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, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ------------------------
Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2956 Waterview Drive, Rochester Hills, Michigan 48309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 293-0440
----------------------------
- -------------------------------------------------------------------------------
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
--- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
--- ----
As of November 5, 2004, there were 219,913 shares of ECD's Class A Common
Stock, 430,000 shares of ECD's Class B Common Stock and 24,669,190 shares of
ECD's Common Stock outstanding.
Page 1 of 38 Pages
ENERGY CONVERSION DEVICES AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements...........................................3
Consolidated Statements of Operations.................................3
Consolidated Balance Sheets - Assets..................................4
Consolidated Balance Sheets - Liabilities and Stockholders' Equity....5
Consolidated Statements of Cash Flows.................................6
Note A - Summary of Accounting Policies...............................8
Note B - Financings..................................................12
Note C - Accounts Receivable.........................................14
Note D - Inventories.................................................15
Note E - Joint Ventures and Investments..............................16
Note F - Liabilities.................................................21
Note G - Nonrefundable Advance Royalties.............................22
Note H - Product Sales, Royalties, Revenues From Product Development
Agreements and License and Other Agreements.................22
Note I - Business Segments...........................................24
Note J - Other Comprehensive Income (Loss)...........................26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................27
Item 3. Quantitative and Qualitative Disclosures about Market Risk....35
Item 4. Controls and Procedures.......................................35
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.............................................37
Item 6. Exhibits and Reports on Form 8-K..............................37
SIGNATURES.................................................................38
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------ --------------------
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended
September 30,
2004 2003
------------ ------------
REVENUES
Product sales $ 14,071,277 $ 6,698,696
Product sales to related parties 33,789 2,422
------------ ------------
Total product sales 14,105,066 6,701,118
Royalties 1,577,813 458,953
Royalties - related party 1,160 546
------------ ------------
Total royalties 1,578,973 459,499
Revenues from product development agreements 2,794,449 2,971,795
Revenues from product development agreements
with related parties 3,117,614 3,866,869
------------ ------------
Total revenues from product development
agreements 5,912,063 6,838,664
Revenues from license and other agreements 238,095 50,000
Other revenues 199,256 81,616
Other revenues from related parties 118,337 74,238
------------ ------------
Total other revenues 317,593 155,854
------------ ------------
TOTAL REVENUES 22,151,790 14,205,135
EXPENSES
Cost of product sales 13,769,321 8,969,266
Cost of revenues from product development
agreements 5,611,184 6,123,616
Product development and research 6,047,946 7,800,123
Patent defense (net) 173,088 2,110,980
Patents 536,084 520,389
Selling, general and administrative (net) 2,512,873 3,093,506
------------ ------------
TOTAL EXPENSES 28,650,496 28,617,880
------------ ------------
LOSS FROM OPERATIONS (6,498,706) (14,412,745)
OTHER INCOME (EXPENSE):
Interest income 77,178 316,141
Interest expense (236,427) (242,688)
Equity in losses of joint ventures - (244,382)
Distribution from joint venture 8,000,000 -
Gain on sales of investments - 309,150
Other nonoperating income (expense) 5,907 (7,059)
------------ ------------
TOTAL OTHER INCOME 7,846,658 131,162
------------ ------------
NET INCOME (LOSS) $ 1,347,952 $(14,281,583)
============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ .05 $ (.65)
============ ============
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
September 30, June 30,
2004 2004
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash, including cash equivalents of $23,456,000
at September 30, 2004 (of which $1,000,000 is
restricted) and $13,074,000 at June 30, 2004
(of which $1,150,000 is restricted) $ 24,043,456 $ 13,826,537
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$307,000 at September 30, 2004 and $274,000
at June 30, 2004) 12,512,977 12,730,100
Accounts receivable due from related parties 1,384,709 2,180,069
Inventories 12,238,679 13,651,715
Other 1,667,751 1,264,364
------------ ------------
TOTAL CURRENT ASSETS 51,847,572 43,652,785
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 15,158,175 15,191,642
Machinery and other equipment (including construction
in progress of approximately $4,000 at
September 30, 2004 and $2,000 at June 30, 2004) 75,877,909 75,776,192
Capitalized lease equipment 10,000,000 10,000,000
------------ ------------
101,303,084 101,234,834
Less accumulated depreciation and amortization (36,998,554) (35,288,928)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 64,304,530 65,945,906
Investment in Rare Earth Ovonic-China 1,710,000 1,710,000
INVESTMENT IN AND ADVANCES TO JOINT VENTURES
Ovonyx - -
Cobasys - -
Texaco Ovonic Hydrogen Systems - -
Ovonic Media - -
OTHER ASSETS 1,958,938 2,003,084
------------ ------------
TOTAL ASSETS $119,821,040 $113,311,775
============ ============
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, June 30,
2004 2004
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 11,342,583 $ 12,937,175
Salaries, wages and amounts withheld from employees 3,647,396 4,766,215
Deferred revenues under business agreements 35,301 966,596
Current portion of deferred patent license fee 952,380 -
Current installments on long-term liabilities 341,944 333,368
------------ ------------
TOTAL CURRENT LIABILITIES 16,319,604 19,003,354
LONG-TERM LIABILITIES 10,155,159 10,160,791
LONG-TERM DEFERRED PATENT LICENSE FEE 8,809,525 -
NONREFUNDABLE ADVANCE ROYALTIES 1,857,193 2,992,562
------------ ------------
TOTAL LIABILITIES 37,141,481 32,156,707
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 - 50,000,000 shares
Issued and outstanding - 24,524,101 shares at
September 30, 2004 and 24,523,001 shares at
June 30, 2004 245,241 245,230
Additional paid-in capital 417,340,094 417,313,665
Accumulated deficit (334,465,833) (335,813,785)
Accumulated other comprehensive income 230,248 250,399
Unearned compensation on Class B Convertible
Common Stock (676,690) (846,940)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 82,679,559 81,155,068
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $119,821,040 $113,311,775
============ ============
See notes to consolidated financial statements.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Three Months Ended
September 30,
2004 2003
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 1,347,952 $(14,281,583)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,036,011 2,027,358
Amortization of premium/discount on investments - 70,794
Equity in losses of joint ventures - 244,382
Change in nonrefundable advance royalties (1,135,369) (8,525)
Stock and stock options issued for services rendered 185,250 188,400
Gain on sales of investments - (309,150)
Loss on sale of equipment 6,898 7,699
Retirement liability 83,136 76,758
Changes in working capital:
Accounts receivable 217,123 1,078,672
Accounts and note receivable due from related parties 795,360 1,488,657
Inventories 1,413,036 (2,350,855)
Other assets (359,241) (1,200,700)
Current portion of deferred nonrefundable patent license fee 952,380 -
Accounts payable and accrued expenses (2,713,411) (3,634,995)
Deferred revenues under business agreements (931,295) (1,717,660)
Deferred nonrefundable patent license fee 8,809,525 -
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 10,707,355 (18,320,748)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (403,538) (560,078)
Sales of investments - 21,546,402
Proceeds from sale of property, plant and equipment 2,005 108,986
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (401,533) 21,095,310
------------ ------------
FINANCING ACTIVITIES:
Principal payments under short-term and long-term
debt obligations and capitalized lease obligations (80,192) (48,964)
Proceeds from exercise of stock options 11,440 24,451
------------ ------------
NET CASH (USED IN) FINANCING ACTIVITIES (68,752) (24,513)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (20,151) (52,586)
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,216,919 2,697,463
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,826,537 8,567,261
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,043,456 $ 11,264,724
============ ============
See notes to consolidated financial statements.
6
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Three Months Ended
September 30,
2004 2003
------------ ------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 236,427 $ 242,688
Noncash transactions:
Short-term and long-term note receivable -
United Solar Ovonic LLC - 184,128
Short-term and long-term note payable -
Canon - (184,128)
See notes to consolidated financial statements.
7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies
- ---------------------------------------
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has recurring losses from operations and needs
additional working capital. On August 12, 2004, the Board of Directors approved
management's business restructuring plan to take full advantage of the favorable
battery settlement agreement announced on July 7, 2004 and the increasing market
interest in solar energy systems and hybrid electric vehicles. Management
believes that funds generated from operations; new business agreements; equity
financing, including the exercise of Common Stock purchase warrants and exercise
of stock options; debt financing; new government contracts and the cost-
containment initiatives (see Note B of Notes to Consolidated Financial
Statements), together with existing cash and cash equivalents, will be adequate
to support the Company's operations for the coming year. However, the amount and
timing of such activities are uncertain. Accordingly, no assurances can be given
as to the timing or success of the aforementioned plans, negotiations,
discussions and programs.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern in the absence of sufficient additional
funds and the achievement of profitable operations. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern (see Note B of Notes to Consolidated
Financial Statements).
Nature of Business
- ------------------
Energy Conversion Devices, Inc. (ECD) is a technology, product development
and manufacturing company engaged in the invention, engineering, development and
commercialization of new materials, products and production technology in the
fields of alternative energy technology and information technology.
Financial Statement Presentation, Principles of Consolidation and
Equity Accounting
- -----------------------------------------------------------------
The consolidated financial statements include the accounts of ECD and its
100%-owned manufacturing and sales subsidiaries United Solar Ovonic Corp. and
United Solar Ovonic LLC (jointly referred to as "United Solar Ovonic") and its
approximately 91%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic Battery)
(collectively the "Company"). No minority interest related to Ovonic Battery
is recorded in the consolidated financial statements because there is no
additional funding requirement by the minority
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
shareholders. The Company has a number of strategic alliances and has four
major investments accounted for using the equity method: (i) Cobasys LLC
(formerly known as Texaco Ovonic Battery Systems LLC), a joint venture between
Ovonic Battery and ChevronTexaco Technology Ventures LLC (CTTV), a unit of
ChevronTexaco Corporation, each having 50% interest in the joint venture; (ii)
Texaco Ovonic Hydrogen Systems LLC, a joint venture between ECD and CTTV, each
having 50% interest in the joint venture; (iii) Ovonyx, Inc., a 41.7%-owned
joint venture with Mr. Tyler Lowrey, Intel Capital and other investors; and (iv)
Ovonic Media, LLC, a joint venture owned 51% by General Electric through its GE
Plastics business unit and 49% by ECD. See Note E of Notes to Consolidated
Financial Statements for discussions of all of the Company's ventures.
At September 30, 2004 and at June 30, 2004, the Company's investments in
Cobasys, Ovonyx, Texaco Ovonic Hydrogen Systems and Ovonic Media 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. To the extent that the Company has
made cash or other contributions, it recognizes its proportionate share of any
losses until the investment reaches zero.
Intellectual property, including patents, 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
patents and joint venture partners provide cash.
While the Company believes, based upon the opinion of legal counsel, that
it has no obligation to fund any losses that its joint ventures incur beyond the
Company's investment, the Company has decided to fund certain of its joint
ventures (see Note E of Notes to Consolidated Financial Statements).
Upon consolidation, all intercompany accounts and transactions are
eliminated. Any profits on intercompany transactions are eliminated to the
extent of the Company's ownership percentage.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (U.S. GAAP)
requires management to make estimates and assumptions that affect amounts
reported therein. Due to the inherent uncertainty involved in making estimates,
actual results reported in future periods may be based upon amounts that differ
from those estimates.
9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with 2004
presentation.
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.
The following is a summary of the gross selling, general and administrative
expenses and the aforementioned allocations:
Three Months Ended
September 30,
2004 2003
------------ ------------
Gross Expenses $ 5,922,000 $ 7,413,000
Less - allocations to product development
and research (2,594,000) (2,816,000)
- allocations to cost of revenues from
product development agreements (815,000) (1,503,000)
----------- -----------
Remaining Expenses $ 2,513,000 $ 3,094,000
=========== ===========
Distribution from Joint Venture
- -------------------------------
In July 2004, Cobasys made an $8,000,000 special distribution to each of
Ovonic Battery and CTTV for partial reimbursement of legal expenses paid on
behalf of Cobasys for litigation with Matsushita Electric Industrial Co. Ltd.
(MEI) and related companies (see Note B of Notes to Consolidated Financial
Statements).
Stock-Based Compensation
- ------------------------
ECD applies APB 25 to its stock-based compensation awards to employees. Had
compensation costs for ECD's stock option plans been determined based upon the
fair value at the grant date for awards under these plans consistent with the
methodology prescribed under SFAS 123, the Company's net income (loss) and net
income (loss) per share for the periods ended September 30, 2004 and 2003 would
have changed as follows:
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Three Months Ended
September 30,
2004 2003
------------ ------------
Net Income (Loss), as reported $ 1,347,952 $(14,281,583)
Less:
Total stock-based compensation expense determined
under fair value based method, net of tax 376,739 1,108,830
------------ ------------
Pro-forma net income (loss) $ 971,213 $(15,390,413)
============ ============
Income (Loss) per share:
Basic and Diluted - as reported $ .05 $ (.65)
============ ============
Basic and Diluted - pro forma $ .04 $ (.70)
============ ============
Basic and Diluted Net Income (Loss) Per Share
- ---------------------------------------------
Basic net income (loss) per common share is computed by dividing the net
income (loss) by the weighted average number of common shares outstanding. ECD
uses the treasury stock method to calculate diluted earnings per share.
Potential dilution exists from stock options and warrants. Weighted average
number of shares outstanding and basic and diluted net income (loss) per share
for the three months ended September 30 are computed as follows:
2004 2003
------------ ------------
Weighted average number of shares outstanding:
- for basic net income (loss) per share 25,173,150 21,902,459
- for diluted net income (loss) per share 25,425,464 21,902,459
Net income (loss) $ 1,347,952 $ (14,281,583)
BASIC NET INCOME (LOSS) PER SHARE $ 0.05 $ (.65)
DILUTED NET INCOME (LOSS) PER SHARE $ 0.05 $ (.65)
Due to the Company's net loss, the 2003 weighted average shares of
potential dilutive securities of 5,343 were excluded from the calculations of
diluted income (loss) per share, as inclusion of these securities would have
been antidilutive to the net income (loss) per share. Additional securities of
2,543,767 and 2,019,241, respectively, were excluded from the 2004 and 2003
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 income or loss.
11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Recent Pronouncements
- ---------------------
In March 2004, the Financial Accounting Standards Board (FASB) ratified
the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," effective for impairment evaluations in reporting periods
beginning after June 15, 2004. EITF 03-1 includes application guidance to
determine whether an investment, including a cost-method investment, is
considered impaired; whether that impairment is other-than-temporary; and, the
measurement of an impairment loss. The Company implemented this EITF on July 1,
2004.
In March 2004, the FASB ratified the consensus reached on EITF Issue No.
03-6, "Participating Securities and the Two Class Method under FASB Statement
No. 128," effective for fiscal periods beginning after the date of Board
ratification. EITF 03-6 requires the inclusion of certain participating
securities in the computation of earnings per share. The Company implemented
this EITF on July 1, 2004.
The adoption of these two EITFs did not have an effect on the Company's
consolidated financial position or results of operations.
NOTE B - Financings
- -------------------
Restructuring
- -------------
On August 12, 2004, the Board of Directors approved management's business
restructuring plan to take full advantage of the favorable battery settlement
agreement announced on July 7, 2004 and the increasing market interest in solar
energy systems and hybrid electric vehicles. Our strategy is to transition from
a research-oriented company to the next phase of development, which is to
commercialize the products we have developed and concentrate on growing sales
revenues and equity value in our core commercial businesses with the goal of
moving the Company into a position of having sustained profitability by July
2006.
The restructuring will increase product revenues while enabling us to carry
out major cost-reduction measures, including significant reductions in the
workforce to right size activities to support our core commercial businesses. We
will manage a reduced portfolio of advanced product development activities and a
leaner R&D team to grow future businesses.
The core commercial businesses on which the Company is focusing are United
Solar Ovonic, Cobasys and Ovonyx.
12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings (Continued)
- -------------------------------
Settlement Agreement
- --------------------
On July 7, 2004, ECD announced that it and Cobasys have entered into a
settlement agreement with MEI, Panasonic EV Energy Co., Ltd. (PEVE), and Toyota
Motor Corporation with respect to patent infringement disputes and counterclaims
involving nickel metal hydride (NiMH) batteries before the International Chamber
of Commerce, International Court of Arbitration. Under the terms of the
settlement, no party admitted any liability.
As part of the settlement, ECD and its subsidiary, Ovonic Battery, received
a $10 million license fee from MEI and PEVE. This fee was recorded as a deferred
patent license fee in July 2004 and is being amortized to income over 10.5
years. The Company recognized $238,095 as revenues from license and other
agreements in the three months ended September 30, 2004 in connection with the
amortization of this fee. In addition, Cobasys received a $20 million license
fee from MEI, PEVE and Toyota, of which $4 million was placed in escrow for a
next-generation NiMH battery development project plan. Upon receipt of the
license fee, Cobasys made an $8 million distribution each to Ovonic Battery and
CTTV representing a partial reimbursement of legal expenses in the three months
ended September 30, 2004. The Company recorded this $8 million as a distribution
from joint venture in the three months ended September 30, 2004.
General
- -------
The Company is engaged in a number of negotiations and discussions to fund
its operations, including raising additional capital through equity and debt
financings and forming new strategic alliances to fund and grow its photovoltaic
and other businesses. In addition, the Company is engaged in negotiations with
government agencies for contracts to fund its development activities.
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable
- ----------------------------
September 30, June 30,
2004 2004
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
Commercial customers $ 402,639 $ -
Amounts billed to customers
Commercial customers 507,649 505,008
----------- -----------
Sub-total 910,288 505,008
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
U.S. Government 90,246 369,322
Commercial customers 88,402 102,638
----------- -----------
178,648 471,960
Amounts billed
U.S. Government 454,186 1,229,432
----------- -----------
Sub-total 632,834 1,701,392
Amounts unbilled for other than long-term contracts
Commercial customers 1,300,968 1,762,282
Amounts billed for other than long-term contracts
U.S. Government 49,945 145,936
Commercial customers 9,925,942 8,889,482
----------- -----------
Sub-total 9,975,887 9,035,418
Allowance for uncollectible accounts (307,000) (274,000)
----------- -----------
TOTAL $12,512,977 $12,730,100
=========== ===========
Certain contracts with the U.S. Government require a retention that is
paid upon completion of audit of the Company's indirect rates. Certain contracts
have been completed for more than 10 years and have not been audited. U.S.
Government retentions totaling $103,447 are included in long-term other assets
at September 30, 2004 and at June 30, 2004. Most U.S. Government contracts
remain subject to audit.
14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable (Continued)
- ----------------------------------------
Accounts Receivable Due from Related Parties
- --------------------------------------------
September 30, June 30,
2004 2004
------------ ------------
Amounts earned which are billed in the
subsequent month on long-term contracts
ChevronTexaco Technology Ventures $ 2,051 $ 38,875
Cobasys 48,148 623,551
Texaco Ovonic Hydrogen Systems 736,823 1,329,194
----------- -----------
Sub-total 787,022 1,991,620
Amounts billed
Cobasys 492,990 7,393
Other unbilled
Ovonyx 23,701 17,237
Other billed
ChevronTexaco Technology Ventures 39,256 121,376
Ovonyx 40,140 16,850
Cobasys 1,600 -
Texaco Ovonic Hydrogen Systems - 25,593
----------- -----------
Sub-total 80,996 163,819
----------- -----------
TOTAL $ 1,384,709 $ 2,180,069
=========== ===========
NOTE D - Inventories
- --------------------
Inventories of raw materials, work in process and finished goods for the
manufacture of solar cells, metal hydride materials and battery packs are valued
at the lower of cost (first in, first out) or market. Cost elements included in
inventory are materials, direct labor and manufacturing overhead.
Inventories for United Solar Ovonic and Ovonic Battery are as
follows:
September 30, June 30,
2004 2004
------------ ------------
Finished products $ 2,010,482 $ 3,511,730
Work in process 3,222,138 4,060,923
Raw materials 7,006,059 6,079,062
------------ ------------
$ 12,238,679 $ 13,651,715
============ ============
15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments
- ---------------------------------------
Joint Ventures
- --------------
Cobasys (formerly Texaco Ovonic Battery Systems)
In July 2001, Ovonic Battery and CTTV, a unit of ChevronTexaco, formed a
strategic alliance named Texaco Ovonic Battery Systems LLC (renamed Cobasys LLC
in March 2004). ChevronTexaco will invest up to $178,000,000 ($144,000,000 of
which has been received as of September 30, 2004) in the venture. Cobasys is
owned 50% by Ovonic Battery and 50% by CTTV.
The Company recorded revenues from Cobasys of $475,000 and $1,417,000 for
the three months ended September 30, 2004 and 2003, respectively, for services
performed on behalf of Cobasys (primarily for advanced product development and
market development work). The Company recorded revenues of $34,000 and $2,000
for the three months ended September 30, 2004 and 2003, respectively, for
products sold to Cobasys.
The Company also recorded revenues from Cobasys of $45,000 for both the
three months ended September 30, 2004 and 2003 for rent of a portion of one of
the Company's facilities.
The following sets forth certain financial data regarding Cobasys that
are derived from its financial statements:
COBASYS LLC AND SUBSIDIARY
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
Three Months Ended
September 30,
2004 2003
------------ ------------
Revenue
Product and prototype revenues $ 218,054 $ 186,974
Contract research revenue 56,589 327,062
Licensing revenue 491,667 -
----------- -----------
Total Revenue 766,310 514,036
Expenses
Cost of product and prototype revenues 1,338,101 1,615,505
Research and development costs 2,572,940 3,287,847
Sales and marketing costs 649,544 769,241
General and administrative costs 1,436,665 939,942
Depreciation and amortization 719,919 672,373
----------- -----------
Total Expenses 6,717,169 7,284,908
----------- -----------
Net Loss $(5,950,859) $(6,770,872)
=========== ===========
16
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
COBASYS LLC AND SUBSIDIARY
BALANCE SHEETS
--------------
September 30, June 30,
2004 2004
------------ ------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents ($3,004,557 of which
is restricted as of September 30, 2004) $ 4,923,132 $ 1,305,873
Accounts receivable 1,182,878 769,444
Inventories 4,024,549 3,825,704
Prepaid expenses 79,640 50,740
------------ ------------
Total Current Assets 10,210,199 5,951,761
Net Property and Equipment 30,266,807 28,091,071
Other Assets:
Cash surrender value of life insurance 482,140 316,302
------------ ------------
Total Assets $ 40,959,146 $ 34,359,134
============ ============
Liabilities and Members' Capital
Current Liabilities:
Accounts payable $ 1,745,404 $ 1,424,092
Accounts payable, related party 55,000 1,300,175
Accrued expenses 2,085,587 1,453,034
Deferred revenues 1,904,762 166,145
------------ ------------
Total Current Liabilities 5,790,753 4,343,446
Deferred revenue - noncurrent 17,603,571 -
Members' Capital:
Members' interest 127,585,464 134,085,471
Loss accumulated during the development stage (110,020,642) (104,069,783)
------------ ------------
Total Members' Capital 17,564,822 30,015,688
------------ ------------
Total Liabilities and Members' Capital $ 40,959,146 $ 34,359,134
============ ============
Ovonyx
ECD owns 41.7% of Ovonyx, Mr. Tyler Lowrey and his colleague own 41.7% of
Ovonyx, and Intel and other investors own the remainder. On a fully diluted
basis after giving effect to the exercise of stock options and warrants, our
ownership of Ovonyx would be 31.4%. ECD has contributed intellectual property
and licenses for its interest in Ovonyx.
17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
In October 2002, ECD, through a newly formed company, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by ECD to Ovonyx and an exclusive, royalty-bearing license, which
requires annual minimum royalty payments in order to maintain its exclusivity.
ECD made a $50,000 minimum royalty payment in November 2003. ECD recorded its
$1,050,000 investment in Ovonyx and accounts for this investment on the equity
method and is recognizing its proportionate share of Ovonyx losses to the extent
of its $1,050,000 investment. In the three months ended September 30, 2003, ECD
recorded an equity loss of $244,000.
ECD recorded revenues from Ovonyx of $63,000 and $37,000, respectively, for
the three months ended September 30, 2004 and 2003 representing services
provided to this joint venture.
Texaco Ovonic Hydrogen Systems
In October 2000, ECD and CTTV, a unit of ChevronTexaco, formed Texaco
Ovonic Hydrogen Systems. As of September 30, 2004, ChevronTexaco has funded
$62,398,000 for initial product and market development, the primary use of which
is to fund a contract from Texaco Ovonic Hydrogen Systems to ECD to further
develop the Ovonic solid hydrogen storage technology. Funding may be cancelled
if mutually agreed-upon milestones are not satisfied. At its meeting on June 30,
2004, the Management Committee of Texaco Ovonic Hydrogen Systems did not approve
the accomplishment of three of the joint venture's milestones. The Management
Committee will review and determine the satisfaction of these milestones at a
future meeting. The joint venture is owned 50% by CTTV and 50% by ECD. ECD has
contributed intellectual property and licenses.
The following sets forth certain financial data regarding Texaco Ovonic
Hydrogen Systems that are derived from its financial statements.
18
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
TEXACO OVONIC HYDROGEN SYSTEMS LLC
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
Three Months Ended
September 30,
2004 2003
------------ ------------
Revenues
Other Income $ 4,671 $ 2,455
Prototype Sales 49,252 -
----------- -----------
Total Revenues 53,923 2,455
Expenses
Product Development - Paid or Payable to ECD 2,642,830 2,516,977
Product Development - Paid or Payable to
ChevronTexaco 247,210 275,974
Depreciation Expense 635,632 611,134
----------- -----------
Total Expenses 3,525,672 3,404,085
----------- -----------
Net Loss $(3,471,749) $(3,401,630)
=========== ===========
TEXACO OVONIC HYDROGEN SYSTEMS LLC
BALANCE SHEETS
--------------
(Unaudited)
September 30, June 30,
2004 2004
------------ ------------
Current Assets:
Cash and Equivalents $ 275,350 $ 1,222,639
Accounts Receivable 43,131 33,639
----------- -----------
Total Current Assets 318,481 1,256,278
Property, Plant and Equipment 9,879,612 9,879,612
Less Accumulated Depreciation (5,678,344) (5,042,712)
----------- -----------
Net Property, Plant and Equipment 4,201,268 4,836,900
----------- -----------
Total Assets $ 4,519,749 $ 6,093,178
=========== ===========
Current Liabilities:
Amount Due to Related Parties, Net $ 736,823 $ 1,278,475
Accounts Payable 25,592 31,109
Deferred Revenue 10,746 15,257
----------- -----------
Total Current Liabilities 773,161 1,324,841
Noncurrent Liabilities
Deferred Revenue 112,000 112,000
Members' Equity 3,634,588 4,656,337
----------- -----------
Total Liabilities and Members' Equity $ 4,519,749 $ 6,093,178
=========== ===========
19
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
During the three months ended September 30, 2004 and 2003, the Company
recorded revenues of $2,643,000 and $2,450,000, respectively, for services
provided to this joint venture, primarily for market development and advanced
product development work.
Ovonic Media
In 2000, we and General Electric, through its GE Plastics business unit,
formed a joint venture, Ovonic Media, LLC, to design, develop, demonstrate and
commercialize our proprietary continuous web roll-to-roll technology for the
ultra-high-speed manufacture of optical media products, primarily rewritable
DVDs. GE owns 51% of Ovonic Media and we own 49%. We have contributed
intellectual property, know-how, licenses and equipment to the joint venture. GE
has made cash and other contributions to the joint venture. Since its inception,
Ovonic Media has paid us $5.6 million through the end of fiscal year 2003 for
services to the joint venture.
GE informed ECD that additional funding after January 3, 2003 was
suspended. GE and ECD have been discussing as how to best position the joint
venture in order to meet the needs of the marketplace, and secure new equity
investors and strategic partners to fund the joint venture's operations. As the
next business step, we are seeking to secure a partner that is a leader in the
storage media industry to facilitate the commercialization and funding of our
technology. In the interim, ECD is directly funding continued product
development activities for this technology at a reduced level.
Investments in Rare Earth Ovonic
During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech of Inner Mongolia, China. The agreement
called for the creation of joint ventures for manufacturing and licensing of
advanced NiMH battery technology, alloy powders, advanced Ovonic nickel
hydroxide materials and production equipment, all for certain battery
applications for NiMH batteries. As of September 30, 2004, three of the
contemplated five joint ventures have been formed. ECD and Ovonic Battery
initially contributed technology for their 19% interest in each of these joint
ventures. In February 2002, ECD and Ovonic Battery jointly made a proportionate
$1,710,000 cash investment in the Rare Earth Ovonic joint ventures and
maintained their 19% interest in these entities. All of these joint ventures are
being accounted for using the cost method of accounting.
Ovonic Battery has three contracts totaling $63,600,000 for supplying
equipment and technology to its Rare Earth Ovonic joint ventures in China. As of
September 30, 2004, Ovonic Battery has received payments totaling $59,484,000
under the three contracts.
20
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
The Company recorded revenues from Rare Earth Ovonic of $1,070,000 and
$1,730,000 for the three months ended September 30, 2004 and 2003, respectively.
NOTE F - Liabilities
- --------------------
Warranty Liability
- ------------------
The Company estimates the liability for product warranty costs based upon
its past experience and best estimate of future warranty claims. The following
is a summary of the changes in the product warranty liability during the three
months ended September 30, 2004 and 2003:
Three Months Ended
September 30,
2004 2003
--------------- --------------
Liability beginning of the period $ 1,945,934 $ 2,990,661
Amounts accrued for as warranty costs 65,633 102,464
Warranty claims (251,722) -
----------- -----------
Liability at September 30 $ 1,759,845 $ 3,093,125
=========== ===========
Warranty liability is recorded at the time that the product is sold (for
sales of photovoltaic products) or at the time that revenue is recognized (for
machine-building and equipment sales).
Government Contract Reserve
- ---------------------------
The Company's contracts with the U.S. Government and its agencies are
subject to audits by the Defense Contract Audit Agency (DCAA). DCAA has audited
the Company's indirect rates, including its methodology of computing these
rates, for the years ended June 30, 1994 through June 30, 2003 for United Solar
Ovonic and the years ended June 30, 2000 through June 30, 2002 for ECD. In its
reports, DCAA has questioned the allowability of and the allocability of certain
costs as well as the Company's methodology for allocating independent research
and development to its indirect cost pools. In addition, DCAA has stated that
there could be penalties imposed. The Company, together with its government
contract consultants, is in the process of discussing each of these items in
detail with DCAA. Management believes that some of these DCAA assertions are
without merit. The Company has recorded a reserve of $1,682,000 and $1,847,000
at September 30 and June 30, 2004, respectively, related to these issues.
21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Nonrefundable Advance Royalties
- ----------------------------------------
At September 30 and June 30, 2004, the Company deferred recognition of
revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
September 30, June 30,
2004 2004
------------ ------------
Battery $ 435,902 $ 1,560,902
Optical memory 1,421,291 1,431,660
----------- -----------
$ 1,857,193 $ 2,992,562
=========== ===========
Creditable royalties earned and recognized as revenue were:
Three Months Ended
September 30,
2004 2003
------------ ------------
$1,135,369 $ 8,525
Included in creditable royalties earned and recognized as revenues in the
quarter ended September 30, 2004 is $1,125,000 related to an advance royalty
payment made by a licensee to the Company in 1993 associated with a license
agreement under which the licensee no longer has a contractual obligation to
make payments.
There are no obligations in connection with any of the advance royalty
agreements which require the Company to incur any additional costs.
NOTE H - Product Sales, Royalties, Revenues from Product Development
Agreements and License and Other Agreements
- --------------------------------------------------------------------
The Company has product sales and business agreements with third parties
and with related parties for which royalties and revenues are included in the
consolidated statements of operations. Product sales include photovoltaic
products, revenues related to machine-building and equipment sales contracts,
nickel hydroxide and metal hydride materials. Revenues related to
machine-building and equipment sales contracts are recognized on the
percentage-of-completion method of accounting using the costs incurred to date
as a percentage of the total estimated costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point. Currently, low sales volumes for metal hydride materials and machine
building combined with high fixed costs result in losses.
A summary of all of the Company's revenues follows.
22
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Product Sales, Royalties, Revenues from Product Development
Agreements and License and Other Agreements (Continued)
- --------------------------------------------------------------------
Three Months Ended
September 30,
2004 2003
----------- -----------
Product sales
Photovoltaics $12,976,318 $ 4,721,327
Machine building and equipment sales 1,069,889 1,737,880
Nickel hydroxide and metal hydride materials 25,070 239,489
----------- -----------
14,071,277 6,698,696
Product sales - related parties
Metal hydride materials 33,789 2,422
----------- -----------
Total product sales $14,105,066 $ 6,701,118
=========== ===========
Royalties
Battery technology $ 1,565,973 $ 450,428
Optical memory 11,840 8,525
----------- -----------
1,577,813 458,953
Royalty - related party
Microelectronics 1,160 546
----------- -----------
Total royalties $ 1,578,973 $ 459,499
=========== ===========
Revenues from product development agreements
Photovoltaics $ 2,639,360 $ 2,532,124
Battery technology - 420,994
Optical memory 130,357 -
Solid hydrogen storage systems 24,732 -
Other - 18,677
----------- -----------
2,794,449 2,971,795
Revenues from product development
agreements - related parties
Battery technology 474,907 1,416,534
Solid hydrogen storage systems 2,642,707 2,450,335
----------- -----------
3,117,614 3,866,869
----------- -----------
Total revenues from product development agreements $ 5,912,063 $ 6,838,664
=========== ===========
License and other agreements
Battery technology $ 238,095 $ 50,000
=========== ===========
23
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Product Sales, Royalties, Revenues from Product Development
Agreements and License and Other Agreements (Continued)
- --------------------------------------------------------------------
The following table presents revenues by country based on the location of
the customer:
Three Months Ended
September 30,
2004 2003
------------ ------------
United States $ 13,234,450 $ 10,827,570
Germany 4,213,475 105,714
China 1,085,171 1,788,586
Other Countries 3,618,694 1,483,265
------------ ------------
$ 22,151,790 $ 14,205,135
============ ============
In the three months ended September 30, 2004, the license fee of $238,000
resulted from the amortization over 10.5 years of the $10,000,000 payment
received in the MEI settlement (see Note B of Notes to Consolidated Financial
Statements). In the three months ended September 30, 2003, Ovonic Battery
entered into a license agreement with Mcnair-tech Co., Ltd. of China ($50,000).
NOTE I - Business Segments
- --------------------------
The Company has three business segments: Ovonic Battery, United Solar
Ovonic and the parent company, ECD. Ovonic Battery is involved in developing
and commercializing NiMH battery technology. United Solar Ovonic is involved
in manufacturing and selling photovoltaic products. ECD is involved in
microelectronics, fuel cells, hydrogen storage and photovoltaics technologies
and machine building. Some general corporate expenses have been allocated to
Ovonic Battery.
The Company's operations by business segments were as follows:
24
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I - Business Segments (Continued)
- --------------------------------------
Financial Data by Business Segment
----------------------------------
(in thousands)
United Solar Ovonic Consolidating
Ovonic ECD Battery Entries Consolidated
------------ ----------- ----------- ------------- ------------
Revenues
Three months ended
September 30, 2004 $ 15,092 $ 4,073 $ 3,411 $ (424) $ 22,152
September 30, 2003 6,940 3,747 4,318 (800) 14,205
Operating Income (Loss)
Three months ended
September 30, 2004 $ (632) $ (4,776) $ (1,468) $ 377 $ (6,499)
September 30, 2003 (4,114) (6,816) (4,475) 992 (14,413)
Interest Income
Three months ended
September 30, 2004 $ 8 $ 768 $ - $ (699) $ 77
September 30, 2003 4 537 - (225) 316
Interest Expense*
Three months ended
September 30, 2004 $ 935 $ - $ - $ (699) $ 236
September 30, 2003 1,018 184 - (959) 243
Equity in Net Loss of Investees
Under Equity Method
Three months ended
September 30, 2004 $ - $ - $ - $ - $ -
September 30, 2003 - (244) - - (244)
Depreciation Expense
Three months ended
September 30, 2004 $ 1,335 $ 572 $ 129 $ - $ 2,036
September 30, 2003 1,304 543 180 - 2,027
Capital Expenditures
Three months ended
September 30, 2004 $ 240 $ 60 $ 104 $ - $ 404
September 30, 2003 482 23 55 - 560
Investments in and Advances
to Equity Method Investees
Three months ended
September 30, 2004 $ - $ - $ - $ - $ -
September 30, 2003 - 350 - - 350
Identifiable Assets
Three months ended
September 30, 2004 $ 79,176 $140,783 $ 5,889 $(106,027) $119,821
September 30, 2003 121,796 128,994 8,660 (125,389) 134,061
- --------------------------------------------------------------------
* Excludes intercompany interest between ECD and Ovonic Battery.
25
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE J - Other Comprehensive Income (Loss)
- ------------------------------------------
The Company's total comprehensive income (loss) was as follows:
Three Months Ended
September 30,
2004 2003
------------ ------------
Net Income (Loss) $ 1,347,952 $(14,281,583)
OTHER COMPREHENSIVE INCOME (LOSS)
(net of taxes):
Unrealized holding gains arising during period - (179,954)
Less: reclassification adjustments for gains
realized in net income - 183,147
----------- ------------
Net unrealized gains (losses) - (363,101)
Foreign currency translation adjustments (20,151) 62,907
----------- ------------
COMPREHENSIVE INCOME (LOSS) $ 1,327,801 $(14,581,777)
=========== ============
The accumulated income (expense) balances of currency translation
adjustments, net of taxes, were $230,248 and $250,399 at September 30, 2004 and
June 30, 2004, respectively.
For the three months ended September 30, 2004, the effect from foreign
currency transactions was a gain of $11,803. For the three months ended
September 30, 2003, the effect from foreign currency transactions was a loss of
$68,826.
26
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, 2004 and is qualified in
its entirety by the foregoing. The results of operations for the three months
ended September 30, 2004 are not necessarily indicative of results to be
expected in future periods.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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
Quarterly Report to identify forward-looking statements.
We have based these forward-looking statements on our current expectations
with respect to future events and occurrences. Investors are cautioned that our
actual results in the future may differ materially from the expected results
reflected in our forward-looking statements. The expected results reflected in
our forward-looking statements are subject to various significant risks and
uncertainties, including the following:
o we need to obtain debt or additional equity financing to continue to
operate our business and financing may be unavailable, reduce our stock
price or be available only on disadvantageous terms;
o our licensees and joint venture partners may be unwilling or unable to
devote their financial resources and manufacturing and marketing
capabilities to commercialize products based on our technologies;
o we may be unable to continue to protect and maintain the proprietary
nature of our technology, or to convince others of the necessity of
licensing our technology without litigation;
o other companies may be successful in asserting patent infringement or
other claims against us which prevent us from commercializing products
based on our technology or which force us to make royalty or other
payments to competitors;
o other companies may develop competing technologies which cause our
technology to become obsolete or noncompetitive;
o we may be unable to successfully execute our internal business plans;
o we may experience performance problems with key suppliers or
subcontractors;
o adverse changes may occur in general economic conditions or in political
or competitive forces affecting our business;
o competition may increase in our industry or markets;
27
o our government product development or research contracts may be
terminated by unilateral government action or we may be unsuccessful in
obtaining new government contracts to replace those which have been
terminated or completed;
o we may become subject to legal or regulatory proceedings which may reach
unfavorable resolutions;
o there may be adverse changes in the securities markets which affect the
price of our stock;
o we may suffer the loss of key personnel or may be unable to attract and
retain qualified personnel to maintain and expand our business;
o our product development and commercialization programs involve a number
of uncertainties and we may never generate sufficient revenues to become
profitable;
o we may not achieve the designed output capabilities of certain
manufacturing equipment designed and built by us;
o we rely on collaborative relationships and termination of any of these
relationships and the underlying contracts could reduce the financial
resources available to us, including future revenues;
o some of our key technologies have not been used to produce commercial
products and may not be capable of producing such products;
o our commercialization programs will require substantial additional
future funding which could hurt our operational and financial condition;
o future sales of our securities may depress the price of our securities;
or
o our securities may not allow our holders to receive a return on such
securities other than through the sale of the securities.
There is also the risk that we incorrectly analyze these risks or that
strategies we develop to address them are unsuccessful.
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.
28
Results of Operations
Overview
- --------
The Company had net income of $1,348,000 on revenues of $22,152,000 in the
three months ended September 30, 2004 compared to a net loss of $14,282,000 on
revenues of $14,205,000 in the three months ended September 30, 2003.
The table below summarizes the Company's operating results (in thousands):
Revenues Operating Profit/(Loss)
-------------------- -----------------------
Segment 2004 2003 2004 2003
------------------------- -------- -------- -------- --------
United Solar Ovonic $ 15,092 $ 6,940 $ (632) $ (4,114)
Energy Conversion Devices 4,073 3,747 (4,776) (6,816)
Ovonic Battery 3,411 4,318 (1,468) (4,475)
Consolidating Entries (424) (800) 377 992
-------- -------- -------- --------
Consolidated $ 22,152 $ 14,205 (6,499) (14,413)
======== ========
Other Income 7,847 131
-------- --------
Net Income (Loss) $ 1,348 $(14,282)
======== ========
Three Months Ended September 30, 2004 Compared to Three Months Ended
September 30, 2003
- ---------------------------------------------------------------------
United Solar Ovonic Segment
- ---------------------------
The United Solar Ovonic segment had a decreased operating loss in 2004
versus 2003 primarily due to significantly higher revenues and the impact of
cost reductions in 2004.
United Solar Ovonic's 2004 revenues increased by $8,152,000 resulting from
increased product sales, partially offset by lower revenues from product
development agreements. Photovoltaic sales increased by 175% to $12,976,000 for
2004 from $4,721,000 for 2003.
United Solar Ovonic's gross margin on product sales improved to $609,000 in
2004 compared to a negative margin of $1,761,000 in 2003 because of higher sales
and lower material costs.
United Solar Ovonic's revenues from product development agreements in the
three months ended September 30, 2004 decreased to $1,946,000 compared to
$2,218,000 in 2003 primarily due to reduced revenues from its $15.5 million Air
Force Contract to develop new solar technology to be used in space and airship
vehicles ($1,460,000 in 2004 compared to $1,947,000 in 2003).
29
Revenues from product development agreements for the segment in 2004 funded
93% of United Solar Ovonic's cost of product development. Revenues from product
development agreements decreased by $272,000 and spending decreased by $86,000,
resulting in an increase of $186,000 in net cost of product development.
Three Months Ended
September 30,
2004 2003
----------- -----------
Cost of revenues from product development
agreements $ 1,609,000 $ 1,648,000
Product development and research 486,000 533,000
----------- -----------
Total cost of product development 2,095,000 2,181,000
Revenues from product development agreements 1,946,000 2,218,000
----------- -----------
Net cost of product development $ 149,000 $ (37,000)
=========== ===========
The product development expenditures were used to fund the development of
new products for space and airship applications and to develop lower-cost and
higher-efficiency terrestrial products.
United Solar Ovonic's operating, general and administrative expenses (net
of allocations) decreased by $1,118,000 in 2004 as a result of reductions
($1,281,000) in marketing activities in 2004 (versus extensive work done in 2003
to develop markets) and cost-savings initiatives, partially offset by reduced
allocation ($163,000) to cost of product development in 2004.
Energy Conversion Devices Segment
- ---------------------------------
The ECD segment had a decreased operating loss in 2004 versus 2003,
primarily due to a decrease in the net cost of product development in 2004. The
ECD segment's revenues increased in 2004 from 2003, primarily due to an increase
from product development agreements.
ECD's revenues from product development agreements increased in the three
months ended September 30, 2004 to $3,843,000 from $3,538,000 in the three
months ended September 30, 2003 due to higher revenues from Texaco Ovonic
Hydrogen Systems ($2,643,000 in 2004 versus $2,450,000 in 2003) and new
contracts with the National Institute of Standards and Technology ($591,000 in
2004 versus zero in 2003).
Revenues from product development agreements for the segment for the three
months ended September 30, 2004 funded 52% of the ECD segment's cost of product
development. Revenues from product development agreements increased by $305,000
and spending decreased by $917,000, resulting in a decrease of $1,222,000 in net
cost of product development.
30
Three Months Ended
September 30,
2004 2003
----------- -----------
Cost of revenues from product development
agreements $ 3,892,000 $ 3,280,000
Product development and research 3,447,000 4,976,000
----------- -----------
Total cost of product development 7,339,000 8,256,000
Revenues from product development agreements 3,843,000 3,538,000
----------- -----------
Net cost of product development $ 3,496,000 $ 4,718,000
=========== ===========
Product development programs include work on the Ovonic Cognitive Computer
technology - a unique approach to develop computing based on the learning
capability that mimics the functionality of the human brain to combine memory
and processing in a single sub-micron device. ECD is also developing a unique
three-terminal Ovonic threshold/memory device technology to have high-speed,
high-current capabilities. Additionally, ECD continued the development of the
Ovonic regenerative fuel cell, which is a fundamentally new approach to fuel
cell technology.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues were $185,000 in the three months ended
September 30, 2004 from $167,000 in the three months ended September 30, 2003.
ECD's operating, general and administrative expenses (net of allocations)
were $889,000 in 2004 compared to $1,121,000 in 2003. The decrease in the net
expense for 2004 was due to the impact ($371,000) of ECD's cost-containment
program, partially offset by lower allocation ($155,000) to cost of product
development and research in 2004.
Ovonic Battery Segment
- ----------------------
The Ovonic Battery segment had a decreased operating loss in 2004 versus
2003, primarily resulting from a $1,116,000 increase in royalty income and a
$1,938,000 decrease in patent defense costs due to settlement of the MEI
litigation.
The decrease in Ovonic Battery's revenues was primarily due to a decrease
in equipment sales to Rare Earth Ovonic and a reduction in revenues from product
development agreements principally related to decreased activities under the
advanced product development agreement from Cobasys, partially offset by
increased royalties and revenues from license and other agreements.
Equipment sales revenues decreased 43% to $1,129,000 in 2004 from
$1,980,000 in 2003, primarily due to Ovonic Battery contracts with Rare Earth
Ovonic to provide battery-manufacturing equipment, the first phase of which is
in final machine acceptance, ($1,070,000 in 2004 compared to $1,730,000 in
2003). Sales of nickel hydroxide were zero in 2004 versus $235,000 in 2003 as
sales to the primary customer were affected by a temporary plant closure and an
accumulation of inventory by the customer. Despite the lower sales, the loss on
product sales improved to negative $329,000 in 2004 from negative $459,000 in
2003 due to Ovonic Battery's cost-containment program.
31
Ovonic Battery's revenues from product development agreements in the three
months ended September 30, 2004 decreased to $475,000 from $1,838,000 in the
three months ended September 30, 2003, primarily due to reduced activities with
Cobasys ($475,000 in 2004 compared to $1,417,000 in 2003) as Cobasys moves into
its commercialization phase.
Revenues from product development agreements for the Ovonic Battery segment
in the three months ended September 30, 2004 funded 18% of Ovonic Battery's cost
of product development as Ovonic Battery significantly reduced its spending on
product development. Revenues from product development agreements decreased by
$1,363,000 and spending decreased by $1,664,000, resulting in a decrease of
$301,000 in net cost of product development.
Three Months Ended
September 30,
2004 2003
----------- -----------
Cost of revenues from product development
agreements $ 463,000 $ 1,951,000
Product development and research 2,115,000 2,291,000
----------- -----------
Total cost of product development 2,578,000 4,242,000
Revenues from product development agreements 475,000 1,838,000
----------- -----------
Net cost of product development $ 2,103,000 $ 2,404,000
=========== ===========
Royalties increased 248% to $1,566,000 in the three months ended September
30, 2004 from $450,000 in the three months ended September 30, 2003 due to the
recognition of $1,125,000 related to an advance royalty payment made by a
licensee to the Company in 1993 associated with a license agreement under which
the licensee no longer has a contractual obligation to make payments.
Revenues from license and other agreements increased to $238,000 in the
three months ended September 30, 2004 from $50,000 in the three months ended
September 30, 2003. The 2004 license fee results from the amortization over 10.5
years of the $10,000,000 payment received in the settlement of the patent
infringement disputes and counterclaims in consideration of the licenses granted
and the agreement to cross license through December 31, 2014 (see Note B of
Notes to Consolidated Financial Statements). The 2003 license fee resulted from
a license to Mcnair-tech Co., Ltd. of China. Revenues from license and other
agreements depend on a small number of new business arrangements, are sporadic
and vary dramatically from period to period.
Patent expenses were incurred in 2004 and 2003 in connection with the
protection of Ovonic Battery's United States and foreign patents covering its
proprietary technologies. Total patent expenses decreased to $439,000 in the
three months ended September 30, 2004 from $2,301,000 in the three months ended
September 30, 2003, principally due to lower patent defense costs ($173,000 in
2004 versus $2,111,000 in 2003) for the protection of the Company's NiMH battery
patents and technology.
32
Ovonic Battery's operating, general and administrative expenses (net of
allocations) increased due to reduced allocation ($606,000) in 2004 to cost of
revenues and product development and research.
Other Income/Expense
- --------------------
The $7,716,000 improvement in other income (net) ($7,847,000 income in 2004
compared to $131,000 income in 2003) resulted primarily from the $8,000,000
distribution received from Cobasys as a distribution from the joint venture
associated with the settlement of the patent infringement disputes and
counterclaims (see Note B of Notes to Consolidated Financial Statements).
Liquidity and Capital Resources
As of September 30, 2004, the Company had consolidated cash, cash
equivalents, and accounts receivable (including $1,385,000 of amounts due from
related parties) of $37,941,000 and had consolidated working capital of
$35,528,000.
As part of the settlement of the patent infringement disputes and
counterclaims, ECD and Ovonic Battery received a nonrefundable $10 million
patent license fee from MEI and PEVE. In addition, Cobasys received a $20
million nonrefundable patent license fee from MEI, PEVE and Toyota, of which $4
million was placed in escrow for a next-generation NiMH battery development
project plan. Upon receipt of the funds, Cobasys made $8 million distributions
to each of Ovonic Battery and CTTV as a distribution from the joint venture (see
Note B of Notes to Consolidated Financial Statements).
On August 12, 2004, the Board of Directors approved management's business
restructuring plan to take full advantage of the favorable battery settlement
agreement announced on July 7, 2004 and the increasing market interest in solar
energy systems and hybrid electric vehicles. Our strategy is to transition from
a highly successful research-oriented company to the next phase of development,
which is to commercialize the products we have developed and concentrate on
growing sales revenues and equity value in our core commercial businesses with
the goal of moving the Company into a position of having sustained profitability
by July 2006.
The restructuring will increase product revenues while enabling us to carry
out major cost-reduction measures, including significant reductions in the
workforce to right size activities to support our core commercial businesses. We
will manage a reduced portfolio of advanced product development activities and a
leaner R&D team to grow future businesses.
The core commercial businesses on which the Company is focusing are United
Solar Ovonic, Cobasys and Ovonyx.
The Company expects the amount of cash to be received under existing
product development agreements in the year ending June 30, 2005 to decrease to
approximately $13,332,000, compared to $36,678,000 received in the year ended
June 30, 2004, substantially due to reduced funding to be received in the year
ending June 30, 2005 from ChevronTexaco.
33
Our backlog of orders as of September 30, 2004 for machine-building and
equipment sales contracts, photovoltaic products and metal hydride materials is
$5,488,000 compared to a backlog of $11,325,000 at September 30, 2003. The
decrease in 2004 was due to a reduction in the backlog for the Rare Earth
Ovonic project. In fiscal 2005, we expect to recognize substantially all of
these revenues.
Certain of the Company's product development and product purchase
agreements contain provisions allowing for the termination of such agreements
for, among other things, failure of the Company to meet agreement milestones or
for breach of material contractual provisions. Generally, the termination
provisions allow for the Company to recover any costs incurred through the
termination date.
As of September 30, 2004, the Company had $24,043,000 consolidated cash and
cash equivalents ($1,000,000 of which was restricted) consisting of money market
funds. It is the Company's policy that investments (including cash equivalents)
shall be rated "A" or higher by Moody's or Standard and Poor's, no single
investment (excluding cash equivalents) shall represent more than 10% of the
portfolio and at least 20% of the total portfolio shall have maturities of 90
days or less.
During the three months ended September 30, 2004, $10,707,000 of cash was
generated from operations. The difference between the net income of $1,348,000
and the net cash generated from operations was principally due to the deferred
nonrefundable patent license fee received from the conclusion of the patent
litigation with MEI ($9,762,000) and noncash costs (principally depreciation,
$2,036,000) partially offset by reductions in nonrefundable advance royalties
($1,135,000) and deferred revenues under business agreements ($931,000) (see
Notes A, B and G of Notes to Consolidated Financial Statements).
The Company spent $404,000 on property, plant and equipment that was placed
in service during the three months ended September 30, 2004. In total, the
Company expects to spend $2,000,000 for capital expenditures in fiscal 2005,
primarily for manufacturing equipment at United Solar Ovonic and for leasehold
improvements to the Company's facilities.
As part of its long-standing strategy, the Company has made investments in
its technologies, which have resulted in enabling intellectual property and
products. The technology emerging from these investments has enabled the Company
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.
The resultant strategic alliances and agreements with major companies have
accelerated the commercialization and development of the Company's products and
technologies. While the Company's business partners have funded most of its
product development and commercialization activities, additional sources of cash
are required to sustain the Company's operations. The Company expects to
continue to use significant cash to fund its operations in the coming year and
is engaged in a number of activities to raise capital, grow revenues and reduce
costs.
34
Management believes that funds generated from operations; new business
agreements; equity financing, including the exercise of Common Stock purchase
warrants and exercise of stock options; debt financings; new government
contracts and the cost-containment initiatives, together with existing cash and
cash equivalents, will be adequate to support the Company's operations for the
coming year. However, the amount and timing of such activities are uncertain.
Accordingly, no assurances can be given as to the timing or success of the
aforementioned plans, negotiations, discussions and programs. The report of the
independent registered public accounting firm states that "the Company's
recurring losses from operations and need for additional working capital raise
substantial doubt about its ability to continue as a going concern." The Company
has recurring losses from operations and is actively engaged in discussions to
obtain the needed additional working capital.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------ ----------------------------------------------------------
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities and
time deposits. All such instruments are classified as securities available for
sale. We do not invest in portfolio equity securities, or commodities, or use
financial derivatives for trading purposes. Our debt security portfolio
represents funds held temporarily, pending use in our business and operations.
The Company had $23,456,000 and $13,074,000 of these investments (including cash
equivalents) on September 30, 2004 and June 30, 2004, respectively. On September
30 and June 30, 2004, the investments were all maturing on a daily basis. It is
the Company's policy that investments (including cash equivalents) shall be
rated "A" or higher by Moody's or Standard and Poor's, no single investment
(excluding cash equivalents) shall represent more than 10% of the portfolio and
at least 20% of the total portfolio shall have maturities of 90 days or less.
Our market risk primarily relates to the risks of changes in the credit quality
of issuers. As of September 30, 2004, the risk associated with changes in
interest rates is minimal due to the short average maturity of the investments.
Item 4. Controls and Procedures
- ------ -----------------------
In Item 9A, Controls and Procedures of the Company's Form 10-K for the year
ended June 30, 2004, the following four significant deficiencies were identified
pursuant to standards established by the Public Company Accounting Oversight
Board (PCAOB):
1. The Company has insufficient documentation of its policies and procedures
around internal controls to ensure that the execution of activities and
controls are consistent with management's objectives.
2. The Company does not currently have monitoring controls in place to
determine whether controls that have been implemented by management,
specifically in the financial reporting function, are actually operating
consistently with management's objectives.
35
3. The Company has areas where employees are performing processes or
controls that are incompatible with their functions. Segregation of
duties issues were identified in the Accounts Receivable, Accounts
Payable, Financial Reporting, Payroll, and Treasury functions.
4. The Company has certain weaknesses in the security of data within the
Company's information systems. These include issues regarding security
event logs and activity reports, assignment of administrator rights,
segregation of duties, and access to data and applications.
The Company's independent registered public accounting firm, Grant Thornton
LLP, has indicated that each of the above significant deficiencies constitutes
a material weakness in our internal controls pursuant to standards established
by the PCAOB.
As part of the Company's effort to ensure compliance with provisions of
Sarbanes-Oxley Section 404, the Company has devised a plan and committed the
required resources to address and remediate these material weaknesses prior to
our attestation of control effectiveness as of June 30, 2005. This has included
the recent retention of a top-tier independent registered public accounting firm
to assist in the project direction, execution and external reporting.
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, which considered the material weaknesses
mentioned above, the Chief Executive Officer and Chief Financial Officer
concluded that the operation of these disclosure controls and procedures were
effective for gathering, analyzing and disclosing information required to be
disclosed in connection with the Company's filing of its Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004. No significant changes were
made in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
36
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- ------ -----------------
See "Settlement Agreement" under Note B - Financings of the Notes to
Consolidated Financial Statements on page 13.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
A. Exhibits
--------
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32. Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
-------------------
During the quarter ended September 30, 2004, the Registrant filed or
furnished the following reports on Form 8-K:
1. On July 7, 2004, we filed a Current Report on Form 8-K for the
purpose of filing our press release announcing the settlement of
patent infringement disputes and counterclaims involving nickel
metal hydride (NiMH) batteries.
2. On August 12, 2004, we filed a Current Report on Form 8-K for the
purpose of filing our press release announcing the Company's
strategic business restructuring to focus on accelerating the
commercialization of our products.
3. On September 13, 2004, we filed a Current Report on Form 8-K for
the purpose of furnishing our press release announcing our
financial results for the fiscal year ended June 30, 2004.
4. On September 24, 2004, we filed a Current Report on Form 8-K for
the purpose of filing our press release announcing our compliance
with Nasdaq Marketplace Rule 4350(b)(1)(B).
37
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 9, 2004 Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Robert C. Stempel
-------------------------------------------
Robert C. Stempel
Date: November 9, 2004 Chairman and Chief Executive Officer
38