SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the period ended DECEMBER 31, 1999
-----------------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ------------------------
Commission file number 1-8403
------------------
ENERGY CONVERSION DEVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1675 WEST MAPLE ROAD, TROY, MICHIGAN 48084
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 280-1900
-----------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
---- ----
As of February 11, 2000, there were 219,913 shares of Class A Common
Stock, 430,000 shares of Class B Common Stock and 12,895,114 shares of Common
Stock outstanding.
Page 1 of 32 Pages
<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 Six Months Ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUES
<S> <C> <C> <C> <C>
Product sales $ 1,377,228 $ 1,041,300 $ 3,247,395 $ 2,007,855
Royalties 1,074,879 616,545 1,738,034 1,231,881
Revenues from product development
agreements 1,992,195 4,828,913 5,909,749 8,602,260
Revenues from license and other
agreements 1,778,000 4,442,000 2,178,000 4,484,000
Other 547,617 940,260 1,276,813 1,720,647
----------- ----------- ----------- -----------
TOTAL REVENUES 6,769,919 11,869,018 14,349,991 18,046,643
EXPENSES
Cost of product sales 2,287,791 2,215,205 4,638,488 4,307,204
Cost of revenues from product
development agreements 2,260,195 4,885,649 5,897,963 8,916,986
Product development and research 4,205,219 2,996,934 7,337,820 5,903,085
Patents 419,642 403,299 893,359 828,129
Operating, general and administrative 1,348,374 1,027,686 2,767,504 2,185,054
---------- ----------- ----------- -----------
TOTAL EXPENSES 10,521,221 11,528,773 21,535,134 22,140,458
---------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (3,751,302) 340,245 (7,185,143) (4,093,815)
OTHER INCOME (EXPENSE)
Gain on sale of Ovonic Battery Company
stock -- 1,970,000 -- 1,970,000
Equity interest in United Solar's net loss (738,000) (1,026,914) (1,298,000) (2,115,914)
Interest expense (117,463) (140,388) (216,256) (307,305)
Interest income 192,443 326,058 418,902 681,551
Other nonoperating income (net) 123,866 196,724 244,901 307,213
---------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (539,154) 1,325,480 (850,453) 535,545
---------- ----------- ----------- -----------
NET INCOME (LOSS) $(4,290,456) $ 1,665,725 $(8,035,596) $(3,558,270)
============ =========== ============ ============
BASIC NET INCOME (LOSS) PER SHARE $ (.32) $ .13 $ (.60) $ (.28)
============ =========== ============ ============
DILUTED NET INCOME (LOSS) PER
SHARE $ (.32) $ .13 $ (.60) $ (.28)
============ =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ ------------
CURRENT ASSETS
<S> <C> <C>
Cash, including cash equivalents of
$12,293,000 as of December 31, 1999 and
$19,026,000 as of June 30, 1999 $12,419,078 $19,076,983
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$310,000 at December 31, 1999 and
$303,000 at June 30, 1999) 5,988,270 6,296,097
Amounts due from related parties 1,058,751 1,423,828
Inventories 372,210 589,245
----------- -----------
TOTAL CURRENT ASSETS 19,838,309 27,386,153
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 312,588 312,588
Buildings and improvements 3,795,114 3,733,816
Machinery and other equipment (including
construction in progress of approximately
$845,000 at December 31, 1999 and
$844,000 at June 30, 1999) 18,566,732 18,353,014
Capitalized lease equipment 4,982,140 4,988,672
----------- -----------
27,656,574 27,388,090
Less accumulated depreciation and amortization (20,513,395) (19,449,827)
----------- -----------
TOTAL PROPERTY, PLANT AND EQUIPMENT 7,143,179 7,938,263
Investments in EV Global and Innovative Transportation Systems 2,239,716 2,239,716
JOINT VENTURES
United Solar 558,411 956,411
GM Ovonic -- --
Sovlux -- --
Ovonyx -- --
OTHER ASSETS 1,241,129 1,287,455
----------- -----------
TOTAL ASSETS $31,020,744 $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>
December 31, June 30,
1999 1999
------------ ------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued expenses $ 4,105,271 $ 4,707,158
Salaries, wages and amounts withheld
from employees 1,721,822 1,581,447
Deferred revenues under business
agreements 1,431,609 1,349,087
Current installments on long-term
liabilities 1,273,952 1,309,508
------------ ------------
TOTAL CURRENT LIABILITIES 8,532,654 8,947,200
LONG-TERM LIABILITIES 2,061,600 2,679,936
DEFERRED GAIN 889,602 1,110,132
NON-REFUNDABLE ADVANCE ROYALTIES 3,814,707 3,882,103
------------ ------------
TOTAL LIABILITIES 15,298,563 16,619,371
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock, par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Class B Convertible Common Stock,
par value $0.01 per share:
Authorized, issued and outstanding - 430,000 shares 4,300 4,300
Common Stock, par value $0.01 per share:
Authorized - 20,000,000 shares Issued & outstanding - 12,843,898
shares at December 31, 1999 and
12,841,270 shares at June 30, 1999 128,439 128,413
Additional paid-in capital 234,090,023 233,861,099
Accumulated deficit (213,563,548) (205,527,952)
Treasury stock at cost - 109,400 shares at
December 31, 1999 and at June 30, 1999 (1,028,092) (1,028,092)
Unearned compensation on Class B Convertible
Common Stock (3,911,140) (4,251,340)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 15,722,181 23,188,627
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 31,020,744 $ 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>
Six Months Ended
December 31,
----------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(8,035,596) $(3,558,270)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,082,777 848,632
Equity interest in United Solar's net loss 1,298,000 2,115,914
Gain on sale of Ovonic Battery stock -- (1,970,000)
Creditable royalties (67,396) 482,264
Options issued to executive for services rendered 113,250 226,500
Stock issued for services rendered 425,850 --
Amortization of deferred gain (220,530) (220,484)
Loss on disposal of capital equipment 4,958 --
Changes in working capital
Accounts receivable and amounts due
from related parties 672,904 (294,496)
Inventories 217,035 362,846
Other assets 46,326 274,842
Accounts payable and accrued expenses (461,512) (778,017)
Deferred revenues under business agreements 82,522 (167,012)
----------- -----------
NET CASH USED IN OPERATIONS (4,841,412) (2,677,281)
INVESTING ACTIVITIES:
Investment in United Solar (900,000) --
Purchases of capital equipment (net) (292,651) (398,674)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,192,651) (398,674)
FINANCING ACTIVITIES:
Purchase of treasury stock -- (419,284)
Principal payments under short-term and long-term
debt and capitalized lease obligations (653,892) (663,348)
Proceeds from sale of stock of subsidiary -- 2,970,000
Proceeds from sale of stock upon exercise of stock
option and warrants 30,050 228,224
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (623,842) 2,115,592
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,657,905) (960,363)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 19,076,983 25,786,112
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,419,078 $24,825,749
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
December 31,
--------------------
1999 1998
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $216,256 $307,305
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31, 1999
--------------------------------------------------------------
NOTE A - Basis of Presentation
- ------------------------------
Information for the three months and six months ended December 31, 1999
(fiscal 2000) and 1998 (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"), Sanoh Industrial Company, Ltd. ("Sanoh") and Sanyo Electric Company,
Ltd. ("Sanyo"). Due to cumulative losses incurred by Ovonic Battery, no minority
interest is recorded in the consolidated financial statements.
ECD also has two major investments accounted for by the equity method: (i)
United Solar Systems Corp. ("United Solar") (49.98%), ECD's photovoltaic (solar
energy) joint venture with Canon Inc. of Japan ("Canon"), and (ii) GM Ovonic
L.L.C. ("GM Ovonic") (40%), Ovonic Battery's joint venture with General Motors
Corporation ("General Motors") to manufacture and sell the Company's proprietary
NiMH batteries for electric, hybrid electric and fuel cell electric vehicle
applications worldwide. ECD also has a 50%-owned joint venture, Ovonyx, Inc.
("Ovonyx"), with Mr. Tyler Lowrey, a recognized authority in semiconductor
memory technology and the former vice chairman and chief technology officer of
Micron Technology, Inc., together with an affiliate of Mr. Lowrey, to
commercialize ECD's Ovonic Unified Memory ("OUM"). In addition, ECD has a
50%-owned joint venture in Russia, Sovlux Co., Ltd. ("Sovlux"). See Note D for
discussion of these ventures.
Investments in EV Global Motors Company ("EV Global") and Innovative
Transportation Systems A.G. ("Innovative Transportation")
The Company accounts for its investment in EV Global, a non-public
company, under the cost method of accounting. The Company accounts for its
investment in Innovative Transportation, formerly known as Unique Europa GmbH,
on the equity basis of accounting in accordance with Accounting Principles Board
Opinion ("APB") No. 18, The
7
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
Equity Method of Accounting for Investments in Common Stock. The Company
accounted for its previous investment in Unique Mobility, Inc. ("Unique
Mobility") in accordance with SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities, and classified this security as available-for-sale.
Unrealized gains or losses as a result of changes in the market value of the
Unique Mobility investments were marked-to-market, with the offset recorded to
Stockholders' Equity. Upon the exchange of Unique Mobility stock for Innovative
Transportation the loss was realized.
Upon consolidation, all intercompany accounts and transactions are
eliminated.
Certain items for the three months and six months ended December 31, 1998
have been reclassified to be consistent with the classification of items in the
three months and six months ended December 31, 1999.
In preparing financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reported period. Actual results could differ from those estimates. The Company
is impacted by other factors such as the continued receipt of contracts from its
industrial partners and the U.S. government, its ability to protect and maintain
the proprietary nature of its technology, its continued product and
technological advances and the strength and ability of the Company's licensees
and joint venture partners to commercialize the Company's products and
technologies.
During the first quarter of the 1999 fiscal year, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. This Statement requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in an
annual financial statement that is displayed with the same prominence as other
financial statements. This Statement also requires that an entity classify items
of other comprehensive earnings by their nature in an annual financial
statement. For example, other comprehensive earnings include unrealized gains
and losses on marketable securities classified as available-for-sale. The
Company's total comprehensive loss was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Income (Loss) $(4,290,456) $ 1,665,725 $(8,035,596) $(3,558,270)
OTHER COMPREHENSIVE LOSSES:
Unrealized gains (losses) on securities -- 16,000 -- (275,000)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $(4,290,456) $ 1,681,725 $(8,035,596) $(3,833,270)
=========== =========== =========== ===========
</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:
December 31, June 30,
1999 1999
------------ ------------
U.S. Government:
Amounts billed $ 1,015,903 $ 1,055,313
Unbilled 639,734 876,649
----------- -----------
Total 1,655,637 1,931,962
----------- -----------
Commercial Customers:
Amounts billed 1,848,940 910,848
Related party billed
- United Solar 289,382 184,200
- GM Ovonic 625,242 830,875
Royalties 1,762,428 1,430,731
License fees 528,000 --
Due per contracts 150,031 2,101,833
Related party unbilled
- United Solar 23,127 --
- GM Ovonic 121,000 408,753
Other unbilled 214,246 116,236
----------- -----------
Total 5,562,396 5,983,476
----------- -----------
Other 138,988 107,487
Allowance for Uncollectible Accounts (310,000) (303,000)
----------- -----------
TOTAL $ 7,047,021 $ 7,719,925
=========== ===========
Amounts due per contracts, related party unbilled, and other unbilled from
commercial customers represent revenues recognized for the present value of
license payments to be received in future periods. They also include revenues
recognized on the percentage-of-completion method of accounting related to
machine-building contracts and amounts earned under certain commercial
contracts, for which amounts are billed in subsequent months.
Certain contracts with the U.S. government require a retention that is
paid upon completion of audit of the Company's indirect rates. There are no
material retentions at December 31, 1999 and June 30, 1999. Certain U.S.
government contracts remain subject to audit. Management believes that
adjustments, if any, which may result from an audit would not be material to the
financial position or results of operations of the Company.
9
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
Inventories
- -----------
Inventories of raw materials, work in process and finished goods for the
manufacture of negative electrodes, battery packs and other products, together
with supplies, are valued at the lower of cost (moving average) or market. Cost
elements included in inventory are materials, direct labor and manufacturing
overhead. Cost of sales is removed from inventory based on actual costs of items
shipped to customers.
Inventories (principally those of Ovonic Battery) are as follows:
December 31, June 30,
1999 1999
------------ ------------
Finished products $ -- $ 1,000
Work in process 206,780 286,193
Raw materials 165,430 302,052
-------- --------
$372,210 $589,245
======== ========
Product Sales
- -------------
Product sales include battery electrodes, revenues related to building of
battery packs, and revenues related to machine-building contracts. Revenues
related to machine-building contracts are recognized on the percentage-of-
completion method of accounting using the costs incurred to date as a percentage
of the total expected costs. All other product sales are recognized when the
product is shipped. In certain cases, cost of sales exceeds product sales due to
significant changes in products, manufacturing methods, and sales volume.
Royalties
- ---------
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the sale of the respective licensed product. In
several instances, the Company has received cash payments for nonrefundable
advance royalty payments which are creditable against future royalties under the
licenses. Advance royalty payments are deferred and recognized in revenues as
the creditable sales occur, the underlying agreement expires, or when the
Company has demonstrable evidence that no additional royalties will be
creditable and, accordingly, the earnings process is completed.
For both ECD and Ovonic Battery royalties, there are royalty trust or
contingent fee arrangements whereby the Company is obligated to pay to a trust
25% of optical memory royalties received and to a law firm 25% of Ovonic Battery
royalties received relative to
10
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
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 recognized
until commencement of production or the resolution of uncertainties. There are
no current or future direct costs associated with license fees.
11
<PAGE>
NOTE A - Basis of Presentation (Continued)
- ------------------------------------------
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project based on the relationship of costs
incurred to estimated total project costs. Revenue from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the agreed-
upon fees for product development agreements contemplate reimbursing the Company
for costs considered associated with project activities including expenses for
direct product development and research, patents, operating, general and
administrative expenses and depreciation. Accordingly, expenses related to
product development agreements are recorded as cost of revenues from product
development agreements.
Overhead Allocations
- --------------------
The Company allocates overhead to product development research expenses
and to cost of revenues from research and development agreements based on a
percentage of direct labor costs. For cost of revenues from product development
agreements, this allocation is limited to the amount of revenues, after direct
expenses, under the applicable agreements. Overhead is allocated to cost of
product sales through the application of overhead to inventory costs.
Other Operating Revenues
- ------------------------
Other operating revenues consist principally of third-party service
revenue realized by certain of the Company's service departments, including the
Production Technology and Machine Building Division and Central Analytical
Laboratory, and changes in estimates of revenues recognized on certain customers
and contracts.
Other Non-Operating Income
- --------------------------
Other non-operating income-net consists of the amortization of deferred
gains, rental income and gains and losses on sale of fixed assets.
12
<PAGE>
NOTE B - Product Sales, Royalties, Revenues from Product Development Agreements
- -------------------------------------------------------------------------------
and License and other Agreements
- --------------------------------
The Company has product sales and business agreements with third parties
for which royalties and revenues are included in the consolidated statements of
operations. A summary of all of the Company's revenues follows:
Six Months Ended
December 31,
----------------------------
1999 1998
------------ ------------
Product Sales:
Negative and positive electrodes $ 1,119,953 $ 1,770,335
Battery packs 1,004,762 237,520
Machine building 1,122,680 --
----------- -----------
$ 3,247,395 $ 2,007,855
=========== ===========
Royalties:
Battery technology $ 1,676,424 $ 1,196,147
Optical Memory 61,610 35,734
----------- -----------
$ 1,738,034 $ 1,231,881
=========== ===========
Revenues from product development agreements:
Photovoltaics $ 873,531 $ 1,547,985
Battery technology 2,896,180 5,689,081
Optical Memory 686,541 1,263,224
Hydrogen 1,345,999 90,220
Other 107,498 11,750
----------- -----------
$ 5,909,749 $ 8,602,260
=========== ===========
License and other agreements:
Battery $ 2,178,000 $ 4,484,000
=========== ===========
The following table presents revenues by country based on the location of
the customer:
Six Months Ended
December 31,
----------------------------
1999 1998
------------ ------------
United States $ 9,755,095 $11,358,917
Japan 3,638,752 5,489,262
Hong Kong -- 797,045
Netherlands 687,500 --
Other countries 268,644 401,419
----------- -----------
$14,349,991 $18,046,643
=========== ===========
13
<PAGE>
NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At December 31, 1999 and June 30, 1999, the Company deferred recognition
of revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
December 31, June 30,
1999 1999
------------ ------------
Battery $1,752,072 $1,792,068
Optical Memory 2,062,635 2,090,035
---------- ----------
$3,814,707 $3,882,103
========== ==========
NOTE D - Joint Ventures and Investments
- ---------------------------------------
Joint Ventures
- --------------
The Company's investments in its joint ventures, other than United Solar,
are recorded at zero. The Company will continue to carry its investment in each
of these joint ventures at zero until the venture becomes profitable (based upon
the venture's history of sustainable profits), at which time the Company will
start to recognize over a period of years its share, if any, of the then equity
of each of the ventures and will recognize its share of each venture's profits
or losses on the equity method of accounting.
Based upon the opinion of legal counsel, the Company believes that it has
no obligation to fund any losses that its joint ventures incur beyond the
Company's investment. Additionally, the Company has no financial or other
guarantees with respect to liabilities incurred by its joint ventures.
United Solar
GAAP requires ECD to carry its pre-May 1998 investments in United Solar
(as well as ECD's other joint ventures) at zero, notwithstanding ECD's
contributions to United Solar of licenses in the field of photovoltaics and
other property and equipment in exchange for ECD's 49.98% interest in United
Solar and notwithstanding Canon's investments of $55,000,000. In May 1998, ECD
and Canon each invested $2,500,000 in United Solar to fund United Solar's
continuing operations. In the year ended June 30, 1999, the Company loaned
United Solar $2,500,000. This loan is convertible, at ECD's option, into
additional shares of United Solar stock. In the six months ended December 31,
1999, ECD advanced United Solar an additional $900,000.
GAAP requires that ECD's cash investments (including loans and advances),
regardless of the true value of United Solar, be recorded on the balance sheet
as the value of ECD's investment in United Solar. At the same time, however,
GAAP requires that ECD make non-cash adjustments to its carrying value of United
Solar such that ECD's carrying value of United Solar is decreased by the losses
of United Solar (in proportion to ECD's
14
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
ownership share of United Solar) and ECD is required to record a non-cash,
non-operating expense in the amount of the reduction in the carrying value of
United Solar.
The investment in United Solar will continue to be carried at an amount no
higher than ECD's total cash investments ($5,900,000 at December 31, 1999) until
United Solar becomes profitable (based upon its history of sustainable profits),
at which time ECD will start to recognize over a period of years its share, if
any, of the then equity of United Solar, and will recognize its proportionate
share of United Solar's profits or losses on the equity method of accounting.
The following sets forth certain financial data regarding United Solar
that are derived from United Solar's financial statements.
UNITED SOLAR STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 2,572,284 $ 2,359,582 $ 5,526,134 $ 5,500,006
Operating Expenses
Cost of sales 2,973,827 2,683,129 6,029,489 6,367,713
Product development 677,280 643,762 1,383,730 1,380,279
General and administrative 377,143 618,296 695,568 1,005,006
Sales and marketing 240,058 335,665 472,554 699,020
----------- ----------- ----------- -----------
Total 4,268,308 4,280,852 8,581,341 9,452,018
Other Income (Expense) 218,927 (179,548) 456,669 (327,208)
----------- ----------- ----------- -----------
Net Loss $(1,477,097) $(2,100,818) $(2,598,538) $(4,279,220)
=========== =========== =========== ===========
</TABLE>
15
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
UNITED SOLAR BALANCE SHEETS
---------------------------
December 31, June 30,
1999 1999
------------ ------------
(Unaudited) (Unaudited)
Current Assets:
Cash and Cash Equivalents $ 151,423 $ 210,314
Accounts Receivable 2,129,663 3,025,485
Inventory 3,618,156 2,629,643
Other Current Assets 443,347 358,350
----------- -----------
Total Current Assets 6,342,589 6,223,792
Property, Plant and Equipment (Net) 8,558,183 9,465,050
Other Assets 234,703 219,351
----------- -----------
Total Assets $15,135,475 $15,908,193
=========== ===========
Current Liabilities:
Accounts Payable and Accrued Expenses $ 6,462,581 $ 4,197,061
Note Payable-ECD 2,500,000 2,500,000
----------- -----------
Total Current Liabilities 8,962,581 6,697,061
Note Payable-Canon 2,500,000 2,500,000
Lease Payable 6,468,333 6,908,033
Total Stockholders' Equity (2,795,439) (196,901)
----------- -----------
Total Liabilities and Stockholders' Equity $15,135,475 $15,908,193
=========== ===========
GM Ovonic
In 1994, Ovonic Battery and General Motors formed a joint venture, GM
Ovonic, for the manufacture and commercialization of Ovonic NiMH batteries for
electric and hybrid electric vehicles. General Motors has a 60% interest and
Ovonic Battery has a 40% interest in this joint venture. Ovonic Battery has
contributed intellectual property, licenses, production processes, know-how,
personnel and engineering services pertaining to Ovonic NiMH battery technology
to the joint venture. The contribution of General Motors consists of operating
capital, plant, equipment and management personnel necessary for the production
of batteries.
There are no financial statements currently available for GM Ovonic. GM
Ovonic is in its developmental stage and, as such, has a history of operating
losses.
Ovonyx
In January 1999, ECD and Mr. Tyler Lowrey, the former vice chairman and
chief technology officer of Micron Technology, Inc., formed a joint venture,
Ovonyx, Inc. (owned 50% by each of ECD and Mr. Lowrey together with an affiliate
of Mr. Lowrey), to commercialize ECD's Ovonic Unified Memory.
16
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
ECD has advanced Ovonyx $1,841,000 through December 31, 1999 ($559,000 in
the current quarter), representing expenses for its operations which commenced
on January 15, 1999. ECD has expensed the advances to Ovonyx, as incurred,
pending third-party funding.
Investments in EV Global and Innovative Transportation
In February 1998, the Company and EV Global, a Lee Iacocca company,
entered into a Stock Purchase Agreement ("Agreement") which provided for the
transfer to EV Global of 146,924 shares of ECD Common Stock and warrants to
purchase 133,658 shares of ECD Common Stock. The Agreement also provided for the
transfer to ECD of 250,000 shares of EV Global Common Stock and 129,241 shares
of Unique Mobility Common Stock. The warrants are exercisable prior to February
2, 2003, with 73,462 shares exercisable at $13.6125 and 60,196 shares
exercisable at $16.6125.
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 private company changed its
name to Innovative Transportation Systems.
Innovative Transportation has been initially capitalized with a minor
amount of cash and a contribution of 625,000 shares of Unique Mobility Common
Stock. Of the stock contribution, 208,333 shares (79,092 of which were acquired
from EV Global in exchange for 34,723 shares of ECD) were contributed by ECD,
resulting in an initial share interest of 33.2%. ECD's share interest decreased
to 5.8% in October 1999 due to an additional cash investment by a shareholder.
There are no financial statements currently available for Innovative
Transportation.
Sovlux
In 1990, ECD formed Sovlux, a joint venture to manufacture the Company's
photovoltaic products in the countries of the former Soviet Union. Sovlux is
owned 50% by ECD and 50% by the State Research and Production Enterprise Kvant
and enterprises of the Russian Ministry of Atomic Energy ("Minatom"). Sovlux has
not been able to commence production of photovoltaic products due to current
economic conditions in Russia.
In 1998, ECD formed Sovlux Battery to produce NiMH batteries and
components for sale to Ovonic Battery and its licensees. Sovlux Battery is owned
50% by ECD and 50% by the Chepetsky Mechanical Plant ("Chepetsky"), an
enterprise of Minatom. ECD's contribution to the ventures consists solely of
technology.
17
<PAGE>
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
There are no financial statements currently available for Sovlux or Sovlux
Battery. Sovlux and Sovlux Battery are in their developmental stage and, as
such, have a history of operating losses.
NOTE E - Net 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 used the
treasury stock method to calculate diluted earnings per share. Potential
dilution exists from stock options and warrants. Weighted average number of
shares outstanding and basic and diluted earnings per share for the three months
and six months ended December 31 are computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Weighted average number of
shares outstanding 13,384,411 12,783,195 13,383,565 12,806,812
Net income (loss) $(4,290,456) $1,665,725 $(8,035,596) $(3,558,270)
BASIC NET INCOME (LOSS) PER SHARE $ (.32) $ .13 $ (.60) $ (.28)
=========== ========== =========== ===========
Weighted average number of
shares outstanding 13,384,411 12,783,195 13,383,565 12,806,812
Weighted average shares for
dilutive securities -- 5,773 -- --
----------- ---------- ----------- -----------
Average number of shares outstanding
and potential dilutive shares 13,384,411 12,788,968 13,383,565 12,806,812
Net income (loss) $(4,290,456) $1,665,725 $(8,035,596) $(3,558,270)
DILUTED NET (INCOME) LOSS PER SHARE $ (.32) $ .13 $ (.60) $ (.28)
=========== ========== =========== ===========
</TABLE>
Due to the Company's net losses, the weighted average shares of potential
dilutive securities for 1999 of 129,085 (three months) and 167,974 (six months)
and for 1998 dilutive securities of 179 (six 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. Basic and diluted income per
share for the three months ended December 31, 1998 were the same due to the fact
that only 5,773 dilutive shares were added in the computation of diluted income
per share. Additional securities of 4,859,851 (for both 1999
18
<PAGE>
NOTE E - Net Income (Loss) Per Share (Continued)
- ------------------------------------------------
periods) and 5,098,170 (for both 1998 periods) were excluded from the 1999 and
1998 calculations of weighted average shares of potential dilutive securities.
Because of the relationship between the exercise prices and the average market
price of ECD's Common Stock during these periods, these securities would have
been antidilutive regardless of the Company's net loss.
NOTE F - Business Segments
- --------------------------
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. This Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company adopted the
provisions of this Statement in fiscal 1999.
The Company has two business segments: its subsidiary, Ovonic Battery, and
the parent company, ECD. Ovonic Battery is primarily involved in developing and
commercializing battery technology. ECD is primarily involved in photovoltaics,
hydrogen storage, microelectronics and machine building. General corporate
expenses (except for those expenses allocated to Ovonic Battery), interest
expense and interest income are classified in the ECD business segment.
19
<PAGE>
NOTE F - Business Segments (Continued)
- --------------------------------------
The Company's operations by business segment were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
Ovonic Battey ECD Consolidated
------------- --------- ------------
Revenues*
Three months ended December 31, 1999 $ 5,303 $ 1,467 $ 6,770
Three months ended December 31, 1998 10,081 1,788 11,869
Six months ended December 31, 1999 $ 10,171 $ 4,179 $ 14,350
Six months ended December 31, 1998 14,973 3,074 18,047
Identifiable Assets
Six months ended December 31, 1999 $ 11,267 $ 19,754 $ 31,021
Six months ended December 31, 1998 16,153 31,063 47,216
Operating Income (Loss)
Three months ended December 31, 1999 $ (2,650) $ (1,101) $ (3,751)
Three months ended December 31, 1998 794 (454) 340
Six months ended December 31, 1999 $ (5,677) $ (1,508) $ (7,185)
Six months ended December 31, 1998 (3,161) (933) (4,094)
- ---------
* All revenues are derived from external customers.
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 six months ended December 31, 1999 are not necessarily indicative of results
to be expected in future periods.
Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 (the "Securities
Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange
Act") which are not historical facts and involve risks and uncertainties that
could cause actual results to differ materially from those expected and
projected. These forward-looking statements concern, among other things, the
Company's expectations, plans and strategies for the development and
commercialization of products based on its technologies and are generally
identified by the use of such terms as "intends," "expects," "plans,"
"projects," "estimates," "anticipates," "should" and "believes."
The Company's future business prospects are substantially dependent upon
the ability of the Company, its joint venture partners and licensees to develop,
manufacture and sell products based on the Company's technologies. Any revenues
or profits which may be derived by the Company from license and joint venture
agreements will be substantially dependent upon the willingness and ability of
the Company's licensees and joint venture partners to devote their financial
resources and manufacturing and marketing capabilities to commercialize products
based on the Company's technologies. Additional development efforts will be
required before certain products based on the Company's technologies can be
manufactured and sold commercially. There can be no assurance that certain
products based on the Company's technologies can be manufactured cost
effectively on a commercial scale, that such products will gain market
acceptance, or that competing products and technologies will not render products
based on the Company's technologies obsolete or noncompetitive. There can be no
assurance that the Company's patents or other proprietary rights will be
determined to be valid or enforceable if challenged in court or administrative
proceedings or that the Company patents or other proprietary rights, even if
determined to be valid, will be broad enough in scope to enable the Company to
prevent third parties from producing products using similar technologies or
processes.
The Company cautions that the foregoing factors, as well as other factors
discussed in this Quarterly Report and in other documents and reports filed by
the Company with the Securities and Exchange Commission pursuant to the
requirements of the federal securities laws, could cause the actual facts and
conditions that may exist in the future to vary materially from the assumed
facts and conditions upon which the forward-looking statements contained herein
are based. The Company does not undertake any obligation
21
<PAGE>
to update or revise any forward-looking statement, made by it or on its behalf,
whether as a result of new information, future events or otherwise.
Results of Operations
Three Months Ended December 31, 1999 Compared to Three Months Ended
- -------------------------------------------------------------------
December 31, 1998
- -----------------
The Company had a net loss from operations in the three months ended
December 31, 1999, of $3,751,000 compared to a net income from operations of
$340,000 for the three months ended December 31, 1998. The change resulted from
a reduction in revenues to $6,770,000 in 1999 from $11,869,000 in 1998,
partially offset by a $1,008,000 reduction in operating expenses. The revenue
reduction primarily resulted from lower revenues from product development
agreements ($2,837,000) and lower revenues from license and other agreements
($2,664,000), partially offset by a $458,000 increase in royalties. Revenues
from license and other agreements in 1999 included a $1,778,000 license fee from
a license agreement with Toshiba Battery Company, Ltd. ("Toshiba") for the HEV
technology compared to a $4,400,000 license fee in 1998 from Sanyo Electric Co.,
Ltd. ("Sanyo").
A large portion of the losses in 1999 was primarily due to the fact that,
in accordance with GAAP, ECD must report its activities to further its
advancements in its technologies as a loss. The ECD/Ovonic Battery programs in
its 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 field where
especially high voltages are required. ECD's continued investments in United
Solar, its Ovonyx joint venture activities and its solid hydride development
programs are all reported as losses. Losses related to electrode production and
the ongoing protection of the Company's intellectual property also contributed
to the 1999 losses. In addition to the loss from operations, the Company
incurred other expenses (net) of $539,000 in the three months ended December 31,
1999 compared to other income (net) of $1,325,000 in the same period in the
prior year. 1998 included the $1,970,000 gain on the sale of Ovonic Battery
Stock to Sanyo. Other income (expense) principally includes interest income and
expense and equity losses. Due to better operating performance at United Solar,
the Company incurred reduced charges for equity losses of $738,000 in 1999
compared to $1,027,000 in 1998. 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 NOTE A of Notes to
Consolidated Financial Statements).
Product sales, consisting of positive and negative battery electrodes,
battery packs and machine building, increased 32% to $1,377,000 in the three
months ended December 31, 1999 from $1,041,000 in the three months ended
December 31, 1998. There were battery pack sales of $452,000 in 1999, compared
to $238,000 in 1998, and machine-building revenues of $395,000 in 1999, compared
to no revenues in 1998. The machine-building revenues in 1999 were applicable to
a contract to build large-area microwave
22
<PAGE>
deposition equipment. Sales of negative and positive electrodes decreased
$273,000, 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.
Royalties increased 74% from $617,000 in the three months ended December
31, 1998 to $1,075,000 in the three months ended December 31, 1999. 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 59% from
$4,829,000 in the three months ended December 31, 1998, to $1,992,000 in the
three months ended December 31, 1999. There were total increases in revenues
from the conclusion of the Shell Hydrogen program in 1999 ($375,000 in 1999
compared to none in 1998), the hydrogen storage program with the Department of
Energy ("DOE") ($224,000 in 1999 compared to none in 1998), and battery pack
research ($201,000 compared to $45,000 in 1999). These increases in 1999 were
more than offset by decreases in revenues from a program with General Motors to
develop batteries for electric and hybrid electric vehicle applications (none in
1999 compared to $2,153,000 in 1998) and from contracts with NIST in the
Company's optical memory and battery technologies ($870,000 in 1999 compared to
$1,789,000 in 1998) and DOE and the National Renewable Energy Laboratory
("NREL") in photovoltaics ($257,000 in 1999 compared to $830,000 in 1998).
Revenues from license and other agreements decreased from $4,442,000 in
the three months ended December 31, 1998 to $1,778,000 in the three months ended
December 31, 1999. The 1998 license fees included $4,400,000 from Sanyo. The
1999 revenues included a $1,778,000 license fee from Toshiba.
Other revenues decreased by $392,000 from $940,000 in the three months
ended December 31, 1998 to $548,000 in the three months ended December 31, 1999,
primarily due to decreased billings for work performed for licensees of Ovonic
Battery.
The increase in cost of product sales from $2,215,000 in the three months
ended December 31, 1998 to $2,288,000 in the three months ended December 31,
1999 was due to an increased level of machine building revenues in 1999. The
reduced loss on product sales from $1,174,000 to $911,000 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, 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 of $6,465,000 ($2,260,000 funded and
$4,205,000 unfunded) in the three months ended December 31, 1999 for product
development
23
<PAGE>
compared to expenses of $7,883,000 ($4,886,000 funded and $2,997,000 unfunded)
in the three months ended December 31, 1998. The expenditures were primarily for
continued development of the Company's "family of batteries" products as well as
work performed on the OUM program.
Expenses were incurred in 1999 and 1998 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technology. These expenses increased to $420,000 in the three months ended
December 31, 1999 from $403,000 in the three months ended December 31, 1998.
The increase in operating, general and administrative expenses from
$1,028,000 in the three months ended December 31, 1998 to $1,348,000 in the
three months ended December 31, 1999 was primarily related to decreased
allocations to cost of revenues from product development agreements and
increased depreciation expense in 1999.
The change from other income (net) of $1,325,000 in the three months
ended December 31, 1998, compared to other expense (net) of $539,000 in the
three months ended December 31, 1999, was due principally to $1,970,000 gain on
the sale of Ovonic Battery Stock in 1998 to Sanyo. In the three months ended
December 31, 1999, other expense (net) was lower due to significantly improved
operating performance of United Solar in 1999, which reduced ECD's share of
United Solar's losses, and to decreased interest income.
Six Months Ended December 31, 1999 Compared to Six Months Ended
- ---------------------------------------------------------------
December 31, 1998
- -----------------
The Company had a net loss from operations in the six months ended
December 31, 1999, of $7,185,000 compared to a net loss from operations of
$4,094,000 for the six months ended December 31, 1998. The change resulted from
a reduction in revenues to $14,350,000 in 1999 from $18,047,000 in 1998,
partially offset by a $605,000 reduction in operating expenses. The revenue
reduction primarily resulted from lower revenues from product development
agreements ($2,693,000) and lower revenues from license and other agreements
($2,306,000), partially offset by a $506,000 increase in royalties. Revenues
from license agreements in 1999 included $1,778,000 from a license agreement
with Toshiba for the HEV technology and $400,000 from Japan Storage, compared to
a $4,400,000 license fee in 1998 from Sanyo.
A large portion of the losses in 1999 was primarily due to the fact that,
in accordance with GAAP, ECD must report its activities to further its
advancements in its technologies as a loss. The ECD/Ovonic Battery programs in
its 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 field where
especially high voltages are required. ECD's continued investments in United
Solar, its Ovonyx joint venture activities and its solid hydride development
programs are all reported as losses. Losses related to electrode production and
the ongoing protection of the Company's intellectual property also contributed
to the 1999 losses. In addition to the loss from operations, the Company
incurred other expenses (net) of $850,000 in the six
24
<PAGE>
months ended December 31, 1999 compared to other income (net) of $536,000 in the
same period in the prior year. 1998 included a $1,970,000 gain on the sale of
Ovonic Battery Stock to Sanyo. Other income (expense) principally includes
interest income and expense and equity losses. Due to better operating
performance at United Solar, the Company incurred reduced charges for equity
losses of $1,298,000 in 1999 compared to $2,116,000 in 1998. 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 NOTE A of Notes to Consolidated Financial Statements).
Product sales, consisting of positive and negative battery electrodes,
battery packs and machine building, increased 62% to $3,247,000 in the six
months ended December 31, 1999 from $2,008,000 in the six months ended December
31, 1998. There were battery pack sales of $1,005,000 in 1999 compared to
$238,000 in 1998 and machine-building revenues of $1,123,000 in 1999 compared to
no revenues in 1998. The machine-building revenues in 1999 were applicable to a
contract to build large-area microwave deposition equipment. Sales of negative
and positive electrodes decreased $650,000, 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.
Royalties increased 41% from $1,232,000 in the six months ended December
31, 1998 to $1,738,000 in the six months ended December 31, 1999. 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 31% from
$8,602,000 in the six months ended December 31, 1998 to $5,910,000 in the six
months ended December 31, 1999. There were total increases in product
development agreements of $1,766,000 which were due to substantially increased
revenues from the conclusion of the Shell Hydrogen program in 1999 ($688,000 in
1999 compared to none in 1998) and the hydrogen storage program with the DOE
($658,000 in 1999 compared to $90,000 in 1998). These increases in 1999 were
more than offset by decreases in revenues resulting from the conclusion of a
program with General Motors to develop batteries for electric and hybrid
electric vehicle applications ($1,002,000 in 1999 compared to $4,077,000 in
1998) from contracts with DOE and NREL in photovoltaics ($828,000 in 1999
compared to $1,548,000 in 1998) and contracts with NIST in the Company's optical
memory and battery technologies ($2,145,000 in 1999 compared to $2,777,000 in
1998).
Revenues from license and other agreements decreased from $4,484,000 in
the six months ended December 31, 1998 to $2,178,000 in the six months ended
December 31, 1999. The 1998 license fees included $4,400,000 from Sanyo. The
1999 revenues included a $1,778,000 license fee from Toshiba Battery and
$400,000 from Japan Storage.
25
<PAGE>
Other revenues decreased by $444,000 from $1,721,000 in the six months
ended December 31, 1998 to $1,277,000 in the six months ended December 31, 1999,
primarily due to decreased billings for work performed for licensees of Ovonic
Battery.
The increase in cost of product sales from $4,307,000 in the six months
ended December 31, 1998 to $4,638,000 in the six months ended December 31, 1999
was due to an increased level of machine building revenues in 1999. The reduced
loss on product sales from $2,299,000 to $1,391,000 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, 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 of $13,236,000 ($5,898,000 funded and
$7,338,000 unfunded) in the six months ended December 31, 1999 for product
development compared to expenses of $14,820,000 ($8,917,000 funded and
$5,903,000 unfunded) in the six months ended December 31, 1998. The expenditures
were primarily for continued development of the Company's "family of batteries"
products as well as work performed on the OUM program.
Expenses were incurred in 1999 and 1998 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technology. These expenses increased to $893,000 in the six months ended
December 31, 1999 from $828,000 in the six months ended December 31, 1998.
The increase in operating, general and administrative expenses from
$2,185,000 in the six months ended December 31, 1998 to $2,768,000 in the six
months ended December 31, 1999 was primarily related to decreased allocations to
cost of revenues from product development agreements and increased depreciation
expense in 1999.
The change from other income (net) of $535,000 in the six months ended
December 31, 1998, compared to other expense (net) of $850,000 in the six months
ended December 31, 1999, was due principally to $1,970,000 gain on the sale of
Ovonic Battery Stock in 1998 to Sanyo. In the six months ended December 31,
1999, other expense (net) was lower due to significantly improved operating
performance of United Solar in 1999, which reduced ECD's share of United Solar's
losses, and to decreased interest income.
Liquidity and Capital Resources
As of December 31, 1999, the Company had unrestricted consolidated cash,
cash equivalents and accounts receivable of $19,466,000, a decrease of
$7,331,000 from June 30, 1999. As of December 31, 1999, the Company had
consolidated working capital of $11,306,000 compared with a consolidated working
capital of $18,439,000 as of June 30, 1999.
26
<PAGE>
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. As a result of the issuance of the basic patents for
NiMH batteries and phase-change optical memory in Japan, various new agreements
are under discussion. Other important areas of the Company's development are the
use of the Company's photovoltaic technology and its proprietary hydrogen
storage technology for storing, transporting and using hydrogen for a wide range
of portable and stationary applications, with vehicles being of prime
importance. Hydrogen is clean, abundant and considered the ultimate fuel. The
barrier to the use of hydrogen as a fuel has been a lack of a viable means to
transport and store it.
ECD's joint venture, Ovonyx, owned equally by ECD and by Mr. Lowrey
(together with an affiliate of Mr. Lowrey) expects to pursue semiconductor
device manufacturing as well as licensing of selected applications of ECD's OUM,
a unique thin-film nonvolatile solid-state memory. In November 1999, Ovonyx
entered into a royalty-bearing agreement with Lockheed Martin Space Electronics
and Communications to commercialize ECDs OUM to replace Flash, DRAM, FPGA and
other electronic devices in radiation-hardened space and military applications.
Ovonyx and ECD are in negotiations with new strategic partners for funding to
commercialize ECD's OUM and to repay the amounts advanced by ECD to Ovonyx
($1,841,000 through December 31, 1999).
In the six months ended December 31, 1999, the Company entered into a new
license agreement ($1,778,000 in license fees plus future royalties) with
Toshiba 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.
In August 1999, Ovonic Battery signed an agreement with Rare Earth
High-Tech Co. Ltd. ("Rare Earth High-Tech") of Baotou Steel Company, Inner
Mongolia, China (subject to approvals by the Governments of the United States
and China and the finalization of financing arrangements) for a series of NiMH
battery projects with a potential value of $100 million. The Company is
negotiating with a number of financial institutions to provide financing for
this project. Rare Earth High-Tech has agreed to pay all costs associated with
this financing. Although no assurances can be given, the Company believes that
it and Rare Earth High-Tech will be successful in obtaining the required
financing and government approvals.
During the six months ended December 31, 1999, $4,841,000 of cash was
used in operations. The difference between the net loss of $8,036,000 and the
net cash used in operations was due to ECD's $1,298,000 share of the losses in
United Solar relating to ECD's investment of cash in United Solar's future
growth and the Company's depreciation expense. In the six months ended December
31, 1999, ECD advanced $900,000 to United Solar (bringing its total investment
to $5,900,000), providing funding for new opportunities in the worldwide
photovoltaic market served by United Solar's unique products which offer
27
<PAGE>
particular advantages to the satellite and telecommunications industries. In
addition, $293,000 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 (Department of Energy,
National Renewable Energy Laboratory, National Institute of Standards, 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, together with a portion of indirect costs
(patents, operating, general and administrative expenses and depreciation).
During the next 12 months, the Company expects to purchase up to $500,000
of machinery and equipment. ECD advanced to United Solar $2,500,000 in May 1998,
$2,500,000 during the year ended June 30, 1999, and an additional $900,000
during the period July 1, 1999 to December 31, 1999. In addition, ECD advanced
an additional $900,000 during the period January 1, 2000 to February 14, 2000.
The Company has a financing arrangement with Standard Federal Bank for a
$3,000,000 line of credit bearing an interest rate at prime rate which expires
on March 31, 2001. The Company does not expect to use any of this available
financing during the next 12 months.
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. While the Company is in negotiations concerning its NiMH battery,
hydrogen storage, photovoltaics, OUM, phase-change optical memory and production
systems technologies with a number of companies which could provide it with
additional revenue under license and other agreements in the coming year, it is
unable to predict the amount, if any, of such revenue.
The Company is not aware of events or circumstances that would
significantly alter royalty revenues for the next 12 months.
In February 1999, ECD received a contract (for approximately $2,060,000)
to build large-area microwave deposition equipment. This new contract provides
the platform for the commercialization of ECD's passive coatings technology and
equipment to manufacture products incorporating such technology. The receipt of
this order directly results from the research and development conducted by ECD,
the costs of which were recorded as losses in prior years. Through December 31,
1999, ECD has recognized revenues of $1,451,000 in connection with this
contract. This contract is nearing completion and the Company expects to obtain
approval of this machine at its facility in the quarter ending March 31, 2000 at
which time it will be shipped to the customer's location for final acceptance.
Machine building is a cyclical but an important part of ECD's business. While
there is no other backlog of machine-building contracts as of December 31, 1999,
negotiations are in
28
<PAGE>
progress with a number of companies for additional machine-building contracts
that could provide revenues in the coming year and beyond.
Based upon the above information, the amount of cash to be received under
existing product development agreements in the year ending June 30, 2000 is
anticipated to be approximately $12,049,000 compared to $19,164,000 received
from product development agreements in the year ended June 30, 1999. Based on
historical trends, the amount of cash from royalties to be received in the year
ending June 30, 2000 is expected to be approximately $3,022,000 compared to
$2,367,000 received in the year ended June 30, 1999.
Since license agreements are continuously being negotiated, fees from
such agreements are difficult to predict. The Company is unable to forecast the
amount of cash to be received from license fees in the year ending June 30,
2000.
Due to the recent increase in its stock price, the Company has received
since January 1, 2000, approximately $3,800,000 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, other than
project financing needed for the Rare Earth High-Tech project, to support and
finance planned growth, capital expenditures and company-sponsored product
development programs over the coming year. Additional sources of cash are
required to sustain the Company for the long-term and to build the business in
the future. While it is the Company's intent to fund its near-term operations
from cash and cash equivalent balances on hand and from activities such as
product sales, licensing, royalties, product development agreements and
strategic alliances, the amount and timing of revenues from such activities are
uncertain. The Company is in discussions with third parties to form joint
ventures and to engage in machine-building and licensing agreements. It may also
consider equity or debt financing in order to fund its growth in certain
strategic areas.
Year 2000 Issue
Historically, many computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
program failing to properly recognize a year that begins with "20" instead of
"19." This, in turn, could result in major system failures or miscalculations
and is generally referred to as the "Year 2000 Issue."
The Company formulated and completed a Year 2000 Plan to address the
Company's Year 2000 Issues. The Company evaluated its financial, business
reporting and data processing as well as other software applications, including,
but not limited to, its computerized laboratory manufacturing equipment and
embedded chips, to identify any Year 2000 Issues to ensure that there were no
material disruptions in the Company's operations. Most non- compliant software
was upgraded from equipment manufacturers
29
<PAGE>
and software providers. The cost of Year 2000 compliance was approximately
$255,000 and was comprised of the purchase of upgraded software and new or
upgraded computers.
The Company experienced no significant Year 2000 problems. The Company
will continue to monitor its Year 2000 compliance and that of its customers,
suppliers and other third parties on which it relies. The Company can give no
assurance that any Year 2000 problems which may develop would not significantly
disrupt the Company's business.
30
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
At the Annual Meeting of Stockholders (the "Meeting") of ECD held on
January 27, 2000, the following directors were elected for the ensuing year and
until their successors shall be duly elected and qualified:
For Withheld Authority
---------- ------------------
Stanford R. Ovshinsky 16,940,234 629,001
Iris M. Ovshinsky 16,939,814 629,421
Robert C. Stempel 16,954,931 614,304
Nancy M. Bacon 16,950,796 618,439
Kenneth R. Baker 16,960,031 609,204
Umberto Colombo 16,959,801 609,434
Subhash K. Dhar 16,955,006 614,229
Hellmut Fritzsche 16,929,371 639,864
Joichi Ito 16,924,571 644,664
Seymour Liebman 16,927,971 641,264
Tyler Lowrey 16,960,031 609,204
Walter J. McCarthy, Jr. 16,958,931 610,304
Florence I. Metz 16,958,731 610,504
Nathan J. Robfogel 16,957,301 611,934
Stanley K. Stynes 16,926,841 642,394
At the Meeting, the stockholders approved a proposal to increase the
number of authorized shares of the Company's Common Stock from 20,000,000 to
30,000,000 with 10,458,121 Common Stock votes, 5,497,825 Class A Common Stock
votes and 430,000 Class B Common Stock votes cast for the proposal. There were
1,096,445 Common Stock votes cast against the proposal and 86,844 Common Stock
abstentions.
Also approved at the Meeting was the appointment of Deloitte & Touche LLP
as independent accountants for the fiscal year ending June 30, 2000 (with
17,315,208 for, 224,757 against, and 29,270 abstentions).
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
A. Exhibits
--------
Exhibit 27. Financial Data Schedule (Edgar version)
B. Reports on Form 8-K
-------------------
None
31
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
-------------------------------
(Registrant)
By: /s/ Stephan W. Zumsteg
-------------------------------
Stephan W. Zumsteg
Date: February 14, 2000 Treasurer
By: /s/ Stanford R. Ovshinsky
-------------------------------
Stanford R. Ovshinsky
Date: February 14, 2000 President and Chief Executive Officer
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the period December 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,419,078
<SECURITIES> 0
<RECEIVABLES> 7,047,021
<ALLOWANCES> (310,000)
<INVENTORY> 372,210
<CURRENT-ASSETS> 19,838,309
<PP&E> 27,656,574
<DEPRECIATION> (20,513,395)
<TOTAL-ASSETS> 31,020,744
<CURRENT-LIABILITIES> 8,532,654
<BONDS> 2,061,600
0
0
<COMMON> 134,938
<OTHER-SE> 15,587,243
<TOTAL-LIABILITY-AND-EQUITY> 31,020,744
<SALES> 3,247,395
<TOTAL-REVENUES> 14,349,991
<CGS> 4,638,488
<TOTAL-COSTS> 5,897,963
<OTHER-EXPENSES> 10,998,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 216,256
<INCOME-PRETAX> (8,035,596)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,035,596)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,035,596)
<EPS-BASIC> (.60)
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