ENERGY CONVERSION DEVICES INC - S-1 - 20040309 - STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Equity Compensation Plan Information
The following table sets forth aggregate information regarding grants
under all our equity compensation plans as of March 5, 2004.
Number of securities
remaining available for
Number of securities future issuance under equity
to be issued upon Weighted average compensation plans
exercise of out- exercise price of (excluding securities
Plan category standing options outstanding options reflected in 1st column)
------------------------------ -------------------- ------------------- ----------------------------
Equity compensation plans
approved by security holders(1) 3,055,468 $16.87 (2)
Equity compensation plans not
approved by security holders 359,749(3)(4) $10.17 (4)(5)
----------
Total 3,415,217 $16.16 (2)(4)(5)
==========
(1) These plans consist of our 1987 Stock Option and Incentive Plan, 1995
Non-Qualified Stock Option Plan and 2000 Non-Qualified Stock Option Plan.
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(2) In October 2003, in order to make available additional shares to complete a
proposed equity financing, our Board of Directors approved the suspension of
all future stock option grants under our existing plans until such time when
our stockholders approve an amendment to Article Four of our Certificate of
Incorporation to increase the number of authorized shares. As of March 5,
2004, there were 1,251,610 securities remaining available for future
issuances under our equity compensation plans approved by security holders.
(3) Of the 359,749 shares issuable upon exercise, options to acquire 221,499 and
138,250 shares were issued to Mr. and Dr. Ovshinsky, respectively, pursuant
to Stock Option Agreements dated November 1993 which are subject to periodic
anti-dilution protection adjustments based on changes in the number of
outstanding shares of our common stock. Under those Stock Option Agreements,
if we issue any equity securities, other than pursuant to the exercise of
options by Mr. and Dr. Ovshinsky under their respective Stock Option
Agreements, we are obligated to grant to Mr. and Dr. Ovshinsky additional
options covering sufficient additional shares of our common stock so that
their respective proportionate equity interest in ECD as of November 1993 is
maintained on a fully-diluted basis. Such adjustments are calculated
quarterly as of the last day of each of our fiscal quarters and coincident
with significant issuances of our common stock.
(4) In October 2003, in order to make available additional shares to complete a
proposed equity financing, our Board of Directors approved our entering into
an agreement with Mr. and Dr. Ovshinsky for the suspension of their rights
to exercise 180,000 and 120,000 shares, respectively, granted to them
pursuant to Stock Option Agreements dated November 1993 until the earlier of
(i) the date that we file an amendment to our Certificate of Incorporation
following stockholder approval to increase the number of authorized shares,
or (ii) December 31, 2004. Mr. and Dr. Ovshinsky also have agreed to the
temporary postponement of the anti-dilution provision (see Note 3 above)
under their respective Stock Option Agreements.
(5) In October 2003, in order to make available additional shares to complete a
proposed equity financing, our Board of Directors approved our entering into
an agreement with Mr. Stempel for the suspension of his rights to exercise
300,000 shares granted to him pursuant to Stock Option Agreement dated
January 1999 until the earlier of (i) the date that we file an amendment to
our Certificate of Incorporation following stockholder approval to increase
the number of authorized shares, or (ii) December 31, 2004.
Class A Common Stock
Mr. Ovshinsky and Dr. Ovshinsky (each an executive officer, director and
founder of ECD), own of record 153,420 shares and 65,601 shares, respectively
(or approximately 69.8% and 29.8%, respectively), of the outstanding shares of
Class A common stock. Such shares are owned directly or indirectly through
certain trusts of which Mr. and Dr. Ovshinsky are co-trustees. Our common stock
is entitled to one vote per share and each share of Class A common stock is
entitled to 25 votes per share. Class A common stock is convertible into common
stock on a share-for-share basis at any time and from time to time at the option
of the holders, and will be deemed to be converted into common stock on a
share-for-share basis on September 30, 2005. Under applicable Delaware law, the
September 30, 2005 mandatory conversion date may be extended in the future from
time to time with approval of our stockholders voting together as a single
class.
As of March 5, 2004, Mr. Ovshinsky also had the right to vote 126,500
shares of common stock owned by Sanoh Industrial Co., Ltd. under the terms of an
agreement dated as of November 3, 1992 between ECD and Sanoh which, together
with the Class A common stock and 19,749 shares of common stock Mr. and Dr.
Ovshinsky own, give Mr. and Dr. Ovshinsky
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voting control over shares representing approximately 18.46% of the combined
voting power of our outstanding stock.
ChevronTexaco has agreed that (i) so long as it beneficially owns an
aggregate of 5% of our common stock and (ii) so long as Mr. and Dr. Ovshinsky
are the beneficial owners of Class A common stock, or Mr. Stempel is the
beneficial owner of Class B common stock, ChevronTexaco will vote its shares
of our common stock in accordance with the votes cast by the holders of Class A
common stock (prior to its conversion) or Class B common stock (after
conversion of the Class A common stock).
The following table sets forth, as of March 5, 2004, information
concerning the beneficial ownership of Class A common stock by each director and
all of our executive officers and directors as a group. All shares are owned
directly except as otherwise indicated. Under the rules of the Securities and
Exchange Commission, Mr. Ovshinsky and Dr. Ovshinsky may each be considered to
beneficially own the shares held by the other.
Class A
Name of Common Stock Total Number of Shares
Beneficial Owner Beneficially Owned(1)(2) Beneficially Owned Percentage of Class
-------------------- ------------------------ ---------------------- -------------------
Stanford R. Ovshinsky 153,420 153,420 69.8%
Iris M. Ovshinsky 65,601 65,601 29.8%
All other executive
officers and directors as - - -
a group (9 persons)
------- ------- -----
Total 219,021 219,021 99.6%
======= ======= =====
----------------
(1) The balance of the 219,913 shares of Class A common stock outstanding, 892
shares, or approximately 0.4%, are owned by other members of Mr. and Dr.
Ovshinsky's family. Neither Mr. nor Dr. Ovshinsky has voting or investment
power with respect to such shares.
(2) On November 10, 1995, the Compensation Committee of our Board of Directors
recommended, and the Board of Directors approved, an amendment to Mr. and
Dr. Ovshinsky's Stock Option Agreements dated November 18, 1993 to permit
Mr. and Dr. Ovshinsky to exercise a portion (126,082 and 84,055 shares,
respectively) of their existing common stock option for Class A common
stock on the same terms and conditions as provided in the Agreements. The
shares of Class A common stock issuable upon exercise of the options under
these Stock Option Agreements, as amended, are not included in the number
of shares indicated in the above table, but are included in the shares of
common stock beneficially owned by Mr. and Dr. Ovshinsky (see table of
beneficial ownership of common stock on the following page).
Class B Common Stock
At our Annual Meeting held on March 25, 1999, our stockholders approved a
proposal to increase our authorized capital stock and to authorize 430,000
shares of a new Class B common stock. All of the authorized shares of Class B
common stock were awarded to Robert C. Stempel, the Chairman of our Board of
Directors, pursuant to the terms of a Restricted Stock Agreement dated as of
January 15, 1999 between us and Mr. Stempel.
22
The terms of our Class B common stock are substantially similar to those
of our Class A common stock. The principal difference between the Class A common
stock and the Class B common stock is with respect to voting rights. Each share
of Class B common stock currently entitles the holder to one vote on all matters
to be voted upon by our stockholders. However, each share of Class B common
stock will become entitled to 25 votes as of the first date upon which all of
the outstanding shares of Class A common stock have been converted into common
stock and no shares of Class A common stock are outstanding. The preferential
voting rights of the Class B common stock, if triggered, will expire on
September 30, 2005.
The Class B common stock is convertible into common stock on a
share-for-share basis at any time at the option of the holder. In addition, the
Class B common stock will be deemed to be converted into common stock on
September 30, 2005. Under applicable Delaware law, the September 30, 2005
mandatory conversion date may be extended in the future from time to time with
the approval of our stockholders voting together as a single class.
ChevronTexaco has agreed that (i) so long as it beneficially owns an
aggregate of 5% of our common stock and (ii) so long as Mr. and Dr. Ovshinsky
are the beneficial owners of Class A common stock, or Mr. Stempel is the
beneficial owner of Class B common stock, ChevronTexaco will vote its shares
of our common stock in accordance with the votes cast by the holders of Class A
common stock (prior to its conversion) or Class B common stock (after
conversion of the Class A common stock).
Common Stock
Directors and Executive Officers. The following table sets forth, as of
March 5, 2004, information concerning the beneficial ownership of common
stock by each of our director and executive officer and for all of our directors
and executive officers as a group. All shares are owned directly except as
otherwise indicated.
Amount and Nature of Percentage
Name of Beneficial Owner Beneficial Ownership(1) of Class(2)
------------------------ ----------------------- -----------
Robert C. Stempel 891,404 (3) 3.52%
Stanford R. Ovshinsky 804,616 (4) 3.19%
Iris M. Ovshinsky 424,248 (5) 1.70%
Nancy M. Bacon 247,215 (6) 1.00%
Hellmut Fritzsche 30,250 (7) *
Stephan W. Zumsteg 30,000 (8) *
Walter J. McCarthy, Jr. 20,708 (9) *
James R. Metzger 19,974 (10) *
Stanley K. Stynes 19,589 (11) *
Florence I. Metz 17,405 (12) *
Umberto Colombo 15,672 (13) *
---------
All executive officers and 2,521,081 9.42%
directors as a group (11 persons) =========
* Less than 1%.
23
(1) Under the rules and regulations of the Securities and Exchange Commission,
a person is deemed to be the beneficial owner of a security if that person
has the right to acquire beneficial ownership of such security within
sixty days, whether through the exercise of options or warrants or through
the conversion of another security.
(2) Under the rules and regulations of the Securities and Exchange Commission,
shares of common stock issuable upon exercise of options and warrants or
upon conversion of securities which are deemed to be beneficially owned by
the holder thereof (see Note (1) above) are deemed to be outstanding for
the purpose of computing the percentage of outstanding securities of the
class owned by such person, but are not deemed to be outstanding for the
purpose of computing the percentage of the class owned by any other
person.
(3) Includes 430,000 shares of Class B common stock and 400,000 shares
represented by options exercisable within 60 days. In October 2003, in
order to make available additional shares to complete a proposed equity
financing, our Board of Directors approved our entering into an agreement
with Mr. Stempel for the suspension of his rights to exercise 300,000
shares granted to him pursuant to Stock Option Agreement dated January
1999 until the earlier of (i) the date that we file an amendment to our
Certificate of Incorporation following stockholder approval to increase
the number of authorized shares, or (ii) December 31, 2004. The 300,000
shares are not included in the number of shares indicated in the above
table.
(4) Includes 512,456 shares represented by options exercisable within 60 days,
the 126,500 shares of common stock owned by Sanoh Industrial Co., Ltd.
over which Mr. Ovshinsky has voting power and 153,420 shares of Class A
common stock which are convertible into common stock. Under the rules and
regulations of the Securities and Exchange Commission, Mr. Ovshinsky may
be deemed a beneficial owner of the shares of common stock and Class A
common stock owned by his wife, Dr. Ovshinsky. Such shares are not
reflected in Mr. Ovshinsky's share ownership in this table. In October
2003, in order to make available additional shares to complete a proposed
equity financing, our Board of Directors approved our entering into an
agreement with Mr. Ovshinsky for the suspension of his rights to exercise
180,000 shares granted to him pursuant to Stock Option Agreements dated
November 1993 until the earlier of (i) the date that we file an amendment
to our Certificate of Incorporation following stockholder approval to
increase the number of authorized shares, or (ii) December 31, 2004. Mr.
Ovshinsky also has agreed to the temporary postponement of the
anti-dilution provision under his Stock Option Agreements. The 180,000
shares are not included in the number of shares indicated in the above
table.
(5) Includes 351,138 shares represented by options exercisable within 60 days
and 65,601 shares of Class A common stock which are convertible into
common stock. Under the rules and regulations of the Securities and
Exchange Commission, Dr. Ovshinsky may be deemed a beneficial owner of the
shares of common stock and Class A common stock owned by her husband, Mr.
Ovshinsky. Such shares are not reflected in Dr. Ovshinsky's share
ownership in this table. In October 2003, in order to make available
additional shares to complete a proposed equity financing, our Board of
Directors approved our entering into an agreement with Dr. Ovshinsky for
the suspension of her rights to exercise 120,000 shares granted to her
pursuant to Stock Option Agreements dated November 1993 until the earlier
of (i) the date that we file an amendment to our Certificate of
Incorporation following stockholder approval to increase the number of
authorized shares, or (ii) December 31, 2004.
24
Dr. Ovshinsky also has agreed to the temporary postponement of the
anti-dilution provision under her Stock Option Agreements. The 120,000
shares are not included in the number of shares in the above table.
(6) Includes 222,200 shares represented by options exercisable within 60 days.
(7) Includes 20,388 shares represented by options exercisable within 60 days.
(8) Includes 28,000 shares represented by options exercisable within 60 days.
(9) Includes 6,000 shares represented by options exercisable within 60 days.
(10) Includes 16,000 shares represented by options exercisable within 60 days.
(11) Includes 6,000 shares represented by options exercisable within 60 days.
(12) Includes 9,000 shares represented by options exercisable within 60 days.
(13) Includes 11,000 shares represented by options exercisable within 60 days.
Principal Shareholders. The following table sets forth, as of March 5,
2004, to our knowledge, the beneficial holders of more than 5% of our common
stock (see footnotes for calculation used to determine "percentage of class"
category):
Name and Address of Amount and Nature of Percentage of
Beneficial Holder Beneficial Ownership Class(1)
----------------------------------- -------------------- -------------
TRMI Holdings Inc. 4,376,633(2) 17.39%
(a unit of ChevronTexaco)
6001 Bollinger Canyon Road
San Ramon, California 94583
Fidelity Capital Trust:
Fidelity Capital Appreciation Fund 2,519,132(3) 9.77%
82 Devonshire Street, E31C
Boston, Massachusetts 02109
Heimdall Investments Ltd. 1,834,573(4) 7.09%
c/o HBK Investments L.P.
300 Crescent Court - Suite 700
Dallas, Texas 75201
CCM Master Qualified Fund, Ltd. 1,971,195(5) 7.82%
c/o Coghill Capital Management, L.L.C.
One North Wacker Drive - Suite 4350
Chicago, Illinois 60606
-------------
(1) Under the rules and regulations of the Securities and Exchange
Commission, shares of common stock issuable upon exercise of
options and warrants or upon conversion of securities which are
deemed to be beneficially owned by the holder thereof are deemed to
be outstanding for the purpose of computing the percentage of
outstanding securities of
25
the class owned by such person, but are not deemed to be outstanding
for the purpose of computing the percentage of the class owned by any
other person.
(2) Pursuant to the Stock Purchase Agreement dated as of May 1, 2000, TRMI
Holdings Inc., a unit of ChevronTexaco, has agreed that (i) so long as
it beneficially owns an aggregate of 5% of our common stock and (ii) so
long as Mr. and Dr. Ovshinsky are the beneficial owners of Class A
common stock, or Mr. Stempel is the beneficial owner of Class B common
stock, ChevronTexaco will vote its shares of our common stock in
accordance with the votes cast by the holders of Class A common stock
(prior to its conversion) or Class B common stock (after conversion of
the Class A common stock). ChevronTexaco's percentage of class is
computed based on 23,947,522 shares of common stock outstanding,
219,913 shares of Class A common stock outstanding and 430,000 shares
of Class B common stock outstanding.
(3) Consists of 1,259,566 outstanding shares of common stock and
1,259,566 shares of common stock issuable upon exercise of currently
exercisable warrants. Excludes 200,000 shares owned by Fidelity
Management & Research Company.
(4) Consists of 496,781 outstanding shares of common stock and 1,337,792
shares of common stock issuable upon exercise of currently exercisable
warrants. HBK Investments L.P. may be deemed to have sole voting power
and sole dispositive power over the shares held by Heimdall Investment
Ltd. pursuant to an Investment Management Agreement between HBK
Investments L.P. and Heimdall Investments Ltd.
(5) Consists of 1,302,299 outstanding shares of common stock and 668,896
shares of common stock issuable upon exercise of currently exercisable
warrants. Coghill Capital Management, L.L.C. and Clint D. Coghill,
through their control of CCM Master Qualified Fund, Ltd., have shared
voting and dispositive power over these shares.
26
BUSINESS
Overview
Energy Conversion Devices, Inc. is a technology, product development
and manufacturing company founded by Stanford R. Ovshinsky and Dr. Iris M.
Ovshinsky. We are engaged in the invention, engineering, development and
commercialization of new materials, products and production technology. Under
the direction of Mr. Ovshinsky, our principal inventor, we have established a
leadership role in the development of proprietary materials, products and
production technology based on our atomically engineered amorphous and
disordered materials. We use chemical and structural disorder to provide
multiple degrees of freedom to our materials and products that result in our
ability to make many new materials.
We develop materials that permit us to design and commercialize products
such as NiMH batteries, thin-film photovoltaic products and phase-change optical
memory media. These products have unique chemical, electrical, mechanical and
optical properties and superior performance characteristics. Our proprietary
materials, products and technologies are branded as "Ovonic."
Certain technical terms used in this prospectus are defined in the section
captioned "Business -- Glossary of Technical Terms."
We have established a multi-disciplinary business, scientific, technical
and manufacturing organization to commercialize products based on our
technologies. We have enabling proprietary technologies in the important fields
of:
ALTERNATIVE ENERGY TECHNOLOGY
o Energy Storage and Related Technologies
Ovonic rechargeable NiMH batteries
Ovonic solid hydrogen storage systems
Alternative energy vehicles
o Energy Generation
Ovonic thin-film photovoltaic modules and systems
Ovonic regenerative fuel cell technology
INFORMATION TECHNOLOGY
o Ovonic rewritable optical memory technology
o Ovonic Unified Memory
o Ovonic Cognitive Computer technology
We manufacture and sell our proprietary products through our subsidiaries
and joint venture companies and through licensing arrangements with major
companies throughout the world. In addition, in support of these activities, we
are engaged in research and development, production of our proprietary materials
and products, as well as in designing and building production machinery. Our
extensive patent portfolio includes numerous basic and fundamental patents
applicable to each of our lines of business. We invent not only materials, but
also develop low-cost production technologies and high-performance products. Our
patents, therefore, cover not only materials, but also the production technology
and products we develop.
27
Our corporate structure and the activities we conduct directly and through
our subsidiaries and joint ventures are summarized below:
Alternative Energy Technology Ownership
----------------------------- ---------
Energy Storage and Related Technologies
---------------------------------------
Batteries
Ovonic Battery Company, Inc.(1) ECD -- 91.4%
Honda Motor Company, Ltd. -- 3.2%
Sanoh Industrial Co., Ltd. -- 3.2%
Sanyo Electric Co. Ltd. -- 2.2%
Texaco Ovonic Battery Ovonic Battery Company, Inc. -- 50%
Systems LLC Texaco Energy Systems LLC, a unit of
ChevronTexaco Corporation -- 50%
Rare Earth Ovonic Metal ECD & Ovonic Battery Company, Inc. -- 19%
Hydride Joint Venture Co. Ltd.
Rare Earth Ovonic High Power Inner Mongolia Baotou Steel Rare Earth
NiMH Battery Joint Venture Co. Ltd. High-Tech Holding Co. Ltd. -- 75%
Rare Earth Ovonic NiMH Battery
Electrode Joint Venture Co. Ltd. American Wako Koeki Corp. -- 6%
Sovlux Battery Closed-Stock ECD -- 50%
Company Chepetsky Mechanical Plant -- 50%
(an enterprise of the Russian Ministry
of Atomic Energy)
Hydrogen
Texaco Ovonic Hydrogen ECD -- 50%
Systems LLC Texaco Energy Systems LLC, a unit of
ChevronTexaco Corporation -- 50%
Alternative Energy Vehicles
ITS Innovative Transportation Systems A.G. ECD -- 26%
Neville D. Chamberlain Family and Related
Entity -- 66%
Texaco Ovonic Battery Systems LLC -- 8%
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Energy Generation Ownership
----------------- ---------
Photovoltaics
United Solar Ovonic Corp.(1)(2) ECD -- 100%
United Solar Ovonic LLC(1)(3) ECD -- 60%
United Solar Ovonic Corp.-- 40%
Sovlux Co., Ltd. ECD -- 50%
State Research & Production Enterprise Kvant and
enterprises of the Russian Ministry of Atomic Energy -- 50%
Fuel Cell Technology
Ovonic Fuel Cell Company LLC(1)(4) ECD -- 100%
Information Technology
----------------------
Optical Memory
Ovonic Media, LLC ECD -- 49%
General Electric -- 51%
Ovonic Unified Memory
Ovonyx, Inc. ECD -- 41.7%
Mr. Tyler Lowrey, Intel Capital and private investors -- 58.3%
Ovonic Cognitive Computer Technology
Ovonic Cognitive Computer, Inc.(1) ECD -- 95%
Ovonyx -- 5%
(1) The revenues and/or expenses of these entities are included in our
consolidated financial statements. The revenues and/or expenses of United
Solar Ovonic Corp. are included in our consolidated financial statements
effective April 11, 2000 upon our attaining 81% ownership of that entity
on that date. The revenues and/or expenses of United Solar Ovonic LLC are
included in our consolidated financial statements effective May 15, 2003
upon our acquisition of the 60% interest in United Solar Ovonic LLC
formerly owned by a unit of N.V. Bekaert S.A. The revenues and/or expenses
of Ovonic Fuel Cell Company are included in our consolidated financial
statements effective January 1, 2003 upon our acquisition of the 50%
interest formerly owned by a unit of ChevronTexaco.
(2) Formerly known as United Solar Systems Corp.
(3) Formerly known as Bekaert ECD Solar Systems LLC.
(4) Formerly known as Texaco Ovonic Fuel Cell Company LLC.
29
Many of our technologies have been commercialized in products such as NiMH
consumer batteries and NiMH batteries for transportation applications,
photovoltaic products and phase-change rewritable optical memory disks. Our
other technologies require further technical development and financial resources
from us, our joint venture partners or third parties in order to achieve
commercial production.
Product manufacturing activities are conducted by us and through our
subsidiaries and joint ventures. Our principal manufacturing activity consists
of machine building by our Production Technology and Machine Building Division.
Our United Solar Ovonic Corp. and United Solar Ovonic LLC subsidiaries
manufacture our photovoltaic products. The principal manufacturing activities of
our subsidiary, Ovonic Battery Company, Inc., are limited production of our
metal hydride negative electrode materials and nickel hydroxide positive
electrode materials for NiMH batteries and metal hydride materials. Our Texaco
Ovonic Battery Systems LLC subsidiary manufactures prismatic NiMH modules and
battery packs.
The critical factor to large-scale market penetration of products
incorporating our technologies is the manufacturing of such products in
sufficient quantities to achieve economies of scale, reduce product cost and
deliver to the marketplace products that answer basic industry and consumer
needs.
Major Businesses
Our business strategy is to develop and commercialize enabling
technologies for use in the fields of alternative energy and information
technologies. We are pursuing our business strategy by developing and
commercializing new products and production technologies based on our
proprietary Ovonic materials. We have established joint ventures, licensing
arrangements and other strategic alliances with major companies around the world
to achieve our strategic objectives.
Our energy activities include developing and manufacturing complete
systems for energy generation, storage and infrastructure, and represent a major
element of our business. Environmentally safe methods of generating and storing
energy have become critical in today's world. Our battery and photovoltaic
products as well as our hydrogen storage materials and technologies have gained
worldwide recognition, particularly in light of continued concerns about energy
security, air pollution, global climate change, ozone layer depletion,
dependence on imported oil and related concerns which contribute to
international political, military and economic instability.
Our information technology activities include our Ovonic phase-change
rewritable optical memory technology, which is directed to applications in the
emerging DVD rewritable optical disk market. Due to their high data storage
capacity, leading manufacturers in the optical disk industry are targeting a
wide range of computer and information technology applications for
DVD-Rewritable disks, including digital television broadcast recording. We are
also applying our optical phase-change technology under a three-year contract
from the National Institute of Standards and Technology's Advanced Technology
Program to develop new optical switching devices for active optical routing
devices in digital signal processing. Information technology activities also
include Ovonic Unified Memory, or OUM, which is based on our proprietary
electrical phase-change materials that have a wide variety of computer and
information technology applications. OUM is being developed to replace
conventional FLASH and DRAM semiconductor memory and information processing
devices. We are developing the Ovonic Cognitive Computer technology, a unique
approach to computing based on the learning
30
capability that mimics the functionality of the human brain to combine memory
and processing in a single sub-micron device.
Consolidated revenues for the six months ended December 31, 2003 and
December 31, 2002 and for our last three fiscal years (including ECD, Ovonic
Battery, United Solar Ovonic Corp. and, from May 15, 2003, United Solar
Ovonic LLC revenues, but excluding revenues of licensees and joint ventures in
our major business groups) were as follows:
Six Months Ended Fiscal Year Ended
December 31, June 30,
------------------ ---------------------------
(in thousands) (in thousands)
2003 2002 2003 2002 2001
------- ------- ------- ------- -------
Alternative energy technology
Energy storage $11,005 $15,560 $32,041 $42,366 $32,727
Energy generation 16,448 10,836 20,176 17,189 17,406
Information technology 214 744 907 2,398 3,336
Other
Machine building and equipment sales 1,969 7,016 11,450 29,533 16,934
Services to joint ventures - - - - 677
Other 243 176 605 224 324
------- ------- ------- ------- -------
Total Revenues $29,879 $34,332 $65,179 $91,710 $71,404
======= ======= ======= ======= =======
We have historically entered into agreements with a relatively small
number of major customers throughout the world. In the year ended June 30, 2003,
three customers represented 58% of our total revenues (21% Texaco Ovonic
Hydrogen Systems, 21% Texaco Ovonic Battery Systems and 16% Rare Earth Ovonic
joint ventures). In the year ended June 30, 2002, three customers represented
67% of our total revenues (28% Rare Earth Ovonic joint ventures, 20% Texaco
Ovonic Hydrogen Systems and 19% Texaco Ovonic Battery Systems).
Alternative Energy Technology
Energy Storage
Rechargeable Batteries. Using Ovonic materials, our Ovonic Battery Company
subsidiary has developed the proprietary materials and technology for NiMH
batteries which have been licensed to all significant NiMH battery manufacturers
throughout the world. NiMH batteries were not commercially viable prior to
Ovonic Battery's development of disordered electrode technology.
Ovonic NiMH batteries store over twice as much energy as standard nickel
cadmium or lead acid batteries of equivalent weight and size. In addition,
Ovonic NiMH batteries have high power, long cycle life, are maintenance free and
have no memory effect. Moreover, Ovonic NiMH batteries do not contain cadmium or
lead, both environmentally hazardous substances. Ovonic NiMH batteries are
capable of being made in a wide range of sizes and have a wide range of
applications, including hand-held consumer electronics such as digital cameras;
hybrid electric vehicles and electric vehicles; power tools, utility and
industrial applications; and 36/42 volt batteries to meet the emerging
requirements for higher voltages, power and energy of next-generation
fuel-efficient vehicle applications.
31
Our basic patents cover all commercial NiMH batteries. Ovonic Battery has
established a dominant patent position in the field of NiMH batteries, with 85
issued U.S. patents and 254 foreign counterparts. While all of our patents
involving Ovonic NiMH battery technology are important to our licensing
activities, there are approximately 11 patents which we believe to be
particularly important. These patents have various dates of expiration through
2013. Additional U.S. and foreign patent applications are in various stages of
preparation, prosecution and allowance. In view of the overall strength of our
patent position relating to NiMH batteries, and with the realization that the
validity of newer patents has not been tested in court, we do not believe that
the expiration of any of our NiMH battery patents during the next five years
will have a material adverse effect on our business. We are, however, involved
in arbitration, asserting certain of our patents against infringement by third
parties. In another matter, a Federal District Court has dismissed the lawsuit
of a party claiming that we infringe such party's patent. The Federal District
Court's dismissal is being appealed by the other party. See "Business -- Legal
Proceedings."
Ovonic NiMH batteries are manufactured and sold throughout the world by
such major companies as Sanyo Electric Co. under a licensing arrangement and by
Texaco Ovonic Battery Systems, our joint venture with Texaco Energy Systems LLC,
a unit of ChevronTexaco. In the last three years, we have licensed our NiMH
patents to nine battery manufacturers in the People's Republic of China. We are
also in discussions with other Chinese companies for additional license
agreements. Ovonic Battery also produces limited quantities of the metal hydride
negative electrode materials and nickel hydroxide positive electrode materials
for sale to several of our licensees. Limited quantities of metal hydride
materials for use in Ovonic solid hydrogen storage systems are also being
manufactured and sold by Ovonic Battery to Texaco Ovonic Hydrogen Systems.
During the fiscal year ended June 30, 2003, Ovonic Battery produced metal
hydride negative electrode materials and nickel hydroxide positive electrode
materials generating revenues of $973,000 from sales to licensees for assembly
into complete batteries for consumer and transportation applications.
Our royalty-bearing NiMH battery licenses have provided for upfront
nonrefundable license fees of up to $5 million paid to us at the time we enter
into the license agreement. A license fee of $3 to $5 million, depending on
factors such as geographical scope and fields of application, requires licensees
to pay us a royalty of 0.5% (for consumer applications) or 3.0% (for
transportation applications) of the selling price of NiMH batteries. Licensees
of NiMH batteries for consumer applications are granted nonexclusive,
royalty-bearing licenses under our NiMH battery patents (and, in the case of
certain licensees, our NiMH battery technology) to make, have made, use, sell,
lease or otherwise dispose of NiMH batteries. Certain licensees, particularly
our Chinese licensees, have paid modest upfront, nonrefundable license fees, but
are required to pay royalty rates considerably higher than 0.5% and to pay
additional license fees as their sales of NiMH batteries increase, or have been
granted substantially narrower rights to geographical areas in which licensed
products can be made or sold. Our joint ventures established to manufacture NiMH
batteries are licensees of Ovonic Battery. Typically, we acquired our ownership
interest in the NiMH battery joint ventures by the contribution of patents or
technology, or both. These licenses to our NiMH battery joint ventures do not
require the payment of royalties and, depending on the scope of the license, may
not require the payment of upfront nonrefundable license fees.
All licenses can be terminated by us if the licensee fails to make royalty
payments. The licensee also can terminate the license should it determine the
license is unnecessary. In this case, however, the licensee's rights to make
NiMH batteries under our patents would also terminate. Generally, the term of
the license agreements extends for so long as the patents
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being licensed are in force. Some licenses have fixed terms but provide for
extensions of additional one-year periods. Based upon our NiMH battery patent
portfolio (and should a market for NiMH batteries remain for the next 10 years),
we believe that patents applicable to NiMH batteries can provide us with
royalty revenues through 2013.
Through our joint venture, Texaco Ovonic Battery Systems, and our
subsidiary, Ovonic Battery, we are currently focusing on seven principal battery
markets:
o portable electronics, portable power tools and consumer applications;
o hybrid electric vehicle, electric vehicle, fuel cell electric
vehicle and fuel cell hybrid electric vehicle batteries for
propulsion in vehicles and light trucks;
o 36/42 volt batteries to meet the emerging requirements for higher
voltages, power and energy of next-generation fuel-efficient vehicle
applications;
o hybrid electric and electric buses and trucks;
o two- and three-wheeled electric vehicle propulsion including
power-assisted bicycles;
o industrial applications such as utility applications, energy
storage for remote power generation and battery-operated
industrial equipment; and
o other stationary and telecommunications applications.
Rechargeable Portable Electronics, Portable Power Tools and Consumer
Batteries. The need for high energy density rechargeable batteries has continued
to grow in recent years. Increasing consumer dependence on portable electronic
products (such as cellular telephones, digital cameras and cordless tools) has
created a large market for rechargeable batteries and has fueled development of
higher energy density battery systems. Consumer and governmental awareness that
cadmium contained in nickel cadmium batteries can cause serious health problems
is moving the industry away from nickel cadmium batteries. Although conventional
storage batteries, such as nickel cadmium, have been further improved in design
and packaging in recent years, the demand for higher performance batteries
continues to increase. Ovonic NiMH batteries are now commercially available from
one of our licensees having a specific energy of over 100 watt-hours/kilogram,
which is more than two times that of nickel cadmium batteries. Over 1,500
watts/kilogram of specific power has been achieved in prototype batteries for
transportation applications, with higher energy and power in the process of
development.
Lithium-Ion batteries compete with NiMH batteries in applications for
consumer electronic devices and have a stronger market share than NiMH in
certain laptop computers and cell phones. NiMH technology has numerous
advantages over Lithium-Ion technology, such as lower cost, higher power, safety
and abuse tolerance. NiMH batteries are most favored by manufacturers of
mass-market consumer products incorporating rechargeable batteries where cost is
a factor, and are the batteries of choice by the manufacturers of hybrid
electric vehicles where safety considerations in large, high-energy battery
systems are extremely important.
Ovonic Battery has licensing arrangements with the most
significant battery manufacturing companies throughout the world. Its
proprietary battery technology or patents have been licensed for
consumer battery applications to Sanyo Electric Co., Toshiba Battery
Co., Ltd. (which sold its former NiMH battery manufacturing business to
Sanyo), Canon Inc., Hitachi Maxell, Ltd., Yuasa Corporation, GP
Batteries International Limited, Varta Batterie AG, Sovlux Battery Co.,
our joint venture in Russia, Harding Energy Inc., Walsin Technology
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Corporation, Nan Ya Plastics Corporation, and Samsung Electronics Co.,
Ltd. Additionally, Saft, S.A., Saft America, Inc., GS-Saft Ltd. and
Japan Storage Battery Co., Ltd. have licensed Ovonic Battery's
proprietary battery patents in the United States.
In addition to our three Rare Earth Ovonic joint ventures in China
with Rare Earth High-Tech Co., which are licensed for consumer and
propulsion battery applications, we have entered into royalty-bearing
consumer battery license agreements with eight other Chinese companies - BYD
Battery Co., Ltd., SANIK Battery Co., Ltd., Lexel Battery (Shenzhen) Co., Ltd.,
Henan Huanyu Power Source Co., Ltd., TWD Battery Co., Ltd., Guangdong Shida
Battery Co., Ltd., Linghao Battery (H.K.) Co., Ltd., and Mcnair-tech Co., Ltd.
Licensees engaged in manufacturing NiMH batteries for consumer
applications are Sanyo, Hitachi Maxell, GP Batteries, Varta, GS-Saft Ltd., Japan
Storage, Yuasa, BYD Battery, SANIK Battery, Lexel Battery, Henan Huanyu Power
Source, TWD Battery, Guangdong Shida Battery, Linghao Battery and Mcnair-tech.
Hybrid Electric, Electric, Fuel Cell Electric and Fuel Cell Hybrid
Electric Vehicle Batteries. The strategic importance of hybrid electric
vehicles, electric vehicles, fuel cell electric vehicles and fuel cell hybrid
electric vehicles both in the United States and worldwide has increased greatly
in recent years. This heightened interest is due to many concerns such as air
pollution, energy security, global climate change, ozone layer depletion,
dependence on imported oil and the high cost of fuel. We generally refer to
these types of vehicles as Alternative Energy Vehicles.
Most of the world's major automobile manufacturers have active programs
underway to develop and commercialize Alternative Energy Vehicles. The
proprietary Ovonic NiMH battery is the enabling technology that has made hybrid
electric vehicles practical. It has, therefore, become the battery of choice for
several major automobile manufacturers as they commercialize and market hybrid
electric vehicles due to a variety of factors such as energy, power, life, cost,
abuse resistance and safety. Currently, Toyota Motor Corporation and Honda Motor
Company are manufacturing hybrid electric vehicles using NiMH batteries
incorporating our Ovonic battery technology and, to date, over 100,000 hybrid
electric vehicles have been sold worldwide.
In July 2001, we and ChevronTexaco Corporation formed Texaco Ovonic
Battery Systems LLC, a 50/50 joint venture for the purpose of bringing advanced
Ovonic NiMH batteries into widespread commercial production for both
transportation and stationary applications. Texaco Ovonic Battery Systems is
also investing in the development of proof-of-concept prototypes of the new
Ovonic NiMH monoblock battery, a compact design for high-voltage (36/42 volt)
automotive electrical systems for future gasoline-powered automobiles which will
permit automobiles to have far more electrical power.
ChevronTexaco is contributing up to $178 million to Texaco Ovonic Battery
Systems to increase the manufacturing capacity at Texaco Ovonic Battery Systems'
facilities in Michigan and Ohio, and for market and advanced product
development. Through December 31, 2003, ChevronTexaco has contributed $118
million to Texaco Ovonic Battery Systems. We have contributed intellectual
property, licenses, production processes, know-how, personnel and engineering
services relating to Ovonic NiMH battery technology to the joint venture.
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Texaco Ovonic Battery has a new 170,000-square-foot state-of-the-art
battery production facility with new automated manufacturing equipment in
Springboro, Ohio. The new facility is more than twice the size of the former
production facility in Kettering, Ohio. Texaco Ovonic Battery is in the process
of obtaining the necessary quality certifications to become a validated supplier
to original equipment manufacturers.
The advanced product development is being accomplished through a product
development contract between Texaco Ovonic Battery Systems and Ovonic Battery.
We recorded revenues of approximately $3.3 million, $12.4 million and
$16.3 million for work performed under the contract in the six months ended
December 31, 2003 and in the years ended June 30, 2003 and 2002, respectively,
and are budgeted to receive approximately $5 million in fiscal 2004.
Sovlux Battery. Sovlux Battery, a 50/50 joint venture between us and the
Chepetsky Mechanical Plant, an enterprise of the Russian Ministry of Atomic
Energy, in Glazov, Russia, plans to produce NiMH battery materials and
components for sale to Ovonic Battery and its licensees. No significant battery
or battery materials manufacturing activities have been undertaken by Sovlux
Battery. In the longer term, Sovlux Battery expects to manufacture batteries for
the emerging two- and three-wheeled electric vehicle market in Europe and Asia
and for four-wheeled electric vehicles in Russia. Our contribution to Sovlux
Battery in return for our 50% interest consisted of licenses, know-how and
proprietary technology.
The availability of Russian raw materials for the battery, Chepetsky's
alloy processing and production expertise, and joint collaboration on battery
research and development could provide the potential for reductions in the cost
of Ovonic Battery's proprietary NiMH batteries.
Other Battery Applications. Several licensees of Ovonic NiMH battery
technology, have been granted rights to manufacture and sell NiMH batteries for
energy storage applications for electricity generated by photovoltaics, remote
power generation, utility applications and battery-operated industrial
equipment. Our licensees presently are not engaged in manufacturing NiMH
batteries for such applications. There are numerous other applications for
Ovonic NiMH batteries where standby, uninterruptible and portable energy storage
is required or convenient.
Ovonic Solid Hydrogen Storage Systems. Hydrogen energy technology has been
a part of our scientific work and business strategy since our founding in 1960.
Our approach to the hydrogen economy encompasses a complete system -- from
generation to storage to infrastructure to products. Our integrated systems
approach will bring together the whole range of our technologies and products
from the Ovonic solar cell to Ovonic NiMH batteries to solid hydrogen storage.
Hydrogen is an ideal fuel. It is clean and efficient and it yields more
energy per unit of weight than any other existing combustible fuel. Hydrogen's
only waste product is water vapor. Because hydrogen is a major component of
water and of hydrocarbons, it is in abundant supply and has been referred to as
the ultimate fuel.
The principal stumbling block to the use of hydrogen as a fuel has been
the inability to store hydrogen safely and efficiently. Conventional methods of
storing hydrogen have been high-pressure compressed gas and liquefaction at
extremely low temperatures. Using these methods of storage allows just 23 grams
of hydrogen per liter to be stored in gaseous form at a high pressure of 5,000
pounds per square inch and 71 grams per liter in liquid form at the
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extremely low temperature of -253(0)C. Hydrogen liquefaction requires a
tremendous amount of energy (approximately 10 kWh of electric energy to
liquefy 1 kilogram of hydrogen) and expensive cryogenic storage tanks. In
addition, liquid hydrogen evaporates at a rate of approximately 1-3% per day.
We have developed a new, practical approach to store hydrogen in a safe
and economical manner using a family of new efficient metal hydrides based upon
our proprietary, atomically-engineered materials technology. Our storage systems
store hydrogen in a solid metal matrix at low practical pressures. Our Ovonic
solid hydrogen storage systems technology is capable of storing up to 125 grams
of hydrogen per liter. Our advanced hydride materials have been shown to store
up to 7% hydrogen by weight, or the equivalent of 780 standard liters of
hydrogen per kilogram of hydride materials.
We have a basic patent position in the solid storage of hydrogen with 36
U.S. patents and 170 foreign counterparts applicable to hydrogen storage in a
metal hydride, as well as patent applications in various stages of prosecution.
Many of the more fundamental patents applicable to our NiMH battery technology
also provide us with a proprietary position in our solid hydrogen storage in
metal hydride materials technology.
In October 2000, we and ChevronTexaco formed a joint venture, Texaco
Ovonic Hydrogen Systems LLC, to further develop and advance the
commercialization of the Ovonic solid hydrogen systems. ChevronTexaco is focused
on commercialization efforts in hydrogen storage systems in conjunction with its
development of viable fuel-processing technology. We and ChevronTexaco each own
50% of Texaco Ovonic Hydrogen Systems. The initial funding of Texaco Ovonic
Hydrogen Systems from ChevronTexaco for initial product and market development
provides up to $104 million. We recorded revenues of approximately $4.8
million, $13.7 million, $18.6 million and $11.8 million in the six months
ended December 31, 2003 and the years ended June 30, 2003, 2002 and 2001,
respectively, for work performed for Texaco Ovonic Hydrogen Systems under
product development and service contracts, and are budgeted to receive
approximately $12 million in 2004. Through December 31, 2003, ChevronTexaco has
contributed $54.3 million to Texaco Ovonic Hydrogen Systems. Our contribution to
Texaco Ovonic Hydrogen Systems in return for our 50% interest consisted of
licenses, know-how and proprietary technology.
Our solid hydrogen storage materials can be packaged in a variety of sizes
and shapes to meet application requirements - from automobiles to consumer
electronic devices. For example, Texaco Ovonic Hydrogen Systems is currently
producing prototype compact hydrogen storage canisters that can store hydrogen
in a portable form to operate lawnmowers, garden equipment, power generators or
barbecue grills once such hydrogen-powered products become commercially
available.
Our prototype metal hydride systems have functioned safely in tests
conducted in cooperation with automobile manufacturers. Our tests indicate that
metal hydride materials will provide more than 2,000 refilling cycles
(equivalent to more than 200,000 miles in an automobile) with no performance
degradation. Among other applications, our advancements in metal hydrides may
facilitate storing sufficient hydrogen to power a fuel cell electric vehicle
for several hundred miles. To provide 300 miles of range in an advanced fuel
cell electric vehicle, four to six kilograms of hydrogen storage capacity are
expected to be required, depending on the size of the vehicle.
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Hydrogen can also be used to power internal combustion engines. Such
engines can be designed to be very clean, meeting or exceeding California's
Ultra Low Emission Vehicles regulations, and virtually eliminate carbon dioxide
and hydrocarbon emissions. In fiscal year 2002, we completed a program sponsored
by the U.S. Department of Energy to develop an integrated renewable
hydrogen-generation storage system. This system uses our multijunction
photovoltaics to electrolyze water into oxygen and hydrogen and stores the
produced hydrogen in metal hydride hydrogen storage devices. In connection with
this program, we have converted a 4-stroke gasoline-powered scooter to run on
hydrogen stored in our solid hydrogen storage materials and devices.
We do not believe that the expiration of any patent applicable to our
solid hydrogen storage materials technology during the next five years will have
a material adverse effect on our business, and we expect to replace expiring
patents with new applications and patents.
We have completed a joint project with ChevronTexaco for the conversion of
a 2-liter internal combustion engine to run on hydrogen. This converted engine
is being used to power a hybrid electric vehicle (a 2002 Toyota Prius) using a
low-pressure solid hydrogen storage system. The modified Prius is being used to
demonstrate solid hydrogen storage technology with a trunk-mounted 60-liter
pressure vessel storing three kilograms of hydrogen to provide a 130-mile
vehicle range. Refueling at 1,500 pounds per square inch takes 10 minutes. We
and ChevronTexaco equally shared the cost of this $1,000,000-development
program. We have recognized revenues of $500,000 under this hydrogen internal
combustion engine program with ChevronTexaco, of which $203,000 was recognized
as revenue in the year ended June 30, 2002 and $297,000 was recognized as
revenue in the year ended June 30, 2003. This program was completed as of
June 30, 2003.
Our Ovonic solid hydrogen storage systems technology, based on our
atomically engineered materials, is being further improved and developed and
requires additional financial resources to reach commercial product status.
Alternative Energy Vehicles
ITS Innovative Transportation Systems A.G. In May 1999, we participated in
the founding of Unique Mobility Europa, GmbH to manufacture and sell Alternative
Energy Vehicles for world markets. The business and assets of Unique Mobility
Europa have been reorganized into a new company, ITS Innovative Transportation
Systems A.G., or ITS, based in Germany. We own a direct 26% interest in ITS and
an indirect beneficial ownership of approximately 4% through Ovonic Battery's
membership interest in Texaco Ovonic Battery Systems. ITS has built a running
prototype of its product, the InnoVan, a new, purpose-built minivan using a
composite body structure and an advanced battery-powered electric drivetrain.
The InnoVan can be configured as either a 2-passenger cargo van or a 6-passenger
commuter van and is designed to serve urban transportation requirements where
urban pollution concerns have restricted the use of conventional vehicles. The
vehicle has been specifically designed to utilize our Ovonic NiMH batteries. ITS
requires significant additional investments to commercialize its products and
currently lacks funds to continue operations. Neither partner in the venture has
an obligation nor has committed to provide additional funding.
Four-Wheeled Vehicle Battery Business Arrangements. In addition to its
Texaco Ovonic Battery Systems joint venture, Ovonic Battery has entered into
royalty-bearing, nonexclusive license agreements granting limited rights for the
manufacture of Ovonic NiMH four-wheeled vehicle propulsion batteries and related
products outside of the United States with
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Sanyo, Toshiba, Hyundai Motor Company, Varta, Nan Ya, GP Batteries and Sovlux
Battery. Sanyo, Toshiba, Hyundai, GP Batteries, the Rare Earth Ovonic joint
ventures and Sovlux Battery have restricted rights to export vehicle propulsion
batteries to North America. Varta's license includes the right to manufacture
vehicle propulsion batteries subject to certain limitations on access to
technology and restrictions on manufacturing in North America. GS-Saft Ltd. and
the United States Advanced Battery Consortium are licensed under a
royalty-bearing, nonexclusive license agreement for the manufacture and sale of
vehicle propulsion batteries in the United States. Among our licensees of
Ovonic NiMH batteries for four-wheeled vehicle propulsion applications, Sanyo
and GP Batteries are engaged in manufacturing batteries for such applications.
Texaco Ovonic Battery Systems is responding to significant interest by bus
manufacturers seeking to comply with government initiatives for providing
pollution-free mass transportation in urban areas. It has a bus demonstration
program in the city of Rome, Italy, pursuant to which an Ovonic NiMH battery
pack replaced an existing lead acid battery. The NiMH batteries provide three
times the range on a single charge which permits continuous operation over an
entire shift service, thus eliminating expensive downtime and labor costs.
In June 2001, Ovonic Battery was awarded a contract by the U.S. Army
Tank-Automotive and Armaments Command, a division of the Department of the Army,
U.S. Department of Defense, to develop an advanced liquid-cooled, plastic
monoblock battery for heavy-duty hybrid electric vehicles. This 30-month, $5
million contract requires us to share 50% of the program cost and calls for
coordinated research and development to be carried out by Ovonic Battery, in
collaboration with Texaco Ovonic Battery Systems, and the U.S. Army
Tank-Automotive and Armaments Command. The program is linked to the 21st Century
Truck Initiative, a government/industry partnership aimed at doubling to
tripling the fuel economy of heavy-duty vehicles. The products developed under
this program will find application in both the public and private sectors,
satisfying the "dual use" requirement established by the U.S. Department of
Defense.
Based on the demonstrated ability of NiMH batteries to be engineered for
different energy and power densities in a wide range of applications, Texaco
Ovonic Battery Systems is developing a "Family of Batteries" that can satisfy
the energy storage needs of the full spectrum of Alternative Energy Vehicles,
including bicycles, two- and three-wheeled scooters, cars, trucks and vans. The
automotive industry has expressed considerable interest in batteries for the
emerging hybrid electric vehicle market and Texaco Ovonic Battery Systems is
positioning itself to offer the industry a high performance NiMH battery. Ovonic
NiMH batteries for hybrid electric vehicles are being reviewed with a variety of
potential customers.
Texaco Ovonic Battery Systems' hybrid electric vehicle battery is intended
to meet specifications set by the U.S. Department of Energy's FreedomCar
Initiative and its predecessor, the Partnership for Next Generation of Vehicles,
a joint program among automakers, suppliers, the U.S. Department of Energy, the
U.S. Department of Commerce, the U.S. Department of Defense and the national
laboratories. In July 2002, Texaco Ovonic Battery Systems announced that it had
received a $5.2 million, two-year cost-sharing contract, sponsored by U.S.
Department of Energy's FreedomCar Initiative, to continue the development work
on its proprietary liquid-cooled 12V monoblock NiMH battery technology for
hybrid electric vehicles focusing on complete battery systems, performance and
production costs. Texaco Ovonic Battery Systems is funding a program, conducted
by Ovonic Battery, to increase the energy and power densities of future NiMH
batteries for both hybrid electric vehicles and electric vehicles as well as
reducing their size and cost.
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Two- and Three-Wheeled Vehicles. We have installed Ovonic NiMH batteries
in scooters converted to electric power and successfully demonstrated the
application of our battery for two- and three-wheeled electric vehicles,
including power-assisted electric bicycles. We consider two- and three-wheeled
electric vehicles and power-assisted bicycles a potentially large-volume market
since these types of vehicles are the primary mode of transportation in many
European and developing countries throughout the world, such as India, China and
Taiwan. Electric two- and three-wheeled vehicles using Ovonic NiMH batteries
should improve the acute air pollution problems in these regions caused by
conventional internal-combustion-engine-powered two- and three-wheeled vehicles.
Scooters powered by Ovonic NiMH batteries have won many awards. At the 2000 Tour
de Sol, the Ovonic scooter was the overall first place winner among the
one-person vehicle entries, achieving a range of 73 miles with an efficiency
equivalent to more than 300 miles per gallon of gasoline.
Ovonic Battery has entered into royalty-bearing license agreements for the
manufacture and sale of Ovonic NiMH batteries for two- and three-wheeled
vehicles with Sanyo, Walsin, Sanoh Industrial Co., Nan Ya and our Rare Earth
Ovonic joint ventures. Subject to these agreements, Texaco Ovonic Battery
Systems has been granted an exclusive royalty-free license for the manufacture
and sale of batteries for two- and three-wheeled vehicles. We believe that Sanyo
and Sanoh are engaged in the manufacture of Ovonic NiMH batteries for two- and
three-wheeled vehicle applications.
Energy Generation
Photovoltaic Technology. Photovoltaic systems provide a clean and simple
solid-state method for direct conversion of sunlight into electrical energy. The
major barrier to the widespread use of direct solar-to-electrical energy
conversion has been the lack of an inexpensive solar cell technology. Based on
Mr. Ovshinsky's basic pioneering inventions in the field of renewable energy, we
originated and have patented our proprietary continuous web, multilayer,
large-area thin-film amorphous silicon technology and are leaders in thin-film
amorphous photovoltaic technology.
We have invented a unique proprietary approach to the manufacture of
thin-film photovoltaic products. Compared to photovoltaic products that are
produced using other technologies, our photovoltaic products are substantially
lighter, more rugged, require much less energy to produce and can be
manufactured in high volume at significantly lower cost. We believe that with
large-volume production equipment incorporating improved technology and making
solar products capable of producing on an annual basis 100 megawatts of
electrical power, the costs of our photovoltaic products can be lowered
dramatically to open up new opportunities in the energy markets which are now
dominated by fossil fuels. Our proprietary position in photovoltaic technology
ranges from the invention of materials and the development of products to the
design and manufacture of production equipment.
Using our proprietary thin-film, vapor-deposited amorphous silicon alloy
materials, we have developed proprietary technology to reduce the materials cost
in a solar cell. Because amorphous silicon absorbs light more efficiently than
its crystalline counterpart, the amorphous silicon solar cell thickness can be
100 times less than that of crystalline technology, thereby significantly
reducing materials cost. By utilizing a flexible, stainless steel substrate and
polymer-based encapsulants, our United Solar Ovonic subsidiaries' photovoltaic
products can be very lightweight, flexible and abuse-tolerant. They do not break
during shipping, are particularly easy to transport to remote rural areas, thus
saving shipping costs, and can be installed without breakage.
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Through our United Solar Ovonic subsidiaries, we have advanced our
pioneering work in amorphous silicon alloy photovoltaic technology and hold
current world records for both large- and small-area conversion efficiency for
amorphous silicon solar cells, as measured by U.S. Department of Energy's
National Renewable Energy Laboratory. Conversion efficiency is the percentage of
sunlight that is converted into electricity. We have achieved a world record of
10.2% stabilized energy conversion efficiency for large area (one-square foot)
amorphous silicon alloy photovoltaic modules, which the U.S. Department of
Energy characterized in 1994 as a major breakthrough. United Solar Ovonic holds
the world records for amorphous silicon alloy photovoltaic cells, including
solar-to-electricity stabilized efficiency of 13% for small-area amorphous
silicon alloy photovoltaic cells.
To further reduce the manufacturing cost of photovoltaic modules, we have
pioneered the development of and have the fundamental patents on a unique
approach utilizing proprietary continuous roll-to-roll solar cell deposition
process. Using a roll of flexible stainless steel that is a mile and one-half
long and 14 inches wide, nine thin-film layers of amorphous silicon alloy with
different light absorption properties are deposited sequentially, one on top of
another, in a high yield, automated machine to make a continuous, stacked
three-cell structure to capture the broad solar spectrum more effectively,
increase energy conversion efficiency and improve performance stability. The
roll of solar cell material then is processed further for use in a variety of
photovoltaic products. This basic approach, pioneered by us, is unique in the
industry and has significant manufacturing cost advantages. We believe that, in
high-volume production, our photovoltaic modules will be significantly less
expensive than conventional crystalline silicon and other thin-film solar
modules produced on glass and can be cost competitive with fossil fuels.
We have 127 U.S. patents and 175 foreign counterparts in photovoltaic
technology. Because many of our patents are broad and because our patent
portfolio is extensive, we do not believe that the expiration of any of our
photovoltaic technology patents occurring in the next five years will have a
material adverse effect on our business.
On May 14, 2003, we acquired the 19% interest of N.V. Bekaert S.A. in
United Solar Ovonic Corp. (formerly known as United Solar Systems Corp.), and
Bekaert's 60% interest in United Solar Ovonic LLC (formerly known as Bekaert ECD
Solar Systems LLC) bringing our direct and indirect interest in each of these
entities to 100%. The purchase price was $6 million, with $4 million paid at
closing and $2 million paid in December 2003. Additionally, we provided
approximately $36 million to United Solar Ovonic LLC to terminate its sale and
leaseback arrangement with third parties. In addition, we provided letters of
credit of approximately $5 million to extinguish guarantees provided by Bekaert.
As part of the transaction, Bekaert received rights to United Solar Ovonic's
technologies outside the field of photovoltaics and limited rights to build
sputtering machines outside the field of triple-junction photovoltaics. In
addition, Bekaert assigned to us its $12.2 million note receivable for its
bridge loans to United Solar Ovonic LLC. We incurred expenses of $953,000 in
connection with the acquisition.
United Solar Ovonic operates its 30-megawatt solar products manufacturing
equipment, the world's largest thin-film solar cell manufacturing machine,
designed and built by our Production Technology and Machine Building Division
using our roll-to-roll technology, at its manufacturing plant in Auburn Hills,
Michigan. Approximately $67 million has been invested in this new,
state-of-the-art manufacturing equipment. The solar-cell manufacturing equipment
is being optimized to its designed manufacturing capability of producing on an
annual basis solar products generating 30 megawatts of electrical power through
a program of maintenance time-reduction and improved operational efficiency.
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United Solar Ovonic is producing a variety of photovoltaic products and
selling photovoltaic modules and systems throughout the world. It manufactures
products for remote power applications, telecommunications, photovoltaic-powered
lighting systems, building-integrated photovoltaic systems and marine
applications at its Michigan facilities.
United Solar Ovonic has developed, and is manufacturing and selling,
unique products for the building and construction industries such as
photovoltaic shingles, metal roofing products and photovoltaic laminate products
which emulate conventional roofing materials in form, construction, function and
installation. In December 2002, United Solar Ovonic unveiled its SmartRoof
residential solar electric system for homeowners. This system offers ease of
installation, lower maintenance and full integration into a home's roof. The
SmartRoof system can generate 50 to 90 percent of a typical household's daily
electrical needs.
The photovoltaic roofing products are receiving enthusiastic market
response. In 2001, United Solar Ovonic shipped solar panels capable of producing
100 kilowatts of electrical power to Sacramento Municipal Utilities District,
California, and solar panels for 148 kilowatts to Energy Australia. United Solar
Ovonic has completed a contract with ChevronTexaco and has installed a
photovoltaic system in California capable of producing 500 kilowatts of
electrical power to help power oil field operations. It is one of the largest
photovoltaic installations in the United States and the largest array of
flexible amorphous silicon solar technology in the world.
In May 2003, U.S. Air Force Research Laboratory (AFRL) awarded United
Solar Ovonic an $11.5 million, 18-month contract to develop its continuous web,
thin-film, multijunction solar cell technology to be used in space and airship
vehicles addressing defense and homeland security applications. The AFRL has
an option to fund an additional $7.8 million. This contract builds upon the
success of earlier contracts with the Air Force and will fund research
activities to develop ultra-lightweight solar arrays as the next-generation
solar power technology for Air Force missions using advanced materials and
innovative manufacturing technology.
United Solar Ovonic space photovoltaic products offer an ultra-light,
low-cost alternative to conventional space photovoltaic modules made of
crystalline silicon or gallium arsenide. The United Solar Ovonic triple-junction
modules, originally developed for terrestrial applications, are made of
amorphous silicon based thin-film alloys, which are deposited on a 5-mil
flexible stainless steel substrate. By utilizing a polymeric or a thinner
stainless substrate, new space cells, we believe, can be developed that have a
specific power density greater than 600 watts per kilogram. A high specific
power density is required for airship application and, considering the high
launching cost of satellites, lightweight cells also are economically attractive
for space application. The radiation hardness and superior high-temperature
performance of amorphous silicon make it an attractive material for space
application.
In 1998, United Solar Ovonic successfully installed its space solar
modules on the MIR Space Station. Cell data was sent by telemetry and virtually
no change in performance was detected during the 19 months and 252 million miles
flown in 1998-2000.
In May 2003, we were awarded a subcontract by the U.S. Department of
Energy's National Renewable Energy Laboratory, or NREL, to develop new solar
cell manufacturing technology based on our continuous web, thin-film,
multijunction technology. This subcontract will provide matching funds for a
research and development program aimed at lowering the manufacturing cost of
solar cells. NREL will fund about $3 million of the approximately $6 million
three-year, phased subcontract, and we will provide the balance of the funds.
41
In October 2002, we were awarded a cost-shared, three-phase subcontract by
NREL to develop new optically enhanced back reflector and improved deposition
processes for amorphous silicon-based solar cells. NREL will fund more than $1.1
million of the approximately $1.4 million three-year, phased subcontract, and we
will provide the balance of the funds. The achievement of the goals of this
program and application of the advances to United Solar Ovonic's 30-megawatt
solar products manufacturing equipment could lead to an immediate improvement in
module light input to electrical output efficiencies.
In May 2002, we were awarded a cost-shared, three-phase contract by NREL
to carry out research work on high efficiency amorphous silicon based solar
cells and modules. The estimated amount for the three-year contract is $4.9
million, of which United Solar Ovonic will provide $2 million. Continuation of
the contract after each phase is determined by performance and availability of
funds.
Ovonic Regenerative Fuel Cell Technology. In September 2000, we and
ChevronTexaco formed a joint venture, Texaco Ovonic Fuel Cell Company LLC, to
further develop and advance the commercialization of the Ovonic regenerative
fuel cell technology. Until December 31, 2002, we and ChevronTexaco each owned
50% of Texaco Ovonic Fuel Cell. The funding of Texaco Ovonic Fuel Cell from
ChevronTexaco for initial product and market development was $9.4 million (of
which we recorded $8.8 million in revenue) and $9.8 million (of which we
recorded $8.9 million in revenue) in fiscal years 2001 and 2002, respectively.
For fiscal year 2003, ChevronTexaco provided $5.5 million in funding of which we
recorded $4 million in revenue. Our contribution to Texaco Ovonic Fuel Cell in
return for our 50% interest consisted of licenses, know-how and proprietary
technology. Effective as of December 31, 2002, we purchased ChevronTexaco's 50%
interest in Texaco Ovonic Fuel Cell Company for $1. It is now owned 100% by us
and has been renamed Ovonic Fuel Cell Company. Since January 1, 2003, we have
funded 100% of the activities of Ovonic Fuel Cell Company at reduced levels.
The Ovonic regenerative fuel cell technology employs electrochemical
devices that include two electrodes, an anode and a cathode. Between the two
electrodes is a solid or liquid electrolyte that allows ions to pass through,
but prevents electrons from passing through. Hydrogen enters the anode and is
oxidized, and oxygen in air enters the cathode and is consumed, thereby
releasing electrical energy and byproducts of water and heat.
The Ovonic regenerative fuel cell technology is being developed for
commercial use in a full range of stationary, portable power and transportation
applications, which can supply electricity as an alternative or supplement to
electricity supplied through grid distribution or portable fossil-fuel-powered
generators.
Many of the patents applicable to our NiMH battery technology are also
applicable to our Ovonic regenerative fuel cell technology. These patents have
various dates of expiration through 2018. We do not believe that the expiration
of any patent applicable to Ovonic regenerative fuel cell technology during the
next five years will have a material adverse effect on our business.
Our Ovonic regenerative fuel cell technology is being further improved and
developed and requires additional financial resources to reach commercial
product status.
42
Information Technology
We have developed a number of key proprietary products and processes in
the field of information technology. The phase-change optical, electrical memory
and Ovonic Cognitive Computer technologies are based on Mr. Ovshinsky's basic
pioneering inventions.
Optical Memory. We are the inventor and originator of phase-change
rewritable optical memory disk technology. Our Ovonic phase-change rewritable
optical memory technology makes it possible to store in a convenient, removable
disk format, many times the amount of data as a conventional floppy magnetic
disk. The product is much more robust and has a much lower cost than removable
rigid magnetic disks. Our proprietary phase-change rewritable optical memory
uses a laser to write or erase digital data on a thin film of amorphous
semiconductor alloy that has been deposited onto a substrate disk. The disk and
data-reading process are similar to an ordinary CD-ROM or DVD-ROM, with the
significant difference being that the phase-change rewritable optical memory can
be erased and rewritten many times (up to 1,000 times in the case of CD-RW and
up to 500,000 times in the case of DVD-RAM).
We have licensed our Ovonic phase-change rewritable optical memory
technology to a number of data storage media companies, including Matsushita
Electric Industrial Co., Ltd., Ricoh Company Limited, Sony Corporation, Toshiba
Corporation, Pioneer Corporation, Hitachi, Ltd., Plasmon Limited, Toray
Industries, Inc., TDK Corporation and Teijin, Limited. Licensees engaged in
limited production of phase-change optical memory products are Matsushita and
Ricoh.
Our rewritable phase-change optical memory licenses provide for a
nonrefundable advance royalty payment of $25,000 paid to us at the inception of
the license agreement. Generally, licensees pay us a royalty of 1-1/2% of the
net selling price of the rewritable optical memory disks for the first one
million sold and 1% of the net selling price thereafter. Licensees are granted
nonexclusive, royalty-bearing, worldwide licenses under our rewritable
phase-change optical memory patents in existence at the time the license is
granted to make, have made, use, sell, lease or otherwise dispose of rewritable
optical memory disks. The licenses can be terminated by us if the licensee fails
to make royalty payments or can be terminated by the licensee, in which event
the licensee's rights to make optical memory disks under our patents would also
terminate. The term of the license agreements extends as long as the patents are
in force. Our portfolio of patents relating to rewritable optical memory
products contains patents expiring beginning in 2005 through 2015 and we expect
to replace expiring patents with new applications and patents.
A convergence of the information processing, communications and
entertainment industries is taking place as a result of advances in digital
electronics. A new and emerging product offering higher-capacity data storage is
the DVD. DVD-RAM, DVD-RW and DVD+RW, three formats of the DVD that use our
phase-change rewritable optical memory technology, are commercially available
now. These products are used for storage of both video and computer data.
We are also applying our Ovonic optical phase-change technology under a
three-year contract awarded in September 2003 by the National Institute of
Standards and Technology's Advanced Technology Program to develop new optical
switching devices for active optical routing devices in digital signal
processing.
43
Following the successful development of technology under a project funded
by the National Institute of Standards and Technology's Advanced Technology
Program, we and General Electric formed a strategic alliance in 2000. We and GE
also formed a joint venture, Ovonic Media, LLC, to design, develop, demonstrate
and commercialize our proprietary continuous web roll-to-roll technology for the
ultra-high-speed manufacture of optical media products, primarily rewritable
DVDs. GE owns 51% of Ovonic Media and we own 49%. We have contributed
intellectual property, know-how, licenses and equipment to the joint venture. GE
has made cash and other contributions to the joint venture. Since its inception,
Ovonic Media has paid us $5.6 million through the end of fiscal year 2003 for
services to the joint venture. We recorded revenues of approximately $615,000,
$1.9 million and $2.3 million in the years ended June 30, 2003, 2002 and 2001,
respectively, for work performed for Ovonic Media under service contracts.
Ovonic Media has successfully met its Phase I milestones. GE suspended
additional funding after January 3, 2003 and has been evaluating the current
market situation to determine the next steps. GE and we have been in discussions
as how to best position the joint venture in order to meet the needs of the
marketplace and secure new equity investors and strategic partners to fund the
joint venture's operations. In the interim, we are directly funding continuing
product development activities for this technology.
Ovonic Unified Memory. We developed the first nonvolatile semiconductor
memory, the Ovonic Electrically Erasable Programmable Read Only Memory, for
computer data storage in the 1960s. We have advanced and extended that early
work and have developed with our Ovonyx joint venture a proprietary family of
high-performance nonvolatile semiconductor memory and information processing
devices called Ovonic Unified Memory, or OUM.
In 1999, we and Mr. Tyler Lowrey, the former vice chairman and chief
technology officer of Micron Technology, Inc., formed Ovonyx, Inc. (initially
owned 50% by us and the balance owned by Mr. Lowrey and a colleague) to further
develop and commercialize OUM. Our contribution to Ovonyx, in return for our
ownership interest, consisted of licenses, know-how and proprietary technology.
In February 2000, Ovonyx and Intel Capital entered into a collaboration
and royalty-bearing license agreement to jointly develop and commercialize OUM
technology. The investment by Intel Capital and other investors in Ovonyx has
brought our ownership of Ovonyx to 41.7%.
Ovonyx's strategy for OUM is to initially target the direct replacement of
FLASH memory in products such as cell phones, digital cameras and personal
digital assistants where a single OUM device can replace DRAM and FLASH devices.
OUM is a high-speed, nonvolatile memory with advantages such as reduced cost per
bit, low power and low voltage, and a robust temperature range. It also is a
random-access, non-destructive read memory that is scalable, radiation hard and
provides a user-friendly PC interface. OUM technology has demonstrated one
million times the cycle life of FLASH and 100 times the write speed of FLASH.
It offers a way to realize full system-on-a-chip capability through integrating
unified memory, linear, and logic on the same silicon chip.
44
In 1999, Ovonyx and BAE Systems (formerly Lockheed Martin Space
Electronics & Communications) entered into a royalty-bearing agreement to
commercialize the OUM technology in radiation-hardened space and military
applications. Ovonyx and BAE Systems are engaged in a joint development program
directed toward application of OUM in BAE Systems' space products.
In 2000, Ovonyx and STMicroelectronics signed a nonexclusive
royalty-bearing agreement whereby STMicroelectronics was granted a license to
use the thin-film nonvolatile semiconductor memory technology of Ovonyx in the
STMicroelectronics product line. The two companies also established a joint
development program. In February 2003, Ovonyx and STMicroelectronics agreed to
expand the scope of the technology license and agreed to extend their joint
development program.
OUM technology will require further technical development and may require
additional financial resources to reach commercial product status.
Ovonic Cognitive Computer Technology. In October 2002, we formed Ovonic
Cognitive Computer, Inc. as the exclusive licensee of certain technologies,
which previously had been licensed to Ovonyx, for the development of the Ovonic
Cognitive Computer technology. We own 95% of Ovonic Cognitive Computer, Inc. and
Ovonyx owns the balance. The Ovonic Cognitive Computer technology is a unique
multifunctional approach to computing that is basically different than the Von
Neumann concept, the prototype of today's computers. It can accomplish many
tasks in a simple manner impossible to perform on conventional computers and has
learning capability that mimics the functionality of the human brain by
combining memory and processing in a single sub-micron device. The Ovonic
Cognitive Computer technology incorporates nanostructural Ovonic materials
deposited as a thin film with the capability to execute ordinary arithmetic and
logic operations as well as advanced functions such as non-binary processing,
higher mathematics, pattern recognition and encryption in a densely
interconnected and parallel fashion. The Ovonic Cognitive Computer technology
requires further technical and product development and additional financial
resources to reach commercial product status.
Production Technology and Machine Building Division and Central Analytical
Laboratory
Our Production Technology and Machine Building Division has been an
important element in our strategy and has extensive experience in designing and
building proprietary automated production equipment. The Production Technology
and Machine Building Division has designed and built for us and certain of our
licensees multiple generations of photovoltaic production lines, including
machinery and equipment for manufacturing solar products which is being
optimized to designed manufacturing capability to produce on an annual basis 30
megawatts of electrical power for United Solar Ovonic, as well as research,
development and manufacturing equipment for high-rate microwave plasma-enhanced
chemical vapor deposition and other materials technology.
In September 2003, we and GE Global Research, the centralized research
organization of General Electric, announced that we had been awarded a grant
from the National Institute of Standards and Technology's Advanced Technology
Program to develop a low-cost, roll-to-roll process for the production of
large-area organic electronic devices. The cost of the $13 million, four-year
project will be shared among the National Institute of Standards and Technology,
GE and us. The program's goal is to create a cost-effective system for the mass
production of products such as flexible electronic paper displays, portable TV
screens the size of posters,
45
embedded sensors, solar powered cells and high-efficiency lighting devices. The
proposed roll-to-roll research prototype line will input a roll of plastic
film and output working organic electronic devices. GE will design and provide
the organic electronic technology, while we will provide our unique roll-to-roll
equipment-building expertise. The key is to form the active organic layers using
low-cost printing techniques such as gravure or screen printing. If successful,
the program will demonstrate that organic electronic devices can be made on
flexible material in a continuous roll-to-roll process without the huge capital
investment normally required for batch-processed inorganic semiconductor
technology. The two major technology challenges that scientists face are
ensuring that roll-to-roll processing is compatible with the materials and
device designs, and integrating all of the fabrication steps into one line.
Our Central Analytical Laboratory conducts analysis of materials produced
by us and our joint venture partners and licensees as well as materials produced
by other companies and manufactures high quality sputtering targets.
Research and Product Development
The nature of our business has required, and will continue to require,
expenditures for research and product development to achieve our objective of
product commercialization. Agencies of the U.S. government and our licensees and
industrial partners have partially funded our research and product development
activities. We believe the materials, production technologies and products being
developed and produced by us and our joint venture partners are technologically
sophisticated and are designed for markets characterized by rapid technological
change and competition based, in large part, upon technological and product
performance advantages.
We have completed the installation of a new state-of-the-art clean room
fabrication facility. This facility will allow us to extend the application of
Ovonic materials and fabricate amorphous semiconductor devices, including
devices that will be used in the development of our Ovonic Cognitive Computer
technology.
The sophisticated capability of this fabrication facility and electronic
test equipment enables us to conduct work not only for ourselves in advanced
materials, optical and memory activities, but for our Ovonyx joint venture as
well as others who could utilize our advanced capabilities.
As of December 31, 2003, the amount of future revenues to be billed and
recognized as revenue under contracts with government agencies totaled
approximately $16,061,000, $5,672,000 of which has not yet been approved by the
government as of December 31, 2003. These contracts are cancelable at any time
with provisions to reimburse us for any costs through the termination date. Our
government contracts, which have partially funded development of specific
segments of our technologies, provide the government with "march-in rights" to
use, or have others use, technologies developed under the applicable contract on
a royalty-free basis under certain conditions. We retain the technology rights
for any inventions or other discoveries under these contracts. The U.S.
government has not exercised its "march-in rights" with respect to any
technologies developed by us under such product development contracts.
The following is a summary of our consolidated direct expenditures,
excluding the allocation of patents, depreciation and general and administrative
expenses, for product research and development for the three years ended June
30, 2003. All of our research and
46
development costs are expensed as incurred and are included in our Consolidated
Statement of Operations as cost of revenues from product development agreements
and product development and research.
Direct Research and Development Expenditures
Year Ended June 30,
--------------------------------------------
2003 2002 2001
----------- ----------- -----------
Sponsored by industrial
partners, government
agencies and licensees $28,139,630 $40,358,618 $26,936,302
Sponsored by us 12,539,628 7,467,157 7,809,453
----------- ----------- -----------
$40,679,258 $47,825,775 $34,745,755
=========== =========== ===========
Sources and Availability of Raw Materials
Materials, parts, supplies and services used in our business are generally
available from a variety of sources. However, interruptions in production or
delivery of these goods and services could have an adverse impact on our
manufacturing operations. The key raw materials used in our business are metals,
primarily nickel, titanium, manganese, cobalt and stainless steel, as well as
various rare-earth elements; high purity industrial gases, primarily argon,
nitrogen, hydrogen, silane, disilane and germane; and polymer materials.
Patents and Proprietary Rights
Since our founding in 1960, we have focused our research and product
development efforts on amorphous, disordered and related materials, a previously
unrecognized field of physics and materials science that has since attracted
widespread attention. We have established a multi-disciplinary business,
scientific and technical organization ranging from research and development to
product development and manufacturing and selling products, as well as designing
and building production machinery. We recognize that all of our activities need
to be carefully protected. Our extensive patent portfolio, including patents
assigned to our joint ventures, consists of 369 U.S. patents and 670 foreign
counterparts, and includes numerous basic and fundamental patents applicable to
each of our lines of business. We invent not only materials, but also develop
low-cost production technologies and high-performance products. Our patents,
therefore, cover not only materials, but also the production technology and
products we develop.
Because we generate patents which basically and broadly cover our
business, we believe that our proprietary patent position will be sustained
notwithstanding the expiration of certain patents and do not expect the
expiration of the patents to adversely affect our business prospects.
We believe that worldwide patent protection is important for us to compete
effectively in the marketplace. Certain of our patents have been the subject of
legal actions, all of which, to date, have been resolved in our favor prior to
trial. See "Business -- Legal Proceedings" for pending and recently resolved
legal proceedings.
47
Working Capital Items
Our most significant working capital item is the inventory level ($15.0
million as of December 31, 2003) at United Solar Ovonic Corp. and at United
Solar Ovonic LLC.
These two entities require significant inventory for the ramp up of
production for their new 30MW production plant, for the stockpiling of certain
materials, and for the availability of products for their customers. This need
for working capital will continue until the 30MW equipment is fully operational
and customer demand has increased.
In addition, United Solar Ovonic Corp. and United Solar Ovonic LLC have
substantial accounts receivable balances ($9.2 million as of December 31, 2003)
due to the fact that they deal with firms with extended payment terms, such as
the construction industry, international customers and other customers dependent
on government-provided incentives for financing. This need for working capital
will also continue for the foreseeable future.
Concentration of Revenues
See Note B of Notes to Consolidated Financial Statements for the Three
Years Ended June 30, 2003 included in this prospectus.
Revenues by Geographical Areas
See Note B to Notes to Consolidated Financial statements for the three
years ended June 30, 2003 included in this prospectus.
Backlog
Our backlog of orders as of December 31, 2003 for machine-building and
equipment sales contracts, photovoltaic products and metal hydride materials
was $9,166,000, all of which is expected to be recognized in the current fiscal
year. The comparable backlog at December 31, 2002 was $15,175,000.
Competition
Because each of our technologies has the potential to replace certain
existing energy storage, energy generation and information technology products,
competition for products based on our technologies comes from new technologies,
improvements to current technologies and improved products from current
technologies.
We also compete with companies that currently manufacture and distribute
products based on well-established technologies in the fields of energy
generation and storage and information technology. Some of the firms with which
we compete are among the largest industrial companies in the world. Many of our
competitors have established product lines, extensive financial, manufacturing
and marketing resources, and large research and development staffs and
facilities.
We believe our success depends primarily on our ability to apply our
technologies to the development and production of proprietary products and
production technologies that offer significant advantages in performance,
efficiency, cost and environmental friendliness over competing products and
technologies, as well as to package our technologies and products with
48
those of others into fully integrated systems. We expect to maintain our
competitive position by diligently prosecuting patents, designing and obtaining
patents for innovative applications for our technologies, removing costs from
our technology applications, developing volume manufacturing processes, and
continuing to form strategic relationships with leading companies.
Many of our technologies, such as those in the field of energy generation
and storage, compete with well-established existing conventional technologies.
There are likely to be transition costs incurred in switching from existing
technologies to new technologies in these fields. Until we are able to achieve
cost reductions through increased production volumes, the costs to produce
products based on our technologies may also be higher than the cost of products
based on existing technologies. These factors may combine to provide companies
offering products based on existing technologies with a competitive advantage.
Employees
As of March 5, 2004, we and our consolidated subsidiaries had a total
of 529 employees in the U.S. and 169 employees outside of the U.S. The above
numbers do not include employees of our joint ventures or licensees.
Principal Facilities
A summary of our principal facilities and those of our consolidated
subsidiaries, Ovonic Battery, United Solar Ovonic and Ovonic Fuel Cell Company,
follows:
Number of
Location Square Feet
-------- -----------
ECD:
2956 Waterview, Rochester Hills, MI 49,550
1050 East Square Lake Road, Bloomfield Hills, MI 11,000
1621 Northwood, Troy, MI 24,900
Ovonic Battery:
1864 Northwood, Troy, MI 12,480
1826 Northwood, Troy, MI 12,480
1707 Northwood, Troy, MI 27,400
2968 Waterview, Rochester Hills, MI 33,804
1414 Combermere, Troy, MI 9,870
49
United Solar Ovonic:
1100 West Maple Road, Troy, MI 47,775
3800 Lapeer Road, Auburn Hills, MI 167,526
Av. La Paz. No. 10009, Parque Industrial
Pacifico, Tijuana, B.C., Mex. C.P. 22670 67,362
Ovonic Fuel Cell Company:
2983 Waterview, Rochester Hills, MI 27,080
--------
TOTAL 491,227
========
Except for the property located at 1050 East Square Lake Road, Bloomfield
Hills, Michigan, which is owned by us, the foregoing properties, which are
generally of brick and block construction, are leased by us. The foregoing
properties are devoted primarily to the product development, production and
pre-production activities and administrative and other operations. We expect to
vacate the property located at 1707 Northwood, Troy, Michigan, upon expiration
of the lease term at the end of March 2004. Management believes that the
above facilities are adequate for present operations.
A summary of the facilities of our North American joint ventures follows:
Number of
Location Square Feet
-------- -----------
Texaco Ovonic Hydrogen Systems:
2983 Waterview, Rochester Hills, MI 50,292
Texaco Ovonic Battery Systems:
1334 Maplelawn, Troy, MI 28,122
1250 Maplelawn, Troy, MI 21,000
1104 West Maple Road, Troy, MI 15,000
50 Ovonic Way, Springboro, OH 170,000
-------
TOTAL 284,414
=======
Legal Proceedings
In March 2001, Ovonic Battery initiated litigation in Federal District
Court for the Eastern District of Michigan against Matsushita Battery Industrial
Co., Ltd. and related companies, or MBI, Panasonic EV Energy Co. Ltd., Toyota
Motor Corporation and related companies, and five employees of MBI for
infringement of Ovonic Battery's U.S. Patent Nos. 5,348,822 and 5,536,591 in
connection with hybrid electric vehicle battery and consumer battery sales in
the United States; U.S. Patent No. 5,879,831 in connection with hybrid electric
vehicle sales in the United States; for misappropriating confidential
information and filing applications for U.S. Patent No. 6,013,390 and
corresponding foreign patents incorrectly naming MBI employees
50
instead of Ovonic Battery employees as inventors. In July 2001, Texaco Ovonic
Battery Systems LLC sought to join the litigation as a co-plaintiff. The
plaintiffs presented a motion for a preliminary injunction against MBI and its
affiliates to enjoin the sale of infringing batteries in the United States.
After a hearing held on October 10, 2001, the Court allowed Texaco Ovonic
Battery Systems to join the case, found that certain counts of our Amended
Complaint should be arbitrated, and scheduled a hearing on our request for a
preliminary injunction to prevent MBI from infringing our patents by offering
or selling batteries to U.S. manufacturers of hybrid electric vehicles, pending
the outcome of the arbitration. On December 12, 2001, we filed an arbitration
demand with the International Chamber of Commerce on the counts held to be
arbitrable by the Federal District Court as well as additional patent
infringement claims. In December 2001, the parties initiated settlement
discussions and the Court, on January 16, 2002, granted a joint motion to stay
further proceedings in the litigation pending the outcome of the settlement
discussions. The International Chamber of Commerce also agreed to hold its
proceedings in abeyance pending settlement discussions.
In December 2002, we and our related companies entered into an arbitration
agreement with MBI and Toyota Motor Corporation and related companies. The
agreement established the basic terms, conditions and procedures to resume
arbitration before the International Chamber of Commerce of the existing patent
infringement disputes involving nickel metal hydride batteries used in
gasoline-electric hybrid vehicles and other products. Pursuant to the
arbitration agreement, the existing disputes among the parties will be resolved
in the arbitration and, therefore, the parties have agreed to dismiss the patent
infringement litigation previously initiated by our related companies in the
U.S. District Court, Eastern District of Michigan. The arbitration proceeding
was held in New York City from November 4-19, 2003 and concluded on January 21,
2004. The parties' arbitration agreement calls for a ruling by the arbitration
panel within two months. Because of administrative handling of the ruling
through the International Chamber of Commerce, International Court of
Arbitration, in Paris, France, the decision is not expected to be released until
May 2004.
On July 24, 2001, an individual, Kaplesh Kumar, filed a lawsuit against
Ovonic Battery, ECD and Mr. Ovshinsky, in the Federal District Court of
Massachusetts, alleging infringement of Kumar's U.S. Patent No. 4,565,686 and
other acts of unfair competition for inducing others to infringe. On July 8,
2002, the Court granted our motion for summary judgment and dismissed Kumar's
complaint. Kumar has appealed the decision of the Federal District Court
granting our motion for summary judgment of non-infringement and the Court's
dismissal of Kumar's complaint to the United States Court of Appeals for the
Federal Circuit. Oral arguments were presented before a panel of the Court of
Appeals for the Federal Circuit on September 19, 2003. In December 2003, the
Court of Appeals for the Federal Circuit issued an opinion vacating the District
Court's dismissal of Kumar's complaint and remanded the case to the District
Court for further proceedings concerning the meaning of certain terms in Kumar's
now expired patent. We believe that the suit is without merit and that we will
prevail.
Due to the uncertainty of the ultimate outcome of these matters, the
impact on future financial results is not subject to reasonable estimates.
51
Glossary of Technical Terms
Certain technical terms used herein have the following meanings:
Amorphous -- having an atomic structure that is not periodic.
CD-ROM (CD--Read Only Memory) -- a type of data-storage media using a CD format
with pre-recorded data which cannot be recorded by the user.
CD-RW (CD--Rewritable Memory) -- a type of data storage media using a CD format
employing our proprietary phase-change rewritable optical memory technology
capable of being recorded and re-recorded many times.
Crystalline -- having a repeating atomic structure in all three dimensions.
Cycle Life -- the number of times a device can be switched or can be charged and
discharged.
Disordered -- Minimizing and lifting of lattice constraints which provides new
degrees of freedom, permitting the placement of elements in multi-dimensional
spaces where they interact in ways not previously available. This allows the use
of multi-elements and complex materials where positional, translational and
compositional disorder remove restrictions so new local order environments can
be generated controlling the physical, electronic and chemical properties of the
material, thereby permitting the synthesis of new materials with new mechanisms.
DRAM (Dynamic Random Access Memory) -- a type of semiconductor memory device
used for the main system memory in most computers.
Electrode (battery) -- the chemically active portions of a battery.
Energy Density -- the amount of energy stored in a specific volume or weight.
Electric Vehicle -- a vehicle propelled exclusively by an electric drive system
powered by an electrochemical energy storage device, typically a rechargeable
battery.
FLASH -- a type of semiconductor memory device that retains stored data even
with the power off.
Encryption -- encoding of information.
Fuel Cell Electric Vehicle -- an electric vehicle that derives its electricity
from a fuel cell.
Fuel Cell Hybrid Electric Vehicle - a vehicle that is propelled both by a fuel
cell and an electrochemical energy storage device coupled to an electric drive.
Fuel Cell -- a device which produces electric power by oxidizing hydrogen and
exhausting only water and heat as byproducts.
52
Hybrid Electric Vehicle -- a vehicle that is propelled both by an
electrochemical energy storage device coupled to an electric drive and an
auxiliary power unit powered by a conventional fuel such as reformulated
gasoline, direct injection diesel, compressed natural gas or hydrogen.
Nanostructural - refers to materials having functional features on the nanometer
length scale.
Nonbinary processing -- computation in a base other than the binary base 2 used
in conventional computers.
Nonvolatile -- a property of some types of computer memory which retain stored
data even when power is removed.
Optical Memory -- a computer memory technology that uses lasers to record and
play back data stored on a rotating disc.
Ovonic -- [after Stanford R. Ov(shinsky) + (electr)onic] - the term used to
describe our proprietary materials, products and technologies.
Peak Power -- the maximum rate of energy output available for a sustained period
of time, typically 10 to 30 seconds.
Phase-Change Rewritable -- an optical memory technology invented by Mr.
Ovshinsky in which data is stored or erased on memory media by means of a laser
beam that switches the structural phase of a thin-film material between
crystalline and amorphous states.
Photovoltaic -- direct conversion of light into electrical energy.
Regenerative Power -- the process of restoring energy to the battery by
absorbing kinetic energy of the vehicle as it slows down.
Roll-to-Roll Process -- a process where a roll of substrate is continuously
converted into a roll of product.
Semiconductor -- a class of materials with special electrical properties used to
fabricate solar cells, transistors, integrated circuits and other electronic
devices.
Specific Energy -- the amount of energy capacity divided by the weight of the
battery.
Specific Power -- the amount of energy available for a sustained period of time
divided by the weight of the battery.
Stabilized Energy Conversion Efficiency -- the long-term ratio of electrical
output to light input.
System-on-a-chip -- an ASIC (application specific integrated circuit) that
integrates, on a single silicon die, processors, memories, logic, I/O
(input/output), and analog functions previously implemented as multiple discrete
chips.
Thin Film -- a very thin layer of material formed on a substrate.
Von Neumann concept -- classical sequential method of computing.
53
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below is certain financial information derived from our audited
and unaudited consolidated financial statements.
Six Months Fiscal Year Ended
Ended December 31, June 30,
-------------------------- --------------------------------------------------------------------
2003 2002 2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------ ------------ ------------
(Unaudited)
Revenues:
Product sales $ 14,065,517 $ 9,846,578 $ 22,415,790 $ 36,634,167 $ 24,239,970 $ 6,892,355 $ 4,524,238
Royalties 1,068,759 899,334 1,843,647 2,000,914 2,898,956 3,440,164 2,735,622
Revenues from product
development agreements 14,374,496 19,978,805 37,335,248 52,685,717 37,582,138 10,418,985 17,240,615
Revenues from license and
other agreements 75,000 3,419,114 3,444,114 25,000 5,300,000 3,138,000 4,753,995
Other 295,205 188,605 140,061 364,487 1,383,429 6,089,581 3,717,826
------------ ------------ ------------ ------------ ------------ ------------ ------------
TOTAL REVENUES 29,878,977 34,332,436 65,178,860 91,710,285 71,404,493 29,979,085 32,972,296
------------ ------------ ------------ ------------ ------------ ------------ ------------
NET LOSS BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $(27,698,008) $(11,431,416) $(38,413,719) $(20,888,034) $ (5,121,838) $(16,656,128) $(13,777,589)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - 2,215,560 2,215,560 - - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------
NET LOSS $(27,698,000) $ (9,215,856) $(36,198,159) $(20,888,034) $ (5,121,838) $(16,656,128) $(13,777,589)
============ ============ ============ ============ ============ ============ ============
BASIC NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ (1.22) $ (.52) $ (1.75) $ (.96) $ (.26) $ (1.16) $ (1.06)
BASIC NET INCOME PER SHARE FOR
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - .10 .10 - - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------
BASIC NET LOSS PER SHARE $ (1.22) $ (.42) $ (1.65) $ (.96) $ (.26) $ (1.16) $ (1.06)
============ ============ ============ ============ ============ ============ ============
DILUTED NET LOSS PER SHARE
BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE $ (1.22) $ (.52) $ (1.75) $ (.96) $ (.26) $ (1.16) $ (1.06)
DILUTED NET INCOME PER SHARE
FOR CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE - .10 .10 - - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------
DILUTED NET LOSS PER SHARE $ (1.22) $ (.42) $ (1.65) $ (.96) $ (.26) $ (1.16) $ (1.06)
============ ============ ============ ============ ============ ============ ============
At balance sheet date:
Cash and Cash Equivalents $ 16,898,399 $ 22,959,803 $ 8,567,261 $ 42,221,015 $ 33,055,399 $ 44,592,017 $ 19,076,983
Short-Term Investments $ 7,978,076 $ 84,926,026 $ 26,801,506 $ 71,997,154 $ 48,908,662 $ 44,723,500 $ -
Total Assets $143,233,738 $184,027,691 $153,694,650 $192,118,594 $166,105,387 $148,905,642 $ 39,807,998
Long-Term Liabilities $ 10,178,191 $ 13,962,534 $ 10,187,127 $ 14,428,769 $ 18,154,121 $ 20,059,353 $ 2,679,936
Working Capital $ 39,828,216 $ 84,176,313 $ 37,794,730 $100,796,311 $ 92,577,489 $ 89,789,457 $ 18,438,953
Stockholders' Equity $ 99,016,125 $127,211,107 $ 99,832,172 $135,254,960 $110,740,711 $ 98,776,560 $ 23,188,627
See notes to consolidated financial statements.
54
SUPPLEMENTARY CONSOLIDATED FINANCIAL DATA
(In thousands except for per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
Year Ending June 30, 2004
Revenue $ 14,205 $ 15,674 - - -
Operating income (loss) $(14,413) $(13,087) - - -
Net income (loss) $(14,282) $(13,416) - - -
Basic net loss per share $ (.65) $ (.57) - - -
Diluted net loss per share $ (.65) $ (.57) - - -
Year Ended June 30, 2003
Revenues $ 15,855 $ 18,478 $ 13,595 $ 17,251 $ 65,179
Operating loss $ (6,388) $ (4,036) $ (9,347) $(13,506) $(33,277)
Net loss before cumulative
effect of change in
accounting principle $ (5,652) $ (5,779) $ (9,076) $(17,907) $(38,414)
Cumulative effect of change
in accounting principle $ 2,216 $ - $ - $ - $ 2,216
Net loss $ (3,436) $ (5,779) $ (9,076) $(17,907) $(36,198)
Basic net loss per share
before cumulative effect
of change in accounting
principle $ (.26) $ (.26) $ (.41) $ (.82) $ (1.75)
Basic net income per share
for cumulative effect of
change in accounting
principle $ .10 $ - $ - $ - $ .10
Basic net loss per share $ (.16) $ (.26) $ (.41) $ (.82) $ (1.65)
Diluted net loss per share
before cumulative effect
of change in accounting
principle $ (.26) $ (.26) $ (.41) $ (.82) $ (1.75)
Diluted net income per share
for cumulative effect of
change in accounting principle $ .10 $ - $ - $ - $ .10
Diluted net loss per share $ (.16) $ (.26) $ (.41) $ (.82) $ (1.65)
Year Ended June 30, 2002
Revenues $ 22,459 $ 26,745 $ 24,490 $ 18,016 $ 91,710
Operating loss $ (3,897) $ (5,002) $ (5,737) $ (7,597) $(22,233)
Net loss $ (2,765) $ (4,317) $ (5,015) $ (8,791) $(20,888)
Basic net loss per share $ (.13) $ (.20) $ (.23) $ (.40) $ (.96)
Diluted net loss per share $ (.13) $ (.20) $ (.23) $ (.40) $ (.96)
55
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, or U.S. GAAP, we are
required to make estimates and assumptions that affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates. We are
impacted by factors such as the continued receipt of contracts from the U.S.
government and industrial partners, our ability to protect and maintain the
proprietary nature of our technology, our continued product and technological
advances and the strength and ability of our licensees and joint venture
partners to commercialize our products and technologies.
We have identified the following as our critical accounting policies:
principles of consolidation, equity accounting and revenue recognition
for product sales, royalties, and business agreements.
Principles of Consolidation and Equity Accounting
The consolidated financial statements include our accounts and our
100%-owned subsidiaries United Solar Ovonic Corp. (previously called United
Solar Systems Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic
LLC (previously called Bekaert ECD Solar Systems LLC and 40% owned by United
Solar Ovonic Corp. prior to May 14, 2003), to which we refer jointly as
United Solar Ovonic, a business formed to develop and commercialize our
continuous web, multilayer, large-area thin-film amorphous silicon photovoltaic
technology (see Note E of Notes to Consolidated Financial Statements for the
Three Years Ended June 30, 2003), and our approximately 91%-owned subsidiary
Ovonic Battery Company, Inc., a company formed to develop and commercialize our
Ovonic NiMH battery technology. The remaining shares of Ovonic Battery are owned
by Honda Motor Company, Sanoh Industrial Co. and Sanyo Electric Co. 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.
We have a number of strategic alliances and have five major investments
accounted for using the equity method:
o Texaco Ovonic Battery Systems LLC, a joint venture between Ovonic
Battery and ChevronTexaco Corporation, each having 50% interest, to
manufacture and sell our proprietary NiMH batteries for transportation
and stationary applications;
o Texaco Ovonic Hydrogen Systems LLC, a joint venture between ECD and
ChevronTexaco, each having 50% interest, to further develop and
commercialize Ovonic solid hydrogen storage technology;
o Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler Lowrey,
Intel Capital and other investors, to further develop and
commercialize our Ovonic Unified Memory technology;
56
o Ovonic Media, LLC, a joint venture owned 51% by General Electric
through its GE Plastics business unit and 49% by ECD, formed to
design, develop, demonstrate and commercialize our proprietary
continuous web roll-to-roll technology for ultra-high-speed
manufacture of optical media products; and
o ITS Innovative Transportation Systems A.G., a German company
beneficially owned 30% by ECD, formed to manufacture battery-powered
electric vehicles.
In addition, prior to May 14, 2003, we accounted for United Solar Ovonic
LLC, owned 40% by United Solar Ovonic Corp. (now 100% owned by ECD), using the
equity method of accounting.
Also, we have two 50%-owned joint ventures in Russia, Sovlux Co., Ltd., or
Sovlux, and Sovlux Battery Closed-Stock Company, or Sovlux Battery. See Note E
of Notes to Consolidated Financial Statements for the Three Years Ended June 30,
2003 for discussion of all of our ventures.
Our investments in Texaco Ovonic Battery Systems, Texaco Ovonic Hydrogen
Systems and Ovonic Media are recorded at zero. We will continue to carry our
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 we will start to recognize over a period of years our share, if any, of the
then equity of each of the ventures, and will recognize our share of each
venture's profits or losses on the equity method of accounting. To the extent
that we have made cash or other contributions, we recognize our proportionate
share of any losses until the investment reaches zero.
We have three joint ventures, to which we refer collectively as Rare Earth
Ovonic, with Rare Earth High-Tech Co., a subsidiary of Baotou Steel Company of
Inner Mongolia, China, for the manufacture of battery and other related products
and components. We account for our 19% interest in each of these joint ventures
using the cost method of accounting (total cash investment of $1,710,000).
In October 2002, through our newly formed subsidiary, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, we made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by us to Ovonyx. We received an exclusive, royalty-bearing license,
subject to existing agreements, for the use of all Ovonic Unified Memory, Ovonic
Threshold Switch and other Ovonyx technology for use in the field of cognitive
computers. We have recorded our $1,000,000 investment in Ovonyx and account for
this investment on the equity method and will recognize our proportionate share
of Ovonyx losses to the extent of our $1,000,000 investment. In the year ended
June 30, 2003, we recorded an equity loss of $406,000, and in the six months
ended December 31, 2003, we recorded an equity loss of $548,000. In November
2003, we increased our investment in Ovonyx with a $50,000 payment, which
represented a minimum royalty payment to Ovonyx on behalf of Ovonic Cognitive
Computer.
While we believe, based upon the opinion of legal counsel, that we have no
obligation to fund any losses that our joint ventures incur beyond our
investment, we have decided to fund certain of our joint ventures.
57
Upon consolidation, all intercompany accounts and transactions are
eliminated. Any profits on intercompany transactions are eliminated to the
extent of our ownership percentage.
Product Sales
Product sales include revenues related to photovoltaic products,
machine-building and equipment sales contracts, nickel hydroxide and metal
hydride materials and battery packs. Revenues related to machine-building and
equipment sales contracts and sales related to other long-term contracts are
recognized on the percentage-of-completion method of accounting using the costs
incurred to date as a percentage of the total expected costs. All other product
sales are recognized when the product is shipped. These products are shipped FOB
shipping point.
Royalties
Most license agreements, other than those granted to certain joint
ventures, provide for us to receive royalties from the sale of products which
utilize the licensed technology. Typically, the royalties are incremental to and
distinct from the license fee and are recognized as revenue upon the sale of the
respective licensed product. In several instances, we have received cash
payments for nonrefundable advance royalty payments which are creditable against
future royalties under the licenses. Advance royalty payments are deferred and
recognized in revenues as the creditable sales occur, the underlying agreement
expires, or when we have demonstrable evidence that no additional royalties will
be creditable and, accordingly, the earnings process is completed.
Business Agreements
A substantial portion of revenues is derived through business agreements
for the development or commercialization of products based upon our proprietary
technologies. We have two major types of business agreements.
The first type of business agreement relates to licensing our proprietary
technology. Licensing activities are tailored to provide each licensee with the
right to use our technology, most of which is patented, for a specific product
application or, in some instances, for further exploration of new product
applications of such technologies. The terms of such licenses, accordingly, are
tailored to address a number of circumstances relating to the use of such
technology which have been negotiated between us and the licensee. Such terms
generally address whether the license will be exclusive or nonexclusive, whether
the licensee is limited to very narrowly defined applications or to
broader-based product manufacture or sale of products using such technologies,
whether the license will provide royalties for products sold which employ such
licensed technology and how such royalties will be measured, as well as other
factors specific to each negotiated arrangement. In some cases, licenses relate
directly to product development that we have undertaken pursuant to product
development agreements. In other cases, they relate to product development and
commercialization efforts of the licensee. Still other agreements combine our
efforts with those of the licensee.
License agreement fees are generally recognized as revenue at the time the
agreements are consummated, which is the completion of the earnings process.
Typically, such fees are nonrefundable, do not obligate us to incur any future
costs or require future performance by us, and are not related to future
production or earnings of the licensee. License fees payable in installments are
recorded at the present value of the amounts to be received,
58
taking into account the collectibility of the license fee. In some instances, a
portion of such license fees is contingent upon the commencement of production
or other uncertainties. In these cases, license fee revenues are not recognized
until commencement of production or the resolution of uncertainties. Generally,
there are no current or future direct costs associated with license fees.
In the second type of agreement, product development agreements, we
conduct specified product development projects related to one of our principal
technology specializations for an agreed-upon fee. Some of these projects have
stipulated performance criteria and deliverables whereas others require "best
efforts" with no specified performance criteria. Revenues from product
development agreements that contain specific performance criteria are recognized
on a percentage-of-completion basis which matches the contract revenues to the
costs incurred on a project, based on the relationship of costs incurred to
estimated total project costs. Revenues from product development agreements,
where there are no specific performance terms, are recognized in amounts equal
to the amounts expended on the programs. Generally, the agreed-upon fees for
product development agreements contemplate reimbursing us for costs considered
associated with project activities including expenses for direct product
development and research, patents, selling, general and administrative expenses
and depreciation. Accordingly, expenses related to product development
agreements are recorded as cost of revenues from product development agreements.
The following discussion of our financial condition and results of
operations should be read together with our unaudited consolidated financial
statements for the six months ended December 31, 2003 and December 31, 2002,
including the notes thereto, and our audited consolidated financial statements
for the three years ended June 30, 2003, including the notes thereto, appearing
elsewhere in this prospectus. The results of operations for the six months
ended December 31, 2003 are not necessarily indicative of results to be
expected in future periods. This discussion contains forward-looking statements.
See "Forward-Looking Statements" for a discussion of uncertainties, risks and
assumptions associated with these statements.
Results of Operations
Six Months Ended December 31, 2003 Compared to Six Months Ended
December 31, 2002
The loss from operations increased to $27,500,000 in 2003 from $10,424,000
in 2002 because of:
o An increased operating loss of $6,084,000 for United Solar Ovonic
(operating loss of $5,525,000 in 2003 versus operating income of
$559,000 in 2002) primarily due to the impact of 100% ownership of
United Solar Ovonic in 2003, a license fee of $3,269,000 in 2002,
start-up and other costs, including depreciation expense associated
with increasing production capacity, partially offset by $1,910,000
improvement in its loss from operations due to higher revenues in
2003.
o An increased operating loss, excluding litigation, of $5,562,000 for
Ovonic Battery (operating loss of $7,644,000 in 2003 versus operating
loss of $2,082,000 in 2002) primarily from lower revenues for the
profitable equipment contract with Rare Earth Ovonic in 2003 compared
to 2002,
59
partially offset by higher royalties in 2003. Additionally, Ovonic
Battery incurred $4,563,000 in higher costs for patent defense.
o An operating loss of $8,860,000 in 2003 for the ECD segment versus
operating loss of $7,993,000 in 2002, primarily due to higher
investment in product development as we increased spending on our
core technologies.
The decrease in consolidated revenues primarily resulted from a reduction
in revenues from product development agreements of $5,604,000, decreased license
and other agreements ($75,000 in 2003 versus $3,419,000 in 2002), partially
offset by an increase in product sales of $4,219,000 and a $169,000 increase in
royalty revenues. (See Note H - Product Sales, Royalties, Revenues from Product
Development Agreements, and License and Other Agreements and Note L - Business
Segments of Notes to Consolidated Financial Statements.)
o United Solar Ovonic's 2003 revenues increased substantially, as a
result of the consolidation of United Solar Ovonic LLC's operating
results into our operating results following the May 14, 2003
acquisition, to $15,858,000 in 2003 versus $6,688,000 in 2002. Product
sales increased to $11,355,000 in 2003 from $2,361,000 in 2002;
$5,930,000 of the increase resulted from consolidating third-party
sales in 2003 and $3,064,000 due to higher third-party sales.
Third-party product sales are included in revenues in 2003 while they
were not in 2002. Also contributing to higher revenues in 2003 were
revenues from product development agreements, principally from the
recently signed Air Force contract. The 2002 revenues included a
license fee of $3,269,000.
o The $7,129,000 decrease in Ovonic Battery's revenues was primarily due
to lower equipment sales to Rare Earth Ovonic ($1,889,000 in 2003
versus $6,505,000 in 2002) due to the near completion of phase one of
this program, reduced revenues from product development agreements
($4,246,000 in 2003 versus $7,128,000 in 2002) principally related to
decreased activities under the advanced product development agreement
from Texaco Ovonic Battery Systems, partially offset by higher
royalties in 2003.
o The ECD segment's revenues decreased to $6,015,000 in 2003 from
$12,509,000 in 2002, primarily due to a decrease of $6,001,000 from
product development agreements, due to reduced revenues for Ovonic
Fuel Cell Company (zero in 2003 compared to $3,942,000 in 2002),
Texaco Ovonic Hydrogen Systems ($4,764,000 in 2003 compared to
$6,744,000 in 2002) and Ovonic Media (zero in 2003 compared to
$605,000 in 2002).
Product sales, consisting of photovoltaic products, machine building and
equipment sales, and nickel hydroxide and metal hydride materials, increased 43%
to $14,066,000 in the six months ended December 31, 2003 from $9,847,000 in the
six months ended December 31, 2002. Photovoltaic sales were $11,355,000 for
2003, which were sales to third parties, and $2,361,000 for 2002, which were
sales to an affiliate. Machine-building and equipment sales revenues decreased
72% to $1,969,000 in 2003 from $7,016,000 in 2002, primarily due to Ovonic
Battery contracts with Rare Earth Ovonic to provide battery-making equipment,
the first phase of which is nearing completion, ($1,889,000 in 2003 compared to
$6,505,000 in 2002). All machine-building and equipment sales contracts are
accounted for using percentage-of-completion accounting. Sales of nickel
hydroxide and metal hydride materials increased to $733,000 in 2003 compared to
$383,000 in 2002. (See Note H of Notes to Consolidated
60
Financial Statements.) We currently have a product sales backlog of $9,166,000,
all of which is expected to be recognized as revenues in fiscal 2004.
Royalties increased 19% to $1,069,000 in the six months ended December 31,
2003 from $899,000 in the six months ended December 31, 2002. Higher royalties
reflect higher sales of large propulsion batteries by one of our licensees.
Revenues from product development agreements decreased 28% to $14,374,000
in the six months ended December 31, 2003 from $19,979,000 in the six months
ended December 31, 2002 primarily due to reduced battery activities under
advanced product development agreements with Texaco Ovonic Battery Systems
($3,351,000 for 2003 compared to $5,465,000 in 2002), the suspension of
funding to Ovonic Media (zero in 2003 versus $605,000 in 2002), a decrease in
revenues from Texaco Ovonic Hydrogen Systems ($4,764,000 for 2003 compared to
$6,744,000 for 2002) and Ovonic Fuel Cell (zero for 2003 - Ovonic Fuel Cell is
now 100% owned and included in our consolidated financial results - compared to
$3,942,000 for 2002), partially offset by increased photovoltaic product
development revenues in 2003 ($5,092,000 compared to $1,263,000 in 2002),
primarily due to the new Air Force contract.
Revenues from license and other agreements decreased to $75,000 in the six
months ended December 31, 2003, from $3,419,000 in the six months ended December
31, 2002. 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. The license revenue in 2002 resulted from
United Solar Ovonic issuing to Canon a notice whereby United Solar Ovonic
granted Canon rights to manufacture in two countries of its choice in Southeast
Asia, excluding India and the People's Republic of China. This notice was
issued in satisfaction of the outstanding obligation ($2,500,000 plus accrued
interest of $769,000) due Canon in connection with a previous loan made to
United Solar Ovonic by Canon. United Solar Ovonic recorded the satisfaction of
the loan from Canon ($3,269,000) as revenue from license agreements in its
statement of operations for the six months ended December 31, 2002.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of our
joint ventures. Other revenues increased to $295,000 in the six months ended
December 31, 2003 from $188,000 in the six months ended December 31, 2002,
primarily due to increased laboratory billings to third parties.
Cost of product sales increased by $7,679,000 in the six months ended
December 31, 2003 ($17,975,000 in 2003 compared to $10,296,000 in 2002). This
resulted in a loss of $3,910,000 on product sales in 2003 compared to a loss of
$449,000 in 2002. There were negative margins on photovoltaic sales of
$1,700,000 on sales of finished products in 2003 compared to negative margins
of $1,487,000 on sales of semi-finished products to an affiliate in 2002, as
well as planned optimization costs of $937,000 for our photovoltaic production
machine. In addition, the margin on sales at Ovonic Battery decreased to
negative $904,000 in 2003 from positive $733,000 in 2002 due to negative margins
on sales of metal hydride materials and lower margins on equipment sales because
of the near completion of the first phase of the Rare Earth program.
Revenues from product development agreements currently fund 56% of our
cost of product development as we continue to develop our core technologies.
Revenues from product development agreements decreased by $5,605,000, and
spending decreased by $1,667,000, resulting in an increase of $3,938,000 in
net cost of product development.
61
Six Months Ended
December 31,
2003 2002
----------- -----------
Cost of revenues from product
development agreements $13,130,000 $18,883,000
Product development and research 12,666,000 8,580,000
----------- -----------
Total cost of product development 25,796,000 27,463,000
Revenues from product development
agreements 14,374,000 19,979,000
----------- -----------
Net cost of product development $11,422,000 $ 7,484,000
=========== ===========
The expenditures continued the development of our core technologies in
energy storage, energy generation and information technology. Also, product
development programs include work on the Ovonic(TM) 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. We are also
developing a unique 3-terminal Ovonic(TM) threshold/memory device which we
expect to have high speed, high current capabilities. Included in the
development costs for the Ovonic(TM) Cognitive Computer technology is
depreciation related to the new state-of-the-art clean room and the related
equipment. We, together with ChevronTexaco, have modified and demonstrated a
hybrid electric vehicle (a 2002 Toyota Prius) to operate on clean hydrogen fuel
stored in an Ovonic(TM) solid hydrogen system. This on-board solid storage
system can potentially be applied to hydrogen-powered fuel cell vehicles and
demonstrates the principles of utilizing metal hydrides to address hydrogen
infrastructure.
Expenses were incurred in 2003 and 2002 in connection with the protection
of our United States and foreign patents covering our proprietary technologies.
Total patent expenses increased to $6,427,000 in the six months ended
December 31, 2003 from $2,082,000 in the six months ended December 31,
2002, principally due to higher patent defense costs ($5,471,000 in 2003
versus $908,000 in 2002) for the protection of our NiMH battery patents and
technology. ChevronTexaco has agreed to share 50% of the patent defense costs
relating to batteries for non-consumer applications beginning in fiscal 2002.
ChevronTexaco's share of the patent defense costs was $6,119,000 and $739,000
for the six months ended December 31, 2003 and 2002, respectively. In
March 2001, Ovonic Battery filed suit against Matsushita Battery Industrial
Co., Ltd., Toyota Motor Corporation, Panasonic EV Energy Co., Ltd. and several
related entities for infringement of patents held by Ovonic Battery. In October
2001, Texaco Ovonic Battery Systems LLC joined the litigation as a co-plaintiff.
In December 2002, we and our related companies entered into an arbitration
agreement with Matsushita Battery Industrial Co., Ltd. and its related companies
and Toyota Motor Corporation and a related company. The arbitration proceeding
was held in New York City, with a hearing before the Arbitral Tribunal in
November 2003. Post trial briefs were filed in December and closing oral
arguments were delivered on January 21, 2004. A decision is expected around
the beginning of May 2004. We expect patent defense costs related to our
arbitration proceedings to be significantly lower in the future.
Selling, general and administrative expenses are allocated to product
development and 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.
62
The increase in selling, general and administrative expenses (net) from
$4,916,000 in the six months ended December 31, 2002 to $7,180,000 in the six
months ended December 31, 2003 was due primarily to increased expenses
associated with United Solar Ovonic ($4,138,000), primarily as a result of
consolidation of United Solar Ovonic LLC following the May 14, 2003 acquisition,
partially offset by increased allocations ($339,000) to product development
research and cost of revenue from product development agreements.
The following is a summary of the gross selling, general and
administrative expenses and the aforementioned allocations:
Six Months Ended
December 31,
2003 2002
----------- -----------
Gross Expenses $15,101,000 $12,497,000
Less - allocations to product development
and research (4,702,000) (4,039,000)
- allocations to cost of revenues from
product development agreements (3,219,000) (3,542,000)
------------ ------------
Net Expenses $ 7,180,000 $ 4,916,000
=========== ===========
The $810,000 decrease in other income (net) ($198,000 expense in 2003
compared to $1,008,000 expense in 2002) resulted primarily from lower equity
losses attributed to losses at ITS (zero in 2003 compared to $362,000 in 2002),
at United Solar Ovonic LLC (zero in 2003 - fully consolidated in 2003 and no
longer on the equity basis - compared to $3,092,000 in 2002) and higher equity
losses at Ovonyx ($548,000 in 2003 versus $280,000 in 2002), partially offset
by lower short-term investments causing lower interest income ($573,000 in 2003
compared to $2,090,000 in 2002) on our investments.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 required us
to recognize, at the adoption of SFAS 142, the unamortized negative goodwill
of approximately $2,216,000 (a favorable benefit) as the cumulative effect of a
change in accounting principle in our statements of operations on July 1, 2002.
Year Ended June 30, 2003 Compared to Year Ended June 30, 2002
For the period July 1, 2002 through May 14, 2003, we owned 81% of United
Solar Ovonic Corp. (formerly United Solar Systems Corp.) and consolidated that
entity with a 19% minority interest recognized, and accounted for United Solar
Ovonic Corp.'s 40% interest in United Solar Ovonic LLC (formerly Bekaert ECD
Solar Systems LLC) on the equity basis. Effective May 15, 2003, with the
purchase by us from Bekaert Corporation of the remaining interests in United
Solar Ovonic Corp. and United Solar Ovonic LLC, we own 100% of each of the
entities and have consolidated the entities in their entirety for the period
from May 15, 2003 through June 30, 2003.
We had a net loss of $36,198,000 on revenues of $65,179,000 in the year
ended June 30, 2003 compared to a net loss of $20,888,000 on revenues of
$91,710,000 for the year ended June 30, 2002. The $15,310,000 increase in the
net loss resulted primarily from increased patent defense expenses (net) of
$2,680,000 to protect Ovonic Battery's intellectual property, increased losses
on product sales of $2,992,000, an increase of $7,672,000 in the net cost of
product development as we received lower third-party funding to offset our
spending on our core
63
technologies, reduced interest income of $1,166,000 due to a lower cash balance
and lower interest rates and increased equity in losses and writedown of joint
ventures of $8,136,000, partially offset by increased license revenues of
$3,419,000. In addition, we recognized income of $2,216,000 attributable to the
cumulative effect of a change in accounting principle. See Note A of Notes to
Consolidated Financial Statements for the Three Years Ended June 30, 2003.
The loss from operations increased to $33,277,000 in 2003 from $22,233,000
in 2002 because of:
o a $5,690,000 increased operating loss for our ECD segment, net
of consolidating entries, which includes machine building,
optical memory, fuel cell technology, support services for
hydrogen storage, and Ovonic Cognitive Computer technology
($16,924,000 in 2003 versus $11,234,000 in 2002), primarily due
to higher investment in product development as we received
lower third-party funding to offset our spending on our core
technologies;
o an increased operating loss of $1,816,000 for United Solar
Ovonic (operating loss of $6,355,000 in 2003 versus
operating loss of $4,539,000 in 2002) primarily due to
costs associated with increasing production capacity with
the February 2003 start-up of new manufacturing equipment
which, when fully optimized, is capable of producing 30
megawatts of photovoltaic products annually and due to,
after May 14, 2003, recognition of 100% of United Solar
Ovonic's operating results;
o a $3,538,000 increased operating loss for Ovonic Battery
(operating loss of $9,998,000 in 2003 versus operating loss
of $6,460,000 in 2002) primarily resulting from higher costs
for patent defense and lower revenues from product development
agreements.
The decrease in consolidated revenues primarily resulted from lower
product sales ($14,218,000), lower revenues from product development agreements
($15,351,000) and lower royalties ($157,000), partially offset by higher license
and other agreements ($3,444,000 in 2003 versus $25,000 in 2002).
o Our ECD segment's revenues, net of consolidating entries,
decreased to $21,463,000 in 2003 from $36,024,000 in
2002 primarily due to an $11,293,000 decrease in
revenues from product development agreements,
principally from the reduced work from the advanced
product development agreement with Texaco Ovonic
Hydrogen Systems, and due to the discontinuance of
funding by the joint venture partners for both Ovonic
Media and the development of work related to Ovonic fuel
cell technology (beginning January 2003).
o The $19,703,000 decrease in Ovonic Battery's revenues was
primarily due to lower equipment sales to Rare Earth
Ovonic ($10,726,000 in 2003 versus $25,287,000 in 2002)
as the first phase of this program nears completion,
decreased revenues from product development agreements
($14,942,000 in 2003 versus $20,078,000 in 2002) due to
reduced work on advanced product development for Texaco
Ovonic Battery Systems and decreased royalties ($136,000
reduction), partially offset by increased revenues from
license and other agreements ($175,000 in 2003 versus
$25,000 in 2002).
64
o United Solar Ovonic's 2003 consolidated revenues increased to
$14,890,000 in 2003 versus $7,157,000 in 2002 due to (i)
increased product sales as it continues to expand its
manufacturing capacity from the previous 5-megawatt
manufacturing equipment to the current equipment which,
when fully optimized, is capable of producing 30 megawatts
of photovoltaic products annually, (ii) the acquisition of
100% of United Solar Ovonic LLC on May 14, 2003 and the
resultant consolidation of their revenues from third
parties after that date, and (iii) higher revenues from
product development agreements.
Product sales, consisting of machine building and equipment sales,
photovoltaic products and nickel hydroxide and metal hydride materials,
decreased 39% to $22,416,000 in the year ended June 30, 2003 from $36,634,000 in
the year ended June 30, 2002. Machine-building and equipment sales revenues
decreased 61% to $11,450,000 in 2003 from $29,533,000 in 2002, primarily due to
the near completion of the first phase of Ovonic Battery's contracts with Rare
Earth Ovonic to provide battery-making equipment ($10,726,000 in 2003 compared
to $25,287,000 in 2002). All machine-building and equipment sales contracts
are accounted for using percentage-of-completion accounting. Partially
offsetting this decrease were photovoltaic sales (sales of semi-finished
products to an affiliate, United Solar Ovonic LLC, prior to May 14, 2003, and
sales of finished products to third parties after that date) which were
$9,769,000 for 2003 and $5,883,000 for 2002. See Note E of Notes to Consolidated
Financial Statements for the Three Years Ended June 30, 2003. Sales of nickel
hydroxide and metal hydride materials were $973,000 in 2003 compared to
$940,000 in 2002.
Royalties decreased 8% to $1,844,000 in the year ended June 30, 2003 from
$2,001,000 in the year ended June 30, 2002. Lower royalties reflect lower sales
of small consumer batteries and increased production efficiencies of our
licensees, which have resulted in lower prices.
Revenues from product development agreements decreased 29% to $37,335,000
in the year ended June 30, 2003 from $52,686,000 in the year ended June 30,
2002. The decrease was primarily a result of reduced funding from ChevronTexaco
for agreements with Texaco Ovonic Hydrogen Systems ($13,651,000 for 2003
compared to $18,581,000 for 2002), Ovonic Fuel Cell, which is now self-funded by
us ($4,022,000 for 2003 compared to $8,887,000 for 2002), and Texaco Ovonic
Battery Systems ($12,367,000 for 2003 compared to $16,315,000 for 2002) for
advanced product development agreements. Also contributing were lower revenues
from a service agreement with Ovonic Media ($615,000 in 2003 versus $1,923,000
in 2002) and the completion of programs with National Institute of Standards and
Technology and U.S. Department of Energy, which advanced our hydrogen storage
and optical memory technologies (zero in 2003 versus $521,000 in 2002). See Note
B of Notes to Consolidated Financial Statements for the Three Years Ended June
30, 2003.
Revenues from license and other agreements increased to $3,444,000 in the
year ended June 30, 2003 from $25,000 in the year ended June 30, 2002. The
increase primarily resulted from United Solar Ovonic Corp. issuing to Canon Inc.
a notice whereby United Solar Ovonic Corp. granted Canon rights to manufacture
photovoltaic products in two countries of its choice in Southeast Asia,
excluding India and the People's Republic of China. These rights were granted in
satisfaction of the outstanding obligation ($2,500,000 plus accrued interest)
due Canon in connection with a previous loan made to United Solar Ovonic Corp.
by Canon. United Solar Ovonic Corp. recorded the satisfaction of the loan and
accrued interest from Canon ($3,269,000) as revenue from license agreements in
our statement of operations for the year
65
ended June 30, 2003. Also, Ovonic Battery entered into license agreements with
four Chinese companies for a total of $175,000. See Note B of Notes to
Consolidated Financial Statements for the Three Years Ended June 30, 2003.
Revenues from license and other agreements depend on a small number of new
business arrangements, are sporadic and vary dramatically from period to period.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of our
joint ventures. Other revenues decreased to $140,000 in the year ended June 30,
2003 from $364,000 in the year ended June 30, 2002. This decrease was primarily
due to certain adjustments which reduced revenues to reflect a change in
estimate based on information received by us pertaining to certain customers and
contracts, partially offset by increases in revenues for services provided by
our Central Analytical Lab and Production Technology and Machine Building
Division to affiliates and others.
The $11,226,000 decrease in cost of product sales in the year ended June
30, 2003 resulted from the $14,218,000 decrease in product sales and resulted in
a $3,523,000 loss on product sales in 2003, compared to a $531,000 loss in 2002.
The increased loss primarily relates to sales of photovoltaic products as the
new manufacturing equipment for photovoltaic products was brought on line.
Partially offsetting this increased loss was improved profitability on the
contract to provide battery manufacturing equipment to Rare Earth Ovonic and a
smaller loss on the sales of metal hydride materials.
Revenues from product development agreements funded 66% (compared to 82%
for 2002) of our cost of product development. While we continued to spend
aggressively on our core technologies, the total cost of product development
decreased by $7,679,000 for the year ended June 30, 2003. However, third-party
funding decreased by $15,351,000, resulting in an increase of $7,672,000 in net
cost of product development.
Fiscal Year Ended
June 30,
---------------------------
2003 2002
------------ ------------
Cost of revenues from product
development agreements $ 37,001,000 $ 51,703,000
Product development and research 19,798,000 12,775,000
------------ ------------
Total cost of product development 56,799,000 64,478,000
Revenues from product development
agreements 37,335,000 52,686,000
------------ ------------
Net cost of product development $ 19,464,000 $ 11,792,000
============ ============
The expenditures continued the development of our core technologies in
energy storage, energy generation and information technology. Also, product
development programs include work on the Ovonic Cognitive Computer technology.
Included in the development costs for the Ovonic Cognitive Computer technology
is depreciation ($886,000) related to the new state-of-the-art clean room and
the related equipment. Another project, in collaboration with ChevronTexaco, was
the conversion of a 2-liter internal combustion engine to run on hydrogen. This
converted engine is being used to power a hybrid electric vehicle (a 2002 Toyota
Prius) using our Ovonic low-pressure solid hydrogen storage system. This solid
storage system can potentially be applied to hydrogen-powered fuel cell vehicles
and demonstrates the principles of utilizing hydrides to address the hydrogen
infrastructure.
66
Expenses were incurred in 2003 and 2002 in connection with the protection
of our U.S. and foreign patents covering our proprietary technologies. Total
patent expenses increased to $7,618,000 in the year ended June 30, 2003 from
$4,932,000 in the year ended June 30, 2002, principally due to litigation costs
($5,429,000 in 2003 versus $2,749,000 in 2002) for the protection of our NiMH
battery patents and technology. ChevronTexaco has agreed to share 50% of the
battery litigation expenses, other than those related to consumer batteries,
beginning in fiscal 2002. The reimbursements of $624,000 in fiscal year 2003 and
$2,167,000 in fiscal year 2002 have been offset against the patent defense
costs.
Operating, general and administrative expenses are allocated to product
development and 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.
The increase in operating, general and administrative expenses (net of
allocations) from $7,368,000 in the year ended June 30, 2002 to $8,099,000 in
the year ended June 30, 2003 was due primarily to reduced allocations of
expenses to cost of revenues from product development agreements ($2,945,000),
partially offset by increased allocations to product development and research
($2,412,000).
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Fiscal Year Ended
June 30,
2003 2002
----------- -----------
Gross Expenses $24,219,000 $24,487,000
Less - allocations to product development
and research (7,667,000) (5,255,000)
- allocations to cost of revenues
from product development agreements (8,453,000) (11,398,000)
- amortization of negative goodwill - (466,000)
----------- -----------
Remaining Expenses $ 8,099,000 $ 7,368,000
=========== ===========
The $6,482,000 decrease in other income (expense) ($5,137,000 expense in
2003 compared to $1,345,000 income in 2002) resulted primarily from increased
equity losses attributed to losses at United Solar Ovonic LLC ($6,103,000 in
2003 compared to $2,944,000 in 2002), equity losses and the writedown of our
investment in ITS Innovative Transportation Systems ($5,286,000 loss in 2003)
and from lower interest income on our investments as a result of lower interest
rates and a lower level of investments ($3,561,000 in 2003 compared to
$4,727,000 in 2002), partially offset by increased realized gains on the sale of
investments ($1,427,000 in 2003 versus $304,000 in 2002) and because 2002 had a
$1,000,000 write-off of our investment in EV Global.
In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
141 required us to recognize, at the adoption of SFAS 142, the unamortized
negative goodwill of approximately $2,216,000. This is a favorable adjustment to
us and is the cumulative effect of a change in accounting principle in
67
our statements of operations on July 1, 2002. We had an amortization of negative
goodwill of $466,000 in 2002 and zero in 2003.
For the three years ended June 30, 2003, there has been no material impact
of inflation and changing prices on our revenue or on our losses from continuing
operations.
We do business in many different parts of the world and our royalty
revenues are affected by changes in foreign currencies and their exchange rates
relative to the U.S. dollar. However, the vast majority of our business
agreements are denominated in U.S. dollars and, as such, we have minimized our
exposure to currency rate fluctuations.
Year Ended June 30, 2002 Compared to Year Ended June 30, 2001
We had a net loss of $20,888,000 on revenues of $91,710,000 in the year
ended June 30, 2002 compared to a net loss of $5,122,000 on revenues of
$71,404,000 for the year ended June 30, 2001. The $15,766,000 increase in the
net loss resulted primarily from reduced license revenues of $5,275,000,
increased patent defense expenses (net) of $836,000 to protect our intellectual
property, reduced royalties of $898,000, an increase of $3,466,000 in the net
cost of product development as we increased spending on our core technologies,
reduced interest income of $1,137,000 due to lower interest rates, decreased
margins on product sales of $1,395,000, increased equity losses (net of minority
interest) of $1,195,000, and a $1,000,000 write-off of our investment in EV
Global Motors Company.
The loss from operations increased to $22,233,000 in 2002 from $10,067,000
in 2001 because of:
o an operating loss of $11,234,000 in 2002 for our ECD segment
(net of consolidating entries) versus operating income of
$302,000 in 2001, primarily due to higher investment in
product development as we increased spending on our core
technologies and an increase in the cost estimate to
complete our contract with United Solar Ovonic LLC to
design and build equipment making solar products which,
when fully optimized, is capable of producing on an
annual basis 30 megawatts of electrical power;
o an increased operating loss of $1,797,000 for United Solar
Ovonic Corp. (operating loss of $4,539,000 in 2002 versus
operating loss of $2,742,000 in 2001) primarily due to costs
associated with the increased production capacity and the
move to the Auburn Hills facility;
o a $1,167,000 decreased operating loss for Ovonic Battery
(operating loss of $6,460,000 in 2002 versus operating loss
of $7,627,000 in 2001) primarily resulting from a profitable
equipment sales contract and higher revenue from product
development agreements, partially offset by higher costs for
litigation and lower revenues from license agreements and
royalties.
The increase in consolidated revenues primarily resulted from higher
product sales ($12,394,000) and higher revenues from product development
agreements ($15,104,000), partially offset by lower royalties ($898,000) and
license and other agreements ($25,000 in 2002 versus $5,300,000 in 2001).
68
o Our ECD segment's revenues, net of consolidating entries,
increased to $36,024,000 in 2002 from $29,356,000 in 2001 due
to increased revenues of $6,549,000 from product development
agreements, primarily resulting from the advanced product
development agreement with Texaco Ovonic Hydrogen Systems.
o The $14,155,000 increase in Ovonic Battery's revenues was
primarily due to higher equipment sales to Rare Earth
Ovonic ($25,287,000 in 2002 versus $12,931,000 in 2001)
and increased revenues from product development
agreements ($20,078,000 in 2002 versus $10,771,000 in
2001) as work was begun on the advanced product development
agreement for Texaco Ovonic Battery Systems, partially
offset by decreased revenues from license and other
agreements ($25,000 in 2002 versus $5,300,000 in 2001)
and decreased royalties ($933,000).
o United Solar Ovonic Corp.'s 2002 revenues decreased to
$7,157,000 in 2002 versus $7,674,000 in 2001 due to lower
sales prices for semi-finished products sold to United
Solar Ovonic LLC and lower revenues from product development
agreements.
Product sales, consisting of machine-building and equipment sales,
photovoltaic products, and nickel hydroxide and metal hydride materials,
increased 51% to $36,634,000 in the year ended June 30, 2002 from $24,240,000 in
the year ended June 30, 2001. Machine-building and equipment sales revenues
increased 74% to $29,533,000 in 2002 from $16,934,000 in 2001, primarily due to
Ovonic Battery's contracts with Rare Earth Ovonic to provide battery-making
equipment ($25,287,000 in 2002 compared to $12,931,000 in 2001). Photovoltaic
sales, which are sales of semi-finished products to an affiliate, United Solar
Ovonic LLC, were $5,883,000 for 2002 and $5,975,000 for 2001. See Note B of
Notes to Consolidated Financial Statements for the Three Years Ended June 30,
2003. Sales of nickel hydroxide and metal hydride materials were $940,000 in
2002 compared to $355,000 in 2001.
Royalties decreased 31% to $2,001,000 in the year ended June 30, 2002 from
$2,899,000 in the year ended June 30, 2001. Lower royalties reflect increased
production efficiencies of our licensees, which have resulted in lower prices as
licensees move aggressively to increase market share, unfavorable exchange
rates, and crediting a previous overpayment of royalties calculated erroneously
by a licensee.
Revenues from product development agreements increased 40% to $52,686,000
in the year ended June 30, 2002 from $37,582,000 in the year ended June 30,
2001. The increase was primarily a result of agreements with Texaco Ovonic
Hydrogen Systems ($18,581,000 for 2002 compared to $11,818,000 for 2001), Ovonic
Fuel Cell ($8,887,000 for 2002 compared to $8,831,000 for 2001) and Texaco
Ovonic Battery Systems ($16,315,000 for 2002 compared to $6,433,000 in 2001) for
advanced product development agreements, partially offset by decreases in
revenues from the services agreement with Ovonic Media ($1,923,000 in 2002
versus $2,298,000 in 2001) and the completion of programs with the National
Institute of Standards and Technology, which advanced our hydrogen storage and
optical memory technologies ($173,000 in 2002 versus $1,744,000 in 2001). See
Note B of Notes to Consolidated Financial Statements for the Three Years Ended
June 30, 2003.
Revenues from license and other agreements decreased to $25,000 in the
year ended June 30, 2002, from $5,300,000 in the year ended June 30, 2001. The
2002 license fee resulted from a license to Lexel Battery (Shenzhen) Co., of
China. Revenues from license and
69
other agreements depend on a small number of new business arrangements,
are sporadic and vary dramatically from period to period.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of our
joint ventures. Other revenues decreased to $364,000 in the year ended June 30,
2002 from $1,383,000 in the year ended June 30, 2001. This decrease was due to
reductions in revenues from Texaco Ovonic Battery Systems as it now performs
in-house services previously provided by Ovonic Battery. Revenues from Ovonyx
were affected by a $142,000 offset to revenues reflecting an adjustment in
revenues previously recognized.
The $13,789,000 increase in cost of product sales in the year ended June
30, 2002 resulted from the $12,394,000 increase in product sales and resulted in
a $531,000 loss on product sales in 2002, compared to $864,000 profit in 2001.
The reduced margin primarily relates to a change in estimate for our contract
with United Solar Ovonic LLC to design and build equipment making solar products
that is expected to be capable of producing on an annual basis 30 megawatts of
electrical power.
Revenues from product development agreements funded 82% of our cost of
product development in both years. The total cost of product development
increased by $18,570,000 for the year ended June 30, 2002, as we increased
spending on our core technologies. This increase in the total cost of product
development was partially offset by increased revenues of $15,104,000, resulting
in an increase of $3,466,000 in net cost of product development.
Fiscal Year Ended
June 30,
2002 2001
------------ ------------
Cost of revenues from product
development agreements $ 51,703,000 $ 36,553,000
Product development and research 12,775,000 9,355,000
------------ ------------
Total cost of product development 64,478,000 45,908,000
Revenues from product development
agreements 52,686,000 37,582,000
------------ ------------
Net cost of product development $ 11,792,000 $ 8,326,000
============ ============
The expenditures continued the development of our core technologies in
energy storage, energy generation and information technology. In addition,
product development programs include work on the Ovonic Cognitive Computer
technology. Another project, in collaboration with ChevronTexaco, was the
conversion of a 2-liter internal combustion engine to run on hydrogen.
Expenses were incurred in 2002 and 2001 in connection with the protection
of our U.S. and foreign patents covering our proprietary technologies. Total
patent expenses increased to $4,932,000 in the year ended June 30, 2002 from
$3,766,000 in the year ended June 30, 2001, principally due to litigation costs
($2,749,000 in 2002 versus $1,913,000 in 2001) for the protection of our NiMH
battery patents and technology. ChevronTexaco has agreed to share 50% of the
battery litigation expenses, other than those related to consumer batteries,
beginning in fiscal 2002. This reimbursement ($2,167,000) has been offset
against the patent defense costs for the year ended June 30, 2002.
70
Operating, general and administrative expenses are allocated to product
development and 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.
The decrease in operating, general and administrative expenses (net) from
$8,421,000 in the year ended June 30, 2001 to $7,368,000 in the year ended June
30, 2002 was due primarily to increased allocations of expenses because of the
increased level of activity for product development and research expenses and to
cost of revenues from product development agreements ($5,521,000), partially
offset by increased spending ($4,468,000) as a result of selling expenses
associated with equipment sales, personnel additions and other expenses
associated with our growth.
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Fiscal Year Ended
June 30,
2002 2001
----------- -----------
Gross Expenses $24,487,000 $20,019,000
Less - allocations to product development
and research (5,255,000) (1,714,000)
- allocations to cost of revenues
from product development agreements (11,398,000) (9,418,000)
- amortization of negative goodwill (466,000) (466,000)
----------- -----------
Remaining Expenses $ 7,368,000 $ 8,421,000
=========== ===========
The $3,600,000 decrease in other income (net) ($1,345,000 income in 2002
compared to $4,945,000 income in 2001) resulted primarily from lower interest
rates causing lower interest income ($4,727,000 in 2002 compared to $5,864,000
in 2001) on our investments and from higher equity losses attributed to losses
at United Solar Ovonic LLC ($2,944,000 in 2002 compared to $1,948,000 in 2001)
and ITS ($714,000 in 2002 compared to $48,000 in 2001) and the $1,000,000
write-off of our interest in EV Global.
We had an amortization of negative goodwill of $466,000 in both 2002 and
2001.
For the three years ended June 30, 2003, there has been no material impact
on inflation and changing prices on our revenue or on our losses from continuing
operations.
We do business in many different parts of the world and our royalty
revenues are affected by changes in foreign currencies and their exchange rates
relative to the U.S. dollar. However, the vast majority of our business
agreements are denominated in U.S. dollars and, as such, we have minimized our
exposure to currency rate fluctuations.
Liquidity and Capital Resources
As of December 31, 2003, we had consolidated cash, cash equivalents,
short-term investments and accounts and short-term note receivable (including
$4,167,000 of amounts due from related parties) of $53,845,000, a decrease of
$10,651,000 from June 30, 2003. As of
71
December 31, 2003, we had consolidated working capital of $39,828,000 compared
with a consolidated working capital of $37,795,000 as of June 30, 2003.
In November 2003, we raised a total of $27,940,000 in connection with a
sale of units to institutional investors. In January 2004, we received
$5,593,000 in connection with a sale of additional units of our securities to
two of the institutional investors.
We plan to use these proceeds for working capital and to support our
development and other operating activities.
We expect the amount of cash to be received under existing product
development agreements in the year ending June 30, 2004 to decrease to
approximately $33,648,000, compared to $42,383,000 received in the year ended
June 30, 2003, substantially due to reduced funding to be received in the year
ending June 30, 2004 from ChevronTexaco. Certain of our product development
and product purchase agreements contain provisions allowing for the termination
of such agreements for, among other things, our failure to meet agreement
milestones or for breach of material contractual provisions. Generally, the
termination provisions allow us to recover any costs incurred through the
termination date. We are engaged in discussions and negotiations
with other parties, including the U.S. government, which are expected to
provide additional funding for product development activities.
In September 2003, we were awarded two new contracts by NIST. One
contract is a three-year, cost-sharing contract (we will receive $1,972,000)
for the development of new optical routing devices, based on our phase-change
materials, for telecommunication and broadband information delivery. The second
contract is a four-year, cost-sharing contract (we will receive $2,645,000) with
GE as the team leader for further development of our roll-to-roll processing
for the mass production of products such as flexible electronic paper displays,
portable TV screens the size of posters, embedded sensors, solar powered cells
and high-efficiency lighting devices.
In October 2003, we were awarded a contract for $500,000 by the U.S.
Army Tank-Automotive and Armaments Command for the development, on behalf of
Texaco Ovonic Hydrogen Systems, of a transportable, solid-hydrogen storage and
refueling system for hydrogen fuel-cell-powered, off-road military vehicles.
In January 2004, United Solar Ovonic was awarded a four-month, $465,000
contract for the development of solar cells for an airship.
In the first phase of an equipment supply agreement with Rare Earth
Ovonic, Ovonic Battery has three contracts to supply equipment and technology
totaling $63,600,000 to its Rare Earth Ovonic joint ventures in China. As of
December 31, 2003, Ovonic Battery has received payments totaling $59,484,000
under the three contracts. Ovonic Battery has recorded revenues of $55,982,000
for the contracts, $3,502,000 less than the cash received. Therefore, in future
periods, we will receive less cash than revenues recognized to the
extent of the deferred revenues.
As of December 31, 2003, we had $24,876,000 consolidated cash,
cash equivalents and short-term investments ($1,600,000 of which was restricted)
consisting of mortgage and asset-backed securities and corporate notes,
classified as available-for-sale, maturing from 42 days to three months. It is
our policy that investments shall be rated "A" or higher by Moody's or
Standard and Poor's, no single investment shall represent more than 10% of the
portfolio and at
72
least 20% of the total portfolio shall have maturities of less than 90 days.
Due to reductions in the total portfolio, two investments represent more than
10% of the portfolio at December 31, 2003.
During the six months ended December 31, 2003, $36,461,000 of cash was
used in operations. The difference between the net loss of $27,698,000 and the
net cash used in operations was principally due to a $13,635,000 increase in
working capital (other than cash). Also contributing were noncash costs,
principally depreciation ($4,094,000) and equity in losses of joint ventures
($548,000).
We spent $809,000 on property, plant and equipment that was placed in
service during the six months ended December 31, 2003 and a balance of
$1,844,000 was in other assets at December 31, 2003 that represents deposits
and progress payments for property, plant and equipment, all of which is
expected to be placed in service during fiscal 2004. In total, we expect to
spend $3,500,000 for capital expenditures in fiscal 2004, primarily for
additions to our state-of-the-art clean room and leasehold improvements.
We had contractual obligations of $49,148,000 at June 30, 2003
and $50,118,000 at December 31, 2003. In the six months ending December 31,
2003, we incurred additional contractual obligations of $3,800,000 for
gases and stainless steel in our photovoltaic operations. On January 2, 2004,
Bekaert paid $12,000,000 to Canon in full satisfaction of our $12,000,000
obligation to Canon.
As part of our long-standing strategy, we have made investments in our
technologies, which have resulted in enabling intellectual property and
products. The technology emerging from these investments has enabled us to
finance our operations and growth through strategic alliances (joint ventures
and license agreements) with third parties who can provide financial resources
and marketing expertise for our technologies and products.
The resultant strategic alliances and joint ventures form the basis for
advancement of the commercialization of our technologies and products:
o Texaco Ovonic Battery Systems LLC - a 50/50 joint venture between
Ovonic Battery and ChevronTexaco formed to bring advanced NiMH
batteries into widespread commercial production for hybrid and
electric vehicles as well as for telecommunications and stationary
applications. ChevronTexaco is funding an initial amount up to
$178,000,000 ($118,000,000 of which has been funded as of December 31,
2003) to increase the manufacturing capacity at Texaco Ovonic Battery
Systems' facilities in Michigan and Ohio, and for market development
and advanced product development. The advanced product development is
being accomplished through a product development contract from Texaco
Ovonic Battery Systems to Ovonic Battery. The contract may be
cancelled if mutually agreed-upon business objectives and milestones
are not materially satisfied. The objectives and milestones were
developed three years ago, have been modified from time to time and
may no longer be relevant. One of the business objectives has not
been materially satisfied and the Texaco Ovonic Battery Systems
management committee has requested that the management of Texaco
Ovonic Battery Systems prepare a new business and marketing plan that
will guide the strategic direction of the venture and form the basis
for revised
73
business objectives. We recorded revenues of $3,351,000 for work
performed under the contract in the six months ended December 31,
2003 and are expected to record approximately $5 million in fiscal
2004.
o Texaco Ovonic Hydrogen Systems LLC - a 50/50 joint venture between
us and ChevronTexaco formed to further develop and advance the
commercialization of our proprietary technology to store hydrogen in
metal hydrides. ChevronTexaco is funding an initial amount of up to
$104,000,000 ($54,298,000 received through December 31, 2003),
including product and market development. A significant portion of
the funding is committed to a product development contract from Texaco
Ovonic Hydrogen Systems to us. The contract began July 1, 2000, and
may be cancelled if mutually agreed-upon milestones are not materially
satisfied. We have revenues for work performed under the contract of
$4,764,000 for the six months ended December 31, 2003 and are
expected to record approximately $12 million in fiscal 2004.
These strategic alliances, in addition to recent purchases of our former
partners' interests in the photovoltaic and fuel cell ventures, have both
near-term and long-term impacts on our capital resources. While we were able to
purchase the interests in the photovoltaic and fuel cell ventures for only
$6,000,000 and $1, respectively, we are now funding 100% of the cash
requirements for (i) United Solar Ovonic (after May 14, 2003), (ii) Ovonic Fuel
Cell (after December 31, 2002) and (iii) Ovonic Media (after January 3, 2003).
Also in connection with the purchase of Bekaert's United Solar Ovonic interests,
we provided approximately $40 million to United Solar Ovonic to terminate the
sale and leaseback agreements related to the 30MW and 5MW photovoltaic
production equipment and extinguish related guarantees provided by Bekaert.
Agreements with ChevronTexaco, Bekaert, Ovonyx and General Electric have
resulted in the acceleration of the commercialization and development of our
products and technologies. While our business partners have funded most of
our product development activities, additional sources of cash are required to
sustain our operations. We expect to continue to use significant cash to fund
our operations in the coming year and are engaged in a number of activities
to raise capital, grow revenues and reduce costs.
Since July 2003, we have implemented a series of initiatives aimed at
aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. We have met these initiatives
through the following actions taken:
o Reductions in staffing by 15% at ECD and Ovonic Battery through
reallocation and reductions ($4,500,000 in annual savings).
o Changes in the healthcare benefit program ($2,200,000 in annual
savings).
o A salary freeze for all ECD and Ovonic Battery employees and a 10%
salary reduction by the executive management team ($1,900,000 in
annual savings).
o Reduced purchased services and contract employees.
o Lower capital expenditures.
74
We are engaged in a number of negotiations and discussions to fund
our operations, including forming new strategic alliances to fund and grow our
photovoltaic, fuel cell and other businesses and raise additional capital
through equity and debt financings. In addition, we are engaged in
negotiations with government agencies for contracts to fund our development
activities. We are presently in negotiations and discussions with third
parties to refinance our 30MW production equipment. We obtained an independent
appraisal from a well-known third party that valued our 30MW equipment higher
than the $67 million equipment cost.
We believe that funds generated from operations, new business agreements,
equity and debt financings, new government contracts and the cost-containment
initiatives described above, together with existing cash and cash equivalents,
will be adequate to support our 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. We have recurring losses from
operations and are actively engaged in discussions to obtain the needed
additional working capital.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
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. We had $22,759,000 and $32,995,000 of these
investments on December 31, 2003 and June 30, 2003, respectively, including
restricted amounts of $1,600,000 at December 31, 2003 and $7,000,000 at June 30,
2003. On December 31, 2003, the investments had an average maturity of 24 days,
$7,978,000 of which had maturities of 42 days to three months. On June 30, 2003,
the investments had an average maturity of 292 days, $26,802,000 of which had
maturities of 35 days to 31 months. It is our policy that investments
shall be rated "A" or higher by Moody's or Standard and Poor's, no single
investment shall represent more than 10% of the portfolio and at least 20% of
the total portfolio shall have maturities of less than 90 days. Due to
reductions in the total portfolio, two investments represent more than 10% of
the portfolio at December 31, 2003. Our market risk primarily relates to the
risks of changes in the credit quality of issuers. As of December 31, 2003, the
risk associated with changes in interest rates is minimal due to the short
average maturity of the investments.
75
Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
On October 29, 2003, our Audit Committee was advised by our independent
auditors, Deloitte & Touche LLP, that Deloitte & Touche declined to stand for
reelection as our independent auditors, and on October 30, 2003 we received a
letter from Deloitte confirming "that the client-auditor relationship between
Energy Conversion Devices, Inc. (Commission File No. 1-8403) and Deloitte &
Touche LLP has ceased." The cessation of our client-auditor relationship with
Deloitte & Touche was not recommended or approved by our Board of Directors or
Audit Committee.
The audit report of Deloitte & Touche on our consolidated financial
statements as of and for the year ended June 30, 2003, dated October 21, 2003,
did not contain any adverse opinion or disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope or accounting principles
except that the report included explanatory paragraphs concerning (i)
substantial doubt about our ability to continue as a going concern and (ii)
effective July 1, 2002, our change in the method of accounting for goodwill and
other intangible assets to conform to Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." The audit report of
Deloitte & Touche on our consolidated financial statements as of, and for the
year ended June 30, 2002, dated September 27, 2002 did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with the audits of our two most recent fiscal years ended
June 30, 2003 and 2002 and for the period July 1, 2003 through October 30, 2003,
we had no disagreements with Deloitte & Touche on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Deloitte
& Touche, would have caused them to make reference to the subject matter of the
disagreements in connection with their reports on our consolidated financial
statements.
In connection with the audits of our two most recent fiscal years ended
June 30, 2003 and 2002 and for the period July 1, 2003 through October 30, 2003,
there were no "reportable events" as that term is defined in Item 304(a)(1)(v)
of Regulation S-K, except that Deloitte & Touche has advised us of certain
internal control matters that Deloitte & Touche believes are "reportable
conditions" under standards adopted by the American Institute of Certified
Public Accountants. The following is a summary of events and actions taken to
address and correct these conditions:
o as of June 30, 2003, an evaluation was carried out under the
supervision and with the participation of our 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-15(e) and
15d - 15(e) under the Securities Exchange Act of 1934). Based
upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, with the exception of the
items listed below, the design and operation of these disclosure
controls and procedures were effective for gathering, analyzing
and disclosing information required to be disclosed in connection
with our filing of our Annual Report on Form 10-K for the year
ended June 30, 2003;
76
o in reviewing our internal controls, it was identified that the
policies and procedures regarding employee conduct and acceptable
business practices, including expense reporting and personal use
of our assets, were not well-documented and did not adequately
communicate our expectations regarding these matters;
o recent filings of our Annual Reports on Form 10-K have been
filed in a timely manner. However, we were not able to meet
the filing deadline for the most recent Form 10-K because we
lacked the resources to address the financial reporting
related to significant and complex business transactions
entered into in fiscal year 2003;
o Deloitte has advised us that the above matters represent
"reportable conditions" under standards established by the
American Institute of Certified Public Accountants. However,
Deloitte also advised us that they believe that none of
these conditions are material weaknesses;
o since the date of the evaluation, there have been no
significant changes to our disclosure controls and procedures
or significant changes in other factors that could affect
our disclosure controls and procedures. However, as noted
below, we have taken, and are continuing to take, certain
actions designed to enhance our disclosure controls and
procedures;
o on September 1, 2003, we appointed a Director of Risk Management
and Internal Audit who is responsible for leading the assessment
of our internal controls and recommending any required changes;
o we have completed our evaluation of resources to address our
financial reporting and believe our resources are sufficient and
will provide the time necessary to prepare, and provide for
reviews by management, the Audit Committee and the Board of
Directors, and file periodic reports within the time periods
specified in the SEC's rules and regulations;
o we have taken, and are continuing to take, certain actions
designed to enhance our disclosure controls and procedures;
o we have established a Sarbanes-Oxley Section 404 Internal
Control Committee. This Committee is responsible for all phases
of this project, including an assessment of current internal
controls, developing improvements to internal controls and
testing internal controls - all leading to management's
assessment of internal controls effectiveness and our
independent public accountants' report on such attestation
of control effectiveness by management in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002;
o we have named the Director of Corporate Risk Management and
Internal Audit as the Section 404 project manager, who has
developed a project plan and has retained outside professional
advisors who are assisting in the evaluation of existing
internal controls and procedures and providing recommendations
for improvement;
o we have adopted a Code of Business Conduct and Ethics that is
applicable to all of our directors, officers and employees;
o we have established a confidential and anonymous reporting
process for the receipt of concerns regarding questionable
accounting, auditing or other business matters from employees
or other Company stakeholders; and
77
o we have instituted certain process changes to enhance the
Company's monitoring and expectations regarding expense
reporting and personal use of Company's assets.
On November 14, 2003, our Audit Committee engaged the public accounting
firm of Grant Thornton LLP as our principal independent accountants. In our two
most recent fiscal years and any subsequent interim period prior to the
engagement of Grant Thornton, neither we nor anyone acting on our behalf has
consulted Grant Thornton regarding either:
o the application of accounting principles to a specified
transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our
consolidated financial statements; and neither a written
report was provided to us nor oral advice was provided
that Grant Thornton concluded was an important factor
considered by us in reaching a decision as to the
accounting, auditing or financial reporting issue; or
o any matter that was either the subject of a "disagreement,"
as that term is defined in Item 304(a)(l)(iv) of Regulation
S-K and the related instructions to Item 304 of Regulation S-K,
or a "reportable event," as that term is defined in Item
304(a)(l)(v) of Regulation S-K.
78
MANAGEMENT
Board of Directors
Our directors are elected by the stockholders to serve until the next
annual meeting of stockholders and until their successors are duly elected and
qualified. The composition of our Board of Directors is as follows:
Director
of the
Company Principal Occupation and
Name Since Office Business Experience
------------------------ -------- ----------- ------------------------------------------
Stanford R. Ovshinsky 1960 President, Mr. Ovshinsky, 81, the founder, our President
Chief and Chief Technology Officer, has been an
Technology executive officer and director of ECD
Officer and since our inception in 1960. Mr. Ovshinsky
Director is the principal inventor of our technologies.
He also serves as the chief executive officer
and a director of Ovonic Battery; chief
executive officer and chairman of United Solar
Ovonic Corp. and United Solar Ovonic LLC;
president of Ovonic Fuel Cell Company;
president and member of the Management
Committees of Texaco Ovonic Hydrogen Systems;
a member of the Management Committee of
Texaco Ovonic Battery Systems; chairman and
director of Ovonyx; a member of the Alliance
Board of Ovonic Media; and co-chairman of
the board of directors of Sovlux. Mr.
Ovshinsky is the husband of Dr. Ovshinsky.
Iris M. Ovshinsky 1960 Vice Dr. Ovshinsky, 76, co-founder and Vice President
President of ECD, has been one of our executive officers
and Director and directors since our inception in 1960. Dr.
Ovshinsky also serves as a director of Ovonic
Battery. Dr. Ovshinsky is the wife of Mr.
Ovshinsky.
Robert C. Stempel 1995 Chairman of Mr. Stempel, 70, is our Chairman of the Board
the Board, and Chief Executive Officer. Prior to his election
Chief as a director in December 1995, Mr. Stempel
Executive served as senior business and technical advisor
Officer and to Mr. Ovshinsky. He is also the chairman of
Director Ovonic Battery; a director of United Solar
Ovonic Corp. and United Solar Ovonic LLC; vice
chairman and director of Ovonyx; a member of
the Management Committee of Texaco Ovonic
Hydrogen Systems and Texaco Ovonic Battery
Systems and a member of the Alliance Board of
Ovonic
79
Media. From 1990 until his retirement in
1992, he was the chairman and chief executive
officer of General Motors Corporation; prior to
serving as chairman, he was GM's president
since 1987. He is a director of Southwall
Technologies, Inc. and serves as chairman of
its audit committee.
Nancy M. Bacon 1977 Senior Vice Mrs. Bacon, 57, Senior Vice President, joined
President us in 1976 as our Vice President of Finance
and Director and Treasurer. Mrs. Bacon also serves as a
director of United Solar Ovonic Corp.,
United Solar Ovonic LLC and Sovlux.
Umberto Colombo 1995 Director Professor Colombo, 76, is Chairman of the
Scientific Councils of the ENI Enrico Mattei
Foundation and of the Instituto Per l'Ambiente
in Italy. He was chairman of the Italian
National Agency for New Technology, Energy
and the Environment until 1993 and then
served as Minister of Universities and
Scientific and Technological Research in the
Italian Government until 1994. Professor
Colombo is a member of the board of directors
of several Italian-based public companies.
He is also active as a consultant in
international science and technology policy
institutions related to economic growth.
Walter J. McCarthy, Jr. 1995 Director Mr. McCarthy, 78, until his retirement in
1990, was the chairman and chief executive
officer of Detroit Edison Company. Prior
to his election to our Board of Directors, he
served as a consultant to ECD. Mr. McCarthy
also served as a director and a member of the
audit committee of Comerica Bank, Federal-Mogul
Corporation and Perry Drug Company. He is a
member of the National Academy of Engineering.
Mr. McCarthy serves as chairman of the
Compensation and Nominating Committee and is a
member of the Audit Committee of our Board of
Directors.
Florence I. Metz 1995 Director Dr. Metz, 74, until her retirement in 1996,
held various executive positions with Inland
Steel: General Manager, New Ventures, Inland
Steel Company (1989-1991); General Manager,
New Ventures, Inland Steel Industries
(1991-1992) and Advanced Graphite Technologies
(1992-1993); Program Manager for Business and
Strategic Planning at Inland Steel (1993-1996).
80
Dr. Metz also serves on the Board of Directors
of Ovonic Battery and is a member of the Audit
Committee and Compensation and Nominating
Committee of our Board of Directors.
James R. Metzger 2000 Executive Mr. Metzger, 56, Executive Vice President and
Vice President, Chief Operating Officer, was Executive Vice President
Chief of Administration at Mercy College in Dobbs Ferry,
Operating New York from March 2002 - October 2003. Prior
Officer and to his retirement from ChevronTexaco on March 1,
Director 2002 following the merger of Chevron and Texaco
on October 9, 2001, he was Vice President and Chief
Technology Officer at Texaco Inc. Mr. Metzger's
responsibilities at Texaco included all aspects
of technology, corporate planning and economics,
safety, health and environment, corporate services
and purchasing. He was a member of the Diversity
Council, chaired the Corporate Technology
Council and served on Texaco's Executive Council,
Texaco's senior management committee.
Stanley K. Stynes 1977 Director Dr. Stynes, 71, was Dean, College of Engineering
at Wayne State University from 1970 to August
1985, and a professor of engineering at Wayne
State University from 1985 until his retirement
in 1992. He has been involved in various
administrative, teaching, research and related
activities. Dr. Stynes serves as chairman of
the Audit Committee of our Board of Directors.
Board Committees
The Audit Committee of our Board of Directors is composed of Dr. Stynes
(Chairman), Mr. McCarthy and Dr. Metz, all of whom are independent directors as
defined under the currently applicable rules of the Nasdaq Stock Market, Inc. In
accordance with its written charter adopted by the Board of Directors on January
29, 2004, the Audit Committee assists the Board of Directors in fulfilling its
responsibility for oversight of the quality and integrity of our accounting,
auditing, and financial reporting practices. The Audit Committee charter is
available on our website at www.ovonic.com.
Effective July 17, 2003, our management recommended and our Board of
Directors approved the restructuring of the Compensation Committee to include
the functions of a nominating committee and renaming it the Compensation and
Nominating Committee. The Compensation and Nominating Committee is composed of
Mr. McCarthy (Chairman) and Dr. Metz, both independent directors. Neither of
the Compensation and Nominating Committee members is or was during the last
fiscal year an officer or employee of ECD or any of its subsidiaries, or had
any business relationship with ECD or any of its subsidiaries. The Compensation
and Nominating Committee met three times during fiscal 2003.
81
The Compensation and Nominating Committee is responsible for administering
the policies which govern both the compensation of executive officers and our
stock option plans. The Compensation and Nominating Committee meets several
times during the year to review recommendations from management regarding stock
options and compensation. Compensation and stock option recommendations are
based upon performance, current compensation, stock option ownership, and years
of service. We do not have a formal bonus program for executives, although
we have awarded bonuses to our executives from time to time.
The Compensation and Nominating Committee is responsible for (1)
identifying individuals qualified to become Board members; (2) recommending to
the Board director nominees for election or reelection at each annual meeting of
stockholders; and (3) establishing compensation policies which govern both the
annual compensation of and grants of stock options to our senior executive
officers and our wholly and/or majority owned subsidiaries and our directors.
The specific responsibilities and functions of the Compensation and Nominating
Committee are delineated in the Compensation and Nominating Committee charter,
which is available on our website at www.ovonic.com.
Attendance at Board and Committee Meetings
During the fiscal year ended June 30, 2003, our Board of Directors held
six meetings, our Audit Committee held six meetings and our Compensation and
Nominating Committee held three meetings. All the directors attended more than
75% of the meetings of the Board of Directors and the committees on which such
directors served. We encourage all Board members to attend annual meeting of
stockholders. All but one of our directors attended the 2002 annual meeting of
stockholders.
Compensation of Directors
Our officers who serve on our Board of Directors do not receive
compensation for their services as a director. Our other directors are issued
approximately $5,000 per year in our common stock based on the closing price of
our common stock on the first business day of each year and are paid $1,000 for
attendance at each Board of Directors meeting and each Compensation and
Nominating Committee meeting (in person or via telephone conference call).
Directors serving on the Audit Committee are paid $2,000 for attendance (in
person or via telephone conference call) at each meeting. Directors who are not
employed by us are also reimbursed for all expenses incurred for the purpose of
attending Board and committee meetings, including airfare, mileage, parking,
transportation and hotel. On November 8, 2002, Messrs. Colombo, McCarthy, Stynes
and Dr. Metz each received options to purchase 5,000 shares of our common stock
at $10.40 per share under the terms of our 2000 Non-Qualified Stock Option Plan.
Compensation Committee Interlocks and Insider Participation
The Compensation and Nominating Committee is composed of Mr.
McCarthy (Chairman) and Dr. Metz. None of the Compensation and
Nominating Committee members are, or were during the past fiscal year,
officers or employees of ECD or of any of our subsidiaries, nor had they
any business relationship with ECD or any of our subsidiaries.
82
Executive Officers
At March 5, 2004, our executive officers are as follows:
Served as an
Executive
Officer or
Name Age Office Director Since
-------------------- ------- -------------------------- --------------
Stanford R. Ovshinsky 81 President, Chief 1960(1)
Technology Officer and
Director
Iris M. Ovshinsky 76 Vice President and 1960(1)
Director
Robert C. Stempel 70 Chairman of the Board, 1995
Chief Executive Officer
and Director
James R. Metzger 56 Executive Vice President, 2000
Chief Operating Officer and
Director
Nancy M. Bacon 57 Senior Vice President 1976
and Director
Hellmut Fritzsche 76 Vice President 1969
Stephan W. Zumsteg 57 Vice President and 1997
Chief Financial Officer
---------------------
(1) The predecessor of ECD was originally founded in 1960. The present
corporation was incorporated in 1964 and is the successor by merger
of the predecessor corporation.
See "Management -- Board of Directors" for biographical information
relating to Mr. Ovshinsky, Dr. Ovshinsky, Mr. Stempel, Mr. Metzger and
Mrs. Bacon.
Dr. Fritzsche was a professor of physics at the University of Chicago from
1957 until his retirement in 1996. He was chairman of the Department of Physics
at the University of Chicago until 1986. Dr. Fritzsche has been one of our vice
presidents since 1965, acting on a part-time basis, chiefly in our research and
product development activities. He serves on the board of directors of United
Solar Ovonic Corp.
Mr. Zumsteg joined us in March 1997. He was elected Treasurer in April
1997 and Vice President and Chief Financial Officer in February 2001. Mr.
Zumsteg also serves as Treasurer of Ovonic Battery, Ovonic Fuel Cell and Texaco
Ovonic Hydrogen Systems.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and officers to file with the Securities and Exchange Commission
reports of ownership and changes in ownership with respect to our securities and
to furnish copies of these reports to us. Based on a review of these reports and
written representations from our directors and officers regarding the necessity
of filing a report, we believe that during fiscal year ended June 30, 2003, all
filing requirements were met on a timely basis.
83
Executive Compensation
The following table sets forth the compensation paid to our Chief
Executive Officer and the next four most highly compensated executive officers
for the fiscal years ended June 30, 2003, 2002 and 2001.
Summary Compensation Table
Annual Long-Term
Compensation Compensation
---------------------------------- -----------------------
All
Options Other
Name and Principal Fiscal (Number Compen-
Position Year(1) Salary(2) Bonus of Shares) sation(3)
----------------- ------- ---------- ---------- ---------- ----------
Stanford R. Ovshinsky, 2003 $ 367,668 40,000 $10,781
President and Chief 2002 $ 349,713 $ 24,076 44,530(4) $12,362
Technology Officer 2001 $ 334,408 118,239(5) $10,361
Iris M. Ovshinsky, 2003 $ 314,727 25,000 $13,562
Vice President 2002 $ 299,730 29,687(4) $12,362
2001 $ 284,636 82,160(5) $10,361
Robert C. Stempel, 2003 $ 300,019 40,000 $ 4,191
Chairman and Chief 2002 $ 294,247 25,000 $ 4,191
Executive Officer(6) 2001 $ 270,004 100,000 $ 4,191
Nancy M. Bacon, 2003 $ 289,441 30,000 $10,322
Senior Vice 2002 $ 275,017 12,000 $ 8,942
President 2001 $ 264,243 60,000 $ 6,041
Subhash K. Dhar, 2003 $ 280,779 25,000 $ 9,407
President and 2002 $ 274,241 10,000 $ 8,111
Chief Operating 2001 $ 247,703 50,000 $ 5,528
Officer, Ovonic
Battery(7)
------------
(1) Our fiscal year is July 1 to June 30. Our 2003 fiscal year ended June 30,
2003.
(2) Amounts shown include compensation deferred under our 401(k) Plan.
(3) "All Other Compensation" is comprised of (i) contributions made by us to
the accounts of each of Mr. Ovshinsky, Dr. Ovshinsky, Mrs. Bacon and Mr.
Dhar under our 401(k) Plan in the amount of $8,000, $6,800 and $4,800 with
respect to calendar year ended December 31, 2002, 2001 and 2000 and (ii)
the dollar value of any life insurance premiums paid by us in the fiscal
years ended June 30, 2003 and 2002 and calendar year ended December 31,
2000 with respect to term-life insurance for the benefit of each of the
named executives as follows: Mr. Ovshinsky $2,781, $5,562 and $5,561; Dr.
Ovshinsky $5,562, $5,562 and $5,561; Mr. Stempel $4,191 (all three years);
Mrs. Bacon $2,322, $2,142 and $1,241; Mr. Dhar $1,407, $1,311 and $728.
Under the 401(k) Plan, which is a qualified defined-contribution plan, we
make matching contributions periodically on behalf of the participants.
Effective
84
October 2000, the Board of Directors approved employer matching
contribution in the amount of 100% of the first 2% and 50% of the next 4%
of each such participant's contributions. These matching contributions were
limited to 4% of a participant's salary, up to $200,000, for calendar year
2002, 4% of salary, up to $170,000, for calendar year 2001 and 3% of salary,
up to $160,000, for calendar year 2000. Mr. Stempel does not participate in
our 401(k) Plan.
(4) The stock options were issued to Mr. and Dr. Ovshinsky pursuant to Stock
Option Agreements dated November 1993 which are subject to periodic
antidilution protection adjustments based on changes in the number of
outstanding shares of our common stock. Under these Stock Option Agreements,
if we issue any equity securities, other than pursuant to the exercise of
options by Mr. and Dr. Ovshinsky under their respective Stock Option
Agreements, we are obligated to grant to Mr. and Dr. Ovshinsky additional
options covering sufficient additional shares of our common stock so that
their respective proportionate equity interest is maintained on a
fully-diluted basis. Such adjustments are calculated quarterly as of the
last day of each of our fiscal quarters and coincident with significant
issuances of our common stock. See Note H of Notes to Consolidated Financial
Statements for the Three Years Ended June 30, 2003.
(5) In fiscal year 2001, of the stock options issued to Mr. and Dr. Ovshinsky in
the amount of 118,239 shares and 82,160 shares, respectively, 18,239 shares
(Mr. Ovshinsky) and 12,160 shares (Dr. Ovshinsky) were issued pursuant to
Stock Option Agreements dated November 1993 which are subject to periodic
antidilution protection adjustments based on changes in the number of
outstanding shares of our common stock. The balance of the stock options
issued to Mr. and Dr. Ovshinsky (100,000 shares and 70,000 shares,
respectively) were granted under the 2000 Non-Qualified Stock Option Plan.
(6) See "Security Ownership of Certain Beneficial Owners and Management" for a
description of Class B common stock awarded to Mr. Stempel under a
Restricted Stock Agreement dated January 15, 1999. All shares of restricted
stock will be deemed to vest if Mr. Stempel is serving as one of our
directors and officers on September 30, 2005 or upon the occurrence of a
change in control of ECD.
(7) Mr. Dhar departed ECD in November 2003.
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Option Grants in Last Fiscal Year
The following table sets forth all options granted to the named executive
officers during the fiscal year ended June 30, 2003.
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term(1)
--------------------------------------------------- -----------------------------
Number of Percent of
Securities Total
Underlying Options Exercise
Options Granted of Base
Granted to Employees Price Expiration
Name (#) in Fiscal Year ($/Sh) Date 5% 10%
-------------------- ---------- -------------- -------- ---------- ------------ -------------
Stanford R. Ovshinsky 40,000 6.27% $10.40 11/08/12 $ 261,620 $ 662,997
Robert C. Stempel 40,000 6.27% $10.40 11/08/12 $ 261,620 $ 662,997
Nancy M. Bacon 30,000 4.70% $10.40 11/08/12 $ 196,215 $ 497,248
Iris M. Ovshinsky 25,000 3.92% $10.40 11/08/12 $ 163,513 $ 414,373
Subhash K. Dhar(2) 25,000 3.92% $10.40 11/08/12 $ 163,513 $ 414,373
---------------
(1) The potential realizable value amounts shown illustrate the values
that might be realized upon exercise immediately prior to
the expiration of their term using 5% and 10% appreciation
rates as required to be used in this table by the Securities
and Exchange Commission, compounded annually, and are not
intended to forecast possible future appreciation, if any,
of our stock price. Additionally, these values do not take
into consideration the provisions of the options providing
for nontransferability or termination of the options
following termination of employment.
(2) Mr. Dhar departed ECD in November 2003.
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Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values
None of the named executives exercised any stock options during the fiscal
year ended June 30, 2003. The following table sets forth the number and value of
unexercised options held by the named executive officers at fiscal year end.
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised in-the-Money Options
on Exercise Realized Options at Fiscal Year End at Fiscal Year End
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---------------------- ----------- -------- -------------------------- -------------------------
Robert C. Stempel(1) _ _ 656,500/87,500 $0/$0
Stanford R. Ovshinsky(2) _ _ 656,456/80,000 $0/$0
Iris M. Ovshinsky(3) _ _ 447,138/53,000 $0/$0
Nancy M. Bacon(4) _ _ 194,600/57,600 $0/$0
Subhash K. Dhar(5) _ _ 81,040/48,000 $0/$0
(1) Mr. Stempel's exercisable and unexercisable options are exercisable at a
weighted average price of $14.09 and $17.10 per share, respectively.
(2) Mr. Ovshinsky's exercisable and unexercisable options are exercisable at a
weighted average price of $14.61 and $16.51 per share, respectively.
(3) Dr. Ovshinsky's exercisable and unexercisable options are exercisable at a
weighted average price of $14.70 and $16.90 per share, respectively.
(4) Mrs. Bacon's exercisable and unexercisable options are exercisable at a
weighted average price of $15.42 and $16.30 per share, respectively.
(5) Mr. Dhar's exercisable and unexercisable options are exercisable at a
weighted average price of $19.50 and $16.30 per share, respectively. As a
result of his departure from ECD in November 2003, Mr. Dhar's exercisable
and unexercisable options will expire according to the terms of the
respective plans pursuant to which they were granted.
Employment Agreements
On September 2, 1993, Mr. Ovshinsky entered into separate employment
agreements with each of ECD and Ovonic Battery in order to define clearly his
duties and compensation arrangements and to provide to each company the benefits
of his management efforts and future inventions. The initial term of each
employment agreement was six years. In February 1999, the boards of directors of
ECD and Ovonic Battery renewed each of Mr. Ovshinsky's employment agreements for
an additional term ending September 30, 2005. Mr. Ovshinsky's employment
agreement with ECD provides for an annual salary of not less than $100,000,
while his agreement with Ovonic Battery provides for an annual salary of not
less than $150,000. Both agreements provide for annual increases to reflect
increases in the cost of living, discretionary annual increases and an annual
bonus equal to 1% of our pre-tax income (excluding Ovonic Battery) and 1% of the
operating income of Ovonic Battery. Mr. Ovshinsky's annual salary increases are
determined based upon increases in the cost of living as
87
determined by the Compensation and Nominating Committee using as a guide the
percentage increase in the Consumer Price Index for the Detroit-metropolitan
area published by the Bureau of Labor Statistics. In recognition and
acknowledgement of Mr. Ovshinsky's invaluable contributions, the Compensation
and Nominating Committee determined that Mr. Ovshinsky's salary increase in
fiscal years 2003, 2002 and 2001 should be above the nominal cost-of-living
increase.
Mr. Ovshinsky's employment agreement with Ovonic Battery additionally
contains a power of attorney and proxy from ECD providing Mr. Ovshinsky with the
right to vote the shares of Ovonic Battery held by ECD following a change in
control of ECD. For purposes of the agreement, change in control means (i) any
sale, lease, exchange or other transfer of all or substantially all of our
assets; (ii) the approval by our stockholders of any plan or proposal of our
liquidation or dissolution; (iii) the consummation of any consolidation or
merger of ECD in which we are not the surviving or continuing corporation; (iv)
the acquisition by any person of 30% or more of the combined voting power of our
then outstanding securities having the right to vote for the election of
directors; (v) changes in the constitution of the majority of our Board of
Directors; (vi) the holders of our Class A common stock ceasing to be entitled
to exercise their preferential voting rights other than as provided in our
charter and (vii) bankruptcy. In the event of mental or physical disability or
death of Mr. Ovshinsky, the foregoing power of attorney and proxy will be
exercised by Dr. Ovshinsky.
Pursuant to his employment agreement with Ovonic Battery, Mr. Ovshinsky
was granted stock options, exercisable at a price of $16,129 per share, to
purchase 186 shares (adjusted from a price of $50,000 per share to purchase 60
shares pursuant to the anti-dilution provisions of the option agreement) of
Ovonic Battery's common stock, representing approximately 6% of Ovonic Battery's
outstanding common stock. The Ovonic Battery stock options vested on a quarterly
basis over six years commencing with the quarter beginning October 1, 1993, and
are now fully vested.
In February 1998, our Compensation and Nominating Committee recommended
and our Board of Directors approved an Employment Agreement between ECD and Dr.
Ovshinsky. The purpose of the Employment Agreement is to clearly define Dr.
Ovshinsky's duties and compensation arrangements. The Employment Agreement also
provides for ECD to have the benefits of Dr. Ovshinsky's services as a
consultant to us following the termination of her active employment for
consulting fees equal to 50% of the salary payable to Dr. Ovshinsky at the date
of the termination of her active employment. Dr. Ovshinsky has the right to
retire at any time during her services as a consultant and receive retirement
benefits equal to the consulting fees for the remainder of Dr. Ovshinsky's life.
The initial term of Dr. Ovshinsky's employment period was until September
2, 1999 and is automatically renewed for successive one-year periods unless
terminated by Dr. Ovshinsky or ECD upon 120 days' notice in advance of the
renewal date. Dr. Ovshinsky's employment agreement provides for an annual salary
of not less than $250,000, annual increases to reflect increases in the cost of
living and discretionary annual increases.
On January 15, 1999, we entered into an Executive Employment Agreement
with Mr. Stempel and a Restricted Stock Agreement awarding Mr. Stempel 430,000
shares of Class B common stock. The Executive Employment Agreement provides that
Mr. Stempel will serve as our Executive Director for a term ending September 30,
2005. During the term of his employment, Mr. Stempel will be entitled to receive
an annual salary as determined from time to time. The Executive Employment
Agreement also provides for discretionary bonuses based on
88
Mr. Stempel's individual performance and our financial performance. The
Executive Employment Agreement also requires us to provide Mr. Stempel with
non-wage benefits of the type provided generally by us to our senior executive
officers.
The Executive Employment Agreement permits Mr. Stempel to retire as one of
our officers and employees and will permit him to resign his employment at any
time in the event he becomes subject to any mental or physical disability which,
in the good faith determination of Mr. Stempel, materially impairs his ability
to perform his regular duties as our officer. The Executive Employment Agreement
permits us to terminate Mr. Stempel's employment upon the occurrence of certain
defined events, including the material breach by Mr. Stempel of certain
non-competition and confidentiality covenants contained in the Executive
Employment Agreement, his conviction of certain criminal acts or his gross
dereliction or malfeasance of his duties as one of our officers and employees
(other than as a result of his death or mental or physical disability).
Mr. Stempel's entitlement to compensation and benefits under the Executive
Employment Agreement will generally cease effective upon the date of the
termination of his employment, except that we will be required to continue to
provide Mr. Stempel and his spouse with medical, disability and life insurance
coverage for the remainder of their lives or until the date they secure
comparable coverage provided by another employer.
Compensation and Nominating Committee Report
Effective July 17, 2003, our management recommended and the Board
of Directors approved the restructuring of the Compensation Committee to
include the functions of a nominating committee and renaming it the
Compensation and Nominating Committee. The Compensation and Nominating
Committee is composed of Mr. McCarthy (Chairman) and Dr. Metz.
The Compensation and Nominating Committee is responsible for administering
the policies which govern both annual compensation of executive officers and our
stock option plans. The Compensation and Nominating Committee meets several
times during the year to review recommendations from management regarding stock
options and compensation. Compensation and stock option recommendations are
based upon performance, current compensation, stock option ownership, and years
of service to us. We do not have a formal bonus program for executives, although
we have awarded bonuses to our executives from time to time.
The Compensation and Nominating Committee also assists in identifying and
recommending qualified individuals to serve on our Board of Directors and
proposes a slate of nominees for election at the annual meeting of stockholders.
Compensation of Executive Officers
The Compensation and Nominating Committee considers our financial position
and other factors in determining the compensation of our executive officers.
These factors include remaining competitive within the relevant hiring market -
whether scientific, managerial or otherwise - so as to enable us to attract and
retain high quality employees, and, where appropriate, linking a component of
compensation to the performance of our common stock, such as by a granting of
stock option or similar equity-based compensation, to instill ownership thinking
and align the employees' and stockholders' objectives. We have been successful
at
89
recruiting and retaining and motivating executives who are highly talented,
performance-focused and entrepreneurial.
Salary and Bonus
Salary is paid for ongoing performance. During our fiscal year 2003, the
Compensation and Nominating Committee determined that we had achieved several
important scientific and business milestones. The Committee also concluded that
the achievement of these milestones had not yet been fully reflected in our
financial results. However, the Compensation and Nominating Committee
determined that it was advisable to raise executive base salaries. We do not
have a formal bonus program for executives. There were no bonuses awarded to
our executives for the fiscal year ended June 30, 2003.
In light of our cost-containment initiatives, the salaries of senior
executives were reduced by 10 percent effective September 1, 2003.
Stock Options
The Compensation and Nominating Committee considers stock options to be an
extremely effective incentive for executive officers and other employees. Such
options also encourage executives to remain with us because they vest over a
period of years. During fiscal year 2003, the Compensation and Nominating
Committee approved the grant of stock options to senior executives. The number
of stock options granted to our five most highly paid executive officers is
described in "Management -- Executive Compensation."
Our employees and our majority-owned subsidiaries also participate in the
broad-based stock option program.
Chief Executive Officer Compensation (Fiscal Year 2003)
In September 1993, Mr. Ovshinsky entered into separate employment
agreements with each of ECD and Ovonic Battery. The purpose of these agreements,
which provide for the payment to Mr. Ovshinsky of an annual salary of not less
than $250,000 by us and by Ovonic Battery, was to define clearly Mr. Ovshinsky's
duties and compensation arrangements and to provide to each company the benefits
of his management efforts and future inventions. See "Management -- Employment
Agreements." Mr. Ovshinsky's compensation for fiscal year 2003 was determined in
accordance with his Employment Agreements with ECD and Ovonic Battery and
included a discretionary increase above the nominal cost-of-living increase. Mr.
Ovshinsky did not receive a bonus during fiscal year 2003.
COMPENSATION AND NOMINATING COMMITTEE
Walter J. McCarthy, Jr.
Florence I. Metz
90
Performance Graph
The line graph below compares the cumulative total stockholder return on
our common stock over a five-year period with the return on the Nasdaq Stock
Market -- U.S. Index and the Russell 2000 Index.
Cumulative Total Return
-------------------------------------------------------------------
6/98 6/99 6/00 6/01 6/02 6/03
ENERGY CONVERSION DEVICES, INC. 100.00 102.58 261.94 289.03 161.96 97.03
NASDAQ STOCK MARKET (U.S.) 100.00 143.67 212.43 115.46 78.65 87.33
RUSSELL 2000 100.00 101.50 116.04 116.80 106.67 104.92
The total return with respect to Nasdaq Stock Market -- U.S. Index and the
Russell 2000 Index assumes that $100 was invested on June 30, 1998, including
reinvestment of dividends.
We have not paid any cash dividends in the past and do not expect to pay
any in the foreseeable future.
The Report of the Compensation and Nominating Committee on Executive
Compensation and the Performance Graph are not deemed to be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
or Securities Exchange Act of 1934, as amended, or incorporated by reference in
any documents so filed.
Audit Committee Report
The Audit Committee is comprised of three directors, all of whom are
independent directors as defined under applicable rules of the Nasdaq Stock
Market, Inc.
In accordance with its written charter adopted by the Board of Directors,
the Audit Committee assists the Board of Directors in fulfilling its
responsibility for oversight of the quality
91
and integrity of our accounting, auditing, and financial reporting practices.
The Audit Committee reviews our financial reporting process on behalf of the
Board. Management has the primary responsibility for the financial statements
and the reporting process. Our independent auditors are responsible for
performing an audit in accordance with auditing standards generally accepted in
the United States of America to obtain reasonable assurance that our
consolidated financial statements are free from material misstatement and
expressing an opinion on the conformity of the financial statements with
accounting principles generally accepted in the United States of America. The
recently appointed Director of Risk Management and Internal Audit is responsible
to the Audit Committee and the Board for testing the integrity of the financial
accounting and reporting control systems and such other matters as the Audit
Committee and the Board determine. During fiscal year 2003, the Audit Committee
met six times with management and our independent auditors and discussed the
interim financial information contained in each quarterly earnings report prior
to public release.
In discharging its oversight responsibility as to the audit process, the
Audit Committee obtained from the independent auditors a formal written
statement describing all relationships between the auditors and us that might
bear on the auditors' independence consistent with Independence Standards Board
Standard No. 1, "Independence Discussions with Audit Committees," discussed with
the auditors any relationships that may impact their objectivity and
independence and satisfied itself as to the auditors' independence. The Audit
Committee also discussed with management and independent auditors the quality
and adequacy of our internal controls. The Audit Committee reviewed with our
independent auditors their audit plans, audit scope, and identification of audit
risks.
The Audit Committee discussed and reviewed with the independent auditors
all communications required by generally accepted auditing standards, including
those described in Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees," and, with and without management present,
discussed and reviewed the results of the independent auditors' examination of
the consolidated financial statements.
The Audit Committee reviewed with management and the independent auditors
our audited financial statements as of and for the fiscal year ended June
30, 2003. Management represented to the Audit Committee that our
consolidated financial statements were prepared in accordance with generally
accepted accounting principles in the United States of America, and the Audit
Committee has reviewed and discussed the consolidated financial statements with
management, the internal auditor and the independent auditors.
Based on the above-mentioned reviews and discussions with management and
the independent auditors, the Audit Committee recommended to the Board of
Directors that the audited consolidated financial statements be included in
our Annual Report on Form 10-K for the fiscal year ended June 30, 2003, for
filing with the Securities and Exchange Commission.
AUDIT COMMITTEE
Stanley K. Stynes, Chairman
Walter J. McCarthy Jr.
Florence I. Metz
Independent Auditor Fees
The following table presents aggregate fees for professional audit
services rendered by Deloitte & Touche LLP ("Deloitte"), our former
independent auditors, for the fiscal years ended
92
June 30, 2003 and 2002, and fees billed for other services rendered by
Deloitte during those periods.
(1) Audit Fees -- These are fees for professional services performed by
Deloitte for the audit of our annual financial statements and
review of financial statements included in our 10-Q filings, and
services that are normally provided in connection with statutory
and regulatory filings or engagements.
(2) Audit-Related Fees -- These are fees for the assurance and related
services performed by Deloitte that are reasonably related to the
performance of the audit or review of our financial statements.
(3) Tax Fees -- These are fees for professional services performed by
Deloitte with respect to tax compliance, tax advice and tax planning.
(4) All Other Fees -- These are fees for permissible work performed by
Deloitte that does not meet the above categories. For 2002 and 2003,
this consists of consulting services for improving controls and
efficiency of our procurement process.
During fiscal year 2003, the Audit Committee approved all audit and
non-audit services provided to us by Deloitte prior to management
engaging Deloitte for that purpose. The Committee's current practice is to
consider for pre-approval annually all audit and non-audit services proposed to
be provided by our independent auditors for the fiscal year. In accordance with
the Committee's current policy, additional fees related to audit services
proposed to be provided within the scope of the approved engagement may be
approved by management, so long as the fees for such additional services are
consistent with historical experience, and are reported to the Audit Committee
at the next regularly scheduled Committee meeting. Additional fees for other
proposed audit related or non-audit services (not within the scope of the
approved engagement) may be considered and, if appropriate, approved by the
Chairman of the Audit Committee if such additional fees constitute five percent
or less of the approved budget, otherwise the Audit Committee must approve all
additional audit related and non-audit services to be performed by the
independent auditor. The Audit Committee has considered that the provision of
non-audit services rendered by Deloitte was compatible with maintaining
Deloitte's independence.
The Audit Committee pre-approves all audit and non-audit services provided
by the independent auditors prior to the engagement of the independent auditors
with respect to such services. The Chairman of the Audit Committee has been
delegated the authority by the Committee to pre-approve the engagement of the
independent auditors when the entire Committee is unable to do so. The Chairman
must report all such pre-approvals to the entire Audit Committee at the next
committee meeting.
93
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRMI (ChevronTexaco). Pursuant to our Stock Purchase Agreement with TRMI
dated as of May 1, 2000, ChevronTexaco, through its TRMI unit, purchased a 20%
equity stake in our common stock for $67.4 million. As part of this Stock
Purchase Agreement, ChevronTexaco received rights to purchase additional shares
of our common stock or our other equity securities.
So long as ChevronTexaco owns more than 5% of our common stock and in the
event we issue additional equity securities other than to ChevronTexaco,
ChevronTexaco has the right to purchase additional equity securities in order
for ChevronTexaco to maintain its same proportionate interest in our common
stock as ChevronTexaco held prior to the issuance of the additional equity
securities. If ChevronTexaco elects to purchase our common stock, the purchase
price will be the average of the closing price on the Nasdaq Stock Market of our
common stock as reported in The Wall Street Journal for the five trading days
prior to the closing date of the sale multiplied by the number of shares of our
common stock which ChevronTexaco is entitled to purchase. If ChevronTexaco does
not exercise its right to purchase additional equity securities within 15 days
after delivery of a notice from us, ChevronTexaco's right to purchase such
additional equity securities which are the subject of the notice will terminate.
ChevronTexaco waived its purchase rights in connection with our recent offering
of shares of common stock and stock purchase warrants to institutional
investors.
Donald L. Paul, Vice President and Chief Technology Officer of
ChevronTexaco, and Greg M. Vesey, President of ChevronTexaco Technology
Ventures, served as our directors from 2001 through September 2003.
ChevronTexaco is entitled to designate one nominee to our Board of Directors
for so long as it owns more than 5% of our common stock and is entitled to
designate two nominees, or one-fifth of the number of directors on our Board
of Directors then serving, for so long as ChevronTexaco owns 10% of our common
stock. There presently are no ChevronTexaco designated nominees serving on our
Board of Directors.
Ovonic Fuel Cell Company. Effective as of December 31, 2002, we purchased
the 50% interest of ChevronTexaco in Texaco Ovonic Fuel Cell Company. This
company is now owned 100% by us and has been renamed Ovonic Fuel Cell Company.
Stanford R. Ovshinsky serves as president of Ovonic Fuel Cell Company and, until
December 31, 2002, served as a member of the Management Committee of Texaco
Ovonic Fuel Cell Company. Until December 31, 2002, Robert C. Stempel served on
the Management Committee of Texaco Ovonic Fuel Cell Company. Mr. Vesey, one of
our former directors, served on the Management Committee of Texaco Ovonic Fuel
Cell Company until December 31, 2002. For the years ended June 30, 2003, 2002
and 2001, we recorded revenues of $4,022,000, $8,887,000 and $8,831,000,
respectively, from Texaco Ovonic Fuel Cell for product development services.
During the six months ended December 31, 2002, we recorded revenues of
$3,942,000 for services provided to this joint venture. For the period
subsequent to December 31, 2002, we have not recorded revenues from Ovonic Fuel
Cell Company.
Texaco Ovonic Hydrogen Systems. Mr. Ovshinsky and Mr. Stempel are members
of the Management Committee of Texaco Ovonic Hydrogen Systems. Mr. Ovshinsky
serves as president of Texaco Ovonic Hydrogen Systems. Mr. Vesey, one of our
former directors, is a member of the Management Committee of Texaco Ovonic
Hydrogen Systems. We own 50% of Texaco Ovonic Hydrogen Systems. For the years
ended June 30, 2003, 2002 and 2001, we recorded revenues of $13,651,000,
$18,581,000 and $11,818,000, respectively, from Texaco Ovonic Hydrogen Systems,
primarily for market development and advanced product
94
development work. During the six months ended December 31, 2003 and 2002, we
recorded revenues of $4,764,000 and $6,744,000, respectively, from this joint
venture.
Texaco Ovonic Battery Systems. Mr. Ovshinsky and Mr. Stempel are members
of the Management Committee of Texaco Ovonic Battery Systems. Mr. Vesey, one of
our former directors, is a member of the Management Committee of Texaco Ovonic
Battery Systems. Ovonic Battery owns 50% of Texaco Ovonic Battery Systems. For
the years ended June 30, 2003 and 2002, Ovonic Battery recorded revenues of
$12,367,000 and $16,315,000 from Texaco Ovonic Battery Systems, primarily for
advanced product development and market development work. Ovonic Battery
recorded revenues from Texaco Ovonic Battery Systems of $3,351,000 and
$5,465,000 for the six months ended December 31, 2003 and 2002, respectively.
Ovonyx. Mr. Ovshinsky is chairman and a director of Ovonyx. Mr. Stempel is
vice chairman and a director of Ovonyx. We currently own 41.7% of Ovonyx. We
recorded revenues from Ovonyx of $162,000, $215,000 and $382,000 for the years
ended June 30, 2003, 2002 and 2001, respectively, representing services
performed for its operations, which commenced on January 15, 1999. We recorded
revenues of $71,000 and $86,000, respectively, for the six months ended
December 31, 2003 and 2002. We made a capital contribution of $1,000,000 to
Ovonyx in the year ended June 30, 2003 in exchange for technology previously
contributed by us to Ovonyx and an exclusive royalty-bearing license.
Ovonic Media. Mr. Ovshinsky and Mr. Stempel are members of the Alliance
Board of Ovonic Media. We have a 49% interest in this joint venture. For the
years ended June 30, 2003, 2002 and 2001, we had revenues of $615,000,
$1,923,000 and $2,298,000, respectively, from Ovonic Media for providing product
development services. We recorded revenues from Ovonic Media of $605,000 for the
six months ended December 31, 2002. GE informed us that additional
funding after January 3, 2003 was suspended.
United Solar Ovonic LLC. This entity was formed on April 11, 2000 as
Bekaert ECD Solar Systems LLC. 60% of the membership interest was owned by
Bekaert Corporation and the remaining 40% was and continues to be owned by
United Solar Ovonic Corp. (formerly known as United Solar Systems Corp.). From
April 11, 2000 to May 14, 2003, when we acquired Bekaert's 60% interest, the
financial statements of United Solar Ovonic LLC were not included in our
consolidated financial statements. Beginning May 15, 2003, we consolidated the
financial statements of United Solar Ovonic LLC within our own financial
statements. For the years ended June 30, 2003, 2002 and 2001, we recorded
revenues from United Solar Ovonic LLC of $6,267,000, $10,121,000 and $9,948,000,
respectively, for product sales. Revenues from United Solar Ovonic LLC were zero
and $305,000 for the six months ended December 31, 2003 and 2002,
respectively.
Southwall. Mr. Stempel is a member of the board of directors of Southwall.
For the years ended June 30, 2003, 2002 and 2001, we had revenues of $223,000,
$9,000 and $30,000, respectively, from Southwall under a contract to build
large-area deposition equipment. The completed equipment was shipped to
Southwall in July 2000. We recorded no revenues from Southwall for either of the
six-month periods ended December 31, 2003 or 2002.
Other Arrangements. Herbert Ovshinsky, Mr. Ovshinsky's brother, is
employed by us as Director of the Production Technology and Machine Building
Division working principally in the design of manufacturing equipment. He
received $200,012 in salary during the year ended June 30, 2003.
95
Benjamin Ovshinsky, Mr. Ovshinsky's son, is employed by us as our business
representative for western United States. He received compensation of
$82,044 during the year ended June 30, 2003.
HKO Media, Inc., owned by Harvey Ovshinsky, Mr. Ovshinsky's son,
performed video production services on our behalf. HKO Media, Inc.
was paid $343,479 by us for its services during the fiscal year ended
June 30, 2003.
LEGAL MATTERS
The validity of the shares of common stock offered hereby has been passed
upon by Roger John Lesinski, Esq., the General Counsel of ECD.
EXPERTS
The consolidated financial statements as of June 30, 2003 and 2002, and
for each of the three years in the period ended June 30, 2003, including in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and contains explanatory paragraphs relating
to (i) our change in method of accounting for goodwill and other
intangible assets in fiscal year 2003, and (ii) substantial doubt about our
ability to continue as a going concern), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus, which is part of the registration
statement, omits certain information, exhibits, schedules and undertakings set
forth in the registration statement. For further information pertaining to us
and our common stock, reference is made to such registration statement and the
exhibits and schedules to the registration statement. Statements contained in
this prospectus as to the contents or provisions of any documents referred to in
this prospectus are not necessarily complete, and in each instance where a copy
of the document has been filed as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matters
involved.
You may read and copy all or any portion of the registration statement
without charge at the office of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the registration statement may be obtained from the SEC at
prescribed rates from the Public Reference Room of the SEC at such address. In
addition, registration statements and certain other filings made with the SEC
electronically are publicly available through the SEC's web site at www.sec.gov.
The registration statement, including all exhibits and amendments to the
registration statement, has been filed electronically with the SEC.
We will furnish copies of the registration statement, exhibits and any
amendments upon request made to our General Counsel, 2956 Waterview Drive,
Rochester Hills, Michigan 48309. We charge $.50 per page to cover expenses of
copying and mailing.
96
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
SEC Registration Fee....................... $ 1,122
Printing and Engraving Fees................ 500
Legal Fees and Expenses.................... 2,000
Accounting Fees and Expenses............... 2,000
Blue Sky Fees and Expenses................. 500
Transfer Agent and Registrar Fees.......... 1,000
Miscellaneous.............................. 1,000
-------
Total..................... $ 8,122
=======
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation -- a derivative action), if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, bylaws,
disinterested director vote, stockholder vote, agreement or otherwise. Article
Eleven of our Certificate of Incorporation generally provides that we will be
obligated to indemnify our officers and directors to the fullest extent
permitted by Delaware law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation will not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit.
Article Thirteen of our Certificate of Incorporation provides that no
director will be personally liable to us or any of our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to us or our stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to section 174 of the Delaware General
97
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit. Any repeal or modification of such Article Thirteen
may not adversely affect any right or protection of a director for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
We maintain insurance policies under which our directors and officers are
insured, within the limits and subject to the limitations of such policies,
against certain expenses in connection with the defense of, and certain
liabilities which might be imposed as a result of, actions, suits or proceedings
to which they are parties by reason of being or having served as our directors
or officers.
Item 15. Recent Sales of Unregistered Securities.
On November 7, 2003, we sold 2,388,915 shares of our common stock pursuant
to Rule 506 of Regulation D. Additionally, in connection with such sale, we
issued warrants to purchase an aggregate of 2,388,915 shares of our common
stock. None of the shares of common stock issuable upon exercise of these
warrants are currently outstanding. The aggregate offering price for these
sales was $25,000,000, and the aggregate commission paid was $875,000 plus
warrants to purchase 71,429 shares of our common stock.
On November 12, 2003, we sold an additional 304,000 shares of our common
stock pursuant to Rule 506 of Regulation D. Additionally, in connection with
such sale, we issued warrants to purchase an aggregate of 304,000 shares of our
common stock. None of the shares of common stock issuable upon exercise of these
warrants are currently outstanding. The aggregate offering price for these sales
was $2,868,000, and the aggregate commission paid was $100,000 plus warrants to
purchase 8,195 shares of our common stock.
The 2,692,915 shares sold in November 2003 and the 2,692,915 shares
issuable upon exercise of the warrants issued in November 2003 were registered
with the Securities and Exchange Commission on Form S-1, Registration No.
333-111500 effective January 8, 2004.
On January 9, 2004, we sold an additional 573,339 shares of our common
stock to the selling stockholders pursuant to Rule 506 of Regulation D.
Additionally, in connection with such sale, we issued warrants to purchase an
aggregate of 573,339 shares of our common stock. None of the shares of common
stock issuable upon exercise of these warrants are currently outstanding. The
aggregate offering price for these sales was $5,593,000, and the aggregate
commission paid was $131,000 plus warrants to purchase 10,653 shares of our
common stock.
During the fiscal years ended June 30, 2003, 2002 and 2001, we issued
2,844, 1,310 and 2,000 shares of restricted common stock, respectively, to our
independent, nonemployee directors as compensation of approximately $5,000 per
year based on the closing price of our common stock on the first business day
of each year.
During the fiscal years ended June 30, 2002 and 2001, we issued 448,358
and 185,475 shares of restricted common stock, respectively, to TRMI Holdings
Inc. for approximately $8.9 million and $5.4 million, respectively.
In each case, the issuances were to persons who had complete access to all
material information relating to us. Accordingly, we claim exemption
from the registration requirements of Section 5 of the Securities Act of 1933
pursuant to Section 4(2) of that Act, no public offering having been involved.
98
During the fiscal year ended June 30, 2003, we issued 390 shares of our
common stock to four persons for no consideration pursuant to their exchange of
certain Convertible Investment Certificates for Common Stock. We claim exemption
from the registration requirements of Section 5 of the Securities Act of 1933
pursuant to Section 3(a)(9) of that Act, for an exchange of securities with an
existing security holder exclusively, where no commission or other remuneration
is paid for soliciting such exchange.
Item 16. Exhibits and Financial Statement Schedules.
Financial Statements:
Financial Statements filed as a part of this registration statement are
listed in the Index to Financial Statements on page F-1.
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
99
Exhibits (including those incorporated by reference):
Page or
Reference
---------
3.1 Restated Certificate of Incorporation filed (a)
September 29, 1967
3.2 Certificate of Amendment to Certificate of (b)
Incorporation filed February 24, 1998, increasing
authorized shares of our common stock from
15,000,000 shares to 20,000,000 shares
3.3 Certificate of Amendment to Certificate of (c)
Incorporation filed January 27, 2000 increasing
authorized shares of our common stock from
20,000,000 shares to 30,000,000
3.4 Certificate of Amendment to Certificate of (d)
Incorporation filed March 25, 1999 extending
voting rights of our Class A common stock,
increasing the authorized capital stock of our
common stock to 20,930,000 shares, and
authorizing 430,000 shares of Class B common
stock
3.5 Bylaws in effect as of July 17, 1997 (e)
3.6 Amendment to Article II of the Bylaws effective (f)
as of January 29, 2004
3.7 Amendment to Article VIII of the Bylaws effective (g)
as of March 18, 2004
4.1 Agreement among the Company, Stanford R. (h)
Ovshinsky and Iris M. Ovshinsky relating to the
automatic conversion of Class A common stock into
our common stock upon the occurrence of certain
events, dated September 15, 1964
4.2 Form of Stock Purchase Agreement between ECD and each *
of Heimdall Investments Ltd. and CCM Master Qualified
Fund, Ltd.
4.3 Form of Common Stock Purchase Warrant, for the right to *
purchase shares of ECD Common Stock, issued to each of
Heimdall Investments Ltd. and CCM Master Qualified Fund,
Ltd.
5.1 Opinion of Roger John Lesinski, Esq., General *
Counsel of ECD
10.1 Executive Employment Agreement dated as of (i)
September 2, 1993 between the Company, Ovonic
Battery Company, Inc. and Stanford R. Ovshinsky
10.2 Executive Employment Agreement dated as of (j)
September 2, 1993 between the Company and
Stanford R. Ovshinsky
10.3 Stock Option Agreement by and between Ovonic (k)
Battery Company, Inc. and Stanford R. Ovshinsky
dated as of November 18, 1993
100
10.4 Stock Option Agreement by and between the Company (l)
and Stanford R. Ovshinsky dated as of
November 18, 1993
10.5 Stock Option Agreement by and between the Company (m)
and Iris M. Ovshinsky dated as of November 18,
1993
10.6 Energy Conversion Devices, Inc. 1995 (n)
Non-Qualified Stock Option Plan
10.7 Executive Employment Agreement dated as of (o)
February 19, 1998 between the Company and Iris M.
Ovshinsky
10.8 Executive Employment Agreement, Restricted Stock (p)
Agreement and Stock Option Agreement dated as of
January 15, 1999 between the Company and Robert
C. Stempel
10.9 Stock Purchase Agreement by and between the (q)
Company and TRMI Holdings Inc. dated as of May 1,
2000
10.10 Limited Liability Agreement of Texaco Ovonic (r)
Hydrogen Systems LLC dated as of October 31, 2000
by and between Texaco Energy Systems Inc. and
Energy Conversion Devices, Inc.
10.11 Amended and Restated Operating Agreement of (s)
Texaco Ovonic Battery Systems LLC (f/k/a GM
Ovonic L.L.C.) dated as of July 17, 2001 by and
between Texaco Energy Systems Inc. and Ovonic
Battery Company, Inc.
10.12 Purchase, Sale and Termination Agreement by and (t)
between Bekaert Corporation, N.V. Bekaert S.A.,
and Energy Conversion Devices, Inc. dated May 14,
2003
21.1 List of all direct and indirect subsidiaries of (u)
the Company
23.1 Consent of former Independent Auditors *
23.2 Consent of Roger John Lesinski, Esq. (included in *
Exhibit 5.1)
--------------
* Filed herewith.
101
Notes to Exhibit List
(a) Filed as Exhibit 2-A to our Form 8-A and incorporated herein by reference.
(b) Filed as Exhibit 3.5 to our Registration Statement on Form S-3
(Registration No. 333-50749) and incorporated herein by reference.
(c) Filed as Exhibit 3.6 to our Registration Statement on Form S-3
(Registration No. 333-33266) and incorporated herein by reference.
(d) Filed as Exhibit 3.3 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 1999 and incorporated herein by reference.
(e) Filed as Exhibit 3.10 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1997, as amended, and incorporated herein by
reference.
(f) Filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2003 and incorporated herein by reference.
(g) Filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2003 and incorporated herein by reference.
(h) Filed as Exhibit 13-D to our Registration Statement on Form S-1
(Registration No. 2-26772) and incorporated herein by reference.
(i) Filed as Exhibit 10.100 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1993 and incorporated herein by reference.
(j) Filed as Exhibit 10.101 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1993 and incorporated herein by reference.
(k) Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 and incorporated herein by reference.
(l) Filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 and incorporated herein by reference.
(m) Filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 and incorporated herein by reference.
(n) Filed as Exhibit 10.77 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1995 and incorporated herein by reference.
102
(o) Filed as Exhibit 10.63 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1998 and incorporated herein by reference.
(p) Filed as Exhibits B, C and D, respectively, to our Proxy Notice and
Statement dated February 23, 1999.
(q) Filed as Exhibit 10.43 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 2000, as amended, and incorporated herein by
reference.
(r) Filed as Exhibit 10.13 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 2001.
(s) Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001.
(t) Filed as Exhibit 2.1 to our Current Report on Form 8-K filed on May 29,
2003.
(u) Filed as Exhibit 21.1 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 2000, as amended, and incorporated herein by
reference.
103
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in Item 14, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rochester
Hills, State of Michigan, on the 9th day of March 2004.
ENERGY CONVERSION DEVICES, INC.
By: /s/ Robert C. Stempel
-------------------------------------------
Robert C. Stempel,
Chairman Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Energy Conversion Devices,
Inc., hereby, severally constitute and appoint each of Roger John Lesinski, Esq.
and Ghazaleh Koefod our true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and registration statements filed pursuant to Rule 462 under the
Securities Act of 1933, and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto such attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that such attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
/s/ Robert C. Stempel Chairman and Chief March 9, 2004
------------------------- Executive Officer
Robert C. Stempel (Principal Executive
Officer)
/s/ Stephan W. Zumsteg Vice President and Chief
------------------------- Financial Officer March 9, 2004
Stephan W. Zumsteg (Principal Financial and
Accounting Officer)
/s/ Stanford R. Ovshinsky President, Chief
------------------------- Technology Officer and March 9, 2004
Stanford R. Ovshinsky Director
105
/s/ Nancy M. Bacon Director March 9, 2004
-------------------------
Nancy M. Bacon
Umberto Colombo* Director March 9, 2004
-------------------------
Umberto Colombo
Walter J. McCarthy, Jr.* Director March 9, 2004
-------------------------
Walter J. McCarthy, Jr.
Florence I. Metz* Director March 9, 2004
-------------------------
Florence I. Metz
James R. Metzger* Director March 9, 2004
-------------------------
James R. Metzger
/s/ Iris M. Ovshinsky Director March 9, 2004
-------------------------
Iris M. Ovshinsky
Stanley K. Stynes* Director March 9, 2004
-------------------------
Stanley K. Stynes
*By /s/ Roger John Lesinski
--------------------------
Roger John Lesinski, Attorney-in-Fact
106
ENERGY CONVERSION DEVICES, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
Consolidated Statements of Operations for the three months
and six months ended December 31, 2003 and 2002 F-2
Consolidated Balance Sheets as of December 31, 2003 and June
30, 2003 F-3
Consolidated Statements of Cash Flows for the six months ended
December 31, 2003 and 2002 F-5
Notes to Unaudited Consolidated Financial Statements for the six
months ended December 31, 2003 and 2002 F-7
Independent Auditors' Report F-27
Consolidated Balance Sheets at June 30, 2003 and 2002 F-28
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 2003 F-30
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended June 30, 2003 F-31
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 2003 F-34
Notes to Consolidated Financial Statements as of June 30, 2003 F-36
Schedule II - Valuation and Qualifying Accounts F-79
F-1
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
--------------------------- ---------------------------
REVENUES
Product sales $ 7,364,399 $ 3,243,546 $ 14,063,095 $ 7,055,404
Product sales to related parties - 1,268,843 2,422 2,791,174
------------ ------------ ------------ ------------
Total product sales 7,364,399 4,512,389 14,065,517 9,846,578
Royalties 609,260 369,657 1,068,759 899,334
Revenues from product development agreements 3,287,914 1,895,468 6,259,709 3,033,756
Revenues from product development agreements
with related parties 4,247,918 8,330,670 8,114,787 16,945,049
------------ ------------ ------------ ------------
Total revenues from product development
agreements 7,535,832 10,226,138 14,374,496 19,978,805
Revenues from license and other agreements 25,000 3,269,114 75,000 3,419,114
Other revenues 80,951 34,168 162,567 69,647
Other revenues from related parties 58,400 66,310 132,638 118,958
------------ ------------ ------------ ------------
Total other revenues 139,351 100,478 295,205 188,605
------------ ------------ ------------ ------------
TOTAL REVENUES 15,673,842 18,477,776 29,878,977 34,332,436
EXPENSES
Cost of product sales 9,006,021 5,475,255 17,975,287 10,295,590
Cost of revenues from product development agreements 7,006,575 9,380,534 13,130,191 18,882,763
Product development and research 4,866,096 4,718,173 12,666,219 8,580,450
Patent defense (net) 3,360,077 668,914 5,471,057 908,299
Patents 435,285 504,246 955,674 1,173,358
Selling, general and administrative (net) 4,086,888 1,766,215 7,180,394 4,915,876
------------ ------------ ------------ ------------
TOTAL EXPENSES 28,760,942 22,513,337 57,378,822 44,756,336
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (13,087,100) (4,035,561) (27,499,845) (10,423,900)
OTHER INCOME (EXPENSE)
Interest income 256,787 1,050,237 572,928 2,090,435
Interest expense (593,049) (122,338) (835,737) (249,610)
Equity in losses of joint ventures (303,699) (2,870,380) (548,081) (3,733,935)
Minority interest share of losses - 212,053 - 755,079
Gain (loss) on sales of investments 55,266 (59,756) 364,416 102,002
Other nonoperating income (net) 255,370 46,348 248,311 28,513
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (329,325) (1,743,836) (198,163) (1,007,516)
------------ ------------ ------------ ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (13,416,425) (5,779,397) (27,698,008) (11,431,416)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - - - 2,215,560
------------ ------------ ------------ ------------
NET LOSS $(13,416,425) $ (5,779,397) $(27,698,008) $ (9,215,856)
============ ============ ============ ============
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (.57) $ (.26) $ (1.22) $ (.52)
BASIC NET LOSS PER SHARE FOR CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - - - .10
------------ ------------ ------------ ------------
BASIC NET LOSS PER SHARE $ (.57) $ (.26) $ (1.22) $ (.42)
============ ============ ============ ============
DILUTED NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (.57) $ (.26) $ (1.22) $ (.52)
DILUTED NET LOSS PER SHARE FOR CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - - - .10
------------ ------------ ------------ ------------
DILUTED NET LOSS PER SHARE $ (.57) $ (.26) $ (1.22) $ (.42)
============ ============ ============ ============
See notes to consolidated financial statements.
F-2
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2003 2003
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash, including cash equivalents of $14,781,000
at December 31, 2003 and $6,193,000 at June 30,
2003 ($1,600,000 of which is restricted at
December 31, 2003 and $2,000,000 of which is
restricted at June 30, 2003) $ 16,898,399 $ 8,567,261
Short-term investments (including restricted
investments of $5,000,000 at June 30, 2003) 7,978,076 26,801,506
Accounts receivable (net of allowance for
uncollectible accounts of approximately $265,000
at December 31, 2003 and at June 30, 2003) 12,801,790 10,520,719
Accounts receivable due from related parties 4,167,137 6,977,280
Note receivable 12,000,000 11,629,489
Inventories 15,026,537 12,448,172
Other 1,508,431 1,017,659
------------ ------------
TOTAL CURRENT ASSETS 70,380,370 77,962,086
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 14,251,399 13,982,830
Machinery and other equipment 75,059,589 75,587,068
Capitalized leases 10,000,000 10,000,000
------------ ------------
99,577,988 99,836,898
Less accumulated depreciation and amortization (32,305,659) (29,137,648)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 67,272,329 70,699,250
Investment in Rare Earth Ovonic-China 1,710,000 1,710,000
INVESTMENT IN JOINT VENTURES
Ovonyx 96,139 594,220
Texaco Ovonic Battery Systems - -
Texaco Ovonic Hydrogen Systems - -
ITS Innovative Transportation Systems - -
Ovonic Media - -
OTHER ASSETS 3,774,900 2,729,094
------------ ------------
TOTAL ASSETS $143,233,738 $153,694,650
============ ============
See notes to consolidated financial statements.
F-3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
2003 2003
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 11,580,360 $ 18,608,052
Accounts payable and accrued expenses - related
parties 27,066 -
Salaries, wages and amounts withheld from
employees 3,405,577 4,574,357
Deferred revenues under business agreements 3,216,545 5,089,597
Deferred revenues - related parties 30,453 36,972
Current installments on long-term liabilities 12,292,153 11,858,378
------------ ------------
TOTAL CURRENT LIABILITIES 30,552,154 40,167,356
LONG-TERM LIABILITIES 10,178,191 10,187,127
NONREFUNDABLE ADVANCE ROYALTIES 3,487,268 3,507,995
------------ ------------
TOTAL LIABILITIES 44,217,613 53,862,478
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Class B Convertible Common Stock,
par value $0.01 per share:
Authorized, issued and
outstanding - 430,000 shares 4,300 4,300
Common Stock, par value $0.01 per share:
Authorized - 30,000,000 shares
Issued & outstanding - 23,947,522 shares at
December 31, 2003 and 21,252,207 shares at
June 30, 2003 239,475 212,522
Additional paid-in capital 411,858,512 384,987,156
Accumulated deficit (312,090,119) (284,392,111)
Accumulated other comprehensive income 189,498 546,646
Unearned compensation on Class B Convertible
Common Stock (1,187,740) (1,528,540)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 99,016,125 99,832,172
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $143,233,738 $153,694,650
============ ============
See notes to consolidated financial statements.
F-4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net loss $(27,698,008) $ (9,215,856)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
License agreement (exchange for debt and related interest) - (3,269,114)
Depreciation and amortization 4,093,802 1,422,897
Amortization of premium/discount on investments 73,083 325,899
Equity in losses of joint ventures 548,081 3,733,935
Changes in nonrefundable advance royalties (20,727) (100,093)
Stock and stock options issued for services rendered 376,800 393,000
Loss (gain) on sales of investments (364,416) -
Loss on sale of property, plant and equipment 11,393 -
Amortization of deferred gain - (69,594)
Minority interest - (755,079)
Cumulative effect of change in accounting principle - (2,215,560)
Retirement liability 153,516 144,122
Other - 34,830
Changes in working capital:
Accounts receivable (2,281,071) 3,127,463
Accounts and note receivable due from related parties 2,810,143 4,483,530
Inventories (2,578,365) (524,958)
Other assets (1,536,578) (32,355)
Accounts payable and accrued expenses (8,196,472) (55,327)
Accounts payable and accrued expenses - related parties 27,066 544,766
Deferred revenues under business agreements (1,873,052) 8,673,002
Deferred revenues - related parties (6,519) (2,203,753)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS (36,461,324) 4,441,755
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (809,350) (5,304,057)
Advances to Bekaert ECD Solar Systems - (1,857,156)
Advance to ITS Innovative Transportation Systems - (2,000,000)
Investment in Ovonyx (50,000) (1,000,000)
Purchases of investments (7,978,076) (23,520,621)
Sales of investments 26,661,685 11,044,852
Proceeds from sale of property, plant and equipment 131,076 23,000
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 17,955,335 (22,613,982)
FINANCING ACTIVITIES:
Principal payments under short-term and long-term debt
obligations and capitalized lease obligations (99,188) (1,088,985)
Proceeds from sale of stock upon exercise of stock options 24,451 -
Proceeds from sale of stock and warrants net of expenses 26,837,858 -
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 26,763,121 (1,088,985)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 74,006 -
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,331,138 (19,261,212)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,567,261 42,221,015
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,898,399 $ 22,959,803
============ ============
See notes to consolidated financial statements.
F-5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
2003 2002
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 835,737 $ 249,610
The Company's noncash investing and
financing activities were as follows:
Short-term and long-term note receivable -
United Solar Ovonic LLC 370,511 348,566
Short-term and long-term note payable -
Canon (370,511) (348,566)
Debt principal exchanged for license - United Solar
Ovonic/Canon 2,500,000
Accounts Payable and Accrued Expenses - Accrued
interest on United Solar Ovonic/Canon debt 769,114
See notes to consolidated financial statements.
F-6
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 (see page 8 for definition of 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.
Management believes that funds generated from operations, equity and debt
financing, new government contracts and the cost-containment initiatives
described below, 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.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial statements for the interim periods have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K (which is available
on the Company's website www.ovonic.com).
The results of operations for the three-month and six-month periods ended
December 31, 2003 and 2002 are not necessarily indicative of the results to be
expected for the full year.
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).
Nature of Business
Energy Conversion Devices, Inc. (ECD) is a multidisciplinary business,
scientific, technical and manufacturing organization to commercialize products
based on its technologies. Its activities range from product development to
manufacturing and selling products, as well as designing and building production
machinery with an emphasis on alternative energy and advanced information
technologies.
F-7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
Financial Statement Presentation, Principles of Consolidation and Equity
Accounting
The consolidated financial statements include the accounts of ECD and its
100%-owned thin-film amorphous silicon photovoltaic manufacturing and sales
subsidiaries United Solar Ovonic Corp. (previously called United Solar Systems
Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic LLC
(previously called Bekaert ECD Solar Systems LLC and 40% owned by United Solar
Ovonic Corp. prior to May 14, 2003) (jointly referred to as United Solar Ovonic)
(see Note E) and its approximately 91%-owned subsidiary Ovonic Battery Company,
Inc. (Ovonic Battery), a company formed to develop and commercialize ECD's
Ovonic(R) nickel metal hydride (NiMH) battery technology (collectively the
"Company"). The remaining shares of Ovonic Battery are owned by Honda Motor
Company, Ltd., Sanoh Industrial Company, Ltd. and Sanyo Electric Co., Ltd. No
minority interest related to Ovonic Battery is recorded in the consolidated
financial statements because there is no additional funding requirement by the
minority shareholders.
The Company has a number of strategic alliances and has five major
investments accounted for using the equity method: (i) Texaco Ovonic Battery
Systems LLC, a joint venture between Ovonic Battery and a unit of ChevronTexaco
Corporation, each having 50% interest in the joint venture, to manufacture and
sell the Company's proprietary NiMH batteries for transportation and stationary
applications; (ii) Texaco Ovonic Hydrogen Systems LLC, a joint venture between
ECD and a unit of ChevronTexaco, each having 50% interest in the joint venture,
to further develop and commercialize Ovonic(TM) solid hydrogen storage
technology; (iii) Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler
Lowrey, Intel Capital and other investors, to further develop and commercialize
ECD's Ovonic Unified Memory(TM) (OUM(TM)) technology; (iv) Ovonic Media, LLC, a
joint venture owned 51% by General Electric through its GE Plastics business
unit and 49% by ECD, formed to design, develop, demonstrate and commercialize
our proprietary continuous web roll-to-roll technology for ultra-high-speed
manufacture of optical media products; and (v) ITS Innovative Transportation
Systems A.G. (ITS), a German company beneficially owned 30% by ECD, formed to
manufacture battery-powered electric vehicles. Also, ECD has two 50%-owned joint
ventures in Russia, Sovlux Co., Ltd. (Sovlux) and Sovlux Battery Closed-Stock
Company (Sovlux Battery). See Note E for discussions of all of the Company's
ventures.
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).
F-8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with Fiscal
2004 presentation.
Other Nonoperating Income
Other nonoperating income-net consists of gains and losses on sales of
property, plant and equipment, amortization of deferred gains, rental income,
and other miscellaneous income.
Recent Pronouncements
In April 2003, the Financial Accounting Statements Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which is
effective for contracts entered into or modified after June 30, 2003. This
statement amends and clarifies financial accounting and reporting for derivative
instruments. The Company implemented this Statement on July 1, 2003. The
adoption of this Statement did not have a material effect on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities & Equity," which
is effective for financial instruments entered into or modified after May 31,
2003 and is effective for the first interim period after June 15, 2003. The
Company implemented this Statement on July 1, 2003. The adoption of this
Statement did not have a material effect on the Company's consolidated financial
position or results of operations.
F-9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings and Liquidity
Since July 2003, the Company has implemented a series of initiatives aimed
at aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. The Company has met these initiatives
through the following actions taken:
o Reductions in staffing by 15% at ECD and Ovonic Battery through
reallocation and reductions ($4,500,000 in annual savings).
o Changes in the healthcare benefit program ($2,200,000 in annual
savings).
o A salary freeze for all ECD and Ovonic Battery employees and a 10%
salary reduction by the executive management team ($1,900,000 in
annual savings).
o Reduced purchased services and contract employees.
o Lower capital expenditures.
These cost-containment initiatives were fully implemented by January 1,
2004 and are expected to result in total savings of $19 million annually. The
Company is reviewing other areas for cost reduction, as well as organizational
changes to improve administrative and operating efficiencies.
In November 2003, the Company received $27,868,000 in connection with
stock purchase agreements with respect to an offering of 573,339 units of its
securities to a group of three institutional investors at an average price per
unit of $10.35 based upon the closing price of ECD Common Stock plus $.125. Each
unit consists of one share of ECD Common Stock and one warrant to purchase one
share of ECD Common Stock for $13.96, if exercised, on or prior to May 2, 2005
and for $16.03, if exercised, at any time thereafter but prior to October 31,
2006.
On January 12, 2004, the Company received $5,593,000 in connection with
an additional rights agreement from two of the institutional investors (see
Note M - Subsequent Event).
Nolan Securities Corporation acted as placement agent and was paid
$978,000 and issued 79,828 warrants on the same terms as the warrants issued in
the unit offering. ECD filed a registration statement (related to the November
sales of stock and warrants) on Form S-1 with the Securities and Exchange
Commission on December 23, 2003 for the resale of the shares issued and the
shares issuable upon exercise of the warrants, which was declared effective on
January 8, 2004.
Certain members of management agreed to the suspension of the exercise of
their stock options until additional authorized shares are made available to
allow that a sufficient
F-10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings and Liquidity (Continued)
number of authorized but unissued shares of Common Stock be available for
issuance to the investors in the offering.
The Company will use these proceeds for working capital and to support its
development and other operating activities.
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. The
Company is presently in negotiations and discussions with third parties to
refinance the 30MW equipment. The Company obtained an independent appraisal of
the 30MW equipment that valued it higher than the $67 million equipment cost.
(See Management's Discussion and Analysis of Financial Condition on Liquidity
and Capital Resources.)
NOTE C - Accounts Receivable
----------------------------
December 31, June 30,
2003 2003
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Amounts billed to customers
Commercial customers $ 564,598 $ 564,598
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
U.S. Government 1,069,076 698,634
Commercial customers 63,856 9,060
----------- -----------
1,132,932 707,694
Amounts billed
U.S. Government 1,603,145 1,773,824
Amounts unbilled for other than long-term contracts
Commercial customers 1,873,913 1,892,532
Amounts billed for other than long-term contracts
Commercial customers 7,892,202 5,847,071
Allowance for uncollectible accounts (265,000) (265,000)
----------- -----------
TOTAL $12,801,790 $10,520,719
=========== ===========
Certain contracts with the U.S. government require a retention that is
paid upon completion of an audit of the Company's indirect rates. Certain
contracts have been
F-11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable (Continued)
completed for more than 10 years and have not been audited. U.S. Government
retentions totaling $103,947 are included in long-term other assets at
December 31, 2003 and June 30, 2003. Most U.S. government contracts remain
subject to audit.
Accounts Receivable Due from Related Parties
--------------------------------------------
December 31, June 30,
2003 2003
------------ ------------
Amounts earned which are billed in the
subsequent month on long-term contracts
ChevronTexaco Technology Ventures $ 125,549 $ -
Texaco Ovonic Battery Systems 723,014 2,072,138
Texaco Ovonic Hydrogen Systems 660,587 1,603,147
---------- ----------
Sub-total 1,509,150 3,675,285
Amounts billed
Texaco Ovonic Battery Systems 2,136,741 3,221,059
Texaco Ovonic Hydrogen Systems 259,824 -
---------- ----------
Sub-total 2,396,565 3,221,059
Other unbilled
Ovonyx 12,680 412
Other billed
ChevronTexaco Technology Ventures 223,390 5,721
Ovonyx 11,300 48,053
Texaco Ovonic Battery Systems 14,052 18,386
Texaco Ovonic Hydrogen Systems - 8,364
---------- ----------
Sub-total 248,742 80,524
---------- ----------
TOTAL $4,167,137 $6,977,280
========== ==========
Short-Term Note Receivable
In connection with N.V. Bekaert S.A. and its U.S.-based subsidiary's
(Bekaert) investment in United Solar Ovonic Corp. and United Solar Ovonic LLC in
April 2000: (1) Bekaert was obligated to invest an additional $12,000,000 in
United Solar Ovonic LLC no later than January 1, 2004, (2) United Solar Ovonic
LLC was required to pay ECD $12,000,000 no later than January 1, 2004, and (3)
ECD was required to pay Canon Inc. of Japan (Canon) $12,000,000 no later than
January 1, 2004. These noninterest-bearing notes were recorded in April 2000 at
a discounted value of $9,500,000 (using a discount rate of 6.3%). In connection
with the purchase of Bekaert's 60% interest in United Solar Ovonic LLC and 19%
interest in United Solar Ovonic Corp. on May 14, 2003, and while ECD continues
to be contractually obligated to pay Canon, Bekaert agreed to pay the
F-12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable (Continued)
$12,000,000 directly to Canon, which, when made, will satisfy Bekaert's
obligation to United Solar Ovonic LLC and ECD's obligation to Canon. On
January 2, 2004, Bekaert paid the $12,000,000 to Canon in full satisfaction of
ECD's obligation to Canon.
NOTE D - Inventories
Inventories for United Solar Ovonic Corp., United Solar Ovonic LLC and
Ovonic Battery are as follows:
December 31, June 30,
2003 2003
------------- -------------
Finished products $ 5,320,128 $ 5,282,156
Work in process 3,845,506 1,825,839
Raw materials 5,860,903 5,340,177
----------- -----------
$15,026,537 $12,448,172
=========== ===========
NOTE E - Joint Ventures and Investments
Joint Ventures
United Solar Ovonic
On May 14, 2003, ECD acquired Bekaert's 19% interest in United Solar
Ovonic Corp. and 60% interest in United Solar Ovonic LLC (bringing the Company's
interest in each of these joint ventures to 100%) for $6 million ($4 million
paid at closing and $2 million paid on December 22, 2003). Additionally, the
Company provided $40 million to United Solar Ovonic LLC to terminate its
sale-and-leaseback arrangement with LaSalle National Leasing Corporation and
another financial institution and, as a result, freed up the $25 million of
Company funds that had been restricted in support of its guarantee of the
LaSalle lease. Bekaert retained rights from United Solar Ovonic for its
technologies outside the field of photovoltaics and rights limited to build
sputtering machines outside the field of triple-junction photovoltaics. In
addition, Bekaert assigned to ECD its $12.2 million note receivable for its
bridge loans to United Solar Ovonic LLC.
Effective after May 14, 2003, ECD is funding 100% of United Solar Ovonic's
cash requirements. Historically, as a consequence of ECD's 81% ownership of
United Solar Ovonic Corp. and United Solar Ovonic Corp.'s 40% membership
interest in United Solar Ovonic LLC, the Company's financial results have
included approximately 50% of the combined operating losses of these entities.
After May 14, 2003, the Company has reflected 100% of the operating losses of
United Solar Ovonic. ECD is in discussions with potential new equity investors
to meet United Solar Ovonic's future cash requirements, as well as refinance the
30MW equipment.
F-13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
Ovonyx
In October 2002, ECD, through a newly formed company, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by ECD to Ovonyx and an exclusive, royalty-bearing license. ECD
recorded its $1,000,000 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 $1,000,000 investment. 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; in the three months and six
months ended December 31, 2002, ECD recorded an equity loss of $280,000.
ECD recorded revenues from Ovonyx of $34,000 and $71,000, for the three
months and six months ended December 31, 2003 representing services provided to
this joint venture. For the three months and six months ended December 31, 2002,
ECD recorded revenues of $41,000 and $86,000, respectively.
Texaco Ovonic Battery Systems
In July 2001, ChevronTexaco bought General Motors' interest in GM Ovonic
L.L.C., a joint venture of Ovonic Battery. ChevronTexaco will invest up to
$178,000,000 ($118,000,000 of which has been received as of December 31, 2003)
in the venture, renamed Texaco Ovonic Battery Systems LLC. Ovonic Battery
contributed additional technology. Texaco Ovonic Battery Systems is owned 50% by
Ovonic Battery and 50% by a unit of ChevronTexaco.
The Company recorded revenues from Texaco Ovonic Battery Systems of
$1,935,000 and $3,351,000 for the three months and six months ended December 31,
2003, respectively, and $2,754,000 and $5,465,000 for the three months and six
months ended December 31, 2002, respectively, for services performed on behalf
of Texaco Ovonic Battery Systems (primarily for advanced product development and
market development work). The Company recorded revenues of zero and $2,000 for
the three months and six months ended December 31, 2003, respectively, and
$16,000 and $39,000 for the three months and six months ended December 31, 2002,
respectively, for products sold to Texaco Ovonic Battery Systems.
The Company also recorded revenues from Texaco Ovonic Battery Systems of
$45,000 and $90,000 for each of the three months and six months ended December
31, 2003 and 2002, respectively, for rent of a portion of one of the Company's
facilities.
The following sets forth certain financial data regarding Texaco Ovonic
Battery Systems that are derived from its financial statements:
F-14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY
STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Product Sales $ 367,190 $ 150,903 $ 554,164 $ 173,495
Other Revenues 1,682,927 736,310 2,009,989 736,310
------------ ------------ ------------ ------------
Total Revenues 2,050,117 887,213 2,564,153 909,805
Expenses
Research and Development costs 5,397,557 5,115,719 8,685,404 9,065,636
Other Expenses 3,669,179 4,172,749 7,666,240 7,704,252
------------ ------------ ------------ ------------
Total Expenses 9,066,736 9,288,468 16,351,644 16,769,888
------------ ------------ ------------ ------------
Net Loss $ (7,016,619) $ (8,401,255) $(13,787,491) $(15,860,083)
============ ============ ============ ============
TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY
BALANCE SHEETS
December 31, June 30,
2003 2003
------------- ------------
Current Assets:
Cash and Equivalents $ 3,832,801 $ 6,849,235
Accounts Receivable 821,626 145,972
Inventory 2,682,200 2,503,650
------------ ------------
Total Current Assets 7,336,627 9,498,857
Property, Plant and Equipment 32,088,845 30,496,884
Less Accumulated Depreciation (4,611,693) (3,311,109)
------------ ------------
Net Property, Plant and Equipment 27,477,152 27,185,775
Other Assets 134,914 85,180
------------ ------------
Total Assets $ 34,948,693 $ 36,769,812
============ ============
Liabilities and Members' Equity
Current Liabilities:
Amounts Due to Related Parties, Net $ 2,740,773 $ 4,639,003
Accounts Payable 2,772,020 4,910,191
Short-term Deferred Revenues 583,773 -
------------ ------------
Total Current Liabilities 6,096,566 9,549,194
Members' Equity 28,852,127 27,220,618
------------ ------------
Total Liabilities and Members' Equity $ 34,948,693 $ 36,769,812
============ ============
F-15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
Texaco Ovonic Hydrogen Systems
In October 2000, ECD and ChevronTexaco formed Texaco Ovonic Hydrogen
Systems. ChevronTexaco is funding $104,000,000 ($54,298,000 of which was
received as of December 31, 2003) for initial product and market development,
the primary use of which is to fund a contract from Texaco Ovonic Hydrogen
Systems to ECD to further develop the Ovonic(TM) hydrogen storage technology.
The joint venture is owned 50% by ChevronTexaco and 50% by ECD. ECD has
contributed intellectual property and licenses.
The following sets forth certain financial data regarding Texaco Ovonic
Hydrogen Systems that are derived from its financial statements.
TEXACO OVONIC HYDROGEN SYSTEMS LLC
STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Other Income $ 2,668 $ 1,944 $ 5,123 $ 2,075
Expenses
Product Development - Paid or
Payable to ECD 1,476,574 3,148,048 3,993,551 6,238,408
Product Development - Paid or
Payable to ChevronTexaco - 448,518 275,974 774,876
Depreciation Expense 625,361 355,040 1,236,495 684,610
Loss on Disposal of Assets 44,000 _ 44,000 _
----------- ----------- ----------- -----------
Total Expenses 2,145,935 3,951,606 5,550,020 7,697,894
----------- ----------- ----------- -----------
Net Loss $(2,143,267) $(3,949,662) $(5,544,897) $(7,695,819)
=========== =========== =========== ===========
F-16
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
TEXACO OVONIC HYDROGEN SYSTEMS LLC
BALANCE SHEETS
December 31, June 30,
2003 2003
------------- -------------
Current Assets:
Cash and Equivalents $ 1,277,854 $ 1,742,437
Accounts Receivable 10,746 10,746
----------- -----------
Total Current Assets 1,288,600 1,753,183
Property, Plant and Equipment 9,683,672 9,501,712
Less Accumulated Depreciation and Amortization (3,792,923) (2,556,428)
----------- -----------
Net Property, Plant and Equipment 5,890,749 6,945,284
----------- -----------
Total Assets $ 7,179,349 $ 8,698,467
=========== ===========
Current Liabilities:
Amount Due to Related Parties, Net $ 186,225 $ 2,130,446
Deferred Revenue 85,257 15,257
----------- -----------
Total Current Liabilities 271,482 2,145,703
Noncurrent Liabilities
Deferred Revenue 112,000 112,000
Members' Equity 6,795,867 6,440,764
----------- -----------
Total Liabilities and Members' Equity $ 7,179,349 $ 8,698,467
=========== ===========
During the three months and six months ended December 31, 2003, the
Company recorded revenues of $2,313,000 and $4,764,000, respectively, for
services provided to this joint venture, primarily for market development and
advanced product development work. During the three months and six months ended
December 31, 2002, the Company recorded revenues of $3,270,000 and $6,744,000,
respectively.
Ovonic Media
For the three months and six months ended December 31, 2002, the Company
recorded revenues of $272,000 and $605,000, respectively, for services provided
to this joint venture for advanced product development work. GE informed the
Company that additional funding after January 3, 2003 was suspended. GE and ECD
have been discussing as how to best position the joint venture in order to meet
the needs of the marketplace, and secure new equity investors and strategic
partners to fund the joint venture's operations. As the next business step, we
are trying to secure a partner that is a leader in this industry to facilitate
the commercialization of our technology. In the interim, ECD is directly funding
continued product development activities for this technology at a reduced level.
F-17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
Investments in Rare Earth Ovonic
During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech. The agreement called for the creation of
joint ventures for manufacturing and licensing of advanced NiMH battery
technology, hydrogen storage alloy powders, advanced Ovonic(TM) nickel hydroxide
materials and production equipment, all for battery applications for NiMH
batteries. As of December 31, 2003, three of the contemplated five joint
ventures have been formed. ECD and Ovonic Battery initially contributed
technology for their 19% interest in each of these joint ventures. In February
2002, ECD and Ovonic Battery jointly made a proportionate $1,710,000 cash
investment in the Rare Earth Ovonic joint ventures and maintained their 19%
interest in these entities. All of these joint ventures are being accounted for
using the cost method of accounting.
In the first phase of the project, 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, 2003, Ovonic Battery has
received payments totaling $59,484,000 under the three contracts.
The Company recorded revenues from Rare Earth Ovonic of $159,000 and
$1,889,000 for the three months and six months ended December 31, 2003,
respectively, and $2,922,000 and $6,505,000 for the three months and six months
ended December 31, 2002, respectively.
Ovonic Fuel Cell
On June 24, 2003, the Company acquired ChevronTexaco's interest in Texaco
Ovonic Fuel Cell Company LLC for $1, effective as of December 31, 2002. The
venture, which is now owned 100% by ECD, was renamed Ovonic Fuel Cell Company
LLC. Effective December 31, 2002, the Company has included the operations of
Ovonic Fuel Cell in its consolidated financial statements. ECD is continuing its
development work at a reduced level and is currently funding all development
costs.
During the three months and six months ended December 31, 2003, the
Company did not record any revenue for services provided to this joint venture.
For the three months and six months ended December 31, 2002, the Company
recorded revenues of $1,922,000 and $3,942,000, respectively.
F-18
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Liabilities
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, 2003 and 2002:
December 31,
2003 2002
------------ ------------
Liability beginning of the period $ 2,990,661 $ 2,489,024
Amounts accrued for as warranty costs
for the six-month period (net) (1,234,927)* 7,981
Warranty claims (130,000) -
----------- -----------
Liability at December 31 $ 1,625,734 $ 2,497,005
=========== ===========
* During the six months ended December 31, 2003, the Company revised its
estimated warranty liability (primarily on its Rare Earth Ovonic
contract), based upon its recent experience, and recorded a reduction in
this liability.
Warranty liability is recorded at the time that the product is sold (for
sales of photovoltaic products) and 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, 1998 for United Solar
Ovonic and the years ended June 30, 2000 and June 30, 2001 for ECD. In its
reports, DCAA has questioned the allowability of and the allocability of certain
costs as well as the Company's methodology for allocating independent research
and development to its indirect cost pools. In addition, DCAA has stated that
there could be penalties imposed. The Company, together with its government
consultants, is in the process of discussing each of these items in detail with
DCAA. Management believes that some of these DCAA assertions are without merit.
The Company has recorded a reserve of $1,757,000 at December 31, 2003 related to
these issues.
F-19
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Nonrefundable Advance Royalties
At December 31, 2003 and June 30, 2003, the Company deferred recognition
of revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
Creditable royalties earned and recognized as revenue were:
Period Ended
December 31,
2003 2002
------------ ------------
Three months ended $ 12,202 $ 45,038
Six months ended $ 20,727 $ 100,093
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 related parties
and with third 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 expected costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point. Currently, low sales volumes combined with high fixed costs result in
losses.
F-20
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:
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,
2003 2002 2003 2002
----------- ----------- ----------- -----------
United States $10,954,112 $10,734,316 $21,781,682 $20,857,648
China 125,460 2,931,650 1,914,046 6,574,547
Germany 1,618,282 - 1,723,996 -
Luxembourg 953,954 - 1,096,727 -
Japan 523,203 3,632,776 891,054 4,065,593
Hong Kong 538,538 - 808,150 -
Australia 196,530 - 419,148 -
United Kingdom 310,890 - 380,313 -
Canada 60,245 - 188,645 -
Taiwan 122,184 - 122,184 -
Kenya 74,215 - 110,903 -
Mexico - 1,087,657 - 2,361,362
Other 196,229 91,377 442,129 473,286
----------- ----------- ----------- -----------
$15,673,842 $18,477,776 $29,878,977 $34,332,436
=========== =========== =========== ===========
F-22
NOTE I - Other Comprehensive Income (Loss)
The Company's total comprehensive loss was as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Loss $(13,416,425) $ (5,779,397) $(27,698,008) $ (9,215,856)
OTHER COMPREHENSIVE INCOME
(LOSS) (net of taxes):
Unrealized holding gains
arising during period - 183,608 - 774,252
Less: reclassification adjustments
for gains realized in net income 68,053 (27,851) 431,153 (4,751)
------------ ------------ ------------ ------------
Net unrealized gains (losses) (68,053) 211,459 (431,153) 779,003
Foreign currency translation adjustments 126,591 - 74,005 -
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $(13,357,887) $ (5,567,938) $(28,055,156) $ (8,436,853)
============ ============ ============ ============
NOTE J - Stock Options
Had compensation costs for the Company'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 loss and net loss per share for the three and six months ended December 31,
2003 and 2002 would have increased as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Loss, as reported $(13,416,425) $ (5,779,397) $(27,698,008) $ (9,215,856)
Add:
Total stock-based compensation
expense determined under fair
value based method, net of tax 899,837 1,392,401 2,008,667 2,489,862
------------ ------------ ------------ ------------
Pro-forma net loss $(14,316,262) $ (7,171,798) $(29,706,675) $(11,705,718)
============ ============ ============ ============
Loss per share:
Basic - as reported $ (.57) $ (.26) $ (1.22) $ (.42)
Basic - pro forma $ (.61) $ (.33) $ (1.31) $ (.53)
Diluted - as reported $ (.57) $ (.26) $ (1.22) $ (.42)
Diluted - pro forma $ (.61) $ (.33) $ (1.31) $ (.53)
F-23
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K - Basic and Diluted Net Loss Per Share
Basic net loss per common share is computed by dividing the net loss by
the weighted average number of common shares outstanding. 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 earnings 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,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Weighted average number of shares
outstanding 23,480,898 21,898,995 22,691,678 21,898,945
Net loss before cumulative effect of
change in accounting principle $(13,416,425) $ (5,779,397) $(27,698,008) $(11,431,416)
Cumulative effect of change in
accounting principle - - - 2,215,560
------------ ------------ ------------ ------------
Net loss $(13,416,425) $ (5,779,397) $(27,698,008) $ (9,215,856)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER
SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE $ (.57) $ (.26) $ (1.22) $ (.52)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (.57) $ (.26) $ (1.22) $ (.42)
============ ============ ============ ============
The per-share amount related to the cumulative effect of change in
accounting principle was $.10 (benefit) for both the basic net loss per share
and the diluted net loss per share for the six months ended December 31, 2002.
Due to the Company's net losses, 2003 and 2002 total weighted average
shares of potential dilutive securities of 2,512,393 and 2,878,802,
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.
NOTE L - Business Segments
The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar Ovonic, and the parent company, ECD. Ovonic Battery is involved
in developing and commercializing battery technology. United Solar Ovonic is
involved in manufacturing, developing and commercializing photovoltaic
technology. ECD is involved in microelectronics, fuel cells and hydrogen storage
technologies, machine building and photovoltaics. Some general corporate
expenses have been allocated to Ovonic Battery.
F-24
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Business Segments (Continued)
The Company's operations by business segment were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
United Solar Consolidating
ECD Ovonic Battery Ovonic Entries Consolidated
----------- -------------- ------------ ------------- -------------
Revenues
Three months ended
December 31, 2003 $ 3,806 $ 3,688 $ 8,918 $ (738) $ 15,674
December 31, 2002 7,236 7,337 4,886 (981) 18,478
Six months ended
December 31, 2003 $ 7,553 $ 8,006 $ 15,858 $ (1,538) $ 29,879
December 31, 2002 13,816 15,135 6,688 (1,307) 34,332
Interest Income
Three months ended
December 31, 2003 $ 972 $ - $ (7) $ (708) $ 257
December 31, 2002 1,028 - 22 - 1,050
Six months ended
December 31, 2003 $ 1,509 $ - $ 7 $ (943) $ 573
December 31, 2002 2,045 - 45 - 2,090
Interest Expense*
Three months ended
December 31, 2003 $ 189 $ - $ 1,053 $ (649) $ 593
December 31, 2002 - 24 99 - 123
Six months ended
December 31, 2003 $ 373 $ - $ 2,081 $ (1,618) $ 836
December 31, 2002 - 53 197 - 250
Operating Income (Loss)
Three months ended
December 31, 2003 $ (3,842) $ (7,004) $ (2,240) $ (1) $(13,087)
December 31, 2002 (5,217) (1,498) 1,832 847 (4,036)
Six months ended
December 31, 2003 $ (9,023) $(13,115) $ (5,525) $ 163 $(27,500)
December 31, 2002 (11,065) (2,990) 559 3,072 (10,424)
--------------
* Excludes intercompany interest between ECD and Ovonic Battery.
F-25
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Business Segments (Continued)
United Solar Consolidating
ECD Ovonic Battery Ovonic Entries Consolidated
----------- -------------- ------------ ------------- -------------
Equity in Net Loss of Investees
Under Equity Method
Three months ended
December 31, 2003 $ (304) $ - $ (37) $ 37 $ (304)
December 31, 2002 (480) - (2,547) 157 (2,870)
Six months ended
December 31, 2003 $ (548) $ - $ (37) $ 37 $ (548)
December 31, 2002 (642) - (3,404) 312 (3,734)
Depreciation Expense
Six months ended
December 31, 2003 $ 1,120 $ 355 $ 2,619 $ - $ 4,094
December 31, 2002 800 570 849 (796) 1,423
Capital Expenditures
Six months ended
December 31, 2003 $ 149 $ 89 $ 571 $ - $ 809
December 31, 2002 4,955 316 33 - 5,304
Investments and Advances to
Equity Method Investees
December 31, 2003 $ 96 $ - $ - $ - $ 96
December 31, 2002 5,643 - 26,036 - 31,679
Identifiable Assets
December 31, 2003 $140,970 $ 9,206 $115,613 $(122,555) $143,234
December 31, 2002 166,071 9,632 20,891 (12,566) 184,028
NOTE M - Subsequent Event
On January 12, 2004, the Company received $5,593,000 in connection with
stock purchase agreements with respect to an offering of 573,339 units of its
securities to two institutional investors at a price per unit of $9.755. Each
unit consists of one share of ECD Common Stock and one warrant to purchase one
share of ECD Common Stock for $13.96, if exercised, on or prior to May 2, 2005
and for $16.03, if exercised, at any time thereafter but prior to October 31,
2006.
F-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Energy Conversion Devices, Inc.
Rochester Hills, Michigan
We have audited the accompanying consolidated balance sheets of Energy
Conversion Devices, Inc. and subsidiaries (the "Company") as of June 30, 2003
and 2002 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2003. Our audits also included the financial statement schedule listed in the
Index at Item 16. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 2003 and
2002 and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2003 in conformity with accounting
principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, effective July
1, 2002, the Company changed its method of accounting for goodwill and other
intangible assets to conform to Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, 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. Management's plans concerning these
matters are also described in Note A. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Deloitte & Touche LLP
Detroit, Michigan
October 21, 2003
F-27
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
---------------------------
2003 2002
------------ ------------
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of $6,193,000
at June 30, 2003, ($2,000,000 of which is
restricted) and $42,210,000 at June 30,
2002 (NOTE C) $ 8,567,261 $ 42,221,015
Short-term investments (including restricted
investments of $5,000,000 at June 30, 2003
and $25,000,000 at June 30, 2002) (NOTE C) 26,801,506 71,997,154
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$265,000 at June 30, 2003 and $563,000
at June 30, 2002) 10,520,719 7,268,447
Accounts receivable due from related parties 6,977,280 9,935,880
Note receivable due from related party - 1,594,275
Note receivable (NOTE F) 11,629,489 -
Inventories 12,448,172 1,163,273
Other 1,017,659 387,901
------------ ------------
TOTAL CURRENT ASSETS 77,962,086 134,567,945
PROPERTY, PLANT AND EQUIPMENT (NOTES A and F)
Land and land improvements 267,000 267,000
Buildings and improvements 13,982,830 3,456,088
Machinery and other equipment (including
construction in progress of approximately
$163,000 at June 30, 2003 and $694,000
at June 30, 2002) 75,587,068 26,713,253
Capitalized lease equipment 10,000,000 3,053,295
------------ ------------
99,836,898 33,489,636
Less accumulated depreciation and amortization (29,137,648) (22,551,768)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 70,699,250 10,937,868
Investment in Rare Earth Ovonic-China (NOTE A) 1,710,000 1,710,000
Long-Term Note Receivable - Related Party
(NOTE A) - 10,921,232
INVESTMENT IN AND ADVANCES TO JOINT
VENTURES (NOTE E)
Texaco Ovonic Battery Systems - -
Texaco Ovonic Hydrogen Systems - -
Ovonyx 594,220 -
ITS Innovative Transportation Systems - 3,285,757
Ovonic Media - -
United Solar Ovonic LLC - 27,269,793
OTHER ASSETS 2,729,094 3,425,999
------------ ------------
TOTAL ASSETS $153,694,650 $192,118,594
============ ============
See notes to consolidated financial statements.
F-28
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
---------------------------
2003 2002
------------ ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 18,608,052 $ 18,249,591
Accounts payable and accrued expenses - related parties - 34,218
Salaries, wages and amounts withheld from employees 4,574,357 2,908,213
Deferred revenues under business agreements (NOTE A) 5,089,597 640,019
Deferred revenues - related parties (NOTE A) 36,972 6,677,846
Current installments on long-term liabilities (NOTE F) 11,858,378 5,261,747
------------ ------------
TOTAL CURRENT LIABILITIES 40,167,356 33,771,634
LONG-TERM LIABILITIES (NOTE F) 10,187,127 3,507,537
LONG-TERM NOTES PAYABLE (NOTE F) - 10,921,232
NONREFUNDABLE ADVANCE ROYALTIES (NOTE D) 3,507,995 3,627,931
------------ ------------
TOTAL LIABILITIES 53,862,478 51,828,334
NEGATIVE GOODWILL (NOTE A) - 2,215,560
MINORITY INTEREST (NOTE E) - 2,819,740
STOCKHOLDERS' EQUITY
Capital Stock (NOTES G and H)
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Class B Convertible Common Stock,
par value $0.01 per share
Authorized, Issued and Outstanding - 430,000 shares 4,300 4,300
Common Stock, par value $0.01 per share:
Authorized - 30,000,000 shares
Issued & Outstanding - 21,252,207 shares at
June 30, 2003 and 21,248,973 shares at
June 30, 2002 212,522 212,490
Additional paid-in capital 384,987,156 384,952,113
Accumulated deficit (284,392,111) (248,193,952)
Accumulated other comprehensive income 546,646 487,950
Unearned Compensation on Class B Convertible
Common Stock (1,528,540) (2,210,140)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 99,832,172 135,254,960
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $153,694,650 $192,118,594
============ ============
See notes to consolidated financial statements.
F-29
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUES (NOTES A and B)
Product sales $ 15,942,438 $ 26,252,235 $ 13,925,029
Product sales to related parties 6,473,352 10,381,932 10,314,941
------------ ------------ ------------
Total product sales 22,415,790 36,634,167 24,239,970
Royalties 1,810,762 1,980,746 2,898,956
Royalties - related party 32,885 20,168 -
------------ ------------ ------------
Total royalties 1,843,647 2,000,914 2,898,956
Revenues from product development agreements 6,382,432 6,776,976 7,421,512
Revenues from product development agreements
with related parties 30,952,816 45,908,741 30,160,626
------------ ------------ ------------
Total revenues from product development
agreements 37,335,248 52,685,717 37,582,138
Revenues from license and other agreements 3,444,114 25,000 5,300,000
Other revenues (79,312) 136,577 265,015
Other revenues from related parties 219,373 227,910 1,118,414
------------ ------------ ------------
Total other revenues 140,061 364,487 1,383,429
------------ ------------ ------------
TOTAL REVENUES 65,178,860 91,710,285 71,404,493
EXPENSES (NOTE A)
Cost of product sales 25,938,925 37,165,211 23,376,373
Cost of revenues from product development
agreements 37,001,106 51,703,118 36,552,685
Product development and research 19,798,126 12,775,128 9,354,940
Patent defense (net) 5,429,042 2,749,176 1,913,212
Patents 2,189,290 2,183,166 1,853,129
Operating, general and administrative (net) 8,098,941 7,367,813 8,421,047
------------ ------------ ------------
TOTAL EXPENSES 98,455,430 113,943,612 81,471,386
------------ ------------ ------------
LOSS FROM OPERATIONS (33,276,570) (22,233,327) (10,066,893)
OTHER INCOME (EXPENSE):
Interest income 3,561,326 4,727,246 5,864,202
Interest expense (881,284) (910,134) (800,911)
Equity in losses and writedown of joint ventures (11,794,552) (3,658,480) (1,996,689)
Minority interest share of losses 2,079,845 1,536,236 1,069,518
Loss on write-off of investment in EV Global
(NOTE A) - (1,000,000) -
Other nonoperating income 1,897,516 650,425 808,935
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (5,137,149) 1,345,293 4,945,055
------------ ------------ ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (38,413,719) (20,888,034) (5,121,838)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NOTE A) 2,215,560 - -
------------ ------------ ------------
NET LOSS $(36,198,159) $(20,888,034) $ (5,121,838)
============ ============ ============
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(NOTE I) $ (1.75) $ (.96) $ (.26)
BASIC NET INCOME PER SHARE FOR CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(NOTE I) .10 - -
------------ ------------ ------------
BASIC NET LOSS PER SHARE (NOTE I) $ (1.65) $ (.96) $ (.26)
============ ============ ============
DILUTED NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE I) $ (1.75) $ (.96) $ (.26)
DILUTED NET INCOME PER SHARE FOR
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE I) .10 - -
------------ ------------ ------------
DILUTED NET LOSS PER SHARE (NOTE I) $ (1.65) $ (.96) $ (.26)
============ ============ ============
See notes to consolidated financial statements.
F-30
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
---------------------------------------------------------------
Three years ended June 30, 2003
Class A and
Class B Unearned
Convertible Compen-
Common Stock Common Stock sation on
--------------- ------------------- Accumulated Class B
Number Number Additional Other Convertible Total
of of Paid-In Comprehen- Accumulated Common Stockholders'
Shares Amount Shares Amount Capital sive Income Deficit Stock Equity
------- ------- ---------- -------- ------------ ----------- ------------- ------------ -------------
Balance at July 1, 2000 649,913 $ 6,499 18,098,646 $180,986 $324,293,312 $ 50,783 $(222,184,080) $(3,570,940) $ 98,776,560
Net loss for year ended
June 30, 2001 (5,121,838) (5,121,838)
Unrealized gain on
investments (net of
reclassification
adjustment) 830,559 830,559
--------
Comprehensive loss (4,291,279)
Earned compensation
on Class B stock 680,400 680,400
Issuance of stock to
directors and
consultants 2,000 20 40,636 40,656
Common stock issued in
connection with exercise
of stock options and
warrants 766,905 7,669 9,970,428 9,978,097
Stock options issued to
non-employees 111,671 111,671
Common stock sold to
ChevronTexaco 185,475 1,855 5,442,751 5,444,606
------- ------- ---------- -------- ------------ -------- ------------- ----------- ------------
Balance at June 30, 2001 649,913 $ 6,499 19,053,026 $190,530 $339,858,798 $881,342 $(227,305,918) $(2,890,540) $110,740,711
======= ======= ========== ======== ============ ======== ============= =========== ============
See notes to consolidated financial statements.
(Continued on next page)
F-31
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
---------------------------------------------------------------
Three years ended June 30, 2003
(CONTINUED)
Class A and
Class B Unearned
Convertible Compen-
Common Stock Common Stock sation on
--------------- ------------------- Accumulated Class B
Number Number Additional Other Convertible Total
of of Paid-In Comprehen- Accumulated Common Stockholders'
Shares Amount Shares Amount Capital sive Income Deficit Stock Equity
------- ------- ---------- -------- ------------ ----------- ------------- ------------ -------------
Balance at July 1, 2001 649,913 $ 6,499 19,053,026 $190,530 $339,858,798 $881,342 $(227,305,918) $(2,890,540) $110,740,711
Net loss for year ended
June 30, 2002 (20,888,034) (20,888,034)
Unrealized loss on
investments (net of
reclassification
adjustment) (393,392) (393,392)
-------------
Comprehensive loss (21,281,426)
Earned compensation on
Class B stock 680,400 680,400
Issuance of stock to
directors and
consultants 1,310 13 25,034 25,047
Common stock issued in
connection with exercise
of stock options
and warrants 1,746,279 17,463 35,727,718 35,745,181
Expense options granted
below market 197,838 197,838
Stock options issued to
non-employees 253,579 253,579
Common stock sold to
ChevronTexaco 448,358 4,484 8,889,146 8,893,630
------- ------- ---------- -------- ------------ -------- ------------- ----------- ------------
Balance at June 30, 2002 649,913 $ 6,499 21,248,973 $212,490 $384,952,113 $487,950 $(248,193,952) $(2,210,140) $135,254,960
======= ======= ========== ======== ============ ======== ============= =========== ============
See notes to consolidated financial statements.
(Continued on next page)
F-32
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
---------------------------------------------------------------
Three years ended June 30, 2003
(CONTINUED)
Class A and
Class B Unearned
Convertible Compen-
Common Stock Common Stock sation on
--------------- ------------------- Accumulated Class B
Number Number Additional Other Convertible Total
of of Paid-In Comprehen- Accumulated Common Stockholders'
Shares Amount Shares Amount Capital sive Income Deficit Stock Equity
------- ------- ---------- -------- ------------ ----------- ------------- ------------ -------------
Balance at July 1, 2002 649,913 $ 6,499 21,248,973 $212,490 $384,952,113 $487,950 $(248,193,952) $(2,210,140) $135,254,960
Net loss for year ended
June 30, 2003 (36,198,159) (36,198,159)
Unrealized loss on
investments (net of
reclassification
adjustment) (56,797) (56,797)
Foreign currency
translation gains 115,493 115,493
----------
Comprehensive loss (36,139,463)
Earned compensation
on Class B stock 681,600 681,600
Issuance of stock to
directors and
consultants 2,844 28 29,976 30,004
Common stock issued in
connection with
convertible investment
certificates 390 4 (4) -
Stock options issued
to non-employees 5,071 5,071
------- ------- ---------- -------- ------------ -------- ------------- ----------- ------------
Balance at June 30, 2003 649,913 $ 6,499 21,252,207 $212,522 $384,987,156 $546,646 $(284,392,111) $(1,528,540) $ 99,832,172
======= ======= ========== ======== ============ ======== ============= =========== ============
See notes to consolidated financial statements.
F-33
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss $(36,198,159) $(20,888,034) $ (5,121,838)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,955,641 2,273,010 2,301,798
Amortization of premium/discount on investments 660,316 362,172 -
Equity in losses and writedown of joint ventures 11,794,552 3,658,480 1,996,689
License Agreement (exchange for debt and related interest) (3,269,114) - -
Profit deferred on sales to United Solar Ovonic LLC - (1,774,172) 1,564,777
Creditable royalties (119,936) (213,057) (120,179)
Stock and stock options issued for services rendered 716,675 1,156,864 832,727
Gain on sales of investments (1,427,241) (335,757) (450,870)
(Gain)/loss on sale of equipment 40,257 (16,245) 61,228
Amortization of deferred gain - (139,164) (390,744)
Amortization of negative goodwill - (466,433) (466,433)
Minority interest (2,079,845) (1,536,236) (1,069,518)
Cumulative effect of change in accounting principle (2,215,560) - -
Loss on write-off of investment in EV Global - 1,000,000 -
Changes in working capital:
Accounts receivable 1,744,131 11,540,647 (11,636,928)
Accounts and note receivable due from related parties 2,958,600 (516,672) (7,110,278)
Inventories (1,207,889) 170,269 (339,465)
Other assets 1,334,471 (1,528,048) (682,675)
Accounts payable and accrued expenses 2,770,204 974,592 12,647,873
Accounts payable and accrued expenses - related parties (34,218) 23,685 (7,013)
Deferred revenues under business agreements 4,509,489 278,125 61,399
Deferred revenues - related parties (6,640,874) 4,331,792 (4,030,590)
Deferred tax assets and other (173,012) 864,999 (864,999)
------------ ------------ ------------
NET CASH USED IN OPERATIONS (22,881,512) (779,183) (12,825,039)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of capital equipment (5,134,579) (7,666,791) (2,240,193)
Acquisition of United Solar Ovonic (net of cash acquired) (3,773,365) - -
Investment in and advances to United Solar Ovonic LLC (2,984,370) - (4,523,841)
Investment in Bekaert ECD Europe - - (43,750)
Investment in and advances to ITS (2,000,000) - (2,409,000)
Investment in Rare Earth Ovonic - (1,710,000) -
Investment in Ovonyx (1,000,000) - -
Purchase of investments (30,907,063) (79,490,214) (49,067,511)
Sales of investments 76,812,839 55,981,916 46,163,777
Proceeds from sale of capital equipment 24,251 35,876 50
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 31,037,713 (32,849,213) (12,120,468)
------------ ------------ ------------
FINANCING ACTIVITIES:
Principal payments under short-term and long-term
debt obligations and capitalized lease obligations (41,764,836) (1,844,799) (2,013,814)
Proceeds from sale of stock, including treasury
stock, to ChevronTexaco - 8,893,630 5,444,606
Proceeds from sale of stock upon exercise of stock
options and warrants - 35,745,181 9,978,097
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (41,764,836) 42,794,012 13,408,889
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (45,119) - -
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (33,653,754) 9,165,616 (11,536,618)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,221,015 33,055,399 44,592,017
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,567,261 $ 42,221,015 $ 33,055,399
============ ============ ============
See notes to consolidated financial statements.
F-34
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 881,284 $ 910,134 $ 800,911
Short-term and long-term note
receivable - United Solar Ovonic LLC - 665,122 624,615
Short-term and long-term note
payable - Canon - (665,122) (624,615)
Debt principal and interest exchanged
for license with Canon 3,269,114 - -
Transfer investment in United Solar
Ovonic LLC to note receivable - (4,523,841) -
Record note receivable - Bekaert ECD
Solar Systems - 4,523,841 -
See notes to consolidated financial statements.
F-35
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 which raises substantial doubt about its ability to
continue as a going concern.
The recent purchases of our former partners' interests in the photovoltaic
and fuel cell ventures have both near-term and long-term impacts on the
Company's capital resources. While the Company was able to purchase the
interests in the photovoltaic and fuel cell ventures for only $ 6,000,000 and
$1 respectively, it is now funding 100% of the cash requirements for (i) United
Solar Ovonic (after May 14, 2003) and (ii) Ovonic Fuel Cell (after December 31,
2002) as well as (iii) Ovonic Media (after January 3, 2003). Also in connection
with the purchase of Bekaert's United Solar Ovonic interests, we provided
approximately $40 million to United Solar Ovonic to terminate the sale and
leaseback agreements related to the 30MW and 5MW photovoltaic production
equipment and to extinguish related guarantees provided by Bekaert.
Agreements with ChevronTexaco, Bekaert, Ovonyx and General Electric have
funded much of the Company's product development activities. However, 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. As of September 30, 2003, the Company had consolidated cash,
cash equivalents and short-term investments of $16,418,000 ($3,827,000 of which
was restricted), which is sufficient to sustain operations through December 31,
2003.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern in the absence of sufficient additional
funds and the achievement of profitable operations. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company is presently in negotiations and discussions with third
parties to refinance the 30MW equipment. The Company obtained an independent
appraisal of the 30MW equipment that valued it higher than the $67 million
equipment cost. The Company is also engaged in a number of other negotiations
and discussions to fund its operations, including raising additional capital
through equity and debt financings, forming new strategic alliances to fund and
grow its photovoltaic, fuel cell and other businesses. In addition the Company
is engaged in negotiations with government agencies for contracts to fund its
development activities.
F-36
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
Management believes that funds generated from operations, equity and debt
financing, new government contracts and the cost-containment initiatives
described below, 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 independent auditors' report 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."
On July 31, 2003, the Company announced a series of initiatives aimed at
aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. Workforce reallocation and reductions of
up to 20% are being implemented to meet the Company's aggressive cost reduction
targets, and business units have begun to reduce discretionary spending and
other costs associated with the Company's operations. A salary freeze has been
implemented and the Company's executive management team has voluntarily taken
10% salary reductions. Additional cost-reduction initiatives will include
attrition, reduced purchased services and contract employees, and lower capital
expenditures. The cost containment initiatives should be fully implemented by
January 1, 2004. In aggregate, they are expected to reduce spending by
approximately $20,000,000 annually.
Nature of Business
Energy Conversion Devices, Inc. (ECD) has established a multidisciplinary
business, scientific, technical and manufacturing organization to commercialize
products based on its technologies. Its activities range from product
development to manufacturing and selling products, as well as designing and
building production machinery with an emphasis on alternative energy and
advanced information technologies.
Financial Statement Presentation, Principles of Consolidation and
Equity Accounting
The consolidated financial statements include the accounts of ECD and its
100%-owned subsidiaries United Solar Ovonic Corp. (previously called United
Solar Systems Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic
LLC (previously called Bekaert ECD Solar Systems LLC and 40% owned by United
Solar Ovonic Corp. prior to May 14, 2003) (jointly referred to as United Solar
Ovonic), a business formed to develop and commercialize the Company's continuous
web, multilayer, large-area thin-film amorphous silicon photovoltaic technology
(see Note E), and its approximately 91%-owned subsidiary Ovonic Battery Company,
Inc. (Ovonic Battery), a company formed to develop and commercialize ECD's
Ovonic(R) nickel metal hydride (NiMH) battery technology (collectively the
"Company"). The remaining shares of Ovonic Battery are owned by Honda Motor
Company, Ltd., Sanoh Industrial Company, Ltd. and Sanyo Electric Co., Ltd. No
F-37
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
minority interest related to Ovonic Battery is recorded in the consolidated
financial statements because there is no additional funding requirement by the
minority shareholders.
The Company has a number of strategic alliances and has five major
investments accounted for using the equity method: (i) Texaco Ovonic Battery
Systems LLC, a joint venture between Ovonic Battery and ChevronTexaco
Corporation, each having 50% interest in the joint venture, to manufacture and
sell the Company's proprietary NiMH batteries for transportation and stationary
applications; (ii) Texaco Ovonic Hydrogen Systems LLC, a joint venture between
ECD and ChevronTexaco, each having 50% interest in the joint venture, to further
develop and commercialize Ovonic(TM) solid hydrogen storage technology; (iii)
Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler Lowrey, Intel Capital
and other investors, to further develop and commercialize ECD's Ovonic Unified
Memory(TM) (OUM(TM)) technology; (iv) Ovonic Media, LLC, a joint venture owned
51% by General Electric (GE) through its GE Plastics business unit and 49% by
ECD, formed to design, develop, demonstrate and commercialize our proprietary
continuous web roll-to-roll technology for ultra-high-speed manufacture of
optical media products; and (v) ITS Innovative Transportation Systems A.G.
(ITS), a German company beneficially owned 30% by ECD formed to manufacture
battery-powered electric vehicles. In addition, prior to May 14, 2003, the
Company accounted for United Solar Ovonic LLC, owned 40% by United Solar Ovonic
Corp. (now 100% owned by the Company) by the equity method of accounting. Also,
ECD has two 50%-owned joint ventures in Russia, Sovlux Co., Ltd. (Sovlux) and
Sovlux Battery Closed-Stock Company (Sovlux Battery). See Note E for discussion
of all of the Company's ventures.
For the period July 1, 2002 through May 14, 2003, ECD owned 81% of United
Solar Ovonic Corp. (formerly United Solar Systems Corp.) and consolidated that
entity with a 19% minority interest recognized, and accounted for United Solar
Ovonic Corp.'s 40% interest in United Solar Ovonic LLC on the equity basis.
Effective May 15, 2003, with the purchase by the Company from Bekaert
Corporation of the remaining interests in United Solar Ovonic Corp. and United
Solar Ovonic LLC, the Company owns 100% of each of the entities and has
consolidated the entities in their entirety for the period from May 15, 2003
through June 30, 2003. (See Note C - Acquisitions.)
The Company's investments in Texaco Ovonic Battery Systems, Texaco Ovonic
Hydrogen Systems and Ovonic Media are recorded at zero. The Company will
continue to carry its investment in each of these joint ventures at zero until
the venture becomes profitable (based upon the venture's history of sustainable
profits), at which time the Company will start to recognize over a period of
years its share, if any, of the then equity of each of the ventures, and will
recognize its share of each venture's profits or losses on the equity method of
accounting. To the extent that the Company has made cash or other contributions,
it recognizes its proportionate share of any losses until the investment reaches
zero.
F-38
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
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.
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. ECD also received an exclusive, royalty-bearing
license, subject to existing agreements, for the use of all OUM(TM) and Ovonic
Threshold Switch and other Ovonyx technology for use in the field of cognitive
computers. ECD has recorded its $1,000,000 investment in Ovonyx and accounts for
this investment on the equity method and will recognize its proportionate share
of Ovonyx losses to the extent of its $1,000,000 investment. In the year ended
June 30, 2003, ECD recorded an equity loss of $406,000.
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).
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 requires
management to make estimates and assumptions that affect amounts reported
therein. Due to the inherent uncertainty involved in making estimates, actual
results reported in future periods may be based upon amounts that differ from
those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with 2003
presentation.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The
Company adopted these statements on July 1, 2002 and recognized the unamortized
negative goodwill of approximately
F-39
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
$2,216,000. This is a favorable adjustment to the Company and is the cumulative
effect of a change in accounting principle in the Company's statements of
operations.
The following is the effect on the years ended June 30, 2003, 2002 and
2001 of this change in accounting principle:
Year Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net Loss $(36,198,159) $(20,888,034) $ (5,121,838)
Deduct:-
Amortization of negative goodwill - (466,433) (466,433)
Cumulative effect of change in
accounting principle (2,215,560) - -
------------ ------------ ------------
Adjusted Net Loss before cumulative
effect of change in accounting
principle $(38,413,719) $(21,354,467) $ (5,588,271)
============ ============ ============
Basic Net Loss Per Share $ (1.75) $ (.96) $ (.26)
Amortization of negative goodwill - (.02) (.02)
Cumulative effect of change in
accounting principle .10 - -
------------ ------------ ------------
Adjusted Basic Net Loss Per Share
before cumulative effect of change
in accounting principle $ (1.65) $ (.98) $ (.28)
============ ============ ============
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement requires that
discontinued operations are measured at the lower of carrying value or fair
value less cost to sell and that future operating losses of discontinued
operations are not recognized until they occur. The Company implemented this
statement on July 1, 2002. On July 1, 2002, in accordance with the provisions of
SFAS 144, the Company assessed for impairment an intangible asset it had on its
balance sheet since 1995. This intangible asset, which was the result of a
license agreement entered into in 1995, was originally valued at $330,000 and
was being amortized over 40 years. After a review of this intangible asset,
including the associated cash flows represented by recent royalties from one
licensee, the Company determined that this intangible asset was impaired. The
Company wrote off the balance ($272,250) of this intangible asset as of July 1,
2002 and recorded this amount in operating, general and administrative expense
in its consolidated statements of operations for the year ended June 30, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date of an entity's commitment to
an exit plan. The Company implemented this statement on January 1, 2003. The
adoption of this statement did not have a material effect on the Company's
consolidated financial position or results of operations.
F-40
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This Statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The Company currently applies
Accounting Principles Board (APB) 25, "Accounting for Stock Issued to
Employees," to its stock-based compensation grants to employees. Most grants are
awarded at the fair market value on the grant date in accordance with the
applicable plan and, as such, no compensation expense is recorded for these
grants. The Company has no current plans to change to the fair value based
method of accounting for these stock option grants.
In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted this
requirement with the financial statements for the year ended June 30, 2003.
Had compensation costs for the Company'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 loss and net loss per share for years ended June 30, 2003, 2002 and 2001
would have increased as follows:
Year Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net Loss, as reported $(36,198,159) $(20,888,034) $(5,121,838)
Add:
Total stock-based compensation
expense determined under fair
value based method, net of tax 5,054,000 10,880,000 4,018,000
------------ ------------ ------------
Pro-forma net loss $(41,252,159) $(31,768,034) $(9,139,838)
============ ============ ============
Loss per share:
Basic - as reported $ (1.65) $ (.96) $ (.26)
============ ============ ============
Basic - pro forma $ (1.88) $ (1.47) $ (.47)
============ ============ ============
Diluted - as reported $ (1.65) $ (.96) $ (.26)
============ ============ ============
Diluted - pro forma $ (1.88) $ (1.47) $ (.47)
============ ============ ============
The Company applies SFAS 123 for any stock options or awards granted to
nonemployees of the Company. When the measurement date (i.e., when the options
are fully vested) is reached, the amount of compensation cost is determined
based upon the fair value of the options. Prior to the measurement date, the
amount of compensation cost of the options is estimated at each reporting date
and the expense is amortized during the period during which the options vest.
F-41
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
There are two executive stock option agreements which contain antidilution
provisions. Options are priced based on the lower of the sales price of the
additional securities sold by the Company or the fair market value of the Common
Stock as of the date of issuance (see Note H - Equity Compensation Plans Not
Approved by Security Holders). When the resultant option exercise price is lower
than the fair market value on the grant date, the difference is recorded as
compensation expense.
Other Comprehensive Income (Loss)
The Company's total comprehensive loss was as follows:
Year Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net Loss $(36,198,159) $(20,888,034) $ (5,212,838)
OTHER COMPREHENSIVE INCOME
(LOSS) (net of taxes):
Foreign currency translation adjustments 115,493 - -
Unrealized holding gains arising during
period 219,147 476,980 839,149
Less: reclassification adjustments for
gains realized in net income 275,944 870,372 8,590
------------ ------------ ------------
Net unrealized gains (losses) (56,797) (393,392) 830,559
------------ ------------ ------------
COMPREHENSIVE LOSS $(36,139,463) $(21,281,426) $ (4,382,279)
============ ============ ============
Cash Equivalents
Cash equivalents consist of investments in short-term, highly liquid
securities having a maturity of three months or less from the date of
acquisition.
Short-Term Investments
The Company has evaluated its investment policies consistent with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
determined that all of its investment securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Stockholders' Equity under the
caption "Accumulated Other Comprehensive Income." The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and accretions are included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in other nonoperating
income (expense). The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
F-42
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
Short-term investments consist of mortgage and asset-backed securities and
corporate notes which matures 91 days or more from date of acquisition. At June
30, 2003 these short term investments mature in 35 days to 31 months.
Investment in Rare Earth Ovonic-China
The Company has three joint ventures, collectively Rare Earth Ovonic, with
Rare Earth High-Tech Co. Ltd. (Rare Earth High-Tech) of Baotou Steel Company of
Inner Mongolia, China, for the manufacturing of its battery and other related
technologies. The Company accounts for its 19% interest in each of these joint
ventures using the cost method of accounting (total cash investment of
$1,710,000).
Financial Instruments
Due to the short-term maturities of cash, cash equivalents, short-term
investments, accounts receivable and accounts payable, the Company believes that
the carrying value of its financial instruments is a reasonable estimate of fair
value.
Foreign Currency Transaction Gains and Losses
Since most of the Company's contracts and transactions are denominated and
settled in U.S. dollars, there are no significant foreign currency gains or
losses.
F-43
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
Accounts Receivable
-------------------
June 30, June 30,
2003 2002
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Revenues recognized but unbilled
Commercial customers $ - $ 505,857
Amounts billed to customers
Commercial customers 564,598 676,462
----------- -----------
Sub-total 564,598 1,182,319
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
U.S. Government 698,634 371,577
Commercial customers 9,060 172,210
----------- -----------
707,694 543,787
Amounts billed
U.S. Government 1,773,824 1,272,208
Commercial customers - 1,575,020
----------- -----------
1,773,824 2,847,228
----------- -----------
Sub-total 2,481,518 3,391,015
Amounts unbilled for other than long-term contracts
Commercial customers 1,892,532 2,146,983
Amounts billed for other than long-term contracts
U.S. Government - 370
Commercial customers 5,847,071 1,110,760
----------- -----------
Sub-total 5,847,071 1,111,130
Allowance for uncollectible accounts (265,000) (563,000)
----------- -----------
TOTAL $10,520,719 $ 7,268,447
=========== ===========
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 $103,947 are included in long-term other
assets at June 30, 2003 and June 30, 2002. Most U.S. government contracts
remain subject to audit.
F-44
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
Accounts Receivable Due from Related Parties
--------------------------------------------
June 30, June 30,
2003 2002
------------ ------------
Amounts earned which are billed in the subsequent
month on long-term contracts
United Solar Ovonic LLC $ - $ 130,000
Ovonic Media - 364,263
Texaco Ovonic Battery Systems 2,072,138 2,182,575
Ovonic Fuel Cell - 788,894
Texaco Ovonic Hydrogen Systems 1,603,147 1,874,463
----------- -----------
Sub-total 3,675,285 5,340,195
Amounts billed
Texaco Ovonic Battery Systems 3,221,059 1,738,990
Ovonic Fuel Cell - 671,358
Texaco Ovonic Hydrogen Systems - 1,508,948
----------- -----------
Sub-total 3,221,059 3,919,296
Other unbilled
Ovonyx 412 21,248
Other billed
ChevronTexaco Technology Ventures 5,721 536,569
Ovonyx 48,053 21,068
Texaco Ovonic Battery Systems 18,386 97,504
Texaco Ovonic Hydrogen Systems 8,364 -
----------- -----------
Sub-total 80,524 655,141
----------- -----------
TOTAL $ 6,977,280 $ 9,935,880
=========== ===========
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 (moving average) or market. Cost elements included in
inventory are materials, direct labor and manufacturing overhead.
Inventories for United Solar Ovonic Corp., United Solar Ovonic LLC (for
June 30, 2003 only) and Ovonic Battery are as follows:
June 30, June 30,
2003 2002
------------ ------------
Finished products $ 5,282,156 $ 250,370
Work in process 1,825,839 478,997
Raw materials 5,340,177 433,906
----------- -----------
$12,448,172 $ 1,163,273
=========== ===========
F-45
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
Property, Plant and Equipment
All properties are recorded at cost. Plant and equipment are depreciated
on the straight-line method over the estimated useful lives of the individual
assets. The estimated lives of the principal classes of assets are as follows:
Years
--------------
Buildings and improvements 5 to 20
Machinery and other equipment 3 to 12.5
Capitalized leased 3 to 15
United Solar Ovonic LLC capitalized the total costs ($66,812,000) of the
30MW machine (equipment which, when fully optimized, is expected to annually
make solar products capable of producing 30MW of electricity) and began
depreciating this equipment over a 12.5-year period (its estimated useful life)
beginning February 1, 2003. See Note C - Acquisitions.
Capitalized leases are amortized over the shorter of the term of the lease
or the life of the equipment, usually three to 15 years. Accumulated
amortization on capitalized leases as of June 30, 2003 and June 30, 2002 was
$1,444,000 and $2,443,000, respectively.
Costs of machinery and other equipment acquired or constructed for a
particular product development project, which have no alternative future use (in
other product development projects or otherwise), are charged to product
development and research costs as incurred.
Expenditures for maintenance and repairs are charged to operations.
Expenditures for betterments or major renewals are capitalized and are
depreciated over their estimated useful lives.
Long-Term Note Receivable
In connection with N.V. Bekaert S.A. and its U.S.-based subsidiary's
(Bekaert) investment in United Solar Ovonic Corp. and United Solar Ovonic LLC in
April 2000: (1) Bekaert was obligated to invest an additional $12,000,000 in
United Solar Ovonic LLC no later than January 1, 2004, (2) United Solar Ovonic
LLC was required to pay ECD $12,000,000 no later than January 1, 2004, and (3)
ECD was required to pay Canon Inc. of Japan (Canon) $12,000,000 no later than
January 1, 2004. These noninterest-bearing notes were recorded in April 2000 at
a discounted value of $9,500,000 (using a discount rate of 6.3%). In connection
with the purchase of Bekaert's 60% interest in United Solar Ovonic LLC and 19%
interest in United Solar Ovonic Corp. on May 14, 2003, and while ECD continues
to be contractually obligated to pay Canon, Bekaert agreed to pay the
F-46
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
$12,000,000 directly to Canon, which, when made, will satisfy Bekaert's
obligation to United Solar Ovonic LLC and ECD's obligation to Canon.
Product Development, Patents and Technology
Product development and research costs are expensed as they are incurred
and, as such, the Company's investments in its technologies and patents are
recorded at zero in its financial statements, regardless of their values. The
technology investments are the bases by which the Company is able to enter into
strategic alliances, joint ventures and license agreements.
Patents and Patent Defense
Patent expenditures are charged directly to expense. Net patent
expenditures were $2,189,000, $2,183,000 and $1,853,000 for the three years
ended June 30, 2003, 2002 and 2001, respectively. Patent defense expenditures of
$5,429,000 in 2003, $2,749,000 in 2002 and $1,913,000 in 2001, which are
incurred by the Company to protect its patents and to defend or prosecute claims
involving the Company's patents, are charged directly to expense. ChevronTexaco
has agreed to share 50% of the battery litigation expenses, other than those
related to consumer batteries, beginning in fiscal 2002. The reimbursements of
$624,000 in fiscal year 2003 and $2,167,000 in fiscal year 2002 have been offset
against the patent defense costs.
Product Sales
Product sales include revenues related to machine-building and equipment
sales contracts, photovoltaic products, nickel hydroxide and metal hydride
materials and battery packs. Revenues related to machine-building and equipment
sales contracts and sales related to other long-term contracts are recognized on
the percentage-of-completion method of accounting using the costs incurred to
date as a percentage of the total expected costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point. Currently, low sales volumes combined with high fixed costs result in
losses.
The Company estimates product warranty cost liability based upon its past
experience and best estimate of future warranty claims. The Company has
recognized a liability for these product warranties. The following is a summary
of the changes in the product warranty liability during the years ended June 30,
2003, 2002 and 2001:
F-47
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
Year Ended June 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Liability beginning of the period $2,489,024 $ 978,895 $ 70,284
Amounts accrued for as warranty costs 1,212,949 1,510,129 908,611
Amounts acquired in connection with
United Solar Ovonic 728,503 - -
Amounts reversed in connection with
acquiring United Solar Ovonic (1,439,815) - -
Warranty claims - - -
---------- ---------- ----------
Liability at June 30 $2,990,661 $2,489,024 $ 978,895
---------- ---------- ----------
Warranty liability is recorded at the time that the product is sold (for
sales of photovoltaic products) and at the time that revenue is recognized (for
machine-building revenues).
Royalties
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the sale of the respective licensed product. In
several instances, the Company has received cash payments for nonrefundable
advance royalty payments which are creditable against future royalties under the
licenses. Advance royalty payments are deferred and recognized in revenues as
the creditable sales occur, the underlying agreement expires, or when the
Company has demonstrable evidence that no additional royalties will be
creditable and, accordingly, the earnings process is completed.
In connection with a 1992 battery development contract with the United
States Advanced Battery Consortium (USABC), partially funded by the U.S.
Department of Energy (DOE), the Company has agreed to reimburse USABC and DOE,
as their recoupment for payments to the Company under the 1992 Contract, a 15%
share of royalty payments the Company receives through May 3, 2012 where
Ovonic(R) NiMH batteries serve as the primary source of power for
battery-propelled vehicles. The Company has accrued as an expense 15% of such
royalty payments.
ECD has a royalty trust arrangement whereby ECD is obligated to pay a
trust 25% of optical memory royalties received.
Business Agreements
A substantial portion of revenues is derived through business agreements
for the development and/or commercialization of products based upon the
Company's proprietary technologies. The Company has two major types of business
agreements.
F-48
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
The first type of business agreement relates to licensing the Company's
proprietary technology. Licensing activities are tailored to provide each
licensee with the right to use the Company's technology, most of which is
patented, for a specific product application or, in some instances, for further
exploration of new product applications of such technologies. The terms of such
licenses, accordingly, are tailored to address a number of circumstances
relating to the use of such technology which have been negotiated between the
Company and the licensee. Such terms generally address whether the license will
be exclusive or nonexclusive, whether the licensee is limited to very narrowly
defined applications or to broader-based product manufacture or sale of products
using such technologies, whether the license will provide royalties for products
sold which employ such licensed technology and how such royalties will be
measured, as well as other factors specific to each negotiated arrangement. In
some cases, licenses relate directly to product development that the Company has
undertaken pursuant to product development agreements; in other cases, they
relate to product development and commercialization efforts of the licensee; and
other agreements combine the efforts of the Company with those of the licensee.
License agreement fees are generally recognized as revenue at the time the
agreements are consummated, which is the completion of the earnings process.
Typically, such fees are nonrefundable, do not obligate the Company to incur any
future costs or require future performance by the Company, and are not related
to future production or earnings of the licensee. License fees payable in
installments are recorded at the present value of the amounts to be received,
taking into account the collectibility of the license fee. In some instances, a
portion of such license fees is contingent upon the commencement of production
or other uncertainties. In these cases, license fee revenues are not recognized
until commencement of production or the resolution of uncertainties. Generally,
there are no current or future direct costs associated with license fees.
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project, based on the relationship of costs
incurred to estimated total project costs. Revenues from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the
agreed-upon fees for product development agreements contemplate reimbursing the
Company for costs considered associated with project activities including
expenses for direct product development and research, patents, operating,
general and administrative expenses and depreciation. Accordingly, expenses
related to product development agreements are recorded as cost of revenues
from product development agreements.
F-49
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
Deferred Revenues
Deferred revenues represent amounts received under business agreements in
excess of amounts recognized as revenues. At June 30, 2003, approximately
$5,074,000 in deferred revenues relates to the Rare Earth Ovonic contracts.
Overhead and General and Administrative Allocations
The Company allocates overhead and general and administrative expenses to
product development research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
Overhead is allocated to cost of product sales through the application of
overhead to inventory costs.
Other Operating Revenues
Other operating revenues consist principally of revenues related to
services provided to certain related parties and third-party service revenue
realized by certain of the Company's service departments, including the
Production Technology and Machine Building Division and Central Analytical
Laboratory. Revenues related to services are recognized upon completion of
performance of the applicable service.
Other Nonoperating Income
Other nonoperating income-net consists of gains and losses on the sales of
short-term investments, amortization of deferred gains, and rental income.
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, 1998 for United Solar
Ovonic and the years ended June 30, 2000 and June 30, 2001 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, together with its government
consultants, 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 related to these issues.
F-50
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Product Sales, Royalties, Revenues from Product Development Agreements
and License and Other Agreements
The Company has product sales and business agreements with related parties
and with third parties for which royalties and revenues are included in the
consolidated statements of operations. A summary of all of the Company's
revenues follows:
Year Ended June 30,
---------------------------------------
2003* 2002 2001
----------- ----------- -----------
Product sales
Photovoltaics $ 4,001,937 $ - $ -
Machine building and equipment sales 10,949,828 25,295,959 12,961,589
Battery packs 138,179 257,637 844,895
Nickel hydroxide and metal hydride materials 852,494 698,639 118,545
----------- ----------- -----------
15,942,438 26,252,235 13,925,029
Product sales-related parties
Photovoltaics 5,767,035 5,883,442 5,975,424
Machine building 499,793 4,237,201 3,972,778
Battery packs 86,363 19,998 130,000
Metal hydride materials 120,161 241,291 236,739
----------- ----------- -----------
6,473,352 10
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