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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 DECEMBER 31, 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.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2956 Waterview Drive, Rochester Hills, Michigan 48309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 293-0440
-----------------------------
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Former name, former address and former Fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X . No .
--- ---
As of February 13, 2003, there were 219,913 shares of ECD's Class A Common
Stock, 430,000 shares of ECD's Class B Common Stock and 21,251,926 shares of
ECD's Common Stock outstanding.
Page 1 of 56 Pages
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------- --------------------
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
REVENUES (NOTES A and B)
Product sales $ 3,243,546 $ 8,715,512 $ 7,055,404 $ 17,378,870
Product sales to related parties 1,268,843 2,460,484 2,791,174 4,956,778
------------ ------------ ------------ -------------
Total product sales 4,512,389 11,175,996 9,846,578 22,335,648
Royalties 369,657 411,268 893,675 1,013,495
Royalties - related parties - 4,368 5,659 10,985
------------ ------------ ------------ -------------
Total royalties 369,657 415,636 899,334 1,024,480
Revenues from product development agreements 1,895,468 1,963,884 3,033,756 3,738,415
Revenues from product development agreements
with related parties 8,330,670 13,036,736 16,945,049 21,805,736
------------ ------------ ------------ -------------
Total revenues from product development
agreements 10,226,138 15,000,620 19,978,805 25,544,151
Revenues from license and other agreements 3,269,114 - 3,419,114 -
Other 34,168 27,251 69,647 71,541
Other revenues from related parties 66,310 125,395 118,958 227,657
------------ ------------ ------------ -------------
Total other revenues 100,478 152,646 188,605 299,198
------------ ------------ ------------ -------------
TOTAL REVENUES 18,477,776 26,744,898 34,332,436 49,203,477
------------ ------------ ------------ -------------
EXPENSES (NOTE A)
Cost of product sales 5,475,255 10,470,201 10,295,590 21,174,658
Cost of revenues from product development agreements 9,380,534 14,759,142 18,882,763 24,912,376
Product development and research 4,718,173 2,694,683 8,580,450 4,685,528
Patent defense (net) 668,914 1,345,674 908,299 1,951,175
Patents 504,246 366,086 1,173,358 1,109,236
Operating, general and administrative (net) 1,766,215 2,110,976 4,915,876 4,269,122
------------ ------------ ------------ -------------
TOTAL EXPENSES 22,513,337 31,746,762 44,756,336 58,102,095
------------ ------------ ------------ -------------
LOSS FROM OPERATIONS (4,035,561) (5,001,864) (10,423,900) (8,898,618)
OTHER INCOME (EXPENSE)
Interest income 1,050,237 1,369,287 2,090,435 2,725,844
Interest expense (122,338) (154,885) (249,610) (309,459)
Equity loss in joint ventures (2,870,380) (1,038,453) (3,733,935) (1,811,472)
Minority interest share of losses 212,053 417,447 755,079 770,944
Other nonoperating income (net) (13,408) 91,284 130,515 440,959
------------ ------------ ------------ -------------
TOTAL OTHER INCOME (EXPENSE) (1,743,836) 684,680 (1,007,516) 1,816,816
------------ ------------ ------------ -------------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (5,779,397) (4,317,184) (11,431,416) (7,081,802)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NOTE A) - - 2,215,560 -
------------ ------------ ------------ -------------
NET LOSS $ (5,779,397) $ (4,317,184) $ (9,215,856) $ (7,081,802)
============ ============ ============ =============
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NOTE E) $ (.26) $ (.20) $ (.52) $ (.33)
BASIC NET LOSS PER SHARE FOR CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NOTE E) - - .10 -
------------ ------------ ------------ -------------
BASIC NET LOSS PER SHARE $ (.26) $ (.20) $ (.42) $ (.33)
============ ============ ============ =============
DILUTED NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NOTE E) $ (.26) $ (.20) $ (.52) $ (.33)
DILUTED NET LOSS PER SHARE FOR CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NOTE E) - - .10 -
------------ ------------ ------------ -------------
DILUTED NET LOSS PER SHARE (NOTE E) $ (.26) $ (.20) $ (.42) $ (.33)
============ ============ ============ =============
See notes to consolidated financial statements.
2
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
December 31, June 30,
2002 2002
------------ ------------
(Unaudited)
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of $22,600,000 at
December 31, 2002 and $42,210,000 at June 30, 2002 $ 22,959,803 $ 42,221,015
Short-term investments (NOTE G) 84,926,026 71,997,154
Accounts receivable (net of allowance for uncollectible
accounts of approximately $514,000 at December 31,
2002, and $563,000 at June 30, 2002) 4,140,984 7,268,447
Accounts receivable due from related parties 5,810,197 9,935,880
Note receivable due from related party 1,236,428 1,594,275
Inventories 1,688,231 1,163,273
Other 676,195 387,901
------------ ------------
TOTAL CURRENT ASSETS 121,437,864 134,567,945
PROPERTY, PLANT AND EQUIPMENT (NOTE A)
Land and land improvements 267,000 267,000
Buildings and improvements 3,592,706 3,456,088
Machinery and other equipment (including construction
in progress of approximately $871,000 and $694,000
at December 31, 2002 and June 30, 2002, respectively) 31,818,548 26,713,253
Capitalized lease equipment 3,053,295 3,053,295
------------ ------------
38,731,549 33,489,636
Less accumulated depreciation and amortization (23,970,351) (22,551,768)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 14,761,198 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) 11,269,798 10,921,232
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (NOTE D)
Bekaert ECD Solar Systems 25,987,787 27,246,958
Bekaert ECD Europe 47,797 22,835
Texaco Ovonic Fuel Cell Company - -
Texaco Ovonic Hydrogen Systems - -
Texaco Ovonic Battery Systems - -
Ovonyx 719,916 -
Ovonic Media - -
ITS Innovative Transportation Systems 4,923,271 3,285,757
OTHER ASSETS 3,170,060 3,425,999
------------ ------------
TOTAL ASSETS $184,027,691 $192,118,594
============ ============
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31, June 30,
2002 2002
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 17,147,677 $ 18,249,591
Accounts payable and accrued expenses - related parties 578,984 34,218
Salaries, wages and amounts withheld from employees 3,329,807 2,908,213
Deferred revenues under business agreements (NOTE A) 9,243,427 640,019
Deferred revenues - related parties (NOTE A) 4,474,093 6,677,846
Current installments on long-term liabilities 2,487,563 5,261,747
------------ ------------
TOTAL CURRENT LIABILITIES 37,261,551 33,771,634
LONG-TERM LIABILITIES 2,692,736 3,507,537
LONG-TERM NOTES PAYABLE (NOTE A) 11,269,798 10,921,232
NONREFUNDABLE ADVANCE ROYALTIES (NOTE C) 3,527,838 3,627,931
------------ ------------
TOTAL LIABILITIES 54,751,923 51,828,334
NEGATIVE GOODWILL (NOTE D) - 2,215,560
MINORITY INTEREST (NOTE D) 2,064,661 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
December 31, 2002 and 21,248,973 shares at
June 30, 2002 212,491 212,490
Additional paid-in capital 385,004,312 384,952,113
Accumulated deficit (257,409,808) (248,193,952)
Accumulated other comprehensive income 1,266,953 487,950
Unearned Compensation on Class B Convertible
Common Stock (1,869,340) (2,210,140)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 127,211,107 135,254,960
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $184,027,691 $192,118,594
============ ============
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
December 31,
-----------------------------
2002 2001
------------- -------------
OPERATING ACTIVITIES:
Net loss $ (9,215,856) $ (7,081,802)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
License agreement (exchange for debt and
related interest) (3,269,114) -
Depreciation and amortization 1,422,897 1,034,935
Amortization of premium/discount on investments 325,899 -
Equity loss in joint ventures 3,733,935 1,811,472
Profit deferred on sales to Bekaert ECD Solar Systems - 1,751,676
Creditable royalties (100,093) (99,471)
Stock and stock options issued for service rendered 393,000 497,400
Amortization of deferred gain (69,594) (69,582)
Amortization of negative goodwill - (233,216)
Cumulative effect of change in accounting principle (2,215,560) -
Minority interest (755,079) (770,944)
Other 34,830 (4,998)
Changes in working capital:
Accounts receivable 3,127,463 (542,940)
Accounts and note receivable due from related parties 4,483,530 (6,516,819)
Inventories (524,958) (99,664)
Other assets (32,355) (325,472)
Accounts payable and accrued expenses 88,795 5,418,114
Accounts payable and accrued expenses - related parties 544,766 (1,037)
Deferred revenues under business agreements 8,673,002 (22,797)
Deferred revenues - related parties (2,203,753) 715,619
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 4,441,755 (4,539,526)
INVESTING ACTIVITIES:
Purchases of capital equipment (5,304,057) (3,251,367)
Advances to Bekaert ECD Solar Systems (1,857,156) 786,247
Investment in Bekaert ECD Europe - (22,117)
Advances to ITS Innovative Transportation Systems (2,000,000) -
Investment in Ovonyx (1,000,000) -
Purchases of investments (23,520,621) (38,076,055)
Sales of investments 11,044,852 24,165,343
Proceeds from sale of capital equipment 23,000 24,076
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (22,613,982) (16,373,873)
FINANCING ACTIVITIES:
Principal payments under short-term and long-term
debt obligations and capitalized lease obligations (1,088,985) (1,031,532)
Proceeds from sale of stock to ChevronTexaco - 8,893,629
Proceeds from sale of stock upon exercise of stock
options and warrants - 35,621,316
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,088,985) 43,483,413
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (19,261,212) 22,570,014
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,221,015 33,055,399
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,959,803 $ 55,625,413
============ ============
See notes to consolidated financial statements.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
December 31,
-----------------------------
2002 2001
------------- -------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 249,610 $ 309,459
The Company's noncash investing and
financing activities were as follows:
Long-term note receivable - Bekaert ECD Solar Systems 348,566 327,337
Long-term note payable - Canon (348,566) (327,337)
Debt principal exchanged for license - United Solar/Canon 2,500,000 -
Accounts Payable & Accrued Expenses - Accrued interest on
United Solar/Canon debt 769,114 -
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 and six months ended December 31, 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) nickel
metal hydride (NiMH) battery technology; and 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 December
31, 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 and
7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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 Unified Memory(TM) (OUM(TM)) 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 formed to manufacture battery-powered electric vehicles. 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, is valued at zero in the balance sheet.
Intellectual property provides the foundation for the creation of the important
strategic alliances whereby the Company provides intellectual property and
patents and joint venture partners provide cash.
In October 2002, the Company made a capital contribution of $1,000,000 in
Ovonyx in exchange for technology, which had previously been contributed by ECD
to Ovonyx, and an exclusive license through a newly formed company, Ovonic
Cognitive Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx. ECD has
recorded its $1,000,000 investment in Ovonyx and 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. In the three months
and six months ended December 31, 2002, the Company recorded an equity loss of
$280,000 related to its investment in Ovonyx.
While the Company believes, based upon the opinion of legal counsel, that
it has no obligation to fund any losses that its joint ventures incur beyond the
Company's investment, the Company has decided to fund certain of its joint
ventures (see Note D).
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.
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Certain items for the three and six months ended December 31, 2001 have
been reclassified to be consistent with the classification of items in the three
and six months ended December 31, 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 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 June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." The Company implemented
these Statements on July 1, 2002 and recognized 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.
9
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 six months ended December 31, 2002 and
2001 of this change in accounting principle:
Six Months Ended
December 31,
-----------------------------
2002 2001
------------- -------------
Net loss $ (9,215,856) $ (7,081,802)
Deduct:-
Amortization of negative goodwill - (233,216)
Cumulative effect of change
in accounting principle (2,215,560) -
------------ ------------
Net Loss before cumulative effect of
change in accounting principle $(11,431,416) $ (7,315,018)
============ ============
Basic Net Loss Per Share $ (.42) $ (.33)
Amortization of negative goodwill - (.01)
Cumulative effect of change
in accounting principle (.10) -
------------ ------------
Basic Net Loss Per Share before
cumulative effect of change in
accounting principle $ (.52) $ (.34)
============ ============
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement requires that
discontinued operations are measured at the lower of carrying value or fair
value less cost to sell and that future operating losses of discontinued
operations are not recognized until they occur. The Company implemented this
statement on July 1, 2002. On July 1, 2002, in accordance with the provisions of
SFAS 144, the Company assessed for impairment an intangible asset it had on its
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 six months ended December 31,
2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date of an entity's commitment to
an exit plan. The Company implemented this statement on January 1, 2003. The
adoption of this statement did not have a material effect on the Company's
consolidated financial position or results of operation.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This Statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Company currently applies Accounting Principles
Board (APB) 25, "Accounting for Stock Issued to Employees," to its stock-based
compensation grants to employees. Most grants are awarded at the fair market
value on the grant date in accordance with the applicable plan and, as such,
no compensation expense is recorded for these grants. The Company has no
current plans to change to the fair value based method of accounting for
these stock option grants.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.
123 to require prominent disclosure in both annual and interim financial
statements of the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. This requirement is effective
for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002, with early application encouraged.
The Company will implement this disclosure provision in its quarterly report for
the period ending March 31, 2003.
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 amount of compensation cost
of the options is estimated at each reporting date and the expense is amortized
during the period during which the options vest.
There are two executive stock option agreements which contain antidilution
provisions. Options are priced based on the lower of the sales price of the
additional securities sold by the Company or the fair market value of the Common
Stock as of the date of issuance. When the resultant option exercise price is
lower than the fair market value on the grant date, the difference is recorded
as compensation expense.
11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Other Comprehensive Income (Loss)
- ---------------------------------
The Company's total comprehensive loss was as follows:
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net Loss $(5,779,397) $(4,317,184) $(9,215,856) $(7,081,802)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on securities 211,459 (654,151) 779,003 (459,922)
----------- ----------- ----------- -----------
COMPREHENSIVE LOSS $(5,567,938) $(4,971,335) $(8,436,853) $(7,541,724)
=========== =========== =========== ===========
Cash Equivalents
- ----------------
Cash equivalents consist of investments in short-term, highly liquid
securities having a maturity of three months or less from the date of
acquisition.
Short-Term Investments
- ----------------------
The Company has evaluated its investment policies consistent with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
determined that all of its investment securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Stockholders' Equity under the
caption "Accumulated Other Comprehensive Income." The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and accretions are included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in other nonoperating
income (expense). The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
Short-term investments consist of commercial paper maturing in 91 days to
35 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).
12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- --------------------------------------------------
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.
Accounts Receivable
- -------------------
December 31, June 30,
2002 2002
------------ ----------
Long-term contracts accounted for under percentage-
of-completion accounting
Revenues recognized but unbilled
Commercial customers $ - $ 505,857
Amounts billed to customers
Commercial customers 328,616 676,462
---------- ----------
Sub-total 328,616 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 375,361 371,577
Commercial customers 302,285 172,210
---------- ----------
677,646 543,787
Amounts billed
U.S. Government 747,787 1,272,208
Commercial customers 51,020 1,575,020
---------- ----------
798,807 2,847,228
---------- ----------
Sub-total 1,476,453 3,391,015
Amounts unbilled for other than long-term contracts
Commercial customers 2,185,752 2,146,983
Amounts billed for other than long-term contracts
U.S. Government - 370
Commercial customers 664,163 1,110,760
---------- ----------
Sub-total 664,163 1,111,130
Allowance for uncollectible accounts (514,000) (563,000)
---------- ----------
TOTAL $4,140,984 $7,268,447
========== ==========
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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 December 31, 2002 and June 30, 2002. Most U.S.
government contracts remain subject to audit.
Accounts Receivable Due from Related Parties
- --------------------------------------------
December 31, June 30,
2002 2002
------------ ----------
Amounts earned which are billed in the
subsequent month
Bekaert ECD Solar Systems $ - $ 130,000
Ovonic Media 271,394 364,263
Texaco Ovonic Battery Systems 876,474 2,182,575
Texaco Ovonic Fuel Cell 573,105 788,894
Texaco Ovonic Hydrogen Systems 931,575 1,874,463
---------- ----------
Sub-total 2,652,548 5,340,195
Amounts billed
Bekaert ECD Solar Systems 216,250 -
Texaco Ovonic Battery Systems 2,628,238 1,738,990
Texaco Ovonic Fuel Cell - 671,358
Texaco Ovonic Hydrogen Systems - 1,508,948
---------- ----------
Sub-total 2,844,488 3,919,296
Other unbilled
Ovonyx 9,779 21,248
Other billed
ChevronTexaco Technology Ventures 272,463 536,569
Ovonyx 15,162 21,068
Texaco Ovonic Battery Systems 15,757 97,504
---------- ----------
Sub-total 303,382 655,141
---------- ----------
TOTAL $5,810,197 $9,935,880
========== ==========
Inventories
- -----------
Inventories of raw materials, work in process and finished goods for the
manufacture of solar cells, metal hydride materials and battery packs are valued
at the lower of cost (moving average) or market. Cost elements included in
inventory are materials, direct labor and manufacturing overhead. 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:
December 31, June 30,
2002 2002
------------ ----------
Finished products $ 339,049 $ 250,370
Work in process 369,862 478,997
Raw materials 979,320 433,906
---------- ----------
$1,688,231 $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 December 31, 2002 and June 30, 2002 was $2,748,000 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 pay Canon Inc. of Japan $12,000,000
no later than January 1, 2004 in connection with the
15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
acquisition of Canon's interest in United Solar. The obligation of Bekaert ECD
Solar Systems to pay ECD is guaranteed by Bekaert.
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.
The Company estimates product warranty cost liability under its machine-
building and equipment sales contracts based upon its past experience and best
estimate of future warranty claims. The Company has recognized a liability for
these product warranties. The following is a summary of the changes in the
product warranty liability during the six months ended December 31, 2002:
Liability at June 30, 2002 $ 2,489,024
Amounts accrued for as warranty costs
for the period July 1, 2002 through
December 31, 2002 7,981
Warranty claims -
-----------
Liability at December 31, 2002 $ 2,497,005
===========
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.
16
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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
battery-propelled vehicles (Recoupment). The Company does not believe that
royalties received to date for batteries manufactured by its licensees are
subject to Recoupment.
ECD has a royalty trust arrangement whereby ECD is obligated to pay a
trust 25% of optical memory royalties received. In the six months ended December
31, 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.
17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project, based on the relationship of costs
incurred to estimated total project costs. Revenues from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the
agreed-upon fees for product development agreements contemplate reimbursing the
Company for costs considered associated with project activities including
expenses for direct product development and research, patents, operating,
general and administrative expenses and depreciation. Accordingly, expenses
related to product development agreements are recorded as cost of revenues from
product development agreements.
Deferred Revenues
- -----------------
Deferred revenues represent amounts received under business agreements in
excess of amounts recognized as revenues. At December 31, 2002, approximately
$8,941,000 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.
18
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:
Six Months Ended
December 31,
-----------------------------
2002 2001
------------- -------------
Product sales
Machine building and equipment sales $ 6,711,037 $16,664,691
Battery packs 578 258,389
Metal hydride materials 343,789 455,790
----------- -----------
7,055,404 17,378,870
----------- -----------
Product sales-related parties
Photovoltaics 2,361,362 2,698,196
Machine building 304,684 2,102,872
Battery packs 86,363 -
Metal hydride materials 38,765 155,710
----------- -----------
2,791,174 4,956,778
----------- -----------
Total product sales $ 9,846,578 $22,335,648
=========== ===========
Royalties
Battery technology $ 879,380 $ 970,608
Optical memory 14,295 42,887
----------- -----------
893,675 1,013,495
Royalty-related party
Microelectronics 5,659 10,985
----------- -----------
Total royalties $ 899,334 $ 1,024,480
=========== ===========
Revenues from product development agreements
Photovoltaics $ 1,263,353 $ 1,448,566
Battery technology 1,662,604 1,776,579
Optical memory 36,411 172,695
Hydrogen - 308,181
Other 71,388 32,394
----------- -----------
3,033,756 3,738,415
----------- -----------
Revenues from product development
agreements - related parties
Battery technology 5,465,249 8,227,793
Optical memory 604,670 841,737
Hydrogen 6,932,973 8,316,791
Fuel cells 3,942,157 4,419,415
----------- -----------
Total revenues from product development
agreements 16,945,049 21,805,736
----------- -----------
$19,978,805 $25,544,151
=========== ===========
License and other agreements
Battery technology $ 150,000 $ -
Photovoltaics -
3,269,114 -
----------- -----------
Total license and other agreements $ 3,419,114 $ -
=========== ===========
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 (Continued)
- --------------------------------------------
The following table presents revenues by country based on the location of
the customer:
Six Months Ended
December 31,
----------------------------
2002 2001
------------ ------------
United States $ 20,857,648 $ 27,460,818
China 6,574,547 16,678,513
Japan 4,065,593 913,486
Mexico 2,361,362 3,587,513
Other countries 473,286 563,147
------------ ------------
$ 34,332,436 $ 49,203,477
============ ============
NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At December 31, 2002 and June 30, 2002, the Company deferred recognition
of revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
December 31, June 30,
2002 2001
------------ ------------
Battery $ 1,560,902 $ 1,642,822
Optical memory 1,966,936 1,985,109
----------- -----------
$ 3,527,838 $ 3,627,931
=========== ===========
Creditable royalties earned and recognized as revenue were:
Period Ended
December 31,
----------------------------
2002 2001
------------ ------------
Three months ended $ 45,038 $ 47,476
Six months ended $ 100,093 $ 99,471
There are no obligations in connection with any of the advance royalty
agreements which require the Company to incur any additional costs.
20
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.
Effective April 11, 2000, ECD has consolidated United Solar in ECD's
financial statements.
21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 (see
Note A).
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).
Beginning October 1, 2002, it was estimated that Bekaert ECD Solar
Systems/United Solar would 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 for the twelve months 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. Bekaert has advised the Company that Bekaert, in order to focus on their
core businesses, will not provide any additional funds to Bekaert ECD Solar
Systems/United Solar beyond the $12,200,000 bridge loans which, together with
ECD's bridge loans, are expected to fund operations through March 31, 2003. ECD
is in discussions with potential new equity investors to meet the joint
ventures' future cash requirements, as well as discussing restructuring of the
joint ventures. ECD is prepared, under the appropriate terms, to provide 100% of
Bekaert ECD Solar Systems/United Solar's funding requirements after March 31,
2003 until new equity investors who will advance our unique, proprietary
thin-film technology represented by our new 30MW manufacturing facility are
brought into the joint ventures. Historically, as a consequence of ECD's
81% ownership of United Solar and United Solar's 40% membership interest in
Bekaert ECD Solar Systems, the Company's financial results have included
approximately 50% of the combined operating losses of these entities.
The Company will reflect up to 100% of the operating losses when it funds 100%
of the cash requirements until new equity investors are brought into the
joint venture (see Note H).
During the period from October 1, 2002 through December 31, 2002, ECD and
Bekaert have provided bridge loans to Bekaert ECD Solar Systems of $2,247,000
and $4,153,000, respectively. During the period from January 1, 2003 through
February 14, 2003, ECD and Bekaert have provided additional bridge loans to
Bekaert ECD Solar Systems of $737,000 and
22
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
$3,309,000, respectively. ECD has provided additional bridge loans of
$1,141,000 to United Solar.
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 Six Months Ended
December 31, December 31,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 4,732,721 $ 4,956,673 $ 8,337,443 $ 8,966,488
Operating Expenses:
Cost of Sales 5,005,428 5,805,410 9,220,312 10,303,913
General and Administrative 3,462,394 2,271,850 5,870,599 3,562,247
----------- ----------- ----------- -----------
Total Expenses 8,467,822 8,077,260 15,090,911 13,866,160
Other Expense (33,925) (772,322) (193,007) (915,531)
----------- ----------- ----------- -----------
Net Loss $(3,769,026) $(3,892,909) $(6,946,475) $(5,815,203)
=========== =========== =========== ===========
BEKAERT ECD SOLAR SYSTEMS LLC
BALANCE SHEETS
--------------
December 31, June 30,
2002 2002
------------ ------------
(Unaudited) (Unaudited)
Current Assets:
Cash and Cash Equivalents $ 729,530 $ 6,569,025
Inventory 7,039,188 7,528,767
Other Current Assets 9,487,546 6,636,430
------------ ------------
Total Current Assets 17,256,264 20,734,222
Property, Plant and Equipment (Net) 83,910,525 81,954,953
Other Assets 38,242,253 38,674,995
------------- ------------
Total Assets $139,409,042 $141,364,170
============ ============
Current Liabilities:
Accounts Payable and Other Current
Liabilities $ 25,984,234 $ 19,374,416
------------ -----------
Total Current Liabilities 25,984,234 19,374,416
Note Payable - ECD 11,269,798 10,921,232
Long-Term Capitalized Lease 59,860,591 61,525,996
------------ ------------
Total Liabilities 97,114,623 91,821,644
Members' Equity 42,294,419 49,542,526
------------ ------------
Total Liabilities and Members' Equity $139,409,042 $141,364,170
============ ============
23
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
Texaco Ovonic Battery Systems
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
$2,754,000 and $5,465,000, respectively, for the three months and six months
ended December 31, 2002 and $5,099,000 and $8,228,000, respectively for the
three months and six months ended December 31, 2001 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 $16,000 and $39,000, respectively, for the
three months and six months ended December 31, 2002 and $30,000 and $156,000,
respectively, for the three months and six months ended December 31, 2001 for
products sold to this joint venture.
There are no financial statements currently available for Texaco Ovonic
Battery Systems. Texaco Ovonic Battery Systems is expanding its production
capacity with a new facility in Springboro, Ohio, but 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 Unified Memory(TM). 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 October 2002, the Company made a capital contribution of $1,000,000 in
Ovonyx in exchange for technology, which had previously been contributed by ECD
to Ovonyx, and an exclusive, royalty-bearing license through a newly formed
company, Ovonic Cognitive Computer, Inc., which is owned 95% by ECD and 5% by
Ovonyx. ECD has recorded its $1,000,000 investment in Ovonyx and 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
24
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
investment. In the three months and six months ended December 31, 2002, the
Company recorded an equity loss of $280,000 related to its investment in Ovonyx.
ECD recorded revenues from Ovonyx of $41,000 and $86,000, respectively,
for the three months and six months ended December 31, 2002 and $124,000 and
$225,000, respectively, for the three months and six months ended December 31,
2001, 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 Six Months Ended
December 31, December 31,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues
Other Income $ 515 $ 1,587 $ 646 $ 3,020
Expenses
Product Development - Paid
or Payable to ECD 1,751,528 2,133,450 3,666,692 3,645,226
Product Development - Paid
or Payable to ChevronTexaco (2,110) 278,460 (2,110) 616,696
Depreciation Expense 176,770 118,973 329,840 193,557
----------- ----------- ----------- -----------
Total Expenses 1,926,188 2,530,883 3,994,422 4,455,479
----------- ----------- ----------- -----------
Net Loss $(1,925,673) $(2,529,296) $(3,993,776) $(4,452,459)
=========== =========== =========== ===========
25
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
--------------
December 31, June 30,
2002 2002
------------ ------------
(Unaudited) (Audited)
Current Assets:
Cash and Cash Equivalents $ 675,863 $ 89,318
----------- -----------
Total Current Assets 675,863 89,318
Fixed Assets:
Leasehold Improvements 1,460,386 1,454,716
Machinery and Other Equipment 1,685,640 1,557,339
Construction in Progress 209,750 78,959
----------- -----------
Total Fixed Assets 3,355,776 3,091,014
Less Accumulated Depreciation (894,901) (566,403)
----------- -----------
Net Fixed Assets 2,460,875 2,524,611
----------- -----------
Total Assets $ 3,136,738 $ 2,613,929
=========== ===========
Current Liabilities:
Amount Due ECD, Net $ 538,564 $ 1,428,117
Amount Due ChevronTexaco - 91,752
----------- -----------
Total Current Liabilities 538,564 1,519,869
Members' Equity:
Capital Contributions 23,147,890 17,650,000
Cumulative Deficit (20,549,716) (16,555,940)
----------- -----------
Total Members' Equity 2,598,174 1,094,060
----------- -----------
Total Liabilities and Members' Equity $ 3,136,738 $ 2,613,929
=========== ===========
During the three months and six months ended December 31, 2002, the
Company recorded revenues of $1,922,000 and $3,942,000, respectively, and during
the three months and six months ended December 31, 2001, the Company recorded
revenues of $2,483,000 and $4,419,000, 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. While Texaco Ovonic Fuel Cell has successfully
demonstrated the concept of the Ovonic(TM) regenerative fuel cell and received a
patent covering its Ovonic(TM) Instant Startup Fuel Cell, certain milestones
have not been materially satisfied and ChevronTexaco advised the Company that it
does not have funds in its budget to fund the venture's activities after
December 31, 2002. The Company and ChevronTexaco are currently in discussions
regarding the venture's operations and its business strategy to involve
additional joint venture partners to fund and expand the venture's operations.
In the interim, the Company plans, under acceptable terms, to fund the
venture (see Note H).
26
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 Six Months Ended
December 31, December 31,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues
Other Income $ 1,944 $ 4,186 $ 2,075 $ 5,658
Expenses
Product Development - Paid
or Payable to ECD 3,148,048 3,091,951 6,238,408 5,896,140
Product Development - Paid
or Payable to ChevronTexaco 448,518 727,905 774,876 1,153,633
Depreciation Expense 355,040 114,854 684,610 201,980
----------- ----------- ----------- -----------
Total Expenses 3,951,606 3,934,710 7,697,894 7,251,753
----------- ----------- ----------- -----------
Net Loss $(3,949,662) $(3,930,524) $(7,695,819) $(7,246,095)
=========== =========== =========== ===========
27
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
--------------
December 31, June 30,
2002 2002
------------ ------------
(Unaudited) (Audited)
Current Assets:
Cash and Cash Equivalents $ 4,693,135 $ 134,823
Accounts Receivable 122,746 10,746
----------- -----------
Total Current Assets 4,815,881 145,569
Fixed Assets:
Leasehold Improvements 3,290,823 3,226,570
Machinery and Other Equipment 2,861,172 2,543,163
Construction in Progress 2,932,126 2,736,571
----------- -----------
Total Fixed Assets 9,084,121 8,506,304
Less Accumulated Depreciation (1,350,654) (666,044)
----------- -----------
Net Fixed Assets 7,733,467 7,840,260
----------- -----------
Total Assets $12,549,348 $ 7,985,829
=========== ===========
Current Liabilities:
Amount Due ECD, Net $ 883,339 $ 3,335,178
Amount Due ChevronTexaco 304,616 376,439
Deferred Revenue 127,257 15,257
----------- -----------
Total Current Liabilities 1,315,212 3,726,874
Members' Equity:
Capital Contributions 43,698,000 29,027,000
Cumulative Deficit (32,463,864) (24,768,045)
----------- -----------
Total Members' Equity 11,234,136 4,258,955
----------- -----------
Total Liabilities and Members' Equity $12,549,348 $ 7,985,829
=========== ===========
During the three months and six months ended December 31, 2002, the
Company recorded revenues of $3,270,000 and $6,744,000, respectively, and during
the three months and six months ended December 31, 2001, the Company recorded
revenues of $4,998,000 and $8,296,000, respectively, for services provided to
this joint venture.
ITS Innovative Transportation Systems
ITS Innovative Transportation Systems, a German company formed to
manufacture battery-powered 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
28
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
interest increased to 11.7% as a result of an additional investment of $400,000
on June 19, 2000. On October 3, 2000, ECD invested an additional amount of
$909,000 in ITS, increasing its ownership interest to 19%. On March 8, 2001, ECD
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%. ECD made an advance of $1,000,000 to ITS on July 1, 2002, followed by an
additional advance 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 has made
cash and other contributions to the joint venture.
For the three months and six months ended December 31, 2002, the Company
had revenues of $272,000 and $605,000, respectively, and for the three months
and six months ended December 31, 2001, the Company had revenues of $436,000 and
$842,000, respectively, from Ovonic Media for services provided to this joint
venture for advanced product development work. Ovonic Media has successfully met
its various milestones. GE is evaluating the current market situation to
determine next steps and has informed the Company that additional funding after
January 3, 2003 is suspended. GE and ECD are in discussions as to how to
position the joint venture in order to meet the needs of the marketplace and to
expand the joint venture's operations, including the possibility of new equity
investors and strategic partners to fund the joint venture's operations. In the
interim, ECD will fund the joint venture, under acceptable terms, until GE
resumes funding, or until new partners who will provide funding, marketing and
distribution are brought into the venture. The other activities of the
strategic alliance are continuing on schedule (see Note H).
The following sets forth certain financial data regarding Ovonic Media
that are derived from Ovonic Media's financial statements:
29
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
OVONIC MEDIA, LLC
STATEMENTS OF OPERATIONS
------------------------
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ - $ - $ - $ -
Operating Expenses
Product Development 183,491 368,922 440,670 659,291
General and Administrative 75,000 75,000 150,000 150,000
Depreciation Expense 30,657 104,501 61,315 120,379
--------- --------- ---------- --------
Total Expenses 289,148 548,423 651,985 929,670
--------- --------- ---------- --------
Net Loss $(289,148) $(548,423) $(651,985) $(929,670)
========= ========= ========= ==========
OVONIC MEDIA, LLC
BALANCE SHEETS
--------------
December 31, June 30,
2002 2002
------------ ------------
(Unaudited) (Unaudited)
Property, Plant and Equipment (Net) $ 412,926 $ 460,241
---------- ----------
Total Assets $ 412,926 $ 460,241
========== ==========
Current Liabilities:
Accounts Payable to ECD $ 271,394 $ 364,263
---------- ----------
Total Current Liabilities 271,394 364,263
Members' Equity:
Capital Contributions 5,353,881 4,656,342
Cumulative Deficit (5,212,349) (4,560,364)
---------- ----------
Total Members' Equity 141,532 95,978
---------- ----------
Total Liabilities and Members' Equity $ 412,926 $ 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
30
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
storage alloy powders, advanced Ovonic(TM) nickel hydroxide materials and
production equipment, all for battery applications for NiMH batteries. As of
December 31, 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.
In the first phase of the project, 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 December 31, 2002, Ovonic Battery has received
payments totaling $58,605,000 under the three contracts.
The Company recorded revenues from Rare Earth Ovonic of $2,922,000 and
$6,505,000 for the three months and six months ended December 31, 2002,
respectively, and $8,252,000 and $16,664,000 for the three months and six months
ended December 31, 2001, respectively.
Sovlux and Sovlux Battery
In 1990, ECD formed Sovlux, a joint venture to manufacture the Company's
photovoltaic products in the countries of the former Soviet Union. Sovlux is
owned 50% by ECD and 50% by the State Research and Production Enterprise Kvant
and enterprises of the Russian Ministry of Atomic Energy (Minatom).
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.
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. Both ventures are in the
pre-production phase and will not commence production until funding is secured
for volume production. Due to economic conditions in Russia, it is uncertain
when financing will be available.
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.
31
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Net Loss Per Share (Continued)
- ---------------------------------------
Weighted average number of shares outstanding and basic and diluted earnings
per share for the three months and six months ended December 31 are computed as
follows:
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Weighted average number of shares outstanding 21,898,995 21,884,850 21,898,945 21,428,864
Net loss before cumulative effect of change
in accounting principle $(5,779,397) $(4,317,184) $(11,431,416) $(7,081,802)
Cumulative effect of change in accounting
principle - - 2,215,560 -
Net loss $(5,779,397) $(4,317,184) $ (9,215,856) $(7,081,802)
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE $ (.26) $ (.20) $ (.52) $ (.33)
=========== =========== ============ ===========
BASIC NET LOSS PER SHARE $ (.26) $ (.20) $ (.42) $ (.33)
=========== =========== ============ ===========
Weighted average number of shares outstanding 21,898,995 21,884,850 21,898,945 21,428,864
Weighted average shares for dilutive securities - - - -
Average number of shares outstanding and
potential dilutive shares 21,898,995 21,884,850 21,898,945 21,428,864
Net loss before cumulative effect of change
in accounting principle $(5,779,397) $(4,317,184) $(11,431,416) $(7,081,802)
Cumulative effect of change in accounting
principle - - 2,215,560 -
Net loss $(5,779,397) $(4,317,184) $ (9,215,856) $(7,081,802)
DILUTED NET LOSS PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE $ (.26) $ (.20) $ (.52) $ (.33)
=========== =========== ============ ===========
DILUTED NET LOSS PER SHARE $ (.26) $ (.20) $ (.42) $ (.33)
=========== =========== ============ ===========
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 5,491 and 37,029, 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
2,873,311 and 2,247,726 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.
32
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)
Consolidating
ECD Ovonic Battery United Solar Entries Consolidated
--------- -------------- ------------ ------------- ------------
Revenues
Three months ended
December 31, 2002 $ 7,236 $ 7,337 $ 4,886 $ (981) $ 18,478
December 31, 2001 19,936 15,544 1,631 (10,367) 26,744
Six months ended
December 31, 2002 $ 13,816 $15,135 $ 6,688 $ (1,307) $ 34,332
December 31, 2001 39,747 28,513 3,279 (22,336) 49,203
Interest Income
Three months ended
December 31, 2002 $ 1,028 $ - $ 22 $ - $ 1,050
December 31, 2001 1,292 - 77 - 1,369
Six months ended
December 31, 2002 $ 2,045 $ - $ 45 $ - $ 2,090
December 31, 2001 2,571 - 155 - 2,726
Interest Expense*
Three months ended
December 31, 2002 $ - $ 24 $ 99 $ - $ 123
December 31, 2001 - 30 124 - 154
Six months ended
December 31, 2002 $ - $ 53 $ 197 $ - $ 250
December 31, 2001 - 65 244 - 309
Operating Income (Loss)
Three months ended
December 31, 2002 $ (5,217) $(1,498) $ 1,462 $ 1,217 $ (4,036)
December 31, 2001 (1,399) (2,142) (1,144) (317) (5,002)
- ------------
* Excludes intercompany interest.
33
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Business Segments (Continued)
- --------------------------------------
Consolidating
ECD Ovonic Battery United Solar Entries Consolidated
--------- -------------- ------------ ------------- ------------
Six months ended
December 31, 2002 $(11,065) $(2,990) $ (510) $ 4,141 $(10,424)
December 31, 2001 (1,857) (4,148) (2,194) (700) (8,899)
Equity in Net Loss of Investees
Under Equity Method
Three months ended
December 31, 2002 $ (480) $ - $(2,547) $ 157 $ (2,870)
December 31, 2001 (125) - (1,038) 125 (1,038)
Six months ended
December 31, 2002 $ (642) $ - $(3,404) $ 312 $ (3,734)
December 31, 2001 (254) - (1,807) 250 (1,811)
Depreciation Expense
Six months ended
December 31, 2002 $ 800 $ 570 $ 849 $ (796) $ 1,423
December 31, 2001 411 573 870 (819) 1,035
Capital Expenditures
Six months ended
December 31, 2002 $ 4,955 $ 316 $ 33 $ - $ 5,304
December 31, 2001 3,017 116 118 - 3,251
Investments and Advances
in Equity Method Investees
December 31, 2002 $ 5,643 $ - $26,036 $ - $ 31,679
December 31, 2001 3,746 - 20,289 - 24,035
Identifiable Assets
December 31, 2002 $166,071 $ 9,632 $20,891 $(12,566) $184,028
December 31, 2001 172,552 27,032 35,909 (28,259) 207,234
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 $1,995,000 as of December 31, 2002. Bekaert also has guaranteed
this rent obligation to the same extent as ECD.
34
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Commitments (Continued)
- --------------------------------
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.
Beginning October 1, 2002, it was estimated that Bekaert ECD Solar
Systems/United Solar would 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.
Bekaert has advised the Company that Bekaert, in order to focus on their core
businesses, will not provide any additional funds to Bekaert ECD Solar
Systems/United Solar beyond the $12,200,000 bridge loans which, together with
ECD's bridge loans, are expected to fund operations through March 31, 2003. ECD
is in discussions with potential new equity investors who will advance our
unique, proprietary thin-film technology represented by our new 30MW
manufacturing facility to meet the joint ventures' future cash requirements, as
well as discussing restructuring of the joint ventures. ECD is prepared, under
the appropriate terms, to provide 100% of Bekaert ECD Solar Systems/United
Solar's funding requirements after March 31, 2003 until new equity investors
are brought into the joint ventures. Historically, as a consequence of ECD's
81% ownership of United Solar and United Solar's 40% membership interest in
Bekaert ECD Solar Systems, the Company's financial results have included
approximately 50% of the combined operating losses of these entities. The
Company will reflect up to 100% of the operating losses when it funds 100% of
the cash requirements until new equity investors are brought into the joint
venture (see Note H).
During the period from October 1, 2002 through December 31, 2002, ECD and
Bekaert have provided bridge loans to Bekaert ECD Solar Systems of $2,247,000
and $4,153,000, respectively. During the period from January 1, 2003 through
February 14, 2003, ECD and Bekaert have provided additional bridge loans to
Bekaert ECD Solar Systems of $737,000 and $3,309,000, respectively. ECD has
provided additional bridge loans of $1,141,000 to United Solar.
35
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Subsequent Events
- --------------------------
Subsequent to December 31, 2002, the Company was notified of the following
information concerning certain of its joint ventures:
o Bekaert ECD Solar Systems/United Solar - Bekaert has advised the
Company that Bekaert, in order to focus on its core businesses, will not
provide any additional funds to Bekaert ECD Solar Systems/United Solar
beyond the $12,200,000 bridge loans which, together with ECD's bridge
loans, are expected to fund operations through March 31, 2003. ECD is in
discussions with potential new equity investors who will advance our
unique, proprietary thin-film technology represented by our new 30MW
manufacturing facility to meet the joint ventures' future cash
requirements, as well as discussing restructuring of the joint ventures.
ECD is prepared under the appropriate terms to provide 100% of Bekaert
ECD Solar Systems/United Solar's funding requirements after March 31,
2003 until new equity investors are brought into the joint ventures (see
Note G). Historically, as a consequence of ECD's 81% ownership of United
Solar and United Solar's 40% membership interest in Bekaert ECD Solar
Systems, the Company's financial results have included approximately 50%
of the combined operating losses of these entities. The Company will
reflect up to 100% of the operating losses when it funds 100% of the cash
requirements until new equity investors are brought into the joint
venture.
o Texaco Ovonic Fuel Cell Company LLC - While Texaco Ovonic Fuel Cell
has successfully demonstrated the concept of the Ovonic(TM)regenerative
fuel cell and received a patent covering its Ovonic(TM)Instant Startup
Fuel Cell, certain milestones have not been materially satisfied and
ChevronTexaco advised the Company that it does not have funds in its
budget to fund the venture's activities after December 31, 2002. The
Company and ChevronTexaco are currently in discussions regarding the
the venture's operations and its business strategy to involve additional
joint venture partners to fund and expand the venture's operations. In
the interim, the Company plans, under acceptable terms, to fund the
venture.
o Ovonic Media has successfully met its various milestones. GE is
evaluating the current market situation to determine next steps and has
informed the Company that additional funding after January 3, 2003 is
suspended. GE and ECD are in discussions as to how to position the joint
venture in order to meet the needs of the marketplace and to expand the
joint venture's operations, including the possibility of new equity
investors and strategic partners to fund the joint venture's operations.
In the interim, ECD will fund the joint venture, under acceptable terms,
until GE resumes funding, or until new partners who will provide funding,
marketing and distribution are brought into the venture. The other
activities of the strategic alliance are continuing on schedule.
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
and six months ended December 31, 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 joint venture partners and licensees may be unwilling or unable
to devote their financial resources and manufacturing and marketing
capabilities to commercialize products based on our technologies;
o we 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;
37
o we may experience performance problems with key suppliers or
subcontractors;
o adverse changes may occur in general economic conditions or in
political or competitive forces affecting our business;
o competition may increase in our industry or markets;
o our government product development or research contracts may be
terminated by unilateral government action or we may be unsuccessful in
obtaining new government contracts to replace those which have been
terminated or completed;
o we may become subject to legal or regulatory proceedings which may
reach unfavorable resolutions;
o there may be adverse changes in the securities markets which affect
the price of our stock; or
o we may suffer the loss of key personnel or may be unable to attract
and retain qualified personnel to maintain and expand our business.
There is also the risk that we incorrectly analyze these risks or that
strategies we develop to address them are unsuccessful.
These forward-looking statements speak only as of the date of this
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 December 31, 2002 Compared to Three Months Ended
- -------------------------------------------------------------------
December 31, 2001
- -----------------
The Company has continued to invest to further advance its technologies.
These investments in its technologies have led to strategic alliances with major
companies, including ChevronTexaco, 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 $5,779,000 on revenues of $18,478,000 in the
three months ended December 31, 2002 compared to a net loss of $4,317,000 on
revenues of $26,745,000 for the three months ended December 31, 2001. The
Company had a $3,269,000 increase in license fees, a $539,000 reduction in
patent expense and a decrease of $345,000
38
in general and administrative expense (net) that were more than offset by a
$1,832,000 increase in equity loss in joint ventures, a decrease in margins on
product sales of $1,669,000, an increase of $1,420,000 in the net cost of
product development, a $319,000 reduction in interest income due to lower
interest rates and a $105,000 reduction of other nonoperating income.
The loss from operations decreased to $4,036,000 in 2002 from $5,002,000
in 2001 because of:
o an operating loss of $4,000,000 in 2002 for the ECD segment (net of
consolidating entries) versus operating loss of $1,716,000 in 2001,
primarily due to higher investment in product development as the Company
increased spending on its core technologies and higher costs related to
the 30MW machine-building contract;
o an improved operating result of $2,606,000 for United Solar (operating
income of $1,462,000 in 2002 versus operating loss of $1,144,000 in 2001)
primarily due to a $3,269,000 license fee;
o a decreased operating loss of $644,000 for Ovonic Battery (operating
loss of $1,498,000 in 2002 versus operating loss of $2,142,000 in 2001)
primarily resulting from a profitable equipment sales contract to Rare
Earth Ovonic in China and lower costs for litigation.
The decrease in consolidated revenues primarily resulted from a reduction
in product sales of $6,664,000 and a reduction in revenues from product
development agreements of $4,775,000, partially offset by increased license and
other agreements ($3,269,000 in 2002 versus zero in 2001).
o The ECD segment's revenues, net of consolidating entries, decreased to
$6,255,000 in 2002 from $9,569,000 in 2001 due to decreased revenues of
$797,000 related to the 30MW machine-building contract, which is nearing
completion, and a decrease of $2,692,000 from product development
agreements, primarily resulting from reduced revenues related to product
development contracts with Texaco Ovonic Hydrogen Systems and Texaco
Ovonic Fuel Cell.
o The $8,207,000 decrease in Ovonic Battery's revenues was primarily due
to lower equipment sales to Rare Earth Ovonic ($2,922,000 in 2002 versus
$8,252,000 in 2001) as the first phase of that project nears completion
and reduced revenues from product development agreements ($3,922,000 in
2002 versus $6,394,000 in 2001), primarily resulting from reduced revenues
related to product development contracts from Texaco Ovonic Battery
Systems and General Motors.
o United Solar's 2002 revenues increased to $4,886,000 in 2002 versus
$1,631,000 in 2001 due to the license fee described above.
Product sales, consisting of machine building and equipment sales,
photovoltaic products and metal hydride materials, decreased 60% to $4,512,000
in the three months ended December 31, 2002 from $11,176,000 in the three months
ended December 31, 2001. Machine-building and equipment sales revenues decreased
64% to $3,293,000 in 2002 from
39
$9,214,000 in 2001, primarily due to Ovonic Battery contracts with Rare Earth
Ovonic to provide battery-making equipment, the first phase of which is nearing
completion, ($2,922,000 in 2002 compared to $8,252,000 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 $1,088,000 for the
three months ended December 31, 2002 and $1,469,000 for the three months ended
December 31, 2001 (see Note D of Notes to Consolidated Financial Statements).
Sales of metal hydride materials were $131,000 in 2002 compared to $409,000 in
2001. The Company currently has a product sales backlog of $15,175,000, of
which $11,161,000 is expected to be recognized as revenues in Fiscal 2003.
(See Note B of Notes to Consolidated Financial Statements.)
Royalties decreased 11% to $370,000 in the three months ended December 31,
2002 from $416,000 in the three months ended December 31, 2001. Royalties
related to batteries for propulsion applications increased in the current
quarter, but were more than offset by lower royalties for consumer applications
reflecting increased production efficiencies of the Company's licensees and a
small reduction in the number of batteries sold by the Company's licensees.
Revenues from product development agreements decreased 32% to $10,226,000
in the three months ended December 31, 2002 from $15,001,000 in the three months
ended December 31, 2001 primarily due to lower revenues under advanced product
development agreements with Texaco Ovonic Battery Systems ($2,754,000 for 2002
compared to $5,099,000 in 2001); from Texaco Ovonic Hydrogen Systems ($3,270,000
for 2002 compared to $4,998,000 for 2001), Texaco Ovonic Fuel Cell ($1,922,000
for 2002 compared to $2,483,000 for 2001) and General Motors (zero for 2002
versus $780,000 for 2001); reduced activity related to Ovonic Media ($272,000 in
2002 versus $435,000 in 2001); and the completion of programs with the National
Institute of Standards and Technology (NIST) and the DOE, which advanced the
Company's hydrogen storage and optical memory technologies (zero in 2002 versus
$205,000 in 2001). Increased product development revenues for United Solar
($515,000 in 2002 compared to $126,000 in 2001) partially offset the decreases.
(See Note B of Notes to Consolidated Financial Statements.)
Revenues from license and other agreements increased to $3,269,000 in the
three months ended December 31, 2002, from zero in the three months ended
December 31, 2001. In December 2002, United Solar issued to Canon Inc. a notice
whereby United Solar granted Canon rights to manufacture in two countries of
their choice in Southeast Asia, excluding India and the People's Republic of
China. This notice was issued in satisfaction of the outstanding obligation
($2,500,000 plus accrued interest of $769,000) due Canon in connection with a
previous loan made to United Solar by Canon. United Solar recorded the
satisfaction of the loan from Canon ($3,269,000) as revenue from license
agreements in its statement of operations for the three months ended December
31, 2002. Revenues from license and other agreements depend on a small number of
new business arrangements, are sporadic and vary dramatically from period to
period.
40
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 $101,000 in the three
months ended December 31, 2002 from $152,000 in the three months ended December
31, 2001. This decrease was due to reductions in revenues from Ovonyx.
Cost of product sales decreased by $4,995,000 in the three months ended
December 31, 2002 due to the $6,664,000 decrease in product sales. This resulted
in a loss of $963,000 on product sales in 2002. The decreased profit primarily
relates to a loss on a machine-building contract, lower sales related to the
profitable equipment sales to Rare Earth Ovonic and negative margins at United
Solar.
Revenues from product development agreements currently fund 73% (compared
to 86% in the same quarter in 2001) of the Company's cost of product
development. The total cost of product development decreased by $3,355,000 for
the three months ended December 31, 2002. Some product development expenses were
shifted from funded programs to self-funded programs and were accompanied by
reduced revenues of $4,775,000, resulting in an increase of $1,420,000 in net
cost of product development.
Three Months Ended
December 31,
---------------------------
2002 2001
------------ ------------
Cost of revenues from product
development agreements $ 9,381,000 $ 14,759,000
Product development and research 4,718,000 2,695,000
----------- ------------
Total cost of product development 14,099,000 17,454,000
Revenues from product development
agreements 10,226,000 15,001,000
----------- ------------
Net cost of product development $ 3,873,000 $ 2,453,000
=========== ============
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.
41
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 $1,173,000 in the three months
ended December 31, 2002 from $1,712,000 in the three months ended December 31,
2001, principally due to lower litigation costs ($669,000 in 2002 versus
$1,346,000 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 $192,000 for the three months ended December 31, 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. In December 2002, the court
proceeding was dismissed and the patent infringement disputes will be resolved
in an arbitration proceeding before The International Chamber of Commerce,
International Court of Arbitration.
Operating, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
The decrease in operating, general and administrative expenses (net) from
$2,111,000 in the three months ended December 31, 2001 to $1,766,000 in the
three months ended December 31, 2002 was due to decreased costs of $554,000 as a
result of selling expenses associated with machine-building contracts, partially
offset by the amortization of negative goodwill in 2001.
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Three Months Ended
December 31,
---------------------------
2002 2001
------------ ------------
Gross Expenses $ 5,667,000 $ 6,120,000
Less - allocations to product development
and research (2,615,000) (967,000)
- allocations to cost of revenues from
product development agreements (1,286,000) (2,925,000)
- amortization of negative goodwill - (117,000)
----------- -----------
Remaining Expenses $ 1,766,000 $ 2,111,000
=========== ===========
The $2,429,000 decrease in other income (net) ($1,744,000 expense in 2002
compared to $685,000 income in 2001) resulted primarily from lower interest
rates causing lower interest income ($1,050,000 in 2002 compared to $1,369,000
in 2001) on the Company's investments and from higher equity losses attributed
to losses at ITS ($200,000 in 2002 compared to $125,000 in 2001), Bekaert ECD
Solar Systems ($2,390,000, principally due to increased sales and marketing
expenses and pre-production costs related to the new 30MW production equipment,
in 2002 compared to $913,000 in 2001), and at Ovonyx ($280,000 in 2002 compared
to zero in 2001). The Company has begun recording its share of Ovonyx' losses
42
because of the $1,000,000 investment ECD made to Ovonyx in exchange for
technology, which had previously been contributed from ECD to Ovonyx.
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.
Six Months Ended December 31, 2002 Compared to Six Months Ended December 31,
- ----------------------------------------------------------------------------
2001
- ----
The Company has continued to invest to further advance its technologies.
These investments in its technologies have led to strategic alliances with major
companies, including ChevronTexaco, 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 $9,216,000 on revenues of $34,332,000 in the
six months ended December 31, 2002 compared to a net loss of $7,082,000 on
revenues of $49,203,000 for the six months ended December 31, 2001. The Company
had increased license fees of $3,419,000 and reduced patent expenses of $979,000
that were more than offset by a decrease in margin on product sales of
$1,610,000, an increase of $3,430,000 in the net cost of product development, an
increase of $647,000 in general and administrative expense (net), a $635,000
reduction in interest income due to lower interest rates, increased equity
losses of $1,923,000 and a $310,000 reduction of other nonoperating income. 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 $10,424,000 in 2002 from $8,899,000
in 2001 because of:
o an operating loss of $6,924,000 in 2002 for the ECD segment (net of
consolidating entries) versus operating loss of $2,557,000 in 2001,
primarily due to higher investment in product development as the Company
increased spending on its core technologies and higher costs related to
the 30MW machine-building contract;
o a reduced operating loss of $1,684,000 for United Solar (operating
loss of $510,000 in 2002 versus operating loss of $2,194,000 in 2001)
primarily due to a $3,269,000 license fee in 2002, partially offset by
startup and other costs associated with increasing production capacity;
o a decreased operating loss of $1,158,000 for Ovonic Battery (operating
loss of $2,990,000 in 2002 versus operating loss of $4,148,000 in 2001)
primarily resulting from a profitable equipment sales contract to Rare
Earth Ovonic in China, 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.
43
The decrease in consolidated revenues primarily resulted from a reduction
in product sales of $12,489,000 and a reduction in revenues from product
development agreements of $5,565,000, partially offset by increased license and
other agreements ($3,419,000 in 2002 versus zero in 2001).
o The ECD segment's revenues, net of consolidating entries, decreased to
$12,509,000 in 2002 from $17,411,000 in 2001 due to decreased revenues of
$1,798,000 related to the 30MW machine-building contract, which is nearing
completion, and a decrease of $3,193,000 from product development
agreements, primarily resulting from reduced revenues related to product
development contracts with Texaco Ovonic Hydrogen Systems and Texaco
Ovonic Fuel Cell.
o The $13,378,000 decrease in Ovonic Battery's revenues was primarily
due to lower equipment sales to Rare Earth Ovonic as the first phase of
that project nears completion ($6,505,000 in 2002 versus $16,664,000 in
2001), reduced revenues from product development agreements ($7,128,000
in 2002 versus $10,004,000 in 2001) and a $91,000 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 $6,688,000 in 2002 versus
$3,279,000 in 2001 due to a $3,269,000 license fee.
Product sales, consisting of machine building and equipment sales,
photovoltaic products and metal hydride materials, decreased 56% to $9,847,000
in the six months ended December 31, 2002 from $22,336,000 in the six months
ended December 31, 2001. Machine-building and equipment sales revenues decreased
63% to $7,016,000 in 2002 from $18,768,000 in 2001, primarily due to Ovonic
Battery contracts with Rare Earth Ovonic to provide battery-making equipment,
which is nearing completion, ($6,505,000 in 2002 compared to $16,664,000 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
$2,361,000 for 2002 and $2,698,000 for 2001 (see Note D of Notes to Consolidated
Financial Statements). Sales of metal hydride materials were $383,000 in 2002
compared to $612,000 in 2001. The Company currently has a product sales backlog
of $15,175,000, of which $11,161,000 is expected to be recognized as revenues in
Fiscal 2003. (See Note B of Notes to Consolidated Financial Statements.)
Royalties decreased 12% to $899,000 in the six months ended December 31,
2002 from $1,024,000 in the six months ended December 31, 2001. Royalties
related to batteries for propulsion applications increased in the current
period, but were more than offset by lower royalties for consumer applications
reflecting increased production efficiencies of the Company's licensees and a
small reduction in the number of batteries sold by the Company's licensees.
Revenues from product development agreements decreased 22% to $19,979,000
in the six months ended December 31, 2002 from $25,544,000 in the six months
ended December 31, 2001 primarily due to reduced battery activities under an
advanced product development agreement with Texaco Ovonic Battery Systems
($5,465,000 for 2002 compared to $8,228,000 in 2001); reduced activity related
to Ovonic Media ($605,000 in 2002 versus $842,000 in 2001);
44
and the completion of programs with the NIST and the DOE, which advanced the
Company's hydrogen storage and optical memory technologies (zero in 2002 versus
$481,000 in 2001). In addition, there was a decrease in revenues from Texaco
Ovonic Hydrogen Systems ($6,744,000 for 2002 compared to $8,296,000 for 2001)
and Texaco Ovonic Fuel Cell ($3,942,000 for 2002 compared to $4,419,000 for
2001). Increased product development revenues for United Solar ($972,000 in
2002 compared to $469,000 in 2001) partially offset the decreases. (See Note B
of Notes to Consolidated Financial Statements.)
Revenues from license and other agreements increased to $3,419,000 in the
six months ended December 31, 2002, from zero in the six months ended December
31, 2001. In December 2002, United Solar issued to Canon a notice whereby United
Solar granted Canon rights to manufacture in two countries of their choice in
Southeast Asia, excluding India and the People's Republic of China. This notice
was issued in satisfaction of the outstanding obligation ($2,500,000 plus
accrued interest) due Canon in connection with a previous loan made to United
Solar by Canon. United Solar recorded the satisfaction of the loan from Canon
($3,269,000) as revenue from license agreements in its statement of operations
for the six months ended December 31, 2002. License fees were also received for
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 $188,000 in the six months
ended December 31, 2002 from $299,000 in the six months ended December 31, 2001.
This decrease was due to reductions in revenues from Ovonyx.
Cost of product sales decreased by $10,879,000 in the six months ended
December 31, 2002 due to the $12,489,000 decrease in product sales. This
resulted in a loss of $449,000 on product sales in 2002, compared to a profit of
$1,161,000 in 2001. The decreased profit primarily relates to a loss on a
machine-building contract and negative margins at United Solar.
Revenues from product development agreements currently fund 73% (compared
to 86% in the same period in 2001) of the Company's cost of product development.
The total cost of product development decreased by $2,135,000 for the six months
ended December 31, 2002. Some product development expenses were shifted, either
in whole or in part, from funded programs to self-funded programs and were
accompanied by reduced revenues of $5,565,000, resulting in an increase of
$3,430,000 in net cost of product development.
Six Months Ended
December 31,
---------------------------
2002 2001
------------ ------------
Cost of revenues from product development
agreements $ 18,883,000 $ 24,912,000
Product development and research 8,580,000 4,686,000
------------ ------------
Total cost of product development 27,463,000 29,598,000
Revenues from product development
agreements 19,979,000 25,544,000
------------ ------------
Net cost of product development $ 7,484,000 $ 4,054,000
============ ============
45
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 $2,082,000 in the six months
ended December 31, 2002 from $3,060,000 in the six months ended December 31,
2001, principally due to lower litigation costs ($908,000 in 2002 versus
$1,951,000 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 $264,000 for the six months ended December 31, 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. In December 2002, the court
proceeding was dismissed and the patent infringement disputes will be resolved
in an arbitration proceeding before The International Chamber of Commerce,
International Court of Arbitration.
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.
46
The increase in operating, general and administrative expenses (net) from
$4,269,000 in the six months ended December 31, 2001 to $4,916,000 in the six
months ended December 31, 2002 was due primarily to increased spending
($509,000); for computer software upgrades ($607,000), the write-off ($272,000)
of the intangible asset associated with a license agreement and increased costs
of $646,000 at United Solar primarily associated with increased selling expenses
and higher costs at the new Auburn Hills facility, partially offset by $368,000
in increased allocations of expenses.
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Six Months Ended
December 31,
-------------------------
2002 2001
----------- -----------
Gross Expenses $12,315,000 $11,534,000
Less - allocations to product development
and research (4,039,000) (1,650,000)
- allocations to cost of revenues
from product development agreements (3,360,000) (5,381,000)
- amortization of negative goodwill - (234,000)
----------- -----------
Remaining Expenses $ 4,916,000 $ 4,269,000
=========== ===========
The $2,824,000 decrease in other income (net) ($1,007,000 expense in 2002
compared to $1,817,000 income in 2001) resulted primarily from lower interest
rates causing lower interest income ($2,090,000 in 2002 compared to $2,726,000
in 2001) on the Company's investments and from higher equity losses attributed
to losses at ITS ($362,000 in 2002 compared to $254,000 in 2001), Bekaert ECD
Solar Systems ($3,092,000, principally due to increased sales and marketing
expenses and pre-production costs related to the new 30MW production equipment,
in 2002 compared to $1,557,000 in 2001), and at Ovonyx ($280,000 in 2002
compared to zero in 2001). The Company has begun recording its share of Ovonyx'
losses because of the $1,000,000 investment ECD made to Ovonyx in exchange for
technology which had previously been contributed from ECD to Ovonyx.
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.
47
Liquidity and Capital Resources
As of December 31, 2002, the Company had consolidated cash, cash
equivalents, short-term investments and accounts and note receivable (including
$7,047,000 of amounts due from related parties) of $119,073,000 (see Note G of
Notes to Consolidated Financial Statements for restrictions), a decrease of
$13,943,000 from June 30, 2002. As of December 31, 2002, the Company had
consolidated working capital of $84,176,000 compared with a consolidated working
capital of $100,796,000 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 $39,187,000, 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, among other things, 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 December 31, 2002, the Company had $107,886,000 cash, cash
equivalents and short-term investments consisting of commercial paper,
classified as available for sale, maturing from 91 days to 35 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 December 31, 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 six months ended December 31, 2002, $4,442,000 of cash was
provided by operations. The difference between the net loss of $9,216,000 and
the net cash provided by operations was principally due to a $14,156,000
increase in working capital (other than cash). Also contributing were non-cash
costs (principally depreciation ($1,423,000) and equity losses in joint ventures
($3,734,000)). In addition, $5,304,000 of machinery and equipment was purchased,
principally for ECD's state-of-the-art clean room ($1,470,000) and for United
Solar's expansion to 30MW of production capacity ($3,330,000).
In the first phase of an equipment supply agreement with Rare Earth
Ovonic, Ovonic Battery has three contracts to supply equipment and technology
totaling $63,600,000 to its Rare Earth Ovonic joint ventures in China. As of
December 31, 2002, Ovonic Battery has received payments totaling $58,605,000
under the three contracts. Ovonic Battery has recorded revenues of $49,872,000
for the contracts, $8,941,000 less than the cash received, the excess being
recorded as deferred revenues. Therefore, in future periods, the Company will
receive less cash than revenues recognized to the extent of the deferred
revenues.
48
As part of its long-standing strategy, the Company has made investments in
its technologies, which have resulted in enabling intellectual property and
products. This has allowed the Company to finance its operations and growth
through strategic alliances (joint ventures and license agreements) with third
parties who can provide financial resources and marketing expertise for the
Company's technologies and products.
The resultant strategic alliances and joint ventures with some of the
world's leading corporations listed below form the basis for the
commercialization of the Company's technologies and products. Highlights are:
o Texaco Ovonic Battery Systems LLC - a 50/50 joint venture between
Ovonic Battery and ChevronTexaco formed to bring advanced NiMH batteries
into widespread commercial production for hybrid and electric vehicles as
well as for nonautomotive applications. ChevronTexaco is funding up to
$178,000,000 to increase the manufacturing capacity at Texaco Ovonic
Battery Systems' facilities in Michigan and Ohio, and for market
development and advanced product development. The advanced product
development is being accomplished through a product development contract
from Texaco Ovonic Battery Systems to Ovonic Battery. The contract
began October 1, 2000, and may be cancelled if mutually agreed-upon
milestones are not materially satisfied. The Company recorded revenues
of $5,465,000 for work performed under the contract in the six months
ended December 31, 2002 and is expected 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 began July 1,
2000, and may be cancelled if mutually agreed-upon milestones are not
materially satisfied. The Company has recorded total revenues of
$37,144,000 for work performed under the contract, $6,744,000 of which
was in the six months ended December 31, 2002, and is expected to
receive approximately $15 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 $21,660,000 for work performed under the contract, of
which $3,942,000 was for work performed under the contract in the six
months ended December 31, 2002. While Texaco Ovonic Fuel Cell has
successfully demonstrated the concept of the Ovonic(TM)regenerative fuel
cell and received a patent covering its Ovonic(TM)Instant Startup Fuel
Cell, certain milestones have not been materially satisfied and
ChevronTexaco has advised the Company that it does not have funds in its
budget to fund the venture's activities after December 31, 2002. The
Company and ChevronTexaco are currently in
49
discussions regarding the venture's operations and its business strategy
to involve additional joint venture partners to fund and expand the
venture's operations. In the interim, the Company plans, under
acceptable terms, to fund the venture (see Note H of Notes to
Consolidated Financial Statements).
o Bekaert ECD Solar Systems LLC/United Solar Systems Corp. - ECD and
Bekaert formed a strategic alliance whereby Bekaert invested $84,000,000
in the combined businesses ($24,000,000 of which is being used as
partial payment to buy out Canon, United Solar's previous joint venture
partner) with the remaining funds used to fund a portion of a sixfold
capacity expansion, and a sales and marketing expansion program. The
capacity expansion resulted in a new manufacturing plant making solar
products capable of producing on an annual basis 30MW of electrical
power, which was designed and built by ECD. 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).
Beginning October 1, 2002, it was estimated that Bekaert ECD Solar
Systems/United Solar would 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 for 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. Bekaert has advised the Company that
Bekaert, in order to focus on their core businesses, will not provide any
additional funds to Bekaert ECD Solar Systems/United Solar beyond the
$12,200,000 bridge loans which, together with ECD's bridge loans,
are expected to fund operations through March 31, 2003. ECD is in
discussions with potential new equity investors who will advance our
unique, proprietary thin-film technology represented by our new 30MW
manufacturing facility to meet the joint ventures' future cash
requirements, as well as discussing restructuring of the joint ventures.
ECD is prepared, under appropriate terms, to provide 100% of Bekaert ECD
Solar Systems/United Solar's funding requirements after March 31, 2003
until new equity investors are brought into the joint ventures.
Historically, as a consequence of ECD's 81% ownership of United
Solar and United Solar's 40% membership interest in Bekaert ECD Solar
Systems, the Company's financial results have included approximately 50%
of the combined operating losses of these entities. The Company will
reflect up to 100% of the operating losses when it funds 100% of the
cash requirements until new equity investors are brought into the
joint venture (see Note H).
During the period from October 1, 2002 through December 31, 2002, ECD and
Bekaert have provided bridge loans to Bekaert ECD Solar Systems of
$2,247,000 and $4,153,000, respectively. During the period from January 1,
2003 through February 14, 2003, ECD and Bekaert have provided additional
bridge loans to Bekaert ECD Solar Systems of $3,309,000 and ECD has
provided additional bridge loans of $665,000 to Bekaert ECD Solar Systems
and $1,141,000 to United Solar.
50
o Ovonic Media, LLC, the joint venture formed in March 2000 between
GE Plastics and ECD, is the first activity resulting from our strategic
alliance with General Electric. ECD recorded revenues of $605,000 for work
performed in the six months ended December 31, 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 to develop process
technology for the next-generation optical discs. Ovonic Media has
successfully met its various milestones. GE is evaluating the current
market situation to determine next steps and has informed the Company
that additional funding after January 3, 2003 is suspended. GE and ECD
are in discussions as to how to position the joint venture in order to
meet the needs of the marketplace and to expand the joint venture's
operations, including the possibility of new equity investors and
strategic partners to fund the joint venture's operations. In the interim,
ECD will fund the joint venture, under acceptable terms, until GE resumes
funding, or until new partners who will provide funding, marketing and
distribution are brought into the venture. The other activities of the
strategic alliance are continuing on schedule (see Note H of Notes to
Consolidated Financial Statements).
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(TM). OUM(TM)
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' revenues.
In October 2002, the Company made a capital contribution of $1,000,000 in
Ovonyx in exchange for technology, which had previously been contributed
by ECD to Ovonyx, and an exclusive, royalty-bearing license through a
newly formed company, Ovonic Cognitive Computer, Inc., which is owned 95%
by ECD and 5% by Ovonyx. ECD has recorded $1,000,000 investment in Ovonyx
and 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. In the three months and six months ended December
31, 2002, the Company recorded an equity loss of $280,000 related to its
investment in Ovonyx.
o ITS Innovative Transportation Systems - a German company formed to
manufacture battery-powered 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 advance to ITS. ECD made an additional advance 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.
51
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 $107,526,000 and $114,207,000 of these investments on December
31, 2002 and June 30, 2002, respectively. On December 31, 2002, the investments
had an average maturity of 475 days, $84,926,000 of which had maturities of 91
days to 35 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 December 31, 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 December 31, 2002 portfolio of approximately $1,407,000.
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
December 31, 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.
52
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
A. Exhibits
--------
3.1 Amendment to Article VIII of the Bylaws effective as of
February 20, 2003
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
53
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
Vice President and Chief Financial Officer
Date: February 14, 2003 (Principal financial and accounting officer)
By: /s/ Stanford R. Ovshinsky
-------------------------------------------
Stanford R. Ovshinsky
Date: February 14, 2003 President and Chief Executive Officer
54
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: February 14, 2003 /s/ Stanford R. Ovshinsky
---------------------------
Stanford R. Ovshinsky
President and Chief Executive Officer
55
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: February 14, 2003 /s/ Stephan W. Zumsteg
---------------------------
Stephan W. Zumsteg
Chief Financial Officer
56