SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the period ended SEPTEMBER 30, 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.)
1675 WEST MAPLE ROAD, TROY, MICHIGAN 48084
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 280-1900
-----------------------------
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of November 10, 2000, there were 219,913 shares of Class A Common
Stock, 430,000 shares of Class B Common Stock and 18,720,319 shares of Common
Stock outstanding.
Page 1 of 34 pages
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
----------------------------
2000 1999
----------- -----------
REVENUES
Product sales $ 3,191,564 $ 1,870,167
Royalties 875,636 663,155
Revenues from product development agreements 5,093,476 3,917,554
Revenues from license and other agreements 300,000 400,000
Other 673,434 729,196
----------- -----------
TOTAL REVENUES 10,134,110 7,580,072
EXPENSES
Cost of product sales 3,194,559 2,350,697
Cost of revenues from product development
agreements 4,560,600 3,637,768
Product development and research 2,379,340 3,132,601
Patents including patent defense 990,607 473,717
Operating, general and administrative 2,101,699 1,419,130
----------- -----------
TOTAL EXPENSES 13,226,805 11,013,913
----------- -----------
LOSS FROM OPERATIONS (3,092,695) (3,433,841)
OTHER INCOME (EXPENSE):
Interest income 1,554,012 226,459
Interest expense (220,693) (98,793)
Equity loss in joint ventures (206,502) (560,000)
Minority interest share of losses 94,900 -
Other non-operating income (net) 126,014 121,035
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 1,347,731 (311,299)
----------- ------------
NET LOSS $(1,744,964) $(3,745,140)
============ ============
BASIC NET LOSS PER SHARE $ (.09) $ (.28)
============ ============
DILUTED NET LOSS PER SHARE $ (.09) $ (.28)
============ ============
See notes to consolidated financial statements.
2
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of
$46,674,000 at September 30, 2000 and
$44,386,000 at June 30, 2000 $ 46,681,653 $ 44,592,017
Investments 47,006,928 44,723,500
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$579,000 at September 30, 2000 and
at June 30, 2000) 5,401,559 6,915,578
Amounts due from related parties 13,952,595 9,149,942
Inventories 990,414 994,077
Other 592,768 302,413
-------------- --------------
TOTAL CURRENT ASSETS 114,625,917 106,677,527
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 312,588 312,588
Buildings and improvements 3,912,957 3,865,506
Machinery and other equipment (including construction
in progress of approximately $517,000 and $578,000
at September 30, 2000 and June 30, 2000) 19,052,170 18,808,002
Capitalized lease equipment 4,734,653 4,734,653
-------------- --------------
28,012,368 27,720,749
Less accumulated depreciation
and amortization (22,006,068) (21,459,477)
--------------- ---------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 6,006,300 6,261,272
Investments in EV Global and Innovative Transportation
Systems (NOTE A) 2,639,716 2,639,716
Long-Term Note Receivable - Bekaert ECD Solar Systems 9,783,988 9,631,495
JOINT VENTURES (NOTE D)
Bekaert ECD Solar Systems 21,949,762 22,394,868
Texaco Ovonic Fuel Cell Company - -
GM Ovonic - -
Ovonyx - -
Ovonic Media - -
Rare Earth Ovonic - China - -
Sovlux - Russia - -
OTHER ASSETS 1,407,085 1,300,764
-------------- --------------
TOTAL ASSETS $ 156,412,768 $ 148,905,642
============== ==============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
2000 2000
------------- ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 7,176,249 $ 6,151,372
Salaries, wages and amounts withheld
from employees 2,426,628 1,998,684
Deferred revenues under business
agreements (NOTE A) 9,762,146 6,537,975
Current installments on long-term
liabilities 2,638,262 2,200,039
------------ ------------
TOTAL CURRENT LIABILITIES 22,003,285 16,888,070
LONG-TERM LIABILITIES 9,442,308 10,427,858
LONG-TERM NOTES PAYABLE 9,783,988 9,631,495
DEFERRED GAIN 558,807 669,072
NONREFUNDABLE ADVANCE ROYALTIES (NOTE C) 3,933,963 3,938,667
------------ ------------
TOTAL LIABILITIES 45,722,351 41,555,162
NEGATIVE GOODWILL (NOTE D) 3,031,818 3,148,426
MINORITY INTEREST (NOTE D) 5,330,594 5,425,494
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 - 18,445,466 shares at
September 30, 2000 and 18,098,646
shares at June 30, 2000 184,455 180,986
Additional paid-in capital 329,224,022 324,293,312
Accumulated deficit (223,929,044) (222,184,080)
Accumulated other comprehensive income 242,913 50,783
Unearned Compensation on Class B Convertible
Common Stock (3,400,840) (3,570,940)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 102,328,005 98,776,560
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $156,412,768 $148,905,642
============ ============
See notes to consolidated financial statements.
4
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,744,964) $(3,745,140)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 553,617 530,865
Equity loss in joint ventures 206,502 560,000
Profit deferred on sales to Bekaert ECD Solar Systems 238,604 -
Stock Options issued to executive for services rendered - 113,250
Stock issued for services rendered 170,100 212,925
Amortization of deferred gain (110,265) (110,265)
Negative goodwill amortization (116,608) -
Minority interest (94,900) -
Other (4,704) (21,989)
Changes in working capital:
Accounts receivable and amounts due from related parties (3,288,634) (1,263,281)
Inventories 3,663 (11,134)
Other assets (396,676) 55,931
Accounts payable and accrued expenses 1,452,821 456,216
Deferred revenues under business agreements 3,224,171 (103,638)
------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 92,727 (3,326,260)
INVESTING ACTIVITIES:
Investment in United Solar - (300,000)
Purchases of capital equipment (298,644) (178,112)
Purchases of investments (2,091,298) -
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (2,389,942) (478,112)
FINANCING ACTIVITIES:
Principal payments under short-term and
long-term debt obligations and capitalized
lease obligations (547,327) (350,728)
Proceeds from sale of common stock upon
exercise of stock options and warrants 4,934,178 30,050
------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,386,851 (320,678)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,089,636 (4,125,050)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,592,017 19,076,983
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $46,681,653 $14,951,933
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
-------------------------
2000 1999
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 220,693 $ 98,793
See notes to consolidated financial statements.
6
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2000
---------------------------------------------------------------
NOTE A - Basis of Presentation
------------------------------
Information for the three months ended September 30, 2000 (Fiscal 2001)
and 1999 (Fiscal 2000) is unaudited, but includes all adjustments which Energy
Conversion Devices, Inc. (ECD) considers necessary for a fair presentation of
financial condition, cash flows and results of operations.
In accordance with the instructions for the completion of the Quarterly
Report on Form 10-Q, certain information and footnotes necessary to comply with
Generally Accepted Accounting Principles (GAAP) have been condensed or omitted.
These financial statements should be read in conjunction with ECD's 2000 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; its
approximately 91%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic
Battery), a company formed to develop and commercialize ECD's Ovonic NiMH
battery technology; and, effective April 11, 2000, its 81%-owned subsidiary
United Solar Systems Corp. (United Solar) (see Note D) (collectively "the
Company"). The remaining shares of Ovonic Battery are owned by Honda Motor
Company, Ltd. (Honda), Sanoh Industrial Company, Ltd. (Sanoh) and Sanyo
Electric Co., Ltd. (Sanyo). The remaining shares of United Solar are owned by
N.V. Bekaert S.A. and its U.S.-based subsidiary (Bekaert). No minority
interest related to Ovonic Battery is recorded in the consolidated financial
statements because there is no additional funding requirement by the minority
shareholders. See Note D for discussion of these ventures.
The Company has a number of strategic alliances and has, as of September
30, 2000, five major investments accounted for by the equity method: (i) Bekaert
ECD Solar Systems LLC (Bekaert ECD Solar Systems), United Solar's 40% joint
venture with Bekaert (ECD has an approximate 50% interest in the combined United
Solar/Bekaert ECD Solar Systems operations); (ii) GM Ovonic (40%), Ovonic
Battery's joint venture with General Motors to manufacture and sell the
Company's proprietary NiMH batteries for electric, hybrid electric and fuel cell
electric vehicle applications. On October 12, 2000, ECD announced that Texaco
and Ovonic Battery signed a Memorandum of Understanding (MOU) to continue the
business of GM Ovonic in a new entity, to be named Texaco Ovonic, LLC, in which
General Motors' interest was to be converted and restructured so that ECD and
Texaco each will have a 50% interest in the joint venture. The MOU was signed in
conjunction with an MOU signed between Texaco and GM on October 10, 2000; (iii)
Ovonyx, Inc. (Ovonyx), a 41.7%-owned joint venture with Mr. Tyler Lowrey, Intel
Corporation (Intel) and other investors, to commercialize ECD's Ovonic Unified
Memory (OUM) technology; (iv) Ovonic Media L.L.C. (Ovonic Media), a joint
venture owned 51% by General Electric (GE) through its GE Plastics business unit
and 49% by ECD; and (v) Texaco Ovonic Fuel Cell Company LLC, a 50%-owned joint
venture with Texaco to further develop and commercialize Ovonic Regenerative
Fuel Cells(TM) technology. 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>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation - (Continued)
--------------------------------------------
Upon consolidation, all intercompany accounts and transactions are
eliminated.
Certain items for the three months ended September 30, 1999 have been
reclassified to be consistent with the classification of items in the three
months ended September 30, 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.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" (FIN 44), which contains rules designed to clarify the application
of APB 25. FIN 44 was effective on July 1, 2000 and the Company adopted it at
that time. The adoption of FIN 44 had no impact on the earnings or the financial
position of the Company.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101), which clarifies certain existing accounting principles for the timing
of revenue recognition and its classification in the financial statements. The
SEC delayed the required implementation date of SAB 101 by issuing Staff
Accounting Bulletins No. 101A, "Amendment: Revenue Recognition in Financial
Statements," and No. 101B, "Second Amendment: Revenue Recognition in Financial
Statements," in March and June 2000, respectively. As a result, the SAB 101 will
not be effective for the Company until the quarter ending June 30, 2001. The
Company believes the adoption of SAB 101 will not be material to the earnings
and financial position of the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," amended by SFAS No. 138, "Accounting for
Derivative Instruments and Hedging Activities, an amendment to SFAS No. 133."
The Company adopted SFAS 133 on July 1, 2000. The Statement requires the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of SFAS 133 had no impact on
the earnings or the financial position of the Company.
8
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation - (Continued)
--------------------------------------------
Other Comprehensive Income (Loss)
The Company's total comprehensive loss was as follows:
Three Months Ended
September 30,
----------------------------------
2000 1999
------------- -------------
Net Loss $ (1,744,964) $ (3,745,140)
OTHER COMPREHENSIVE LOSSES:
Unrealized gains on securities 192,130 -
------------- -------------
COMPREHENSIVE LOSS $ (1,552,834) $ (3,745,140)
============= =============
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 and Innovative
Transportation on the cost method basis of accounting. On October 3, 2000, ECD
invested an additional amount of $909,000 in Innovative Transportation,
increasing its ownership interest to 19%.
Financial Instruments
---------------------
The Company considers the carrying value of its financial instruments to
be a reasonable estimate of fair value.
Translation Gains and Losses
----------------------------
Since most of the Company's contracts and transactions are denominated and
settled in U.S. dollars, there are no significant foreign currency gains or
losses.
9
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation - (Continued)
--------------------------------------------
Accounts Receivable
The following tabulation shows the component elements of accounts
receivable from long-term contracts, royalties and other programs:
September 30, June 30,
2000 2000
------------------------------
U.S. Government:
Amounts billed $ 867,213 $ 758,930
Unbilled 1,177,754 750,131
----------- -----------
Total 2,044,967 1,509,061
----------- -----------
Commercial Customers:
Amounts billed 1,560,256 2,974,176
Related party billed
- Bekaert ECD Solar Systems 8,553,730 939,854
- Ovonyx 540,107 444,868
- GM Ovonic 270,369 433,760
Royalties 1,251,933 1,847,485
Due per contracts 106,020 11,400
Related party unbilled
- GM Ovonic 1,395 1,688
- Ovonyx 33,521 36,665
- Bekaert ECD Solar Systems 2,216,473 7,144,030
- Rare Earth Ovonic joint ventures - 149,077
- Texaco Ovonic joint ventures 2,337,000 -
Other unbilled 124,633 212,745
----------- -----------
Total 16,995,437 14,195,748
----------- -----------
Other 892,750 939,711
----------- -----------
Allowance for Uncollectible Accounts (579,000) (579,000)
------------ ------------
TOTAL $19,354,154 $16,065,520
=========== ===========
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 September 30, 2000 and June 30, 2000. 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.
10
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
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, photovoltaic products, 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 and United Solar) are as
follows:
September 30, June 30,
2000 2000
------------- -------------
Finished products $ 40,290 $ 37,785
Work in process 590,924 557,732
Raw materials 359,200 398,560
----------- ----------
$ 990,414 $ 994,077
========== ==========
Product Sales
-------------
Product sales include battery electrodes, revenues related to building of
battery packs, and revenues related to machine-building contracts. In addition,
after April 11, 2000, product sales include photovoltaic products. Revenues
related to machine-building contracts are recognized on the
percentage-of-completion method of accounting using the costs incurred to date
as a percentage of the total expected costs. All other product sales are
recognized when the product is shipped. In certain cases, low sales volumes,
previously related to negative electrodes, combined with high fixed costs result
in losses.
Royalties
---------
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the sale of the respective licensed product. In
several instances, the Company has received cash payments for nonrefundable
advance royalty payments which are creditable against future royalties under the
licenses. Advance royalty payments are deferred and recognized in revenues as
the creditable sales occur, the underlying agreement expires, or when the
Company has demonstrable evidence that no additional royalties will be
creditable and, accordingly, the earnings process is completed.
For both ECD and Ovonic Battery royalties, there are royalty trust or
contingent fee arrangements whereby the Company is obligated to pay a trust 25%
of optical memory royalties
11
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation - (Continued)
--------------------------------------------
received and a law firm 25% of Ovonic Battery royalties received relative to
consumer battery licenses entered into in 1995 in settlement of an International
Trade Commission action.
Product Development, Patents and Technology
-------------------------------------------
Product development and research costs are expensed as they are incurred
and, as such, the Company's investments in its technologies and patents are
recorded at zero in its financial statements, regardless of their values. The
technology investments are the bases by which the Company is able to enter into
license and joint venture agreements.
Business Agreements
-------------------
A substantial portion of revenues is derived through business agreements
for the development and/or commercialization of products based upon the
Company's proprietary technologies. The following describes two types of such
agreements.
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 recognized
until
12
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation - (Continued)
--------------------------------------------
commencement of production or the resolution of uncertainties. Generally,
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. Revenues 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 and General and Administrative Allocations
---------------------------------------------------
The Company allocates overhead and general and administrative expenses 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 revenues related to
services provided 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 Nonoperating Income
-------------------------
Other nonoperating income-net consists of the amortization of deferred
gains and rental income.
13
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE B - Product Sales, Royalties, Revenues from Product Development
-----------------------------------------------------------------------
Agreements and License and other Agreements
-------------------------------------------
The Company has product sales and business agreements with third parties
for which royalties and revenues are included in the consolidated statements of
operations. A summary of all of the Company's revenues follows:
Three Months Ended
September 30,
---------------------------
2000 1999
----------- -----------
Product Sales:
Negative and positive electrodes $ 69,569 $ 589,525
Battery packs 178,075 552,861
Machine building 1,562,877 727,781
Photovoltaics 1,381,043 -
----------- -----------
$ 3,191,564 $ 1,870,167
=========== ===========
Royalties:
Battery technology $ 848,997 $ 648,900
Optical Memory 26,639 14,255
----------- -----------
$ 875,636 $ 663,155
=========== ===========
Revenues from product development agreements:
Photovoltaics $ 870,443 $ 597,353
Battery technology 794,228 1,978,811
Optical Memory 744,865 531,425
Hydrogen 1,786,940 746,704
Fuel cells 897,000 -
Other - 63,261
----------- -----------
$ 5,093,476 $ 3,917,554
=========== ===========
License and other agreements:
Battery $ 300,000 $ 400,000
----------- -----------
$ 300,000 $ 400,000
=========== ===========
The following table presents revenues by country based on the location of
the customer:
Three Months Ended
September 30,
-----------------------------
2000 1999
----------- -----------
United States $ 8,130,358 $ 5,920,435
China 1,198,037 -
Germany 38,001 -
Japan 735,783 893,805
Hong Kong 14,576 8,700
Netherlands - 562,500
Other countries 17,355 194,632
----------- -----------
$10,134,110 $ 7,580,072
=========== ===========
14
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Nonrefundable Advance Royalties
----------------------------------------
At September 30, 2000 and June 30, 2000, the Company deferred recognition
of revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
September 30, June 30,
2000 2000
------------- ----------
Battery $1,913,331 $1,913,331
Optical Memory 2,020,632 2,025,336
----------- ----------
$3,933,963 $3,938,667
=========== ==========
During the three months ended September 30, 2000 and 1999, $4,704 and
$24,696, respectively, of creditable royalties earned were recognized as
revenue. There are no obligations in connection with any of the advance royalty
agreements which require the Company to incur any additional costs.
NOTE D - Joint Ventures and Investments
---------------------------------------
Joint Ventures
--------------
Intellectual property resulting from the Company's investments in its
technologies is 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.
The Company's investments in its joint ventures, other than Bekaert ECD
Solar Systems, 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.
15
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
United Solar/Bekaert ECD Solar Systems
--------------------------------------
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 operates through two related
companies: United Solar, which is owned 81% by ECD and 19% by Bekaert, and a new
assembly, marketing and sales company, Bekaert ECD Solar Systems, which is owned
60% by Bekaert and 40% by United Solar. In April 2000, at the closing of the
aforementioned transactions, ECD received a total of $7,000,000 from United
Solar and Bekaert ECD Solar Systems. 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 11,
2000, ECD is consolidating United Solar in ECD's financial statements. Prior to
the transaction, United Solar's fiscal year-end was December 31.
ECD valued the acquisition of Canon's interest in United Solar at
$13,214,630, which includes the issuance of 700,000 shares of ECD Common Stock
which was valued at $12,758,000 plus the $456,630 balance in ECD's investment
account for United Solar on April 11, 2000. The acquisition resulted in ECD's
ownership interest in United Solar to increase from 49.98% to 81%. The Company
recorded the acquisition under the purchase method of accounting and allocated
the purchase price for this acquisition to the net assets of United Solar. The
value of the net assets acquired exceeded the purchase price resulting in
negative goodwill, which resulted in a reduction of consolidated expenses. The
Company allocated this negative goodwill to reduce United Solar's long-term
assets (capital equipment) and applicable depreciation expense. The remaining
negative goodwill ($3,300,000) is being amortized over seven years on a
straight-line basis.
16
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
The following sets forth certain financial data regarding Bekaert ECD
Solar Systems that are derived from Bekaert ECD Solar Systems' financial
statements.
BEKAERT ECD SOLAR SYSTEMS
STATEMENT OF OPERATIONS
-------------------------
Three Months Ended
September 30, 2000
------------------
(Unaudited)
Revenues $ 1,233,891
Operating Expenses
Cost of Sales 1,148,407
General and administrative 678,962
-----------
Total 1,827,369
Other Income (net) 76,147
------------
Net Loss $ (517,331)
============
BEKAERT ECD SOLAR SYSTEMS BALANCE SHEET
---------------------------------------
September 30, 2000
------------------
(Unaudited)
Current Assets:
Cash and Cash Equivalents $14,656,238
Inventory 7,083,299
Other Current Assets 23,125,241
-----------
Total Current Assets 44,864,778
Property, Plant and Equipment (Net) 1,968,184
Other Assets 5,870,799
-----------
Total Assets $52,703,761
===========
Current Liabilities:
Accounts Payable and Accrued Expenses $ 9,369,909
Note Payable-ECD 9,783,988
-----------
Total Liabilities 19,153,897
Total Members' Equity 33,549,864
-----------
Total Liabilities and Members' Equity $52,703,761
============
17
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
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 and hybrid electric vehicles. General Motors has a 60% interest and
Ovonic Battery has a 40% interest in this joint venture. Ovonic Battery has
contributed intellectual property, licenses, production processes, know-how,
personnel and engineering services pertaining to Ovonic NiMH battery technology
to the joint venture. The contribution of General Motors consists of operating
capital, plant, equipment and management personnel necessary for the production
of batteries. On October 12, 2000, ECD announced that Texaco and Ovonic Battery
signed a Memorandum of Understanding (MOU) to continue the business of GM Ovonic
in a new entity, to be named Texaco Ovonic, LLC, in which General Motors'
interest was to be converted and restructured so that ECD and Texaco each will
have a 50 percent interest in the joint venture. The MOU was signed in
conjunction with an MOU signed between Texaco and GM on October 10, 2000.
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 strategic
alliance, Ovonyx (formed on June 23, 1999 and initially owned 50% by ECD, with
the balance owned by Mr. Lowrey and his affiliate), to commercialize ECD's
Ovonic Unified Memory - a unique thin-film, nonvolatile, solid-state 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 nonexclusive royalty-bearing license and began a joint
development program utilizing one of Intel's wafer fabrication facilities.
Presently, ECD owns 41.7% of Ovonyx and Mr. Lowrey and his affiliate own 41.7%
of Ovonyx.
ECD recorded revenues from Ovonyx of $94,000 for the three months ended
September 30, 2000, compared to $593,000 in the three months ended September 30,
1999, representing services performed for its operations which commenced on
January 15, 1999.
18
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
The following sets forth certain financial data regarding Ovonyx that are
derived from Ovonyx's financial statements.
OVONYX, INC. STATEMENT OF OPERATIONS
------------------------------------
Three Months Ended
August 31, 2000
------------------
Revenues $1,025,168
Operating Expenses
Product development 450,900
Patent 13,440
General and administrative 184,905
----------
Total 649,245
Other Income 98,784
----------
Net Income $ 474,707
==========
OVONYX, INC. BALANCE SHEET
--------------------------
August 31, 2000
-----------------------
Current Assets:
Cash and Cash Equivalents $2,047,725
Investments 5,234,136
Accounts Receivable 112,731
Other Current Assets 53,908
----------
Total Current Assets 7,448,500
Property, Plant and Equipment (Net) 10,707
----------
Total Assets $7,459,207
==========
Current Liabilities:
Accounts Payable and Accrued Expenses $ 571,528
----------
Total Current Liabilities 571,528
Total Stockholders' Equity 6,887,679
----------
Total Liabilities and Stockholders' Equity $7,459,207
==========
19
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
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, Inc. (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.
Innovative Transportation, a German company formed to manufacture
battery-electric, hybrid-electric and fuel cell electric vehicles, was 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. At the inception of Innovative Transportation, ECD's
interest was 5.7%. ECD's interest increased to 11.7% as a result of an
additional investment of $400,000. On October 3, 2000, ECD invested an
additional amount of $909,000 in Innovative Transportation, increasing its
ownership interest to 19%.
Innovative Transportation is in its formative stage and, as such, there
are no financial statements currently available.
Rare Earth Ovonic
During the year ended June 30, 2000, ECD signed an agreement with Rare
Earth High-Tech Co. Ltd. (Rare Earth High-Tech) of Baotou Steel Company of Inner
Mongolia, China. Rare Earth High-Tech is one of the principal suppliers of rare
earth raw materials to NiMH battery material manufacturers around the world and,
together with its affiliates, is believed to own approximately half of the
world's reserves of these rare earth materials. The agreement called for the
creation of joint ventures for manufacturing and licensing of advanced NiMH
battery technology, hydrogen storage alloy powders, advance Ovonic nickel
hydroxide materials and production equipment for NiMH batteries. Three of the
contemplated five joint ventures have been started. ECD's subsidiary, Ovonic
Battery, will contribute technology for its 19% interest in each of these joint
ventures.
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. This joint venture is owned 51% by General Electric through its GE
Plastics business unit and 49% by ECD. ECD has
20
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
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.
The following sets forth certain financial data regarding Ovonic Media
that are derived from Ovonic Media's financial statements.
OVONIC MEDIA STATEMENT OF OPERATIONS
------------------------------------
Three Months Ended
September 30, 2000
--------------------
(Unaudited)
Revenues $ -
Operating expenses:
Product development 510,862
General and administrative 100,824
---------
Total expenses 611,686
---------
Loss from operations (611,686)
Interest expense (2,922)
----------
Net Loss $(614,608)
==========
OVONIC MEDIA BALANCE SHEET
--------------------------
September 30, 2000
-------------------
(Unaudited)
Current Assets:
Advances to ECD $ 697,694
----------
Total Current Assets 697,694
Property, Plant and Equipment (Net) 244,154
----------
Total Assets $ 941,848
==========
Current Liabilities:
Current Portion of Equipment Lease $ 44,602
----------
Total Liabilities 44,602
Capital Contributions 2,061,018
Accumulated Deficit (1,163,772)
-----------
Total Members' Equity 897,246
----------
Total Liabilities and Members' Equity $ 941,848
==========
21
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
Texaco Ovonic Fuel Cell Company
In September 2000, ECD and Texaco Energy Systems, Inc. (TESI), a wholly
owned subsidiary of Texaco, formed Texaco Ovonic Fuel Cell Company LLC. TESI
will fund initial product and market development estimated to exceed $40
million. The primary use of this funding is to fund a contract from Texaco
Ovonic Fuel Cell to ECD to further develop Ovonic Regenerative Fuel Cells(TM)
technology. The joint venture is owned 50% by TESI and 50% by ECD. ECD has
contributed intellectual property and licenses. TESI will make the
aforementioned cash contribution to the joint venture.
There are no financial statements currently available for Texaco Ovonic
Fuel Cell Company.
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 sustained 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.
There are no financial statements currently available for Sovlux or Sovlux
Battery. Sovlux and Sovlux Battery are in their developmental stage and, as
such, have a history of operating losses.
NOTE E - Net Loss Per Share
---------------------------
Basic net loss per common share is computed by dividing the net loss by
the weighted average number of common shares outstanding. The Company used the
treasury stock method to calculate diluted earnings per share. Potential
dilution exists from stock options and
22
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Net Loss Per Share (Continued)
---------------------------------------
warrants. Weighted average number of shares outstanding and basic and diluted
earnings per share for the three months ended September 30 are computed as
follows:
2000 1999
----------- ----------
Weighted average number of shares outstanding 18,883,836 13,382,719
Net loss $(1,744,964) $(3,745,140)
BASIC NET LOSS PER SHARE $ (.09) $ (.28)
============ ============
Weighted average number of shares outstanding 18,883,836 13,382,719
Weighted average shares for dilutive securities 0 0
------------ -----------
Average number of shares outstanding and
potential dilutive shares 18,883,836 13,382,719
Net loss $(1,744,964) $(3,745,140)
DILUTED NET LOSS PER SHARE $ (.09) $ (.28)
============ ============
Due to the Company's net losses, 2000 and 1999 weighted average shares of
potential dilutive securities of 2,272,395 and 233,540, respectively, were
excluded from the calculations of diluted loss per share as inclusion of these
securities would have been antidilutive to the net loss per share. There were an
additional 1,328,072 potentially dilutive securities which were excluded from
the 1999 calculations of the weighted average shares due to their antidilutive
effect to the net loss per share because of the relationship between the
exercise prices and the average market price of ECD's Common Stock during these
periods.
NOTE F - Business Segments
--------------------------
The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar, and the parent company, ECD. Ovonic Battery is involved in
developing and commercializing battery technology. United Solar is involved in
manufacturing, developing and commercializing photovoltaic technology. ECD is
involved in microelectronics, fuel cells, hydrogen storage technologies, machine
building and photovoltaics. Some general corporate expenses have been allocated
to Ovonic Battery.
23
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Business Segments - (Continued)
----------------------------------------
The Company's operations by business segment were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
<TABLE>
<CAPTION> Consolidating
Ovonic Battery United Solar* ECD Entries Consolidated
-------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues
Three months ended
September 30, 2000 $ 3,421 $ 2,251 $ 5,920 $ (1,458) $ 10,134
September 30, 1999 4,868 - 2,712 - 7,580
Interest Income**
Three months ended
September 30, 2000 $ - $ 31 $ 1,523 $ - $ 1,554
September 30, 1999 - - 226 - 226
Identifiable Assets
Three months ended
September 30, 2000 $ 7,608 $45,793 $130,798 $(27,786) $156,413
September 30, 1999 13,358 - 22,928 - 36,286
Interest Expense**
Three months ended
September 30, 2000 $ 74 $ 147 $ - $ - $ 221
September 30, 1999 97 - 2 - 99
Operating Loss***
Three months ended
September 30, 2000 $(4,606) $ (178) $ 1,421 $ 270 $ (3,093)
September 30, 1999 (2,931) - (503) - (3,434)
Equity in Net Loss of Investee
Under Equity Method
Three months ended
September 30, 2000 $ - $ (206) $ - $ - $ (206)
September 30, 1999 - - (560) - (560)
Depreciation Expense
Three months ended
September 30, 2000 $ 391 $ 439 $ 160 $ (437) $ 553
September 30, 1999 350 - 181 - 531
24
<PAGE>
Consolidating
Ovonic Battery United Solar* ECD Entries Consolidated
-------------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Capital Expenditures
Three months ended
September 30, 2000 $ 74 $ 171 $ 54 $ - $ 299
September 30, 1999 162 - 16 - 178
Investments in Equity
Method Investees
Three months ended
September 30, 2000 $ - $21,950 $ - $ - $ 21,950
September 30, 1999 - - 696 - 696
</TABLE>
------------
* No financial data for United Solar for the three months ended September 30,
1999 were included due to the fact that United Solar financial statements
were not consolidated until after April 11, 2000.
** Excludes intercompany interest.
*** Includes intercompany interest of $1,134 for the three months ended
September 30, 2000, $966 for the three months ended September 30, 1999
charged by ECD to Ovonic Battery in accordance with the agreements between
the parties.
25
<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, 2000, and is qualified in
its entirety by the foregoing. The results of operations for the three months
ended September 30, 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
about our financial condition, results of operations, plans, objectives, future
performance and business. In addition, from time to time we and our
representatives have made or may make forward-looking statements orally or in
writing. The words "may," "will," "believes," "expects," "intends,"
"anticipates," "estimates," and similar expressions have been used in this
Annual Report to identify forward-looking statements.
We have based these forward-looking statements on our current views with
respect to future events and performance. Actual results may differ materially
from those predicted by the forward-looking statements. These forward-looking
statements involve risks, uncertainties, assumptions and the following:
- our continued ability to protect and maintain the proprietary nature
of our technology;
- the willingness and ability of our licensees and joint venture partners
to devote financial resources and manufacturing and marketing
capabilities to commercialize products based on our technologies;
- we are unable to successfully execute our internal business plans;
- we experience performance problems with key suppliers or
subcontractors;
- there are no adverse changes in general economic conditions or in
political or competitive forces;
- competition increases in our industry or markets;
- legal or regulatory proceedings reach unfavorable resolutions;
- there are adverse changes in the securities markets; and
- we suffer the loss of key personnel.
There is also the risk that we incorrectly analyze these risks or that
strategies we develop to address them are unsuccessful.
26
<PAGE>
These forward-looking statements speak only as of the date of this
Quarterly Report. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified in their
entirety by the cautionary statements in this section. Because of these risks,
uncertainties and assumptions, you should not place undue reliance on these
forward-looking statements. We are not obligated to update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended
--------------------------------------------------------------------
September 30, 1999
------------------
The Company has continued to invest to further advance its
technologies. These investments in its technologies have led to historic new
strategic alliances over the past year with Texaco Inc., N.V. Bekaert S.A.
and its U.S.-based subsidiary (Bekaert), Intel Corporation, General Electric
Company (GE), Lockheed Martin Space Electronics and Communications and
China's Rare Earth High-Tech Co. Ltd. of Baotou Steel Company (Rare Earth
High-Tech). According to generally accepted accounting principles as
practiced in the United States (GAAP), the Company was required to report
these investments in its technologies as a loss.
The Company had a net loss in the three months ended September 30, 2000 of
$1,745,000 compared to a net loss of $3,745,000 for the three months ended
September 30, 1999 - an improvement of $2,000,000. The improvement primarily
relates to a $478,000 lower loss on product sales, a $212,000 increase in
revenues from royalties, a $753,000 reduction in unfunded research and
development expenses, a $253,000 improvement in profitability from product
development agreements, a $1,328,000 increase in interest income, and a $354,000
improvement in equity losses from joint ventures, partially offset by higher
patent expense ($517,000) and operating, general and administrative expenses
($683,000). The loss is primarily due to: (i) ongoing product development and
continued market development activities, (ii) fixed costs related to maintaining
and improving the Company's core competencies pertaining to electrode
production, and (iii) ongoing protection of the Company's intellectual property.
In 2000, the Company recorded an equity loss in joint ventures of $207,000 as
required under GAAP. (See NOTE A of Notes to Consolidated Financial Statements.)
Product sales, consisting of positive and negative battery electrodes,
battery packs, photovoltaic products, and machine building, increased 71% to
$3,192,000 in the three months ended September 30, 2000 from $1,870,000 in the
three months ended September 30, 1999. Photovoltaic sales were $1,381,000 in
2000 versus zero in 1999 (United Solar financial statements were consolidated
effective April 11, 2000). Machine-building revenues increased to $1,563,000 in
2000 compared to $728,000 in 1999. The machine-building revenues in 2000 were
applicable to contracts to build production equipment for Bekaert ECD Solar
Systems having 25MW of annual capacity and for equipment for the manufacture of
NiMH batteries for the Rare Earth Ovonic joint ventures. Sales of negative and
positive electrodes decreased $520,000, 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
27
<PAGE>
Company. The Company has continued its development of advanced electrode
materials to be introduced to its customers. Because most battery pack orders
are being filled through GM Ovonic, the Company's battery pack sales decreased
to $178,000 in 2000 versus $553,000 in 1999.
Royalties increased 32% to $876,000 in the three months ended September
30, 2000 from $663,000 in the three months ended September 30, 1999, primarily
due to increased royalties from battery technologies. (See NOTE B - Notes to
Consolidated Financial Statements.)
Revenues from product development agreements, primarily related to the
Company's enabling technologies in NiMH batteries and hydrogen systems,
increased 30% to $5,093,000 in the three months ended September 30, 2000 from
$3,918,000 in the three months ended September 30, 1999. There were total
increases in product development agreements of $3,014,000 which were due to
development programs in 2000 for Texaco Ovonic Fuel Cell Company LLC (Texaco
Ovonic Fuel Cell) ($897,000), Texaco Ovonic Hydrogen Systems LLC (Texaco Ovonic
Hydrogen Systems) ($1,440,000) (see discussion of these joint ventures under
Liquidity and Capital Resources) and United Solar contracts with Department of
Energy (DOE) and Solar Design Associates ($677,000), partially offset by the
successful conclusion of programs with General Motors to develop batteries for
electric and hybrid electric vehicle applications ($0 in 2000 compared to
$1,003,000 in 1999), other hydrogen programs ($0 in 2000 compared to $313,000 in
1999) and decreases in programs with DOE and National Renewable Energy
Laboratory ($444,000 in 2000 compared to $$986,000 in 1999) and National
Institute of Standards and Technology in the Company's battery and optical
memory technologies ($660,000 in 2000 compared to $1,275,000 in 1999).
Revenues from license and other agreements decreased to $300,000 in the
three months ended September 30, 2000 from $400,000 in the three months ended
September 30, 1999. The 2000 revenues consisted of agreements with two
Chinese companies ($250,000 from BYD Battery Co., Ltd. and $50,000 from SANIK
Battery Co., Ltd.).
Other revenues decreased by $56,000 to $673,000 in the three months ended
September 30, 2000 from $729,000 in the three months ended September 30, 1999,
primarily due to decreased billings for work performed for Ovonyx.
The increase in cost of product sales to $3,195,000 in the three months
ended September 30, 2000 from $2,351,000 in the three months ended September 30,
1999 was due to increased level of sales in 2000. The reduced loss on product
sales from $481,000 to $3,000 is a result of cost-reduction measures taken by
the Company and due to the addition of new contracts that are expected to be
profitable. The continuing losses related to low sales of electrode products
were mostly offset by profitable machine building and photovoltaic product
sales. The Company has continued its development of advanced electrode materials
to be introduced to its customers.
The Company incurred expenses of $6,940,000 ($4,561,000 funded and
$2,379,000 unfunded) in the three months ended September 30, 2000 for product
development compared
28
<PAGE>
to expenses of $6,770,000 ($3,638,000 funded and $3,132,000 unfunded) in the
three months ended September 30, 1999. The expenditures were related to all
facets of the Company's technologies.
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 increased to $991,000 in the three months ended
September 30, 2000 from $474,000 in the three months ended September 30, 1999.
The increase in operating, general and administrative expenses to
$2,102,000 in the three months ended September 30, 2000 from $1,419,000 in the
three months ended September 30, 1999 was primarily related to decreased
allocations to research and development expenses and the consolidation of United
Solar's expense in 2000, partially offset by the amortization of negative
goodwill in connection with United Solar.
The change from other income (net) of $1,348,000 in the three months ended
September 30, 2000, compared to other expense (net) of $311,000 in the three
months ended September 30, 1999, was due principally to increased interest
income ($1,554,000 in 2000 compared to $226,000 in 1999) in the three months
ended September 30, 2000.
Liquidity and Capital Resources
As of September 30, 2000, the Company had unrestricted consolidated cash,
cash equivalents and accounts receivable of $113,043,000, an increase of
$7,662,000 from June 30, 2000. As of September 30, 2000, the Company had
consolidated working capital of $92,623,000 compared with a consolidated working
capital of $89,789,000 as of June 30, 2000.
During the three months ended September 30, 2000, $93,000 of cash was
provided by operations. The difference between the net loss of $1,745,000 and
the net cash provided by operations was due to an increase of $3,224,000 in
deferred revenue under business agreements, principally due to advance payments
received from the Rare Earth Ovonic joint ventures and increases of $1,453,000
in accounts payable and accrued expenses, partially offset by an increase of
$3,289,000 in accounts receivable, principally due to new programs with Bekaert
ECD Solar Systems and the new programs with the Texaco Ovonic joint ventures. In
addition, $299,000 of machinery and equipment was purchased or constructed,
principally for the Company's battery operations, during this period.
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 additional 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 bringing the Company's
short-term cash reserves to approximately $90 million and having a significant
positive impact on future cash flows. As part of its long-standing strategy, the
Company has made investments in its technologies which have resulted in enabling
intellectual property and products. It has entered into strategic alliances and
joint
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ventures with some of the world's leading corporations listed below, which
form the basis of a fundamental restructuring of the Company. Highlights are:
- Based on ECD's enabling technologies in NiMH batteries and hydrogen
systems which the Company believes can provide a solution to the
infrastructure requirements of a hydrogen economy, ECD and Texaco Energy
Systems, Inc. (TESI), a wholly owned subsidiary of Texaco, announced
three important agreements:
- On September 21, 2000, ECD and TESI formed Texaco Ovonic Fuel Cell
Company LLC. TESI is funding Texaco Ovonic Fuel Cell in an amount
estimated to exceed $40 million, including initial product and market
development and a multimillion dollar contract from Texaco Ovonic
Fuel Cell to ECD to further develop Ovonic Regenerative Fuel
Cells(TM) technology, validate manufacturing methodologies and
produce production-ready prototypes.
- On October 12, 2000, ECD announced that Texaco and Ovonic Battery
signed a Memorandum of Understanding to continue the business of GM
Ovonic in a new entity, to be named Texaco Ovonic, LLC, in which
General Motors' interest was converted and restructured so that ECD
and Texaco each will have a 50 percent interest in the joint venture.
The MOU was signed concurrent with an MOU signed between Texaco and
GM on October 10, 2000.
- On October 31, 2000, ECD and TESI formed Texaco Ovonic Hydrogen
Systems LLC. TESI is funding Texaco Ovonic Hydrogen Systems in an
amount estimated to exceed $46 million, including initial product and
market development and a multimillion dollar contract from Texaco
Ovonic Hydrogen Systems to ECD to further develop and advance the
commercialization of ECD's technology to store hydrogen in metal
hydrides.
- 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 from Bekaert ECD Solar
Systems to ECD for production equipment valued at approximately $50
million with an annual capacity of 25 megawatts.
- 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 multimillion 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.
- Ovonyx formed a strategic alliance with Intel in February 2000, which
entails an investment by Intel in Ovonyx, to commercialize ECD's
proprietary nonvolatile semiconductor memory technology, OUM. OUM memory
technology promises to
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enable significantly faster write and erase speeds and higher cycling
endurance than conventional memory types. It has been used in rewritable
CD 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 nonexclusive royalty-bearing license agreement and a joint
development program utilizing Intel's wafer fabrication facilities.
- On April 25, 2000, Ovonic Battery, after having received all necessary
government approvals, officially started the first (total contract value
is $25.2 million) in a series of NiMH projects in China. On June 15,
2000, the second and third projects (total contract value is $38.4
million) were started. These projects with Rare Earth Ovonic resulted in
joint ventures, of which Ovonic Battery has a 19% interest, 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 Texaco, Bekaert, Ovonyx and General
Electric agreements will all, in the near term, result in reduced cash
expenditures and increased product development revenues as the Company's
business partners assume the responsibility for funding operations, while, at
the same time, form the basis in the long term to commercialize the Company's
products.
Accordingly, 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 industry partners and U.S. government agencies
to develop the Company's products and production technology, thereby adding to
the Company's technological base.
During the next 12 months, the Company expects to purchase approximately
$2,500,000 of machinery and equipment and leasehold improvements.
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
operational cash flows in the future, particularly from the building of
photovoltaic and NiMH battery production equipment and from funded product
development. While the Company is in negotiations with a number of companies
related to its technologies 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, 2001 is
anticipated to be approximately $25,600,000 compared to $15,654,000 received
from product development agreements in the year ended June 30, 2000. Based on
historical trends, the amount of cash
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from royalties to be received in the year ending June 30, 2001 is expected to be
approximately $3,900,000 compared to $3,058,000 received in the year ended
June 30, 2000.
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,
2001.
Due to the recent increase in its stock price, the Company has received,
since August 1, 1999, approximately $18,000,000 ($1,300,000 of which occurred
after September 30, 2000) in proceeds from the exercise of employee stock
options and the exercise of warrants. While there are additional employee stock
options and privately placed warrants, which may be exercised, the Company is
unable to predict the amount or the timing of such exercises.
In connection with the 1998 limited public offering of units (consisting
of one share of ECD Common Stock and a warrant to purchase one share of ECD
Common Stock), ECD has outstanding warrants for the purchase of 1,750,000 shares
of Common Stock. These warrants, which trade on the NASDAQ National Market under
the symbol ENERW, are exercisable at $20.54 at any time on or prior to July 31,
2001, the expiration date of the warrants. Should all of these warrants be
exercised, the Company would receive proceeds of $35,945,000.
Pursuant to the Stock Purchase Agreement between ECD and Texaco Inc. dated
May 1, 2000, Texaco purchased a 20% equity stake in ECD for $67,400,000.
As part of this Stock Purchase Agreement, Texaco has rights to purchase
additional shares of ECD Common Stock in order to maintain its 20% equity stake.
In connection with these rights, Texaco purchased 125,233 additional shares for
$3,795,000 on October 26, 2000. (See Item 5.)
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 the company-sponsored
product development programs over the coming year.
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PART II - OTHER INFORMATION
---------------------------
Item 5. Other Events
------ ------------
Pursuant to the Purchase Agreement dated May 1, 2000 between Texaco and
the Company whereby Texaco purchased 3,742,800 shares of ECD Common Stock,
Texaco has the right to purchase additional ECD Common Stock in order for Texaco
to maintain its 20% proportionate interest in ECD. Since May 1, 2000, the
Company has issued additional shares of ECD Common Stock due to stock option and
warrant exercises. So as to maintain its 20% proportionate interest in the
Company, Texaco purchased 125,233 shares of ECD Common Stock on October 26, 2000
for $3,795,000.
Texaco acquired the ECD Common Stock in a private transaction under
Regulation D, Rule 505 of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K.
------- --------------------------------
A. Exhibits
Exhibit 27. Financial Data Schedule (Edgar version)
B. Reports on Form 8-K
The Company filed the following reports on Form 8-K:
Report on Form 8-K, dated September 21, 2000 and filed on October 4,
2000, under Item 5, Other Events, reporting the formation of a 50-50
joint venture, Texaco Ovonic Fuel Cell Company LLC, with Texaco Energy
Systems, Inc. to further develop and commercialize the Company's Ovonic
Regenerative Fuel Cell(TM) technology.
Report on Form 8-K, dated October 31, 2000 and filed on November 3,
2000, under Item 5, Other Events, reporting the formation of a 50-50
joint venture, Texaco Ovonic Hydrogen Systems LLC, with Texaco Energy
Systems, Inc. to further develop and commercialize the Company's
proprietary technology to store hydrogen in metal hydrides.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
-------------------------------------------
(Registrant)
By: /s/ Stephan W. Zumsteg
---------------------------------------
Stephan W. Zumsteg
Date: November 14, 2000 Treasurer
By: /s/ Stanford R. Ovshinsky
-------------------------------------------
Stanford R. Ovshinsky
Date: November 14, 2000 President and Chief Executive Officer
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