SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the period ended SEPTEMBER 30, 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
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Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2956 Waterview Drive, Rochester Hills, Michigan 48309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 293-0440
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ----
As of November 13, 2002, there were 219,913 shares of ECD's Class A Common
Stock, 430,000 shares of ECD's Class B Common Stock and 21,249,082 shares of
ECD's Common Stock outstanding.
Page 1 of 50 Pages
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended
September 30,
---------------------------
2002 2001
------------ ------------
REVENUES (NOTES A and B)
Product sales $ 3,811,858 $ 8,663,358
Product sales to related parties 1,522,331 2,496,294
----------- -----------
Total product sales 5,334,189 11,159,652
Royalties 524,018 602,227
Royalties - related parties 5,659 6,617
----------- -----------
Total royalties 529,677 608,844
Revenues from product development agreements 1,138,288 1,774,531
Revenues from product development agreements
with related parties 8,614,379 8,769,000
----------- -----------
Total revenues from product development
agreements 9,752,667 10,543,531
Revenues from license and other agreements 150,000 -
Other 35,479 44,290
Other revenues from related parties 52,648 102,262
----------- -----------
Total other revenues 88,127 146,552
----------- -----------
TOTAL REVENUES 15,854,660 22,458,579
EXPENSES (NOTE A)
Cost of product sales 4,820,335 10,704,457
Cost of revenues from product development
agreements 9,502,229 10,153,234
Product development and research 3,862,277 1,990,845
Patent defense (net) 239,385 605,501
Patents 669,112 743,150
Operating, general and administrative (net) 3,149,661 2,158,146
----------- -----------
TOTAL EXPENSES 22,242,999 26,355,333
----------- -----------
LOSS FROM OPERATIONS (6,388,339) (3,896,754)
OTHER INCOME (EXPENSE):
Interest income 1,040,198 1,356,557
Interest expense (127,272) (154,574)
Equity loss in joint ventures (863,555) (773,019)
Minority interest share of losses 543,026 353,497
Other non-operating income (net) 143,923 349,675
----------- -----------
TOTAL OTHER INCOME 736,320 1,132,136
----------- -----------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (5,652,019) (2,764,618)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 2,215,560 -
----------- -----------
NET LOSS $(3,436,459) $(2,764,618)
=========== ============
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (NOTE E) $ (.26) $ (.13)
BASIC NET LOSS PER SHARE FOR CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (NOTE E) .10 -
----------- -----------
BASIC NET LOSS PER SHARE $ (.16) $ (.13)
=========== ===========
DILUTED NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (.26) $ (.13)
DILUTED NET LOSS PER SHARE FOR CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (NOTE E) .10 -
----------- -----------
DILUTED NET LOSS PER SHARE (NOTE E) $ (.16) $ (.13)
=========== ===========
See notes to consolidated financial statements.
2
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
September 30, June 30,
2002 2002
------------ ------------
(Unaudited)
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of $39,283,000 at
September 30, 2002 and $42,210,000 at June 30, 2002 $ 39,307,633 $ 42,221,015
Short-term investments (NOTE G) 77,420,507 71,997,154
Accounts receivable (net of allowance for uncollectible
accounts of approximately $514,000 at September 30,
2002, and $563,000 at June 30, 2002) 4,142,834 7,268,447
Accounts receivable due from related parties 19,020,517 19,449,870
Note receivable due from related party 1,615,814 1,594,275
Inventories 1,126,702 1,163,273
Other 493,843 387,901
------------ ------------
TOTAL CURRENT ASSETS 143,127,850 144,081,935
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 3,476,103 3,456,088
Machinery and other equipment (including construction
in progress of approximately $857,000 and $694,000
at September 30, 2002 and June 30, 2002, respectively) 30,921,877 26,713,253
Capitalized lease equipment 3,053,295 3,053,295
------------ ------------
37,718,275 33,489,636
Less accumulated depreciation and amortization (23,240,605) (22,551,768)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 14,477,670 10,937,868
Investments in Rare Earth Ovonic-China (NOTE A) 1,710,000 1,710,000
Long-Term Note Receivable - Bekaert ECD Solar
Systems (NOTE A) 11,094,146 10,921,232
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (NOTE D)
Bekaert ECD Solar Systems 17,022,743 17,732,968
Bekaert ECD Europe 31,991 22,835
Texaco Ovonic Fuel Cell Company - -
Texaco Ovonic Hydrogen Systems - -
Texaco Ovonic Battery Systems - -
Ovonyx 1,000,000 -
Ovonic Media - -
ITS Innovative Transportation Systems 4,123,271 3,285,757
Sovlux - -
OTHER ASSETS 2,153,250 3,425,999
------------ ------------
TOTAL ASSETS $194,740,921 $192,118,594
============ ============
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, June 30,
2002 2002
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 15,299,877 $ 18,249,591
Accounts payable and accrued expenses - related parties 1,059,853 34,218
Salaries, wages and amounts withheld from employees 2,414,147 2,908,213
Deferred revenues under business agreements (NOTE A) 12,491,221 640,019
Deferred revenues - related parties (NOTE A) 5,718,124 6,677,846
Current installments on long-term liabilities 5,127,136 5,261,747
------------ ------------
TOTAL CURRENT LIABILITIES 42,110,358 33,771,634
LONG-TERM LIABILITIES 3,104,282 3,507,537
LONG-TERM NOTES PAYABLE (NOTE A) 11,094,146 10,921,232
NONREFUNDABLE ADVANCE ROYALTIES (NOTE C) 3,572,876 3,627,931
------------ ------------
TOTAL LIABILITIES 59,881,662 51,828,334
NEGATIVE GOODWILL (NOTE D) - 2,215,560
MINORITY INTEREST (NOTE D) 2,276,714 2,819,740
COMMITMENTS (NOTE G)
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Class B Convertible Common Stock,
par value $0.01 per share
Authorized, Issued and Outstanding - 430,000 shares 4,300 4,300
Common Stock, par value $0.01 per share:
Authorized - 30,000,000 shares
Issued & Outstanding - 21,249,082 shares at
September 30, 2002 and 21,248,973 shares at
June 30, 2002 212,491 212,490
Additional paid-in capital 384,978,212 384,952,113
Accumulated deficit (251,630,411) (248,193,952)
Accumulated other comprehensive income 1,055,494 487,950
Unearned Compensation on Class B Convertible
Common Stock (2,039,740) (2,210,140)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 132,582,545 135,254,960
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $194,740,921 $192,118,594
============ ============
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Three Months Ended
September 30,
---------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net loss $(3,436,459) $ (2,764,618)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 688,837 496,569
Amortization of premium/discount on investments 161,433 -
Equity loss in joint ventures 863,555 773,019
Profit deferred on sales to Bekaert ECD Solar Systems - 908,572
Creditable royalties (55,055) (51,995)
Stock and stock options issued for services rendered 196,500 248,700
Amortization of deferred gain (104,379) (34,791)
Amortization of negative goodwill - (116,608)
Cumulative effect of change in accounting principle (2,215,560) -
Minority interest (543,026) (353,497)
Other - (2,260)
Changes in working capital:
Accounts receivable 3,125,613 3,873,152
Accounts and note receivable due from related parties 407,814 (5,469,397)
Inventories 36,571 (60,357)
Other assets 1,166,807 (426,883)
Accounts payable and accrued expenses (3,443,779) (277,116)
Accounts payable and accrued expenses - related parties 25,635 16,186
Deferred revenues under business agreements 11,955,581 (147,730)
Deferred revenues - related parties (959,722) (1,278,260)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 7,870,366 (4,667,314)
INVESTING ACTIVITIES:
Purchases of capital equipment (4,228,639) (1,958,648)
Investment in Bekaert ECD Solar Systems - (45,758)
Investment in Bekaert ECD Europe - (28,346)
Advance to ITS Innovative Transportation Systems (1,000,000) -
Purchases of investments (11,229,103) (35,622,315)
Sales of investments 6,211,860 10,281,479
Proceeds from sale of capital equipment - 13,560
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (10,245,882) (27,360,028)
FINANCING ACTIVITIES:
Principal payments under short-term and long-term
debt obligations and capitalized lease obligations (537,866) (510,440)
Proceeds from sale of stock to ChevronTexaco - 8,893,629
Proceeds from sale of stock upon exercise
of stock options and warrants - 35,572,549
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (537,866) 43,955,738
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,913,382) 11,928,396
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,221,015 33,055,399
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39,307,633 $ 44,983,795
============ ============
See notes to consolidated financial statements.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Three Months Ended
September 30,
------------------------
2002 2001
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SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 127,272 $ 154,574
The Company's noncash investing and
financing activities were as follows:
Long-term note receivable - Bekaert ECD Solar Systems 172,914 162,383
Long-term note payable - Canon (172,914) (162,383)
Investment in Ovonyx 1,000,000 -
Accounts payable and accrued expenses - related party (1,000,000) -
See notes to consolidated financial statements.
6
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies
- ---------------------------------------
Basis of Presentation
- ---------------------
Information for the three months ended September 30, 2002 (Fiscal 2003)
and 2001 (Fiscal 2002) is unaudited, but includes all adjustments which Energy
Conversion Devices, Inc. (ECD) considers necessary for a fair presentation of
financial condition, cash flows and results of operations.
In accordance with the instructions for the completion of the Quarterly
Report on Form 10-Q, certain information and footnotes necessary to comply with
accounting principles generally accepted in the United States (GAAP) for annual
financial statements have been condensed or omitted. These financial statements
should be read in conjunction with ECD's 2002 Annual Report on Form 10-K which
contains a summary of ECD's accounting principles and other footnote
information.
Nature of Business
- ------------------
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. 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 September
30, 2002, seven major investments accounted for by the equity method: (i)
Bekaert ECD Solar Systems LLC, United Solar's 40% joint venture with Bekaert;
(ii) Texaco Ovonic Battery Systems LLC, a joint venture between Ovonic Battery
and ChevronTexaco Corporation, each having 50% interest in the joint venture, to
manufacture and sell the Company's proprietary NiMH batteries for propulsion
applications as well as non-propulsion applications; (iii) Texaco Ovonic Fuel
Cell Company LLC, 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, a
joint venture between ECD
7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
and ChevronTexaco, each having 50% interest in the joint venture, to further
develop Ovonic(TM) solid hydrogen storage technology; (v) Ovonyx, Inc., 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, 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.
The Company's investments in Texaco Ovonic Battery Systems, Texaco Ovonic
Fuel Cell, Texaco Ovonic Hydrogen Systems and Ovonic Media are recorded at zero.
The Company will continue to carry its investment in each of these joint
ventures at zero until the venture becomes profitable (based upon the venture's
history of sustainable profits), at which time the Company will start to
recognize over a period of years its share, if any, of the then equity of each
of the ventures, and will recognize its share of each venture's profits or
losses on the equity method of accounting. To the extent that the Company has
made cash or other contributions, it recognizes its proportionate share of any
losses until the investment reaches zero.
Intellectual property, including patents resulting from the Company's
investments in its technologies, 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.
In the three months ended September 30, 2002, the Company agreed to make a
capital contribution of $1,000,000 in Ovonyx in exchange for technology which
had previously been contributed by ECD to Ovonyx. In October 2002, through a
newly formed company, Ovonic Cognitive Computer, Inc., which is owned 95% by ECD
and 5% by Ovonyx, ECD paid Ovonyx $1,000,000 for the use of this technology and
Ovonyx provided an exclusive license for this technology. At September 30, 2002,
ECD has recorded an accrued liability to Ovonyx of $1,000,000 with a
corresponding investment in Ovonyx. In future periods, ECD will account for this
investment on the equity method and will recognize its proportionate share of
Ovonyx losses to the extent of its $1,000,000 investment.
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 G).
Bekaert ECD Solar Systems/United Solar will require additional funding
in order to cover operating expenses, including ramp-up of production and
implementation of marketing
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
programs, and for working capital purposes, including an estimated $40,000,000
through the year ending September 30, 2003. 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 loans provided by Bekaert and $16,100,000 by ECD. ECD and
Bekaert are exploring new equity investors and bank financing to meet the joint
ventures' future cash requirements, as well as discussing restructuring of the
joint ventures. ECD may also provide additional bridge loans to the joint
ventures (see Note G).
During the period from October 1, 2002 through November 14, 2002, ECD and
Bekaert have provided bridge loans to Bekaert ECD Solar Systems of $1,124,000
and $2,077,000, respectively.
Upon consolidation, all intercompany accounts and transactions are
eliminated. Any profits on intercompany transactions are eliminated to the
extent of the Company's ownership percentage.
Certain items for the three months ended September 30, 2001 have been
reclassified to be consistent with the classification of items in the three
months ended September 30, 2002.
In preparing financial statements in conformity with 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. The 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 June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 implemented this statement on July 1, 2002. The adoption of
this statement had no impact on the Company's consolidated financial position or
results of operation.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes 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
9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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. It
requires that discontinued operations are measured at the lower of carrying
value or fair value less cost to sell and that future operating losses of
discontinued operations are not recognized until they occur. The Company
implemented this statement on July 1, 2002. On July 1, 2002, in accordance with
the provisions of SFAS 144, the Company assessed for impairment an intangible
asset it had on its books since 1995. This intangible asset, which was the
result of a license agreement entered into in 1995, was originally valued at
$330,000 and was being amortized over 40 years. After a review of this
intangible asset, including the associated cash flows represented by recent
royalties from a certain licensee, the Company determined that this intangible
asset was impaired. The Company wrote off the balance ($272,250) of this
intangible asset as of July 1, 2002 and recorded this amount in operating,
general and administrative expense in its consolidated statements of operations
for the three months ended September 30, 2002.
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.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 required the
Company to recognize, at the adoption of SFAS 142, the unamortized negative
goodwill of approximately $2,216,000 (a favorable benefit) as the cumulative
effect of a change in accounting principle in the Company's statements of
operations on July 1, 2002.
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
The following is the effect on the three months ended September 30, 2002
and 2001 of this change in accounting principle:
Three Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
Reported net loss $(3,436,459) $(2,764,618)
Deduct:-
Amortization of negative goodwill - (116,608)
Cumulative effect of change
in accounting principle (2,215,560) -
----------- -----------
Adjusted net loss $(5,652,019) $(2,881,226)
=========== ===========
Basic net loss per share
Reported net loss $ (.16) $ (.13)
Amortization of negative goodwill - (.01)
Cumulative effect of change
in accounting principle (.10) -
----------- -----------
Adjusted net loss $ (.26) $ (.14)
=========== ===========
Other Comprehensive Income (Loss)
- ---------------------------------
The Company's total comprehensive loss was as follows:
Three Months Ended
September 30,
---------------------------
2002 2001
------------ ------------
Net Loss $(3,436,459) $(2,764,618)
OTHER COMPREHENSIVE INCOME:
Unrealized gains on securities 567,544 194,229
----------- -----------
COMPREHENSIVE LOSS $(2,868,915) $(2,570,389)
=========== ===========
Cash Equivalents
- ----------------
Cash equivalents consist of investments in short-term, highly liquid
securities having a maturity of three months or less from the date of
acquisition.
Short-Term Investments
- ----------------------
The Company has evaluated its investment policies consistent with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
determined that all of its investment securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Stockholders' Equity under the
caption "Accumulated Other Comprehensive Income." The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and accretions are included in interest income.
Realized gains and losses and
11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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
34 months from date of acquisition.
Investment in Rare Earth Ovonic-China
- -------------------------------------
The Company has three joint ventures, collectively Rare Earth Ovonic, with
Rare Earth High-Tech Co. Ltd. (Rare Earth High-Tech) of Baotou Steel Company of
Inner Mongolia, China, for the manufacturing of its battery and other related
technologies. The Company accounts for its 19% interest in each of these joint
ventures using the cost method of accounting (total cash investment of
$1,710,000).
Financial Instruments
- ---------------------
Due to the short-term maturities of cash, cash equivalents, marketable
securities, accounts receivable and accounts payable, the Company believes that
the carrying value of its financial instruments is a reasonable estimate of fair
value.
Foreign Currency Transaction Gains and Losses
- ---------------------------------------------
Since most of the Company's contracts and transactions are denominated and
settled in U.S. dollars, there are no significant foreign currency gains or
losses.
12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Accounts Receivable
- -------------------
September 30, June 30,
2002 2002
------------- ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Revenues recognized but unbilled
Commercial customers $ 52,655 $ 505,857
Amounts billed to customers
Commercial customers 215,593 676,462
----------- -----------
Sub-total 268,248 1,182,319
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in
the subsequent month
U.S. Government 255,706 371,577
Commercial customers 139,948 172,210
----------- -----------
395,654 543,787
Amounts billed
U.S. Government 1,063,046 1,272,208
Commercial customers 51,020 1,575,020
----------- -----------
1,114,066 2,847,228
----------- -----------
Sub-total 1,509,720 3,391,015
Amounts unbilled for other than
long-term contracts
Commercial customers 2,201,466 2,146,983
Amounts billed for other than
long-term contracts
U.S. Government - 370
Commercial customers 677,400 1,110,760
----------- -----------
Sub-total 677,400 1,111,130
Allowance for uncollectible accounts (514,000) (563,000)
------------ -----------
TOTAL $ 4,142,834 $ 7,268,447
=========== ===========
Certain contracts with the U.S. government require a retention that is
paid upon completion of audit of the Company's indirect rates. Certain
contracts have been completed for more than 10 years and have not been
audited. U.S. Government retentions totaling $113,947 are included in
long-term other assets at September 30, 2002 and June 30, 2002. Most U.S.
government contracts remain subject to audit.
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Accounts Receivable Due from Related Parties
- --------------------------------------------
September 30, June 30,
2002 2002
------------- ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Amounts billed
Bekaert ECD Solar Systems $ 3,402,121 $ 3,792,025
Retainages
Bekaert ECD Solar Systems 5,721,965 5,721,965
----------- -----------
Sub-total 9,124,086 9,513,990
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
Bekaert ECD Solar Systems 216,250 130,000
Ovonic Media 287,427 364,263
Texaco Ovonic Battery Systems 938,702 2,182,575
Texaco Ovonic Fuel Cell 818,024 788,894
Texaco Ovonic Hydrogen Systems 1,149,373 1,874,463
----------- -----------
Sub-total 3,409,776 5,340,195
Amounts billed
Texaco Ovonic Battery Systems 4,197,161 1,738,990
Texaco Ovonic Fuel Cell 765,527 671,358
Texaco Ovonic Hydrogen Systems 1,425,343 1,508,948
----------- -----------
Sub-total 6,388,031 3,919,296
Amounts unbilled for other than long-term contracts
Ovonyx 7,980 21,248
Amounts billed for other than long-term contracts
ChevronTexaco Technology Ventures 57,141 536,569
Ovonyx - 21,068
Texaco Ovonic Battery Systems 33,503 97,504
----------- -----------
Sub-total 90,644 655,141
----------- -----------
TOTAL $19,020,517 $19,449,870
=========== ===========
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.
14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Inventories for United Solar and Ovonic Battery are as follows:
September 30, June 30,
2002 2002
------------ ------------
Finished products $ 143,185 $ 250,370
Work in process 262,391 478,997
Raw materials 721,126 433,906
---------- ----------
$1,126,702 $1,163,273
========== ==========
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 September 30, 2002 and June 30, 2002 was $2,595,000 and
$2,443,000, respectively.
Costs of machinery and other equipment acquired or constructed for a
particular product development project, which have no alternative future use (in
other product development projects or otherwise), are charged to product
development and research costs as incurred.
Expenditures for maintenance and repairs are charged to operations.
Expenditures for betterments or major renewals are capitalized and are
depreciated over their estimated useful lives.
Long-Term Note Receivable
- -------------------------
In connection with 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
15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
pay Canon Inc. of Japan $12,000,000 no later than January 2004 in connection
with the acquisition of Canon's interest in United Solar.
Product Development, Patents and Technology
- -------------------------------------------
Product development and research costs are expensed as they are incurred
and, as such, the Company's investments in its technologies and patents are
recorded at zero in its financial statements, regardless of their values. The
technology investments are the bases by which the Company is able to enter into
strategic alliances, joint ventures and license agreements.
Product Sales
- -------------
Product sales include revenues related to machine-building and equipment
sales contracts, photovoltaic products, metal hydride materials and battery
packs. Revenues related to machine-building and equipment sales contracts and
sales related to other long-term contracts are recognized on the
percentage-of-completion method of accounting using the costs incurred to date
as a percentage of the total expected costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point. Currently, low sales volumes related to metal hydride materials combined
with high fixed costs result in losses.
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), the Company has agreed to reimburse USABC
and DOE, as their recoupment for payments to the Company under the 1992
Contract, a 15% share of royalty payments the Company receives through May 3,
2012 where Ovonic(TM) NiMH batteries serve as the primary source of power for
electric vehicles (Recoupment). The Company does not believe that royalties
received to date for batteries manufactured by its licensees are subject to
Recoupment.
16
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
ECD has a royalty trust arrangement whereby ECD is obligated to pay a
trust 25% of optical memory royalties received. In the three months ended
September 30, 2002, no payments were made.
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 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
17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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.
Deferred Revenues
- -----------------
Deferred revenues represent amounts received under business agreements in
excess of amounts recognized as revenues. At September 30, 2002, approximately
$11,863,000 in deferred revenues relates to the Rare Earth Ovonic contracts.
Overhead and General and Administrative Allocations
- ---------------------------------------------------
The Company allocates overhead and general and administrative expenses to
product development research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
Overhead is allocated to cost of product sales through the application of
overhead to inventory costs.
Other Operating Revenues
- ------------------------
Other operating revenues consist principally of revenues related to
services provided to certain related parties and third-party service revenue
realized by certain of the Company's service departments, including the
Production Technology and Machine Building Division and Central Analytical
Laboratory. Revenues related to services are recognized upon completion of
performance of the applicable service.
Other Nonoperating Income
- -------------------------
Other nonoperating income-net consists of 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
18
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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. When the resultant option exercise price is lower than
the fair market value on the grant date, the difference is recorded as
compensation expense.
19
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:
Three Months Ended
September 30,
---------------------------
2002 2001
------------ ------------
Product sales
Machine building and equipment sales $ 3,582,946 $ 8,412,455
Battery packs 578 121,693
Metal hydride materials 228,334 129,210
----------- -----------
3,811,858 8,663,358
----------- -----------
Product sales - related parties
Photovoltaics 1,273,705 1,229,545
Machine building 139,482 1,141,041
Battery packs 86,363 52,860
Metal hydride materials 22,781 72,848
----------- -----------
1,522,331 2,496,294
----------- -----------
Total product sales $ 5,334,189 $11,159,652
=========== ===========
Royalties
Battery technology $ 519,827 $ 567,811
Optical memory 4,191 34,416
----------- -----------
524,018 602,227
----------- -----------
Royalty - related party
Microelectronics 5,659 6,617
----------- -----------
Total royalties $ 529,677 $ 608,844
=========== ===========
Revenues from product development agreements
Photovoltaics $ 608,716 $ 1,016,835
Battery technology 494,841 481,661
Optical memory - 111,978
Hydrogen - 164,057
Other 34,731 -
----------- -----------
1,138,288 1,774,531
----------- -----------
Revenues from product development agreements -
related parties
Battery technology 2,710,845 3,129,029
Optical memory 332,179 406,355
Hydrogen 3,551,664 3,297,638
Fuel cells 2,019,691 1,935,978
----------- -----------
8,614,379 8,769,000
----------- -----------
Total revenues from product development agreements $ 9,752,667 $10,543,531
=========== ===========
License and other agreements
Battery technology $ 150,000 $ -
=========== ===========
20
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:
Three Months Ended
September 30,
---------------------------
2002 2001
------------ ------------
United States $10,123,332 $12,302,218
China 3,642,897 8,423,846
Mexico 1,273,705 1,229,545
Japan 432,817 440,777
Hong Kong 344,334 24,618
Germany 37,575 37,575
----------- -----------
$15,854,660 $22,458,579
=========== ===========
NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At September 30, 2002 and June 30, 2002, the Company deferred recognition
of revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
September 30, June 30,
2002 2002
------------ ------------
Battery $ 1,589,662 $ 1,642,822
Optical memory 1,983,214 1,985,109
----------- -----------
$ 3,572,876 $ 3,627,931
=========== ===========
During the three months ended September 30, 2002 and 2001, $55,055 and
$51,995, respectively, of creditable royalties earned were recognized as
revenue. There are no obligations in connection with any of the advance royalty
agreements which require the Company to incur any additional costs.
21
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.
22
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) was being amortized over seven years on a straight-line basis.
On July 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," and recognized the unamortized negative goodwill balance of
approximately $2,216,000 as the cumulative effect of a change in accounting
principle. (See Note A.)
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 G).
Bekaert ECD Solar Systems/United Solar will require additional funding
in order to cover operating expenses, including ramp-up of production and
implementation of marketing programs, and for working capital purposes,
including an estimated $40,000,000 through the year ending September 30, 2003.
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 loans provided by Bekaert and
$16,100,000 by ECD. ECD and Bekaert are exploring new equity investors and bank
financing to meet the joint ventures' future cash requirements, as well as
discussing restructuring of the joint ventures. ECD may also provide additional
bridge loans to the joint ventures (see Note G).
During the period from October 1, 2002 through November 14, 2002, ECD and
Bekaert have provided bridge loans to Bekaert ECD Solar Systems of $1,124,000
and $2,077,000, respectively.
23
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 Bekaert ECD
Solar Systems that are derived from Bekaert ECD Solar Systems' financial
statements.
BEKAERT ECD SOLAR SYSTEMS LLC
STATEMENTS OF OPERATIONS
------------------------
Three Months Ended
September 30,
---------------------------
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Revenues $ 3,604,722 $ 4,009,815
Operating Expenses:
Cost of Sales 4,214,884 4,498,503
General and Administrative 2,408,205 1,290,397
----------- -----------
Total Expenses 6,623,089 5,788,900
Other Income (Expense) (159,082) (143,209)
----------- -----------
Net Loss $ (3,177,449) $(1,922,294)
=========== ===========
BEKAERT ECD SOLAR SYSTEMS LLC
BALANCE SHEETS
--------------
September 30, June 30,
2002 2002
------------ ------------
(Unaudited) (Unaudited)
Current Assets:
Cash and Cash Equivalents $ 1,489,858 $ 6,569,025
Inventory 7,359,768 7,528,767
Other Current Assets 7,142,236 6,636,430
------------ ------------
Total Current Assets 15,991,862 20,734,222
Property, Plant and Equipment (Net) 83,127,470 81,954,953
Other Assets 38,353,438 38,674,995
------------ ------------
Total Assets $137,472,770 $141,364,170
============ ============
Current Liabilities:
Accounts Payable and Other Current
Liabilities $ 19,837,341 $ 19,374,416
------------ ------------
Total Current Liabilities 19,837,341 19,374,416
Note Payable - ECD 11,094,146 10,921,232
Long-Term Capitalized Lease 60,353,576 61,525,996
------------ ------------
Total Liabilities 91,285,063 91,821,644
Members' Equity 46,187,707 49,542,526
------------ ------------
Total Liabilities and Members' Equity $137,472,770 $141,364,170
============ ============
24
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 had 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, and Ovonic Battery contributed additional
technology. Texaco Ovonic Battery Systems is owned 50% by Ovonic Battery and 50%
by ChevronTexaco.
The Company recorded revenues from Texaco Ovonic Battery Systems of
$2,711,000 for the three months ended September 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 $109,000 for the three months ended September
30, 2002, for products sold to this joint venture.
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.
In the three months ended September 30, 2002, the Company agreed to make
a capital contribution of $1,000,000 in Ovonyx in exchange for technology which
had previously been contributed by ECD to Ovonyx. In October 2002, through a
newly formed company, Ovonic Cognitive Computer, Inc., which is owned 95% by ECD
and 5% by Ovonyx, ECD paid Ovonyx $1,000,000 for the use of this technology and
Ovonyx provided an exclusive license for this technology. At September 30, 2002,
ECD has recorded an accrued liability to Ovonyx of $1,000,000 with a
corresponding investment in Ovonyx. In future periods, ECD will account for this
investment on the equity method and will recognize its proportionate share of
Ovonyx losses to the extent of its $1,000,000 investment.
25
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
ECD recorded revenues from Ovonyx of $42,000 and $101,000 for the three
months ended September 30, 2002 and 2001, respectively, representing services
performed for its operations.
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.
TEXACO OVONIC FUEL CELL COMPANY LLC
STATEMENTS OF OPERATIONS
------------------------
Three Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Revenues
Other Income $ 131 $ 1,433
Expenses:
Product Development - Paid or
Payable to ECD 1,915,164 1,511,776
Product Development - Paid or
Payable to ChevronTexaco - 338,236
Depreciation Expense 153,070 74,584
----------- -----------
Total Expenses 2,068,234 1,924,596
----------- -----------
Net Loss $(2,068,103) $(1,923,163)
=========== ===========
26
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
TEXACO OVONIC FUEL CELL COMPANY LLC
BALANCE SHEETS
--------------
September 30, June 30,
2002 2002
------------ ------------
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 51,283 $ 89,318
Accounts Receivable From Related Party 6,977 -
----------- -----------
Total Current Assets 58,260 89,318
Fixed Assets:
Leasehold Improvements 1,454,716 1,454,716
Machinery and Other Equipment 1,464,060 1,557,339
Construction in Progress 267,118 78,959
----------- -----------
Total Fixed Assets 3,185,894 3,091,014
Less Accumulated Depreciation (718,131) (566,403)
----------- -----------
Net Fixed Assets 2,467,763 2,524,611
----------- -----------
Total Assets $ 2,526,023 $ 2,613,929
=========== ===========
Current Liabilities:
Amount Due ECD, Net $ 1,550,066 $ 1,428,117
Amount Due ChevronTexaco - 91,752
----------- -----------
Total Current Liabilities 1,550,066 1,519,869
Members' Equity:
Capital Contributions 19,600,000 17,650,000
Cumulative Deficit (18,624,043) (16,555,940)
----------- -----------
Total Members' Equity 975,957 1,094,060
----------- -----------
Total Liabilities and Members' Equity $ 2,526,023 $ 2,613,929
=========== ===========
During the three months ended September 30, 2002 and 2001, the Company
recorded revenues of $2,020,000 and $1,936,000, 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. 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 funding of the venture's
activities, business strategy of the venture, and the involvement of additional
joint venture partners.
27
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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
------------------------
Three Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Revenues
Other Income $ 131 $ 1,472
Expenses:
Product Development - Paid or
Payable to ECD 3,090,360 2,804,189
Product Development - Paid or
Payable to ChevronTexaco 326,358 425,728
Depreciation Expense 329,570 87,126
----------- -----------
Total Expenses 3,746,288 3,317,043
----------- -----------
Net Loss $(3,746,157) $(3,315,571)
=========== ===========
28
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
--------------
September 30, June 30,
2002 2002
------------ ------------
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 39,204 $ 134,823
Accounts Receivable 10,746 10,746
----------- -----------
Total Current Assets 49,950 145,569
Fixed Assets:
Leasehold Improvements 3,226,570 3,226,570
Machinery and Other Equipment 2,543,163 2,543,163
Construction in Progress 3,156,825 2,736,571
----------- -----------
Total Fixed Assets 8,926,558 8,506,304
Less Accumulated Depreciation (995,614) (666,044)
----------- -----------
Net Fixed Assets 7,930,944 7,840,260
----------- -----------
Total Assets $ 7,980,894 $ 7,985,829
=========== ===========
Current Liabilities:
Amount Due ECD, Net $ 2,526,480 $ 3,335,178
Amount Due ChevronTexaco 326,359 376,439
Deferred Revenue 15,257 15,257
----------- -----------
Total Current Liabilities 2,868,096 3,726,874
Members' Equity:
Capital Contributions 33,627,000 29,027,000
Cumulative Deficit (28,514,202) (24,768,045)
----------- -----------
Total Members' Equity 5,112,798 4,258,955
----------- -----------
Total Liabilities and Members' Equity $ 7,980,894 $ 7,985,829
=========== ===========
During the three months ended September 30, 2002 and 2001, the Company
recorded revenues of $3,475,000 and $3,298,000, respectively, for services
provided to this joint venture.
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
29
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 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 beneficial 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. ECD made an additional loan of $1,000,000 to ITS on November 8, 2002.
Ovonic Media
In March 2000, ECD and GE formed a strategic alliance (the "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 three months ended September 30, 2002 and 2001, the Company had
revenues of $332,000 and $406,000, 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.
The following sets forth certain financial data regarding Ovonic Media
that are derived from Ovonic Media's financial statements:
OVONIC MEDIA, LLC
STATEMENTS OF OPERATIONS
------------------------
Three Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Revenues $ - $ -
Operating Expenses:
Product Development 257,179 290,369
General and Administrative 75,000 76,491
Depreciation Expense 30,658 14,387
----------- -----------
Total Expenses 362,837 381,247
----------- -----------
Net Loss $ (362,837) $ (381,247)
=========== ===========
30
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
OVONIC MEDIA, LLC
BALANCE SHEETS
--------------
September 30, June 30,
2002 2002
------------ ------------
(Unaudited) (Unaudited)
Property, Plant and Equipment (Net) $ 429,583 $ 460,241
----------- -----------
Total Assets $ 429,583 $ 460,241
=========== ===========
Current Liabilities:
Accounts Payable to ECD $ 287,427 $ 364,263
----------- -----------
Total Current Liabilities 287,427 364,263
Members' Equity:
Capital Contributions 5,065,357 4,656,342
Cumulative Deficit (4,923,201) (4,560,364)
----------- -----------
Total Members' Equity 142,156 95,978
----------- -----------
Total Liabilities and Members' Equity $ 429,583 $ 460,241
=========== ===========
Investments in Rare Earth Ovonic
During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech of Inner Mongolia, China. The agreement
called for the creation of joint ventures for manufacturing and licensing of
advanced NiMH battery technology, hydrogen storage alloy powders, advanced
Ovonic(TM) nickel hydroxide materials and production equipment, all for battery
applications for NiMH batteries. As of September 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 $3,583,000 and
$8,413,000 for the three months ended September 30, 2002 and September 30, 2001,
respectively.
31
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 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.
32
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Net Loss Per Share
- ---------------------------
Basic net loss per common share is computed by dividing the net loss by
the weighted average number of common shares outstanding. ECD uses the treasury
stock method to calculate diluted earnings per share. Potential dilution exists
from stock options and warrants. Weighted average number of shares outstanding
and basic and diluted earnings per share for the three months ended September 30
are computed as follows:
2002 2001
------------ ------------
Weighted average number of shares outstanding 21,898,895 20,972,923
Net loss before cumulative effect of change in
accounting principle $(5,652,019) $(2,764,618)
Cumulative effect of change in accounting principle 2,215,560 0
Net loss $(3,436,459) $(2,764,618)
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (.26) $ (.13)
=========== ===========
BASIC NET LOSS PER SHARE $ (.16) $ (.13)
=========== ===========
Weighted average number of shares outstanding 21,898,895 20,972,923
Weighted average shares for dilutive securities 0 0
----------- -----------
Average number of shares outstanding and
potential dilutive shares 21,898,895 20,972,923
Net loss before cumulative effect of change in
accounting principle $(5,652,019) $(2,764,618)
Cumulative effect of change in accounting principle 2,215,560 0
Net loss $(3,436,459) $(2,764,618)
DILUTED NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (.26) $ (.13)
=========== ===========
DILUTED NET LOSS PER SHARE $ (.16) $ (.13)
=========== ===========
The per-share amount related to the cumulative effect of change in
accounting principle was $.10 (favorable benefit) for both the basic net loss
per share and the diluted net loss per share.
Due to the Company's net losses, 2002 and 2001 weighted average shares of
potential dilutive securities of 46,785 and 994,318, 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. There were additional
1,747,660 and 39,034 potentially dilutive securities which were respectively
excluded from the 2002 and 2001 calculations of the weighted average shares due
to their antidilutive effect to the net loss per share because of the
relationship between the exercise prices and the average market price of ECD's
Common Stock during these periods.
33
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Business Segments
- --------------------------
The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar, and the parent company, ECD. Ovonic Battery is involved in
developing and commercializing battery technology. United Solar is involved in
manufacturing, developing and commercializing photovoltaic technology. ECD is
involved in microelectronics, fuel cells and hydrogen storage technologies,
machine building and photovoltaics. Some general corporate expenses have been
allocated to Ovonic Battery.
The Company's operations by business segment were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
Ovonic United Consolidating
ECD Battery Solar Entries Consolidated
----------- ----------- ----------- ----------- -----------
Revenues
Three months ended
September 30, 2002 $ 6,580 $ 7,798 $ 1,803 $ (326) $ 15,855
September 30, 2001 19,811 12,969 1,648 (11,969) 22,459
Interest Income
Three months ended
September 30, 2002 $ 1,017 $ - $ 23 $ - $ 1,040
September 30, 2001 1,279 - 78 - 1,357
Interest Expense*
Three months ended
September 30, 2002 $ - $ 29 $ 98 $ - $ 127
September 30, 2001 - 35 120 - 155
Operating Income (Loss)
Three months ended
September 30, 2002 $ (5,848) $ (1,492) $ (1,972) $ 2,924 $ (6,388)
September 30, 2001 (458) (2,006) (1,050) (383) (3,897)
Equity in Net Loss of Investees
Under Equity Method
Three months ended
September 30, 2002 $ (162) $ - $ (857) $ 155 $ (864)
September 30, 2001 (129) - (769) 125 (773)
Depreciation Expense
Three months ended
September 30, 2002 $ 380 $ 282 $ 425 $ (398) $ 689
September 30, 2001 189 284 433 (409) 497
34
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Business Segments (Continued)
- --------------------------------------
Ovonic United Consolidating
ECD Battery Solar Entries Consolidated
----------- ----------- ----------- ----------- -----------
Capital Expenditures
Three months ended
September 30, 2002 $ 4,030 $ 153 $ 46 $ - $ 4,229
September 30, 2001 1,662 89 208 - 1,959
Investments and Advances
in Equity Method Investees
Three months ended
September 30, 2002 $ 5,123 $ - $ 17,055 $ - $ 22,178
September 30, 2001 - - 21,971 - 21,971
Identifiable Assets
Three months ended
September 30, 2002 $174,271 $ 10,918 $ 23,485 $(13,933) $194,741
September 30, 2001 175,177 21,185 37,122 (27,826) 205,658
- ---------
* Excludes intercompany interest.
NOTE G - Commitments
- --------------------
On February 12, 2001, ECD signed an agreement with the landlord of the
Bekaert ECD Solar Systems' 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 under this guaranty is reduced by 50% of monthly rental installments
paid, and was $2,141,000 as of September 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 were 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
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.
35
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Commitments (Continued)
- --------------------------------
Bekaert ECD Solar Systems/United Solar will require additional funding
in order to cover operating expenses, including ramp-up of production and
implementation of marketing programs, and for working capital purposes,
including an estimated $40,000,000 through the year ending September 30, 2003.
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 loans 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.
During the period from October 1, 2002 through November 14, 2002, ECD and
Bekaert have provided bridge loans to Bekaert ECD Solar Systems of $1,124,000
and $2,077,000, respectively.
36
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
The following discussion should be read in conjunction with the
accompanying Quarterly Financial Information and Notes thereto and the Company's
Annual Report on Form 10-K for the year ended June 30, 2002 and is qualified in
its entirety by the foregoing. The results of operations for the three months
ended September 30, 2002 are not necessarily indicative of results to be
expected in future periods.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements
about our financial condition, results of operations, plans, objectives, future
performance and business. In addition, from time to time we and our
representatives have made or may make forward-looking statements orally or in
writing. The words "may," "will," "believes," "expects," "intends,"
"anticipates," "estimates," and similar expressions have been used in this
Quarterly Report to identify forward-looking statements.
We have based these forward-looking statements on our current expectations
with respect to future events and occurrences. Investors are cautioned that our
actual results in the future may differ materially from the expected results
reflected in our forward-looking statements. The expected results reflected in
our forward-looking statements are subject to various significant risks and
uncertainties, including the following:
o 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;
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;
37
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
Quarterly Report. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified in their
entirety by the cautionary statements in this section. Because of these risks,
uncertainties and assumptions, you should not place undue reliance on these
forward-looking statements. We are not obligated to update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended
- --------------------------------------------------------------------
September 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 $3,436,000 on revenues of $15,855,000 in the
three months ended September 30, 2002 compared to a net loss of $2,765,000 on
revenues of $22,459,000 for the three months ended September 30, 2001. The
$671,000 increase in the net loss resulted primarily from an increase of
$2,011,000 in the net cost of product development, an increase of $992,000 in
general and administrative expense (net), a $79,000 reduction in royalty
revenues, a $316,000 reduction in interest income due to lower interest rates
and a $206,000 reduction of other nonoperating income. These increases
contributing to
38
the net loss were partially offset by increased license fees of $150,000 and
a reduction of patent expenses of $440,000. In addition, the Company recognized
income of $2,216,000 attributable to the cumulative effect of a change in
accounting principle (see Note A of Notes to Consolidated Financial Statements).
The loss from operations increased to $6,388,000 in 2002 from $3,897,000
in 2001 because of:
o an operating loss of $2,924,000 in 2002 for the ECD segment (net of
consolidating entries) versus operating loss of $841,000 in 2001,
primarily due to higher investment in product development as the Company
increased spending on its core technologies;
o an increased operating loss of $922,000 for United Solar (operating
loss of $1,972,000 in 2002 versus operating loss of $1,050,000 in 2001)
primarily due to start-up and other costs associated with increasing
production capacity;
o an improved operating loss of $514,000 for Ovonic Battery (operating
loss of $1,492,000 in 2002 versus operating loss of $2,006,000 in 2001)
primarily resulting from a profitable equipment sales contract, lower
costs for litigation, and higher revenues from license agreements,
partially offset by a write-off ($272,000) of an intangible asset
associated with a license agreement.
The decrease in consolidated revenues primarily resulted from a reduction
in product sales of $5,826,000 and a reduction in revenues from product
development agreements of $791,000 and a $79,000 reduction in royalty revenues,
partially offset by increased license and other agreements ($150,000 in 2002
versus zero in 2001).
o The ECD segment's revenues, net of consolidating entries, decreased to
$6,254,000 in 2002 from $7,842,000 in 2001 due to decreased revenues of
$1,002,000 related to the 30MW machine-building contract, which is nearing
completion, and a decrease of $501,000 from product development
agreements, primarily resulting from reduced photovoltaic revenues.
o The $5,171,000 decrease in Ovonic Battery's revenues was primarily due
to lower equipment sales to Rare Earth Ovonic ($3,583,000 in 2002 versus
$8,412,000 in 2001), reduced revenues from product development agreements
($3,206,000 in 2002 versus $3,611,000 in 2001) and a $48,000 reduction in
royalty revenues, partially offset by increased revenues from license and
other agreements ($150,000 in 2002 versus zero in 2001).
o United Solar's 2002 revenues increased to $1,803,000 in 2002 versus
$1,648,000 in 2001 due to higher sales prices for semi-finished products
sold to Bekaert ECD Solar Systems and higher revenues from product
development agreements.
Product sales, consisting of machine building and equipment sales,
photovoltaic products and metal hydride materials, decreased 52% to $5,334,000
in the three months ended September 30, 2002 from $11,160,000 in the three
months ended September 30, 2001. Machine-building and equipment sales revenues
decreased 61% to $3,722,000 in 2002 from $9,553,000 in 2001, primarily due to
Ovonic Battery contracts with Rare Earth Ovonic to
39
provide battery-making equipment, which is nearing completion, ($3,583,000 in
2002 compared to $8,412,000 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 $1,274,000 for 2002 and $1,230,000 for 2001
(see Note D of Notes to Consolidated Financial Statements). Sales of metal
hydride materials were $251,000 in 2002 compared to $202,000 in 2001. The
Company currently has a product sales backlog of $18,471,000, of which
$14,457,000 is expected to be recognized as revenues in Fiscal 2003. (See
Note B of Notes to Consolidated Financial Statements.)
Royalties decreased 13% to $530,000 in the three months ended September
30, 2002 from $609,000 in the three months ended September 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 and unfavorable exchange rates.
Revenues from product development agreements decreased 8% to $9,753,000 in
the three months ended September 30, 2002 from $10,544,000 in the three months
ended September 30, 2001 primarily due to reduced battery activities under
advanced product development agreements with Texaco Ovonic Battery Systems
($2,711,000 for 2002 compared to $3,064,000 in 2001); reduced activity related
to Ovonic Media ($332,000 in 2002 versus $406,000 in 2001); and the completion
of programs with the National Institute of Standards and Technology and the
Department of Energy, which advanced the Company's hydrogen storage and optical
memory technologies (zero in 2002 versus $276,000 in 2001). This decrease was
partially offset by an increase in revenues from Texaco Ovonic Hydrogen Systems
($3,475,000 for 2002 compared to $3,298,000 for 2001) and Texaco Ovonic Fuel
Cell ($2,020,000 for 2002 compared to $1,936,000 for 2001) and increased
product development revenues for United Solar ($457,000 in 2002 compared to
$342,000 in 2001). (See Note B of Notes to Consolidated Financial Statements.)
Revenues from license and other agreements increased to $150,000 in the
three months ended September 30, 2002, from zero in the three months ended
September 30, 2001. The 2002 license fees resulted from licenses to Henan Huanyu
Power Source Co., Ltd., Guangdong Shida Battery Co., Ltd. and TWD Battery Co.,
Ltd. 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 $88,000 in the three
months ended September 30, 2002 from $147,000 in the three months ended
September 30, 2001. This decrease was due to reductions in revenues from Texaco
Ovonic Battery Systems as it now performs services in-house that had previously
been provided by Ovonic Battery.
Cost of product sales decreased by $5,884,000 in the three months ended
September 30, 2002 due to the $5,826,000 decrease in product sales. This
resulted in a profit of $514,000 on product sales in 2002, compared to a profit
of $455,000 in 2001. The increased profit primarily relates to a higher profit
margin on Ovonic Battery's Rare Earth Ovonic contracts, partially offset by
negative margins at United Solar.
40
Revenues from product development agreements currently fund 73% of the
Company's cost of product development. The total cost of product development
increased by $1,220,000 for the three months ended September 30, 2002, as the
Company increased spending on its core technologies. This increase in the total
cost of product development was accompanied by reduced revenues of $791,000,
resulting in an increase of $2,011,000 in net cost of product development.
Three months ended
September 30,
---------------------------
2002 2001
------------ ------------
Cost of revenues from product
development agreements $ 9,502,000 $10,153,000
Product development and research 3,862,000 1,991,000
----------- -----------
Total cost of product development 13,364,000 12,144,000
Revenues from product development
agreements 9,753,000 10,544,000
----------- -----------
Net cost of product development $ 3,611,000 $ 1,600,000
=========== ===========
The expenditures continued the development of the Company's core
technologies in energy storage, energy generation and information technology.
Also, 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. Included in the development costs for the Ovonic(TM)
Cognitive Computer is depreciation related to the new state-of-the-art clean
room and the related equipment. 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 decreased to $908,000 in the three months
ended September 30, 2002 from $1,349,000 in the three months ended September 30,
2001, principally due to lower litigation costs ($239,000 in 2002 versus
$606,000 in 2001) for the protection of the Company's NiMH battery patents and
technology. ChevronTexaco has agreed to share 50% of the litigation expenses
relating to batteries for non-consumer applications beginning in Fiscal 2002.
This reimbursement of $72,000 for the three months ended September 30, 2002 has
been offset against the patent defense costs. 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.
41
The increase in operating, general and administrative expenses (net) from
$2,158,000 in the three months ended September 30, 2001 to $3,150,000 in the
three months ended September 30, 2002 was due primarily to increased spending
($962,000); for computer software upgrades ($350,000), the write-off ($272,000)
of the intangible asset associated with a license agreement and increased costs
of $576,000 at United Solar associated with increased net expense at the Auburn
Hills facility, partially offset by $360,000 in increased allocations of
expenses.
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Three months ended
September 30,
------------------------
2002 2001
---------- ----------
Gross Expenses $6,649,000 $5,414,000
Less - allocations to product development
and research (1,425,000) (682,000)
- allocations to cost of revenues from
product development agreements (2,074,000) (2,457,000)
- amortization of negative goodwill - (117,000)
---------- ----------
Remaining Expenses $3,150,000 $2,158,000
========== ==========
The $396,000 decrease in other income (net) ($736,000 income in 2002
compared to $1,132,000 income in 2001) resulted primarily from lower interest
rates causing lower interest income ($1,040,000 in 2002 compared to $1,357,000
in 2001) on the Company's investments and from higher equity losses attributed
to losses at ITS ($163,000 in 2002 compared to $129,000 in 2001), and at Bekaert
ECD Solar Systems ($701,000 in 2002 compared to $644,000 in 2001).
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 required the
Company to recognize, at the adoption of SFAS 142, the unamortized negative
goodwill of approximately $2,216,000 (a favorable benefit) as the cumulative
effect of a change in accounting principle in 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.
42
Liquidity and Capital Resources
As of September 30, 2002, the Company had consolidated cash, cash
equivalents, short-term investments and accounts and note receivable (including
$20,636,000 of amounts due from related parties) of $141,507,000 (see Note G of
Notes to Consolidated Financial Statements for restrictions), a decrease of
$1,024,000 from June 30, 2002. As of September 30, 2002, the Company had
consolidated working capital of $101,017,000 compared with a consolidated
working capital of $110,310,000 as of June 30, 2002.
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 $42,718,000, 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 September 30, 2002, the Company had $116,728,000 cash, cash
equivalents and short-term investments consisting of commercial paper,
classified as available for sale, maturing from 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 September 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 three months ended September 30, 2002, $7,870,000 of cash was
provided by operations. The difference between the net loss of $3,436,000 and
the net cash provided by operations was principally due to a $12,315,000
increase in working capital (other than cash). Also contributing were non-cash
costs (principally depreciation ($689,000) and equity losses in joint ventures
($864,000)). In addition, $4,229,000 of machinery and equipment was purchased,
principally for ECD's state-of-the-art clean room ($1,454,000) and for United
Solar's expansion ($2,564,000).
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.
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.
43
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 $2,711,000 for work
performed under the contract in the three months ended September 30,
2002 and is budgeted to receive approximately $13 million in Fiscal
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 $33,874,000 for work performed
under the contract, $3,475,000 of which was in the three months ended
September 30, 2002, and is budgeted to receive approximately $20
million in Fiscal 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 $19,738,000 for work performed under the contract, of
which $2,020,000 was for work performed under the contract in the three
months ended September 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 funding of the venture's activities, business strategy of the
venture, and the involvement of additional joint venture partners.
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
44
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 G of Notes to Consolidated Financial Statements).
Bekaert ECD Solar Systems/United Solar will require additional funding in
order to cover operating expenses, including ramp-up of production and
implementation of marketing programs, and for working capital purposes,
including an estimated $40,000,000 through the year ending September 30,
2003. 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
loans provided by Bekaert and $16,100,000 by ECD. ECD and Bekaert are
exploring new equity investors and bank financing to meet the joint
ventures' future cash requirements, as well as discussing restructuring of
the joint ventures. ECD may also provide additional bridge loans to the
joint ventures (see Note G of Notes to Consolidated Financial Statements).
During the period from October 1, 2002 through November 14, 2002, ECD and
Bekaert have provided bridge loans to Bekaert ECD Solar Systems of
$1,124,000 and $2,077,000, respectively.
o Ovonic Media, LLC - the 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 $332,000
for work performed in the three months ended September 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.
In October 2002, ECD, through a newly formed company, Ovonic Cognitive
Computer, Inc., which is currently owned 95% by ECD and 5% by Ovonyx, made
a $1,000,000 capital contribution to Ovonyx in exchange for an exclusive
license to Ovonic(TM)
45
Cognitive Computer for technology which had previously been contributed
by ECD to Ovonyx.
o ITS Innovative Transportation Systems - a German company formed to
manufacture battery-driven electric, hybrid-electric and fuel cell
electric vehicles. ECD currently owns 26% of ITS and Texaco Ovonic Battery
Systems owns 8%. On July 1, 2002, ECD made a $1,000,000 loan to ITS. ECD
made an additional loan of $1,000,000 to ITS on November 8, 2002.
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 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities and
time deposits. All such instruments are classified as securities available for
sale. We do not invest in portfolio equity securities, or commodities, or use
financial derivatives for trading purposes. Our debt security portfolio
represents funds held temporarily, pending use in our business and operations.
The Company had $116,704,000 and $114,207,000 of these investments on September
30, 2002 and June 30, 2002, respectively. On September 30, 2002, the investments
had an average maturity of 397 days, $77,421,000 of which had maturities of 91
days to 34 months. 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. 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 September 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 September 30, 2002 portfolio of approximately $1,290,000.
46
PART II - OTHER INFORMATION
---------------------------
Item 4. Controls and Procedures
- ------- -----------------------
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-14(c) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective for gathering, analyzing and
disclosing information required to be disclosed in connection with the Company's
filing of its Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002. No significant changes were made in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
A. Exhibits
--------
99.1 Chief Executive Officer's Certification Pursuant to 18 U.S.C.
Section 1350
99.2 Chief Financial Officer's Certification Pursuant to 18 U.S.C.
Section 1350
B. Reports on Form 8-K
-------------------
None
47
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
(Registrant)
By: /s/ Stephan W. Zumsteg
------------------------------------
Stephan W. Zumsteg
Date: November 14, 2002 Vice President and Chief Financial Officer
(Principal financial and accounting officer)
By: /s/ Stanford R. Ovshinsky
------------------------------------
Stanford R. Ovshinsky
Date: November 14, 2002 President and Chief Executive Officer
48
CERTIFICATIONS
I, Stanford R. Ovshinsky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Energy Conversion
Devices, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /S/ Stanford R. Ovshinsky
-------------------------------------
Stanford R. Ovshinsky
President and Chief Executive Officer
49
I, Stephan W. Zumsteg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Energy Conversion
Devices, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /S/ Stephan W. Zumsteg
---------------------------------
Stephan W. Zumsteg
Chief Financial Officer
50