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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 38-1749884
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
2956 Waterview Drive, Rochester Hills, Michigan 48309
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (248) 293-0440
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x].
The aggregate market value of stock held by non-affiliates (based upon the
closing price of such stock on the NASDAQ National Market System on September
20, 2002) was approximately $230 million. As of September 20, 2002, there were
219,913 shares of ECD's Class A Common Stock, 430,000 shares of ECD's Class B
Common Stock and 21,248,973 shares of ECD's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
===============================================================================
PART I
Item 1: Business
- ------- --------
OVERVIEW
Energy Conversion Devices, Inc. (ECD) is a technology, product development
and manufacturing company, founded by Stanford R. Ovshinsky and Iris M.
Ovshinsky, engaged in the invention, engineering, development and
commercialization of new materials, products and production technology. Under
the direction of Stanford R. Ovshinsky, 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 using chemical and structural disorder to provide extra
degrees of freedom that result in our ability to make many new materials.
We develop Ovonic materials that permit us to design and commercialize new
products such as nickel metal hydride (NiMH) batteries, thin-film solar
(photovoltaic) cell products and phase-change optical memory media. These
products have unique chemical, electrical, mechanical or optical properties and
superior performance characteristics.
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
Energy Storage and Related Technologies
o Rechargeable NiMH batteries
o Ovonic(TM)solid hydrogen storage systems
o Alternative energy vehicles
Energy Generation
o Thin-film photovoltaic (solar) modules and systems
o Ovonic(TM)regenerative fuel cell technology
Information Technology
o Ovonic(TM)Unified Memory
o Rewritable optical memory technology
We manufacture and sell our proprietary products through our 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.
2
Our corporate structure and the activities we conduct directly and through
our subsidiaries and joint ventures are summarized below:
ALTERNATIVE ENERGY TECHNOLOGY
- -----------------------------
ENERGY STORAGE AND RELATED TECHNOLOGIES
---------------------------------------
Batteries
---------
Ovonic Battery Company, Inc.* ECD -- 91.4%
Honda Motor Company, Ltd. -- 3.2%
Sanoh Industrial Co., Ltd. -- 3.2%
Sanyo Electric Co. Ltd. -- 2.2%
Texaco Ovonic Battery Systems LLC Ovonic Battery Company, Inc.-- 50%
ChevronTexaco Corporation -- 50%
Sovlux Battery Closed-stock Company ECD -- 50%
Chepetsky Mechanical Plant -- 50%
(an enterprise of the Russian Ministry of Atomic
Energy (Minatom))
Rare Earth Ovonic Metal ( ECD & Ovonic Battery Company, Inc.-- 19%
Hydride Joint Venture Co. Ltd. (
Rare Earth Ovonic High Power NiMH ( Inner Mongolia Baotou Steel Rare-Earth
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%
Hydrogen
--------
Texaco Ovonic Hydrogen Systems LLC ECD -- 50%
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%
(Continued on next page.)
3
ENERGY GENERATION
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Photovoltaics
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United Solar Systems Corp.* ECD -- 81%
Bekaert Corporation -- 19%
Bekaert ECD Solar Systems LLC United Solar Systems Corp. -- 40%
Bekaert Corporation -- 60%
Sovlux Co., Ltd. ECD -- 50%
State Research & Production Enterprise Kvant and
enterprises of Minatom -- 50%
Fuel Cell Technology
--------------------
Texaco Ovonic Fuel Cell Company LLC ECD-- 50%
ChevronTexaco Corporation -- 50%
INFORMATION TECHNOLOGIES
- ------------------------
Ovonic(TM) Unified Memory
-------------------------
Ovonyx, Inc. ECD -- 41.7%
Tyler Lowrey; Intel Capital; private investors -- 58.3%
Optical Memory
--------------
Ovonic Media, LLC ECD -- 49%
General Electric -- 51%
- -------------------
* The revenues of these entities are included in our consolidated financial
statements.
4
Our technologies have been commercialized in products such as NiMH
consumer batteries and certain NiMH batteries for vehicle propulsion
applications, photovoltaic products and phase-change rewritable optical memory
disks. Other of our technologies require further technical development and
financial resources from us, our joint venture partners and/or third parties in
order to achieve commercial production.
Product manufacturing activities are conducted through our joint ventures.
ECD's principal manufacturing activity consists of machine building by our
Production Technology and Machine Building Division. The principal manufacturing
activities of Ovonic Battery Company, Inc. are metal hydride negative electrode
materials and nickel hydroxide positive electrode materials for NiMH batteries
and metal hydride materials. Texaco Ovonic Battery Systems LLC manufactures
battery packs and positive and negative electrodes for NiMH batteries. United
Solar Systems Corp. and Bekaert ECD Solar Systems LLC manufacture our
photovoltaic products.
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.
Certain technical terms used in this Annual Report are defined in the
section captioned "Glossary of Technical Terms" appearing at the end of this
Item 1.
5
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 permit us to achieve our strategic objectives. Our battery licensees have
produced more than a billion NiMH batteries during 2001.
Energy activities, specifically in the areas of complete systems for
energy generation, storage and infrastructure, 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 sustained concerns about air pollution,
energy security, 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 Ovonic(TM) Unified Memory
(OUM), based on our proprietary electrical phase-change materials, which 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. Our Ovonic phase-change rewritable optical
memory technology 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 recording.
Consolidated revenues for our last three fiscal years (including revenues
of ECD, Ovonic Battery and United Solar, but excluding revenues of licensees and
joint ventures) in our major business groups were as follows:
2002 2001 2000
---------- ---------- ----------
(000's) (000's) (000's)
Alternative energy technology
Energy storage $ 42,366 $ 32,727 $ 15,757
Energy generation 17,189 17,406 4,398
Information technology 2,398 3,336 4,489
Other
Machine building and equipment sales 29,533 16,934 1,824
Services to joint ventures - 677 2,843
Other 224 324 668
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Total Revenues $ 91,710 $ 71,404 $ 29,979
======== ======== ========
6
The Company has historically entered into agreements with a relatively
small number of major customers throughout the world. In the year ended June 30,
2002, three customers represented 67% of the Company's total revenues (28% Rare
Earth Ovonic joint ventures, 20% Texaco Ovonic Hydrogen Systems and 19% Texaco
Ovonic Battery Systems). In the year ended June 30, 2001, three customers
represented 54% of the Company's total revenues (25% Rare Earth Ovonic joint
ventures, 17% Texaco Ovonic Hydrogen Systems and 12% Texaco Ovonic Fuel Cell).
In the year ended June 30, 2000, two customers represented 25% (14% GM Ovonic
and 11% GM) of the Company's total revenues.
Alternative Energy Technology
Energy Storage
Rechargeable Batteries. Using Ovonic materials, our battery subsidiary,
Ovonic Battery, has developed proprietary NiMH battery technology which has
achieved recognition by all significant NiMH battery manufacturers throughout
the world.
Ovonic(TM) NiMH batteries store over twice as much energy as standard
nickel cadmium (Ni-Cd) or lead acid batteries of equivalent weight. In addition,
Ovonic(TM) NiMH batteries have high power, long cycle life, are maintenance free
and have no memory effect. Moreover, Ovonic(TM) NiMH batteries do not contain
cadmium or lead, both environmentally-hazardous substances. Ovonic(TM) NiMH
batteries are capable of being made in a wide range of sizes and have a wide
range of applications, including, for example, hand-held consumer electronics
such as digital cameras; electric and hybrid 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.
Our basic patents cover all commercial NiMH batteries. Ovonic Battery has
established a dominant patent position in the field of NiMH batteries, with 72
issued United States patents and 312 foreign counterparts. While all of our
patents involving Ovonic(TM) NiMH battery technology are important to our
licensing activities, there are approximately 12 patents which we believe to be
particularly important. These patents have various dates of expiration ranging
from 2003 through 2013. Additional United States 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 litigation, 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.
See Item 3: Legal Proceedings on page 33.
Ovonic(TM) NiMH batteries are manufactured and sold throughout the world
by such major companies as Sanyo under a licensing arrangement and our joint
venture with ChevronTexaco, Texaco Ovonic Battery Systems. In the last three
years, we have licensed our NiMH patents to five battery manufacturers in the
People's Republic of China. We are
7
also in negotiations with other Chinese companies for additional license
agreements. Ovonic Battery also produces the metal hydride negative electrode
materials and nickel hydroxide positive electrode materials for sale to some
licensees. Metal hydride materials for use in Ovonic(TM) 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, 2002, Ovonic Battery
produced metal hydride negative electrode materials and nickel hydroxide
positive electrode materials generating revenues of $940,000 from sales to some
licensees for assembly into complete batteries for consumer and propulsion
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 propulsion
applications) of the selling price of NiMH batteries. Licensees of NiMH
batteries are granted nonexclusive, royalty-bearing licenses under our consumer
NiMH battery patents (and, in the case of certain licensees, our 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% or 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 licenses also can be terminated by the licensee should the
licensee determine the license is unnecessary; 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 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 11 years), we believe
that patents applicable to NiMH batteries can provide us with royalty revenues
through 2013 at the present time.
Through our joint venture, Texaco Ovonic Battery Systems, and our
subsidiary, Ovonic Battery, we are currently focusing on six principal battery
markets:
o portable electronics, portable power tools and consumer
applications;
o EV, HEV, fuel cell electric vehicle (FCEV) and fuel
cell hybrid electric vehicle (FCHEV) 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;
8
o electric and hybrid electric buses and trucks;
o two- and three-wheeled electric vehicle propulsion
including power-assisted bicycles;
o industrial applications such as utility applications,
industrial uses, telecommunications, energy storage
for remote power generation and battery-operated
industrial equipment.
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, portable computers and cordless tools)
has created a large market for rechargeable batteries and has fueled development
of higher energy density battery systems. Although conventional storage
batteries, such as Ni-Cd, have been further improved in design and packaging in
recent years, the demand for higher performance batteries continues to increase.
Ovonic(TM) NiMH batteries are capable of having an energy density of over 90
watt-hours/kilogram, which is more than two times that of Ni-Cd batteries.
Technology improvements have led to a demonstration of specific energy in excess
of 100 watt-hours/kilogram in our prototype batteries, with higher specific
energy in the process of development. Over 1,500 watts/kilogram of specific
power has been achieved in prototype batteries for propulsion applications, with
higher energy and power in the process of development.
Consumer and governmental awareness that cadmium contained in Ni-Cd
batteries can cause serious health problems is moving the industry away from
Ni-Cd batteries, with many European governments seeking to ban their use. The
desire of the battery industry to be cadmium free is also a major factor in the
growing interest in Ovonic(TM) NiMH batteries.
Lithium-Ion (Li-Ion) batteries compete with NiMH batteries in applications
for consumer electronic devices. Li-Ion technology presently achieves higher
specific energy than NiMH technology and has a stronger market share than NiMH
in high-end consumer electronic devices such as laptop computers and more
expensive cell phones. NiMH technology has numerous advantages over Li-Ion
technology such as lower cost, higher power, safety and abuse tolerance. NiMH
batteries are most favored by manufacturers of mass market consumer electronic
devices and are the batteries of choice by the manufacturers of hybrid
electric vehicles.
Ovonic Battery has licensing arrangements with the world's largest battery
manufacturing companies. Its proprietary battery technology has been licensed
for consumer battery applications to Sanyo Electric Co., Ltd., Toshiba
Battery Co., Ltd., (which sold its former NiMH battery manufacturing business
to Sanyo), Canon Inc., and Hitachi Maxell, Ltd., all leading Japanese companies;
GP Batteries International Limited (formerly Sylva Industries, Ltd.) in Hong
Kong; Varta Batterie AG; Sovlux Battery Co. Ltd., our joint venture in Russia;
Harding Energy Inc.; Walsin Technology Corporation and Nan Ya Plastics
Corporation (Nan Ya) (an affiliate of Formosa Plastics Group and the assignee
of Asia Pacific Investment Co.), both leading Taiwanese companies; and Samsung
Electronics Co., Ltd. of Korea. In addition, the Ovonic Battery technology is
being used in consumer battery applications by another consumer battery
manufacturer based in Japan. Saft, S.A., Saft America, Inc., GS-Saft Ltd. (Saft
Group) and Japan Storage Battery Co., Ltd. are also
9
licensed under a royalty-bearing license agreement to Ovonic Battery's
proprietary battery technology in the United States.
In addition to our three Rare Earth Ovonic joint ventures in China with
Rare Earth High-Tech Co., Ltd., which are licensed for consumer and propulsion
battery applications, we have entered into royalty-bearing consumer battery
license agreements with five other Chinese companies - BYD Battery Co., Ltd.,
SANIK Battery Co., Ltd., Lexel Battery (Shenzhen) Co., Ltd., Henan Huanyu Power
Source Co., Ltd. and TWD Battery Co, Ltd.
Licensees engaged in manufacturing NiMH batteries for consumer
applications are Sanyo, Hitachi Maxell, GP Batteries, Varta, Saft Group, Japan
Storage, BYD Battery and a consumer battery manufacturer in Japan.
Electric, Hybrid and Fuel Cell Electric, and Fuel Cell Hybrid Electric
Vehicle Batteries. The strategic importance of EVs, HEVs, FCEVs and FCHEVs 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.
Most of the world's major automobile manufacturers have active programs
underway to develop and commercially market EVs, HEVs, FCEVs and FCHEVs. Since
Ovonic(TM) NiMH battery technology provides two to two-and-a-half times the
driving range as the same mass of lead acid batteries, the NiMH battery
technology has become the battery of choice for several major automobile
manufacturers as they prepare to commercialize and market EVs, HEVs, FCEVs and
FCHEVs. Currently, Toyota Motor Corporation and Honda are manufacturing HEVs
using NiMH batteries incorporating our Ovonic(TM) battery technology (see Item
3: Legal Proceedings on page 33) and, to date, over 100,000 HEVs have been sold
worldwide.
In May 1999, the U.S. Department of Energy (DOE) released the results of
baseline performance testing of the General Motors EV1 and the Chevrolet S10
electric pickup truck powered by Ovonic(TM) NiMH batteries manufactured by GM
Ovonic L.L.C., the predecessor to Texaco Ovonic Battery Systems. According to
the DOE results, the EV1 with Ovonic(TM) NiMH batteries was the first vehicle to
have a range of 220.7 miles at a constant speed of 45 miles-per-hour (mph) and
160.6 miles at a constant speed of 60 mph. In addition, the S10 electric pickup
truck with Ovonic(TM) NiMH batteries traveled 130.6 miles at a constant speed of
45 mph and 87.7 miles at a constant speed of 60 mph, twice as far as the S10
powered by the lead acid battery previously tested. The baseline performance
testing was conducted by the DOE's Field Operations Program at the Idaho
National Engineering and Environmental Laboratory.
To illustrate the lower cost operation of battery-powered electric
vehicles, a four-door Chevrolet Geo Metro with a gasoline engine was matched
against a Solectria Force (the electric version of the Geo Metro) to measure the
operating efficiencies of the two vehicles over a 23.5-mile route through
mid-town Manhattan (New York City) at the 1998 Tour de Sol. Based upon a central
power plant efficiency rate of 51%, a power transmission efficiency rate of 92%,
a battery charger efficiency rate of 90% and a battery energy efficiency rate of
90%, the electric car's use of 2.87 kWh of electricity was the equivalent of
10
0.27 gallon of gasoline. The gasoline-fueled car used 2.28 gallons of gasoline.
The gasoline Geo Metro achieved 10.3 miles per gallon, while the Solectria Force
returned an 87 miles-per-gallon equivalent. At $1.50 per gallon, it cost $3.42
for the Geo Metro's gasoline and the equivalent of $0.41 to power the Solectria.
Texaco Ovonic Battery Systems. In June 1994, Ovonic Battery and General
Motors Corporation formed a joint venture, GM Ovonic, of which Ovonic Battery
owned a 40% interest and General Motors owned a 60% interest, to manufacture and
sell Ovonic Battery's proprietary NiMH batteries for four-wheeled electric
propulsion applications. In July 2001, a business unit of ChevronTexaco
Corporation completed the purchase from GM of its stake in GM Ovonic and we and
ChevronTexaco announced the formation of Texaco Ovonic Battery Systems LLC, a
50/50 joint venture between Ovonic Battery and ChevronTexaco, for the purpose of
bringing advanced NiMH batteries into widespread commercial production for
propulsion applications as well as for non-propulsion applications. Texaco
Ovonic Battery Systems is also investing in the development of production-ready
prototypes of the new Ovonic(TM) NiMH monoblock battery, a compact design for
high-voltage (36-42 volt) automotive electrical systems for future
gasoline-powered automobiles.
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. Ovonic Battery has contributed intellectual property, licenses,
production processes, know-how, personnel and engineering services relating to
Ovonic(TM) NiMH battery technology to the joint venture.
The advanced product development is being accomplished through a product
development contract from Texaco Ovonic Battery Systems to Ovonic Battery. The
contract, which began October 1, 2000, will last up to three years and may be
cancelled if mutually agreed-upon milestones are not materially satisfied. The
Company recorded revenues of approximately $16.3 million for work performed
under the contract in the year ended June 30, 2002 and is budgeted to receive
approximately $12.7 million in 2003.
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 (Minatom), 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 substantial reductions
in the cost of Ovonic Battery's proprietary NiMH batteries.
11
Other Battery Applications. Several licensees of Ovonic(TM) NiMH battery
technology, such as Sovlux, Canon and Texaco Ovonic Battery Systems, 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(TM)
NiMH batteries where standby, uninterruptible and portable energy storage is
required or convenient.
Ovonic(TM) Solid Hydrogen Storage Systems. Hydrogen energy technology
has been a part of our scientific work and business strategy since our founding
in 1960.
No potential fuel source approaches the ideal fuel other than hydrogen. It
is clean and efficient and it yields more energy per unit of weight than any
other existing 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 liquifaction 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
psi and 71 grams per liter in liquid form at the extremely low temperature of
- -253 degrees C. Hydrogen liquifaction requires a tremendous amount of energy
(approximately 10 kWh of electric energy to liquify 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 which stores
hydrogen in a solid metal matrix at low practical pressures. Our Ovonic(TM)
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 33 United States patents and 167 foreign
counterparts applicable to hydrogen storage in a metal hydride, as well as
patent applications in various stages of prosecution.
On October 31, 2000, we and ChevronTexaco formed a joint venture,
Texaco Ovonic Hydrogen Systems LLC, to further develop and advance the
commercialization of the Ovonic(TM) 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 will be up to $104 million, of which $12.5 million ($11.8 million
of which we received in revenue) and $20.2 ($18.6 million of which we received
in revenue) was expended in fiscal years 2001 and 2002, respectively,
12
and $21 million is expected to be expended in fiscal year 2003 (of which we
expect to receive $20 million in revenue). 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
even 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. This is a critically
important attribute that carries over to metal hydrides engineered for hydrogen
storage. Our tests also 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 an FCEV for several hundred miles. To provide 300 miles of range in an
advanced FCEV, four to six kilograms of hydrogen storage capacity are expected
to be required (depending on the size of the vehicle).
Our Ovonic(TM) solid hydrogen storage systems technology requires further
technical and product development and additional financial resources to reach
commercial product status.
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 CO2 and
hydrocarbon emissions. In fiscal year 2002, we completed a DOE-sponsored program
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. This contract was a standard R&D cost-sharing contract,
which required us to bear 50% of the overall costs of this program, with
standard termination provisions. We received revenues of $1,949,000 during the
term of this contract. We retain the technology rights for the inventions and
other discoveries under this program. The DOE has so-called "march-in rights"
under standard government contracts of this type to use, or have others use,
this technology on a royalty-free basis under certain conditions.
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. 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.
13
We have initiated a further joint project with ChevronTexaco to convert a
2-liter internal combustion engine (ICE) to run on hydrogen. This converted
engine will be used to power a hybrid electric vehicle, using metal hydride
storage tanks. We and ChevronTexaco are equally sharing the cost of this
$1,000,000-development program. We expect to recognize revenues of $500,000
under this hydrogen ICE program with ChevronTexaco, of which $203,000 was
recognized as revenue in the year ended June 30, 2002.
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 EVs, HEVs
and FCHEVs for world markets. The business and assets of Unique Europa have been
reorganized into a new company, ITS Innovative Transportation Systems A.G.
(ITS), based in Germany. As of October 2001, 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 is in the
process of building 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.
Four-Wheeled Vehicle Battery Business Arrangements. In addition to its
Texaco Ovonic Battery Systems joint venture, Ovonic Battery has entered into
royalty-bearing license agreements having limited rights for the manufacture of
Ovonic(TM) NiMH four-wheeled vehicle propulsion batteries and related products
outside of the United States with 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. Saft Group is licensed under a royalty-bearing license agreement
for the manufacture and sale of vehicle propulsion batteries in the United
States. Among our licensees of Ovonic(TM) NiMH batteries for four-wheeled
vehicle propulsion applications, Sanyo is the only licensee 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(TM) 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 (TACOM), a division of the Department of
the Army, U.S. Department of Defense (DOD), to develop an advanced
liquid-cooled, plastic
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monoblock battery for heavy-duty HEVs. This 30-month, $5 million, 50/50
cost-share contract calls for coordinated research and development to be carried
out by Ovonic Battery, in collaboration with Texaco Ovonic Battery Systems, and
TACOM. 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 DOD.
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 has a "Family of Batteries" that can satisfy the energy
storage needs of the full spectrum of EVs, HEVs, FCEVs and FCHEVs, including
bicycles, two- and three-wheeled scooters, cars, trucks and vans. The automotive
industry has expressed considerable interest in batteries for the emerging HEV
market and Texaco Ovonic Battery Systems is positioning itself to offer the
industry a high performance NiMH battery. Ovonic(TM) NiMH batteries have
demonstrated power capabilities of prototype HEV batteries at more than 1500
watts per kilogram. Ovonic(TM) NiMH batteries for HEVs are being reviewed with a
variety of potential customers. Both EV and HEV types of NiMH batteries are
included in a program, conducted by Ovonic Battery and funded by Texaco Ovonic
Battery Systems, with the objective of increasing the energy density and power
of future batteries as well as reducing their size and cost.
Texaco Ovonic Battery Systems' HEV battery meets specifications set by the
DOE's FreedomCar Initiative and its predecessor, the Partnership for Next
Generation of Vehicles, a program among automakers, suppliers, the DOE, the U.S.
Department of Commerce, the DOD 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 DOE's FreedomCar Initiative, to
continue the development work on its proprietary liquid-cooled 12V monoblock
NiMH battery technology for HEVs focusing on complete battery systems,
performance and production costs.
Two- and Three-Wheeled Vehicles. We have installed Ovonic(TM) 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. Texaco Ovonic Battery Systems
considers 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(TM) 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(TM) NiMH batteries have
won many awards. At the 2000 Tour de Sol, the Ovonic(TM) 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(TM) NiMH batteries for two- and three-wheeled
vehicles with Sanyo, Walsin, Sanoh Industrial Co., Ltd., Nan Ya and our Rare
Earth Ovonic joint
15
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(TM) NiMH batteries for two-
and three-wheeled vehicle applications.
Energy Generation
Photovoltaic Technology. Photovoltaic (PV) 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. We
originated and have patented our proprietary continuous web, multilayer,
large-area thin-film amorphous silicon (a-Si) technology, and, together with our
joint venture, United Solar Systems Corp., 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 PV products that are
produced using other PV technologies, our PV 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 PV 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. We and United Solar have 155 United States patents and 251 foreign
counterparts in photovoltaic technology.
Because many of our patents are broad and because our patent portfolio is
extensive, we do not consider the expiration of any patent applicable to PV
technology to be material. In view of the overall strength of our patent
position relating to PV technology, we do not believe that the expiration of any
of our PV technology patents occurring in the next five years will have a
material adverse effect on our business.
Crystalline silicon was the original materials technology used by the
photovoltaic industry. First widely used in space satellites, conventional
crystalline silicon solar cells are fabricated in a step-and-repeat, batch
process from small wafers of single crystal or polycrystalline silicon
semiconductor materials. Notwithstanding the substantial advances that have been
made in the development of this technology, the cost of crystalline photovoltaic
modules is still high because of high materials costs and the many processing
steps needed to manufacture the modules. Crystalline silicon solar cell modules
are bulky, break easily and consume more energy in their manufacture than does
our a-Si technology.
There are other thin-film technologies for producing solar cells using
materials containing cadmium, which is not environmentally friendly and which
require that care be taken with products using such materials during
manufacturing and after sale. These other thin-film technologies, as well as
crystalline silicon technology, employ a step-and-repeat batch process, not a
continuous roll-to-roll manufacturing process as pioneered by us and used by
United Solar.
16
Using our proprietary thin-film, vapor-deposited a-Si alloy materials, we
have developed proprietary technology to reduce the materials cost in a solar
cell. Because a-Si absorbs light more efficiently than its crystalline
counterpart, the a-Si 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,
United Solar's PV 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.
Amorphous cells with different light absorption properties also can be
deposited continuously, one on top of another, to capture the broad solar
spectrum more effectively, which increases the energy conversion efficiency of
the multi-cell device and improves performance stability. This unique
multi-junction approach has resulted in world record efficiencies for our a-Si
technology. United Solar has been awarded an "R&D 100" award by R&D Magazine for
its triple-junction amorphous silicon solar electric module. The magazine's
editors and staff, together with outside experts, reviewed thousands of new
inventions to determine the 100 most significant advances of 1998. United Solar
was also honored in January 2001 with the Bright Light Award for its
triple-junction technology by DOE. The Award honors the best scientific and
technological accomplishments during the 20th century carried out under the
sponsorship of DOE.
Through our United Solar joint venture, we have advanced our pioneering
work in amorphous silicon alloy photovoltaic and hold current world records for
both large- and small-area conversion efficiency for amorphous silicon solar
cells, as measured by the DOE's National Renewable Energy Laboratory (NREL).
Conversion efficiency is the percentage of sunlight that is converted into
electricity. United Solar has achieved a world record of 10.2% stabilized energy
conversion efficiency for large area (one-square foot) amorphous silicon alloy
photovoltaic modules, which the DOE characterized in 1994 as a major
breakthrough. United Solar 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 a-Si alloy are deposited
sequentially in a high yield, automated machine to make a continuous, stacked
three-cell structure. 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 formed joint ventures to manufacture PV modules and systems and to
sell them throughout the world.
17
In April 2000, we entered into a strategic alliance with N.V. Bekaert S.A.
of Belgium, a leading manufacturer of steel wire, steel wire products and steel
cord, and a fast-growing manufacturer of advanced materials.
As part of our alliance, Bekaert provided ECD with the cash to acquire for
ourselves and Bekaert the shares in United Solar formerly held by Canon and we
formed a new joint venture company, Bekaert ECD Solar Systems, which assembles
PV modules, provides systems integration and markets and sells PV products.
United Solar is owned 81% by us and 19% by Bekaert. Bekaert ECD Solar Systems
is owned 40% by United Solar and 60% by Bekaert.
Bekaert's total investment commitment relating to our strategic alliance
is $84 million, which includes $24 million which was provided to ECD as partial
payment to purchase Canon's stock in United Solar and an investment of $60
million in United Solar and in Bekaert ECD Solar Systems. All of this investment
was funded by the end of calendar year 2002 except for the last $12 million
which will be funded before 2004. A portion of the funds invested by Bekaert
in United Solar was used to purchase new manufacturing equipment, which we
designed and built, to make solar products capable of producing on an annual
basis 30 megawatts of electrical power. A portion of the investment in
Bekaert ECD Solar Systems will be used to implement an expanded sales and
marketing program for PV products. Our contribution to United Solar in return
for our ownership interest consisted of licenses, know-how and proprietary
technology. United Solar and Bekaert ECD Solar Systems will require additional
financial resources to fund their future activities.
ECD and Bekaert each have guaranteed 50% of the rent obligation for
Bekaert ECD Solar Systems' new Auburn Hills, Michigan facility and 50% of
Bekaert ECD Solar Systems' $40,000,000 sale-and-leaseback of the 30MW machinery
and equipment.
Bekaert ECD Solar Systems/United Solar will require an estimated
additional $40,000,000 through the period ending September 30, 2003 in order to
cover operating expenses, including ramp-up of production and implementation of
marketing programs, and for working capital purposes. Neither ECD nor Bekaert
is obligated to provide any portion of the required additional funding to
Bekaert ECD Solar Systems/United Solar. However, ECD and Bekaert have agreed to
make bridge loans to the joint ventures in the aggregate amount of $28,300,000
with $12,200,000 in bridge financing provided by Bekaert and $16,100,000 by ECD.
ECD and Bekaert plan to explore new equity investors and bank financing to meet
the joint ventures' future cash requirements. ECD may also provide additional
bridge loans to the joint ventures.
United Solar and Bekaert ECD Solar Systems are producing a variety of PV
products and selling PV modules and systems throughout the world. They
manufacture products for remote power applications, telecommunications,
PV-powered lighting systems, building-integrated photovoltaic systems and marine
applications at their Michigan facilities.
On June 24, 2002, United Solar and Bekaert ECD Solar Systems officially
inaugurated their 30-megawatts solar products manufacturing equipment, the
world's largest thin-film solar cell manufacturing machine, at their
manufacturing plant in Auburn
18
Hills, Michigan. Approximately $59 million has been invested in this new,
state-of-the-art manufacturing equipment. The solar-cell manufacturing
equipment, designed and built by our Production Technology and Machine Building
Division using our roll-to-roll technology, will expand the manufacturing
capacity of United Solar and Bekaert ECD Solar Systems sixfold to solar
products capable of producing on an annual basis 30 megawatts of electrical
power.
We and United Solar have developed, and United Solar and Bekaert ECD Solar
Systems are manufacturing and selling, unique products for the building and
construction industries such as PV shingles, metal roofing products and PV
laminate products which emulate conventional roofing materials in form,
construction, function and installation.
The PV roofing products are receiving enthusiastic market response. In
2001, United Solar and Bekaert ECD Solar Systems 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.
They also will be completing, prior to the end of calendar year 2002, a contract
with ChevronTexaco to install a PV system in California capable of producing 500
kilowatts of electrical power (expanded from 400 kilowatts). ChevronTexaco has
the option to expand the system to 1 megawatt of power. Bekaert ECD Solar
Systems also has recently installed a 76-kilowatt PV roofing system in Spain.
United Solar is also building on ECD's development of extremely
lightweight PV technology and developing PV products for space applications.
Telecommunication and defense requirements are expected to result in the launch
of large constellations of low earth orbit satellites and high altitude
platforms in the next decade which will require lower cost, lighter weight PV
modules than those currently used in space. United Solar's PV cells, initially
developed by ECD, are radiation hard, perform very well at the high temperatures
encountered in space and can be significantly lighter and less expensive than
conventional technologies.
In April 2000, upon the successful completion of a Phase I contract, we
were awarded a cost-sharing contract by the U.S. Air Force to further advance
our proprietary PV space technology. This contract, expected to be completed
prior to the end of calendar year 2002, is a standard R&D cost-sharing contract
which requires us to bear 50% of the overall costs of this program. We expect to
recognize revenue of approximately $1,245,000 during the term of this contract.
Under this contract, we and United Solar will develop laser-integrated extremely
light, thin-film amorphous silicon-based solar panels on Kapton(R), a
lightweight, 1 to 2 mil thick plastic substrate, for auxiliary spacecraft power
systems. The technology being developed is expected to be capable of providing
2,500 watts per kilogram which is dramatically higher than 30-50 watts per
kilogram currently available, with savings of approximately $500,000 per
satellite launch.
In July 2001, DOE and NREL awarded United Solar a contract under the
Photovoltaic Technologies Beyond the Horizon program. Under this contract,
United Solar will work on the development of high-efficiency thin-film solar
cells deposited at high rates. This cost-sharing contract requires United Solar
to bear 50% of the overall cost of the
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program and will provide approximately $500,000 in revenue to United Solar over
its three-year term.
In October 2001, United Solar was awarded two U.S. government-sponsored
sub-contracts from Lockheed Martin and Boeing under the Dual-Use Science and
Technology (DUST) program of the U.S. Air Force. The goal of the program is to
develop lightweight and space-qualified solar arrays for satellites. These
approximately 50/50 cost-shared programs are valued at $1.6 million (Lockheed
Martin) and $900,000 (Boeing) and are expected to provide approximately
$1,250,000 in revenue to United Solar over a period of three years. Each
contract is awarded for one year, and continuation is dependent on performance
and availability of funding.
Ovonic(TM) Regenerative Fuel Cell. 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(TM) regenerative fuel cell
technology. We and ChevronTexaco each own 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 received $8.8 million in
revenue) and $9.8 million (of which we received $8.9 million in revenue) in
fiscal years 2001 and 2002, respectively. Our contribution to Texaco Ovonic Fuel
Cell in return for our 50% interest consisted of licenses, know-how and
proprietary technology.
We and ChevronTexaco are currently in discussions regarding the future
business strategy of this joint venture, including the involvement of additional
joint venture partners. ChevronTexaco has approved a budget of $3.8 million to
fund the activities of the joint venture through December 31, 2002, and will
review its funding of this joint venture for periods following December 31,
2002.
The Ovonic(TM) 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.
We believe that we have solved major barriers in modern fuel cell
technology with our fundamentally different Ovonic(TM) fuel cell technology to
enable the widespread utilization of fuel cells.
Our unique, low-cost, proprietary fuel cell technology utilizes materials
for the production of electrodes which do not rely on expensive and rare noble
metals such as platinum and palladium, are manufactured using processes similar
to those used in the manufacture of electrodes used in our Ovonic(TM) NiMH
batteries, are robust, poison resistant and expected to provide significantly
superior performance and lower costs as compared to other technologies, such as
proton exchange membrane (PEM) fuel cells. Our fuel cell technology is capable
of instant start-up and allows for the storage of kinetic energy recaptured
during vehicle braking, making our technology ideal for vehicle propulsion
applications. Additionally, our fuel cell technology is capable of increased
efficiency and
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power availability (higher voltage and current), has a greater operating
temperature range of -20 degrees C to +120 degrees C and does not require an
extensive external thermal management system.
PEM fuel cells, on the other hand, require platinum in the electrodes and
a costly proton exchange membrane and operate over a narrow temperature range.
The Ovonic(TM) regenerative fuel cell technology is being developed for
commercial use in a full range of stationary, portable power and propulsion
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(TM) regenerative fuel cell technology. These patents
have various dates of expiration ranging from 2002 through 2018. We do not
believe that the expiration of any patent applicable to Ovonic(TM) regenerative
fuel cell technology during the next five years will have a material adverse
effect on our business.
Our Ovonic(TM) regenerative fuel cell technology requires further
technical and product development and additional financial resources to reach
commercial product status.
Information Technologies
We have developed a number of key proprietary products and processes in
the field of information technology. Both the phase-change optical and
electrical memory technologies are based on Stanford Ovshinsky's basic
pioneering inventions.
Ovonic(TM) Unified Memory. We developed the first nonvolatile
semiconductor memory, the Ovonic(TM) 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(TM) Unified Memory (OUM).
In January 1999, we and Tyler Lowrey, the former vice chairman and chief
technology officer of Micron Technology, Inc., formed an alliance (a corporation
was formed on June 23, 1999), Ovonyx, Inc. (initially owned 50% by ECD 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 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 PDAs where a
single OUM device can replace DRAM and FLASHh 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
21
scalable, radiation-hard and provides a user-friendly PC interface. OUM
technology is expected to have 1 million times the cycle life of FLASH and
100 times the write speed of FLASH.
In November 1999, Ovonyx and Lockheed Martin Space Electronics &
Communications (now BAE Systems) 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 December 2000, Ovonyx and STMicroelectronics signed a nonexclusive
royalty-bearing agreement whereby STMicroelectronics will license Ovonyx
thin-film nonvolatile semiconductor memory technology for use in the
STMicroelectronics product line. The two companies also established a joint
development program.
OUM technology will require further technical development and may require
additional financial resources to reach commercial product status.
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, and is a much more robust product having 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 or CD-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 phase-change rewritable optical memory technology to
a number of companies engaged in the manufacture of data storage media. Among
our licensees are 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 present portfolio of patents
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relating to rewritable optical memory products does not expire until 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 "convergence" product offering higher-capacity
data storage is the DVD. Playback-only DVD disks and drives (DVD-ROM) are
commercially available now, as well as DVD-RAM, DVD-RW and DVD+RW, three formats
that use our phase-change rewritable optical memory technology. These products
are used for storage of both video and computer data.
Following the successful development of technology under a project funded
by the National Institute of Standards and Technology's (NIST) Advanced
Technology Program (ATP), we and General Electric, through its GE Plastics
business unit, formed a strategic alliance in March 2000. We and GE Plastics
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
will make cash and other contributions to the joint venture. Since its
inception, Ovonic Media has paid us $4.9 million through the end of fiscal year
2002. This joint venture is presently being funded by GE on a month-to-month
basis.
Ovonic Media has completed the first phase of the technology development
phase of its operations and has entered the second phase of operation. Current
activities include process optimization and production machine design. The
venture is strategizing its product planning to coordinate product introduction
to best match market opportunities. The scale up of manufacturing capacity with
production equipment will require additional funding beyond the capital
contribution by GE, requiring Ovonic Media to seek funding from external sources
or from its joint venture partners.
Thin-Film Synthetic Materials
ECD has developed a range of vapor-deposited thin-film materials and
cost-effective roll-to-roll production technologies, including a high-rate
microwave plasma-enhanced chemical vapor deposition (MPCVD) process. The major
commercial application for this technology is high-performance optical coatings.
Optical Films. An important application for transparent thin-film coatings
which are deposited using our cost-effective roll-to-roll production
technologies is in thin-film optical coatings which selectively absorb, reflect
or transmit certain types of electromagnetic radiation. These coatings have a
wide range of commercial applications--from anti-glare screens for computer and
television displays to solar-controlled windows for architectural and automotive
applications. In February 1999, we received a contract from Southwall
Technologies, Inc. to build proprietary large-area MPCVD equipment. In July
2000, our Production Technology and Machine Building Division delivered the
large area roll-to-roll MPCVD machine to Southwall. This is the first
large-scale commercial machine utilizing our passive coatings technology, and is
expected to provide a platform for commercialization of our passive coatings
technology and related equipment.
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PRODUCTION TECHNOLOGY AND MACHINE BUILDING DIVISION
AND CENTRAL ANALYTICAL LABORATORY
Our Production Technology and Machine Building Division 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 our licensees multiple generations of photovoltaic production lines,
including machinery and equipment for manufacturing solar products capable of
producing on an annual basis 30 megawatts of electrical power for Bekaert ECD
Solar Systems and United Solar, as well as research, development and
manufacturing equipment for vapor barrier coating and other materials
technology.
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 support our commercial
activities. Agencies of the United States 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 are in the process of completing 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 the Ovonic
(TM) Cognitive Computer - a unique approach to 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. The Ovonic(TM) Cognitive
Computer incorporates nanostructural Ovonic materials deposited a 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 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 and GE joint
ventures, as well as others who could utilize our advanced capabilities.
As of June 30, 2002, the amount of future revenues we were entitled to
receive under contracts with government agencies totaled approximately
$5,006,000, $200,000 of which has not yet been approved by the government as of
June 30, 2002. These contracts are cancelable at any time with provisions to
reimburse us for any costs through the termination date. The Company's
government contracts, which have partially funded
24
development of limited portions of certain areas of the Company's 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 the Company
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, 2002. All of our research and development costs are expensed as incurred.
Direct Research and Development Expenditures
--------------------------------------------
Year Ended June 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Sponsored by industrial
partners, government
agencies and licensees $40,358,618 $26,936,302 $ 8,333,348
Sponsored by us 7,467,157 7,809,453 11,863,416
----------- ----------- -----------
$47,825,775 $34,745,755 $20,196,764
=========== =========== ===========
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 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 341 United States patents and 760
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.
There are three patents which we have previously considered to be
important to our business. Two patents relating to our fuel cell technology
expired in July 2002 and one patent relating to our battery technology will
expire in April 2003. We do not expect the
25
expiration of these patents to adversely affect our business prospects.
Because we have generated other patents which basically and broadly cover our
business, we believe that our proprietary patent position will be sustained
notwithstanding the expiration of these patents.
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 have been resolved in our favor prior to trial. See
Item 3: Legal Proceedings on page 33 for pending and recently resolved legal
proceedings.
CONCENTRATION OF REVENUES
See Note B of the Notes to Consolidated Financial Statements on page 73 of
this Report.
BACKLOG
Our backlog of orders as of June 30, 2002 for machine-building and
equipment sales contracts, photovoltaic products and metal hydride materials
is $21,910,000. The backlog at June 30, 2001 for machine-building and
equipment sales contracts, photovoltaic products, battery packs and electrode
materials was $49,485,000. We expect to recognize revenues of $21,910,000 from
our backlog in 2003.
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 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
26
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 September 20, 2002, we had a total of 519 employees, of which 181
are Ovonic Battery employees and 119 are United Solar employees. The above
numbers do not include employees of our joint ventures or licensees. We
consider our relations with our employees to be excellent.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking statements about
our financial condition, results of operations, plans, objectives, future
performance and business. In addition, from time to time we and our
representatives have made or may make forward-looking statements orally or in
writing. The words "may," "will," "believes," "expects," "intends,"
"anticipates," "estimates," and similar expressions have been used in this
Annual Report to identify forward-looking statements.
We have based these forward-looking statements on our current expectations
with respect to future events and occurrences. Investors are cautioned that our
actual results in the future may differ materially from the expected results
reflected in our forward-looking statements. The expected results reflected in
our forward-looking statements are subject to various significant risks and
uncertainties, including the following:
o our licensees and joint venture partners may be unwilling or unable
to devote their financial resources and manufacturing and marketing
capabilities to commercialize products based on our technologies;
o we may be unable to continue to protect and maintain the proprietary
nature of our technology, or to convince others of the necessity of
licensing our technology without litigation;
o other companies may be successful in asserting patent infringement
or other claims against us which prevent us from commercializing
products based on our technology or which force us to make royalty
or other payments to competitors;
o other companies may develop competing technologies which cause our
technology to become obsolete or non-competitive;
o we may be unable to successfully execute our internal business
plans;
27
o we may need to obtain debt or additional equity financing to
continue to operate our business and financing may be unavailable
or available only on disadvantageous terms;
o we may experience performance problems with key suppliers or
subcontractors;
o adverse changes may occur in general economic conditions or in
political or competitive forces affecting our business;
o competition may increase in our industry or markets;
o our government product development or research contracts may be
terminated by unilateral government action or we may be unsuccessful
in obtaining new government contracts to replace those which have
been terminated or completed;
o we may become subject to legal or regulatory proceedings which may
reach unfavorable resolutions;
o there may be adverse changes in the securities markets which affect
the price of our stock; or
o we may suffer the loss of key personnel or may be unable to attract
and retain qualified personnel to maintain and expand our business.
There is also the risk that we incorrectly analyze these risks or that
strategies we develop to address them are unsuccessful.
These forward-looking statements speak only as of the date of this Annual
Report. All subsequent written and oral forward-looking statements attributable
to us or any person acting on our behalf are qualified in their entirety by the
cautionary statements in this section. Because of these risks, uncertainties and
assumptions, you should not place undue reliance on these forward-looking
statements. We are not obligated to update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
28
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 ECD's 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.
EV (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.
FCEV (Fuel Cell Electric Vehicle) - an electric vehicle that derives its
electricity from a fuel cell.
FCHEV (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.
29
Fuel Cell - a device which produces electric power by oxidizing hydrogen and
exhausting only water and heat as byproducts.
HEV (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.
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 S.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 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 (PV) - 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.
Thin Film - a very thin layer of material formed on a substrate.
30
Item 2: Properties
- ------- ----------
A summary of our principal facilities and those of our consolidated
subsidiaries, Ovonic Battery and United Solar, 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
United Solar:
1100 West Maple Road, Troy, MI 47,775
-------
TOTAL 229,259
=======
Except for the property located at 1050 East Square Lake Road, Bloomfield
Hills, MI, 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 of ECD, Ovonic Battery and
United Solar. Management believes that the above facilities are generally
adequate for present operations.
31
A summary of the facilities of our joint ventures in North America
follows:
Number of
Location Square Feet
-------- -----------
Texaco Ovonic Hydrogen Systems and Texaco
Ovonic Fuel Cell:
2983 Waterview, Rochester Hills, MI 71,542
Texaco Ovonic Battery Systems:
1334 Maplelawn, Troy, MI 28,122
4991 Hempstead Station Road, Kettering, OH 84,000
Bekaert ECD Solar Systems:
3800 Lapeer Road, Auburn Hills, MI 167,526
United Solar Systems de Mexico S.A. de C.V.
AV. LA PAZ. No. 10009, Parque Industrial Pacifico,
Tijuana, B.C., Mex. C.P. 22670 67,362
-------
TOTAL 418,552
=======
32
Item 3: 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 ("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 instead of Ovonic
Battery employees as inventors. In July 2001, Texaco Ovonic Battery Systems LLC
sought to join in 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 (ICC) 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 ICC also
agreed to hold its proceedings in abeyance pending settlement discussions. While
settlement discussions are continuing, we cannot predict whether or not such
discussions will result in a satisfactory resolution of existing disputes.
On July 24, 2001, an individual, Kaplesh Kumar, filed a lawsuit against
Ovonic Battery, ECD and Stanford 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. The Court also denied Kumar's motion for reconsideration of the
Court's dismissal of Kumar's complaint. Kumar has filed a notice of appeal. If
Kumar does appeal, we do not believe that the District Court's ruling will be
overturned.
Due to the uncertainty of the ultimate outcome of these matters, the
impact on future financial results is not subject to reasonable estimates.
Item 4: Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable.
33
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
- ------- ---------------------------------------------------------------------
Shares of our Common Stock, par value $.01 per share, trade on the NASDAQ
National Market System under the symbol "ENER." Shares of our Class A Common
Stock, par value $.01 per share, and Class B Common Stock, par value $.01 per
share, are not publicly traded.
As of September 20, 2002, there were approximately 2,200 holders of record
of Common Stock, four holders of record of Class A Common Stock and one holder
of record of Class B Common Stock.
Below is the reported high and low price on the NASDAQ National Market
System for our Common Stock for the following quarters:
For the Fiscal Year Ended June 30
(in Dollars Per Share)
-----------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
High Low High Low High Low
------- ------- ------- ------- ------- -------
First Quarter $15.90* $9.47* $28.00 $12.64 $42.75 $22.063
(July - September)
Second Quarter $22.00 $15.26 $38.25 $14.563
(October - December)
Third Quarter $24.53 $18.18 $30.875 $19.50
(January - March)
Fourth Quarter $25.73 $14.01 $36.54 $21.125
(April - June)
- -------
* Through September 20, 2002
We have not paid any cash dividends in the past and do not expect to pay
any in the foreseeable future.
34
During the fiscal year ended June 30, 2002, we issued the following
securities to the following persons for the consideration noted. In each case,
the issuances were to persons who had complete access to all material
information relating to the Company. 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.
Party/ies Security Issued Number of Securities Consideration
- --------- --------------- -------------------- -------------
TRMI Holdings Inc. Common Stock 448,358 shares $8,894,000
(ChevronTexaco)
5 members of our Common Stock 1,310 shares Services rendered valued
Board of Directors at approximately $25,000
Pursuant to the Stock Purchase Agreement between ECD and Texaco Inc. dated
as of May 1, 2000, Texaco purchased a 20% equity stake in ECD for $67.4 million.
As part of this Stock Purchase Agreement, Texaco received rights to purchase
additional shares of ECD Common Stock or other ECD securities (ECD Stock). On
October 9, 2001, the shareholders of Texaco and Chevron Corp. voted on the
merger of Texaco and Chevron. The combined companies have been renamed
ChevronTexaco Corporation and TRMI Holdings is a wholly owned subsidiary of
ChevronTexaco.
So long as ChevronTexaco owns more than 5% of ECD Stock and in the event
ECD issues additional ECD Stock other than to ChevronTexaco, ChevronTexaco has
the right to purchase additional ECD Stock in order for ChevronTexaco to
maintain its same proportionate interest in ECD Stock as ChevronTexaco held
prior to the issuance of the additional ECD Stock. If ChevronTexaco elects to
purchase ECD Common Stock, the purchase price will be the average of the closing
price on NASDAQ of the ECD 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 the ECD Common Stock which ChevronTexaco is entitled to
purchase.
If ChevronTexaco does not exercise its right to purchase additional ECD
Stock within 15 days after delivery of a Rights Notice from ECD, ChevronTexaco's
right to purchase such additional ECD Stock which are the subject of the Rights
Notice will terminate. Donald L. Paul, a director of ECD, is Vice President and
Chief Technology Officer of ChevronTexaco and Greg M. Vesey, an ECD director, is
President of ChevronTexaco Technology Ventures.
The independent outside directors of the Company are issued approximately
$5,000 per year in ECD Common Stock based on the closing price of the Common
Stock on the first business day of each year. See Part III, Item 10, Directors
and Executive Officers of the Registrant, for compensation of directors.
35
Item 6: Selected Financial Data
- ------- -----------------------
Set forth below is certain financial information taken from the Company's
audited consolidated financial statements (See Item 1: Description of Business).
June 30,
-----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Revenues:
Product sales $ 36,634,167 $ 24,239,970 $ 6,892,355 $ 4,524,238 $ 9,858,343
Royalties 2,000,914 2,898,956 3,440,164 2,735,622 2,485,981
Revenues from product
development agreements 52,685,717 37,582,138 10,418,985 17,240,615 14,321,416
Revenues from license
and other agreements 25,000 5,300,000 3,138,000 4,753,995 1,701,134
Other 364,487 1,383,429 6,089,581 3,717,826 3,190,707
------------- ------------- ------------- ------------- -------------
TOTAL REVENUES 91,710,285 71,404,493 29,979,085 32,972,296 31,557,581
------------- ------------- ------------- ------------- -------------
Net Loss $ (20,888,034) $ (5,121,838) $ (16,656,128) $ (13,777,589) $ (16,664,999)
============= ============= ============= ============= =============
Basic Net Loss per
Common Share $ (.96) $ (.26) $ (1.16) $ (1.06) $ (1.50)
Diluted Net Loss per
Common Share $ (.96) $ (.26) $ (1.16) $ (1.06) $ (1.50)
At year end:
Cash and Cash Equivalents $ 42,221,015 $ 33,055,399 $ 44,592,017 $ 19,076,983 $ 25,786,112
Short-Term Investments $ 71,997,154 $ 48,908,662 $ 44,723,500 $ - $ -
Total Assets $ 192,118,594 $ 166,105,387 $ 148,905,642 $ 39,807,998 $ 51,360,816
Long-Term Liabilities $ 14,428,769 $ 18,154,121 $ 20,059,353 $ 2,679,936 $ 3,967,496
Working Capital $ 110,310,301 $ 92,577,489 $ 89,789,457 $ 18,438,953 $ 29,800,158
Stockholders' Equity $ 135,254,960 $ 110,740,711 $ 98,776,560 $ 23,188,627 $ 34,815,346
36
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------- ---------------------------------------------------------------
Critical Accounting Policies
- ----------------------------
In preparing financial statements in conformity with generally accepted
accounting principles in the United States (GAAP), management is required to
make estimates and assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reported
period. Actual results could differ from those estimates.
We have identified the following as critical accounting policies to our
company: financial statement presentation, principles of consolidation and
equity accounting; product sales; royalties; and business agreements. For a
detailed discussion on these policies, see Note A - Summary of Accounting
Policies in the Notes to Consolidated Financial Statements.
Financial Statement Presentation, Principles of Consolidation and
Equity Accounting
- -----------------------------------------------------------------
The consolidated financial statements include the accounts of ECD; its
approximately 91%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic
Battery), a company formed to develop and commercialize the Ovonic(TM) NiMH
battery technology; and, effective April 11, 2000, its 81%-owned subsidiary
United Solar Systems Corp. (United Solar) (see Note D) (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. The
remaining shares of United Solar are owned by N.V. Bekaert S.A. and its
U.S.-based subsidiary (Bekaert). 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, as of June 30,
2002, seven major investments accounted for by the equity method: (i) Bekaert
ECD Solar Systems LLC (Bekaert ECD Solar Systems), United Solar's 40% joint
venture with Bekaert; (ii) Texaco Ovonic Battery Systems LLC (Texaco Ovonic
Battery Systems), a joint venture between Ovonic Battery and ChevronTexaco, each
having 50% interest in the joint venture, to manufacture and sell the Company's
proprietary NiMH batteries for propulsion applications as well as non-propulsion
applications; (iii) Texaco Ovonic Fuel Cell Company LLC (Texaco Ovonic Fuel
Cell), a joint venture between ECD and ChevronTexaco, each having 50% interest
in the joint venture, to further develop and commercialize Ovonic(TM)
regenerative fuel cell technology; (iv) Texaco Ovonic Hydrogen Systems LLC
(Texaco Ovonic Hydrogen Systems), a joint venture between ECD and ChevronTexaco,
each having 50% interest in the joint venture, to further develop Ovonic(TM)
solid hydrogen storage technology; (v) Ovonyx, Inc. (Ovonyx), a 41.7%-owned
joint venture with Mr. Tyler Lowrey, Intel Capital and other investors, to
commercialize ECD's Ovonic(TM) Unified Memory (OUM) technology; (vi) Ovonic
Media, LLC (Ovonic Media), a joint venture owned 51% by General Electric (GE)
through its GE Plastics business unit and 49% by ECD; and (vii) ITS Innovative
Transportation Systems A.G. (ITS), a German company beneficially owned 30% by
ECD. In addition, ECD has two 50%-owned joint ventures in Russia, Sovlux Co.,
Ltd. (Sovlux) and Sovlux Battery Closed-stock Company (Sovlux Battery), and
United Solar and Bekaert ECD Solar Systems formed a joint venture in Belgium,
N.V.
37
Bekaert ECD Europe (Bekaert ECD Europe) owned 10% by United Solar and 90%
by Bekaert ECD Solar Systems.
The Company's investments in Texaco Ovonic Battery Systems, Texaco Ovonic
Fuel Cell, Texaco Ovonic Hydrogen Systems, Ovonyx 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 capital
contributions, it recognizes its proportionate share of any losses until the
investment reaches zero.
The Company has three joint ventures, 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 products
and components. 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).
Based upon the opinion of legal counsel, the Company believes that it has
no obligation to fund any losses that its joint ventures incur beyond the
Company's investment.
ECD and Bekaert each have guaranteed 50% of the rent obligation for
Bekaert ECD Solar Systems' new Auburn Hills, Michigan facility and 50% of
Bekaert ECD Solar Systems' $40,000,000 sale-and-leaseback of the 30MW machinery
and equipment (see Note M - Commitments).
Bekaert ECD Solar Systems/United Solar will require an estimated
additional $40,000,000 through the period ending September 30, 2003 in order to
cover operating expenses, including ramp-up of production and implementation of
marketing programs, and for working capital purposes. Neither ECD nor Bekaert is
obligated to provide any portion of the required additional funding to Bekaert
ECD Solar Systems/United Solar. However, ECD and Bekaert have agreed to make
bridge loans to the joint ventures in the aggregate amount of $28,300,000 with
$12,200,000 in bridge financing provided by Bekaert and $16,100,000 by ECD. ECD
and Bekaert plan to explore new equity investors and bank financing to meet the
joint ventures' future cash requirements. ECD may also provide additional bridge
loans to the joint ventures (see Note M - Commitments).
Product Sales
- -------------
Product sales include revenues related to machine-building contracts and
equipment sales, photovoltaic products, metal hydride materials and revenues
related to building of battery packs. Revenues related to machine-building
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 related to metal hydride materials combined
with high fixed costs result in losses.
38
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 (1992 Contract)
with the United States Advanced Battery Consortium (USABC), partially funded by
the U.S. Department of Energy (DOE), we have agreed to reimburse USABC and DOE,
as their recoupment for payments to us under the 1992 Contract, a 15% share of
royalty payments we receive through May 3, 2012 where Ovonic(TM) NiMH batteries
serve as the primary source of power for electric vehicles (Recoupment). We do
not believe that royalties received to date for batteries manufactured by our
licensees are subject to Recoupment.
ECD has a royalty trust arrangement whereby ECD is obligated to pay a
trust 25% of optical memory royalties received. In the year ended June 30, 2002,
ECD paid $7,362 to this trust.
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.
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.
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
39
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.
Results of Operations
Year Ended June 30, 2002 Compared to Year Ended June 30, 2001
- -------------------------------------------------------------
The Company has continued to invest to further advance its technologies.
These investments in its technologies have led to strategic alliances with
ChevronTexaco, Bekaert, Intel, General Electric and China's Rare Earth High-Tech
Co., Ltd. of Baotou Steel Company. In accordance with accounting principles
generally accepted in the United States of America, the investments the Company
makes in developing its technologies are expensed as research and development
expense in the periods in which they are incurred and the value of these
technologies are not carried as assets in the Company's balance sheet.
The Company 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 the Company's
intellectual property, reduced royalties of $898,000, an increase of $3,466,000
in the net cost of product development as the Company increased spending on its
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 its
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 the ECD segment (net of
consolidating entries) versus operating income of $302,000 in 2001,
primarily due to higher investment in product development as the Company
increased spending on its core technologies;
o an increase in the cost estimate to complete ECD's contract with
Bekaert ECD Solar Systems to design and build equipment making solar
products capable of producing on an annual basis 30MW of electrical power;
o an increased operating loss of $1,797,000 for United Solar (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 new 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
40
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).
o The 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'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 Bekaert ECD Solar Systems and lower revenues from product
development agreements.
Product sales, consisting of machine building and equipment sales,
photovoltaic products 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). All machine-building and equipment sales
contracts are accounted for using percentage-of-completion accounting.
Photovoltaic sales, which are sales of semi-finished products to an affiliate,
Bekaert ECD Solar Systems, were $5,883,000 for 2002 and $5,975,000 for 2001 (see
Note D of Notes to Consolidated Financial Statements). Sales of metal hydride
materials were $940,000 in 2002 compared to $355,000 in 2001. The Company
currently has a product sales backlog of $21,910,000, all of which is expected
to be recognized as revenues in Fiscal 2003. (See Note B - Notes to Consolidated
Financial Statements.)
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 the Company's 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), Texaco
Ovonic Fuel Cell ($8,887,000 for 2002
41
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 National Institute of Standards and Technology
(NIST), which advanced the Company's hydrogen storage and optical memory
technologies ($173,000 in 2002 versus $1,744,000 in 2001). (See Research and
Development in Item 1 and Note B - Notes to Consolidated Financial Statements.)
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., 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.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues 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 (formerly GM
Ovonic) 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 ECD's contract
with Bekaert ECD Solar Systems to design and build equipment making solar
products capable of producing on an annual basis 30MW of electrical power.
Revenues from product development agreements continued to fund more than
82% of the Company's cost of product development. The total cost of product
development increased by $18,570,000 for the year ended June 30, 2002, as the
Company increased spending on its 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.
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
============ ============
42
The expenditures continued the development of the Company's core
technologies in energy storage, energy generation and information technology. In
addition, product development programs include work on the Ovonic(TM) Cognitive
Computer - a unique approach to 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. Another current project is the conversion of an
automobile to a hybrid electric vehicle with an internal combustion engine
fueled by hydrogen (Hydrogen ICE) coupled with an Ovonic(TM) NiMH Battery System
to demonstrate driving performances similar to a conventionally fueled gasoline
vehicle, but with superior fuel economy and virtually no exhaust emission.
Expenses were incurred in 2002 and 2001 in connection with the protection
of the Company's United States and foreign patents covering its 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 the Company's NiMH battery patents and technology. ChevronTexaco
has agreed to share 50% of the non-consumer battery litigation expenses
beginning in fiscal 2002. This reimbursement ($2,167,000) has been offset
against the patent defense costs for the year ended June 30, 2002. 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.
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 the Company's growth.
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
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
============ ============
43
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 the Company's investments and from higher equity losses attributed
to losses at Bekaert ECD Solar Systems ($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 the Company's interest in EV Global.
The Company had an amortization of negative goodwill of $466,000 in both
2002 and 2001.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This will require the Company to recognize any unamortized negative
goodwill as the effect of a change in accounting principle no later than July 1,
2002. The Company will recognize a favorable benefit of approximately
$2,216,000 as the effect of a change in accounting principle in the Company's
statements of operations on July 1, 2002.
The Company does business in many different parts of the world and its
royalty revenues are affected by changes in foreign currencies and their
exchange rates relative to the U.S. dollar. However, the vast majority of the
Company's business agreements are denominated in U.S. dollars and, as such, the
Company has minimized its exposure to currency rate fluctuations.
Year Ended June 30, 2001 Compared to Year Ended June 30, 2000
- -------------------------------------------------------------
The Company has continued to invest to further advance its technologies.
These investments in its technologies have led to strategic alliances with
ChevronTexaco, Bekaert, Intel, General Electric and China's Rare Earth High-Tech
Co., Ltd. of Baotou Steel Company. In accordance with generally accepted
accounting principles in the United States, the investments the Company makes in
its technologies are expensed as research and development expense in the periods
in which they are incurred and the value of these technologies are not carried
as assets in the Company's balance sheet.
The Company had a net loss of $5,122,000 on revenues of $71,404,000 in the
year ended June 30, 2001 compared to a net loss of $16,656,000 on revenues of
$29,979,000 for the year ended June 30, 2000. The $11,534,000 improvement in
profitability resulted primarily from a lower loss from operations where there
was a 138% ($41,425,000) increase in revenues while operating expenses increased
only 77% ($35,557,000). The improved operating performance resulted from a
$4,914,000 improvement for ECD (operating loss of $285,000 in 2001 versus
operating loss of $5,199,000 in 2000) and a $2,956,000 improvement for Ovonic
Battery (operating loss of $7,627,000 in 2001 versus operating loss of
$10,583,000 in 2000), partially offset by an increased operating loss of
$2,245,000 for United Solar (operating loss of $2,742,000 in 2001 versus
operating loss of $497,000 in 2000 due to the inclusion of United Solar's
operating results for all of 2001 compared to their inclusion only after April
11 in the prior year).
The ECD/Ovonic Battery programs in the Ovonic(TM) nickel metal hydride
battery technology have led to a new family of batteries not only for hybrid
electric vehicles, electric
44
vehicles and fuel cell electric vehicles, but also for a new universal battery
platform that has included a much-needed 36/42 volt battery to meet the
emerging requirements for higher voltages, power and energy of next-generation
vehicle applications. Expenses related to electrode production and the ongoing
protection of the Company's intellectual property also contributed to the 2001
losses. Partially offsetting the loss from operations in the year ended June 30,
2001 was other income (net) of $4,945,000 compared to other expense (net) of
$721,000 in the prior year.
The increase in revenues primarily resulted from higher revenues from
product development agreements ($27,163,000), higher product sales ($17,348,000)
and from license and other agreements ($2,162,000), partially offset by lower
royalties ($541,000). ECD segment's revenues increased to $48,218,000 in 2001
from $11,213,000 in 2000 due to increased revenues from product development
agreements, primarily resulting from the advanced product development agreements
with Texaco Ovonic Hydrogen Systems and Texaco Ovonic Fuel Cell and due to
machine-building sales to Bekaert ECD Solar Systems to build equipment making
solar products capable of producing on an annual basis 30MW of electrical power.
The increase in Ovonic Battery's revenues was primarily due to higher equipment
sales to Rare Earth Ovonic ($12,931,000 in 2001 versus $149,000 in 2000),
increased revenues from product development agreements ($10,771,000 in 2001
versus $4,851,000 in 2000), as work was begun on the advanced product
development agreement for Texaco Ovonic Battery Systems, and increased revenues
from license and other agreements ($5,300,000 in 2001 versus $3,138,000 in
2000), partially offset by lower sales of electrode materials and battery packs.
United Solar's 2001 revenues increased to $7,674,000 in 2001 versus $3,763,000
in 2000 as a result of their inclusion for a full year in the Company's
consolidated financial results versus the prior year when they were included
only after April 11, 2000 (the beginning date for the consolidation of United
Solar).
Product sales, consisting of machine building and equipment sales,
photovoltaic products (for United Solar since April 11, 2000), positive and
negative battery electrodes, and battery packs, increased 252% to $24,240,000 in
the year ended June 30, 2001 from $6,892,000 in the year ended June 30, 2000.
Machine-building and equipment sales revenues increased 828% to $16,934,000 in
2001 from $1,824,000 in 2000. The machine-building and equipment sales revenues
in 2001 relate primarily to Ovonic Battery's contracts with Rare Earth Ovonic to
provide battery-making equipment ($12,931,000) and ECD's contract with Bekaert
ECD Solar Systems to build equipment making solar products capable of producing
on an annual basis 30MW of electrical power ($3,973,000). The machine-building
revenues in 2000 related to a contract to build large-area deposition equipment.
All machine-building and equipment sales contracts are accounted for using
percentage-of-completion accounting. Photovoltaic sales were $2,212,000 for the
period from April 11, 2000 through June 30, 2000 and $5,975,000 for the year
ended June 30, 2001. Battery pack sales decreased to $975,000 in 2001 versus
$1,493,000 in 2000 due to decreased orders from customers for evaluation of
battery packs. Sales of metal hydride materials decreased $1,007,000 primarily
due to reduced sales to GM Ovonic.
Royalties decreased 16% to $2,899,000 in the year ended June 30, 2001 from
$3,440,000 in the year ended June 30, 2000. The royalties the Company receives
continue to reflect increased production efficiencies of its licensees which
have resulted in lower prices as licensees move aggressively to increase market
share. (See Note B - Notes to Consolidated Financial Statements.)
45
Revenues from product development agreements increased 261% to $37,582,000
in the year ended June 30, 2001 from $10,419,000 in the year ended June 30,
2000. The increase was primarily a result of agreements with Texaco Ovonic
Hydrogen Systems ($11,818,000), Texaco Ovonic Fuel Cell ($8,831,000) and Texaco
Ovonic Battery Systems ($6,433,000) for advanced product development services,
all of which began in Fiscal 2001. Also contributing to the increase were
contracts with Ovonic Media ($2,298,000 in 2001 versus $634,000 in 2000) and
Partnership for Next Generation Vehicles (PNGV) ($2,090,000 in 2001 versus
$509,000 in 2000). Partially offsetting these increases were the completion of
programs with GM, which helped to fund the development of the family of NiMH
batteries (zero in 2001 versus $1,002,000 in 2000), NIST, which advanced the
Company's hydrogen storage and optical memory technologies ($1,744,000 in 2001
versus $3,883,000 in 2000), and Shell Hydrogen (zero in 2001 versus $750,000 in
2000). (See Research and Product Development in Item 1 and NOTE B - Notes to
Consolidated Statements.)
Revenues from license and other agreements increased to $5,300,000 in the
year ended June 30, 2001 from $3,138,000 in the year ended June 30, 2000. The
2001 revenues included $5,000,000 in license fees from the Rare Earth Ovonic
joint ventures, $250,000 from BYD Battery Co., Ltd., and $50,000 from SANIK
Battery Co., Ltd., all from the People's Republic of China. The 2000 license
fees included $1,000,000 from Sanyo Electric Co., $1,778,000 from Toshiba
Battery and $360,000 from Japan Storage. 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 the
Company's joint ventures. Other revenues decreased to $1,383,000 in the year
ended June 30, 2001 from $6,090,000 in the year ended June 30, 2000. This
decrease was due to reduced revenues from Ovonyx ($382,000 in 2001 versus
$2,686,000 in 2000), GM Ovonic ($1,095,000 in 2001 versus $1,745,000 in 2000)
and Bekaert ECD Solar Systems (zero in 2001 versus $1,098,000 in 2000). Revenues
from Ovonyx are lower because they have hired their own employees and utilize
fewer of the Company's services. Revenues from GM Ovonic were lower due to
reduced activity at GM Ovonic. Revenues from Bekaert ECD Solar Systems are lower
due to lower management fees in 2001.
The $13,452,000 increase in cost of product sales in the year ended June
30, 2001 results from the $17,348,000 increase in product sales. The $864,000
gross profit on product sales in 2001 is an improvement of $3,896,000 compared
to 2000. The improvement primarily results from equipment sales contracts and
sales of photovoltaic products with positive gross profit margins. Partially
offsetting this improvement was a higher loss on the sales of electrode
materials which resulted from the Company maintaining its production capacity to
produce metal hydride powders to meet the needs of Texaco Ovonic Battery Systems
and Texaco Ovonic Hydrogen Systems. Low sales volumes for electrodes, combined
with high fixed costs, result in the loss on product sales for these products.
For the year ended June 30, 2001, compared to the year ended June 30,
2000, the net cost of product development to the Company decreased by $6,778,000
despite an increase in expenditures for the development products by $20,385,000
because the amount of funding received by customers increased by $27,163,000.
46
Year Ended June 30,
----------------------------
2001 2000
------------ ------------
Cost of revenues from product development
agreements $ 36,553,000 $ 10,373,000
Product development and research 9,355,000 15,150,000
------------ ------------
Total cost of product development 45,908,000 25,523,000
Revenues from product development
agreements 37,582,000 10,419,000
------------ ------------
Net cost of product development $ 8,326,000 $ 15,104,000
============ ============
The expenditures continued the development of the Company's core technologies in
energy storage, energy generation and information technology.
Expenses were incurred in 2001 and 2000 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. These expenses increased to $3,766,000 in the year ended June 30,
2001 from $1,750,000 in the year ended June 30, 2000, principally due to
litigation costs ($1,913,000 in 2001 versus $59,000 in 2000) for the protection
of our NiMH battery patents and technology. 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.
The decrease in operating, general and administrative expenses from
$8,717,000 in the year ended June 30, 2000 to $8,421,000 in the year ended June
30, 2001 was due to increased allocations to cost of revenues from product
development agreements ($7,558,000), partially offset by increased spending
($5,150,000) and $900,000 due to the inclusion of United Solar expenses for all
of 2001 compared to their inclusion in results after April 11, 2000.
The $5,666,000 improvement in other income (net) ($4,945,000 income in
2001 compared to $721,000 loss in 2000) resulted primarily from higher interest
income ($5,864,000 in 2001 compared to $1,576,000 in 2000) because of higher
cash investments and from a higher minority interest share of losses relating to
Bekaert's 19% ownership of United Solar ($1,070,000 in 2001 versus $182,000 in
2000) because of Bekaert's 19% ownership for all of 2001 compared to Bekaert's
19% ownership for a portion of 2000 (after April 11, 2000).
The Company does business in many different parts of the world and its
royalty revenues are affected by changes in foreign currencies and their
exchange rates relative to the U.S. dollar. However, the vast majority of the
Company's business agreements are denominated in U.S. dollars and, as such, the
Company has minimized its exposure to currency rate fluctuations.
47
Liquidity and Capital Resources
As of June 30, 2002, the Company had consolidated cash, cash equivalents,
short-term investments and accounts and note receivable (including $21,044,000
of amounts due from related parties) of $142,531,000 (see Note M - Commitments
for restrictions), an increase of $25,754,000 from June 30, 2001. As of June 30,
2002, the Company had consolidated working capital of $110,310,000 compared with
a consolidated working capital of $92,577,000 as of June 30, 2001. Since June
30, 2001, ECD has received $44,639,000 from the exercise of warrants that had
been issued in connection with the Company's 1998 limited public offering,
exercise of employee stock options and the sale of additional shares to
ChevronTexaco to maintain its 20% ownership.
The Company expects the amount of cash to be received under existing
product development agreements in the year ending June 30, 2003 to decrease to
approximately $47,913,000, compared to $53,546,000 received from product
development agreements in the year ended June 30, 2002. However, the Company
has had, and intends to have on an ongoing basis, discussions with other
parties, including the U.S. government, which may provide additional funding
for product development activities. Certain of the Company's product
development and product purchase agreements contain provisions allowing for the
termination of such agreements for failure of the Company to meet agreement
milestones or for breach of material contractual provisions. Generally, the
termination provisions allow for the Company to recover any costs incurred
through the termination date.
As of June 30, 2002, the Company had $114,218,000 cash, cash equivalents
and short-term investments consisting of commercial paper, classified as
available for sale, maturing from 91 days to 37 months. It is the Company's
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.
As of June 30, 2002, there were two investments totaling $10,000,000 which, at
that time, did not comply with the rating policy and were rated BBB+. The
Company has continued to hold these investments based on advice from its
investment advisor.
During the year ended June 30, 2002, $443,000 of cash was used in
operations. The difference between the net loss of $20,888,000 and the net cash
used in operations was principally due to a $16,139,000 decrease in working
capital (other than cash). Also contributing were non-cash costs (principally
depreciation ($2,273,000) and equity losses in joint ventures ($3,658,000)). In
addition, $7,667,000 of machinery and equipment was purchased, principally for
ECD's state-of-the-art clean room ($3,041,000) and for United Solar's expansion
($1,660,000).
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
September 30, 2002, Ovonic Battery has received payments totaling $59,485,000
under the three contracts.
On February 22, 2002, the Company made a proportionate cash investment of
$1,710,000 in the Rare Earth Ovonic joint ventures, which maintained the
Company's 19% ownership.
48
As part of its long-standing strategy, the Company has made investments in
its technologies, which have resulted in enabling intellectual property and
products. This has allowed the Company to finance its operations and growth
through strategic alliances (joint ventures and license agreements) with third
parties who can provide financial resources and marketing expertise for the
Company's technologies and products.
The resultant strategic alliances and joint ventures with some of the
world's leading corporations listed below form the basis for the
commercialization of the Company's technologies and products. Highlights are:
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 nonautomotive applications. ChevronTexaco is
funding up to $178,000,000 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, which began October 1, 2000, will last up to three years and
may be cancelled if mutually agreed-upon milestones are not
materially satisfied. The Company recorded revenues of $16,315,000
for work performed under the contract in the year ended June 30, 2002
and is budgeted to receive approximately $13 million in 2003.
o Texaco Ovonic Hydrogen Systems LLC - a 50/50 joint venture between
ECD and ChevronTexaco formed to further develop and advance the
commercialization of ECD's technology to store hydrogen in metal
hydrides. ChevronTexaco is funding an initial amount of up to
$104,000,000, including product and market development. A significant
portion of the funding is committed to a product development contract
from Texaco Ovonic Hydrogen Systems to ECD. The contract, which began
July 1, 2000, will last up to three years and may be cancelled if
mutually agreed-upon milestones are not materially satisfied. The
Company has recorded total revenues of $30,398,000 for work performed
under the contract, $18,581,000 of which was in the year ended June 30,
2002, and is budgeted to receive approximately $20 million in 2003.
o Texaco Ovonic Fuel Cell Company LLC - a 50/50 joint venture between
ECD and ChevronTexaco formed to further develop and advance the
commercialization of the Ovonic(TM) regenerative fuel cell technology.
ChevronTexaco has been funding initial product and market development,
which includes funding a product development contract from Texaco
Ovonic Fuel Cell to ECD. The contract, which began July 1, 2000, may
be cancelled under certain circumstances, including not materially
satisfying mutually agreed-upon milestones. The Company has recorded
total revenues of $17,718,000 for work performed under the contract, of
which $8,887,000 was for work performed under the contract in the year
ended June 30, 2002. While certain milestones have not been materially
satisfied, ChevronTexaco has approved a budget of $3,839,000 for work
to be performed through December 31, 2002. The Company and
ChevronTexaco are currently in discussions regarding
49
the future business strategy of the venture, including the involvement
of additional joint venture partners. ChevronTexaco will review its
funding of the joint venture for periods following December 31, 2002.
o Bekaert ECD Solar Systems LLC/United Solar Systems Corp. - ECD and
Bekaert have formed a strategic alliance whereby Bekaert invested
$84,000,000 in the combined businesses ($24,000,000 of which is being
used as partial payment to buy out Canon, United Solar's previous joint
venture partner) with the remaining funds to be used to fund a portion
of a sixfold capacity expansion, and a sales and marketing expansion
program. The capacity expansion resulted in an order from Bekaert ECD
Solar Systems to ECD to build equipment making solar products capable
of producing on an annual basis 30MW of electrical power, currently
valued at approximately $59,000,000. ECD and Bekaert each have
guaranteed 50% of the rent obligation for Bekaert ECD Solar Systems'
new Auburn Hills, Michigan facility and 50% of Bekaert ECD Solar
Systems' $40,000,000 sale-and-leaseback of the 30MW machinery and
equipment (see Note M - Commitments).
Bekaert ECD Solar Systems/United Solar will require an estimated
additional $40,000,000 through the period ending September 30, 2003 in
order to cover operating expenses, including ramp-up of production and
implementation of marketing programs, and for working capital purposes.
Neither ECD nor Bekaert is obligated to provide any portion of the
required additional funding to Bekaert ECD Solar Systems/United Solar.
However, ECD and Bekaert have agreed to make bridge loans to the joint
ventures in the aggregate amount of $28,300,000 with $12,200,000 in
bridge financing provided by Bekaert and $16,100,000 by ECD. ECD and
Bekaert plan to explore new equity investors and bank financing to meet
the joint ventures' future cash requirements. ECD may also provide
additional bridge loans to the joint ventures (see Note M -
Commitments).
o Ovonic Media, LLC - a strategic alliance formed with General
Electric, the first activity of which resulted in the creation of a
joint venture, Ovonic Media, LLC. ECD recorded revenues of $1,923,000
for work performed in the year ended June 30, 2002, from a contract
from Ovonic Media to design, develop and demonstrate ECD's proprietary
continuous web roll-to-roll technology for the ultra-high-speed
manufacture of optical media products, primarily rewritable DVDs. This
joint venture is currently being funded on a month-to-month basis.
o Ovonyx, Inc. - a joint venture owned 41.7% by ECD and the remainder
by Tyler Lowrey, Intel and others with a purpose to commercialize ECD's
proprietary nonvolatile semiconductor memory technology, OUM. OUM
memory technology promises to enable significantly faster write and
erase speeds and higher cycling endurance than conventional memory
types and may have potential as a replacement for such memory types as
FLASH and DRAM. Ovonyx has granted nonexclusive royalty-bearing
licenses to Intel, STMicroelectronics and BAE Systems. In addition,
ECD receives royalties from Ovonyx equal to .5% of Ovonyx's revenues.
50
These strategic alliances and new business agreements have both near-term
and long-term impacts on the Company's capital resources. The ChevronTexaco,
Bekaert, Ovonyx and General Electric agreements have resulted in the
acceleration of the commercialization and development of the Company's products
and technologies. The Company's business partners have funded most of its
product development activities.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
- -------- ----------------------------------------------------------
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities and
time deposits. All such instruments are classified as securities available for
sale. We do not invest in portfolio equity securities, or commodities, or use
financial derivatives for trading purposes. Our debt security portfolio
represents funds held temporarily, pending use in our business and operations.
The Company had $114,207,000 and $81,956,000 of these investments on June 30,
2002 and 2001, respectively. On June 30, 2002, the investments had an average
maturity of 393 days, $71,997,000 of which had maturities of 91 days to 37
months. On June 30, 2001, the investments had an average maturity of 224 days,
$48,909,000 of which had maturities of 91 days to 34 months. It is the Company's
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.
As of June 30, 2002, there were two investments totaling $10,000,000 which, at
that time, did not comply with the rating policy and were rated BBB+. The
Company has continued to hold these investments based on advice from its
investment advisor. Our market risk exposure consists of exposure to changes in
interest rates and to the risks of changes in the credit quality of issuers. An
interest rate change of 1% would result in a change in the value of our June 30,
2002 portfolio of approximately $1,277,000.
51
Item 8: Consolidated Financial Statements and Supplementary Data
- ------- --------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
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, 2002
and 2001, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2002. Our audits also included the financial statement schedule listed in the
Index at Item 14. 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 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, 2002 and
2001, and the results of its operations and its cash flows for the three years
in the period ended June 30, 2002, 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.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
September 27, 2002
52
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
June 30,
----------------------------
2002 2001
------------ ------------
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of $42,210,000 at
June 30, 2002 and $33,047,000 at June 30, 2001 $ 42,221,015 $ 33,055,399
Short-term investments (NOTE M) 71,997,154 48,908,662
Accounts receivable (net of allowance for uncollectible
accounts of approximately $563,000 at June 30,
2002 and $583,000 at June 30, 2001) 7,268,447 18,809,094
Accounts receivable due from related parties 19,449,870 16,003,632
Note receivable due from related party (NOTE D) 1,594,275 -
Inventories 1,163,273 1,333,542
Other 387,901 542,930
------------ ------------
TOTAL CURRENT ASSETS 144,081,935 118,653,259
PROPERTY, PLANT AND EQUIPMENT (NOTES A and E)
Land and land improvements 267,000 267,000
Buildings and improvements 3,456,088 1,214,625
Machinery and other equipment (including construction
in progress of approximately $694,000 at June 30,
2002 and $1,010,000 at June 30, 2001) 26,713,253 22,261,322
Capitalized lease equipment 3,053,295 3,056,060
------------ ------------
33,489,636 26,799,007
Less accumulated depreciation and amortization (22,551,768) (20,660,619)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 10,937,868 6,138,388
Investment in Rare Earth Ovonic-China (NOTE A) 1,710,000 -
Investment in EV Global (NOTE D) - 1,000,000
Long-Term Note Receivable - Bekaert ECD Solar
Systems (NOTE A) 10,921,232 10,256,110
Deferred tax assets - 864,999
JOINT VENTURES (NOTE D)
Bekaert ECD Solar Systems 17,732,968 23,421,156
Bekaert ECD Europe 22,835 28,347
Texaco Ovonic Fuel Cell Company - -
Texaco Ovonic Hydrogen Systems - -
Texaco Ovonic Battery Systems - -
Ovonyx - -
Ovonic Media - -
ITS Innovative Transportation Systems 3,285,757 4,000,206
Sovlux - -
OTHER ASSETS 3,425,999 1,742,922
------------ ------------
TOTAL ASSETS $192,118,594 $166,105,387
============ ============
See notes to consolidated financial statements.
53
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
----------------------------
2002 2001
------------ ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 18,249,591 $ 18,413,708
Accounts payable - related parties 34,218 10,533
Salaries, wages and amounts withheld from employees 2,908,213 2,366,673
Deferred revenues under business agreements (NOTE A) 640,019 222,730
Deferred revenues - related parties (NOTE A) 6,677,846 2,346,054
Current installments on long-term liabilities (NOTE E) 5,261,747 2,716,072
------------ ------------
TOTAL CURRENT LIABILITIES 33,771,634 26,075,770
LONG-TERM LIABILITIES (NOTE E) 3,507,537 7,898,011
LONG-TERM NOTES PAYABLE (NOTE E) 10,921,232 10,256,110
DEFERRED GAIN - 278,328
NONREFUNDABLE ADVANCE ROYALTIES (NOTE C) 3,627,931 3,818,488
------------ ------------
TOTAL LIABILITIES 51,828,334 48,326,707
NEGATIVE GOODWILL (NOTE D) 2,215,560 2,681,993
MINORITY INTEREST (NOTE D) 2,819,740 4,355,976
COMMITMENTS AND CONTINGENCIES (NOTES M and N)
STOCKHOLDERS' EQUITY
Capital Stock (NOTES F and G)
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 - 21,248,973 shares at June
30, 2002 and 19,053,026 shares at June 30, 2001 212,490 190,530
Additional paid-in capital 384,952,113 339,858,798
Accumulated deficit (248,193,952) (227,305,918)
Accumulated other comprehensive income 487,950 881,342
Unearned Compensation on Class B Convertible
Common Stock (2,210,140) (2,890,540)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 135,254,960 110,740,711
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $192,118,594 $166,105,387
============ ============
See notes to consolidated financial statements.
54
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year Ended June 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
REVENUES (NOTES A and B)
Product sales $ 26,252,235 $ 13,925,029 $ 3,271,723
Product sales to related parties 10,381,932 10,314,941 3,620,632
------------ ------------ ------------
Total product sales 36,634,167 24,239,970 6,892,355
Royalties 1,980,746 2,898,956 3,440,164
Royalties - related party 20,168 - -
------------ ------------ ------------
Total royalties 2,000,914 2,898,956 3,440,164
Revenues from product development
agreements 6,776,976 7,421,512 9,660,782
Revenues from product development
agreements with related parties 45,908,741 30,160,626 758,203
------------ ------------ ------------
Total revenues from product development
agreements 52,685,717 37,582,138 10,418,985
Revenues from license and other agreements 25,000 5,300,000 3,138,000
Other 136,577 265,015 434,810
Other revenues from related parties 227,910 1,118,414 5,654,771
------------ ------------ ------------
Total other revenues 364,487 1,383,429 6,089,581
------------ ------------ ------------
TOTAL REVENUES 91,710,285 71,404,493 29,979,085
EXPENSES (NOTE A)
Cost of product sales 37,165,211 23,376,373 9,924,350
Cost of revenues from product development
agreements 51,703,118 36,552,685 10,373,243
Product development and research 12,775,128 9,354,940 15,149,637
Patent defense (net) 2,749,176 1,913,212 59,300
Patents 2,183,166 1,853,129 1,690,275
Operating, general and administrative (net) 7,367,813 8,421,047 8,717,388
------------ ------------ ------------
TOTAL EXPENSES 113,943,612 81,471,386 45,914,193
------------ ------------ ------------
LOSS FROM OPERATIONS (22,233,327) (10,066,893) (15,935,108)
OTHER INCOME (EXPENSE):
Interest income 4,727,246 5,864,202 1,576,243
Interest expense (910,134) (800,911) (574,386)
Equity loss in joint ventures (3,658,480) (1,996,689) (2,462,978)
Minority interest share of losses 1,536,236 1,069,518 181,911
Loss on write-off of investment
in EV Global (NOTE A) (1,000,000) - -
Other nonoperating income (net) 650,425 808,935 558,190
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 1,345,293 4,945,055 (721,020)
------------ ------------ ------------
NET LOSS $(20,888,034) $ (5,121,838) $(16,656,128)
============ ============ ============
BASIC NET LOSS PER SHARE (NOTE H) $ (.96) $ (.26) $ (1.16)
============ ============ ============
DILUTED NET LOSS PER SHARE (NOTE H) $ (.96) $ (.26) $ (1.16)
============ ============ ============
See notes to consolidated financial statements.
55
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES F and G)
---------------------------------------------------------------
Three years ended June 30, 2002
Class A and Class B
Convertible
Common Stock Common Stock
------------------- -------------------- Accumulated
Number Number Additional Other
of of Paid-In Comprehen-
Shares Amount Shares Amount Capital sive Income
------------------- -------------------- ------------ -----------
Balance at July 1, 1999 649,913 $ 6,499 12,841,270 $128,413 $233,861,099 $ 0
Net loss for year ended
June 30, 2000
Unrealized gain on
investments 50,783
Comprehensive loss
Earned compensation on
Class B convertible
common stock
Issuance of stock to
directors and
consultants 3,542 35 34,942
Common stock issued in con-
nection with exercise of
stock options and warrants
and conversion of CICs 965,434 9,654 11,529,526
Stock options issued to
non-employees 146,000
Purchase of treasury stock
Warrants sold to GE Plastics 400,000
Treasury stock sold to
ChevronTexaco
Common stock sold to
ChevronTexaco 3,588,400 35,884 65,570,745
Stock issued to Canon 700,000 7,000 12,751,000
------- ------- ---------- -------- ------------ -------
Balance at June 30, 2000 649,913 $ 6,499 18,098,646 $180,986 $324,293,312 $50,783
======= ======= ========== ======== ============ =======
Unearned
Compen-
Treasury Stock sation on
-------------- Class B
Number Convertible Total
Accumulated of Common Stockholders'
Deficit Shares Amount Stock Equity
-------------- ------------------------ ------------ ---------------
Balance at July 1, 1999 $(205,527,952) (109,400) $(1,028,092) $(4,251,340) $ 23,188,627
Net loss for year ended
June 30, 2000 (16,656,128) (16,656,128)
Unrealized gain on
investments 50,783
------------
Comprehensive loss (16,605,345)
Earned compensation on
Class B convertible
common stock 680,400 680,400
Issuance of stock to
directors and
consultants 34,977
Common stock issued in con-
nection with exercise of
stock options and warrants
and conversion of CICs 11,539,180
Stock options issued to
non-employees 146,000
Purchase of treasury stock (45,000) (735,679) (735,679)
Warrants sold to GE Plastics 400,000
Treasury stock sold to
ChevronTexaco 154,400 1,763,771 1,763,771
Common stock sold to
ChevronTexaco 65,606,629
Stock issued to Canon 12,758,000
------------- --------- ----------- ----------- ------------
Balance at June 30, 2000 $(222,184,080) 0 $ 0 $(3,570,940) $ 98,776,560
============= ========= =========== =========== ============
See notes to consolidated financial statements.
(Continued on next page.)
56
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES F and G)
---------------------------------------------------------------
Three years ended June 30, 2002
(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, 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 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.)
57
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES F and G)
---------------------------------------------------------------
Three years ended June 30, 2002
(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 (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.
58
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended June 30,
------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
OPERATING ACTIVITIES:
Net loss $ (20,888,034) $ (5,121,838) $ (16,656,128)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,273,010 2,301,798 2,194,989
Amortization of premium/discount on investments 362,172 - -
Equity loss in joint ventures 3,658,480 1,996,689 2,462,978
Profit deferred on sales to Bekaert ECD Solar Systems (1,774,172) 1,564,777 209,395
Creditable royalties (213,057) (120,179) 56,564
Options issued to executive for services rendered - - 113,250
Stock and stock options issued for services rendered 1,156,864 832,727 861,377
(Gain)/loss on sale of equipment (16,245) 61,228 5,051
Amortization of deferred gain (139,164) (390,744) (441,060)
Amortization of negative goodwill (466,433) (466,433) (116,608)
Minority interest (1,536,236) (1,069,518) (181,911)
Loss on write-off of investment in EV Global 1,000,000 - -
Other - - 62,000
Changes in working capital:
Accounts receivable 11,540,647 (11,636,928) 5,417,811
Accounts and note receivable due from related parties (516,672) (7,110,278) (7,489,069)
Inventories 170,269 (339,465) 400,364
Other assets (1,528,048) (682,675) 22,994
Accounts payable and accrued expenses 974,592 12,647,873 (3,378,186)
Accounts payable - related parties 23,685 (7,013) 16,551
Deferred revenues under business agreements 278,125 61,399 (1,187,756)
Deferred revenues - related parties 4,331,792 (4,030,590) 6,376,644
Deferred tax assets 864,999 (864,999) -
------------- ------------- -------------
NET CASH USED IN OPERATIONS (443,426) (12,374,169) (11,250,750)
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of capital equipment (7,666,791) (2,240,193) (698,328)
Investment in United Solar - - (1,499,589)
Investment in Bekaert ECD Solar Systems - (4,523,841) -
Investment in Bekaert ECD Europe - (43,750) -
Cash acquired in business combination - - 7,080,329
Investment in ITS Innovative Transportation Systems - (2,409,000) (400,000)
Investment in Rare Earth Ovonic (1,710,000) - -
Purchase of investments (79,490,214) (49,067,511) (44,672,717)
Sales of investments 55,646,159 45,712,907 -
Proceeds from sale of capital equipment 35,876 50 14,420
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (33,184,970) (12,571,338) (40,175,885)
------------- ------------- -------------
FINANCING ACTIVITIES:
Purchase of treasury stock - - (735,679)
Principal payments under short-term and long-term
debt obligations and capitalized lease obligations (1,844,799) (2,013,814) (1,518,982)
Proceeds from sale of stock, including treasury stock,
to ChevronTexaco 8,893,630 5,444,606 67,370,400
Proceeds from sale of stock upon exercise of stock
options and warrants 35,745,181 9,978,097 11,425,930
Proceeds from issuance of warrants - GE Plastics - - 400,000
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 42,794,012 13,408,889 76,941,669
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,165,616 (11,536,618) 25,515,034
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,055,399 44,592,017 19,076,983
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,221,015 $ 33,055,399 $ 44,592,017
============= ============= =============
See notes to consolidated financial statements.
59
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended June 30,
----------------------------------
2002 2001 2000
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 910,134 $ 800,911 $ 574,386
The Company's noncash investing and
financing activities were as follows:
Issuance of 700,000 shares of ECD
common stock to Canon in exchange
for Canon's interest in United Solar - - 12,758,000
Long-term note receivable -
Bekaert ECD Solar Systems 665,122 624,615 9,631,495
Long-term note payable - Canon (665,122) (624,615) (9,631,495)
Transfer investment in Bekaert ECD Solar
Systems to note receivable (4,523,841) - -
Record note receivable - Bekaert ECD
Solar Systems 4,523,841 - -
See notes to consolidated financial statements.
60
NOTE A - Summary of Accounting Policies
- ---------------------------------------
Nature of Business
- ------------------
Energy Conversion Devices, Inc. (ECD) has established a multidisciplinary
business, scientific and technical 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; its
approximately 91%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic
Battery), a company formed to develop and commercialize ECD's Ovonic(TM) NiMH
battery technology; and, effective April 11, 2000, its 81%-owned subsidiary
United Solar Systems Corp. (United Solar) (see Note D) (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.
(Sanyo). The remaining shares of United Solar are owned by N.V. Bekaert S.A.
and its U.S.-based subsidiary (Bekaert). 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. See
Note D for discussion of these ventures.
The Company has a number of strategic alliances and has, as of June 30,
2002, seven major investments accounted for by the equity method: (i) Bekaert
ECD Solar Systems LLC (Bekaert ECD Solar Systems), United Solar's 40% joint
venture with Bekaert; (ii) Texaco Ovonic Battery Systems LLC (Texaco Ovonic
Battery Systems), a joint venture between Ovonic Battery and ChevronTexaco, each
having 50% interest in the joint venture, to manufacture and sell the Company's
proprietary NiMH batteries for propulsion applications as well as non-propulsion
applications; (iii) Texaco Ovonic Fuel Cell Company LLC (Texaco Ovonic Fuel
Cell), a joint venture between ECD and ChevronTexaco, each having 50% interest
in the joint venture, to further develop and commercialize Ovonic(TM)
regenerative fuel cell technology; (iv) Texaco Ovonic Hydrogen Systems LLC
(Texaco Ovonic Hydrogen Systems), a joint venture between ECD and ChevronTexaco,
each having 50% interest in the joint venture, to further develop Ovonic(TM)
solid hydrogen storage technology; (v) Ovonyx, Inc. (Ovonyx), a 41.7%-owned
joint venture with Mr. Tyler Lowrey, Intel Capital and other investors, to
commercialize ECD's Ovonic(TM) Unified Memory (OUM) technology; (vi) Ovonic
Media, LLC (Ovonic Media), a joint venture owned 51% by General Electric (GE)
through its GE Plastics business unit and 49% by ECD; and (vii) ITS Innovative
Transportation Systems A.G. (ITS), a German company beneficially owned 30% by
ECD. In addition, ECD has two 50%-owned joint ventures in Russia, Sovlux Co.,
Ltd. (Sovlux) and Sovlux Battery Closed-stock Company (Sovlux Battery), and
United Solar and Bekaert ECD Solar Systems formed a joint venture in Belgium,
N.V. Bekaert ECD Europe (Bekaert ECD Europe) owned 10% by United Solar and 90%
by Bekaert ECD Solar Systems. See Note D for discussion of all of the Company's
ventures.
61
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
The Company's investments in Texaco Ovonic Battery Systems, Texaco Ovonic
Fuel Cell, Texaco Ovonic Hydrogen Systems, Ovonyx and Ovonic Media are recorded
at zero. The Company will continue to carry its investment in each of these
joint ventures at zero until the venture becomes profitable (based upon the
venture's history of sustainable profits), at which time the Company will start
to recognize over a period of years its share, if any, of the then equity of
each of the ventures, and will recognize its share of each venture's profits or
losses on the equity method of accounting. To the extent that the Company has
made cash or other contributions, it recognizes its proportionate share of any
losses until the investment reaches zero.
Intellectual property, including patents resulting from the Company's
investments in its technologies, are 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.
Based upon the opinion of legal counsel, the Company believes that it has
no obligation to fund any losses that its joint ventures incur beyond the
Company's investment.
ECD and Bekaert each have guaranteed 50% of the rent obligation for
Bekaert ECD Solar Systems' new Auburn Hills, Michigan facility and 50% of
Bekaert ECD Solar Systems' $40,000,000 sale-and-leaseback of the 30MW machinery
and equipment (see Note M - Commitments).
Bekaert ECD Solar Systems/United Solar will require an estimated
additional $40,000,000 through the period ending September 30, 2003 in order to
cover operating expenses, including ramp-up of production and implementation of
marketing programs, and for working capital purposes. Neither ECD nor Bekaert is
obligated to provide any portion of the required additional funding to Bekaert
ECD Solar Systems/United Solar. However, ECD and Bekaert have agreed to make
bridge loans to the joint ventures in the aggregate amount of $28,300,000 with
$12,200,000 in bridge financing provided by Bekaert and $16,100,000 by ECD. ECD
and Bekaert plan to explore new equity investors and bank financing to meet the
joint ventures' future cash requirements. ECD may also provide additional bridge
loans to the joint ventures (see Note M - Commitments).
Upon consolidation, all intercompany accounts and transactions are
eliminated. Any profits on intercompany transactions are eliminated to the
extent of our ownership percentage.
Certain items for the years ended June 30, 2001 and 2000 have been
reclassified to be consistent with the classification of items in the year ended
June 30, 2002.
In preparing financial statements in conformity with generally accepted
accounting principles in the United States (GAAP), management is required to
make estimates and assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reported
period. Actual results could differ from those estimates. In addition, the
Company has certain concentrations of revenues as described in Note B. The
62
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Company is impacted by other factors such as the continued receipt of contracts
from the U.S.government and industrial partners, its ability to protect and
maintain the proprietary nature of its technology, its continued product and
technological advances and the strength and ability of the Company's licensees
and joint venture partners to commercialize the Company's products and
technologies.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In August 2002, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires the Company to recognize a
liability for any obligations associated with the retirement of a tangible
long-lived asset. Any such liability will be recorded at fair value and will be
initially offset by an increase to the carrying amount of the related long-lived
asset. The Company will implement this statement on July 1, 2002. The Company
believes that the adoption of this statement will not have a material effect on
the Company's consolidated financial position or results of operation.
In August 2002, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement will supersede SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," as well as certain provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." The main objective of this
statement is to resolve implementation issues related to SFAS No. 121 by further
clarifying certain of its provisions. The Company will implement this statement
on July 1, 2002. The Company believes that the adoption of this statement will
not have a material effect on the Company's consolidated financial position or
results of operation.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." 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 will implement this statement on January 1, 2003. The
Company believes that the adoption of this statement will not have a material
effect on the Company's consolidated financial position or results of operation.
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.
63
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Short-Term Investments
- ----------------------
The Company has evaluated its investment policies consistent with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
determined that all of its investment securities are classified as available-
for-sale. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses reported in Stockholders' Equity under the caption
"Accumulated Other Comprehensive Income." The amortized cost of debt securities
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretions are included in interest income. Realized
gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in other nonoperating income
(expense). The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
Short-term investments consist of commercial paper maturing in 91 days to
37 months from date of acquisition.
Investment in Rare Earth Ovonic-China and EV Global
- ---------------------------------------------------
The Company has three joint ventures, 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).
The Company accounts for its investment in EV Global using the cost method
of accounting. ECD's interest in EV Global is less than 1%. In the year ended
June 30, 2002, the Company determined that this investment was permanently
impaired and wrote off its investment ($1,000,000).
Financial Instruments
- ---------------------
Due to the short-term maturities of cash, cash equivalents, marketable
securities, accounts receivable and accounts payable, the Company believes that
the carrying value of its financial instruments to be 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.
64
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Accounts Receivable
- -------------------
June 30,
------------------------
2002 2001
----------- -----------
Long-term contracts accounted for under percentage-
of-completion accounting
Revenues recognized but unbilled
Commercial customers $ 505,857 $11,604,014
Amounts billed to customers
Commercial customers 676,462 1,215,328
----------- -----------
Sub-total 1,182,319 12,819,342
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
U.S. Government 371,577 844,720
Commercial customers 172,210 72,970
----------- -----------
543,787 917,690
Amounts billed
U.S. Government 1,272,208 2,545,250
Commercial customers 1,575,020 51,020
----------- -----------
2,847,228 2,596,270
Retainages
U.S. Government - 40,500
----------- -----------
Sub-total 3,391,015 3,554,460
Amounts unbilled for other than long-term contracts
Commercial customers 2,146,983 2,164,631
Amounts billed for other than long-term contracts
U.S. Government 370 -
Commercial customers 1,110,760 853,661
----------- -----------
Sub-total 1,111,130 853,661
Allowance for uncollectible accounts (563,000) (583,000)
----------- -----------
TOTAL $ 7,268,447 $18,809,094
=========== ===========
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.
There are no material retentions at June 30, 2002 and June 30, 2001. Certain
U.S. government contracts remain subject to audit.
As of June 30, 2002, all U.S. government retentions (totaling $113,947)
have been reclassified to long-term other assets.
65
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,
----------------------------
2002 2001
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Revenues recognized but unbilled
Bekaert ECD Solar Systems $ - $ 1,229,324
Amounts billed
Bekaert ECD Solar Systems 3,792,025 4,015,345
Retainages
Bekaert ECD Solar Systems 5,721,965 1,622,266
----------- -----------
Sub-total 9,513,990 6,866,935
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
Bekaert ECD Solar Systems 130,000 130,000
Ovonic Media 364,263 16,748
Texaco Ovonic Battery Systems 2,182,575 6,432,859
Texaco Ovonic Fuel Cell 788,894 932,323
Texaco Ovonic Hydrogen Systems 1,874,463 777,441
----------- -----------
Sub-total 5,340,195 8,289,371
Amounts billed
Texaco Ovonic Battery Systems (formerly
GM Ovonic) 1,738,990 185,830
Texaco Ovonic Fuel Cell 671,358 -
Texaco Ovonic Hydrogen Systems 1,508,948 -
----------- -----------
Sub-total 3,919,296 185,830
Amounts unbilled for other than long-term
contracts
Texaco Ovonic Battery Systems (formerly
GM Ovonic) - 20,714
Ovonyx 21,248 30,875
----------- -----------
Sub-total 21,248 51,589
Amounts billed for other than long-term
contracts
Bekaert ECD Solar Systems - 396,912
ChevronTexaco Technology Ventures 536,569 -
Ovonyx 21,068 25,863
Texaco Ovonic Battery Systems (formerly
GM Ovonic) 97,504 187,132
----------- -----------
Sub-total 655,141 609,907
----------- -----------
TOTAL $19,449,870 $16,003,632
=========== ===========
66
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Inventories
- -----------
Inventories of raw materials, work in process and finished goods for the
manufacture of solar cells, metal hydride materials, battery packs and other
products, together with supplies, are valued at the lower of cost (moving
average) or market. Cost elements included in inventory are materials, direct
labor and manufacturing overhead. Cost of sales is removed from inventory based
on actual costs of items shipped to customers.
Inventories for United Solar and Ovonic Battery are as follows:
Year Ended June 30,
---------------------------
2002 2001
------------ ------------
Finished products $ 250,370 $ 109,500
Work in process 478,997 809,829
Raw materials 433,906 414,213
---------- ----------
$1,163,273 $1,333,542
========== ==========
Property, Plant and Equipment
- -----------------------------
All properties are recorded at cost. Plant and equipment for ECD and
Ovonic Battery are depreciated on the straight-line method over the estimated
useful lives of the individual assets. Plant and equipment for United Solar are
depreciated using an accelerated depreciation method over the estimated useful
lives of the assets. All other assets for United Solar are depreciated on the
straight-line method. 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 10
Capitalized lease equipment and
leasehold improvements 3 to 10
Capitalized lease equipment and leasehold improvements are amortized over
the shorter of the term of the lease or the life of the equipment or
improvement, usually three to ten years. Accumulated amortization on capitalized
lease equipment as of June 30, 2002 and June 30, 2001 was $2,443,000 and
$1,834,000, 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.
67
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Long-Term Note Receivable
- -------------------------
In connection with Bekaert's investment in United Solar and Bekaert ECD
Solar Systems, Bekaert ECD Solar Systems is required to pay ECD $12,000,000 no
later than January 1, 2004. This noninterest-bearing note receivable was
recorded on April 11, 2000 by ECD at a discounted value of $9,500,000 (using a
discount rate of 6.3%). ECD is required to pay Canon Inc. of Japan (Canon)
$12,000,000 no later than January 2004 in connection with the acquisition of
Canon's interest in United Solar (see Note E).
Product Development, Patents and Technology
- -------------------------------------------
Product development and research costs are expensed as they are incurred
and, as such, the Company's investments in its technologies and patents are
recorded at zero in its financial statements, regardless of their values. The
technology investments are the bases by which the Company is able to enter into
license and joint venture agreements.
Total direct product development and research costs, a portion of which is
included in cost of revenues from product development agreements, were
$47,826,000, $34,746,000 and $20,197,000 for the three years ended June 30,
2002, 2001 and 2000, respectively.
Patents and Patent Defense
- --------------------------
Patent expenditures are charged directly to expense. Total patent
expenditures were $2,183,000, $1,853,000 and $1,690,000 for the three years
ended June 30, 2002, 2001 and 2000, respectively. Patent defense expenditures of
$2,749,000 in 2002, $1,913,000 in 2001 and $59,000 in 2000, 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 non-consumer battery litigation expenses
beginning in fiscal 2002. This reimbursement ($2,167,000) has been offset
against the patent defense costs for the year ended June 30, 2002. 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.
Product Sales
- -------------
Product sales include revenues related to machine-building and equipment
sales contracts, photovoltaic products, metal hydride materials and revenues
related to building of 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 related to metal hydride materials
combined with high fixed costs result in losses.
68
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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.
Ovonic Battery had a contingent fee arrangement with a law firm which
required Ovonic Battery to pay the law firm 25% of royalties received relative
to consumer battery licenses entered into in 1995 in settlement of an
International Trade Commission action. In December 2000, the Company paid the
law firm $1,300,000 ($977,000 of which had been accrued through December 31,
2000 and an additional $323,000 was expensed as of that date) in full settlement
for all current and future payments. No additional contingent fee payments will
be required.
In connection with a 1992 battery development contract (1992 Contract)
with the United States Advanced Battery Consortium (USABC), partially funded by
the U.S. Department of Energy (DOE), we have agreed to reimburse USABC and DOE,
as their recoupment for payments to us under the 1992 Contract, a 15% share of
royalty payments we receive through May 3, 2012 where Ovonic(TM) NiMH batteries
serve as the primary source of power for electric vehicles (Recoupment). We do
not believe that royalties received to date for batteries manufactured by our
licensees are subject to Recoupment.
ECD has a royalty trust arrangement whereby ECD is obligated to pay a
trust 25% of optical memory royalties received. In the year ended June 30, 2002,
ECD paid $7,362 to this trust.
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 following describes two types of such
agreements.
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
69
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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.
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.
70
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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 the amortization of deferred
gains and rental income.
Stock Options
- -------------
The Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation," 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 cost of the options is
estimated at each reporting date and the expense is amortized during the period
during which the options vest. The Company applies APB 25, "Accounting for Stock
Issued to Employees," to its stock-based compensation awards to employees. Most
awards are granted at the fair market value on the grant date in accordance with
the applicable plan and, as such, no compensation expense is recorded in
connection with these grants.
There are two executive stock option agreements which specify that the
option exercise price be 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 G - 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.
71
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,
-------------------------------------
2002 2001 2000*
----------- ----------- -----------
Product sales
Machine building and equipment sales $25,295,959 $12,961,589 $ 1,745,653
Battery packs 257,637 844,895 1,506,715
Metal hydride materials 698,639 118,545 19,355
----------- ----------- -----------
26,252,235 13,925,029 3,271,723
Product sales-related parties
Photovoltaics 5,883,442 5,975,424 2,212,251
Machine building 4,237,201 3,972,778 78,391
Battery packs 19,998 130,000 (13,418)
Metal hydride materials 241,291 236,739 1,343,408
----------- ----------- -----------
10,381,932 10,314,941 3,620,632
----------- ----------- -----------
Total product sales $36,634,167 $24,239,970 $ 6,892,355
=========== =========== ===========
Royalties
Battery technology $ 1,913,914 $ 2,846,795 $ 3,300,547
Optical memory 66,832 52,161 139,617
----------- ----------- -----------
1,980,746 2,898,956 3,440,164
Royalty-related party
Microelectronics 20,168 - -
----------- ----------- -----------
Total royalties $ 2,000,914 $ 2,898,956 $ 3,440,164
=========== =========== ===========
Revenues from product development
agreements
Photovoltaics $ 2,419,332 $ 2,600,216 $ 2,185,911
Battery technology 3,762,186 3,557,618 4,727,639
Optical memory 172,695 603,724 1,029,102
Hydrogen 348,435 659,954 1,610,632
Other 74,328 - 107,498
----------- ----------- -----------
6,776,976 7,421,512 9,660,782
Revenues from product development
agreements - related parties
Battery technology 16,315,424 7,213,698 123,733
Optical memory 1,923,273 2,297,977 634,470
Hydrogen 18,783,190 11,818,301 -
Fuel cells 8,886,854 8,830,650 -
----------- ----------- -----------
45,908,741 30,160,626 758,203
----------- ----------- -----------
Total revenues from product development
agreements $52,685,717 $37,582,138 $10,418,985
=========== =========== ===========
License and other agreements
Battery technology $ 25,000 $ 5,300,000 $ 3,138,000
=========== =========== ===========
- ------------
* United Solar is included in ECD's consolidated financial
statements effective April 11, 2000.
72
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 (Continued)
- -------------------------------------------------------
In the year ended June 30, 2002, the Company entered into a license
agreement with Lexel Battery (Shenzhen) Co., Ltd. of China ($25,000).
In the year ended June 30, 2001, the Company entered into license
agreements with three Chinese companies (BYD Battery Co., Ltd. ($250,000),
SANIK Battery Co., Ltd. ($50,000) and Rare Earth Ovonic ($5,000,000).
In the year ended June 30, 2000, the Company entered into a license
agreement ($1,778,000 in license fees plus future royalties) with Toshiba
Battery Co., Ltd. for its HEV technology. In addition, Japan Storage Battery
Co., Ltd. (Japan Storage), a licensee, notified the Company that it had reached
a certain level of sales of its products and that the Company had earned an
additional license fee of $360,000.
In the year ended June 30, 1999, the Company entered into a patent license
agreement with Sanyo. Sanyo has been granted a nonexclusive license under Ovonic
Battery patents, which includes the right to sublicense Sanyo affiliates. The
license agreement provided for an up-front payment of $4,400,000, which was
recognized as license revenue, and payment of advance royalties of $500,000,
which was deferred. In addition, ECD and Sanyo also entered into a stock
purchase agreement that provided for the purchase by Sanyo of a minority
interest in Ovonic Battery. The stock purchase agreement, which provided for
payments totaling $2,970,000, also contained terms which required the Company to
assist Sanyo in negotiating a cooperative venture agreement with a joint venture
of ECD. The Company recognized a $1,970,000 gain relating to the sale of stock
of Ovonic Battery in the year ended June 30, 1999 under the terms of the stock
purchase agreement and deferred $1,000,000 pending the negotiation of a
cooperative venture agreement. In the year ended June 30, 2000, the cooperative
venture agreement was completed and the $1,000,000 was recognized as revenues
from license and other agreements, as the earnings process related to this
aspect of the transaction was completed.
The Company has historically entered into agreements with a relatively
small number of major customers throughout the world. In the year ended June 30,
2002, three customers represented 67% of the Company's total revenues (28% Rare
Earth Ovonic joint ventures, 20% Texaco Ovonic Hydrogen Systems and 19% Texaco
Ovonic Battery Systems). In the year ended June 30, 2001, three customers
represented 54% of the Company's total revenues (25% Rare Earth Ovonic joint
ventures, 17% Texaco Ovonic Hydrogen Systems and 12% Texaco Ovonic Fuel Cell).
In the year ended June 30, 2000, two customers represented 25% (14% GM Ovonic
and 11% GM) of the Company's total revenues.
73
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 (Continued)
- -------------------------------------------------------
The following table presents revenues by country based on the location of
the customer:
Year Ended June 30,
--------------------------------------
2002 2001 2000
----------- ----------- -----------
United States $57,804,373 $44,190,933 $21,243,803
China 25,344,459 18,227,952 -
Mexico 5,883,442 5,975,424 -
Japan 1,815,399 2,304,348 5,984,375
Hong Kong 711,950 275,405 81,519
Germany 150,300 151,125 698,211
The Netherlands - 40,000 779,336
Australia - - 536,764
Other countries 362 239,306 655,077
----------- ----------- -----------
$91,710,285 $71,404,493 $29,979,085
=========== =========== ===========
NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At June 30, 2002 and 2001, the Company deferred recognition of revenue
relating to nonrefundable advance royalty payments. Nonrefundable advance
royalties consist of the following:
June 30,
------------------------
2002 2001
---------- ----------
Battery $1,642,822 $1,819,416
Optical memory 1,985,109 1,999,072
---------- ----------
$3,627,931 $3,818,488
========== ==========
During the years ended June 30, 2002, 2001 and 2000, $213,057, $120,179
and $165,536, respectively, of creditable royalties earned were recognized as
revenue. During the year ended June 30, 2001, a nonrefundable advance royalty of
$100,000 was received from Japan Storage. There are no obligations in connection
with any of the advance royalty agreements which require the Company to incur
any additional costs.
74
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments
- ---------------------------------------
Joint Ventures
- --------------
United Solar/Bekaert ECD Solar Systems
Immediately prior to the April 11, 2000 transaction described below,
United Solar was owned 49.98% by ECD, 49.98% by Canon, and the remainder by a
minority shareholder. United Solar repurchased the shares of the minority
shareholder, bringing the ownership of United Solar for both ECD and Canon to
50%.
On April 11, 2000, ECD and Bekaert entered into a strategic alliance in
the field of photovoltaic (solar) products. The joint venture entailed an
investment in a new manufacturing plant making solar products capable of
producing on an annual basis 30 megawatts (MW) of electrical power, a sales
and marketing expansion program, and the purchase of Canon's interest in
United Solar for a total investment by Bekaert of $84,000,000.
This transaction involved the following:
o Bekaert invested $72,000,000 for 1,372,015 newly issued shares of
United Solar stock and its 60% share of Bekaert ECD Solar Systems
($42,000,000 in cash and $30,000,000 in the form of a note, payable on
an as-needed basis).
o Bekaert ECD Solar Systems paid to ECD (1) $12,000,000 in cash
(paid at the closing of the transaction) and will pay (2) $12,000,000
(to be paid to ECD no later than January 1, 2004).
o ECD paid to Canon for all of Canon's shares in United Solar stock
(1) $12,000,000 in cash, (2) a note, guaranteed by Bekaert, for
$12,000,000 to be paid to Canon no later than January 1, 2004 and
(3) 700,000 shares of ECD stock.
o United Solar invested $28,000,000 for its 40% interest in Bekaert ECD
Solar Systems, consisting of (1) $23,056,000 in cash, (2) $5,000,000 in
the form of a note, payable on an as-needed basis, but no later than
April 11, 2003, and (3) the stock of United Solar de Mexico with a
negative book value of $56,000.
As a result of this transaction, United Solar is owned 81% by ECD and 19%
by Bekaert. Bekaert ECD Solar Systems is owned 40% by United Solar and
60% by Bekaert.
At the closing of this transaction, ECD received a total of $7,000,000
from United Solar and Bekaert ECD Solar Systems. Of this amount, $5,000,000 was
an advance on the 30MW machine-building order and $2,000,000 was a repayment by
United Solar to ECD of previous loans made by ECD to United Solar.
75
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
Effective April 11, 2000, ECD has consolidated United Solar in ECD's
financial statements.
ECD valued its acquisition of Canon's interest in United Solar at
$13,214,630, which included the issuance of 700,000 shares of ECD Common Stock
valued at $12,758,000 and the $456,630 balance in ECD-United Solar's joint
venture account on April 11, 2000. The acquisition, which resulted in ECD's
ownership in United Solar increasing from 49.98% to 81%, has been recorded
under the purchase method of accounting. The Company allocated the purchase
price for this acquisition to the net assets of United Solar. The value of the
net assets acquired exceeded the purchase price resulting in negative goodwill,
which resulted in a reduction of consolidated expenses. The Company allocated
this negative goodwill to reduce United Solar's long-term assets (capital
equipment) and applicable depreciation expense. The remaining negative goodwill
($3,265,000) is being amortized over seven years on a straight-line basis.
Based upon the opinion of legal counsel, the Company believes that it has
no obligation to fund any losses that its joint ventures incur beyond the
Company's investment.
ECD and Bekaert each have guaranteed 50% of the rent obligation for
Bekaert ECD Solar Systems' new Auburn Hills, Michigan facility and 50% of
Bekaert ECD Solar Systems' $40,000,000 sale-and-leaseback of the 30MW machinery
and equipment (see Note M - Commitments).
Bekaert ECD Solar Systems/United Solar will require an estimated
additional $40,000,000 through the period ending September 30, 2003 in order to
cover operating expenses, including ramp-up of production and implementation of
marketing programs, and for working capital purposes. Neither ECD nor Bekaert is
obligated to provide any portion of the required additional funding to Bekaert
ECD Solar Systems/United Solar. However, ECD and Bekaert have agreed to make
bridge loans to the joint ventures in the aggregate amount of $28,300,000 with
$12,200,000 in bridge financing provided by Bekaert and $16,100,000 by ECD. ECD
and Bekaert plan to explore new equity investors and bank financing to meet the
joint ventures' future cash requirements. ECD may also provide additional bridge
loans to the joint ventures (see Note M - Commitments).
The FASB has issued SFAS No. 142, "Goodwill and Other Intangible Assets."
This will require the Company to recognize any unamortized negative goodwill as
the effect of a change in accounting principle no later than July 1, 2002. The
Company has continued to amortize the favorable benefit of negative goodwill
through June 30, 2002 and will recognize the balance of approximately $2,216,000
as the favorable effect of a change in accounting principle in the Company's
statements of operations on July 1, 2002.
76
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
The fair value of the assets acquired by ECD was:
Cash $ 7,080,329
Accounts Receivable 6,274,337
Inventory 805,196
Other 182,516
Property, Plant and Equipment (net) 7,425,587
Investment in Bekaert ECD Solar Systems 23,000,000
Other 156,200
-----------
Total Assets 44,924,165
Accounts Payable 5,223,086
Current Installments of long-term debt 1,445,703
Long-term notes payable - Canon 2,500,000
Long-term Debt 6,242,720
-----------
Total Liabilities 15,411,509
-----------
Net assets acquired 29,512,656
Less - Minority interest (19%) (5,607,405)
- Write-off of fixed assets (7,425,587)
- Negative goodwill (3,265,034)
-----------
ECD's investment in United Solar $13,214,630
===========
ECD performed laboratory, shop, patent and research services for the
benefit of United Solar for which ECD billed approximately $149,000 in the nine
months ended March 31, 2000. These amounts are included in other revenues. In
addition, in the nine months ended March 31, 2000, United Solar billed ECD for
approximately $359,000 for work performed in accordance with U.S. Government
contracts.
The following sets forth certain financial data regarding Bekaert ECD
Solar Systems that are derived from Bekaert ECD Solar Systems' financial
statements.
BEKAERT ECD SOLAR SYSTEMS
STATEMENTS OF OPERATIONS
------------------------
Year Ended June 30,
----------------------------
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Revenues $ 16,298,166 $ 8,606,637
Operating Expenses:
Cost of Sales 16,889,974 10,435,170
General and Administrative 7,555,484 4,131,707
------------ -----------
Total Expenses 24,445,458 14,566,877
Other Income (Expense) (840,838) 38,251
------------ -----------
Net Loss $ (8,988,130) $(5,921,989)
============ ===========
77
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
BEKAERT ECD SOLAR SYSTEMS
BALANCE SHEETS
--------------
Year Ended June 30,
----------------------------
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Current Assets:
Cash and Cash Equivalents $ 6,569,025 $ 10,726,490
Inventory 7,528,767 7,714,969
Other Current Assets 6,636,430 5,100,865
------------ ------------
Total Current Assets 20,734,222 23,542,324
Property, Plant and Equipment (Net) 81,954,953 26,104,169
Other Assets 38,674,995 20,908,387
------------ ------------
Total Assets $141,364,170 $ 70,554,880
============ ============
Current Liabilities:
Accounts Payable and Other Current Liabilities $ 19,374,416 $ 14,602,720
------------ ------------
Total Current Liabilities 19,374,416 14,602,720
Note Payable-ECD 10,921,232 10,256,110
Long-Term Capitalized Lease 61,525,996 -
------------ ------------
Total Liabilities 91,821,644 24,858,830
Members' Equity 49,542,526 45,696,050
------------ ------------
Total Liabilities and Members' Equity $141,364,170 $ 70,554,880
============ ============
At July 1, 2001, an advance of $4,523,841 previously made by United Solar
to Bekaert ECD Solar Systems was transferred to an interest-bearing note payable
to United Solar. At June 30, 2002, the balance of this note payable to United
Solar is $1,594,275.
Bekaert ECD Solar Systems was formed on April 11, 2000, and for the years
ended June 30, 2002 and 2001 and for the period from April 11, 2000 through June
30, 2000, the Company recorded revenues of $10,121,000, $9,948,000 and
$2,291,000, respectively, from Bekaert ECD Solar Systems.
Texaco Ovonic Battery Systems/GM Ovonic
In June 1994, Ovonic Battery and General Motors formed a joint venture, GM
Ovonic, for the manufacture and commercialization of Ovonic(TM) NiMH batteries
for electric, hybrid electric and fuel cell electric vehicles. As of June 30,
2001, GM had a 60% interest and Ovonic Battery has a 40% interest in this joint
venture.
On July 17, 2001, ChevronTexaco bought GM's interest in GM Ovonic.
ChevronTexaco will invest up to $178,000,000 in the venture, renamed Texaco
Ovonic Battery Systems LLC (Texaco Ovonic Battery Systems) and Ovonic Battery
contributed additional technology. Texaco Ovonic Battery Systems is owned 50% by
Ovonic Battery and 50% by ChevronTexaco.
78
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
The Company recorded revenues from Texaco Ovonic Battery Systems of
$16,315,000 for the year ended June 30, 2002, for services performed on behalf
of Texaco Ovonic Battery Systems (primarily for advanced product development and
market development work). The Company recorded revenues from Texaco Ovonic
Battery Systems of $261,000 for the year ended June 30, 2002, for products sold
to this joint venture. During the years ended June 30, 2001 and 2000, the
Company had revenues of $2,127,000 and $4,233,000 related to sales of products
to GM Ovonic and revenues for services performed for GM Ovonic.
There are no financial statements currently available for Texaco Ovonic
Battery Systems. Texaco Ovonic Battery Systems is in the developmental stage
and, as such, has a history of operating losses.
Ovonyx
In January 1999, ECD and Mr. Tyler Lowrey, the former vice chairman and
chief technology officer of Micron Technology, Inc., formed an alliance
(a corporation was formed on June 23, 1999), Ovonyx (initially owned 50% by ECD
with the balance owned by Mr. Lowrey and a colleague), to further develop and
commercialize ECD's Ovonic(TM) Unified Memory. In February 2000, Ovonyx and
Intel entered into a collaboration and royalty-bearing license agreement to
jointly develop and commercialize OUM technology. Presently, ECD owns 41.7% of
Ovonyx, Mr. Lowrey and his colleague own 41.7% of Ovonyx, and Intel and other
investors own the remainder. ECD has contributed intellectual property and
licenses for its interest in Ovonyx.
ECD recorded revenues from Ovonyx of $215,000, $382,000 and $2,686,000 for
the years ended June 30, 2002, 2001 and 2000, respectively, representing
services performed for its operations which commenced on January 15, 1999. ECD
has received payment of $3,263,000 for these services as of June 30, 2002, and
the remaining balance is included in accounts receivable.
Texaco Ovonic Fuel Cell
In September 2000, ECD and ChevronTexaco formed Texaco Ovonic Fuel Cell.
ChevronTexaco has been funding initial product and market development, the
primary use of which is to fund a contract from Texaco Ovonic Fuel Cell to ECD
to further develop Ovonic(TM) regenerative fuel cell 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
Fuel Cell that are derived from Texaco Ovonic Fuel Cell's financial statements.
79
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
TEXACO OVONIC FUEL CELL COMPANY LLC
STATEMENTS OF OPERATIONS
------------------------
From Date of Inception
Year Ended (September 21, 2000)
June 30, 2002 Through June 30, 2001
------------- ---------------------
Revenues
Other Income $ 5,584 $ 24,940
Expenses:
Product Development - Paid or Payable to ECD 7,714,186 6,870,682
Product Development - Paid or Payable to
ChevronTexaco 968,451 456,892
Depreciation Expense 500,597 65,806
Loss on Disposal of Assets 9,850 -
----------- -----------
Total Expenses 9,193,084 7,393,380
----------- -----------
Net Loss $(9,187,500) $(7,368,440)
=========== ===========
TEXACO OVONIC FUEL CELL COMPANY LLC
BALANCE SHEETS
--------------
June 30, 2002 June 30, 2001
------------- -------------
Current Assets:
Cash and Equivalents $ 89,318 $ 131,051
----------- -----------
Total Current Assets 89,318 131,051
Fixed Assets:
Leasehold Improvements 1,454,716 674,797
Machinery and Other Equipment 1,557,339 976,466
Construction in Progress 78,959 308,759
----------- -----------
Total Fixed Assets 3,091,014 1,960,022
Less Accumulated Depreciation and Amortization (566,403) (65,806)
------------ ------------
Net Fixed Assets 2,524,611 1,894,216
----------- -----------
Total Assets $ 2,613,929 $ 2,025,267
=========== ===========
Current Liabilities:
Amount Due ECD, Net $ 1,428,117 $ 932,323
Amount Due ChevronTexaco 91,752 311,384
----------- -----------
Total Current Liabilities 1,519,869 1,243,707
Members' Equity:
Capital Contributions 17,650,000 8,150,000
Cumulative Deficit (16,555,940) (7,368,440)
----------- -----------
Total Members' Equity 1,094,060 781,560
----------- -----------
Total Liabilities and Members' Equity $ 2,613,929 $ 2,025,267
=========== ===========
80
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
During the years ended June 30, 2002 and 2001, the Company recorded
revenues of $8,887,000 and $8,831,000, respectively, for services provided to
this joint venture. ChevronTexaco has been funding initial product and market
development, which includes funding a product development contract from Texaco
Ovonic Fuel Cell to ECD. The contract, which began July 1, 2000, may be
cancelled under certain circumstances, including not materially satisfying
mutually agreed-upon milestones. The Company has recorded total revenues of
$17,718,000 for work performed under the contract, of which $8,887,000 was for
work performed under the contract in the year ended June 30, 2002. While certain
milestones have not been materially satisfied, ChevronTexaco has approved a
budget of $3,839,000 for work to be performed through December 31, 2002. The
Company and ChevronTexaco are currently in discussions regarding the future
business strategy of the venture, including the involvement of additional joint
venture partners. ChevronTexaco will review its funding of the joint venture
for periods following December 31, 2002.
Texaco Ovonic Hydrogen Systems
In October 2000, ECD and ChevronTexaco formed Texaco Ovonic Hydrogen
Systems. ChevronTexaco is funding 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 Texaco Ovonic Hydrogen Systems' financial
statements.
TEXACO OVONIC HYDROGEN SYSTEMS LLC
STATEMENTS OF OPERATIONS
------------------------
From Date of Inception
Year Ended (October 31, 2000)
June 30, 2002 Through June 30, 2001
------------- ---------------------
Revenues
Other Income $ 26,581 $ 27,520
Prototype sales 21,793 -
------------ ------------
Total Revenues 48,374 27,520
Expenses:
Product Development - Paid or Payable to ECD 11,979,981 9,857,453
Product Development - Paid or Payable to
ChevronTexaco 1,691,406 596,310
Depreciation Expense 596,193 71,684
Loss on Disposal of Assets 50,912 -
------------ ------------
Total Expenses 14,318,492 10,525,447
------------ ------------
Net Loss $(14,270,118) $(10,497,927)
============ ============
81
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
TEXACO OVONIC HYDROGEN SYSTEMS LLC
BALANCE SHEETS
--------------
June 30, 2002 June 30, 2001
------------- ------------
Current Assets:
Cash and Equivalents $ 134,823 $ 151,413
Accounts Receivable 10,746 -
----------- -----------
Total Current Assets 145,569 151,413
Fixed Assets:
Leasehold Improvements 3,226,570 900,329
Machinery and Other Equipment 2,543,163 651,953
Construction in Progress 2,736,571 408,589
----------- -----------
Total Fixed Assets 8,506,304 1,960,871
Less Accumulated Depreciation and Amortization (666,044) (71,684)
----------- -----------
Net Fixed Assets 7,840,260 1,889,187
----------- -----------
Total Assets $ 7,985,829 $ 2,040,600
=========== ===========
Current Liabilities:
Amount Due ECD, Net $ 3,335,178 $ 777,441
Amount Due ChevronTexaco 376,439 434,086
Deferred Revenue 15,257 -
----------- ----------
Total Current Liabilities 3,726,874 1,211,527
Members' Equity:
Capital Contributions 29,027,000 11,327,000
Cumulative Deficit (24,768,045) (10,497,927)
----------- ----------
Total Members' Equity 4,258,955 829,073
----------- ----------
Total Liabilities and Members' Equity $ 7,985,829 $ 2,040,600
=========== ==========
During the years ended June 30, 2002 and 2001, the Company recorded
revenues of $18,581,000 and $11,818,000, respectively, for services provided to
this joint venture, primarily for market development and advanced product
development work.
ITS Innovative Transportation Systems
ITS Innovative Transportation Systems, a German company formed to
manufacture battery-driven electric, hybrid-electric and fuel cell electric
vehicles, was initially capitalized with a minor amount of cash and a
contribution of 625,000 shares of Unique Mobility Common Stock. Of the stock
contribution, 208,333 shares (79,092 of which were acquired from EV Global in
exchange for 34,723 shares of ECD) were contributed by ECD. At the inception of
ITS, ECD's interest was 5.7%. ECD's interest increased to 11.7% as a result of
an additional investment of $400,000 on June 19, 2000. On October 3, 2000, ECD
invested an additional amount of $909,000 in ITS, increasing its ownership
interest to 19%. On March 8, 2001, ECD
82
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
invested an additional amount of $1,500,000, increasing its ownership
interest to 30%. As of March 8, 2001, ECD is using the equity method to account
for its investment in ITS. In October 2001, Texaco Ovonic Battery Systems
invested $4,000,000 in ITS for an 8% investment, reducing ECD's direct ownership
to 26%. On July 1, 2002, ECD made a loan of $1,000,000 to ITS.
Ovonic Media
In March 2000, ECD and GE formed a strategic alliance, the first activity
of which resulted in the creation of a joint venture, Ovonic Media. This joint
venture is owned 51% by GE through its GE Plastics business unit and 49% by ECD.
ECD has contributed intellectual property, know-how, licenses and equipment to
the joint venture. GE will make cash and other contributions to the joint
venture.
For the years ended June 30, 2002, 2001 and 2000, the Company had revenues
of $1,923,000, $2,298,000 and $634,000, respectively, from Ovonic Media for
services provided to this joint venture for advanced product development work.
This joint venture is currently being funded on a month-to-month basis.
83
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
The following sets forth certain financial data regarding Ovonic Media
that are derived from Ovonic Media's financial statements.
OVONIC MEDIA
STATEMENTS OF OPERATIONS
------------------------
Year Ended June 30,
----------------------------
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Revenues $ - $ -
Operating Expenses:
Product Development 1,550,600 1,569,310
General and Administrative 292,289 305,968
Depreciation Expense 189,129 97,320
----------- -----------
Total Expenses 2,032,018 1,972,598
----------- -----------
Loss From Operations (2,032,018) (1,972,598)
Interest Expense - (6,584)
----------- -----------
Net Loss $(2,032,018) $(1,979,182)
=========== ===========
OVONIC MEDIA
BALANCE SHEETS
--------------
June 30, 2002 June 30, 2001
------------- -------------
(Unaudited) (Unaudited)
Current Assets:
Property, Plant and Equipment (Net) $ 460,241 $ 569,579
---------- ----------
Total Assets $ 460,241 $ 569,579
========== ==========
Current Liabilities:
Accounts Payable to ECD $ 364,263 $ 17,341
---------- ----------
Total Liabilities 364,263 17,341
Members' Equity:
Capital Contributions 4,656,342 3,080,584
Accumulated Deficit (4,560,364) (2,528,346)
---------- ----------
Total Members' Equity 95,978 552,238
---------- ----------
Total Liabilities and Members' Equity $ 460,241 $ 569,579
========== ==========
84
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
Investments in EV Global and Rare Earth Ovonic
In February 1998, the Company invested in EV Global, a company formed by
Lee Iacocca for the manufacture and sale of electric bicycles. In the year ended
June 30, 2002, the Company determined that this cost method investment was
permanently impaired and wrote off its investment ($1,000,000).
During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech of Inner Mongolia, China. The agreement
called for the creation of joint ventures for manufacturing and licensing of
advanced NiMH battery technology, hydrogen storage alloy powders, advanced
Ovonic(TM) nickel hydroxide materials and production equipment, all for battery
applications for NiMH batteries. As of June 30, 2002, 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.
On February 22, 2002, ECD and Ovonic Battery made a proportionate $1,710,000
cash investment in the Rare Earth Ovonic joint ventures and maintained their 19%
interest in these entities. All of these joint ventures are being accounted for
using the cost method of accounting.
Ovonic Battery has three contracts totaling $63,600,000 to supply
equipment and technology to its Rare Earth Ovonic joint ventures in China. As of
September 30, 2002, Ovonic Battery has received payments totaling $59,485,000
under the three contracts.
The Company recorded revenues from Rare Earth Ovonic of $25,287,000 and
$12,931,000 for the years ended June 30, 2002 and June 30, 2001, respectively.
Sovlux and Sovlux Battery
In 1990, ECD formed Sovlux, a joint venture to manufacture the Company's
photovoltaic products in the countries of the former Soviet Union. Sovlux is
owned 50% by ECD and 50% by the State Research and Production Enterprise Kvant
and enterprises of the Russian Ministry of Atomic Energy (Minatom). Sovlux has
not been able to continue production of photovoltaic products due to current
economic conditions in Russia.
In 1998, ECD formed Sovlux Battery to produce NiMH batteries and
components for sale to Ovonic Battery and its licensees. Sovlux Battery is owned
50% by ECD and 50% by the Chepetsky Mechanical Plant (Chepetsky), an enterprise
of Minatom. ECD's contribution to the ventures consists solely of technology. No
significant battery or battery materials manufacturing activities have been
undertaken by Sovlux Battery.
There are no financial statements currently available for Sovlux or Sovlux
Battery. Sovlux and Sovlux Battery are in their developmental stage and, as
such, have a history of operating losses.
85
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Long-Term Liabilities and Line of Credit
- -------------------------------------------------
A summary of the Company's long-term liabilities is as follows:
June 30,
---------------------------
2002 2001
------------ ------------
Capitalized leases - Finova
(with interest rates of approximately 12%) $ 936,358 $ 1,335,301
Capitalized leases - Fuji
(interest rate of 6.93%) 4,800,343 6,500,000
Note Payable - Canon (discount rate of 6.3%) 10,921,232 10,256,110
Note Payable - Canon (interest rate of 6.21%) 2,500,000 2,500,000
Other capitalized leases 4,132 15,295
Other 528,451 263,487
----------- -----------
Total 19,690,516 20,870,193
Less amounts included in current liabilities 5,261,747 2,716,072
----------- -----------
Total Long-Term Liabilities $14,428,769 $18,154,121
=========== ===========
Capitalized Leases
- ------------------
In April 1998, the Company entered into a capital lease transaction with
Finova Capital Corporation, which has two components. One component, which was
fully utilized, provided $2,000,000 to refinance existing leased equipment
(resulting in $1,200,000 net cash to the Company) and had a three-year term at
the expiration whereby the Company was required to purchase the equipment for
10% of the original cost. On April 25, 2001, the Company purchased the equipment
under this lease for a total cost of $204,000. The second component provided for
the Company's sale and leaseback of equipment it acquired subsequent to June 30,
1996. At the expiration of the related five-year lease, the Company will be
required to purchase the leased equipment for 10% of the original cost. At June
30, 1998, the Company had entered into sale-and-leaseback arrangements of
$3,137,000 in connection with the second component. The lease agreement is
secured by Ovonic Battery's plant and equipment. In addition, ECD has guaranteed
Ovonic Battery's obligations under this agreement and has provided a first
security interest in the Company's unencumbered plant and equipment.
The Company is obligated under a capital lease with Fuji Bank for certain
machinery and equipment. Under the terms of the agreement, United Solar has made
43 monthly payments of $120,475 from the period November 21, 1997 to June 21,
2001; made 12 monthly payments of $174,733 for the period from July 21, 2001 to
June 21, 2002; and will make 30 monthly payments of $174,733 from the period
July 21, 2002 until the lease termination date of December 21, 2004, at which
time United Solar can repurchase the assets for the nominal value of $1.00. The
lease is guaranteed by Canon and Bekaert and, as a result, Canon has a lien on
United Solar's assets.
86
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Long-Term Liabilities and Line of Credit (Continued)
- -------------------------------------------------------------
Notes Payable and Other Long-Term Liabilities
- ---------------------------------------------
In connection with the acquisition of Canon's interest in United Solar,
ECD issued a noninterest-bearing note payable to Canon for $12,000,000 due no
later than January 2004. This note payable was recorded on April 11, 2000, by
ECD at a value of $9,500,000 (at a discount rate of 6.3%). (See Note A -
Long-Term Note Receivable.)
United Solar entered into a term loan with Canon in the amount of
$2,500,000. Interest accrues at a rate of 6.21% per annum and the loan plus
accrued interest is payable in full on January 17, 2003. At the Company's
option, certain additional rights can be given to Canon under a license
currently in effect in lieu of a cash payment.
Other
- -----
The Company has operating lease agreements, principally for office and
research facilities and equipment. These leases, in some instances, include
renewal provisions at the option of the Company. Rent expense under such lease
agreements for the years ended June 30, 2002, 2001 and 2000 was approximately
$2,443,000, $1,941,000 and $765,000, respectively.
Future Minimum Payments
- -----------------------
Future minimum payments on long-term notes payable and other long-term
liabilities, obligations under capital leases and noncancellable operating
leases expiring in each of the five years subsequent to June 30, 2002 are as
follows:
Long-Term Note
Payable and
Other Long-Term
Liabilities Capital Leases Operating Lease
--------------- -------------- ---------------
2003 $ 2,500,000 $3,120,631 $ 2,201,780
2004 12,000,000 2,096,795 1,873,944
2005 - 1,048,397 1,511,934
2006 - 528,447 898,790
2007 - - 755,865
Thereafter - - 2,813,571
----------- ---------- -----------
TOTAL $14,500,000 $6,794,270 $10,055,884
Less interest & taxes included above 1,078,768 524,987 ===========
----------- ----------
Present value of minimum payments $13,421,232 $6,269,283
=========== ==========
87
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Long-Term Liabilities and Line of Credit (Continued)
- -------------------------------------------------------------
Line of Credit
- --------------
In April 2001, the Company entered into a two-year financing agreement
with Standard Federal Bank for a line of credit of up to $3,000,000. This
financing bears an interest rate of prime, is secured by a first interest in the
Company's accounts receivable and inventory and contains certain financial
covenants relating to the Company's tangible net worth, working capital and
total debt to tangible net worth. The Company utilizes the line of credit for
foreign exchange and letter of credit transactions.
NOTE F - Capital Stock
- ----------------------
The voting rights of ECD's three classes of stock are as follows:
Class A Convertible Common Stock - 25 votes per share Class B
Convertible Common Stock - one vote per share
Common Stock - one vote per share
The Class A Convertible Common Stock is automatically convertible into
Common Stock on a share-for-share basis on September 30, 2005 and is convertible
at the option of the holder any time prior to that date.
As part of an employment agreement among ECD, Ovonic Battery and Mr.
Stanford R. Ovshinsky, president and CEO of ECD, ECD granted Mr. Ovshinsky the
right to vote the shares of Ovonic Battery held by ECD following a change in
control of ECD. For purposes of this agreement, change in control means (i) any
sale, lease, exchange or other transfer of all or substantially all of ECD's
assets, (ii) the approval by ECD stockholders of any plan or proposal of
liquidation or dissolution of ECD, (iii) the consummation of any consolidation
or merger of ECD in which ECD is not the surviving or continuing corporation,
(iv) the acquisition by any person of 30% or more of the combined voting power
of the then-outstanding securities having the right to vote for the election of
directors, (v) changes in the constitution of the majority of the Board of
Directors, (vi) the holders of the Class A Common Stock ceasing to be entitled
to exercise their preferential voting rights other than as provided in ECD's
charter and (vii) bankruptcy. In the event of mental or physical disability or
death of Mr. Ovshinsky, the foregoing power of attorney and proxy shall be
exercised by Mr. Ovshinsky's wife, Dr. Iris Ovshinsky, a vice president of ECD.
In February 1999, the Board of Directors of the Company renewed each of Mr.
Ovshinsky's employment agreements for an additional term ending September 30,
2005.
As part of an Executive Employment Agreement between ECD and Mr. Robert C.
Stempel, chairman and executive director of ECD, dated January 15, 1999, ECD
issued to Mr. Stempel 430,000 shares of its Common Stock ($.01 par value),
having a total value of $4,595,840 based upon the closing price of ECD common
stock on January 15, 1999, for $4,300, representing an amount equal to the
aggregate par value of the Common Stock. The Restricted Stock Agreement entered
into between the Company and Mr. Stempel states that
88
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Capital Stock (Continued)
- ----------------------------------
the stock fully vests to Mr. Stempel on September 30, 2005, 81 months after the
date of the agreement. The Company is amortizing the total value of the stock
grant on a straight-line basis, and recorded compensation expense of $680,400 in
each of the years ended June 30, 2002, 2001 and 2000 in connection with this
transaction. Following stockholder approval on March 25, 1999 authorizing
430,000 shares of a new Class B Common Stock, par value $.01, Mr. Stempel
surrendered to ECD the shares of Common Stock issued for an equal number of
shares of Class B Common Stock. After the conversion of the Class A Common Stock
into Common Stock, the Class B Common Stock will be entitled to 25 votes per
share.
The Class B Common Stock is automatically convertible into Common Stock on
a share-for-share basis on September 30, 2005.
During the years ended June 30, 2002, 2001 and 2000, ECD issued 1,310,
2,000, and 3,542 shares of restricted Common Stock, respectively, as
compensation to directors. ECD recorded compensation expense, based upon fair
market value of these shares at the date of issuance, for the years ended June
30, 2002, 2001 and 2000 of $25,000, $40,000 and $35,000, respectively, relating
to these restricted shares of Common Stock.
89
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Stock Option Plans, Warrants and Other Rights to Purchase Stock
- ------------------------------------------------------------------------
The Company has Common Stock reserved for issuance as follows:
Number of Shares
-----------------------------
June 30, 2002 June 30, 2001
------------- -------------
Conversion of Class A Convertible Common Stock 219,913 219,913
Conversion of Class B Convertible Common Stock 430,000 430,000
Stock options 5,276,107 5,221,302
Warrants issued in connection with public
offering of units - 1,720,535
Warrants issued in connection with services
rendered - 70,000
Warrants issued to General Electric 400,000 400,000
Convertible Investment Certificates 5,600 5,600
--------- ---------
TOTAL RESERVED SHARES 6,331,620 8,067,350
========= =========
Equity Compensation Plans Approved by Security Holders
- ------------------------------------------------------
The Company's 1976 Amended and Restated Stock Option Plan (the "Amended
Plan") which expired in November 1996, the 1987 Stock Option and Incentive Plan
(1987 Stock Option Plan), which expired in December 1997, the 1995 Non-Qualified
Stock Option Plan (1995 Stock Option Plan) and the 2000 Non-Qualified Stock
Option Plan (2000 Stock Option Plan) authorize the granting of stock options at
such exercise prices and to such employees, consultants and other persons as the
Compensation Committee appointed by the Board of Directors (the "Compensation
Committee") shall determine. All four stock option plans are administered by the
Compensation Committee.
Options under the Amended Plan and the 1987 Stock Option Plan expire six
years from the date of grant. Options under the 1995 and the 2000 Stock Option
plans expire no later than 10 years from the date of grant. Stock options under
the 1995 stock option plan may not be exercised during the first six months of
the grant. Thereafter, options may be exercised cumulatively each year, starting
at the end of six months after grant of the option, at a predetermined rate of
the number of shares of the Common Stock subject to the option. Stock options
under the 2000 Stock Option Plan may not be exercised during the first year of
the grant. Therefore, options may be exercised cumulatively each year, starting
at the end of the first year after grant of the option, at a predetermined rate
of the number of shares of the Common Stock subject to the option. The exercise
price of all options granted has been equal to the fair market value of the
Common Stock at the time of grant.
The purchase price and number of shares covered by the options are subject
to adjustment under certain circumstances to protect the optionholders against
dilution.
90
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Stock Option Plans, Warrants and Other Rights to
- ---------------------------------------------------------
Purchase Stock (Continued)
- --------------------------
A summary of the transactions during the years ended June 30, 2002, 2001
and 2000 with respect to the Company's Amended Plan, 1987 Stock Option Plan,
1995 Stock Option Plan and 2000 Stock Option Plan follows:
2002 2001 2000
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------- --------------------- ---------------------
Outstanding July 1 2,444,545 $18.50 1,453,865 $13.50 2,254,693 $13.17
Granted 120,000 $21.88 1,334,400 $22.66 5,000 $19.00
Exercised 14,412 $11.98 341,345 $13.43 798,468 $12.59
Cancelled 18,380 $22.57 2,375 $23.51 7,360 $13.61
--------- ------ --------- ------ --------- ------
Outstanding June 30 2,531,753 $18.67 2,444,545 $18.50 1,453,865 $13.50
========= ====== ========= ====== ========= ======
Exercisable June 30 1,730,668 $16.90 1,058,820 $13.72 1,339,065 $13.75
========= ====== ========= ====== ========= ======
Weighted average fair $21.88 $22.66 $19.00
value of options granted ====== ====== ======
during the year
The following table summarizes information about stock options outstanding
at June 30, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices As of 6/30/02 Contractual Life Price As of 6/30/02 Price
- ------------------- ------------- ---------------- -------- ------------- --------
$10.1880 - $11.8750 729,513 3.18 $11.6511 729,513 $11.6511
$14.7500 - $22.4300 381,195 4.21 $17.1240 337,695 $16.8524
$22.6250 - $22.6250 1,307,645 8.70 $22.6250 604,910 $22.6250
$22.8810 - $27.0400 113,400 7.96 $23.3902 58,550 $23.3619
--------- ---- -------- --------- --------
2,531,753 6.40 $18.6703 1,730,668 $16.8978
========= ==== ======== ========= ========
Equity Compensation Plans Not Approved by Security Holders
- ----------------------------------------------------------
In November 1993, stock options to purchase 94,367 shares of Common Stock
held by Stanford R. Ovshinsky, and stock options to purchase 49,630 shares of
Common Stock held by Dr. Iris M. Ovshinsky, issued under the aforementioned
Amended Plan, were cancelled and new stock options, covering 150,000 (adjusted
to 401,499 as of June 30, 2002) shares of Common Stock in the case of Mr.
Ovshinsky and 100,000 shares (adjusted to 258,250 as of June 30, 2002) of Common
Stock in the case of Dr. Ovshinsky, were granted by ECD. The stock options
cancelled had an average exercise price of approximately $18.00 per share. The
weighted average exercise price of all the outstanding stock options is $14.84
per share. The
91
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Stock Option Plans, Warrants and Other Rights to
- ---------------------------------------------------------
Purchase Stock (Continued)
- --------------------------
weighted average price was arrived at based upon (i) the option price of $7.00
per share for the original number of shares and any additional shares as
adjusted for the antidilution provisions during the 18-month period following
the grant; and (ii) thereafter the option exercise price will be the lower of
the sales price of the additional securities or the fair market value of the
Common Stock as of the date of such issuance.
The number of stock options granted to Mr. and Dr. Ovshinsky is adjusted
pursuant to the antidilution provisions of the stock option agreements. For the
three years ended June 30, 2002, 2001 and 2000, Mr. Ovshinsky was granted stock
options to purchase 44,530, 18,239 and 106,611 shares of ECD Common Stock,
respectively. For the three years ended June 30, 2002, 2001 and 2000, Dr.
Ovshinsky was granted stock options to purchase 29,687, 12,160 and 71,074 shares
of ECD Common Stock, respectively. The weighted average exercise price of
options granted to Mr. and Dr. Ovshinsky during the three years ended June 30,
2002, 2001 and 2000 was $20.38, $30.53 and $18.80 per share, respectively. The
weighted average fair value of options granted to Mr. and Dr. Ovshinsky during
the three years ended June 30, 2002, 2001 and 2000 was $22.97, $30.63 and $18.11
per share, respectively.
On January 15, 1999, ECD entered into a Stock Option Agreement with Robert
C. Stempel that granted Mr. Stempel an option to purchase up to 300,000 shares
of Common Stock at an exercise price of $10.688 per share, the fair market value
of the Common Stock as of the date of the Stock Option Agreement. The option,
which is not subject to vesting requirements, may be exercised from time to
time, in whole or in part, commencing as of the date of the Stock Option
Agreement and ending on the tenth anniversary of such date.
The Company continues to apply APB 25 to its stock-based compensation
awards to employees. Had compensation cost 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 No. 123, the
Company's net loss and loss per share for the years ended June 30, 2002, 2001
and 2000 would have been increased by approximately $10,880,000, $4,018,000 and
$2,133,000 and $.50, $.21 and $.15 per share, respectively. The fair value of
the options granted during 2002, 2001 and 2000 is estimated as $2,253,000,
$19,078,000 and $1,849,000 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
2002 2001 2000
---------- ---------- ----------
Dividend Yield 0% 0% 0%
Volatility % 76.53% 82.84% 77.96%
Risk Free Interest Rate 3.71% 4.48% 6.19%
Expected Life 5.11 years 5.10 years 4.31 years
92
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Stock Option Plans, Warrants and Other Rights to
- ---------------------------------------------------------
Purchase Stock (Continued)
- --------------------------
Warrants
- --------
As of June 30, 2002, ECD had outstanding warrants for the purchase of
400,000 shares of Common Stock granted to General Electric pursuant to a Common
Stock Warrant between General Electric and ECD entered into in March 2000. These
warrants are exercisable on or prior to March 10, 2010 at $22.93 per share.
Other Rights to Purchase Stock
- ------------------------------
Pursuant to the Stock Purchase Agreement between ECD and Texaco Inc.
dated as of May 1, 2000, Texaco purchased a 20% equity stake in ECD for $67.4
million. As part of this Stock Purchase Agreement, Texaco received rights to
purchase additional shares of ECD Common Stock or other ECD securities
(ECD Stock). On October 9, 2001, the shareholders of Texaco and Chevron Corp.
voted on the merger of Texaco and Chevron. The combined companies have been
renamed ChevronTexaco Corporation and TRMI Holdings is a wholly owned subsidiary
of ChevronTexaco.
So long as ChevronTexaco owns more than 5% of ECD Stock and in the event
ECD issues additional ECD Stock other than to ChevronTexaco, ChevronTexaco has
the right to purchase additional ECD Stock in order for ChevronTexaco to
maintain its same proportionate interest in ECD Stock as ChevronTexaco held
prior to the issuance of the additional ECD Stock. If ChevronTexaco elects to
purchase ECD Common Stock, the purchase price will be the average of the closing
price on NASDAQ of the ECD 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 the ECD Common Stock which ChevronTexaco is entitled to
purchase.
If ChevronTexaco does not exercise its right to purchase additional ECD
Stock within 15 days after delivery of a Rights Notice from ECD, ChevronTexaco's
right to purchase such additional ECD Stock which are the subject of the Rights
Notice will terminate.
93
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - 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. The Company 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 years
ended June 30 are computed as follows:
2002 2001 2000
------------ ------------ ------------
Weighted average number of
shares outstanding 21,659,933 19,348,954 14,327,869
Net loss $(20,888,034) $(5,121,838) $(16,656,128)
BASIC NET LOSS PER SHARE $(.96) $(.26) $(1.16)
============ =========== ============
Weighted average number of
shares outstanding 21,659,933 19,348,954 14,327,869
Weighted average shares for
dilutive securities - - -
------------ ----------- ------------
Average number of shares outstanding
and potential dilutive shares 21,659,933 19,348,954 14,327,869
Net loss $(20,888,034) $(5,121,838) $(16,656,128)
DILUTED NET LOSS PER SHARE $(.96) $(.26) $(1.16)
============ =========== ============
Due to the Company's net losses, the 2002, 2001 and 2000 weighted average
shares of potential dilutive securities of 532,151, 1,872,516 and 721,513,
respectively, were excluded from the calculations of diluted loss per share, as
inclusion of these securities would have been antidilutive to the net loss per
share. Additional securities of 62,799, 0 and 332,817, respectively, were
excluded from the 2002, 2001 and 2000 calculations of weighted average shares of
potential dilutive securities. Because of the relationship between the exercise
prices and the average market price of ECD's Common Stock during these periods,
these securities would have been antidilutive regardless of the Company's net
loss.
94
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I - Federal Taxes on Income
- --------------------------------
At June 30, 2002 and 2001, the Company has approximately $78,763,000 and
$73,100,000, respectively, of net deferred tax assets, consisting primarily of
$58,540,000 and $50,950,000, respectively, due to net operating loss
carryforwards, and $487,000 and $487,000, respectively, due to tax credit
carryforwards and at June 30, 2002, $19,736,000 in temporary differences,
including $18,360,000 due to a basis difference in the Company's investments in
the Texaco Ovonic Fuel Cell and Texaco Ovonic Hydrogen Systems joint ventures.
However, a valuation reserve of $78,763,000 is required due to the Company's
operating history and uncertainty regarding the future realizability of the net
tax operating loss carryforwards and tax credit carryforwards.
The Company's valuation reserve was increased by $6,528,000 in 2002,
$1,531,000 in 2001 and $27,388,000 in 2000 for the impact of the 2002, 2001 and
2000 net operating losses, temporary differences and the expiration of tax
carryforwards. The increases in 2002 and 2001 are mainly the result of ECD's net
operating losses. The Company's utilization of United Solar's net operating
losses is limited to approximately $10,000,000 per year under the Internal
Revenue code.
At June 30, 2002, the Company's remaining net tax operating loss
carryforwards and tax credit carryforwards expire as follows:
Net Tax Operating R&D Credit
Loss Carryforward Carryforward
----------------- ------------
2003 $ 13,258,000 $ -
2004 4,245,000 -
2005 5,307,000 -
2006 14,651,000 -
2007 10,548,000 276,000
2008 9,302,000 41,000
2009 11,923,000 30,000
2010 9,313,000 15,000
2011 6,854,000 40,000
2012 26,121,000 14,000
2013 12,447,000 29,000
2014 7,219,000 42,000
2015 - -
2016 - -
2017 - -
2018 6,825,000 -
2019 993,000 -
2020 10,170,000 -
2021 - -
2022 23,002,000 -
------------ -----------
Total $172,178,000 $ 487,000
============ ===========
95
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE J - Related Party Transactions
- -----------------------------------
For the three years ended June 30, 2002, 2001 and 2000, ECD incurred
expenses of $72,038, $45,656 and $470,824, respectively, for services rendered
by its directors.
For related party transactions involving United Solar, Bekaert ECD Solar
Systems, Ovonic Media, Ovonyx, Texaco Ovonic Fuel Cell, Texaco Ovonic Hydrogen
Systems, Texaco Ovonic Battery Systems, ITS Innovative Transportation Systems
and Sovlux see Note D.
NOTE K - Business Segments
- --------------------------
The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar, and the parent company, ECD. Ovonic Battery is primarily
involved in developing and commercializing battery technology. United Solar is
primarily involved in developing, manufacturing, and commercializing
photovoltaic technology. ECD is primarily involved in photovoltaics,
microelectronics, fuel cells, hydrogen storage technologies and machine
building. Some general corporate expenses have been allocated to Ovonic Battery.
The Company's operations by business segment were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
Ovonic Consolidating
ECD Battery United Solar Entries Consolidated
---------- ---------- ------------ ------------- ------------
Revenues
Year ended June 30, 2002 $ 61,636 $ 48,529 $ 7,157 $(25,612) $ 91,710
Year ended June 30, 2001 48,218 34,374 7,674 (18,862) 71,404
Year ended June 30, 2000 11,213 16,365 3,763* (1,362) 29,979
Interest Income
Year ended June 30, 2002 $ 4,439 $ - $ 288 $ - $ 4,727
Year ended June 30, 2001 5,816 - 48 - 5,864
Year ended June 30, 2000 1,526 - 50* - 1,576
Interest Expense**
Year ended June 30, 2002 $ 51 $ 375 $ 484 $ - $ 910
Year ended June 30, 2001 12 220 569 - 801
Year ended June 30, 2000 15 385 174* - 574
Operating Income (Loss)
Year ended June 30, 2002 $(17,560) $ (6,460) $ (4,539) $ 6,326 $(22,233)
Year ended June 30, 2001 (285) (7,627) (2,742) 587 (10,067)
Year ended June 30, 2000 (5,199) (10,583) (497)* 344 (15,935)
96
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K - Business Segments (Continued)
- --------------------------------------
Ovonic Consolidating
ECD Battery United Solar Entries Consolidated
---------- ---------- ------------ ------------- ------------
Equity in Net Loss of Investees
Under Equity Method
Year ended June 30, 2002 $ (714) $ - $ (3,472) $ 528 $ (3,658)
Year ended June 30, 2001 (49) - (2,434) 486 (1,997)
Year ended June 30, 2000 (2,067) - (396)* - (2,463)
Depreciation Expense
Year ended June 30, 2002 $ 1,008 $ 1,146 $ 1,750 $ (1,631) $ 2,273
Year ended June 30, 2001 825 1,442 1,720 (1,685) 2,302
Year ended June 30, 2000 708 1,486 424* (424) 2,194
Capital Expenditures
Year ended June 30, 2002 $ 7,340 $ 172 $ 155 $ - $ 7,667
Year ended June 30, 2001 1,349 106 786 - 2,241
Year ended June 30, 2000 265 335 98* - 698
Investments in Equity
Method Investees
Year ended June 30, 2002 $ 3,286 $ - $ 17,756 $ - $ 21,042
Year ended June 30, 2001 - - 23,450 - 23,450
Year ended June 30, 2000 - - 22,395 - 22,395
Identifiable Assets
Year ended June 30, 2002 $171,018 $ 13,588 $ 25,819 $(18,306) $192,119
Year ended June 30, 2001 127,462 27,106 38,909 (27,372) 166,105
Year ended June 30, 2000 121,225 8,930 41,763 (23,012) 148,906
- ---------------------------
* For the period from April 11, 2000 to June 30, 2000.
** Excludes intercompany interest.
97
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Quarterly Financial Data (Unaudited)
- ---------------------------------------------
(In thousands)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -----
Year Ended June 30, 2002
Revenues $22,459 $26,745 $24,490 $ 18,016 $ 91,710
Operating income (loss) $(3,897) $(5,002) $(5,737) $ (7,597) $(22,233)
Net income (loss) $(2,765) $(4,317) $(5,015) $ (8,791) $(20,888)
Basic earnings per share $ (.13) $ (.20) $ (.23) $ (.40) $ (.96)
Diluted earnings per share $ (.13) $ (.20) $ (.23) $ (.40) $ (.96)
Year Ended June 30, 2001
Revenues $10,134 $15,088 $17,722 $ 28,460* $ 71,404
Operating income (loss) $(3,093) $(2,039) $(4,980) $ 45 $(10,067)
Net income (loss) $(1,745) $ (716) $(4,272) $ 1,611 $ (5,122)
Basic earnings per share $ (.09) $ (.04) $ (.22) $ .09 $ (.26)
Diluted earnings per share $ (.09) $ (.04) $ (.22) $ .07 $ (.26)
Year Ended June 30, 2000
Revenues $ 7,580 $ 6,770 $ 7,477 $ 8,152 $ 29,979
Operating loss $(3,434) $(3,751) $(3,068) $ (5,682) $(15,935)
Net loss $(3,745) $(4,290) $(3,315) $ (5,306) $(16,656)
Basic earnings per share $ (.28) $ (.32) $ (.24) $ (.32) $ (1.16)
Diluted earnings per share $ (.28) $ (.32) $ (.24) $ (.32) $ (1.16)
- ---------------------------
* Includes $3,900,000 related to work performed and expensed in the second
and third quarters by Ovonic Battery for Texaco Ovonic Battery Systems
that subsequently became billable upon the formation of Texaco Ovonic
Battery Systems.
NOTE M - Commitments
- --------------------
On February 12, 2001, ECD signed an agreement with the landlord of the
Bekaert ECD Solar Systems' new facility guaranteeing 50% of the rent obligation
($3,015,000) of Bekaert ECD Solar Systems due under the lease for this facility
for the first five years of the term of this lease agreement. ECD's maximum
exposure and liability under this guaranty is reduced by 50% of monthly rental
installments paid, and was $2,287,000 as of June 30, 2002. Bekaert also has
guaranteed this rent obligation to the same extent as ECD.
In December 2001, Bekaert ECD Solar Systems and LaSalle National Leasing
Corporation entered into a $40 million sale-and-leaseback transaction pursuant
to which Bekaert ECD Solar Systems' 30MW machinery and equipment are being sold
to LaSalle and leased back for a period of seven years. In connection with this
transaction, ECD and Bekaert have severally guaranteed Bekaert ECD Solar
Systems' lease payments for two years after the final draw down of the principal
amount and ECD has pledged $25 million of its short-term investments to secure
its portion of the guarantee. The Company, at its sole election, can replace the
investments with $20 million of money market funds to meet the security
98
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE M - Commitments (Continued)
- --------------------------------
requirement. After the first two-year period has expired, ECD and Bekaert will
guarantee the remaining payments on a joint and several basis for the remaining
term of the lease and ECD will no longer be required to pledge the $25 million
in short-term investments.
Bekaert ECD Solar Systems/United Solar will require an estimated
additional $40,000,000 through the period ending September 30, 2003 in order to
cover operating expenses, including ramp-up of production and implementation of
marketing programs, and for working capital purposes. Neither ECD nor Bekaert is
obligated to provide any portion of the required additional funding to Bekaert
ECD Solar Systems/United Solar. However, ECD and Bekaert have agreed to make
bridge loans to the joint ventures in the aggregate amount of $28,300,000 with
$12,200,000 in bridge financing provided by Bekaert and $16,100,000 by ECD. ECD
and Bekaert plan to explore new equity investors and bank financing to meet the
joint ventures' future cash requirements. ECD may also provide additional bridge
loans to the joint ventures.
NOTE N - Contingent Liabilities
- -------------------------------
The State of Michigan has assessed ECD a penalty of approximately $216,000
for late payment of Michigan Single Business Taxes. ECD is appealing this
penalty and management believes that there will be no liability for this
penalty.
99
Item 9: Changes in and Disagreements on Accounting and Financial Disclosure
- ------ -------------------------------------------------------------------
Not applicable.
100
PART III
Item 10: Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
The ECD 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 the Board of Directors of ECD is as follows:
Director of
the Company Principal Occupation and
Name Since Office Business Experience
- ----------------------- ----------- ------------- -------------------------------
Stanford R. Ovshinsky 1960 President, Mr. Ovshinsky, 79, the founder, Chief
Chief Executive Officer and President of
Executive ECD, has been an executive officer and
Officer and director of ECD since its inception
Director in 1960. Mr. Ovshinsky is the principal
inventor of ECD's technologies. He
also serves as the chief executive
officer and a director of Ovonic
Battery; chief executive officer and
chairman of United Solar; president
and member of the Management Committees
of Texaco Ovonic Fuel Cell and Texaco
Ovonic Hydrogen Systems; a member of
the Management Committee of Texaco
Ovonic Battery Systems and Bekaert ECD
Solar 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.
Iris M. Ovshinsky.
Iris M. Ovshinsky 1960 Vice President Dr. Ovshinsky, 75, co-founder and Vice
and Director President of ECD, has been an executive
officer and director of ECD since its
inception in 1960. Dr. Ovshinsky also
serves as a director of Ovonic Battery.
Dr. Ovshinsky is the wife of Stanford
R. Ovshinsky.
Robert C. Stempel 1995 Chairman of Mr. Stempel, 69, is Chairman of the Board
the Board and Executive Director of ECD. Prior to
and Executive his election as a director in December
Director 1995, Mr. Stempel served as senior
business and technical advisor to Mr.
Ovshinsky. He is also the chairman of
Ovonic Battery; a director of United
Solar; vice chairman and director of
Ovonyx; a member of the Management
Committee of Texaco Ovonic Fuel Cell,
Texaco Ovonic Hydrogen Systems and
Bekaert ECD Solar Systems; chief
executive officer and a member of the
Management Committee of Texaco Ovonic
Battery Systems and a member of the
Alliance Board of Ovonic 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.
101
Nancy M. Bacon 1977 Senior Vice Mrs. Bacon, 56, Senior Vice President,
President and joined ECD in 1976 as its Vice President
Director of Finance and Treasurer. Mrs. Bacon
also serves as a director of United Solar
and Sovlux and is a member of the
Management Committee of Bekaert ECD
Solar Systems.
Umberto Colombo 1995 Director Professor Colombo, 74, 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.
Subhash K. Dhar 1999 Director Mr. Dhar, 51, President and Chief
Operating Officer of Ovonic Battery,
joined ECD in 1981 and has held various
positions with Ovonic Battery since its
inception in October 1982. He also
serves as a director of Ovonic Battery.
Hellmut Fritzsche 1969 Vice President Dr. Fritzsche, 75, was a professor of
and Director 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 a
vice president of ECD since 1965,
acting on a part-time basis, chiefly
in ECD's research and product development
activities. He serves on the board of
directors of United Solar.
Walter J. McCarthy, Jr. 1995 Director Mr. McCarthy, 77, until his retirement
in 1990, was the chairman and chief
executive officer of Detroit Edison
Company. Prior to his election to the
ECD Board, 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 Committee and is on the
Audit Committee of the ECD board.
102
Florence I. Metz 1995 Director Dr. Metz, 73, 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).
Dr. Metz also serves on the Board of
Directors of Ovonic Battery and is
on the Compensation and Audit
Committees of the ECD board.
James R. Metzger 2000 Director Mr. Metzger, 55, is Executive Vice
President of Administration at
Mercy College in Dobbs Ferry, New
York. Prior to his retirement from
ChevronTexaco on March 1, 2002
following the merger of Chevron and
Texaco on October 9, 2001, he was
Vice President and Chief Technology
Officer at Texaco Inc. and has held
various positions since joining
Texaco in 1969. 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,
the company's senior management
committee. Mr. Metzger serves on the
Audit Committee of the ECD board. On
November 1, 2002, he will join ECD
as an employee and vice chairman of
the board.
Donald L. Paul 2001 Director Mr. Paul, 55, is vice president and
chief technology officer of
ChevronTexaco. Previously, he
served as vice president of technology
and environmental affairs for Chevron
Corp., a position he assumed in 1996,
in which role he was also the corporate
officer for Chevron's worldwide health,
safety and environmental compliance
function. Mr. Paul joined Chevron in
1975 as a research geophysicist with
Chevron Oil Field Research Co. and has
held a variety of management positions
in both business and technology,
including president of Chevron Petroleum
Technology Co. and president of Chevron
Canada. Mr. Paul holds a doctorate in
geophysics from MIT.
Stanley K. Stynes 1977 Director Dr. Stynes, 70, 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
the ECD board.
103
Greg M. Vesey 2001 Director Mr. Vesey, 43, is president of
ChevronTexaco Technology Ventures.
In this position, he is responsible
for the commercialization of both
internal and external technology in
which ChevronTexaco finds current or
strategic application. Previously,
he was vice president, ebusiness and
general manager, Business Service
Center for Texaco Inc., a position
he assumed in November 1999. He has
held many positions since joining
Texaco in 1984, including assistant
to the Chairman of the Board (1999).
Mr. Vesey is a member of the Management
Committee of Texaco Ovonic Fuel Cell,
Texaco Ovonic Hydrogen Systems and
Texaco Ovonic Battery Systems.
William M. Wicker 2000 Director Mr. Wicker, 53, is a Managing Director
at Goldman Sachs & Co. Prior to joining
Goldman Sachs in December 2001, Mr.
Wicker was Senior Vice President at
Texaco Inc. Prior to joining Texaco in
1997, Mr. Wicker was a Managing Director
at Credit Suisse First Boston, which he
joined in 1989. Mr. Wicker's
responsibilities at Texaco included
Texaco Power and Gasification, Texaco
Natural Gas, Texaco Pipeline International
and Texaco Energy Systems. He served on
Texaco's Executive Council, the company's
senior management committee.
COMPENSATION OF DIRECTORS
Officers of ECD who serve on ECD's Board do not receive compensation for
their services as a director. The other directors of the Company are issued
approximately $5,000 per year in ECD Common Stock based on the closing price of
the Common Stock on the first business day of each year and are paid $1,000 for
attendance at each Board meeting and each Compensation Committee meeting (in
person or via telephone conference call). Effective February 2002, directors
serving on the Audit Committee are paid $2,000 for attendance (in person or via
telephone conference call) at each meeting ($1,000 prior to February 2002).
Directors who are not employed by the Company are also reimbursed for all
expenses incurred for the purpose of attending board of directors and committee
meetings, including airfare, mileage, parking, transportation and hotel. During
the year ended June 30, 2002, Messrs. Metzger and Wicker each received options
to purchase 10,000 shares of ECD Common Stock at $19.31 per share, the fair
market value of the stock on the day of the grant. Messrs. Paul and Vesey have
waived any entitlement to compensation for serving as directors of ECD.
104
The executive officers of ECD are as follows:
Served as an
Executive Officer
Name Age Office or Director Since
- ---------------------- --- ---------------------------- ------------------
Stanford R. Ovshinsky 79 President, Chief Executive
Officer and Director 1960(1)
Iris M. Ovshinsky 75 Vice President and Director 1960(1)
Robert C. Stempel 69 Executive Director and
Chairman of the Board 1995
Nancy M. Bacon 56 Senior Vice President and
Director 1976
Hellmut Fritzsche 75 Vice President and Director 1969
Subhash K. Dhar 51 President and Chief Operating
Officer of Ovonic Battery
and Director 1986
Stephan W. Zumsteg 56 Vice President and Chief
Financial Officer 1997
- -------
(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 pages 101 and 102 for information relating to Stanford R. Ovshinsky,
Iris M. Ovshinsky, Robert C. Stempel, Nancy M. Bacon, Hellmut Fritzsche and
Subhash K. Dhar.
Stephan W. Zumsteg joined ECD 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, Texaco Ovonic Fuel Cell and
Texaco Ovonic Hydrogen Systems. Prior to joining ECD, Mr. Zumsteg was Chief
Financial Officer of the Kirlin Company from July 1996 to February 1997 and Vice
President-Finance & Administration and Chief Financial Officer of Lincoln Brass
Works from July 1991 to June 1996.
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 reports of ownership and changes in ownership
with respect to our securities and those of our affiliates with the Securities
and Exchange Commission 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, 2002, all filing requirements were met on a timely
basis.
105
Item 11: Executive Compensation
- -------- ----------------------
The following table sets forth the compensation paid to ECD's Chief
Executive Officer and the next four most highly compensated executive officers
for the fiscal years ended June 30, 2002, 2001 and 2000.
SUMMARY COMPENSATION TABLE
Annual Long Term
Compensation Compensation
------------ ------------
All
Restricted Options Other
Name and Principal Fiscal Stock (Number Compen-
Position Year(1) Salary(2) Bonus Award of Shares) sation(3)
- ---------------------- --------- ------------- --------- ---------- ---------- -------------
Stanford R. Ovshinsky, 2002 $349,713 $24,076 44,530(4) $12,362
President and Chief 2001 $334,408 118,239(5) $10,361
Executive Officer 2000 $303,908 106,611(4) $12,657
Iris M. Ovshinsky, 2002 $299,730 29,687(4) $12,362
Vice President 2001 $284,636 82,160(5) $10,361
2000 $265,918 71,074(4) $12,657
Robert C. Stempel, 2002 $294,247 25,000 $ 4,191
Chairman and 2001 $270,004 100,000 $ 4,191
Executive Director(6) 2000 $270,004 - $ 5,035
Nancy M. Bacon, 2002 $275,017 12,000 $ 8,942
Senior Vice President 2001 $264,243 60,000 $ 6,041
2000 $255,008 - $ 6,538
Subhash K. Dhar, 2002 $274,241 10,000 $ 8,111
President and Chief 2001 $247,703 50,000 $ 5,528
Operating Officer, 2000 $224,421 - $ 5,829
Ovonic Batery
- -------
(1) ECD's fiscal year is July 1 to June 30. ECD's 2002 fiscal year ended June
30, 2002.
(2) Amounts shown include compensation deferred under ECD's 401(k) Plan.
(3) "All Other Compensation" is comprised of (i) contributions made by ECD to
the accounts of each of Mr. Ovshinsky, Dr. Ovshinsky, Mrs. Bacon and Mr.
Dhar in the amount of $6,800 under ECD's 401(k) Plan with respect to
calendar year ended December 31, 2001 and $4,800 with respect to each of the
calendar years ended December 31, 2000 and 1999; (ii) the dollar value of
any life insurance premiums paid by ECD in the fiscal year ended June 30,
2002 and calendar years ended December 31, 2000 and 1999 with respect to
term-life insurance for the benefit of each of the named executives as
follows: Mr. Ovshinsky $5,562, $5,561 and $7,857; Dr. Ovshinsky $5,562,
$5,561 and $7,857; Mr. Stempel $4,191, $4,191 and $5,035; Mrs. Bacon $2,142,
$1,241 and $1,738; Mr. Dhar $1,311, $728 and $1,029. Under the 401 (k) Plan,
which is a qualified defined-contribution plan, ECD makes matching
contributions periodically on behalf of the participants.
106
Effective 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 $170,000, for calendar year
2001 and 3% of salary, up to $160,000, for calendar years 2000 and 1999. Mr.
Stempel does not participate in the Company's 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 ECD Common Stock. Under those Stock Option Agreements,
if ECD issues any equity securities, other than pursuant to the exercising
of options by Mr. and Dr. Ovshinsky under their respective Stock Option
Agreements, ECD is obligated to grant to Mr. and Dr. Ovshinsky additional
options covering sufficient additional shares of ECD 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 ECD Common Stock. (See Note G of the Notes to Consolidated
Financial Statements - Stock Option Plans, Warrants and Other Rights to
Purchase Stock.)
(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 ECD 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 Item 12, Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 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 a director and officer of ECD on September 30, 2005 or upon
the occurrence of a change in control of ECD.
107
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, 2002.
Individual Grants
---------------------------------------------------------
Number of Percent of Potential Realizable Value at
Securities Total Assumed Annual Rates of
Underlying Options Exercise Stock Price Appreciation for
Options Granted of Base Option Term(1)
Granted to Employees Price Expiration
Name (#) in Fiscal Year ($/Sh) Date 5% 10%
- ----------------------- ---------- --------------- --------- ---------- ------------ -------------
Stanford R. Ovshinsky 44,530(2) 22.93% $20.38(3) (4) $570,717 $1,446,310
Iris M. Ovshinsky 29,687(2) 15.29% $20.38(3) (4) $380,482 $964,217
Robert C. Stempel 25,000 12.87% $23.36 7/31/11 $367,274 $930,745
Nancy M. Bacon 12,000 6.18% $23.36 7/31/11 $176,291 $446,757
Subhash K. Dhar 10,000 5.15% $23.36 7/31/11 $146,909 $372,298
- -------
(1) The potential realizable value amounts shown illustrate the values that
might be realized upon exercise immediately prior to the expiration of
their term using 5% and 10% appreciation rates as required to be used in
this table by the Securities and Exchange Commission, compounded annually,
and are not intended to forecast possible future appreciation, if any, of
the Company's stock price. Additionally, these values do not take into
consideration the provisions of the options providing for
nontransferability or termination of the options following termination
of employment.
(2) The stock options were issued to Mr. and Dr. Ovshinsky pursuant to Stock
Option Agreements dated November 1993 which are subject to periodic
antidilution protection adjustments based on changes in the number of
outstanding shares of ECD Common Stock.
(3) The exercise price is the weighted average exercise price of the stock
options granted in fiscal year 2002.
(4) November 18, 2003 or 12 months after termination of employment,
whichever is later.
108
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
None of the named executives exercised any stock options during the fiscal
year ended June 30, 2002. The following table sets forth the number and value of
unexercised options held by the named executive officers at fiscal year end.
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised
on Value Options at Fiscal in-the-Money Options
Exercise Realized Year End at Fiscal Year End
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- -------------------------- --------- -------- ------------------------- ---------------------------
Stanford R. Ovshinsky(1) - - 636,456/60,000 $850,163/$0
Iris M. Ovshinsky(2) - - 433,138/42,000 $540,222/$0
Robert C. Stempel(3) - - 629,000/75,000 $1,245,260/$0
Nancy M. Bacon(4) - - 179,000/43,200 $477,638/$0
Subhash K. Dhar(5) - - 68,040/36,000 $0/$0
- ----------
(1) Mr. Ovshinsky's exercisable and unexercisable options are exercisable at a
weighted average price of $14.35 and $22.63 per share, respectively.
(2) Dr. Ovshinsky's exercisable and unexercisable options are exercisable at a
weighted average price of $14.44 and $22.63 per share, respectively.
(3) Mr. Stempel's exercisable and unexercisable options are exercisable at a
weighted average price of $13.71 and $22.77 per share, respectively.
(4) Mrs. Bacon's exercisable and unexercisable options are exercisable at a
weighted average price of $14.78 and $22.75 per share, respectively.
(5) Mr. Dhar's exercisable and unexercisable options are exercisable at a
weighted average price of $18.87 and $22.75 per share, respectively.
109
EMPLOYMENT AGREEMENTS
On September 2, 1993, Stanford R. 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 Board 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 pre-tax income of ECD (excluding Ovonic Battery) and
1% of the operating income of Ovonic Battery. Mr. Ovshinsky's annual salary
increases for fiscal year 2000 was determined based upon increases in the cost
of living as determined by the Compensation 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
Committee determined that Mr. Ovshinsky's salary increase in fiscal years 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 ECD's
assets; (ii) the approval by ECD's stockholders of any plan or proposal of
liquidation or dissolution of ECD; (iii) the consummation of any consolidation
or merger of ECD in which ECD is not the surviving or continuing corporation;
(iv) the acquisition by any person of 30 percent or more of the combined voting
power of the then outstanding securities having the right to vote for the
election of directors; (v) changes in the constitution of the majority of the
Board of Directors; (vi) the holders of the Class A Common Stock ceasing to be
entitled to exercise their preferential voting rights other than as provided in
ECD's 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. Iris M. 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 percent 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.
110
In February 1998, the Compensation Committee of the Board of Directors
recommended and the Board of Directors approved an Employment Agreement between
ECD and Dr. Iris M. 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 ECD following the termination of her
active employment for consulting fees equal to 50 percent of the salary payable
to Dr. Ovshinsky at the date of the termination of her active employment. Dr.
Ovshinsky shall have 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, ECD 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. See Class B Common Stock under Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters on page 117. The Executive Employment Agreement provides
that Mr. Stempel will serve as the Executive Director of ECD 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
Mr. Stempel's individual performance and the financial performance of ECD. The
Executive Employment Agreement also requires ECD to provide Mr. Stempel with
non-wage benefits of the type provided generally by ECD to its senior executive
officers.
The Executive Employment Agreement permits Mr. Stempel to retire as an
officer and employee of ECD 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 an officer of ECD. The Executive Employment
Agreement permits ECD 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 an officer and employee of ECD
(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 ECD 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.
111
COMPENSATION COMMITTEE REPORT
Compensation Committee
The Compensation Committee is composed of Mr. McCarthy (Chairman) and Dr.
Metz, both independent outside directors. Neither of the Compensation 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 Committee is responsible for administering the policies
which govern both annual compensation of executive officers and ECD's stock
option plans. The Compensation 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 ECD. ECD
does not have a formal bonus program for executives, although it has awarded
bonuses to its executives from time to time.
Compensation of Executive Officers
The Compensation Committee considers ECD's financial position and other
factors in determining the compensation of its executive officers. These factors
include remaining competitive within the relevant hiring market-whether
scientific, managerial or otherwise-so as to enable ECD to attract and retain
high quality employees, and, where appropriate, linking a component of
compensation to the performance of ECD's 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. ECD has been successful
at recruiting and retaining and motivating executives who are highly talented,
performance-focused and entrepreneurial.
During ECD's last fiscal year, the Compensation Committee determined that
ECD had again achieved several important scientific and business milestones. The
Compensation Committee also concluded that the achievement of these milestones
had not yet been fully reflected in ECD's financial results. However, the
Compensation Committee determined that it was advisable to raise executive base
salaries, and separately to grant stock options to certain executives. There
were no bonuses awarded to ECD executives for the fiscal year ended June 30,
2002.
Chief Executive Officer Compensation
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 ECD 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 "Employment
Agreements." Mr. Ovshinsky's compensation for fiscal year 2002 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.
Based on Mr. Ovshinsky's employment agreement with ECD, he was entitled to a
bonus, paid in fiscal year 2002, based on ECD's financial performance in fiscal
year 2001.
COMPENSATION COMMITTEE
Walter J. McCarthy, Jr.
Florence I. Metz
112
PERFORMANCE GRAPH
Two line graphs are presented below.
The first graph compares the cumulative total stockholder return on ECD's
Common Stock over a five-year period ending June 30, 2001 with the return on the
NASDAQ Stock Market - U.S. Index, the JP Morgan H&Q Technology Index and the
Russell 2000 Index.
The JP Morgan H&Q Technology Index ceased publication in April 2002 and
therefore could not be used for measurement purposes for the entire period
ending June 30, 2002. In order to provide stockholders with a basis against
which to evaluate ECD's results consistent with the indices contained in the
2001 10-K, this first graph presents a comparison of ECD's stockholder return
with the Russell 2000 Index, the Index chosen by ECD in substitution for the JP
Morgan H&Q Technology Index for the period ended June 30, 2001.
The second graph compares the cumulative total stockholder return on ECD's
Common Stock over a five-year period ending June 30, 2002 with the return on the
NASDAQ Stock Market - U.S. Index and the Russell 2000 Index.
Cumulative Total Return
---------------------------------------------------------------------------
6/96 6/97 6/98 6/99 6/00 6/01
ENERGY CONVERSION DEVICES, INC. 100.00 56.04 42.58 43.68 111.54 123.08
NASDAQ STOCK MARKET (U.S.) 100.00 121.60 160.06 230.22 340.37 184.51
JP MORGAN H & Q TECHNOLOGY 100.00 130.60 165.43 267.75 469.74 233.62
RUSSELL 2000 100.00 116.33 135.53 137.56 157.27 158.30
The total return with respect to NASDAQ Stock Market - U.S. Index, JP
Morgan H&Q Technology Index and the Russell 2000 Index assumes that $100 was
invested on June 30, 1996, including reinvestment of dividends.
113
Cumulative Total Return
---------------------------------------------------------------------------
6/97 6/98 6/99 6/00 6/01 6/02
ENERGY CONVERSION DEVICES, INC. 100.00 75.98 77.94 199.02 219.61 123.06
NASDAQ STOCK MARKET (U.S.) 100.00 131.62 189.31 279.93 151.75 103.40
RUSSELL 2000 100.00 116.51 118.26 135.19 136.08 124.28
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, 1997, 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 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.
114
AUDIT COMMITTEE REPORT
The Audit Committee is comprised of four outside directors, all of whom
presently are independent under the rules of the Nasdaq Stock Market, Inc. Mr.
Metzger, a member of the Audit Committee, will not be deemed to be independent
under Nasdaq rules effective November 1, 2002, at which time he will become an
employee and vice chairman of the Company.
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 and integrity of the accounting,
auditing, and financial reporting practices of the Company. During fiscal year
2002, the Audit Committee met five times with management and the independent
auditors, Deloitte & Touche LLP (Deloitte) 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 Deloitte a formal written statement describing all
relationships between Deloitte and the Company 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 Deloitte the quality and adequacy of the Company's
internal controls. The Audit Committee reviewed with Deloitte their audit plans,
audit scope, and identification of audit risks.
The Audit Committee discussed and reviewed with Deloitte 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 Deloitte's examination of the financial
statements.
The Audit Committee reviewed with management and Deloitte the audited
financial statements of the Company as of and for the fiscal year ended June 30,
2002. Management has the responsibility for the preparation of the Company's
financial statements and Deloitte has the responsibility for the examination of
those statements.
Based on the above-mentioned reviews and discussions with management and
Deloitte, the Audit Committee recommended to the Board of Directors that the
Company's audited financial statements be included in its Annual Report on Form
10-K for the fiscal year ended June 30, 2002, for filing with the Securities and
Exchange Commission.
115
AUDIT FEES
The aggregate fees billed or expected to be billed to the Company for the
fiscal year ended June 30, 2002 by the Company's principal accounting firm,
Deloitte & Touche LLP, are as follows:
Audit Fees............................................................ $374,000
Financial Information Systems Design and Implementation Fees.......... -0-
All Other Fees........................................................ 135,000
--------
Total...........................................................$509,000
========
The Audit Committee, based on its reviews and discussions with management
and Deloitte noted above, determined that the provision of All Other Fees by
Deloitte was compatible with maintaining Deloitte's independence.
AUDIT COMMITTEE
Stanley K. Stynes, Chairman
Walter J. McCarthy Jr.
Florence I. Metz
James R. Metzger
116
AUDIT COMMITTEE CHARTER
Purpose. The Audit Committee ("Committee") is established as an
independent committee of the Board of Directors ("Board"). Its primary function
is to assist the Board in fulfilling its oversight responsibilities by reviewing
the financial information that will be provided to shareholders and others, the
systems of internal controls which management has established and the audit
process. The Committee's primary duties and responsibilities are to:
o Serve as an independent party to monitor the Company's financial
reporting process and internal control system.
o Review and appraise the audit efforts of the Company's independent
accountants.
o Provide an open means of communication between the independent
accountants, financial and senior management, and the Board.
o Oversee that management has established and maintained processes to
assure compliance by the Company with all applicable laws, regulations
and Company policy.
Consistent with these functions, the Committee should encourage continuous
improvement of, and should monitor adherence to, the Company's policies,
procedures and practices at all levels.
Composition. The Committee shall consist of three or more directors as
determined by the Board, each of whom shall be independent of the management of
the Company and are free of any relationships that, in the opinion of the Board,
would interfere with their exercise of independent judgment as a committee
member. All members of the Committee shall have a working familiarity with basic
finance and accounting practices, and at least one member of the Committee shall
have accounting or related financial management sophistication.
The Board shall appoint the members of the Committee and the Committee's
Chair. The term of membership shall be at the discretion of the Board.
Authority. The Committee's direct reporting responsibility shall be to
the Board.
The Committee shall have the power to conduct or authorize investigations
into any matters within the Committee's scope of responsibilities. The Committee
shall be empowered to retain independent counsel, accountants, or others to
assist in the conduct of any investigation.
Meetings. The Committee shall meet at least four times annually, or more
frequently as circumstances require. As part of its job to foster open
communications, the Committee should meet at least quarterly with management and
the independent accountants in separate executive sessions to discuss any
matters that the Committee or each of these groups believe should be discussed
privately.
117
Responsibilities and Duties. The duties and responsibilities of a
member of the Committee are in addition to those duties set out for a member
of the Board. To fulfill its responsibilities and duties, the Committee
shall:
Board of Directors
- ------------------
o Submit the minutes of all meetings of the Committee to the Board and
discuss Committee actions and recommendations as deemed appropriate.
o Review and update this Charter periodically, at least annually, to
allow the Committee to operate effectively and respond to the
Company's changing needs.
o Perform any other activities consistent with this Charter, the
Company's By-laws and governing law, as the Committee or the Board
deems necessary or appropriate.
Financial Reporting Process
- ---------------------------
o In consultation with the independent accountants, review the integrity of
the Company's financial reporting process, both internal and external,
including the review of audit findings and any significant suggestions for
improvements provided to management by the independent accountants.
o Review with financial management and the independent accountants the 10Q
prior to its filing or prior to the release of operating results.
o Following completion of the annual audit, review separately with each of
management and the independent accountants:
(a) The Company's annual financial statements and related footnotes.
(b) The independent accountant's audit of the financial statements and
their report thereon.
(c) Any significant changes required in the independent accountant's
audit plan.
(d) Any serious difficulties or disputes with management encountered
during the course of the audit, including any restrictions on the
scope of the work or access to required information.
(e) Qualitative judgments about the appropriateness, not just the
acceptability, of accounting principles and financial disclosure
practices used or proposed to be adopted.
(f) Other matters related to the conduct of the audit, which are to be
communicated to the Committee under generally accepted auditing
standards.
o Inquire of the existence and substance of any significant accounting
accruals, reserves, or other estimates made by management having a
material impact on the financial statements.
118
o Review significant accounting and reporting issues, including recent
professional and regulatory pronouncements, and understand their impact on
the financial statements.
o Inquire of management and the independent accountants about significant
risks or exposures and assess the steps management has taken to minimize
such risks to the Company.
Process Improvement
- -------------------
o Consider and review with the independent accountants and financial and
accounting personnel:
(a) The adequacy and effectiveness of the accounting and financial
controls of the Company, including computerized information system
controls and security.
(b) Any significant findings and recommendations of the independent
accountants for the improvement of such internal control procedures
or particular areas where new or more detailed controls or
procedures are desirable, together with management's responses.
Independent Accountants
- -----------------------
o Instruct the independent accountants that the Board, as the shareholders'
representative, is their client and provide an opportunity for the
independent accountants to be available to the Board as appropriate.
o Review the performance quality of the independent accountants and make
recommendations to the Board regarding the appointment or the termination
of the independent accountants selected to audit the financial statements
of the Company and its subsidiaries.
o Consider with management and the independent accountants the rationale for
employing audit firms other than the principal independent accountants.
o Review requests for any significant management consulting engagement to be
performed by the independent accountants and be advised of other studies
undertaken at the request of management that are beyond the scope of the
audit engagement letter and the related costs.
o Consider and review with the independent accountants and the financial
management of the Company:
(a) The scope of the proposed audit for the current year, the audit
procedures to be utilized and the cost of the audit.
(b) The coordination of audit effort to assure completeness of
coverage, reduction of redundant efforts and the effective use
of audit resources.
119
(c) The results of the audit, including any comments or
recommendations of the independent accountants.
o Review and monitor the maintenance of the independent accountants'
independence through discussion with and written disclosure from the
independent accountants of:
(a) All relationships between the independent accountants and the
Company that may reasonably be thought to bear on independence.
(b) The independent accountants' professional judgment that they are
independent of the Company within the meaning of the Securities Act.
Legal Compliance
- ----------------
o Review with the General Counsel any legal matters that could have a
significant impact on the Company's financial statements.
o Ensure that management has the proper review system in place to ensure
that the Company's financial statements, reports and other financial
information disseminated to government organizations and the public,
satisfy legal requirements.
o Issue a report for the proxy statement indicating that the Committee:
(a) Reviewed and discussed the Company's audited financial statements
with management and the independent auditors.
(b) Discussed the matters outlined in SAS No. 61, Communication with
Audit Committees, with the independent auditors.
(c) Discussed independence issues with the auditors and received the
communications required by Independence Standards Board Standard
No. 1, Independence Discussions with Audit Committees. This standard
directs auditors to (1) disclose in an annual letter to the
Committee all relationships between the auditing firm and the
Company that "in the auditor's professional judgment may reasonably
be thought to bear on independence," and (2) include a confirmation
of the auditors' independence in the letter.
(d) The report will state whether, based on the reviews and discussions
described above, anything came to the attention of the Committee
members that caused them to believe the Company's audited financial
statements included in Form 10-K "contain an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which they were
made, not misleading."
(e) Names of the Committee members will be printed in the proxy
statement beneath the Committee's report (no signatures required).
120
Item 12: Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
- -------- --------------------------------------------------------------
Equity Compensation Plan Information
The following table sets forth aggregate information regarding grants
under all equity compensation plans of ECD as of June 30, 2002.
Number of secu- Number of securities
rities to be issued remaining available for
upon exercise of Weighted-average future issuance under
outstanding exercise price of equity compensation plans
options, warrants outstanding options, (excluding securities
Plan category and rights warrants and rights reflected in 1st column)
-------------- ------------------- -------------------- ------------------------
Equity compensation
plans approved by
security holders(1) 2,531,753 $18.67 1,784,605
Equity compensation
plans not approved by
security holders 959,749(2)(3) $13.55 (2)(3)
Total 3,491,502 $17.26 1,784,605
- -------
(1) These plans consist of: (i) the 1976 Amended and Restated Stock Option Plan,
(ii) the 1987 Stock Option and Incentive Plan, (iii) the 1995 Non-Qualified
Stock Option Plan and (iv) the 2000 Non-Qualified Stock Option Plan.
(2) Of the 959,749 shares issuable upon exercise, options to acquire 659,749
shares 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 ECD Common Stock. Under those Stock Option Agreements, if ECD issues any
equity securities, other than pursuant to the exercising of options by Mr.
and Dr. Ovshinsky under their respective Stock Option Agreements, ECD is
obligated to grant to Mr. and Dr. Ovshinsky additional options covering
sufficient additional shares of ECD 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 ECD's fiscal quarters and coincident with significant
issuances of ECD Common Stock.
(3) Of the 959,749 shares issuable upon exercise, options to acquire 300,000
shares were issued to Mr. Robert Stempel pursuant to a Stock Option
Agreement dated January 15, 1999. There are no securities available for
future issuance under this Stock Option Agreement.
121
Security Ownership of Certain Beneficial Owners and Management
CLASS A COMMON STOCK
Mr. Stanford R. Ovshinsky and his wife, Dr. Iris M. Ovshinsky (executive
officers, directors and founders 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. 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 ECD's stockholders
voting together as a single class.
As of September 20, 2002, Mr. Ovshinsky also had the right to vote 126,500
shares of Common Stock (Sanoh Shares) owned by Sanoh Industrial Co., Ltd.
(Sanoh) 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 19,884 shares of
Common Stock Mr. and Dr. Ovshinsky own, give Mr. and Dr. Ovshinsky voting
control over shares representing approximately 20.69% of the combined voting
power of ECD's outstanding stock.
The following table sets forth, as of September 20, 2002, information
concerning the beneficial ownership of Class A Common Stock by each director and
all executive officers and directors of ECD as a group. All shares are owned
directly except as otherwise indicated. Under the rules of the Securities and
Exchange Commission, Stanford R. Ovshinsky and Iris M. Ovshinsky may each be
considered to beneficially own the shares held by the other.
Class A
Name of Common Stock Total Number of
Beneficial Owner Beneficially Owned(1)(2) Shares 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 (13 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.
122
(2) On November 10, 1995, the Compensation Committee recommended, and the
Board of Directors approved, an amendment to Mr. and Dr. Ovshinsky's Stock
Option Agreements dated November 18, 1993 (the "Agreements") 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
the 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 page 124).
CLASS B COMMON STOCK
At ECD's Annual Meeting held on March 25, 1999, ECD's stockholders
approved a proposal to increase ECD's 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 Mr. Robert C. Stempel pursuant to the terms
of a Restricted Stock Agreement dated as of January 15, 1999 between ECD and Mr.
Stempel.
The terms of the Class B Common Stock are substantially similar to those
of ECD's 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 will initially entitle the holder to one vote on
all matters to be voted upon by ECD's 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 will be 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 ECD stockholders voting together as a single class.
123
COMMON STOCK
Directors and Executive Officers. The following table sets forth, as of
September 20, 2002, information concerning the beneficial ownership of Common
Stock by each director and executive officer and for all directors and executive
officers of ECD 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 1,120,404 (3) 5.02%
Stanford R. Ovshinsky 928,616 (4) 4.21%
Iris M. Ovshinsky 506,383 (5) 2.33%
Nancy M. Bacon 204,015 (6) *
Subhash K. Dhar 69,540 (7) *
Hellmut Fritzsche 21,250 (8) *
Stephan W. Zumsteg 17,600 (9) *
Walter J. McCarthy, Jr. 15,699 (10) *
Stanley K. Stynes 14,580 (11) *
Florence I. Metz 12,396 (12) *
Umberto Colombo 10,663 (13) *
James R. Metzger 6,500 (14) *
William M. Wicker 4,000 (15) *
Donald L. Paul -
Greg M. Vesey -
All executive officers and directors
as a group (15 persons) 2,931,646 12.27%
========= ======
-------
* Less than 1%.
(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.
124
(3) Includes 430,000 shares of Class B Common Stock and 629,000 shares
represented by options exercisable within 60 days.
(4) Includes 636,456 shares (adjusted as of June 30, 2002) represented by
options exercisable within 60 days, the 126,500 Sanoh Shares 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, Iris M. Ovshinsky.
Such shares are not reflected in Mr. Ovshinsky's share ownership in
this table.
(5) Includes 433,138 shares (adjusted as of June 30, 2002) 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, Stanford R.
Ovshinsky. Such shares are not reflected in Dr. Ovshinsky's share
ownership in this table.
(6) Includes 179,000 shares represented by options exercisable within 60
days.
(7) Includes 68,040 shares represented by options exercisable within 60
days.
(8) Includes 11,388 shares represented by options exercisable within 60
days.
(9) Includes 15,600 shares represented by options exercisable within 60
days.
(10) Includes 2,000 shares represented by options exercisable within 60
days.
(11) Includes 2,000 shares represented by options exercisable within 60
days.
(12) Includes 5,000 shares represented by options exercisable within 60
days.
(13) Includes 7,000 shares represented by options exercisable within 60
days.
(14) Includes 4,000 shares represented by options exercisable within 60
days.
(15) Shares represented by options exercisable within 60 days.
Principal Shareholders. The following table sets forth, as of September
20, 2002, to the knowledge of ECD, the beneficial holders of more than 5% of
ECD's Common Stock (see footnotes for calculation used to determine "percentage
of class" category):
Name and Address of Amount and Nature of Percentage
Beneficial Holder Beneficial Ownership of Class(1)
----------------------------------- -------------------- -----------
TRMI Holdings Inc. (ChevronTexaco) 4,376,633(2) 19.99%
6001 Bollinger Canyon Road
San Ramon, CA 94583
Stanford R. and Iris M. Ovshinsky 1,434,999(3) 6.54%(4)
2956 Waterview Drive
Rochester Hills, Michigan 48309
Robert C. Stempel 1,120,404(5) 5.02%
2956 Waterview Drive
Rochester Hills, Michigan 48309
- -------------
125
(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 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,
ChevronTexaco has agreed that (i) so long as it beneficially owns an
aggregate of 5% of ECD's 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 ECD 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). TRMI
Holdings' percentage of class is computed based on 21,248,973 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) Includes 219,021 shares of Class A Common Stock owned by Mr. and Dr.
Ovshinsky (which shares are convertible at any time into Common Stock
and will be deemed to be converted into Common Stock on September 30,
2005), 19,884 shares of Common Stock owned by Mr. and Dr. Ovshinsky,
126,500 shares of Sanoh Shares over which Mr. Ovshinsky has voting
rights and 1,069,594 (adjusted as of June 30, 2002) shares represented
by options exercisable within 60 days.
(4) Represents the sum of Mr. and Dr. Ovshinsky's respective ownership
interests calculated separately.
(5) Includes 430,000 shares of Class B Common Stock owned by Mr. Stempel
(which shares are convertible at any time into Common Stock and will be
deemed to be converted into Common Stock on September, 30, 2005) 61,404
shares of Common Stock and 629,000 shares represented by options
exercisable within 60 days.
126
Item 13: Certain Relationships and Related Transactions
- -------- ----------------------------------------------
ChevronTexaco. Pursuant to the Stock Purchase Agreement between ECD and
Texaco Inc. dated as of May 1, 2000, Texaco purchased a 20% equity stake in ECD
for $67.4 million. As part of this Stock Purchase Agreement, Texaco received
rights to purchase additional shares of ECD Common Stock or other ECD securities
(ECD Stock). On October 9, 2001, the shareholders of Texaco and Chevron Corp.
voted on the merger of Texaco and Chevron. The combined companies have been
renamed ChevronTexaco Corporation and TRMI Holdings is a wholly owned
subsidiary of ChevronTexaco.
So long as ChevronTexaco owns more than 5% of ECD Stock and in the event
ECD issues additional ECD Stock other than to ChevronTexaco, ChevronTexaco has
the right to purchase additional ECD Stock in order for ChevronTexaco to
maintain its same proportionate interest in ECD Stock as ChevronTexaco held
prior to the issuance of the additional ECD Stock. If ChevronTexaco elects to
purchase ECD Common Stock, the purchase price will be the average of the closing
price on NASDAQ of the ECD 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 the ECD Common Stock which ChevronTexaco is entitled to
purchase. If ChevronTexaco does not exercise its right to purchase additional
ECD Stock within 15 days after delivery of a Rights Notice from ECD,
ChevronTexaco's right to purchase such additional ECD Stock which are the
subject of the Rights Notice will terminate.
Donald L. Paul, a director of ECD, is Vice President and Chief Technology
Officer of ChevronTexaco and Greg M. Vesey, an ECD director, is President of
ChevronTexaco Technology Ventures.
Texaco Ovonic Fuel Cell. Stanford R. Ovshinsky, a director of ECD, is
president of Texaco Ovonic Fuel Cell as well as a member of its Management
Committee. Robert C. Stempel and Greg M. Vesey, directors of ECD, are members of
the Management Committee of Texaco Ovonic Fuel Cell. ECD owns 50% of Texaco
Ovonic Fuel Cell.
For the years ended June 30, 2002 and 2001, ECD recorded revenues of
$8,887,000 and $8,831,000, respectively, from Texaco Ovonic Fuel Cell for
product development services and facilities.
Texaco Ovonic Hydrogen Systems. Stanford R. Ovshinsky, a director of ECD,
is president of Texaco Ovonic Hydrogen Systems as well as a member of its
Management Committee. Robert C. Stempel and Greg M. Vesey, directors of ECD, are
members of the Management Committee of Texaco Ovonic Hydrogen Systems. ECD owns
50% of Texaco Hydrogen.
For the years ended June 30, 2002 and 2001, ECD recorded revenues of
$18,581,000 and $11,818,000, respectively, from Texaco Ovonic Hydrogen Systems
for product development services and facilities.
Texaco Ovonic Battery Systems. Stanford R. Ovshinsky and Robert C.
Stempel, directors of ECD and Ovonic Battery, are members of the Management
Committee of Texaco Ovonic Battery Systems. Mr. Stempel is the chief executive
officer of Texaco
127
Ovonic Battery. Greg M. Vesey, a director of ECD, is a member of the Management
Committee of Texaco Ovonic Batetry Systems. Ovonic Battery owns 50% of Texaco
Ovonic Battery Systems.
For the year ended June 30, 2002, Ovonic Battery recorded revenues of
$16,315,000 from Texaco Ovonic Battery Systems for product development services.
Ovonyx. Stanford R. Ovshinsky, a director of ECD, is chairman and a
director of Ovonyx. Robert C. Stempel, a director of ECD, is vice chairman and
a director of Ovonyx. ECD currently owns 41.7% of Ovonyx.
ECD recorded revenues from Ovonyx of $215,000 and $382,000 for the years
ended June 30, 2002 and 2001, respectively, representing services performed for
its operations which commenced on January 15, 1999. ECD has received payment of
$3,263,000 for these services as of June 30, 2002, and the remaining balance is
included in accounts receivable.
Ovonic Media. Stanford R. Ovshinsky and Robert C. Stempel, directors of
ECD, are members of the Alliance Board of Ovonic Media. ECD has a 49%
interest in this joint venture.
For the years ended June 30, 2002, 2001 and 2000, the Company had revenues
of $1,923,000, $2,298,000 and $634,000, respectively, from Ovonic Media for
providing product development services.
United Solar. Stanford R. Ovshinsky, Robert C. Stempel, Nancy M. Bacon
and Hellmut Fritzsche, directors of ECD, are directors of United Solar. The
financial statements of United Solar are included in the consolidated
financial statements of ECD for the period from April 11, 2000 through June 30,
2002.
Bekaert ECD Solar Systems. Stanford R. Ovshinsky, Robert C. Stempel and
Nancy M. Bacon, directors of ECD, are members of the Management Committee of
Bekaert ECD Solar Systems, of which United Solar owns 40%.
Bekaert ECD Solar Systems was formed on April 11, 2000. For the years
ended June 30, 2002 and 2001 and for the period from April 11, 2000 through
June 30, 2000, the Company recorded revenues of $10,121,000, $9,948,000 and
$2,291,000, respectively, from Bekaert ECD Solar Systems for product sales.
Southwall. Robert C. Stempel, a director of ECD, is a member of the
Board of Directors of Southwall.
For the year ended June 30, 2002, the Company had revenues of $9,000 from
Southwall under a contract to build large-area deposition equipment. The
completed equipment was shipped to Southwall in July 2000. $206,000 of the sale
price is included in accounts receivable at June 30, 2002.
128
Herbert Ovshinsky, Stanford R. Ovshinsky's brother, is employed by ECD as
Director of the Production Technology and Machine Building Division working
principally in the design of manufacturing equipment. He received $195,395 in
salary during the year ended June 30, 2002.
Benjamin Ovshinsky, Stanford R. Ovshinsky's son, is employed on a
part-time basis by ECD as its business representative for Western United States.
He received compensation of $69,386 during the year ended June 30, 2002.
HKO Media, Inc., owned by Harvey Ovshinsky, Stanford R. Ovshinsky's son,
performed video production services on behalf of ECD. HKO Media, Inc. was
paid $144,370 by ECD for its services during the fiscal year ended June 30,
2002.
129
PART IV
Item 14: Exhibits, Financial Statement Schedules and Report on Form 8-K
- -------- --------------------------------------------------------------
(a) 1. Financial Statements:
Page
----
The following is included in Part II, Item 8:
Independent Auditors' Report ..............................52
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts...........134
Other financial statements and financial statement schedules are omitted
(1) because of the absence of the conditions under which they are required
or (2) because the information called for is shown in the financial
statements and notes thereto.
3. Exhibits (including those incorporated by reference)
Page or
Reference
---------
3.1 Restated Certificate of Incorporation filed September 29, 1967 (a)
3.2 Certificate of Amendment to Certificate of Incorporation filed (b)
February 24, 1998, increasing authorized shares of the Company's
Common Stock from 15,000,000 shares to 20,000,000 shares
3.3 Certificate of Amendment of Incorporation filed January 27, 2000 (c)
increasing authorized shares of the Company's Common Stock from
20,000,000 shares to 30,000,000
3.4 Certificate of Amendment to Certificate of Incorporation filed (d)
March 25, 1999 extending voting rights of the Company's Class A
Common Stock, increasing the authorized capital stock of the
Company's 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 VIII of the Bylaws effective as of (f)
February 21, 2002
4.1 Agreement among the Company, Stanford R. Ovshinsky and Iris M. (g)
Ovshinsky relating to the automatic conversion of Class A Common
Stock into the Company's Common Stock upon the occurrence of
certain events, dated September 15, 1964
130
10.1 Executive Employment Agreement dated as of September 2, 1993 (h)
between the Company, Ovonic Battery Company, Inc. and Stanford
R. Ovshinsky
10.2 Executive Employment Agreement dated as of September 2, 1993 (i)
between the Company and Stanford R. Ovshinsky
10.3 Stock Option Agreement by and between Ovonic Battery Company, (j)
Inc. and Stanford R. Ovshinsky dated as of November 18, 1993
10.4 Stock Option Agreement by and between the Company and Stanford (k)
R. Ovshinsky dated as of November 18, 1993
10.5 Stock Option Agreement by and between the Company and Iris M. (l)
Ovshinsky dated as of November 18, 1993
10.6 Energy Conversion Devices, Inc. 1995 Non-Qualified Stock Option (m)
Plan
10.7 Executive Employment Agreement dated as of February 19, 1998 (n)
between the Company and Iris M. Ovshinsky
10.8 Executive Employment Agreement, Restricted Stock Agreement and (o)
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 Company and TRMI (p)
Holdings Inc. dated as of May 1, 2000
10.10 Foundation Agreement dated as of March 17, 2000 between United (q)
Solar Systems Corp., Bekaert Corporation and the Company
10.11 Limited Liability Agreement effective as of April 11, 2000 by (r)
and between United Solar Systems Corp. and Bekaert Corporation
10.12 Limited Liability Agreement of Texaco Ovonic Fuel Cell Company (s)
LLC dated as of September 21, 2000 by and between Texaco
Energy Systems Inc. and Energy Conversion Devices, Inc.
10.13 Limited Liability Agreement of Texaco Ovonic Hydrogen Systems (t)
LLC dated as of October 31, 2000 by and between Texaco Energy
Systems Inc. and Energy Conversion Devices, Inc.
10.14 Amended and Restated Operating Agreement of Texaco Ovonic (u)
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.
131
21.1 List of all direct and indirect subsidiaries of the Company (v)
23.1 Consent of Independent Auditors 139
23.2 Consent of Independent Auditors relating to the financial 140
statements of Bekaert ECD Solar Systems LLC as of December 31,
2001
99.1 Financial Statements of Bekaert ECD Solar Systems LLC as of 141
December 31, 2001
99.2 Chief Executive Officer's Certification Pursuant to 156
18 U.S.C. Section 1350
99.3 Chief Financial Officer's Certification Pursuant to 157
18 U.S.C. Section 1350
Notes to Exhibit List
---------------------
(a) Filed as Exhibit 2-A to the Company's Form 8-A and incorporated herein
by reference.
(b) Filed as Exhibit 3.5 to the Company's Registration Statement on Form S-3
(Registration No. 333-50749) and incorporated herein by reference.
(c) Filed as Exhibit 3.6 to the Company's Registration Statement on Form S-3
(Registration No. 333-33266) and incorporated herein by reference.
(d) Filed as Exhibit 3.3 to the Company's 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 the Company's 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 the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002.
(g) Filed as Exhibit 13-D to the Company's Registration Statement on Form
S-1 (Registration No. 2-26772) and incorporated herein by reference.
(h) Filed as Exhibit 10.100 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 and incorporated herein by reference.
(i) Filed as Exhibit 10.101 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 and incorporated herein by reference.
132
(j) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 and incorporated herein by reference.
(k) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 and incorporated herein by reference.
(l) Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 and incorporated herein by reference.
(m) Filed as Exhibit 10.77 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 and incorporated herein by reference.
(n) Filed as Exhibit 10.63 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998 and incorporated herein by reference.
(o) Filed as Exhibits B, C and D, respectively, to the Company's Proxy Notice
and Statement dated February 23, 1999.
(p) Filed as Exhibit 10.43 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000, as amended, and incorporated herein by
reference.
(q) Filed as Exhibit 10.44 to the Company's 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 10.45 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000, as amended, and incorporated herein by
reference.
(s) Filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.
(t) Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.
(u) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001.
(v) Filed as Exhibit 21.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000, as amended, and incorporated herein by
reference.
(b) Reports on Form 8-K
None.
133
Schedule II - Valuation and Qualifying Accounts
-----------------------------------------------
Additions
-----------------------
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Description Period Expenses Accounts Deductions End of Period
============================ ============ ======================= ========== =============
Allowance for Uncollectible
Accounts:
Year Ended June 30, 2002 $ 583,000 $ 28,000 $ (48,000) $ 563,000
Year Ended June 30, 2001 579,000 824,000 (820,000) 583,000
Year Ended June 30, 2000 303,000 442,000 $ 87,000* (253,000) 579,000
Reserve for Losses on
Government Contracts:
Year Ended June 30, 2002 $1,650,000 $(250,000) $1,400,000
Year Ended June 30, 2001 1,350,000 $ 300,000 1,650,000
Year Ended June 30, 2000 1,350,000 1,350,000
Reserve for Warranty:
Year Ended June 30, 2002 $ 978,896 $1,510,129 $2,489,025
Year Ended June 30, 2001 70,284 908,612 978,896
Year Ended June 30, 2000 70,284 70,284
- ----------------
* Represents allowance for uncollectible accounts for United Solar at
April 11, 2000 (the date at which United Solar was consolidated).
134
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENERGY CONVERSION DEVICES, INC.
By: /s/ Stanford R. Ovshinsky
-----------------------------------------
Stanford R. Ovshinsky,
President and Chief Executive Officer
Dated: September 30, 2002 (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Stanford R. Ovshinsky President, Chief Executive
--------------------- Officer and Director September 30, 2002
Stanford R. Ovshinsky (Principal Executive Officer)
/s/ Stephan W. Zumsteg Vice President and Chief
--------------------- Financial Officer September 30, 2002
Stephan W. Zumsteg (Principal Financial and
Accounting Officer)
/s/ Robert C. Stempel Director September 30, 2002
--------------------- (Chairman of the Board)
Robert C. Stempel
/s/ Nancy M. Bacon Director September 30, 2002
---------------------
Nancy M. Bacon
/s/ Umberto Colombo Director September 30, 2002
---------------------
Umberto Colombo
135
/s/ Subhash K. Dhar Director September 30, 2002
---------------------
Subhash K. Dhar
/s/ Hellmut Fritzsche Director September 30, 2002
---------------------
Hellmut Fritzsche
/s/ Walter J. McCarthy, Jr. Director September 30, 2002
---------------------
Walter J. McCarthy, Jr.
/s/ Florence I. Metz Director September 30, 2002
---------------------
Florence I. Metz
/s/ James R. Metzger Director September 30, 2002
---------------------
James R. Metzger
/s/ Iris M. Ovshinsky Director September 30, 2002
---------------------
Iris M. Ovshinsky
/s/ Donald L. Paul Director September 30, 2002
---------------------
Donald L. Paul
/s/ Stanley K. Stynes Director September 30, 2002
---------------------
Stanley K. Stynes
/s/ Greg M. Vesey Director September 30, 2002
---------------------
Greg M. Vesey
/s/ William M. Wicker Director September 30, 2002
---------------------
William M. Wicker
136
CERTIFICATIONS
I, Stanford R. Ovshinsky, certify that:
1. I have reviewed this annual report on Form 10-K of Energy Conversion
Devices, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
/s/ Stanford R. Ovshinsky
Date: September 30, 2002 -------------------------------------
Stanford R. Ovshinsky
President and Chief Executive Officer
137
I, Stephan W. Zumsteg, certify that:
1. I have reviewed this annual report on Form 10-K of Energy Conversion
Devices, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
/s/ Stephan W. Zumsteg
Date: September 30, 2002 ------------------------------------
Stephan W. Zumsteg
Chief Financial Officer
138