years ended December 31, 1999 and 1998 was
$587,146 and $649,574, respectively.
See accompanying notes to consolidated financial statements.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(1) Formation and Ownership Structure
United Solar Systems Corp. and subsidiary ("United Solar", "Joint Venture"
or "Company"), a joint venture between Canon Inc. ("Canon") and Energy
Conversion Devices, Inc. ("ECD"), was formed to produce solar panels that
convert sunlight to electric current. The Joint Venture combines ECD's
technological knowledge of photovoltaics with Canon's manufacturing
technology and marketing "know-how" to develop and bring this technology to
the marketplace. United Solar became operational in 1991.
In 1992, United Solar established a maquiladora (assembly) operation in
Tijuana, Mexico through its subsidiary, United Solar Systems de Mexico,
S.A. de C.V. ("USS de Mexico"). United Solar directly owns 99.9% of its
subsidiary. The remaining interest is held by USS de Mexico directors who
are also employees of United Solar. Under this maquiladora operation,
United Solar ships partially assembled solar cell products that are
manufactured in Troy, Michigan to USS de Mexico for final assembly,
packaging, and shipment to United Solar's ultimate customers.
Canon and ECD each have an ownership interest in United Solar of 49.998%.
The remaining minority ownership interest is held by an unrelated party.
Unless and until either the Series A common stockholder or the Series B
common stockholder owns more than 50% of the stock outstanding, the Series
A and the Series B stockholders may each elect four directors and the
Series C stockholder may elect one director. In all other voting matters,
each share outstanding has an equal voting right. Canon, ECD, and the
Series C stockholder have agreed that if the Series C stockholder decides
to sell its shares, Canon may purchase the Series C common stock at the
greater of principal plus interest or appraised value.
As noted in the accompanying statement of operations, the Company incurred
significant losses in 1998 and 1999. The Company may not be able to
generate enough cash to fund further deficits (see note 11).
The Joint Venture is economically dependent on its stockholders. In the
past, the stockholders have provided additional equity cash infusions,
guarantees of third-party debt, direct lending, and other similar
activities necessary to provide cash or other assets to fund the Joint
Venture's continued operating losses, capital expenditures, and utilization
of licensed technology. There can be no assurances that such support will
continue.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements for the years ended
December 31, 1999 and 1998 include the accounts of United Solar and its
majority-owned subsidiary, USS de Mexico, after elimination of
intercompany accounts and transactions.
(b) Cash Equivalents
Cash equivalents are temporary investments with an original maturity of
less than three months. Substantially all cash and cash equivalents are
interest bearing.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using standard costs, which approximate the first-in,
first-out (FIFO) method. Market is calculated using an average value of
recent sales to unrelated entities.
(d) Machinery, and Equipment
Machinery and equipment are stated at cost. Depreciation on machinery
and equipment, furniture and fixtures, and vehicles is calculated using
accelerated methods over the estimated useful lives of the assets, which
are five to six years. Amortization of tooling is calculated using the
straight-line method over two years. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease
term or the estimated useful life of the asset. Included in machinery
and equipment are capitalized assets which were sold to a third party
(see note 7) and leased back under a sale-leaseback transaction entered
into in 1997.
Expenditures for machinery and other equipment acquired for a particular
research and development project and which have no alternative future
use (in other research and development projects or otherwise) are
charged to product development and research costs as incurred. Machinery
and other equipment which have alternative future uses are capitalized
at cost.
Expenditures for maintenance and repairs are charged to operations.
Expenditures for betterments or major renewals are capitalized and are
depreciated over their estimated useful lives.
(e) Research and Development
Research and product development costs are expensed as incurred.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(f) Royalties
Royalty expenses are accrued when the sales generating the royalty are
recorded. United Solar is responsible for royalties on future sales of
photovoltaic products for a 13-year period which expires in fiscal year
2003. The Joint Venture pays royalties at a rate of 3% of the first $25
million of annual net sales of certain photovoltaic products, 2% of the
next $100 million of annual net sales, and 1% of the annual net sales
above $125 million. Royalty expense was approximately $268,800 and
$273,000 for the years ended December 31, 1999 and 1998, respectively.
The Joint Venture Agreement also provides for a cross-license related to
"know-how" among Canon, ECD, and United Solar. In addition, ECD, United
Solar, and Canon have agreed to an option to obtain certain nonexclusive
licenses related to photovoltaic technology developed after December 31,
1992.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(3) Cash and Cash Equivalents
Cash and cash equivalents were comprised of the following at December 31,
1999 and 1998:
1999 1998
------- -------
Cash (checks issued in excess of available $ (83,828) 4,620
funds)
Money Market Funds 239,084 330,604
------- -------
$ 155,256 335,224
======= =======
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(4) Inventories
Inventories at December 31, 1999 and 1998 consist of the following:
1999 1998
--------- ----------
Raw materials $ 2,115,695 1,903,123
Work in process 1,102,562 1,156,596
Finished goods 826,299 1,758,100
--------- ----------
4,044,556 4,817,819
Lower of cost or market valuation (426,400) (1,010,000)
provision
--------- ----------
Total $ 3,618,156 3,807,819
========= ===========
(5) Machinery and Equipment
Machinery and equipment at December 31, 1999 and 1998 consist of the
following:
1999 1998
--------- ---------
Machinery and equipment $ 5,322,917 5,270,818
Furniture and fixtures 553,221 548,032
Leasehold improvements 1,489,061 1,480,354
Tooling 439,092 433,092
Vehicles 49,802 49,802
Capitalized leased equipment 9,650,000 9,650,000
--------- ---------
17,504,093 17,432,098
Less accumulated depreciation and (8,945,913) (7,003,855)
amortization
----------- -----------
Machinery and equipment, net $ 8,558,180 10,428,243
========== ===========
(6) Related Party Transactions
United Solar incurred $107,324 and $159,401 in various administrative,
equipment, and facility construction costs from ECD in 1999 and 1998,
respectively. United Solar purchased $29,382 of various equipment and
materials from Canon and subsidiaries in 1998. Canon and subsidiaries
provided various management services to United Solar at no charge during
the years ended December 31, 1999 and 1998 (see also notes 7 and 9).
United Solar made product sales to Canon and subsidiaries of $812,707 and
$261,087 in 1999 and 1998, respectively. Revenues from ECD totaled $472,640
and $20,153 in 1999 and 1998, respectively.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
United Solar was awarded a cost-sharing research contract with ECD. The
contract initially ran through May 31, 1997 and which was subsequently
extended, and was being funded 47.6% by National Renewable Energy
Laboratory ("NREL") and 52.4% by United Solar. The amount of funding
recorded as revenue under this contract in 1999 and 1998 was $418,422 and
$84,179, respectively. Included in accounts receivable from stockholder at
December 31, 1999 is $77,435 related to this contract.
Also included in accounts receivable from stockholders at December 31, 1999
are amounts due from Canon and subsidiaries of $13,710 for the purchase of
solar panels. The accounts payable to stockholders represent amounts
payable to ECD of $504,078 and $395,926 at December 31, 1999 and 1998,
respectively.
Long-term note payable at December 31, 1999 and 1998 consisted of a term
loan from Canon in the amount of $2,500,000. Interest is calculated at the
rate of 6.21% per annum, and the loan plus accrued interest is payable in
full at January 17, 2003. Total interest accrued at December 31, 1999 and
1998 was $304,215 and 148,965, respectively.
Short-term notes payable at December 31, 1999, consists of a $2,500,000
draw on a revolving line of credit provided by ECD and $900,000 in advances
from ECD. Interest on the line of credit does not begin accruing until July
1, 2000. Interest on the advances is calculated at 9.75% per month. Total
interest accrued at December 31, 1999 for the advances was $18,772.
(7) Leases
United Solar has noncancelable operating leases for its corporate facility
in Troy, Michigan, a warehouse facility in San Diego, California, and its
maquiladora operation in Tijuana, Mexico. Rent expense for the years ended
December 31, 1999 and 1998 was $820,012 and $849,605, respectively.
At December 31, 1999, future minimum lease payments under noncancelable
operating leases are as follows:
2000 $ 773,099
2001 746,334
2002 746,334
2003 745,048
2004 and thereafter 977,672
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Company is also obligated under a capital lease for certain machinery
and equipment. Under the terms of the agreement, United Solar will make 43
monthly payments of $120,475 from the period November 21, 1997 to June 21,
2001, and 42 monthly payments of $174,733 from the period July 21, 2001
until the lease termination date of December 21, 2004, at which time United
Solar can repurchase the assets for the nominal value of $1.00. The lease
is guaranteed by Canon, and as a result, Canon has a lien on United Solar's
assets. Future minimum capital lease payments as of December 31, 1999 are:
Year ending December 31:
2000 $ 1,445,703
2001 1,771,249
2002 2,096,795
2003 2,096,795
2004 2,096,795
------------
Total minimum lease payments 9,507,337
Less amount representing interest at
6.93% 1,593,301
------------
Present value of net minimum
capital lease payments 7,914,036
Less current maturities of capital
lease obligations 926,315
------------
Capital lease obligations,
less current maturities $ 6,987,721
============
The Company subleases its warehouse space in San Diego, California to a
third party. The operating lease expires April 30, 2000 and requires
monthly payments of $6,387 plus common area maintenance fees and real
property taxes during the year ended December 31, 1999 and $6,025 during
the year ended December 31, 1998. Lease revenue recorded in 1999 and 1998
was $93,552 and $12,050, respectively.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(8) Income Taxes
At December 31, 1999, United Solar had available net operating loss (NOL)
carryforwards for federal income tax purposes of approximately $66,500,000.
The carryforwards expire as follows:
Fiscal year:
2005 $ 2,900,000
2006 5,300,000
2007 7,600,000
2008 7,700,000
2009 7,500,000
2010 7,600,000
2011 9,300,000
2012 1,400,000
2013 10,400,000
2019 6,800,000
------------
$ 66,500,000
=============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1999 and 1998 are presented
below.
1999 1998
---------- ----------
Deferred tax assets:
Accounts receivable allowance $ 41,000 14,000
Inventory reserve 157,000 343,000
Warranty accrual 75,000 68,000
Intangibles 1,290,000 1,490,000
NOL and general business credits carryforwards 23,399,000 20,340,000
Other 136,000 81,000
------------ ----------
Total gross deferred tax assets 25,098,000 22,336,000
----------- ----------
Deferred tax liabilities:
Government contracts 153,000 --
Excess tax over book depreciation 464,000 426,000
----------- ----------
Total gross deferred tax liabilities 617,000 426,000
----------- ----------
Net deferred tax assets 24,481,000 21,910,000
Less valuation allowance (24,481,000) (21,910,000)
------------ ------------
Net deferred tax assets $ -- --
========== ==========
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The net changes in the total valuation allowance for the years ended
December 31, 1999 and 1998 were an increase of $2,571,000 and $208,000,
respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers projected future
taxable income and tax planning strategies in making this assessment. Based
upon the level of historical losses and projections for future taxable
income over the periods during which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
not realize the benefits of these deferred tax assets.
(9) Research Contracts
United Solar was awarded a follow-on cost-sharing contract with NREL in
August 1994. The final phase ended February 28, 1998. The total amount of
the contract is $3,106,578, which was funded 47.6% by NREL and 52.4% by
United Solar. Amounts billed to NREL and recognized as revenues under the
contract in 1998 was $110,488. Included in accounts receivable - contracts
at December 31, 1998 was $14,769 related to this contract.
Similarly, United Solar was awarded a separate cost-sharing contract with
NREL in February 1995. The last phase ran through February 1, 1998. The
total amount of the three-year contract was $3,985,786, which was funded
50% by NREL and 50% by United Solar. Amounts billed to NREL and recognized
as revenue under this contract in 1998 was $163,210. Included in accounts
receivable - contracts at December 31, 1998 was $51,230 related to this
contract.
United Solar was awarded a follow-on cost-sharing contract with NREL in
March 1998. Phase I runs through September 30, 1999. The total amount of
the 38-month contract is $5,560,000, which is being funded 50% by NREL and
50% by United Solar. Amounts billed to NREL and recognized as revenues
under contract in 1999 and 1998 were $783,763 and $902,557, respectively.
Included in accounts receivable - contracts at December 31, 1999 and 1998
is $128,322 and $297,667, respectively, related to this contract.
In addition, United Solar is working with the United States Department of
Energy ("DOE") on two separate contracts, one as the prime contractor and
one as a subcontractor. Amounts billed to DOE and recognized as revenues
under the contracts in 1999 and 1998 were $540,715 and $481,501,
respectively. Included in accounts receivable - contracts at December 31,
1999 and 1998 is $9,413 and $161,990, respectively.
United Solar is working with Fokker Space ("Fokker") under a cost-sharing
contract. The total amount of the contract is estimated at $1,200,000,
which is funded 50% by Fokker and 50% by United Solar. Amounts billed to
Fokker and recognized as revenues under contract in 1999 were $400,000.
As described in note 6, United Solar was engaged in a cost-sharing contract
with ECD in 1998.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(10) Defined Contribution Pension Plan
United Solar has established a 401(k) pension plan for all full-time
employees. The plan allows eligible participants to contribute up to 15% of
their gross wages. United Solar provides a matching contribution of 50% of
employee contributions, limited to 4% of gross wages. United Solar's
expense under the plan for 1999 and 1998 was $53,951 and $57,897,
respectively.
(11) Liquidity
As noted in the accompanying financial statements, the Company has suffered
recurring losses from operations. Further, the Company has a significant
accumulated deficit and stockholders deficit and continues to sell its
products for small profits or at a gross loss. The Company has previously
obtained capital investment and debt funding from its stockholders.
Additionally, the Company has relied on the stockholder guarantees for debt
and lease financing.
(12) Subsequent Event
On April 4, 2000 various agreements were entered into by and among the
stockholders of the Company and N.V. Bekaert S.A. ("Bekaert"). These
agreements provide for, among other things, (1) a restructuring of the
ownership interests in the Company in which Bekaert infused additional cash
for an equity interest in the Company, (2) the creation of a new minority
interest subsidiary, which will be owned by the Company and Bekaert; and
(3) the purchase of a new manufacturing facility from ECD.
These interrelated transactions are intended to provide sufficient
liquidity for the Company's operations through 2000.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Unaudited Consolidated Balance Sheets
Quarters Ended March 31, 2000 and December 31, 1999
<PAGE>
UNITED SOLAR SYSTEMS CORP. AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and Energy Conversion Devices, Inc.)
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
Unaudited
----------------------------
2000 1999
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 162,087 $ 155,256
Accounts receivable:
Trade 2,204,179 1,695,819
Stockholders 61,523 91,145
Contracts 193,214 422,954
Inventories 3,911,701 3,618,156
Prepaid expenses 321,293 380,440
Other current assets 50,333 16,780
----------- -----------
Total current assets 6,904,330 6,380,550
Machinery and equipment, net 8,133,138 8,558,180
Other assets 236,885 234,703
----------- -----------
$15,274,353 $15,173,433
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable - stockholder 5,500,000 3,400,000
Current maturities of capital lease obligations 942,456 926,315
Accounts payable:
Trade 2,279,481 2,318,064
Stockholders 547,860 504,078
Accrued expenses 1,386,658 1,354,908
Deferred revenue 0 0
----------- -----------
Total current liabilities 10,656,455 8,503,365
Capital lease obligations less current maturities 6,745,967 6,987,721
Notes payable - stockholder 2,500,000 2,500,000
----------- -----------
Total liabilities 19,902,422 17,991,086
Stockholders' equity (deficit):
Common stock:
Series A, par value $0.01: authorized 3,000,000 shares;
issued and outstanding 2,924,558.85 shares 29,245 29,245
Series B, par value $0.01; authorized 3,000,000 shares;
issued and outstanding 2,924,558.85 shares 29,245 29,245
Series C, par value $0.01; authorized 500 shares;
issued and outstanding 200 shares 2 2
----------- -----------
Total common stock 58,492 58,492
Additional paid-in capital 58,939,336 58,939,336
Accumulated deficit (63,625,897) (61,815,481)
----------- -----------
Total stockholders' equity (deficit) (4,628,069) (2,817,653)
----------- -----------
Commitments and contingencies
$15,274,353 $15,173,433
=========== ===========
</TABLE>
<PAGE>
UNITED SOLAR SYSTEMS CORP. AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and Energy Conversion Devices, Inc.)
Consolidated Statements of Operations
Three months ended March 31, 2000 and 1999
2000 1999
------------ ------------
Revenues $ 3,056,668 $ 3,034,580
Cost of Sales 3,393,496 3,461,166
------------ ------------
Gross loss (336,828) (426,586)
------------ ------------
Research and development expenses 620,508 805,027
General and administrative expenses 379,289 289,172
Sales and marketing expenses 254,036 213,060
----------- ------------
Total operating expenses 1,253,833 1,307,259
------------ ------------
Operating loss (1,590,661) (1,733,845)
Other income (expense)
Interest income 3,239 2,033
Interest expense (224,583) (205,415)
Foreign exchange loss 773 (1,640)
Other, net 816 312
------------ ------------
Net loss $(1,810,416) $(1,938,555)
============ ============
<PAGE>
UNITED SOLAR SYSTEMS CORP. AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and Energy Conversion Devices, Inc.)
Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
Unaudited
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,810,416) $(1,938,554)
Adjustments to reconcile net loss used in
operating activities
Depreciation 450,561 486,592
Changes in assets and liabilities:
Accounts receivable - trade (508,360) (204,689)
Accounts receivable - stockholders 29,622 (189,212)
Accounts receivable - contracts 229,740 91,184
Inventories (293,545) 1,017,217
Prepaid expenses 59,147 45,224
Other current assets (33,553) (42,682)
Other assets (2,182) (2,639)
Accounts payable - trade (38,583) (507,674)
Accounts payable - stockholders 43,782 3,486
Accrued expenses 31,750 (102,858)
Deferred revenue 0 71,500
------------ ------------
Net cash used in operating activities (1,842,037) (1,273,105)
------------ ------------
Cash flows used in investing activities:
Capital expenditures (25,519) (10,670)
------------ ------------
Net cash used in investing activities (25,519) (10,670)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable - stockholder 2,100,000 1,650,000
Principal payments under capital lease obligations (225,613) (210,550)
------------ ------------
Net cash provided by financing activities 1,874,387 1,439,450
------------ ------------
Net decrease in cash and cash equivalents 6,831 155,675
Cash and cash equivalents at beginning of the period 155,256 335,224
------------ ------------
Cash and cash equivalents at end of the period $ 162,087 $ 490,899
============ ============
</TABLE>
