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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the period ended MARCH 31, 2005
------------------------------------------------------------
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
incorporation or organization) Identification No.)
2956 Waterview Drive, Rochester Hills, Michigan 48309
- --------------------------------------------------------------------------------
(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 May 6, 2005, there were 219,913 shares of ECD's Class A Common
Stock, 430,000 shares of ECD's Class B Common Stock and 32,585,153 shares of
ECD's Common Stock outstanding.
Page 1 of 45 Pages
ENERGY CONVERSION DEVICES, INC. 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 ................................................13
NOTE C - Accounts Receivable .......................................16
NOTE D - Inventories ...............................................17
NOTE E - Joint Ventures and Investments ............................18
NOTE F - Liabilities ...............................................22
NOTE G - Nonrefundable Advance Royalties ...........................23
NOTE H - Product Sales, Royalties, Revenues from Product Development
Agreements and License and Other Agreements .............23
NOTE I - Business Segments .........................................25
NOTE J - Other Comprehensive Income (Loss) .........................28
NOTE K - Income Taxes ..............................................28
NOTE L - Subsequent Event ..........................................28
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................29
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ....42
ITEM 4. Controls and Procedures .......................................42
PART II - OTHER INFORMATION
---------------------------
ITEM 6. Exhibits ......................................................44
SIGNATURES ............................................................45
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------ --------------------
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUES
Product sales $ 13,495,625 $ 8,584,859 $ 36,467,233 $ 22,650,376
Royalties 670,128 975,766 3,746,342 2,044,525
Revenues from product development agreements 2,901,312 3,917,117 9,073,182 10,176,826
Revenues from product development agreements
with related parties 460,586 2,890,720 5,616,777 11,005,507
------------ ------------ ------------ ------------
Total revenues from product
development agreements 3,361,898 6,807,837 14,689,959 21,182,333
Revenues from license and other agreements 238,095 - 80,246,285 75,000
Other revenues 80,169 83,303 419,482 245,870
Other revenues from related parties 95,660 93,412 247,963 226,050
------------ ------------ ------------ ------------
Total other revenues 175,829 176,715 667,445 471,920
------------ ------------ ------------ ------------
TOTAL REVENUES 17,941,575 16,545,177 135,817,264 46,424,154
EXPENSES
Cost of product sales 12,943,675 10,051,509 39,560,326 28,026,796
Cost of revenues from product
development agreements 3,229,416 6,566,234 13,345,812 19,696,425
Product development and research 7,102,601 5,537,940 19,991,759 18,204,159
Patent defense (net) 42,096 887,485 231,265 6,358,542
Patents 669,622 623,128 1,857,919 1,578,802
Selling, general and administrative (net) 5,544,803 4,958,912 11,354,740 12,139,306
------------ ------------ ------------ ------------
TOTAL EXPENSES 29,532,213 28,625,208 86,341,821 86,004,030
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (11,590,638) (12,080,031) 49,475,443 (39,579,876)
OTHER INCOME (EXPENSE)
Interest income 409,019 62,346 594,552 635,274
Interest expense (70,364) (78,107) (541,170) (913,844)
Equity in losses of joint ventures - (96,139) (100,000) (644,220)
Impairment loss in Rare Earth Ovonic-China - - (1,710,000) -
Distribution from joint venture - - 8,000,000 -
Gain on sales of investments - - - 364,416
Other nonoperating income (196,141) (73,589) 76,989 174,722
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 142,514 (185,489) 6,320,371 (383,652)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (11,448,124) (12,265,520) 55,795,814 (39,963,528)
INCOME TAXES (BENEFIT) (198,136) - 826,864 -
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (11,249,988) (12,265,520) 54,968,950 (39,963,528)
EXTRAORDINARY ITEM (NET OF TAXES) - - 2,266,326 -
------------ ------------ ------------ ------------
NET INCOME (LOSS) $(11,249,988) $(12,265,520) $57,235,276 $(39,963,528)
============ ============ ============ ============
BASIC NET INCOME (LOSS) PER SHARE
BEFORE EXTRAORDINARY ITEM $ (.39) $ (.49) $ 2.08 $ (1.70)
EXTRAORDINARY ITEM - - .08 -
------------ ------------ ------------ ------------
BASIC NET INCOME (LOSS) PER SHARE $ (.39) $ (.49) $ 2.16 $ (1.70)
============ ============ ============ ============
DILUTED NET INCOME (LOSS) PER SHARE
BEFORE EXTRAORDINARY ITEM $ (.39) $ (.49) $ 2.00 $ (1.70)
EXTRAORDINARY ITEM - - .08 -
------------ ------------ ------------ ------------
DILUTED NET INCOME (LOSS) PER SHARE $ (.39) $ (.49) $ 2.08 $ (1.70)
============ ============ ============ ============
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
March 31, June 30,
2005 2004
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash, including cash equivalents of
$79,297,000 at March 31, 2005 and
$11,924,000 at June 30, 2004 $ 79,872,019 $ 12,676,537
Short-term Investments 19,768,819 -
Restricted Cash (cash equivalents) 800,000 1,150,000
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$436,000 at March 31, 2005 and $274,000
at June 30, 2004) 14,679,941 12,730,100
Accounts receivable due from related parties 292,374 2,180,069
Inventories 15,008,343 13,651,715
Other 1,202,287 1,264,364
------------ ------------
TOTAL CURRENT ASSETS 131,623,783 43,652,785
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 15,083,501 15,191,642
Machinery and other equipment 76,057,503 75,776,192
Capitalized lease equipment 10,000,000 10,000,000
------------ ------------
101,408,004 101,234,834
Less accumulated depreciation and amortization (40,417,245) (35,288,928)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 60,990,759 65,945,906
Investment in Rare Earth Ovonic-China - 1,710,000
INVESTMENT IN AND ADVANCES TO JOINT VENTURES
Ovonyx - -
Cobasys - -
OTHER ASSETS 2,108,527 2,003,084
------------ ------------
TOTAL ASSETS $194,723,069 $113,311,775
============ ============
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, June 30,
2005 2004
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 14,183,436 $ 12,937,175
Salaries, wages and amounts withheld from employees 3,962,580 4,766,215
Deferred revenues under business agreements 1,482,956 966,596
Current portion of deferred patent license fee 952,380 -
Current installments on long-term liabilities 359,757 333,368
------------ ------------
TOTAL CURRENT LIABILITIES 20,941,109 19,003,354
LONG-TERM LIABILITIES 10,136,985 10,160,791
LONG-TERM DEFERRED PATENT LICENSE FEE 8,333,335 -
NONREFUNDABLE ADVANCE ROYALTIES 1,162,260 2,992,562
------------ ------------
TOTAL LIABILITIES 40,573,689 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 - 30,612,071 shares at
March 31, 2005 and 24,523,001 shares at
June 30, 2004 306,121 245,230
Additional paid-in capital 432,399,381 417,313,665
Accumulated deficit (278,578,509) (335,813,785)
Accumulated other comprehensive income 352,078 250,399
Unearned compensation on Class B Convertible
Common Stock (336,190) (846,940)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 154,149,380 81,155,068
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $194,723,069 $113,311,775
============ ============
See notes to consolidated financial statements.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
March 31,
2005 2004
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 57,235,276 $(39,963,528)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 6,070,436 6,099,374
Amortization of deferred nonrefundable
patent license fee (714,285) -
Amortization of premium/discount on investments - 73,083
Equity in losses of joint ventures 100,000 644,220
Impairment loss in Rare Earth Ovonic 1,710,000 -
Change in nonrefundable advance royalties (1,830,302) (415,984)
Stock and stock options issued for services rendered 786,242 585,209
Gain on sales of investments - (364,416)
Loss on sale of equipment 5,383 10,378
Retirement liability 249,408 230,274
Option received in exchange for license (79,532,000) -
Changes in working capital:
Reduction in restricted cash 350,000 550,000
Accounts receivable (1,949,841) (3,652,734)
Accounts and note receivable due from related parties 1,887,695 4,947,808
Inventories (1,356,628) (2,369,457)
Other assets (134,664) (27,080)
Current portion of deferred nonrefundable
patent license fee 952,380 -
Accounts payable and accrued expenses 442,627 (9,209,510)
Deferred revenues under business agreements 516,360 (2,988,312)
Deferred nonrefundable patent license fee 9,047,620 -
------------ ------------
NET CASH USED IN OPERATIONS (6,164,293) (45,850,675)
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (1,044,439) (2,831,696)
Investment in Ovonyx (100,000) (50,000)
Purchases of investments (19,768,819) (11,969,949)
Sales of investments - 38,631,634
Proceeds from sale of property, plant and equipment 15,065 161,466
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (20,898,193) 23,941,455
FINANCING ACTIVITIES:
Principal payments under short-term and long-term
debt obligations and capitalized lease obligations (246,825) (150,703)
Proceeds from exercise of stock options 12,216,297 24,451
Proceeds from sale of stock and warrants, net
of expenses 82,186,817 32,247,582
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 94,156,289 32,121,330
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 101,679 88,948
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 67,195,482 10,301,058
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,676,537 6,567,261
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 79,872,019 $ 16,868,319
============ ============
See notes to consolidated financial statements.
6
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
March 31,
2005 2004
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 541,170 $ 913,844
Noncash transactions:
Short-term and long-term note receivable -
United Solar Ovonic LLC - (11,629,489)
Short-term and long-term note payable -
Canon - 11,629,489
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 had recurring losses from operations and, at
June 30, 2004, the Company had $12,677,000 in cash and cash equivalents and
needed additional working capital. These factors, among others, raised
substantial doubt about the Company's ability to continue as a going concern in
the absence of sufficient additional funds and the sustained achievement of
profitable operations.
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. In February 2005, the Company
received $82,187,000 (net of expenses) from a private placement through the sale
of 5,090,000 shares of its Common Stock. Management believes that funds
generated from operations; new business agreements; the exercises of Common
Stock purchase warrants and 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 next
twelve months. No assurances can be given as to the timing or success of the
aforementioned plans, negotiations, discussions and programs.
As of March 31, 2005, as noted above, the Company has raised financing
and has taken other steps to improve its financial condition. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset 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
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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 shareholders. The Company has a number of strategic
alliances and, as of March 31, 2005, has two 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 subsidiary of ChevronTexaco Corporation, each
having 50% interest in the joint venture and (ii) Ovonyx, Inc., a 41.7%-owned
joint venture with Mr. Tyler Lowrey, Intel Capital and other investors. See Note
E of Notes to Consolidated Financial Statements for discussions of all of the
Company's ventures.
At March 31, 2005 and at June 30, 2004, the Company's investments in
Cobasys and Ovonyx 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.
Cash Equivalents
- ----------------
Cash equivalents consist of investments in short-term, highly liquid
securities maturing 90 days or less from the date of acquisition.
9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Short-Term Investments
- ----------------------
The Company has evaluated its investment policies consistent with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
determined that all of its investment securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Stockholders' Equity under the
caption "Accumulated Other Comprehensive Income." The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and accretions are included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in other nonoperating
income (expense). The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
Short-term investments consist of corporate notes which mature 91 days or
more from date of acquisition. No realized gains or losses were recorded in the
three and nine months ended March 31, 2005 and 2004. Unrealized losses of
$431,153 were recorded in the nine months ended March 31, 2004.
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.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with 2005
presentation.
Overhead and Selling, General and Administrative Allocations
- ------------------------------------------------------------
The Company allocates overhead and general and administrative expenses to
product development and research expenses and to cost of revenues from product
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:
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Gross Expenses $ 8,478,000 $ 7,666,000 $21,095,000 $22,767,000
Less - allocations to product
development and research (2,369,000) (2,283,000) (7,720,000) (6,985,000)
- allocations to cost of
revenues from product
development agreements (564,000) (424,000) (2,020,000) (3,643,000)
----------- ----------- ----------- -----------
Remaining Expenses $ 5,545,000 $ 4,959,000 $11,355,000 $12,139,000
=========== =========== =========== ===========
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 three months and nine months ended March 31,
2005 and 2004 would have changed as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net Income (Loss), as reported $(11,249,988) $(12,265,520) $ 57,235,276 $(39,963,528)
Less:
Total stock-based compensation
expense determined under fair
value based method, net of tax 412,803 1,028,081 1,413,743 3,036,748
------------ ------------ ------------ ------------
Pro forma net income (loss) $(11,662,791) $(13,293,601) $ 55,821,533 $(43,000,276)
============ ============ ============ ============
Income (Loss) per share:
Basic - as reported $ (.39) $ (.49) $ 2.16 $ (1.70)
============ ============ ============ ============
Basic - pro forma $ (.41) $ (.53) $ 2.11 $ (1.83)
============ ============ ============ ============
Diluted - as reported $ (.39) $ (.49) $ 2.08 $ (1.70)
============ ============ ============ ============
Diluted - pro forma $ (.41) $ (.53) $ 2.03 $ (1.83)
============ ============ ============ ============
11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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 and nine months ended March 31 are computed as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Weighted average number of
shares outstanding:
- for basic net income
(loss) per share 28,688,992 25,122,487 26,438,055 23,505,848
- for diluted net income
(loss) per share 28,688,992 25,122,487 27,537,033 23,505,848
Net income (loss) before
extraordinary item $(11,249,988) $(12,265,520) $ 54,968,950 $(39,963,528)
Extraordinary item (net of taxes) - - 2,266,326 -
------------ ------------ ------------ ------------
Net income (loss) $(11,249,988) $(12,265,520) $ 57,235,276 $(39,963,528)
============ ============ ============ ============
Basic net income (loss) per share
before extraordinary item $ (.39) $ (.49) $ 2.08 $ (1.70)
Extraordinary item - - .08 -
------------ ------------ ------------ ------------
Basic net income (loss) per share $ (.39) $ (.49) $ 2.16 $ (1.70)
============ ============ ============ ============
Diluted net income (loss) per share
before extraordinary item $ (.39) $ (.49) $ 2.00 $ (1.70)
Extraordinary item - - .08 -
------------ ------------ ------------ ------------
Diluted net income (loss) per share $ (.39) $ (.49) $ 2.08 $ (1.70)
============ ============ ============ ============
Due to the Company's net loss in the three months ending March 31, 2005,
weighted average shares of potential dilutive securities of 1,559,894 were
excluded from the calculations of diluted net loss per share, as inclusion of
these securities would have been antidilutive to the net loss per share.
Due to the Company's net loss in 2004, weighted average shares of
potentially dilutive securities of 21,701 and 69,886 for the three and nine
months ending March 31, 2004, respectively, were excluded from the calculations
of diluted net loss per share, as inclusion of these securities would have been
antidilutive to the net loss per share.
Additional securities of 330,600 and 6,553,225 for the three months ended
March 31, 2005 and 2004, respectively, and 668,656 and 4,562,542 for the nine
months ended March 31, 2005 and 2004, respectively, were excluded from the 2005
and 2004 calculations of weighted average shares of potentially dilutive
securities. Because of the relationship
12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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.
Recent Pronouncements
- ---------------------
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
This Statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award and is effective as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005. The Company
is in the process of reviewing this Statement for the future effect on the
Company's consolidated financial position or results of operations.
NOTE B - Financings
- -------------------
Private Placement
- -----------------
In February 2005, the Company completed an $82.2 million (net of expenses)
private placement of its Common Stock. The Company sold 5,090,000 shares of
Common Stock at a price of $17.25 per share to 65 institutional investors. The
Company plans to use the net proceeds of this transaction to double the
manufacturing capacity of United Solar Ovonic's triple-junction, thin-film
amorphous silicon photovoltaic products; to exercise the option to purchase for
$4.55 per share the 4,376,633 shares of ECD's Common Stock held by TRMI
Holdings, Inc. (TRMI), a subsidiary of ChevronTexaco Corporation; and for
general corporate purposes, including research and development activities.
Restructuring
- -------------
In August 2004, the Board of Directors approved management's business
restructuring plan to take full advantage of the battery settlement agreement
announced in July 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.
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings (Continued)
- -------------------------------
The core commercial businesses on which the Company is focusing are United
Solar Ovonic, Cobasys and Ovonyx.
On December 2, 2004, as part of its focus on its core businesses, ECD
entered into a series of agreements with CTTV and Cobasys to expand the scope of
licenses granted to Cobasys at the time of the formation of the joint venture in
July 2001.
In consideration of the expanded license, revised joint venture agreements
and the grant to CTTV of a security interest in our membership interest in
Cobasys, ECD, through its subsidiary Ovonic Battery, received an option to
purchase the 4,376,633 shares of ECD Common Stock currently owned by TRMI. The
option is exercisable at $4.55 per share and expires on November 1, 2005.
The amount of the license fee was calculated based upon the application of
the Black Scholes valuation model to the difference between the closing price of
ECD Common Stock on December 2, 2004 on the NASDAQ National Market and the $4.55
per share option price under the option granted by TRMI to ECD's Ovonic Battery
subsidiary on December 2, 2004 to acquire 4,376,633 shares of ECD Common Stock.
The transaction increased ECD's revenues and decreased additional paid-in
capital in the nine months ended March 31, 2005 by $79,532,000 as a result of
this one-time, non-cash event.
The 4,376,633 shares of ECD Common Stock subject to the option represent
approximately 14% of the currently issued and outstanding shares. ECD believes
that the option arrangement will provide it with value and added flexibility in
its activities to secure additional capital required for its future growth.
The agreement also provides a mechanism for additional funding from CTTV
to continue Cobasys' expansion. CTTV will be entitled to a priority right of
repayment for providing the additional funding. ECD and CTTV will each continue
to own a 50 percent interest in Cobasys, subject to adjustment under certain
circumstances.
In addition, CTTV transferred to ECD its interest in Ovonic Hydrogen in
consideration of relieving CTTV of any continuing obligations to fund Ovonic
Hydrogen. ECD received $4,675,000 from CTTV for payment of restructuring fees.
The $4,675,000 received from CTTV was $2,266,000 (net of tax) in excess of
restructuring costs through December 31, 2004. The Company has recognized this
as an extraordinary item (gain) in the nine months ended March 31, 2005.
After the transfer by CTTV of its interest in Ovonic Hydrogen to ECD,
Ovonic Hydrogen is 100% owned by ECD. It is funded by ECD at a reduced level and
is included in the Company's consolidated financial statements. Ovonic Hydrogen
will focus on continuing to commercialize small portable metal hydride storage
systems that have current
14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings (Continued)
- -------------------------------
and near-term market applications while continuing to develop and commercialize
ECD's proprietary reversible solid metal hydride-based low-pressure hydrogen
storage systems for longer-term stationary, transportation and infrastructure
applications.
Settlement Agreement
- --------------------
In July 2004, ECD and Cobasys 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 $238,000 and $714,000 as revenues from
license and other agreements in the three months and nine months ended March 31,
2005, respectively, 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. The Company recorded this $8 million as a
distribution from joint venture in the nine months ended March 31, 2005.
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.
15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable
- ----------------------------
March 31, June 30,
2005 2004
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Amounts billed to customers
Commercial customers $ 3,508 $ 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 906,826 369,322
Commercial customers 26,067 102,638
------------ ------------
932,893 471,960
Amounts billed
U.S. Government 987,170 1,229,432
------------ ------------
Sub-total 1,920,063 1,701,392
Amounts unbilled for other than long-term contracts
Commercial customers 1,701,091 1,762,282
Amounts billed for other than long-term contracts
U.S. Government 148 145,936
Commercial customers 11,491,131 8,889,482
------------ ------------
Sub-total 11,491,279 9,035,418
Allowance for uncollectible accounts (436,000) (274,000)
------------ ------------
TOTAL $ 14,679,941 $ 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 March 31, 2005 and at June 30, 2004. Most U.S. Government contracts remain
subject to audit.
16
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable (Continued)
- ----------------------------------------
Accounts Receivable Due from Related Parties
- --------------------------------------------
March 31, June 30,
2005 2004
------------ ------------
Amounts earned which are billed in the
subsequent month on long-term contracts
Cobasys $ 57,807 $ 623,551
Ovonic Hydrogen Systems - 1,329,194
------------ ------------
Sub-total 57,807 1,952,745
Amounts billed
Cobasys 144,649 7,393
Other unbilled
ChevronTexaco Technology Ventures - 38,875
Ovonyx 18,558 17,237
------------ ------------
Sub-total 18,558 56,112
Other billed
ChevronTexaco Technology Ventures 41,847 121,376
Ovonyx 20,673 16,850
Cobasys 8,840 -
Ovonic Hydrogen Systems - 25,593
------------ ------------
Sub-total 71,360 163,819
------------ ------------
TOTAL $ 292,374 $ 2,180,069
============ ============
NOTE D - Inventories
- --------------------
Inventories of raw materials, work in process and finished goods for the
manufacture of solar cells, nickel hydroxide, and metal hydride materials 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 (principally for United Solar Ovonic) are as follows:
March 31, June 30,
2005 2004
------------ ------------
Finished products $ 2,013,077 $ 3,511,730
Work in process 3,788,723 4,060,923
Raw materials 9,206,543 6,079,062
------------ ------------
$ 15,008,343 $ 13,651,715
============ ============
17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments
- ---------------------------------------
Joint Ventures
- --------------
Cobasys
In July 2001, Ovonic Battery and CTTV, a unit of ChevronTexaco, formed a
strategic alliance (Cobasys LLC). ChevronTexaco has agreed to invest up to
$160,000,000 (which has been received as of March 31, 2005) to match the
Company's technological contribution in the venture. Cobasys is owned 50% by
Ovonic Battery and 50% by CTTV.
On December 2, 2004, as part of its focus on its core businesses, ECD
entered into a series of agreements with CTTV and Cobasys to expand the scope of
licenses granted to Cobasys at the time of the formation of the joint venture in
July 2001 (see Note B of Notes to Consolidated Financial Statements).
In July 2004, ECD and Cobasys 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.
The Company recorded revenues from Cobasys of $461,000 and $1,528,000 for
the three months and nine months ended March 31, 2005, respectively, and
$916,000 and $4,267,000 for the three months and nine months ended March 31,
2004, respectively, for services performed on behalf of Cobasys (primarily for
advanced product development and market development work). The Company recorded
revenues of $0 and $34,000 for the three months and nine months ended March 31,
2005, and recorded no revenues for the three months and nine months ended March
31, 2004 for products sold to Cobasys.
The Company also recorded revenues from Cobasys of $0 and $45,000 for the
three months and nine months ended March 31, 2005, respectively, and $45,000 and
$135,000 for the three months and nine months ended March 31, 2004,
respectively, for rent of a portion of one of the Company's facilities.
18
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue
Product and prototype revenues $ 295,140 $ 647,444 $ 714,180 $ 1,201,608
Engineering service and contract
revenues 273,342 66,583 630,907 2,076,572
Licensing revenue 476,190 - 1,428,571 -
Other revenues 10,468 - 10,468 -
------------ ------------ ------------ ------------
Total Revenue 1,055,140 714,027 2,784,126 3,278,180
Expenses
Cost of product and prototype revenues 1,904,592 262,171 4,674,527 2,862,218
Research and development costs 5,480,162 6,147,130 12,894,735 14,832,534
Sales and marketing costs 760,376 918,951 1,988,723 2,423,289
General and administrative costs 1,900,939 1,338,906 4,787,241 3,559,119
Loss on impairment of assets 1,951,432 - 1,951,432 -
Depreciation and amortization 808,813 711,810 2,297,874 2,053,452
------------ ------------ ------------ ------------
Total Expenses 12,806,314 9,378,968 28,594,532 25,730,612
------------ ------------ ------------ ------------
Net Loss $(11,751,174) $ (8,664,941) $(25,810,406) $(22,452,432)
============ ============ ============ ============
19
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
COBASYS LLC AND SUBSIDIARY
BALANCE SHEETS
--------------
March 31, June 30,
2005 2004
------------ ------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents ($3,028,000
of which is restricted as of
March 31, 2005) $ 5,171,317 $ 1,305,873
Accounts receivable 1,955,075 769,444
Inventories 4,363,173 3,825,704
Prepaid expenses 87,481 50,740
------------ ------------
Total Current Assets 11,577,046 5,951,761
Net Property and Equipment 34,971,534 28,091,071
Other Assets:
Cash surrender value of life insurance 379,574 316,302
------------ ------------
Total Assets $ 46,928,154 $ 34,359,134
============ ============
Liabilities and Members' Capital
Current Liabilities:
Accounts payable $ 2,838,346 $ 1,424,092
Accounts payable, related party 129,170 1,300,175
Accrued expenses 2,722,956 1,453,034
Deferred revenues 2,310,962 166,145
------------ ------------
Total Current Liabilities 8,001,434 4,343,446
Long-Term Liabilities:
Deferred revenue - noncurrent 16,666,667 -
Preferred interest loan - related party 8,089,293 -
Note payable, capital leases 50,949 -
------------ ------------
Total Long-Term Liabilities 24,806,909 -
Total Liabilities 32,808,343 4,343,446
Members' Capital:
Members' interest 144,000,000 134,085,471
Loss accumulated during the development
stage (129,880,189) (104,069,783)
------------ ------------
Total Members' Capital 14,119,811 30,015,688
------------ ------------
Total Liabilities and Members' Capital $ 46,928,154 $ 34,359,134
============ ============
20
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 30.9%. ECD has contributed intellectual property
and licenses for its interest in Ovonyx.
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 and a $100,000
payment in December 2004. ECD recorded its $1,150,000 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 $1,150,000 investment.
In the nine months ended March 31, 2005, ECD recorded an equity loss of
$100,000; and in the three months and nine months ended March 31, 2004, ECD
recorded an equity loss of $96,000 and $644,000, respectively, related to its
investment in Ovonyx.
ECD recorded revenues from Ovonyx of $52,000 and $177,000, respectively,
for the three months and nine months ended March 31, 2005, and $38,000 and
$109,000, respectively, for the three months and nine months ended March 31,
2004, representing services provided to this joint venture.
Investments in Rare Earth Ovonic
During the year ended June 30, 2000, ECD and Ovonic Battery signed
agreements with Rare Earth High-Tech of Inner Mongolia, China. The agreements
called for the creation of three joint ventures for manufacturing and licensing
of advanced NiMH battery technology, alloy powders, and production equipment,
all for certain battery applications for NiMH batteries. 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.
At December 31, 2004, the Company reviewed its revenue and cost estimates
for its Rare Earth Ovonic joint ventures in connection with its investment
($1,710,000) in Rare Earth Ovonic. Based upon these estimates, the Company
recorded an impairment charge of $1,710,000 as of December 31, 2004.
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
March 31, 2005, Ovonic Battery has received payments totaling $59,484,000 under
the three contracts. In
21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
December 2004, the Company reviewed its estimates to complete the equipment
under the Rare Earth Ovonic contracts. As a result of this review and the
changes in estimates, the Company reduced its estimated margin from 12% to 8%.
This resulted in a reduction in the cumulative revenue for these contracts at
March 31, 2005 of approximately $2,668,000.
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 nine
months ended March 31, 2005 and 2004:
Nine Months Ended
March 31,
2005 2004
------------ ------------
Liability at beginning of the period $ 1,945,934 $ 2,990,661
Amounts accrued for as warranty costs (203,228)** (1,093,228)*
Warranty claims (172,708) (130,000)
------------ ------------
Liability at end of the period $ 1,569,998 $ 1,767,433
============ ============
- -------------------
* During the nine months ended March 31, 2004, the Company
revised its estimated warranty liability (primarily on its
Rare Earth Ovonic contract), based upon its recent experience,
and recorded a reduction in this liability.
** During the nine months ended March 31, 2005, United Solar
Ovonic LLC revised its warranty liability, based upon its
recent experience, and recorded a reduction in this liability.
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, 2003 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 is in the process of discussing
each of these items in detail with DCAA. Management believes that some of these
DCAA
22
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE - F - Liabilities (Continued)
- ----------------------------------
assertions are without merit. The Company has recorded a reserve of $2,504,000
and $1,847,000 at March 31, 2005 and June 30, 2004, respectively, related to
these issues.
NOTE G - Nonrefundable Advance Royalties
- ----------------------------------------
At March 31, 2005 and June 30, 2004, the Company deferred recognition of
revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
March 31, June 30,
2005 2004
----------- -----------
Battery $ 435,902 $ 1,560,902
Optical memory 726,358 1,431,660
----------- -----------
$ 1,162,260 $ 2,992,562
=========== ===========
Creditable royalties earned and recognized as revenue were:
March 31,
2005 2004
----------- -----------
Three months ended $ (2,190) $ 35,257
Nine months ended $ 1,830,302 $ 55,984
Included in creditable royalties earned and recognized as revenues in the
three months and nine months ended March 31, 2005 are zero and $1,811,000,
respectively, related to advance royalty payments made by licensees to the
Company associated with license agreements under which the licensees no longer
have contractual obligations 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,
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)
- --------------------------------------------------------------------
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.
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Product sales
Photovoltaics $12,495,412 $ 6,966,658 $36,706,755 $18,321,912
Machine building and
equipment sales 498,244 1,283,041 (1,099,791)* 3,251,837
Nickel hydroxide and metal
hydride materials 501,969 335,160 860,269 1,076,627
----------- ----------- ----------- -----------
Total product sales $13,495,625 $ 8,584,859 $36,467,233 $22,650,376
=========== =========== =========== ===========
Royalties
Battery technology $ 612,323 $ 496,308 $ 2,960,778 $ 1,542,623
Optical memory/microelectronics 57,805 479,458 785,564 501,902
----------- ----------- ----------- -----------
Total royalties $ 670,128 $ 975,766 $ 3,746,342 $ 2,044,525
=========== =========== =========== ===========
Revenues from product
development agreements
Photovoltaics $ 2,192,760 $ 2,734,998 $ 6,869,343 $ 7,715,478
Battery technology (20,751) 531,767 (20,603) 1,426,325
Optical 283,337 80,465 768,922 201,541
Solid hydrogen storage systems 143,695 434,910 291,668 567,959
Other 302,271 134,977 1,163,852 265,523
----------- ----------- ----------- -----------
2,901,312 3,917,117 9,073,182 10,176,826
----------- ----------- ----------- -----------
Revenues from product development
agreements - related parties
Battery technology 460,586 916,064 1,527,853 4,267,150
Solid hydrogen storage systems - 1,974,656 4,088,924 6,738,357
----------- ----------- ----------- -----------
460,586 2,890,720 5,616,777 11,005,507
----------- ----------- ----------- -----------
Total revenues from product
development agreements $ 3,361,898 $ 6,807,837 $14,689,959 $21,182,333
=========== =========== =========== ===========
License and other agreements
Battery technology $ 238,095 $ - $80,246,285 $ 75,000
=========== =========== =========== ===========
- -------------------------------
* Reflects adjustment in percentage-of-completion revenues as of December 31,
2004. (See Note E of Notes to Consolidated Financial Statements.)
24
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 Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
----------- ----------- ------------ -----------
United States $ 9,729,962 $ 9,535,025 $114,165,560 $31,316,707
Germany 4,958,057 3,514,356 12,689,054 5,238,352
China 546,320 1,354,012 (1,017,317) 3,268,058
Other Countries 2,707,236 2,141,784 9,979,967 6,601,037
----------- ----------- ------------ -----------
$17,941,575 $16,545,177 $135,817,264 $46,424,154
=========== =========== ============ ===========
In the three months and nine months ended March 31, 2005, the license fees
of $238,000 and $714,000, respectively, 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 addition, in the nine months
ended March 31, 2005, Ovonic Battery recognized a license fee of $79,532,000 in
connection with a license with CTTV (see Note B of Notes to Consolidated
Financial Statements). In the nine months ended March 31, 2004, Ovonic Battery
entered into license agreements with Mcnair-tech Co., Ltd. of China ($50,000)
and Linghao Battery in China ($25,000).
NOTE I - Business Segments
- --------------------------
The Company has three business segments: United Solar Ovonic, Ovonic
Battery and the parent company, ECD. United Solar Ovonic is involved in
manufacturing and selling photovoltaic products. Ovonic Battery is involved in
developing and licensing Ovonic NiMH consumer battery technology. ECD is
involved in developing microelectronics, fuel cells, hydrogen storage,
catalysis, photovoltaics technologies and machine building. Some general
corporate expenses have been allocated to Ovonic Battery.
25
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I - Business Segments (Continued)
- --------------------------------------
The Company's operations by business segments were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
United Solar Ovonic Consolidating
Ovonic ECD Battery Entries Consolidated
------------ --------- --------- ------------- ------------
Revenues
Three months ended
March 31, 2005 $ 14,425 $ 1,747 $ 2,354 $ (585) $ 17,941
March 31, 2004 9,232 3,779 3,576 (42) 16,545
Nine months ended
March 31, 2005 $ 43,008 $ 9,791 $ 84,612 $ (1,594) $135,817
March 31, 2004 25,090 11,332 11,582 (1,580) 46,424
Operating Income (Loss)
Three months ended
March 31, 2005 $ (1,052) $ (9,165) $ (1,399) $ 25 $(11,591)
March 31, 2004 (2,377) (5,617) (3,468) (618) (12,080)
Nine months ended
March 31, 2005 $ (3,590) $(18,966) $ 71,370 $ 661 $ 49,475
March 31, 2004 (9,529) (18,077) (13,146) 1,172 (39,580)
Interest Income
Three months ended
March 31, 2005 $ 8 $ 1,104 $ - $ (703) $ 409
March 31, 2004 8 1,108 - (1,054) 62
Nine months ended
March 31, 2005 $ 21 $ 2,664 $ - $ (2,091) $ 594
March 31, 2004 15 2,617 - (1,997) 635
Interest Expense*
Three months ended
March 31, 2005 $ 935 $ - $ - $ (865) $ 70
March 31, 2004 457 - - (379) 78
Nine months ended
March 31, 2005 $ 2,794 $ - $ - $ (2,253) $ 541
March 31, 2004 2,538 373 - (1,997) 914
- ---------------------------
* Excludes intercompany interest between ECD and Ovonic Battery.
26
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I - Business Segments (Continued)
- --------------------------------------
United Solar Ovonic Consolidating
Ovonic ECD Battery Entries Consolidated
------------ --------- --------- ------------- ------------
Equity in Net Loss of Investees
Under Equity Method
Three months ended
March 31, 2005 $ - $ - $ - $ - $ -
March 31, 2004 - (96) - - (96)
Nine months ended
March 31, 2005 $ - $ (100) $ - $ - $ (100)
March 31, 2004 - (644) - - (644)
Depreciation Expense
Nine months ended
March 31, 2005 $ 4,033 $ 1,660 $ 377 $ - $ 6,070
March 31, 2004 3,936 1,629 534 - 6,099
Capital Expenditures
Nine months ended
March 31, 2005 $ 865 $ 98 $ 81 $ - $ 1,044
March 31, 2004 697 1,727 408 - 2,832
Identifiable Assets
Nine months ended
March 31, 2005 $ 80,784 $218,799 $ 4,687 $(109,547) $194,723
March 31, 2004 83,745 137,561 6,913 (106,137) 122,082
27
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 Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net Income (Loss) $(11,249,988) $(12,265,520) $ 57,235,276 $(39,963,528)
OTHER COMPREHENSIVE INCOME
(LOSS) (net of taxes):
Net unrealized gains (losses) on
investments - - - (431,153)
Foreign currency translation
adjustments 45,097 14,943 101,679 88,948
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $(11,204,891) $(12,250,577) $ 57,336,955 $(40,305,733)
============ ============ ============ ============
There were no unrealized holding gains (losses) on investments arising
during the three and nine months ended March 31, 2005 and 2004. There was a
reclassification adjustment of $431,153 for gains realized in net income for the
nine months ended March 31, 2004.
The accumulated income (expense) balances of currency translation
adjustments, net of taxes, were $352,078 and $250,399 at March 31, 2005 and June
30, 2004, respectively.
For the three months ended March 31, 2005 and 2004, the effect from
foreign currency transactions was a loss of $229,712 and $133,742, respectively.
For the nine months ended March 31, 2005 and 2004, the effect from foreign
currency transactions was a gain of $44,708 and a loss of $2,875, respectively.
NOTE K - Income Taxes
- ---------------------
Due to the transaction with CTTV (see Note A of Notes to Consolidated
Financial Statements) and the recognition of $79,532,000 in revenue from the
license with Cobasys, it is estimated that the Company will have an alternative
minimum tax liability. The Company has used the effective alternative minimum
tax rate of 1.51% in computing the income tax expense as of March 31, 2005.
NOTE L - Subsequent Event
- -------------------------
Subsequent to March 31, 2005, the Company received $26,921,000 from the
exercise of warrants. The warrants to purchase 1,928,462 shares of ECD Common
Stock at an exercise price of $13.96 per share were exercised by warrantholders
who received the warrants as a result of purchasing units consisting of one
share of Common Stock and one warrant to purchase a share of Common Stock in the
private placements of November 2003 and January 2004.
28
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
and nine months ended March 31, 2005 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 have a history of losses, our future profitability is uncertain, and
our financial statements are subject to a going concern explanatory
paragraph by our independent registered public accounting firm;
(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) we have disclosed several material weaknesses in our internal controls
that, if not remedied, could result in material misstatements in our
financial statements, cause investors to lose confidence in our
reported financial information, and have a negative effect on the
trading price of our stock;
(o) our revenues are dependent upon licensing arrangements and our
licensees may be unwilling or unable to devote their financial
resources and manufacturing and marketing capabilities to commercialize
products based on our technologies;
(o) we receive a significant portion of our revenues from a small number
of customers;
(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
29
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) our ability to succeed will be dependent upon our ability to
successfully implement our business plan, as to which no assurance can
be given;
(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;
(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
30
undue reliance on these forward-looking statements. We are not obligated to
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
Results of Operations
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
- -------------------------------------------------------------------------------
Overview
- --------
The Company had net loss of $11,250,000 on revenues of $17,941,000 in the
three months ended March 31, 2005 compared to a net loss of $12,266,000 on
revenues of $16,545,000 in the three months ended March 31, 2004.
The table below summarizes the Company's operating results (in thousands)
for the three months ended March 31, 2005 and 2004:
Operating
Revenues Profit/(Loss)
----------------------- -----------------------
Segment 2005 2004 2005 2004
- -------------------------- ---------- ---------- ---------- ----------
United Solar Ovonic $ 14,425 $ 9,232 $ (1,052) $ (2,377)
Energy Conversion Devices 1,747 3,779 (9,165) (5,617)
Ovonic Battery 2,354 3,576 (1,399) (3,468)
Consolidating Entries (585) (42) 25 (618)
--------- --------- --------- ---------
Consolidated $ 17,941 $ 16,545 (11,591) (12,080)
========= =========
Other Income (Expense) 143 (186)
Income Taxes 198 -
--------- ---------
Net Income (Loss) $ (11,250) $ (12,266)
========= =========
United Solar Ovonic Segment
- ---------------------------
The United Solar Ovonic segment had a decreased operating loss in 2005
versus 2004 primarily due to significantly higher revenues and the impact of
cost reductions in 2005.
United Solar Ovonic's 2005 revenues increased by $5,193,000 from increased
product sales. Photovoltaic sales increased by 79% to $12,495,000 for 2005 from
$6,967,000 for 2004.
Gross profit on United Solar Ovonic's product sales was $1,282,000 in 2005
compared to a gross loss of $572,000 in 2004 because of higher sales and lower
material costs.
United Solar Ovonic's revenues from product development agreements in the
three months ended March 31, 2005 were $1,930,000 compared to $2,265,000 in
2004. The
31
decrease in revenue from product development agreements was principally due to
reduced funding from contracts completed in the previous year.
Revenues from product development agreements for the United Solar Ovonic
segment in 2005 funded 87% of its cost of product development. Revenues from
product development agreements decreased by $335,000 and spending increased by
$238,000, resulting in an increase of $573,000 in net cost of product
development.
Three Months Ended
March 31,
2005 2004
---------- ----------
Cost of revenues from product development
agreements $1,080,000 $1,504,000
Product development and research 1,128,000 466,000
---------- ----------
Total cost of product development 2,208,000 1,970,000
Revenues from product development agreements 1,930,000 2,265,000
---------- ----------
Net cost (excess revenue) of product
development $ 278,000 $ (295,000)
========== ==========
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.
While revenues increased 56%, United Solar Ovonic's selling, general and
administrative expenses (net of allocations) decreased by $46,000.
Energy Conversion Devices Segment
- ---------------------------------
The ECD segment had an increased operating loss in 2005 versus 2004,
primarily due to a decrease in the segment's hydrogen development contract
revenues and cost of $1,401,000 in 2005 related to compliance with
Sarbanes-Oxley requirements.
ECD's revenues from product development agreements decreased in the three
months ended March 31, 2005 to $1,476,000 from $3,062,000 in the three months
ended March 31, 2004 due to lower revenues from Ovonic Hydrogen (zero in 2005
versus $1,975,000 in 2004) and the previous completion of work on the ECD TACOM
contract resulting in no revenues in 2005 versus revenues of $366,000 in 2004,
partially offset by increased revenues from contracts with the National
Institute of Standards and Technology (NIST) ($500,000 in 2005 versus $215,000
in 2004) and additional revenues on United Solar's Air Force contract ($492,000
in 2005 versus $74,000 in 2004).
Revenues from product development agreements for the ECD segment for the
three months ended March 31, 2005 funded 23% of this segment's cost of product
development. Revenues from product development agreements decreased by
$1,586,000 and spending decreased by $434,000, resulting in an increase of
$1,152,000 in net cost of product development.
32
Three Months Ended
March 31,
2005 2004
----------- -----------
Cost of revenues from product development
agreements $ 2,201,000 $ 3,460,000
Product development and research 4,251,000 3,426,000
----------- -----------
Total cost of product development 6,452,000 6,886,000
Revenues from product development agreements 1,476,000 3,062,000
----------- -----------
Net cost of product development $ 4,976,000 $ 3,824,000
=========== ===========
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 and continued the development of Ovonic Hydrogen's solid
hydrogen storage systems.
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 $162,000 in the three months ended
March 31, 2005 compared with $213,000 in the three months ended March 31, 2004.
ECD's operating, general and administrative expenses (net of allocations)
were $1,518,000 in 2005 compared to $1,870,000 in 2004. The decrease in the net
expense for 2005 was due to increased allocations, which are based on the
relationship of selling, general and administrative expenses to product
development wages, in 2005, partially offset by $1,401,000 in 2005 related to
compliance with Sarbanes-Oxley requirements.
Ovonic Battery Segment
- ----------------------
The Ovonic Battery segment had a decreased operating loss in 2005 versus
2004 primarily resulting from reduced expenses in 2005, particularly for patent
defense costs.
The decrease in Ovonic Battery's revenues was primarily due to reduced
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.
Equipment sales revenues decreased to $498,000 in 2005 from $1,283,000 in
2004 due to reduced revenues on contracts with Rare Earth Ovonic to provide
battery-manufacturing equipment. Sales of nickel hydroxide increased to $456,000
in 2005 versus $323,000 in 2004.
Ovonic Battery's revenues from product development agreements in the three
months ended March 31, 2005 decreased to $440,000 from $1,448,000 in the three
months ended March 31, 2004, primarily due to reduced activities with Cobasys
($460,000 in 2005
33
compared to $916,000 in 2004) as Cobasys moves into its commercialization phase
and the previous completion of the TACOM contract resulting in no revenues in
2005 versus revenues of $516,000 in 2004.
Revenues from product development agreements for the Ovonic Battery
segment in the three months ended March 31, 2005 funded 20% of Ovonic Battery's
cost of product development as Ovonic Battery reduced its spending on product
development. Revenues from product development agreements decreased by
$1,008,000 and spending decreased by $1,058,000, resulting in a decrease of
$50,000 in net cost of product development.
Three Months Ended
March 31,
2005 2004
---------- ----------
Cost of revenues from product development
agreements $ 433,000 $1,570,000
Product development and research 1,724,000 1,645,000
---------- ----------
Total cost of product development 2,157,000 3,215,000
Revenues from product development agreements 440,000 1,448,000
---------- ----------
Net cost of product development $1,717,000 $1,767,000
========== ==========
Royalties increased 23% to $612,000 in the three months ended March 31,
2005 from $496,000 in the three months ended March 31, 2004. This increase was
due to increased royalties earned from one of our licensees based on its
increased sale of hybrid electric vehicle batteries in 2005.
Revenues from license and other agreements increased to $238,000 in the
three months ended March 31, 2005 from zero in the three months ended March 31,
2004. The 2005 license fees result 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). 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 2005 and 2004 in connection with the
protection of Ovonic Battery's United States and foreign patents covering its
proprietary technologies. Total patent expenses decreased to $293,000 in the
three months ended March 31, 2005 from $1,109,000 in the three months ended
March 31, 2004, principally due to lower patent defense costs ($42,000 in 2005
versus $887,000 in 2004) for the protection of Ovonic Battery's NiMH battery
patents and technology.
Ovonic Battery's operating, general and administrative expenses (net of
allocations) increased due to decreased allocations, which are based on the
relationship of selling, general and administrative expenses to product
development wages, in 2005.
34
Other Income/Expense
- --------------------
The $327,000 increase in other income (net) ($142,000 profit in 2005
compared to $185,000 loss in 2004) resulted primarily from increased interest
income in 2005 due to a higher level of investments.
Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004
- -----------------------------------------------------------------------------
Overview
- --------
The Company had net income of $57,235,000 on revenues of $135,817,000 in
the nine months ended March 31, 2005 compared to a net loss of $39,964,000 on
revenues of $46,424,000 in the nine months ended March 31, 2004.
The table below summarizes the Company's operating results (in thousands)
for the nine months ended March 31, 2005 and 2004:
Operating
Revenues Profit/(Loss)
----------------------- -----------------------
Segment 2005 2004 2005 2004
- -------------------------- ---------- ---------- ---------- ----------
United Solar Ovonic $ 43,008 $ 25,090 $ (3,590) $ (9,529)
Energy Conversion Devices 9,791 11,332 (18,966) (18,077)
Ovonic Battery 84,612 11,582 71,370 (13,146)
Consolidating Entries (1,594) (1,580) 661 1,172
--------- --------- --------- ---------
Consolidated $ 135,817 $ 46,424 49,475 (39,580)
========= =========
Other Income (Expense) 6,321 (384)
Income Taxes (827) -
Extraordinary Item 2,266 -
--------- ---------
Net Income (Loss) $ 57,235 $ (39,964)
========= =========
United Solar Ovonic Segment
- ---------------------------
The United Solar Ovonic segment reduced its operating loss by 62% in 2005
versus 2004 primarily due to significantly higher revenues and the impact of
cost reductions in 2005.
United Solar Ovonic's 2005 revenues increased by $17,918,000 from
increased product sales. Photovoltaic sales increased by 100% to $36,707,000 for
2005 from $18,322,000 for 2004.
Gross profit on United Solar Ovonic's product sales was $1,670,000 in 2005
compared to a gross loss of $3,857,000 in 2004 because of higher sales and lower
material costs.
35
United Solar Ovonic's revenues from product development agreements in the
nine months ended March 31, 2005 were $6,132,000 compared to $6,768,000 in 2004.
Revenues from product development agreements for the United Solar Ovonic
segment in 2005 funded 93% of its cost of product development. Revenues from
product development agreements decreased by $636,000 and spending increased by
$432,000, resulting in an increase of $1,068,000 in net cost of product
development.
Nine Months Ended
March 31,
2005 2004
---------- ----------
Cost of revenues from product development
agreements $3,997,000 $4,754,000
Product development and research 2,581,000 1,392,000
---------- ----------
Total cost of product development 6,578,000 6,146,000
Revenues from product development agreements 6,132,000 6,768,000
---------- ----------
Net cost (excess revenue) of product
development $ 446,000 $ (622,000)
========== ==========
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.
While revenues increased 71%, United Solar Ovonic's selling, general and
administrative expenses (net of allocations) decreased by $1,306,000 in 2005 as
a result of various cost-reduction measures in 2005, including a decrease in the
number of employees, in other employee-related costs and in warranty expense,
partially offset by reduced allocations, which are based on the relationship of
selling, general and administrative expenses to product development wages,
($151,000) to cost of product development in 2005.
Energy Conversion Devices Segment
- ---------------------------------
The ECD segment had an increased operating loss in 2005 versus 2004,
primarily due to a decrease in the segment's hydrogen development contract
revenues and costs of $1,664,000 in 2005 related to compliance with
Sarbanes-Oxley requirements.
ECD's revenues from product development agreements decreased in the nine
months ended March 31, 2005 to $8,332,000 from $10,152,000 in the nine months
ended March 31, 2004 due to lower revenues from Ovonic Hydrogen ($4,089,000 in
2005 versus $6,738,000 in 2004) and the previous completion of work on the ECD
TACOM contract resulting in no revenues in 2005 versus revenues of $499,000 in
2004, partially offset by new contracts with the National Institute of Standards
and Technology (NIST) ($1,690,000 in 2005 versus $388,000 in 2004).
Revenues from product development agreements for the ECD segment for the
nine months ended March 31, 2005 funded 41% of this segment's cost of product
development. Revenues from product development agreements decreased by
$1,820,000 and spending
36
decreased by $1,345,000, resulting in an increase of $475,000 in net cost of
product development.
Nine Months Ended
March 31,
2005 2004
------------ ------------
Cost of revenues from product development
agreements $ 9,150,000 $ 10,264,000
Product development and research 11,368,000 11,599,000
------------ ------------
Total cost of product development 20,518,000 21,863,000
Revenues from product development agreements 8,332,000 10,152,000
------------ ------------
Net cost of product development $ 12,186,000 $ 11,711,000
============ ============
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 and continued the development of Ovonic Hydrogen's solid
hydrogen storage systems.
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 $550,000 in the nine months ended
March 31, 2005 compared with $519,000 in the nine months ended March 31, 2004.
ECD's operating, general and administrative expenses (net of allocations)
were $3,940,000 in 2005 compared to $4,935,000 in 2004. The decrease in the net
expense for 2005 was due to increased allocations, which are based on the
relationship of selling, general and administrative expenses to product
development wages, in 2005, partially offset by $1,664,000 in 2005 related to
compliance with Sarbanes-Oxley requirements.
Ovonic Battery Segment
- ----------------------
The Ovonic Battery segment had operating income in 2005 versus operating
loss in 2004 primarily resulting from the recognition of license revenue of
$79,532,000 in 2005 as described in Note B of Notes to Consolidated Financial
Statements.
The increase in Ovonic Battery's revenues was primarily due to the
aforementioned license agreement, partially offset by reduced 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.
Equipment sales revenues decreased to a negative $1,100,000 in 2005 from
$3,172,000 in 2004, primarily due to the cumulative revenue adjustment at
December 31, 2004 of $2,668,000 in connection with a review of its estimates to
complete the equipment on the Ovonic Battery contracts with Rare Earth Ovonic to
provide battery-manufacturing
37
equipment and a reduction in the estimated margin from 12% to 8%. Sales of
nickel hydroxide were $710,000 in 2005 versus $1,037,000 in 2004 as sales to
the primary customer were affected by a temporary plant closure and an
accumulation of inventory by the customer. The loss on product sales increased
to $4,240,000 in 2005 from a loss of $1,203,000 in 2004 due to Ovonic Battery's
reduction in revenues on the Rare Earth Ovonic contract.
Ovonic Battery's revenues from product development agreements in the nine
months ended March 31, 2005 decreased to $1,507,000 from $5,693,000 in the nine
months ended March 31, 2004, primarily due to reduced activities with Cobasys
($1,528,000 in 2005 compared to $4,267,000 in 2004) as Cobasys moves into its
commercialization phase and the previous completion of the TACOM contract
resulting in no revenues in 2005 versus revenues of $1,158,000 in 2004.
Revenues from product development agreements for the Ovonic Battery
segment in the nine months ended March 31, 2005 funded 20% 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 $4,186,000 and spending decreased by $3,800,000, resulting in an increase of
$386,000 in net cost of product development.
Nine Months Ended
March 31,
2005 2004
----------- -----------
Cost of revenues from product development
agreements $ 1,479,000 $ 6,109,000
Product development and research 6,043,000 5,213,000
----------- -----------
Total cost of product development 7,522,000 11,322,000
Revenues from product development agreements 1,507,000 5,693,000
----------- -----------
Net cost of product development $ 6,015,000 $ 5,629,000
=========== ===========
Royalties increased 92% to $2,961,000 in the nine months ended March 31,
2005 from $1,543,000 in the nine months ended March 31, 2004. This increase was
due to increased royalties earned from one of our licensees based on its
increased sale of hybrid electric vehicle batteries in 2005.
Revenues from license and other agreements increased to $80,246,000 in the
nine months ended March 31, 2005 from $75,000 in the nine months ended March 31,
2004. The 2005 license fees result from the recognition of revenue of
$79,532,000 as a license fee (see Note B of Notes to Consolidated Financial
Statements) and 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 2004 license fees resulted from licenses to Mcnair-tech Co.,
Ltd. of China and to Linghao Battery 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.
38
Patent expenses were incurred in 2005 and 2004 in connection with the
protection of Ovonic Battery's United States and foreign patents covering its
proprietary technologies. Total patent expenses decreased to $1,105,000 in the
nine months ended March 31, 2005 from $6,946,000 in the nine months ended March
31, 2004, principally due to lower patent defense costs ($231,000 in 2005 versus
$6,359,000 in 2004) for the protection of Ovonic Battery's NiMH battery patents
and technology.
Ovonic Battery's operating, general and administrative expenses (net of
allocations) decreased due to reductions in 2004 in the cost of outside services
and facilities.
Other Income/Expense
- --------------------
The $6,704,000 improvement in other income (net) ($6,320,000 income in
2005 compared to $384,000 loss in 2004) 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),
partially offset by the impairment loss ($1,710,000) in the Company's investment
in Rare Earth Ovonic (see Note E of Notes to Consolidated Financial Statements).
Liquidity and Capital Resources
As of March 31, 2005, the Company had consolidated cash, cash equivalents,
short-term investments, restricted cash ($800,000), and accounts receivable
(including $292,000 of amounts due from related parties) of $115,413,000 and had
consolidated working capital of $110,683,000.
In February 2005, the Company completed an $82.2 million (net of expenses)
private placement of its Common Stock. The Company sold 5,090,000 shares of
Common Stock at a price of $17.25 per share to 65 institutional investors. The
Company plans to use the net proceeds of this transaction to double the
manufacturing capacity of United Solar Ovonic's triple-junction, thin-film
amorphous silicon photovoltaic products; to exercise the option to purchase for
$4.55 per share the 4,376,633 shares of ECD's Common Stock held by TRMI
Holdings, Inc., an affiliate of ChevronTexaco Corporation; and for general
corporate purposes, including research and development activities.
Subsequent to March 31, 2005, the Company received $26,921,000 from the
exercise of warrants. The warrants to purchase 1,928,462 shares of ECD Common
Stock at an exercise price of $13.96 per share were exercised by warrantholders
who received the warrants as a result of purchasing units consisting of one
share of Common Stock and one warrant to purchase a share of Common Stock in the
private placements of November 2003 and January 2004.
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
39
core commercial businesses with the goal of moving the Company into a position
of having sustained profitability by July 2006.
The restructuring is expected to 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 our
wholly owned subsidiary, United Solar Ovonic, and our joint ventures, Cobasys
and Ovonyx.
The December 2004 agreement with CTTV provides a mechanism for additional
funding from CTTV to continue the Cobasys expansion. CTTV will be entitled to
priority right of repayment for providing the additional funding. ECD and CTTV
will each continue to own a 50-percent interest in Cobasys subject to adjustment
under certain circumstances.
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 $14,320,000, compared to $36,678,000 received in the year ended
June 30, 2004, due to reduced funding to be received in the year ending June 30,
2005 from ChevronTexaco.
Our backlog of orders as of March 31, 2005 for machine-building and
equipment sales contracts, photovoltaic products and metal hydride materials is
$35,933,000, including $34,670,000 for photovoltaic products, compared to a
backlog of $7,821,000, including $5,031,000 for photovoltaic products, at March
31, 2004. The increase in 2005 is due to an increase in the backlog for United
Solar Ovonic. In fiscal 2006, we expect to recognize $19,321,000 of this
backlog.
As of March 31, 2005, the Company had $100,441,000 consolidated cash, cash
equivalents and short-term investments ($800,000 of which was restricted)
consisting of money market funds, and corporate notes, classified as
available-for-sale, maturing from 67 days to five months. 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 nine months ended March 31, 2005, $6,164,000 of cash was used
in operations. The difference between the net income of $57,235,000 and the net
cash used in operations was principally due to the recognition of non-cash
revenue of $79,532,000 as a license fee (see Note B of Notes to Consolidated
Financial Statements) and reductions in nonrefundable advance royalties
($1,830,000), increases in both accounts receivable ($1,950,000) and inventories
($1,357,000) due to a higher volume of product sales, partially offset by
depreciation ($6,070,000), deferred nonrefundable patent license fee
($9,048,000), impairment loss in Rare Earth Ovonic ($1,710,000), and decreases
in related-party accounts receivable ($1,888,000) due to reduced volume in
related party revenues. Items offsetting the above reductions in the net cash
used in operations include stock issued for service rendered ($786,000),
increase in long-term retirement ($249,000) and a
40
decrease in restricted cash ($350,000) (see Notes A, B and G of Notes to
Consolidated Financial Statements).
In consideration of the expanded license with Cobasys, revised joint
venture agreements and the collateralization of certain obligations, ECD
received an option to purchase the 4,376,633 shares of ECD Common Stock owned by
a subsidiary of ChevronTexaco. The option, exercisable at $4.55 per share,
expires on November 1, 2005.
The Company spent $1,044,000 on property, plant and equipment that was
placed in service during the nine months ended March 31, 2005. In total, the
Company expects to spend $2,500,000 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 a substantial
portion 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.
Management believes that funds generated from operations; new business
agreements; the exercises of Common Stock purchase warrants and stock options;
debt financings; new government contracts and the cost-containment initiatives,
together with existing cash and cash equivalents and the aforementioned
restructuring plan, will be adequate to support the Company's operations for the
next twelve months. No assurances can be given as to the timing or success of
the aforementioned plans, negotiations, discussions and programs. The September
2004 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." Since that date, the Company has received approximately $109 million
through the private placement of stock and the exercise of warrants. The Company
is using a portion of the net proceeds of these transactions to double the
manufacturing capacity for United Solar Ovonic's triple-junction, thin-film,
amorphous silicon photovoltaic products and to exercise its option to purchase
4,376,633 shares of ECD Common Stock at $4.55 per share held by TRMI Holdings,
an affiliate of ChevronTexaco Corporation.
41
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 $99,866,000 and $13,074,000 of these investments (including cash
equivalents) on March 31, 2005 and June 30, 2004, respectively. On March 31,
2005, the investments had an average maturity of less than 30 days, $19,769,000
of which had maturities of 67 days to five months, and on 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 March 31, 2005, 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.
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.
42
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 plan includes
the following:
1. The Company has retained a registered public accounting firm as a
consultant (Consultant) to assist in the project direction, execution
and external reporting. This firm is assisting the Company in
documenting its policies and procedures around its internal controls.
These policies and procedures have been drafted, reviewed, approved
and disseminated to all critical employees. The Company has completed
its documentation of these policies and procedures and the Consultant
has completed, where no remediation is necessary, its walkthrough and
testing of these policies and procedures.
2. The Company has enhanced its monitoring controls in the area of the
financial reporting and has contracted with the Consultant to act as
its internal auditor to assist in this monitoring activity.
3. The Company has completed job descriptions for all of its accounting
and finance employees, has prepared matrices of all the accounting
and finance functions, and has restructured these duties and
responsibilities to provide for appropriate segregation of duties and
oversight or review of their activities.
4. The Company, with the assistance of the Consultant, is in the process
of strengthening its controls in the security of data within its
information systems, initiating security event logs and activity
reports, assignment of administrative rights, segregation of duties
and access to data and applications.
The Company, with its Consultant's assistance, has a plan to fully
complete the remediation of all of the above items to enable management to
assess its internal controls and to enable the Company's independent registered
public accounting firm to audit management's assessment as of June 30, 2005.
The Company has committed significant resources (total estimated cost of
$2.2 million) to this project and management has informed all employees that
this project is of the utmost importance to the Company and all of its
employees.
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, notwithstanding the material weaknesses
mentioned above, the Chief Executive Officer and Chief Financial Officer
concluded that the operation of these disclosure controls and procedures were
43
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 March 31, 2005. No changes were made in our
internal controls or in other factors that could affect these controls
subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
---------------------------
Item 6. 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.
44
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
-------------------------------
(Registrant)
By: /s/ Stephan W. Zumsteg
-------------------------------------------
Stephan W. Zumsteg
Date: May 10, 2005 Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Robert C. Stempel
-------------------------------------------
Robert C. Stempel
Date: May 10, 2005 Chairman and Chief Executive Officer
45