SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the period ended DECEMBER 31, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2956 Waterview Drive, Rochester Hills, Michigan 48309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 293-0440
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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 February 4, 2005, there were 219,913 shares of ECD's Class A
Common Stock, 430,000 shares of ECD's Class B Common Stock and 25,477,020
shares of ECD's Common Stock outstanding.
Page 1 of 46 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 ...............................................12
NOTE C - Accounts Receivable ......................................15
NOTE D - Inventories ..............................................16
NOTE E - Joint Ventures and Investments ...........................17
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
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 1. Legal Proceedings ..............................................44
ITEM 4. Submission of Matters to a Vote of Security Holders ............44
ITEM 6. Exhibits and Reports on Form 8-K ...............................44
SIGNATURES .............................................................46
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
------ --------------------
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES
Product sales $ 8,866,542 $ 7,364,399 $ 22,971,608 $ 14,065,517
Royalties 1,497,241 609,260 3,076,214 1,068,759
Revenues from product development agreements 3,377,421 3,287,914 6,171,870 6,259,709
Revenues from product development
agreements with related parties 2,038,577 4,247,918 5,156,191 8,114,787
------------ ------------ ------------ ------------
Total revenues from product development agreements 5,415,998 7,535,832 11,328,061 14,374,496
Revenues from license and other agreements 79,770,095 25,000 80,008,190 75,000
Other revenues 98,386 80,951 339,313 162,567
Other revenues from related parties 75,637 58,400 152,303 132,638
------------ ------------ ------------ ------------
Total other revenues 174,023 139,351 491,616 295,205
------------ ------------ ------------ ------------
TOTAL REVENUES 95,723,899 15,673,842 117,875,689 29,878,977
EXPENSES
Cost of product sales 12,847,330 9,006,021 26,616,651 17,975,287
Cost of revenues from product development agreements 4,505,212 7,006,575 10,116,396 13,130,191
Product development and research 6,841,212 4,866,096 12,889,158 12,666,219
Patent defense (net) 16,081 3,360,077 189,169 5,471,057
Patents 652,213 435,285 1,188,297 955,674
Selling, general and administrative (net) 3,297,064 4,086,888 5,809,937 7,180,394
------------ ------------ ------------ ------------
TOTAL EXPENSES 28,159,112 28,760,942 56,809,608 57,378,822
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 67,564,787 (13,087,100) 61,066,081 (27,499,845)
OTHER INCOME (EXPENSE)
Interest income 108,355 256,787 185,533 572,928
Interest expense (234,379) (593,049) (470,806) (835,737)
Equity in losses of joint ventures (100,000) (303,699) (100,000) (548,081)
Impairment loss in Rare Earth Ovonic - China (1,710,000) - (1,710,000) -
Distribution from joint venture - - 8,000,000 -
Gain (loss) on sales of investments - 55,266 - 364,416
Other nonoperating income 267,223 255,370 273,130 248,311
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (1,668,801) (329,325) 6,177,857 (198,163)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 65,895,986 (13,416,425) 67,243,938 (27,698,008)
INCOME TAXES 1,025,000 - 1,025,000 -
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 64,870,986 (13,416,425) 66,218,938 (27,698,008)
EXTRAORDINARY ITEM (NET OF TAXES) 2,266,326 - 2,266,326 -
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 67,137,312 $(13,416,425) $ 68,485,264 $(27,698,008)
============ ============ ============ ============
BASIC NET INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEM $ 2.54 $ (.57) $ 2.61 $ (1.22)
EXTRAORDINARY ITEM .09 - .09 -
------------ ------------ ----------- ------------
BASIC NET INCOME (LOSS) PER SHARE $ 2.63 $ (.57) $ 2.70 $ (1.22)
============ ============ =========== ============
DILUTED NET INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEM $ 2.36 $ (.57) $ 2.53 $ (1.22)
EXTRAORDINARY ITEM .08 - .08 -
------------ ------------ ------------ ------------
DILUTED NET INCOME (LOSS) PER SHARE $ 2.44 $ (.57) $ 2.61 $ (1.22)
============ ============ ============ ============
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
December 31, June 30,
2004 2004
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash, including cash equivalents of
$29,738,000 at December 31, 2004 and
$13,074,000 at June 30, 2004 ($1,000,000
of which is restricted at December 31,
2004 and $1,150,000 of which is restricted
at June 30, 2004) $ 29,743,042 $ 13,826,537
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$404,000 at December 31, 2004 and $274,000
at June 30, 2004) 12,213,273 12,730,100
Accounts receivable due from related parties 294,562 2,180,069
Inventories 13,697,789 13,651,715
Other 2,038,451 1,264,364
------------ ------------
TOTAL CURRENT ASSETS 57,987,117 43,652,785
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 15,157,839 15,191,642
Machinery and other equipment 75,827,777 75,776,192
Capitalized lease equipment 10,000,000 10,000,000
------------ ------------
101,252,616 101,234,834
Less accumulated depreciation and amortization (38,671,536) (35,288,928)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 62,581,080 65,945,906
Investment in Rare Earth Ovonic-China - 1,710,000
INVESTMENT IN AND ADVANCES TO JOINT VENTURES
Ovonyx - -
Cobasys - -
Ovonic Hydrogen Systems - -
Ovonic Media - -
OTHER ASSETS 2,045,163 2,003,084
------------ ------------
TOTAL ASSETS $122,613,360 $113,311,775
============ ============
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31, June 30,
2004 2004
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 13,811,859 $ 12,937,175
Accounts payable and accrued expenses - related parties 443,434 -
Salaries, wages and amounts withheld from employees 3,320,857 4,766,215
Deferred revenues under business agreements 1,860,692 966,596
Current portion of deferred patent license fee 952,380 -
Current installments on long-term liabilities 350,737 333,368
------------ ------------
TOTAL CURRENT LIABILITIES 20,739,959 19,003,354
LONG-TERM LIABILITIES 10,147,243 10,160,791
LONG-TERM DEFERRED PATENT LICENSE FEE 8,571,430 -
NONREFUNDABLE ADVANCE ROYALTIES 1,160,070 2,992,562
------------ ------------
TOTAL LIABILITIES 40,618,702 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 - 25,463,849 shares at
December 31, 2004 and 24,523,001 shares at
June 30, 2004 254,638 245,230
Additional paid-in capital 349,261,501 417,313,665
Accumulated deficit (267,328,521) (335,813,785)
Accumulated other comprehensive income 306,981 250,399
Unearned compensation on Class B Convertible
Common Stock (506,440) (846,940)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 81,994,658 81,155,068
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $122,613,360 $113,311,775
============ ============
See notes to consolidated financial statements.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
December 31,
2004 2003
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 68,485,264 $(27,698,008)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,075,090 4,093,802
Amortization of deferred nonrefundable patent license fee (476,190) -
Amortization of premium/discount on investments - 73,083
Equity in losses of joint ventures 100,000 548,081
Impairment loss in Rare Earth Ovonic 1,710,000 -
Change in nonrefundable advance royalties (1,832,492) (20,727)
Stock and stock options issued for services rendered 428,949 376,800
Gain on sales of investments - (364,416)
Loss on sale of equipment 5,101 11,393
Retirement liability 166,272 153,516
Option received in exchange for license (79,532,000) -
Changes in working capital:
Accounts receivable 516,827 (2,281,071)
Accounts and note receivable due from related parties 1,885,507 2,810,143
Inventories (46,074) (2,578,365)
Other assets (816,166) (1,536,578)
Current portion of deferred nonrefundable patent license fee 952,380 -
Accounts payable and accrued expenses (570,675) (8,169,406)
Accounts payable and accrued expenses - related parties 443,434 -
Deferred revenues under business agreements 894,096 (1,879,571)
Deferred nonrefundable patent license fee 9,047,620 -
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 5,436,943 (36,461,324)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (730,370) (809,350)
Investment in Ovonyx (100,000) (50,000)
Purchases of investments - (7,978,076)
Sales of investments - 26,661,685
Proceeds from sale of property, plant and equipment 15,005 131,076
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (815,365) 17,955,335
FINANCING ACTIVITIES:
Principal payments under short-term and long-term debt
obligations and capitalized lease obligations (162,451) (99,188)
Proceeds from exercise of stock options 11,423,427 24,451
Proceeds from sale of stock and warrants net of expenses - 26,837,858
Payment for services (22,631) -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,238,345 26,763,121
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 56,582 74,006
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,916,505 8,331,138
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,826,537 8,567,261
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,743,042 $ 16,898,399
============ ============
See notes to consolidated financial statements.
6
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
December 31,
2004 2003
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 470,806 $ 835,737
Noncash transactions:
Short-term and long-term note receivable -
United Solar Ovonic LLC - 370,511
Short-term and long-term note payable -
Canon - (370,511)
See notes to consolidated financial statements.
7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies
---------------------------------------
Basis of Presentation
---------------------
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has recurring losses from
operations and needs additional working capital. On August 12, 2004, the
Board of Directors approved management's business restructuring plan to take
full advantage of the favorable battery settlement agreement announced on
July 7, 2004 and the increasing market interest in solar energy systems and
hybrid electric vehicles. Management believes that funds generated from
operations; new business agreements; equity financing, including the exercise
of Common Stock purchase warrants and exercise of stock options; debt
financing; new government contracts and the cost-containment initiatives (see
Note B of Notes to Consolidated Financial Statements), together with existing
cash and cash equivalents, will be adequate to support the Company's
operations for the coming year. However, the amount and timing of such
activities are uncertain. Accordingly, no assurances can be given as to the
timing or success of the aforementioned plans, negotiations, discussions and
programs.
These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern in the absence of sufficient
additional funds and the sustained achievement of profitable operations. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of assets carrying amounts
or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern (see Note B of
Notes to Consolidated Financial Statements).
Nature of Business
------------------
Energy Conversion Devices, Inc. (ECD) is a technology, product
development and manufacturing company engaged in the invention, engineering,
development and commercialization of new materials, products and production
technology in the fields of alternative energy technology and information
technology.
Financial Statement Presentation, Principles of Consolidation and
-----------------------------------------------------------------
Equity Accounting
-----------------
The consolidated financial statements include the accounts of ECD and
its 100%-owned manufacturing and sales subsidiaries United Solar Ovonic Corp.
and United Solar Ovonic LLC (jointly referred to as "United Solar Ovonic")
and its approximately 91%-owned subsidiary Ovonic Battery Company, Inc.
(Ovonic Battery) and, as of December 2, 2004, Ovonic Hydrogen Systems
(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
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
number of strategic alliances and has four major investments accounted for
using the equity method: (i) Cobasys LLC (formerly known as Texaco Ovonic
Battery Systems LLC), a joint venture between Ovonic Battery and
ChevronTexaco Technology Ventures LLC (CTTV), a unit of ChevronTexaco
Corporation, each having 50% interest in the joint venture; (ii) Ovonic
Hydrogen Systems LLC (Ovonic Hydrogen) (formerly known as Texaco Ovonic
Hydrogen Systems LLC), a joint venture between ECD and CTTV, each having 50%
interest in the joint venture through December 2, 2004 and 100% owned by ECD
thereafter; (iii) Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler
Lowrey, Intel Capital and other investors; and (iv) Ovonic Media, LLC, a
joint venture owned 51% by General Electric through its GE Plastics business
unit and 49% by ECD. See Note E of Notes to Consolidated Financial
Statements for discussions of all of the Company's ventures.
At December 31, 2004 and at June 30, 2004, the Company's investments in
Cobasys, Ovonyx and Ovonic Media are recorded at zero. In December 2004, the
Company made a $100,000 investment in Ovonyx. The Company will continue to
carry its investment in each of these joint ventures at zero until the
venture becomes profitable (based upon the venture's history of sustainable
profits), at which time the Company will start to recognize over a period of
years its share, if any, of the then equity of each of the ventures, and will
recognize its share of each venture's profits or losses on the equity method
of accounting. To the extent that the Company has made cash or other
contributions, it recognizes its proportionate share of any losses until the
investment reaches zero.
Intellectual property, including patents, resulting from the Company's
investments in its technologies, is valued at zero in the balance sheet.
Intellectual property provides the foundation for the creation of the
important strategic alliances whereby the Company provides intellectual
property and patents and joint venture partners provide cash.
While the Company believes, based upon the opinion of legal counsel,
that it has no obligation to fund any losses that its joint ventures incur
beyond the Company's investment, the Company has decided to fund certain of
its joint ventures (see Note E of Notes to Consolidated Financial
Statements).
Upon consolidation, all intercompany accounts and transactions are
eliminated. Any profits on intercompany transactions are eliminated to the
extent of the Company's ownership percentage.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (U.S. GAAP)
requires management to make estimates and assumptions that affect amounts
reported therein. Due to the inherent uncertainty involved in making
estimates, actual results reported in future periods may be based upon
amounts that differ from those estimates.
9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform with 2004
presentation.
Overhead and General and Administrative Allocations
---------------------------------------------------
The Company allocates overhead and general and administrative expenses
to product development research expenses and to cost of revenues from
research and development agreements based on a percentage of direct labor
costs. For cost of revenues from product development agreements, this
allocation is limited to the amount of revenues, after direct expenses, under
the applicable agreements. Overhead is allocated to cost of product sales
through the application of overhead to inventory costs.
The following is a summary of the gross selling, general and
administrative expenses and the aforementioned allocations:
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Gross Expenses $ 6,694,000 $ 7,688,000 $12,616,000 $15,101,000
Less -allocations to product
development and research (2,756,000) (1,886,000) (5,351,000) (4,702,000)
-allocations to cost of
revenues from product
development agreements (641,000) (1,716,000) (1,456,000) (3,219,000)
----------- ----------- ----------- -----------
Remaining Expenses $ 3,297,000 $ 4,086,000 $ 5,809,000 $ 7,180,000
=========== =========== =========== ===========
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 six months ended
December 31, 2004 and 2003 would have changed as follows:
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Income (Loss), as reported $ 67,137,312 $(13,416,425) $ 68,485,264 $(27,698,008)
Less:
Total stock-based compensation
expense determined under
fair value based method,
net of tax 624,201 899,837 1,000,990 2,008,667
------------ ------------ ------------ ------------
Pro forma net income (loss) $ 66,513,111 $(14,316,262) $ 67,484,274 $(29,706,675)
============ ============ ============ ============
Income (Loss) per share:
Basic - as reported $ 2.63 $ (.57) $ 2.70 $ (1.22)
============ ============ ============ ============
Basic - pro forma $ 2.61 $ (.61) $ 2.66 $ (1.31)
============ ============ ============ ============
Diluted - as reported $ 2.44 $ (.57) $ 2.61 $ (1.22)
============ ============ ============ ============
Diluted - pro forma $ 2.42 $ (.61) $ 2.58 $ (1.31)
============ ============ ============ ============
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 six months ended
December 31 are computed as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Weighted average number of shares outstanding:
- for basic net income (loss) per share 25,500,955 23,480,898 25,337,052 22,691,678
- for diluted net income (loss) per share 27,524,047 23,480,898 26,199,018 22,691,678
Net income (loss) before extraordinary item $ 64,870,986 $(13,416,425) $ 66,218,938 $(27,698,008)
Extraordinary item (net of taxes) 2,266,326 - 2,266,326 -
------------ ------------ ------------ ------------
Net income (loss) $ 67,137,312 $(13,416,425) $ 68,485,264 $(27,698,008)
============ ============ ============ ============
Basic net income (loss) per share
before extraordinary item $ 2.54 $ (.57) $ 2.61 $ (1.22)
Extraordinary item .09 - .09 -
------------ ------------ ------------ ------------
Basic net income (loss) per share $ 2.63 $ (.57) $ 2.70 $ (1.22)
============ ============ ============ ============
Diluted net income (loss) per share
before extraordinary item $ 2.36 $ (.57) $ 2.53 $ (1.22)
Extraordinary item .08 - .08 -
------------ ------------ ------------ ------------
Diluted net income (loss) per share $ 2.44 $ (.57) $ 2.61 $ (1.22)
============ ============ ============ ============
11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
Due to the Company's net loss in 2003, weighted average shares of
potentially dilutive securities of 5,210 and 5,343 for the three and six
months ending December 31, 2003, 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 397,786 and 3,139,657 for the three months
ended December 31, 2004 and 2003, respectively, and 947,367 and 2,507,183 for
the six months ended December 31, 2004 and 2003, respectively, were excluded
from the 2004 and 2003 calculations of weighted average shares of potentially
dilutive securities. Because of the relationship between the exercise prices
and the average market price of ECD's Common Stock during these periods,
these securities would have been antidilutive regardless of the Company's net
income or loss.
Recent Pronouncements
---------------------
In November 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory
Costs." This Statement clarifies the accounting for abnormal amounts of idle
facility expenses, freight, handling costs and wasted material spoilage and
is effective for fiscal years beginning 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.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets." This Statement addresses the measurement of exchanges
of nonmonetary assets and is effective for nonmonetary asset exchanges
occurring in fiscal years beginning after June 15, 2005. The Company does
not believe that this will have an effect on the Company's consolidated
financial position or results of operations.
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
-------------------
Restructuring
-------------
On August 12, 2004, the Board of Directors approved management's
business restructuring plan to take full advantage of the battery settlement
agreement announced on July 7, 2004 and the increasing market interest in
solar energy systems and hybrid electric vehicles. Our strategy is to
transition from a research-oriented company to the next phase of development,
which is to commercialize the products we have developed and
12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings (Continued)
-------------------------------
concentrate on growing sales revenues and equity value in our core commercial
businesses with the goal of moving the Company into a position of having
sustained profitability by July 2006.
The restructuring will increase product revenues while enabling us to
carry out major cost-reduction measures, including significant reductions in
the workforce to right size activities to support our core commercial
businesses. We will manage a reduced portfolio of advanced product
development activities and a leaner R&D team to grow future businesses.
The core commercial businesses on which the Company is focusing are
United Solar Ovonic, Cobasys and Ovonyx.
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
a subsidiary of ChevronTexaco. 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 a subsidiary
of ChevronTexaco Corporation 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 quarter ended December 31, 2004 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 17% 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.
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings (Continued)
-------------------------------
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 three months and six months ended
December 31, 2004.
The hydrogen business unit was renamed Ovonic Hydrogen Systems LLC and
ECD will fund Ovonic Hydrogen on a reduced level. It will focus on
continuing to commercialize small portable metal hydride storage systems that
have current 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 $238,095 and $476,190 as
revenues from license and other agreements in the three months and six months
ended December 31, 2004, 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 in the six
months ended December 31, 2004. The Company recorded this $8 million as a
distribution from joint venture in the six months ended December 31, 2004.
General
-------
The Company is engaged in a number of negotiations and discussions to
fund its operations, including raising additional capital through equity and
debt financings and forming new strategic alliances to fund and grow its
photovoltaic and other businesses. In addition, the Company is engaged in
negotiations with government agencies for contracts to fund its development
activities.
14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable
----------------------------
December 31, June 30,
2004 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 714,544 369,322
Commercial customers 36,819 102,638
------------ ------------
751,363 471,960
Amounts billed
U.S. Government 630,600 1,229,432
------------ ------------
Sub-total 1,381,963 1,701,392
Amounts unbilled for other than long-term contracts
Commercial customers 2,142,133 1,762,282
Amounts billed for other than long-term contracts
U.S. Government 148 145,936
Commercial customers 9,089,521 8,889,482
------------ ------------
Sub-total 9,089,669 9,035,418
Allowance for uncollectible accounts (404,000) (274,000)
------------ ------------
TOTAL $ 12,213,273 $ 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 December 31, 2004 and at June 30, 2004. Most U.S.
Government contracts remain subject to audit.
15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable (Continued)
----------------------------------------
Accounts Receivable Due from Related Parties
--------------------------------------------
December 31, June 30,
2004 2004
------------ ------------
Amounts earned which are billed in the
subsequent month on long-term contracts
Cobasys $ 22,057 $ 623,551
Ovonic Hydrogen Systems - 1,329,194
---------- ----------
Sub-total 22,057 1,952,745
Amounts billed
Cobasys 184,043 7,393
Other unbilled
ChevronTexaco Technology Ventures 2,591 38,875
Ovonyx 23,079 17,237
---------- ----------
Sub-total 25,670 56,112
Other billed
ChevronTexaco Technology Ventures 39,256 121,376
Ovonyx 21,776 16,850
Cobasys 1,760 -
Ovonic Hydrogen Systems - 25,593
---------- ----------
Sub-total 62,792 163,819
---------- ----------
TOTAL $ 294,562 $2,180,069
========== ==========
NOTE D - Inventories
--------------------
Inventories of raw materials, work in process and finished goods for
the manufacture of solar cells, metal hydride materials and battery packs are
valued at the lower of cost (first in, first out) or market. Cost elements
included in inventory are materials, direct labor and manufacturing
overhead.
Inventories (principally for United Solar Ovonic) are as follows:
December 31, June 30,
2004 2004
------------ ------------
Finished products $ 1,575,018 $ 3,511,730
Work in process 3,000,946 4,060,923
Raw materials 9,121,825 6,079,062
------------ ------------
$ 13,697,789 $ 13,651,715
============ ============
16
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 ($157,000,000 of which has been received as of December 31,
2004) 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 $592,000 and $1,067,000
for the three months and six months ended December 31, 2004, respectively,
and $1,935,000 and $3,351,000 for the three months and six months ended
December 31, 2003, respectively, for services performed on behalf of Cobasys
(primarily for advanced product development and market development work).
The Company recorded revenues of zero and $34,000 for the three months and
six months ended December 31, 2004 and revenues of zero and $2,000 for the
three months and six months ended December 31, 2003, respectively, for
products sold to Cobasys.
The Company also recorded revenues from Cobasys of zero and $45,000 for
the three months and six months ended December 31, 2004, respectively, and
$45,000 and $90,000 for the three months and six months ended December 31,
2003, respectively, for rent of a portion of one of the Company's facilities.
The following sets forth certain financial data regarding Cobasys that
are derived from its financial statements:
17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------
COBASYS LLC AND SUBSIDIARY
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue
Product and prototype revenues $ 200,986 $ 367,190 $ 419,040 $ 554,164
Contract research revenue 300,976 1,682,927 357,565 2,009,989
Licensing revenue 460,714 - 952,381 -
------------ ------------ ------------ ------------
Total Revenue 962,676 2,050,117 1,728,986 2,564,153
Expenses
Cost of product and prototype revenues 1,431,834 984,542 2,769,935 2,600,047
Research and development costs 4,841,633 5,397,557 7,414,573 8,685,404
Sales and marketing costs 578,803 735,097 1,228,347 1,504,338
General and administrative costs 1,449,637 1,280,271 2,886,302 2,220,213
Depreciation and amortization 769,142 669,269 1,489,061 1,341,642
------------ ------------ ------------ ------------
Total Expenses 9,071,049 9,066,736 15,788,218 16,351,644
------------ ------------ ------------ ------------
Net Loss $ (8,108,373) $ (7,016,619) $(14,059,232) $(13,787,491)
============ ============ ============ ============
18
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------
COBASYS LLC AND SUBSIDIARY
BALANCE SHEETS
--------------
December 31, June 30,
2004 2004
------------- -------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents ($3,018,872
of which is restricted as of
December 31, 2004) $ 6,994,471 $ 1,305,873
Accounts receivable 838,280 769,444
Inventories 4,493,853 3,825,704
Prepaid expenses 99,372 50,740
------------- -------------
Total Current Assets 12,425,976 5,951,761
Net Property and Equipment 32,888,786 28,091,071
Other Assets:
Cash surrender value of life insurance 342,830 316,302
------------- -------------
Total Assets $ 45,657,592 $ 34,359,134
============= =============
Liabilities and Members' Capital
Current Liabilities:
Accounts payable $ 1,317,198 $ 1,424,092
Accounts payable, related party 184,000 1,300,175
Accrued expenses 2,652,326 1,453,034
Deferred revenues 1,904,762 166,145
------------- -------------
Total Current Liabilities 6,058,286 4,343,446
Deferred revenue - noncurrent 17,142,857 -
Members' Capital:
Members' interest 140,585,464 134,085,471
Loss accumulated during the
development stage (118,129,015) (104,069,783)
------------- -------------
Total Members' Capital 22,456,449 30,015,688
------------- -------------
Total Liabilities and Members' Capital $ 45,657,592 $ 34,359,134
============= =============
Ovonyx
ECD owns 41.7% of Ovonyx, Mr. Tyler Lowrey and his colleague own 41.7%
of Ovonyx, and Intel and other investors own the remainder. On a fully
diluted basis after giving effect to the exercise of stock options and
warrants, our ownership of Ovonyx would be 31.4%. ECD has contributed
intellectual property and licenses for its interest in Ovonyx.
19
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------
In October 2002, ECD, through a newly formed company, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by ECD to Ovonyx and an exclusive, royalty-bearing license, which
requires annual minimum royalty payments in order to maintain its
exclusivity. ECD made a $50,000 minimum royalty payment in November 2003 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 each of the three months and six months ended
December 31, 2004, ECD recorded an equity loss of $100,000; and in the three
months and six months ended December 31, 2003, ECD recorded an equity loss of
$304,000 and $548,000, respectively, related to its investment in Ovonyx.
ECD recorded revenues from Ovonyx of $62,000 and $125,000,
respectively, for the three months and six months ended December 31, 2004 and
$34,000 and $71,000, respectively, for the three months and six months ended
December 31, 2003, representing services provided to this joint venture.
Ovonic Media
In 2000, we and General Electric, through its GE Plastics business
unit, formed a joint venture, Ovonic Media, LLC, to design, develop,
demonstrate and commercialize our proprietary continuous web roll-to-roll
technology for the ultra-high-speed manufacture of optical media products,
primarily rewritable DVDs. We have contributed intellectual property,
know-how, licenses and equipment to the joint venture. GE has made cash and
other contributions to the joint venture. Since its inception, Ovonic Media
has paid us $5.6 million through the end of fiscal year 2003 for services to
the joint venture.
GE informed ECD that additional funding after January 3, 2003 was
suspended. ECD is considering how to best position the joint venture in
order to meet the needs of the marketplace, and secure new equity investors
and strategic partners to fund the joint venture's operations. As the next
business step, we are seeking to secure a partner that is a leader in the
storage media industry to facilitate the commercialization and funding of our
technology. In the interim, ECD is directly funding continued product
development activities for this technology at a reduced level.
Investments in Rare Earth Ovonic
During the year ended June 30, 2000, ECD and Ovonic Battery signed
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
20
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------
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 revenues 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 took 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 December 31, 2004, Ovonic Battery has received payments totaling
$59,484,000 under the three contracts. In 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 December 31, 2004
of approximately $2,668,000.
21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
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 six months ended December 31, 2004 and 2003:
Six Months Ended
December 31,
2004 2003
------------ ------------
Liability beginning of the period $ 1,945,934 $ 2,990,661
Amounts accrued for as warranty costs (253,712) (1,234,927)
Warranty claims (106,628) (130,000)
----------- -----------
Liability at December 31 $ 1,585,594 $ 1,625,734
=========== ===========
Warranty liability is recorded at the time that the product is sold
(for sales of photovoltaic products) or at the time that revenue is
recognized (for machine-building and equipment sales).
Government Contract Reserve
---------------------------
The Company's contracts with the U.S. Government and its agencies are
subject to audits by the Defense Contract Audit Agency (DCAA). DCAA has
audited the Company's indirect rates, including its methodology of computing
these rates, for the years ended June 30, 1994 through June 30, 2003 for
United Solar Ovonic and the years ended June 30, 2000 through June 30, 2002
for ECD. In its reports, DCAA has questioned the allowability of and the
allocability of certain costs as well as the Company's methodology for
allocating independent research and development to its indirect cost pools.
In addition, DCAA has stated that there could be penalties imposed. The
Company is in the process of discussing each of these items in detail with
DCAA. Management believes that some of these DCAA assertions are without
merit. The Company has recorded a reserve of $1,682,000 and $1,847,000 at
December 31, 2004 and June 30, 2004, respectively, related to these issues.
22
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Nonrefundable Advance Royalties
----------------------------------------
At December 31 and June 30, 2004, the Company deferred recognition of
revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
December 31, June 30,
2004 2004
----------- -----------
Battery $ 435,902 $ 1,560,902
Optical memory 724,168 1,431,660
----------- -----------
$ 1,160,070 $ 2,992,562
=========== ===========
Creditable royalties earned and recognized as revenue were:
December 31,
2004 2003
----------- ----------
Three months ended $ 697,123 $ 12,202
Six months ended $ 1,832,492 $ 20,727
Included in creditable royalties earned and recognized as revenues in
the three months and six months ended December 31, 2004 are $686,000 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, low sales volumes for metal hydride materials and
machine building combined with high fixed costs result in losses.
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)
-------------------------------------------------------
A summary of all of the Company's revenues follows.
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Product sales
Photovoltaics $11,235,026 $ 6,633,927 $24,211,343 $11,355,254
Machine building
and equipment sales (2,667,924)* 238,916 (1,598,035)* 1,968,796
Nickel hydroxide and metal
hydride materials 299,440 491,556 358,300 741,467
----------- ----------- ----------- -----------
Total product sales $ 8,866,542 $ 7,364,399 $22,971,608 $14,065,517
=========== =========== =========== ===========
Royalties
Battery technology $ 782,482 $ 595,887 $ 2,348,455 $ 1,046,315
Optical memory/microelectronics 714,759 13,373 727,759 22,444
----------- ----------- ----------- -----------
Total royalties $ 1,497,241 $ 609,260 $ 3,076,214 $ 1,068,759
=========== =========== =========== ===========
Revenues from product
development agreements
Photovoltaics $ 2,497,970 $ 2,448,356 $ 4,676,583 $ 4,980,480
Battery technology 148 473,564 148 894,558
Optical 355,228 121,076 485,585 121,076
Solid hydrogen storage systems 123,241 133,049 147,973 133,049
Other 400,834 111,869 861,581 130,546
----------- ----------- ----------- -----------
3,377,421 3,287,914 6,171,870 6,259,709
Revenues from product development
agreements - related parties
Battery technology 592,360 1,934,552 1,067,267 3,351,086
Solid hydrogen storage systems 1,446,217 2,313,366 4,088,924 4,763,701
----------- ----------- ----------- -----------
2,038,577 4,247,918 5,156,191 8,114,787
----------- ----------- ----------- -----------
Total revenues from product
development agreements $ 5,415,998 $ 7,535,832 $11,328,061 $14,374,496
=========== =========== =========== ===========
License and other agreements
Battery technology $79,770,095 $ 25,000 $80,008,190 $ 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 Six Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
United States $ 91,201,148 $ 10,954,112 $104,435,598 $ 21,781,682
Germany 3,517,522 1,618,282 7,730,997 1,723,996
China (2,648,808)* 125,460 (1,563,637)* 1,914,046
Other Countries 3,654,037 2,975,988 7,272,731 4,459,253
------------ ------------ ------------ ------------
$ 95,723,899 $ 15,673,842 $117,875,689 $ 29,878,977
============ ============ ============ ============
--------------------
* See Note E of Notes to Consolidated Financial Statements.
In the three months and six months ended December 31, 2004, the license
fees of $238,000 and $476,000, 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 the three
months ended December 31, 2003, Ovonic Battery entered into a license
agreement with Mcnair-tech Co., Ltd. of China ($50,000). In addition, in the
six months ended December 31, 2003, Ovonic Battery entered into a license
agreement with Linghao Battery in China ($25,000).
NOTE I - Business Segments
--------------------------
The Company has three business segments: Ovonic Battery, United Solar
Ovonic and the parent company, ECD. Ovonic Battery is involved in developing
and commercializing NiMH Ovonic consumer battery technology. United Solar
Ovonic is involved in manufacturing and selling photovoltaic products. ECD
is involved in microelectronics, fuel cells, hydrogen storage, catalysis,
photovoltaics technologies and machine building. Some general corporate
expenses have been allocated to Ovonic Battery.
The Company's operations by business segments were as follows:
25
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I - Business Segments (Continued)
--------------------------------------
Financial Data by Business Segment
----------------------------------
(in thousands)
United Solar Ovonic Consolidating
Ovonic ECD Battery Entries Consolidated
------------ ------------ ------------ ------------- ------------
Revenues
Three months ended
December 31, 2004 $ 13,490 $ 3,971 $ 78,848 $ (585) $ 95,724
December 31, 2003 8,918 3,806 3,688 (738) 15,674
Six months ended
December 31, 2004 $ 28,582 $ 8,044 $ 82,259 $ (1,009) $ 117,876
December 31, 2003 15,858 7,553 8,006 (1,538) 29,879
Operating Income (Loss)
Three months ended
December 31, 2004 $ (1,906) $ (5,026) $ 74,237 $ 260 $ 67,565
December 31, 2003 (3,038) (5,644) (5,203) 798 (13,087)
Six months ended
December 31, 2004 $ (2,538) $ (9,802) $ 72,769 $ 637 $ 61,066
December 31, 2003 (7,152) (12,460) (9,678) 1,790 (27,500)
Interest Income
Three months ended
December 31, 2004 $ 6 $ 791 $ - $ (689) $ 108
December 31, 2003 3 972 - (718) 257
Six months ended
December 31, 2004 $ 14 $ 1,559 $ - $ (1,388) $ 185
December 31, 2003 7 1,509 - (943) 573
Interest Expense*
Three months ended
December 31, 2004 $ 924 $ - $ - $ (689) $ 235
December 31, 2003 1,063 189 - (659) 593
Six months ended
December 31, 2004 $ 1,859 $ - $ - $ (1,388) $ 471
December 31, 2003 2,081 373 - (1,618) 836
Equity in Net Loss of Investees
Under Equity Method
Three months ended
December 31, 2004 $ - $ (100) $ - $ - $ (100)
December 31, 2003 - (304) - - (304)
Six months ended
December 31, 2004 $ - $ (100) $ - $ - $ (100)
December 31, 2003 - (548) - - (548)
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
------------ ------------ ------------ ------------- ------------
Depreciation Expense
Six months ended
December 31, 2004 $ 2,689 $ 1,129 $ 257 $ - $ 4,075
December 31, 2003 2,619 1,120 355 - 4,094
Capital Expenditures
Six months ended
December 31, 2004 $ 567 $ 60 $ 103 $ - $ 730
December 31, 2003 571 149 89 - 809
Investments in and Advances
to Equity Method Investees
Six months ended
December 31, 2004 $ - $ - $ - $ - $ -
December 31, 2003 - 96 - - 96
Identifiable Assets
Six months ended
December 31, 2004 $ 78,054 $ 145,130 $ 4,504 $(105,075) $ 122,613
December 31, 2003 122,321 140,970 9,206 (129,263) 143,234
-----------------------
* Excludes intercompany interest between ECD and Ovonic Battery.
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 Six Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Income (Loss) $ 67,137,312 $(13,416,425) $ 68,485,264 $(27,698,008)
OTHER COMPREHENSIVE INCOME
(LOSS) (net of taxes):
Unrealized holding gains arising
during period - - - -
Less: reclassification
adjustments for gains realized
in net income - 68,053 - 431,153
------------ ------------ ------------ ------------
Net unrealized gains (losses) - (68,053) - (431,153)
Foreign currency translation
adjustments 76,733 126,591 56,582 74,005
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 67,214,045 $(13,357,887) $ 68,541,846 $(28,055,156)
============ ============ ============ ============
The accumulated income (expense) balances of currency translation
adjustments, net of taxes, were $306,981 and $250,399 at December 31, 2004
and June 30, 2004, respectively.
For the three months ended December 31, 2004 and 2003, the effect from
foreign currency transactions was a gain of $262,617 and $199,704,
respectively. For the six months ended December 31, 2004 and 2003, the
effect from foreign currency transactions was a gain of $274,420 and
$130,877, 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 1.52% in computing the income tax expense as
of December 31, 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 six months ended December 31, 2004 are not necessarily
indicative of results to be expected in future periods.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements
about our financial condition, results of operations, plans, objectives,
future performance and business. In addition, from time to time we and our
representatives have made or may make forward-looking statements orally or in
writing. The words "may," "will," "believes," "expects," "intends,"
"anticipates," "estimates," and similar expressions have been used in this
Quarterly Report to identify forward-looking statements.
We have based these forward-looking statements on our current
expectations with respect to future events and occurrences. Investors are
cautioned that our actual results in the future may differ materially from
the expected results reflected in our forward-looking statements. The
expected results reflected in our forward-looking statements are subject to
various significant risks and uncertainties, including the following:
(o) we 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 joint
ventures, and our licensees and joint venture partners may be
unwilling or unable to devote their financial resources and
manufacturing and marketing capabilities to commercialize
products based on our technologies;
(o) we 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 December 31, 2004 Compared to Three Months Ended
-------------------------------------------------------------------
December 31, 2003
-----------------
Overview
--------
The Company had net income of $67,137,000 on revenues of $95,724,000 in
the three months ended December 31, 2004 compared to a net loss of
$13,416,000 on revenues of $15,674,000 in the three months ended December 31,
2003.
The table below summarizes the Company's operating results (in
thousands):
Operating
Revenues Profit/(Loss)
----------------------- ----------------------
Segment 2004 2003 2004 2003
-------------------------- ---------- ---------- ---------- ----------
United Solar Ovonic $ 13,490 $ 8,918 $ (1,906) $ (3,038)
Energy Conversion Devices 3,971 3,806 (5,026) (5,644)
Ovonic Battery 78,848 3,688 74,237 (5,203)
Consolidating Entries (585) (738) 260 798
-------- -------- -------- --------
Consolidated $ 95,724 $ 15,674 67,565 (13,087)
======== ========
Other Income (Expense) (1,669) (329)
Income Taxes (1,025) -
Extraordinary Item 2,266 -
-------- --------
Net Income (Loss) $ 67,137 $(13,416)
======== ========
United Solar Ovonic Segment
---------------------------
The United Solar Ovonic segment had a decreased operating loss in 2004
versus 2003 primarily due to significantly higher revenues and the impact of
cost reductions in 2004.
United Solar Ovonic's 2004 revenues increased by $4,572,000 from
increased product sales. Photovoltaic sales increased by 69% to $11,235,000
for 2004 from $6,634,000 for 2003.
Gross loss on United Solar Ovonic's product sales was $220,000 in 2004
compared to a gross loss of $1,524,000 in 2003 because of higher sales and
lower material costs.
United Solar Ovonic's revenues from product development agreements in
the three months ended December 31, 2004 were $2,255,000 compared to
$2,285,000 in 2003.
31
Revenues from product development agreements for the United Solar
Ovonic segment in 2004 funded 99% of its cost of product development.
Revenues from product development agreements decreased by $30,000 and
spending increased by $280,000, resulting in an increase of $310,000 in net
cost of product development.
Three Months Ended
December 31,
2004 2003
---------- ----------
Cost of revenues from product development
agreements $1,308,000 $1,602,000
Product development and research 967,000 393,000
---------- ----------
Total cost of product development 2,275,000 1,995,000
Revenues from product development agreements 2,255,000 2,285,000
---------- ----------
Net cost of product development $ 20,000 $ (290,000)
========== ==========
The product development expenditures were used to fund the development
of new products for space and airship applications and to develop lower-cost
and higher-efficiency terrestrial products.
United Solar Ovonic's operating, general and administrative expenses
(net of allocations) decreased by $142,000 in 2004 as a result of reductions
in 2004 in the number of employees, in other employee-related costs and in
warranty expense, partially offset by reduced allocations ($52,000) to cost of
product development in 2004.
Energy Conversion Devices Segment
---------------------------------
The ECD segment had a decreased operating loss in 2004 versus 2003,
primarily due to an increase in the segment's revenues, an increase from
royalties and other revenues, and the impact of ECD's cost-containment
program.
ECD's revenues from product development agreements decreased in the
three months ended December 31, 2004 to $3,012,000 from $3,552,000 in the
three months ended December 31, 2003 due to lower revenues from Ovonic
Hydrogen ($1,446,000 in 2004 versus $2,313,000 in 2003) partially offset by
new contracts with the National Institute of Standards and Technology (NIST)
($599,000 in 2004 versus $173,000 in 2003).
Revenues from product development agreements for the ECD segment for
the three months ended December 31, 2004 funded 45% of this segment's cost of
product development. Revenues from product development agreements decreased
by $540,000 and spending increased by $6,000, resulting in an increase of
$546,000 in net cost of product development.
32
Three Months Ended
December 31,
2004 2003
---------- ----------
Cost of revenues from product development
agreements $3,057,000 $3,524,000
Product development and research 3,670,000 3,197,000
---------- ----------
Total cost of product development 6,727,000 6,721,000
Revenues from product development agreements 3,012,000 3,552,000
---------- ----------
Net cost of product development $3,715,000 $3,169,000
========== ==========
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, effective December 2,
2004, continued the development of Ovonic Hydrogen.
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 $203,000 in the three months
ended December 31, 2004 compared with $140,000 in the three months ended
December 31, 2003.
ECD's operating, general and administrative expenses (net of
allocations) were $1,533,000 in 2004 compared to $1,944,000 in 2003. The
decrease in the net expense for 2004 was due to reductions in 2004 in the
cost of outside services and communications.
Ovonic Battery Segment
----------------------
The Ovonic Battery segment had an operating income in 2004 versus an
operating loss in 2003 primarily resulting from a license agreement, and the
recognition of revenue of $79,532,000 in 2004 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 $2,668,000 in 2004
from $159,000 in 2003, primarily due to the cumulative revenue adjustment 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 equipment and a reduction in the estimated margin from
12% to 8%. Sales of nickel hydroxide were $254,000 in 2004 versus $480,000
in 2003 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 $3,682,000 in 2004 from $445,000 in 2003 due to
Ovonic Battery's reduction in revenues on the Rare Earth Ovonic
contract.
33
Ovonic Battery's revenues from product development agreements in the
three months ended December 31, 2004 decreased to $592,000 from $2,408,000 in
the three months ended December 31, 2003, primarily due to reduced activities
with Cobasys ($592,000 in 2004 compared to $1,935,000 in 2003) as Cobasys
moves into its commercialization phase.
Revenues from product development agreements for the Ovonic Battery
segment in the three months ended December 31, 2004 funded 21% of Ovonic
Battery's cost of product development as Ovonic Battery significantly reduced
its spending on product development. Revenues from product development
agreements decreased by $1,816,000 and spending decreased by $1,077,000,
resulting in an increase of $739,000 in net cost of product development.
Three Months Ended
December 31,
2004 2003
---------- ----------
Cost of revenues from product development
agreements $ 582,000 $2,588,000
Product development and research 2,205,000 1,276,000
---------- ----------
Total cost of product development 2,787,000 3,864,000
Revenues from product development agreements 592,000 2,408,000
---------- ----------
Net cost of product development $2,195,000 $1,456,000
========== ==========
Royalties increased 31% to $782,000 in the three months ended December
31, 2004 from $596,000 in the three months ended December 31, 2003 due to
increased royalties earned on the sale of hybrid electric vehicle batteries
in 2004.
Revenues from license and other agreements increased to $79,770,000 in
the three months ended December 31, 2004 from $25,000 in the three months
ended December 31, 2003. The 2004 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 2003 license fee resulted from a license 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.
Patent expenses were incurred in 2004 and 2003 in connection with the
protection of Ovonic Battery's United States and foreign patents covering its
proprietary technologies. Total patent expenses decreased to $373,000 in the
three months ended December 31, 2004 from $3,536,000 in the three months
ended December 31, 2003, principally due to lower patent defense costs
($16,000 in 2004 versus $3,360,000 in 2003) for the protection of the
Company'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.
34
Other Income/Expense
--------------------
The $1,340,000 decrease in other income (net) ($1,669,000 loss in 2004
compared to $329,000 loss in 2003) resulted primarily from the impairment
loss ($1,710,000) in the Company's investment in Rare Earth Ovonic (see Note
E of Notes to Consolidated Financial Statements).
Six Months Ended December 31, 2004 Compared to Six Months Ended
---------------------------------------------------------------
December 31, 2003
-----------------
Overview
--------
The Company had net income of $68,485,000 on revenues of $117,876,000
in the six months ended December 31, 2004 compared to a net loss of
$27,698,000 on revenues of $29,879,000 in the six months ended December 31,
2003.
The table below summarizes the Company's operating results (in
thousands) for the six months ended December 31, 2004 and 2003.
Operating
Revenues Profit/(Loss)
----------------------- ----------------------
Segment 2004 2003 2004 2003
-------------------------- ---------- ---------- ---------- ----------
United Solar Ovonic $ 28,582 $ 15,858 $ (2,538) $ (7,152)
Energy Conversion Devices 8,044 7,553 (9,802) (12,460)
Ovonic Battery 82,259 8,006 72,769 (9,678)
Consolidating Entries (1,009) (1,538) 637 1,790
--------- --------- -------- --------
Consolidated $ 117,876 $ 29,879 61,066 (27,500)
========= =========
Other Income (Expense) 6,178 (198)
Income Taxes (1,025) -
Extraordinary Item 2,266 -
-------- --------
Net Income (Loss) $ 68,485 $(27,698)
======== ========
United Solar Ovonic Segment
---------------------------
The United Solar Ovonic segment had a decreased operating loss in 2004
versus 2003 primarily due to significantly higher revenues and the impact of
cost reductions in 2004.
United Solar Ovonic's 2004 revenues increased by $12,724,000 from
increased product sales, partially offset by lower revenues from product
development agreements. Photovoltaic sales increased by 113% to $24,211,000
for 2004 from $11,355,000 for 2003.
Gross margin on United Solar Ovonic's product sales improved to
$389,000 in 2004 compared to a gross loss of $3,285,000 in 2003 because of
higher sales and lower material costs.
35
United Solar Ovonic's revenues from product development agreements in
the six months ended December 31, 2004 decreased to $4,201,000 compared to
$4,503,000 in 2003 primarily due to reduced revenues from its $15.5 million
Air Force Contract to develop new solar technology to be used in space and
airship vehicles ($3,385,000 in 2004 compared to $3,874,000 in 2003).
Revenues from product development agreements for the United Solar
Ovonic segment in 2004 funded 96% of its cost of product development.
Revenues from product development agreements decreased by $302,000 and
spending increased by $194,000, resulting in an increase of $496,000 in net
cost of product development.
Six Months Ended
December 31,
2004 2003
---------- ----------
Cost of revenues from product development
agreements $2,917,000 $3,250,000
Product development and research 1,453,000 926,000
---------- ----------
Total cost of product development 4,370,000 4,176,000
Revenues from product development agreements 4,201,000 4,503,000
---------- ----------
Net cost of product development $ 169,000 $ (327,000)
========== ==========
The product development expenditures were used to fund the development
of new products for space and airship applications and to develop lower-cost
and higher-efficiency terrestrial products.
United Solar Ovonic's operating, general and administrative expenses
(net of allocations) decreased by $1,260,000 in 2004 as a result of
reductions in 2004 in the number of employees, in other employee-related
costs and in warranty expense, partially offset by reduced allocations
($215,000) to cost of product development in 2004.
Energy Conversion Devices Segment
---------------------------------
The ECD segment had a decreased operating loss in 2004 versus 2003,
primarily due to a decrease in the net cost of product development in 2004,
an increase in ECD segment's revenues due to an increase in royalty revenue,
and the impact of ECD's cost-containment program.
ECD's revenues from product development agreements decreased in the six
months ended December 31, 2004 to $6,855,000 from $7,090,000 in the six
months ended December 31, 2003 due to lower revenues from Ovonic Hydrogen
($4,089,000 in 2004 versus $4,764,000 in 2003), partially offset by contracts
with NIST ($1,190,000 in 2004 versus $173,000 in 2003).
Revenues from product development agreements for the ECD segment for
the six months ended December 31, 2004 funded 49% of this segment's cost of
product development. Revenues from product development agreements decreased
by $235,000 and spending decreased by $911,000, resulting in a decrease of
$676,000 in net cost of product development.
36
Six Months Ended
December 31,
2004 2003
---------- ----------
Cost of revenues from product development
agreements $6,949,000 $6,804,000
Product development and research 7,117,000 8,173,000
---------- ----------
Total cost of product development 14,066,000 14,977,000
Revenues from product development agreements 6,855,000 7,090,000
---------- ----------
Net cost of product development $7,211,000 $7,887,000
========== ==========
In the six months ended December 31, 2004, the Company reduced its
spending in Ovonic Media ($325,000), fuel cell ($895,000) and hydrogen
($386,000) compared to spending in the six months ended December 31, 2003.
Product development programs include work on the Ovonic Cognitive
Computer technology - a unique approach to develop computing based on the
learning capability that mimics the functionality of the human brain to
combine memory and processing in a single sub-micron device. ECD is also
developing a unique three-terminal Ovonic threshold/memory device technology
to have high-speed, high-current capabilities. Additionally, ECD continued
the development of the Ovonic regenerative fuel cell, which is a
fundamentally new approach to fuel cell technology.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues were $388,000 in the six months
ended December 31, 2004 compared with $306,000 in the six months ended
December 31, 2003.
ECD's operating, general and administrative expenses (net of
allocations) were $2,422,000 in 2004 compared to $3,065,000 in 2003. The
decrease in the net expense for 2004 was due to reductions in 2004 in the
cost of outside services and communications.
Ovonic Battery Segment
----------------------
The Ovonic Battery segment had an operating income in 2004 versus an
operating loss in 2003, primarily from a license agreement and the
recognition of revenue of $79,532,000 in 2004.
The increase in Ovonic Battery's revenues was primarily the recognition
of revenue of $79,532,000 from a license agreement in 2004, partially offset
by a decrease in equipment sales to Rare Earth Ovonic and a reduction in
revenues from product development agreements principally related to decreased
activities under the advanced product development agreement from Cobasys.
Equipment sales revenues decreased to negative $1,240,000 in 2004 from
$2,630,000 in 2003, primarily due to the cumulative revenue adjustment 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 equipment and a reduction in the estimated margin from
12% to 8% resulting in negative revenue of
37
$1,598,000 in 2004 compared to revenue of $1,889,000 in 2003). Sales of
nickel hydroxide were $254,000 in 2004 versus $715,000 in 2003 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 negative $4,011,000 in 2004 from negative $903,000 in 2003 due
to Ovonic Battery's reduction in revenues on the Rare Earth Ovonic contracts.
Ovonic Battery's revenues from product development agreements in the
six months ended December 31, 2004 decreased to $1,067,000 from $4,246,000 in
the six months ended December 31, 2003, primarily due to reduced activities
with Cobasys ($1,067,000 in 2004 compared to $3,351,000 in 2003) as Cobasys
moves into its commercialization phase.
Revenues from product development agreements for the Ovonic Battery
segment in the six months ended December 31, 2004 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 $3,179,000 and spending decreased by $2,741,000,
resulting in an increase of $438,000 in net cost of product development.
Six Months Ended
December 31,
2004 2003
---------- ----------
Cost of revenues from product development
agreements $1,045,000 $4,539,000
Product development and research 4,320,000 3,567,000
---------- ----------
Total cost of product development 5,365,000 8,106,000
Revenues from product development agreements 1,067,000 4,246,000
---------- ----------
Net cost of product development $4,298,000 $3,860,000
========== ==========
Royalties increased 124% to $2,348,000 in the six months ended December
31, 2004 from $1,046,000 in the six months ended December 31, 2003 due to the
recognition of $1,125,000 related to an advance royalty payment made by a
licensee to the Company in 1993 associated with a license agreement under
which the licensee no longer has a contractual obligation to make payments
and increased royalties earned on the sale of hybrid electric vehicle
batteries in 2004.
Revenues from license and other agreements increased to $80,008,000 in
the six months ended December 31, 2004 from $75,000 in the six months ended
December 31, 2003. The 2004 license fees result from the recognition of
revenues of $79,532,000 as a license fee 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 2003 license fees
resulted from licenses to Linghao Battery and Mcnair-tech Co., Ltd. of China.
Revenues from license and other agreements depend on a small number of new
business arrangements, are sporadic and vary dramatically from period to period.
38
Patent expenses were incurred in 2004 and 2003 in connection with the
protection of Ovonic Battery's United States and foreign patents covering its
proprietary technologies. Total patent expenses decreased to $812,000 in the
six months ended December 31, 2004 from $5,837,000 in the six months ended
December 31, 2003, principally due to lower patent defense costs ($189,000 in
2004 versus $5,471,000 in 2003) for the protection of the Company'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 $6,376,000 improvement in other income (net) ($6,178,000 income in
2004 compared to $198,000 loss in 2003) resulted primarily from the
$8,000,000 distribution received from Cobasys as a distribution from the
joint venture associated with the settlement of the patent infringement
disputes and counterclaims (see Note B of Notes to Consolidated Financial
Statements), 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 December 31, 2004, the Company had consolidated cash, cash
equivalents, and accounts receivable (including $295,000 of amounts due from
related parties) of $42,251,000 and had consolidated working capital of
$37,247,000.
As part of the settlement of the patent infringement disputes and
counterclaims, ECD and Ovonic Battery received a nonrefundable $10 million
patent license fee from MEI and PEVE. In addition, Cobasys received a $20
million nonrefundable patent license fee from MEI, PEVE and Toyota, of which
$4 million was placed in escrow for a next-generation NiMH battery
development project plan. Upon receipt of the funds, Cobasys made $8 million
distributions to each of Ovonic Battery and CTTV as a distribution from the
joint venture (see Note B of Notes to Consolidated Financial Statements).
On August 12, 2004, the Board of Directors approved management's
business restructuring plan to take full advantage of the favorable battery
settlement agreement announced on July 7, 2004 and the increasing market
interest in solar energy systems and hybrid electric vehicles. Our strategy
is to transition from a highly successful research-oriented company to the
next phase of development, which is to commercialize the products we have
developed and concentrate on growing sales revenues and equity value in our
core commercial businesses with the goal of moving the Company into a
position of having sustained profitability by July 2006.
The restructuring 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.
39
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 $16,882,000, 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 December 31, 2004 for machine-building and
equipment sales contracts, photovoltaic products and metal hydride materials
is $21,853,000 compared to a backlog of $9,166,000 at December 31, 2003. The
increase in 2004 was due to an increase in the backlog for United Solar
Ovonic. In fiscal 2006, we expect to recognize $3,679,000 of this backlog.
As of December 31, 2004, the Company had $29,743,000 consolidated cash
and cash equivalents ($1,000,000 of which was restricted) consisting of money
market funds. It is the Company's policy that investments (including cash
equivalents) shall be rated "A" or higher by Moody's or Standard and Poor's,
no single investment (excluding cash equivalents) shall represent more than
10% of the portfolio and at least 20% of the total portfolio shall have
maturities of 90 days or less.
During the six months ended December 31, 2004, $5,437,000 of cash was
generated from operations. The difference between the net income of
$68,485,000 and the net cash generated from 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, partially offset by deferred nonrefundable
patent license fee received from the conclusion of the patent litigation with
MEI ($10,000,000), noncash costs (principally depreciation, $4,075,000),
changes in nonrefundable advance royalties ($1,832,000) and deferred revenues
under business agreements ($894,000) (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
and expiring on November 1, 2005, will provide the Company with the added
flexibility to secure additional capital required for its future growth.
The Company spent $730,000 on property, plant and equipment that was
placed in service during the six months ended December 31, 2004. In total,
the Company expects to spend $2,000,000 for capital expenditures in fiscal
2005, primarily for manufacturing equipment at United Solar Ovonic and for
leasehold improvements to the Company's facilities.
40
As part of its long-standing strategy, the Company has made investments
in its technologies, which have resulted in enabling intellectual property
and products. The technology emerging from these investments has enabled the
Company to finance its operations and growth through strategic alliances
(joint ventures and license agreements) with third parties who can provide
financial resources and marketing expertise for the Company's technologies
and products.
The resultant strategic alliances and agreements with major companies
have accelerated the commercialization and development of the Company's
products and technologies. While the Company's business partners have funded
most of its product development and commercialization activities, additional
sources of cash are required to sustain the Company's operations. The
Company expects to continue to use significant cash to fund its operations in
the coming year and is engaged in a number of activities to raise capital,
grow revenues and reduce costs.
Management believes that funds generated from operations; new business
agreements; equity financing, including the exercise of Common Stock purchase
warrants and exercise of stock options; debt financings; new government
contracts and the cost-containment initiatives, together with existing cash
and cash equivalents, will be adequate to support the Company's operations
for the coming year. However, the amount and timing of such activities are
uncertain. Accordingly, no assurances can be given as to the timing or
success of the aforementioned plans, negotiations, discussions and programs.
The report of the independent registered public accounting firm states that
"the Company's recurring losses from operations and need for additional
working capital raise substantial doubt about its ability to continue as a
going concern." The Company has recurring losses from operations and is
actively engaged in discussions to obtain the needed additional working
capital.
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 $29,738,000 and $13,074,000 of
these investments (including cash equivalents) on December 31, 2004 and June
30, 2004, respectively. On December 31 and June 30, 2004, the investments
were all maturing on a daily basis. It is the Company's policy that
investments (including cash equivalents) shall be rated "A" or higher by
Moody's or Standard and Poor's, no single investment (excluding cash
equivalents) shall represent more than 10% of the portfolio and at least 20%
of the total portfolio shall have maturities of 90 days or less. Our market
risk primarily relates to the risks of changes in the credit quality of
issuers. As of December 31, 2004, the risk associated with changes in
interest rates is minimal due to the short average maturity of the
investments.
Item 4. Controls and Procedures
------ -----------------------
In Item 9A, Controls and Procedures of the Company's Form 10-K for the
year ended June 30, 2004, the following four significant deficiencies were
identified pursuant to standards established by the Public Company Accounting
Oversight Board (PCAOB):
1. The Company has insufficient documentation of its policies and
procedures around internal controls to ensure that the execution of
activities and controls are consistent with management's objectives.
2. The Company does not currently have monitoring controls in place to
determine whether controls that have been implemented by management,
specifically in the financial reporting function, are actually
operating consistently with management's objectives.
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 has
included the recent retention of a registered public accounting firm to
assist in the project direction, execution and external reporting.
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-14(c) under the Securities
Exchange Act of 1934). Based upon that evaluation, which considered the
material weaknesses mentioned above, the Chief Executive Officer and Chief
Financial Officer concluded that the operation of these disclosure controls
and procedures were effective for gathering, analyzing and disclosing
information required to be disclosed in connection with the Company's filing
of its Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.
No significant changes were made in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
43
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
------ -----------------
See "Settlement Agreement" under Note B - Financings of the Notes to
Consolidated Financial Statements on page 14.
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
At the Annual Meeting of Stockholders (the "Meeting") held on November
18, 2004, the following directors were elected for the ensuing year and until
their successors are duly elected and qualified:
For Withheld
---------- --------
Robert C. Stempel 29,325,400 214,011
Stanford R. Ovshinsky 29,277,312 262,099
Iris M. Ovshinsky 29,186,940 352,471
Robert I. Frey 29,447,558 91,853
William J. Ketelhut 29,438,108 101,303
Florence I. Metz 29,340,152 199,259
Stephen Rabinowitz 29,436,453 102,958
Also approved at the Meeting was the appointment of Grant Thornton LLP
as independent registered public accounting firm for the fiscal year ending
June 30, 2005 (with 29,463,443 votes For; 50,088 votes Against; and 25,880
Abstentions).
Item 6. Exhibits and Reports on Form 8-K
------ --------------------------------
A. Exhibits
--------
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
-------------------
During the quarter ended December 31, 2004, the Registrant filed or
furnished the following reports on Form 8-K:
1. On November 5, 2004, we filed a Current Report on Form 8-K for
the purpose of filing an amendment to article VIII of our bylaws
decreasing the maximum number of our directors to seven effective
November 18, 2004.
44
2. On November 9, 2004, we filed a Current Report on Form 8-K for
the purpose of furnishing our press release announcing the
financial results for the quarter ended September 30, 2004.
3. On December 2, 2004, we filed a Current Report on Form 8-K under
Items 1.01, 1.02 and 7.01 relating to a series of agreements
entered into by ECD and its subsidiary Ovonic Battery Company,
Inc. and certain affiliates of ChevronTexaco Corporation, TRMI
Holdings Inc., and ChevronTexaco Technology Ventures LLC.
45
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
-------------------------------
(Registrant)
By: /s/ Stephan W. Zumsteg
--------------------------------------------
Stephan W. Zumsteg
Date: February 9, 2005 Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Robert C. Stempel
--------------------------------------------
Robert C. Stempel
Date: February 9, 2005 Chairman and Chief Executive Officer
46