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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 MARCH 31, 2003
-----------------------------------------------------------
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
-----------------------------
- -------------------------------------------------------------------------------
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 May 9, 2003, there were 219,913 shares of ECD's Class A Common
Stock, 430,000 shares of ECD's Class B Common Stock and 21,252,207 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 Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES (NOTES A and B)
Product sales $ 2,901,294 $ 7,277,124 $ 9,956,698 $ 24,655,994
Product sales to related parties 1,955,857 2,747,240 4,747,031 7,704,018
------------ ------------ ------------ ------------
Total product sales 4,857,151 10,024,364 14,703,729 32,360,012
Royalties 503,377 453,509 1,397,052 1,467,004
Royalties - related parties 26,814 5,824 32,473 16,809
------------ ------------ ------------ ------------
Total royalties 530,191 459,333 1,429,525 1,483,813
Revenues from product development agreements 1,074,438 1,322,810 4,108,194 5,061,225
Revenues from product development agreements
with related parties 7,038,633 12,717,273 23,983,682 34,523,009
------------ ------------ ------------ ------------
Total revenues from product development
agreements 8,113,071 14,040,083 28,091,876 39,584,234
Revenues from license and other agreements - - 3,419,114 -
Other revenues 55,004 30,703 124,651 102,244
Other revenues from related parties 39,794 (64,505) 158,752 163,152
------------ ------------ ------------ ------------
Total other revenues 94,798 (33,802) 283,403 265,396
------------ ------------ ------------ ------------
TOTAL REVENUES 13,595,211 24,489,978 47,927,647 73,693,455
EXPENSES (NOTE A)
Cost of product sales 5,918,247 9,853,715 16,213,837 31,028,373
Cost of revenues from product development
agreements 8,672,832 14,289,248 27,555,595 39,201,624
Product development and research 5,737,613 4,453,370 14,318,063 9,138,898
Patent defense (net) 1,485,772 368,459 2,394,071 2,319,634
Patents 529,520 401,069 1,702,878 1,510,305
Operating, general and administrative (net) 598,705 860,829 5,514,581 5,129,951
------------ ------------ ------------ ------------
TOTAL EXPENSES 22,942,689 30,226,690 67,699,025 88,328,785
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (9,347,478) (5,736,712) (19,771,378) (14,635,330)
OTHER INCOME (EXPENSE)
Interest income 958,566 1,229,912 3,049,001 3,955,756
Interest expense (80,988) (144,696) (330,598) (454,155)
Equity loss in joint ventures (1,494,480) (1,131,266) (5,228,415) (2,942,738)
Minority interest share of losses 734,175 485,971 1,489,254 1,256,915
Other nonoperating income (net) 154,576 282,175 285,091 723,134
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 271,849 722,096 (735,667) 2,538,912
------------ ------------ ------------ ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (9,075,629) (5,014,616) (20,507,045) (12,096,418)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NOTE A) - - 2,215,560 -
------------ ------------ ------------ ------------
NET LOSS $ (9,075,629) $ (5,014,616) $(18,291,485) $(12,096,418)
============ ============ ============ ============
BASIC NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE E) $ (.41) $ (.23) $ (.94) $ (.56)
BASIC NET INCOME PER SHARE FOR CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NOTE E) - - .10 -
------------ ------------ ------------ ------------
BASIC NET LOSS PER SHARE $ (.41) $ (.23) $ (.84) $ (.56)
============ ============ ============ ============
DILUTED NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE E) $ (.41) $ (.23) $ (.94) $ (.56)
DILUTED NET INCOME PER SHARE FOR CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NOTE E) - - .10 -
------------ ------------ ------------ ------------
DILUTED NET LOSS PER SHARE (NOTE E) $ (.41) $ (.23) $ (.84) $ (.56)
============ ============ ============ ============
See notes to consolidated financial statements.
2
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
March 31, June 30,
2003 2002
-------------- --------------
(Unaudited)
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of $14,106,000 at
March 31, 2003 and $42,210,000 at June 30, 2002 $ 14,323,162 $ 42,221,015
Short-term investments (NOTE G) 78,841,734 71,997,154
Accounts receivable (net of allowance for uncollectible
accounts of approximately $415,000 at March 31,
2003, and $563,000 at June 30, 2002) 4,258,608 7,268,447
Accounts receivable due from related parties 5,558,150 9,935,880
Note Receivable - Bekaert ECD Solar Systems (NOTE A) 12,395,901 1,594,275
Inventories 2,961,983 1,163,273
Other 408,046 387,901
------------ ------------
TOTAL CURRENT ASSETS 118,747,584 134,567,945
PROPERTY, PLANT AND EQUIPMENT (NOTE A)
Land and land improvements 267,000 267,000
Buildings and improvements 3,802,625 3,456,088
Machinery and other equipment (including construction
in progress of approximately $912,000 and $694,000
at March 31, 2003 and June 30, 2002, respectively) 33,738,948 26,713,253
Capitalized lease equipment 3,053,295 3,053,295
------------ ------------
40,861,868 33,489,636
Less accumulated depreciation and amortization (24,779,013) (22,551,768)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 16,082,855 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) - 10,921,232
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
(NOTES D AND H)
Bekaert ECD Solar Systems 25,295,102 27,246,958
Bekaert ECD Europe 36,889 22,835
Texaco Ovonic Hydrogen Systems - -
Texaco Ovonic Battery Systems - -
Ovonyx 720,000 -
Ovonic Media - -
ITS Innovative Transportation Systems 4,869,610 3,285,757
OTHER ASSETS 3,009,688 3,425,999
------------ ------------
TOTAL ASSETS $170,471,728 $192,118,594
============ ============
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, June 30,
2003 2002
-------------- --------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 17,862,981 $ 18,249,591
Accounts payable and accrued expenses - related parties 342,454 34,218
Salaries, wages and amounts withheld from employees 2,481,119 2,908,213
Deferred revenues under business agreements (NOTE A) 6,897,390 640,019
Deferred revenues - related parties (NOTE A) 3,835,058 6,677,846
Current installments on long-term liabilities 13,793,147 5,261,747
------------ ------------
TOTAL CURRENT LIABILITIES 45,212,149 33,771,634
LONG-TERM LIABILITIES 2,272,763 3,507,537
LONG-TERM NOTES PAYABLE (NOTE A) - 10,921,232
NONREFUNDABLE ADVANCE ROYALTIES (NOTE C) 3,520,424 3,627,931
------------ ------------
TOTAL LIABILITIES 51,005,336 51,828,334
NEGATIVE GOODWILL (NOTE D) - 2,215,560
MINORITY INTEREST (NOTE D) 1,330,486 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 - 21,251,926 shares at March 31,
2003 and 21,248,973 shares at June 30, 2002 212,519 212,490
Additional paid-in capital 385,060,387 384,952,113
Accumulated deficit (266,485,437) (248,193,952)
Accumulated other comprehensive income 1,040,878 487,950
Unearned Compensation on Class B Convertible
Common Stock (1,698,940) (2,210,140)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 118,135,906 135,254,960
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $170,471,728 $192,118,594
============ ============
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
March 31,
--------------------------------
2003 2002
-------------- --------------
OPERATING ACTIVITIES:
Net loss $(18,291,485) $(12,096,418)
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 2,252,989 1,638,858
Amortization of premium/discount on investments 532,508 -
Equity loss in joint ventures 5,228,415 2,942,738
Profit deferred on sales to Bekaert ECD Solar
Systems - (1,774,172)
Creditable royalties (107,507) (121,975)
Stock and stock options issued for services
rendered 619,503 771,147
Amortization of deferred gain (34,809) (104,373)
Amortization of negative goodwill - (349,825)
Cumulative effect of change in accounting
principle (2,215,560) -
Minority interest (1,489,254) (1,256,915)
Other 33,578 (16,748)
Changes in working capital:
Accounts receivable 3,009,839 (3,977,283)
Accounts and note receivable due from related
parties 5,024,335 (2,650,611)
Inventories (1,798,710) (105,410)
Other assets 396,166 (893,191)
Accounts payable and accrued expenses (44,586) 2,714,112
Accounts payable and accrued expenses - related
parties 308,236 533,760
Deferred revenues under business agreements 6,292,180 (147,730)
Deferred revenues - related parties (2,842,788) (1,347,478)
------------ ------------
NET CASH USED IN OPERATIONS (6,396,064) (16,241,514)
INVESTING ACTIVITIES:
Purchases of capital equipment (7,455,809) (4,322,573)
Proceeds from sale of capital equipment 24,251 35,826
Advances to Bekaert ECD Solar Systems (2,594,466) (3,036,551)
Advances to ITS Innovative Transportation Systems (2,000,000) -
Investment in Ovonyx (1,000,000) -
Investment in Rare Earth - (1,710,000)
Purchases of investments (25,536,196) (72,698,554)
Sales of investments 18,712,036 45,309,216
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (19,850,184) (36,422,636)
FINANCING ACTIVITIES:
Principal payments under short-term and
long-term debt obligations and capitalized
lease obligations (1,651,605) (1,564,143)
Proceeds from sale of stock to ChevronTexaco - 8,893,629
Proceeds from sale of stock upon exercise of
stock options and warrants - 35,660,431
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,651,605) 42,989,917
NET DECREASE IN CASH AND CASH EQUIVALENTS (27,897,853) (9,674,233)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,221,015 33,055,399
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,323,162 $ 23,381,166
============ ============
See notes to consolidated financial statements.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
March 31,
-------------------------
2003 2002
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 330,598 $ 454,155
The Company's noncash investing and financing
activities were as follows:
Short-term and long-term note receivable -
Bekaert ECD Solar Systems 526,999 494,903
Short-term and long-term note payable - Canon (526,999) (494,903)
Debt principal exchanged for license -
United Solar/Canon 2,500,000 -
Accounts payable and accrued expenses - Accrued
interest on United Solar/Canon debt 769,114 -
Transfer deferred tax asset to accounts receivable - (864,999)
Record tax accounts receivable - 864,999
Transfer investment in Bekaert ECD Solar Systems
to notes receivable - (4,493,166)
Record note receivable - Bekaert ECD Solar Systems - 4,493,166
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 nine months ended March 31, 2003 (Fiscal
2003) and 2002 (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.
Certain items for the three and nine months ended March 31, 2002 have been
reclassified to be consistent with the classification of items in the three and
nine months ended March 31, 2003.
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.
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 Notes D and H) (collectively the
"Company"). The remaining shares of Ovonic Battery are owned by Honda
7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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) (see Note H - Subsequent Events). 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 six major
investments accounted for by the equity method: (i) Bekaert ECD Solar Systems
LLC, United Solar's 40% joint venture with Bekaert (see Note H - Subsequent
Events); (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 nonpropulsion applications; (iii) Texaco
Ovonic Hydrogen Systems LLC, a joint venture between ECD and ChevronTexaco, each
having 50% interest in the joint venture, to further develop Ovonic(TM) solid
hydrogen storage technology; (iv) 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; (v) Ovonic Media, LLC, a joint
venture owned 51% by General Electric (GE) through its GE Plastics business unit
and 49% by ECD; and (vi) 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
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, ECD, through a newly formed company, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by ECD to Ovonyx and an exclusive, royalty-bearing license. ECD has
recorded its $1,000,000 investment in Ovonyx and accounts for this investment
on the equity method and will recognize its proportionate share of Ovonyx
losses to the extent of its $1,000,000 investment. In the nine
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
months ended March 31, 2003, ECD recorded an equity loss of $280,000. In the
three months ended March 31, 2003, ECD recorded zero equity income.
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.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The
Company 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.
The following is the effect on the nine months ended March 31, 2003 and
2002 of this change in accounting principle:
Nine Months Ended
March 31,
-------------------------------
2003 2002
-------------- --------------
Net loss $(18,291,485) $(12,096,418)
Deduct:-
Amortization of negative goodwill - (349,825)
Cumulative effect of change in
accounting principle (2,215,560) -
------------ ------------
Net Loss before cumulative effect of
change in accounting principle $(20,507,045) $(12,446,243)
============ ============
Basic Net Loss Per Share (.84) (.56)
Amortization of negative goodwill - (.02)
Cumulative effect of change in
accounting principle (.10) -
------------ ------------
Basic Net Loss Per Share before cumulative
effect of change in accounting principle $ (.94) $ (.58)
============ ============
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
9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
provisions of SFAS 144, the Company assessed for impairment an intangible asset
it had on its balance sheet since 1995. This intangible asset, which was the
result of a license agreement entered into in 1995, was originally valued at
$330,000 and was being amortized over 40 years. After a review of this
intangible asset, including the associated cash flows represented by recent
royalties from 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 nine months ended March 31, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date of an entity's commitment to
an exit plan. The Company implemented this statement on January 1, 2003. The
adoption of this statement did not have a material effect on the Company's
consolidated financial position or results of 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 voluntary change to the fair value based method of
accounting for stock-based employee compensation. The Company currently applies
Accounting Principles Board (APB) 25, "Accounting for Stock Issued to
Employees," to its stock-based compensation grants to employees. Most grants are
awarded at the fair market value on the grant date in accordance with the
applicable plan and, as such, no compensation expense is recorded for these
grants. The Company has no current plans to change to the fair value based
method of accounting for these stock option grants.
In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. 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 is adopting this requirement with the financial statements for the three
months and nine months ended March 31, 2003.
Had compensation costs for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, the Company's
net loss and net loss per share for three months and nine months ended March 31,
2003 and 2002 would have increased as follows:
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Loss, as reported $ (9,075,629) $ (5,014,616) $(18,291,485) $(12,096,418)
Add:
Total stock-based compensation
expense determined under
fair value based method 1,454,253 2,677,947 2,845,769 6,659,224
------------ ------------ ------------ ------------
Pro-forma net loss $(10,529,882) $ (7,692,563) $(21,137,254) $(18,755,642)
============ ============ ============ ============
Loss per share:
Basic - as reported $ (.41) $ (.23) $ (.84) $ (.56)
============ ============ ============ ============
Basic - pro forma $ (.48) $ (.35) $ (.97) $ (.87)
============ ============ ============ ============
Diluted - as reported $ (.41) $ (.23) $ (.84) $ (.56)
============ ============ ============ ============
Diluted - pro forma $ (.48) $ (.35) $ (.97) $ (.87)
============ ============ ============ ============
The Company applies SFAS 123 for any stock options or awards granted to
nonemployees of the Company. When the measurement date (i.e., when the options
are fully vested) is reached, the amount of compensation cost is determined
based upon the fair value of the options. Prior to the measurement date, the
amount of compensation cost of the options is estimated at each reporting date
and the expense is amortized during the period during which the options vest.
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.
Other Comprehensive Income (Loss)
- ---------------------------------
The Company's total comprehensive loss was as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Loss $ (9,075,629) $ (5,014,616) $(18,291,485) $(12,096,418)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on securities (226,075) (967,973) 552,928 (1,427,895)
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (9,301,704) $ (5,982,589) $(17,738,557) $(13,524,313)
============ ============ ============ ============
11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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
28 months from date of acquisition.
Investment in Rare Earth Ovonic - China
- ---------------------------------------
The Company has three joint ventures, collectively Rare Earth Ovonic, with
Rare Earth High-Tech Co. Ltd. (Rare Earth High-Tech) of Baotou Steel Company of
Inner Mongolia, China, for the manufacturing of its battery and other related
technologies. The Company accounts for its 19% interest in each of these joint
ventures using the cost method of accounting (total cash investment of
$1,710,000).
Financial Instruments
- ---------------------
Due to the short-term maturities of cash, cash equivalents, marketable
securities, accounts receivable and accounts payable, the Company believes that
the carrying value of its financial instruments is a reasonable estimate of fair
value.
Foreign Currency Transaction Gains and Losses
- ---------------------------------------------
Since most of the Company's contracts and transactions are denominated and
settled in U.S. dollars, there are no significant foreign currency gains or
losses.
12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Accounts Receivable
- -------------------
March 31, June 30,
2003 2002
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Revenues recognized but unbilled
Commercial customers $ - $ 505,857
Amounts billed to customers
Commercial customers 602,064 676,462
----------- -----------
Sub-total 602,064 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 363,800 371,577
Commercial customers 30,356 172,210
----------- -----------
394,156 543,787
Amounts billed
U.S. Government 741,176 1,272,208
Commercial customers 151,020 1,575,020
----------- -----------
892,196 2,847,228
----------- -----------
Sub-total 1,286,352 3,391,015
Amounts unbilled for other than long-term contracts
Commercial customers 2,044,873 2,146,983
Amounts billed for other than long-term contracts
U.S. Government - 370
Commercial customers 590,319 1,110,760
----------- -----------
Sub-total 590,319 1,111,130
Other 150,000 -
Allowance for uncollectible accounts (415,000) (563,000)
----------- -----------
TOTAL $ 4,258,608 $ 7,268,447
=========== ===========
Certain contracts with the U.S. government require a retention that is
paid upon completion of audit of the Company's indirect rates. Certain
contracts have been completed for more than 10 years and have not been audited.
U.S. Government retentions totaling $113,947 are included in long-term other
assets at March 31, 2003 and June 30, 2002. Most U.S. government contracts
remain subject to audit.
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Accounts Receivable Due from Related Parties
- --------------------------------------------
March 31, June 30,
2003 2002
------------ ------------
Amounts earned which are billed in the
subsequent month
Bekaert ECD Solar Systems $ - $ 130,000
Ovonic Media 282,054 364,263
Texaco Ovonic Battery Systems 1,399,694 2,182,575
Texaco Ovonic Fuel Cell 82,593 788,894
Texaco Ovonic Hydrogen Systems 1,531,706 1,874,463
----------- -----------
Sub-total 3,296,047 5,340,195
Amounts billed
Texaco Ovonic Battery Systems 2,181,445 1,738,990
Texaco Ovonic Fuel Cell - 671,358
Texaco Ovonic Hydrogen Systems - 1,508,948
----------- ------------
Sub-total 2,181,445 3,919,296
Other unbilled
Ovonyx 38,838 21,248
Other billed
ChevronTexaco Technology Ventures - 536,569
Sovlux Battery 1,248 -
Ovonyx 13,172 21,068
Texaco Ovonic Battery Systems 27,400 97,504
----------- ------------
Sub-total 41,820 655,141
----------- ------------
TOTAL $ 5,558,150 $ 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.
Inventories for United Solar and Ovonic Battery are as follows:
March 31, June 30,
2003 2002
------------ ------------
Finished products $ 162,098 $ 250,370
Work in process 1,670,892 478,997
Raw materials 1,128,993 433,906
---------- ----------
$2,961,983 $1,163,273
========== ==========
14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Property, Plant and Equipment
- -----------------------------
All properties are recorded at cost. Plant and equipment are depreciated
on the straight-line method over the estimated useful lives of the individual
assets. The estimated lives of the principal classes of assets are as follows:
Years
-------------
Buildings and improvements 5 to 20
Machinery and other equipment 3 to 12.5
Capitalized lease equipment and
leasehold improvements 3 to 10
Bekaert ECD Solar Systems capitalized the total costs ($64,293,000) of the
30MW machine (equipment which, when fully optimized, will annually make solar
products capable of producing 30MW of electricity) and began depreciating this
equipment over a 12.5-year period (its estimated useful life) beginning
February 1, 2003. The depreciation applicable to United Solar ($744,000) for
the two months ended March 31, 2003 is included in United Solar's financial
statements which are consolidated with ECD's financial statements.
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. The 30MW equipment is being depreciated
over its estimated useful life since Bekaert ECD Solar Systems expects to
purchase the equipment under this lease. Accumulated amortization on
capitalized lease equipment as of March 31, 2003 and June 30, 2002 was
$2,901,000 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 acquisition of Canon's
interest in United Solar. The obligation of Bekaert ECD Solar Systems to pay
ECD is guaranteed by Bekaert.
15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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 three months and nine
months ended March 31, 2003:
Nine Months Ended Three Months Ended
March 31, 2003
------------------------------------
Liability beginning of the period $ 2,489,024 $ 2,497,005
Amounts accrued for as warranty costs 122,961 114,980
Warranty claims - -
----------- -----------
Liability at March 31, 2003 $ 2,611,985 $ 2,611,985
=========== ===========
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 has accrued as an expense
15% of such royalties.
ECD has a royalty trust arrangement whereby ECD is obligated to pay a
trust 25% of optical memory royalties received. In the nine months ended March
31, 2003, 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 March 31, 2003, approximately
$6,768,000 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:
Nine Months Ended
March 31,
-------------------------------
2003 2002
-------------- --------------
Product sales
Machine building and equipment sales $ 9,256,306 $23,806,081
Battery packs 138,179 315,645
Metal hydride materials 562,213 534,268
----------- -----------
9,956,698 24,655,994
Product sales-related parties
Photovoltaics 4,128,850 3,835,363
Machine building 446,440 3,667,003
Battery packs 86,363 19,488
Metal hydride materials 85,378 182,164
----------- -----------
4,747,031 7,704,018
----------- -----------
Total product sales $14,703,729 $32,360,012
=========== ===========
Royalties
Battery technology $ 1,374,237 $ 1,402,416
Optical memory 22,815 64,588
----------- -----------
1,397,052 1,467,004
Royalty-related party
Microelectronics 32,473 16,809
----------- -----------
Total royalties $ 1,429,525 $ 1,483,813
=========== ===========
Revenues from product development agreements
Photovoltaics $ 1,717,236 $ 1,692,117
Battery technology 2,258,453 2,804,721
Optical memory 36,411 172,695
Hydrogen technology - 348,435
Other 96,094 43,257
----------- -----------
4,108,194 5,061,225
Revenues from product development agreements -
related parties
Battery technology 8,803,336 12,154,477
Optical memory 615,330 1,355,332
Hydrogen technology 10,625,265 14,184,056
Fuel cell technology 3,939,751 6,829,144
----------- -----------
23,983,682 34,523,009
----------- -----------
Total revenues from product development
agreements $28,091,876 $39,584,234
=========== ===========
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:
Nine Months Ended
March 31,
----------------------------
2003 2002
------------ ------------
United States $29,459,019 $44,040,011
China 9,111,729 23,820,858
Japan 4,493,076 1,355,847
Mexico 4,128,850 3,835,363
Hong Kong 712,346 528,434
Other countries 22,627 112,942
----------- -----------
$47,927,647 $73,693,455
=========== ===========
NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At March 31, 2003 and June 30, 2002, the Company deferred recognition of
revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
March 31, June 30,
2003 2002
------------- -------------
Battery $ 1,560,902 $ 1,642,822
Optical memory 1,959,522 1,985,109
----------- -----------
$ 3,520,424 $ 3,627,931
=========== ===========
Creditable royalties earned and recognized as revenue were:
Period Ended
March 31,
----------------------------
2003 2002
------------ ------------
Three months ended $ 7,414 $ 22,504
Nine months ended $ 107,507 $ 121,975
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
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 facility (equipment which, when fully
optimized, will annually make solar products capable of producing 30MW of
electricity), a sales and marketing expansion program, and the purchase of
Canon's interest in United Solar for an initial investment by Bekaert of
$84,000,000.
ECD and Bekaert guaranteed 50% of the rent obligation for Bekaert ECD
Solar Systems' Auburn Hills, Michigan facility and, in December 2002, 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 of $40,000,000 for
the twelve months ending September 30, 2003, in order to cover operating
expenses, including ramp-up of production and implementation of marketing
programs, and for working capital purposes. While neither ECD nor Bekaert was
obligated to provide any portion of the required additional funding, ECD and
Bekaert 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 had advised the Company that it was focusing on its core
businesses and would 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 funded operations through April 30, 2003.
On May 14, 2003, ECD acquired Bekaert's 19% interest in United Solar and
60% interest in Bekaert ECD Solar Systems (bringing the Company's interest in
each of these joint ventures to 100%) for $6 million ($4 million paid at closing
and $2 million to be paid no later than December 22, 2003). Additionally, the
Company provided $36 million to Bekaert ECD Solar Systems to terminate its sale
and leaseback arrangement with LaSalle National Leasing Corporation and, as a
result, freed up the $20 million of Company funds that had been restricted in
support of its guarantee of this lease. The Company also provided back-up
guarantees to Bekaert for its guarantee of United Solar's Fuji lease
($3.4 million) and Bekaert's share of the guarantee of the Auburn Hills
facility ($1.8 million) (see Note G - Commitments). Bekaert will receive rights
to United Solar's technologies outside the field of photovoltaics and rights
limited to build sputtering machines outside the field of triple-junction
photovoltaics. In addition, Bekaert assigned to ECD its $12.2 million note
receivable for its bridge loans to Bekaert ECD Solar Systems (see Note H -
Subsequent Events).
ECD is in discussions with potential new equity investors to meet the joint
ventures' future cash requirements, as well as refinancing the 30MW equipment.
ECD has agreed to
21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
provide 100% of Bekaert ECD Solar Systems/United Solar's funding requirements
after April 30, 2003 until new equity investors, who would 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 100% of the operating losses when it funds 100% of the
cash requirements until new equity investors are brought into the joint venture.
During the period from October 1, 2002 through March 31, 2003, ECD
provided bridge loans to Bekaert ECD Solar Systems and United Solar of
$2,984,000 and $2,247,000, respectively, and Bekaert provided bridge loans to
Bekaert ECD Solar Systems of $9,669,000. During the period from April 1, 2003
through April 18, 2003, ECD provided additional bridge loans to United Solar
of $1,369,000 and Bekaert has provided additional bridge loans to Bekaert
ECD Solar Systems of $2,531,000.
As of April 18, 2003, Bekaert ECD Solar Systems and United Solar have
fully drawn down the bridge loans committed by Bekaert and ECD (except for the
final $9.5 million, which is the remaining amount due ECD under the 30MW
equipment contract).
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 Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 4,452,744 $ 3,396,962 $ 12,790,187 $ 12,363,450
Operating Expenses:
Cost of Sales 4,648,665 4,356,608 13,868,977 14,180,773
General and Administrative 2,638,231 1,685,975 8,508,830 5,628,592
----------- ----------- ------------ ------------
Total Expenses 7,286,896 6,042,583 22,377,807 19,809,365
Other Expense 809,603 624,745 1,002,610 1,708,522
----------- ----------- ------------ ------------
Net Loss $(3,643,755) $(3,270,366) $(10,590,230) $ (9,154,437)
=========== =========== ============ ============
22
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
BEKAERT ECD SOLAR SYSTEMS LLC
BALANCE SHEETS
--------------
March 31, June 30,
2003 2002
------------ ------------
(Unaudited) (Unaudited)
------------ ------------
Current Assets:
Cash and Cash Equivalents $ 1,411,451 $ 6,569,025
Inventory 8,532,741 7,528,767
Other Current Assets 10,001,911 6,636,430
------------ ------------
Total Current Assets 19,946,103 20,734,222
Property, Plant and Equipment (Net) 81,902,557 81,954,953
Other Assets 37,915,108 38,674,995
------------ ------------
Total Assets $139,763,768 $141,364,170
============ ============
Current Liabilities:
Accounts Payable and Other Current
Liabilities $ 42,446,667 $ 19,374,416
------------ ------------
Total Current Liabilities 42,446,667 19,374,416
Note Payable - ECD - 10,921,232
Long-Term Capitalized Lease 58,655,670 61,525,996
------------ ------------
Total Liabilities 101,102,337 91,821,644
Members' Equity 38,661,431 49,542,526
------------ ------------
Total Liabilities and Members' Equity $139,763,768 $141,364,170
============ ============
The Company recorded revenues from Bekaert ECD Solar Systems of $1,909,000
and $4,575,000, respectively, for the three months and nine months ended March
31, 2003 and $2,701,000 and $7,502,000, respectively, for the three months and
nine months ended March 31, 2002, representing revenues realized on ECD's
machine-building contract with Bekaert ECD Solar Systems and United Solar's
sales of product to Bekaert ECD Solar Systems.
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.
23
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
The Company recorded revenues from Texaco Ovonic Battery Systems of
$3,338,000 and $8,803,000, respectively, for the three months and nine months
ended March 31, 2003 and $3,927,000 and $12,155,000, respectively, for the three
months and nine months ended March 31, 2002 for services performed on behalf of
Texaco Ovonic Battery Systems (primarily for advanced product development and
market development work). The Company recorded revenues of $46,000 and $85,000,
respectively, for the three months and nine months ended March 31, 2003 and
$46,000 and $188,000, respectively, for the three months and nine months ended
March 31, 2002 for products sold to Texaco Ovonic Battery Systems.
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
ECD owns 41.7% of Ovonyx, Mr. Tyler Lowrey and his colleague own 41.7% of
Ovonyx, and Intel and other investors own the remainder. ECD has contributed
intellectual property and licenses for its interest in Ovonyx.
In October 2002, ECD, through a newly formed company, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by ECD to Ovonyx and an exclusive, royalty-bearing license. ECD has
recorded its $1,000,000 investment in Ovonyx and accounts for this investment on
the equity method and will recognize its proportionate share of Ovonyx losses to
the extent of its $1,000,000 investment. In the nine months ended March 31,
2003, ECD recorded an equity loss of $280,000. In the three months ended March
31, 2003, ECD recorded zero equity income.
ECD recorded revenues from Ovonyx of $32,000 and $115,000, respectively,
for the three months and nine months ended March 31, 2003 and ($71,000)
(negative revenues due to an adjustment) and $155,000, respectively, for the
three months and nine months ended March 31, 2002, representing services
performed for its operations.
Texaco Ovonic Fuel Cell
In September 2000, ECD and ChevronTexaco formed Texaco Ovonic Fuel Cell.
ChevronTexaco was funding (through December 31, 2002) initial product and market
development, the primary use of which was to fund a contract from Texaco Ovonic
Fuel Cell to ECD to further develop Ovonic(TM) regenerative fuel cell
technology. The joint venture was owned 50% by ChevronTexaco and 50% by ECD. ECD
has contributed intellectual property and licenses.
On April 30, 2003, ECD signed a memorandum of understanding with
ChevronTexaco whereby ECD will acquire ChevronTexaco's interest in Texaco Ovonic
Fuel Cell for $1 effective
24
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
December 31, 2002. When this transaction is completed, the Company will include
this joint venture in its consolidated financial statements. ECD is continuing
its development work and is currently funding all of this joint venture's
development costs. (See Note H - Subsequent Events.)
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 Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2003* 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues
Dividend Income $ 564 $ 2,276 $ 1,232 $ 5,296
Expenses
Product Development - Paid or
Payable to ECD - 2,176,879 3,666,714 5,822,105
Product Development - Paid or
Payable to ChevronTexaco - 260,003 (2,110) 876,699
Depreciation Expense 164,920 146,056 494,760 339,613
----------- ----------- ----------- -----------
Total Expenses 164,920 2,582,938 4,159,364 7,038,417
----------- ----------- ----------- -----------
Net Loss $ (164,356) $(2,580,662) $(4,158,132) $(7,033,121)
=========== =========== =========== ===========
- ------------------
* Excludes amounts funded by ECD on fuel cell development activities.
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
--------------
March 31, June 30,
2003 2002
------------ ------------
(Unaudited) (Audited)
Current Assets:
Cash and Cash Equivalents $ 105,728 $ 89,318
----------- -----------
Total Current Assets 105,728 89,318
Fixed Assets:
Leasehold Improvements 1,460,386 1,454,716
Machinery and Other Equipment 1,685,110 1,557,339
Construction in Progress 292,873 78,959
----------- -----------
Total Fixed Assets 3,438,369 3,091,014
Less Accumulated Depreciation (1,059,821) (566,403)
----------- -----------
Net Fixed Assets 2,378,548 2,524,611
----------- -----------
Total Assets $ 2,484,276 $ 2,613,929
=========== ===========
Current Liabilities:
Amount Due ECD, Net $ 50,458 $ 1,428,117
Amount Due ChevronTexaco - 91,752
----------- -----------
Total Current Liabilities 50,458 1,519,869
Members' Equity:
Capital Contributions 23,147,890 17,650,000
Cumulative Deficit (20,714,072) (16,555,940)
----------- -----------
Total Members' Equity 2,433,818 1,094,060
----------- -----------
Total Liabilities and Members' Equity $ 2,484,276 $ 2,613,929
=========== ===========
During the three months and nine months ended March 31, 2003, the Company
recorded revenues of zero and $3,940,000, respectively, and during the three
months and nine months ended March 31, 2002, the Company recorded revenues of
$2,410,000 and $6,829,000, respectively, for services provided to this joint
venture.
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.
26
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
The following sets forth certain financial data regarding 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 Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues
Other Income $ 7,519 $ 20,330 $ 9,594 $ 25,988
Expenses
Product Development - Paid or
Payable to ECD 2,950,992 2,950,172 9,189,400 8,846,312
Product Development - Paid or
Payable to ChevronTexaco 1,261,046 161,333 2,035,922 1,314,966
Depreciation Expense 591,570 215,617 1,276,180 417,597
----------- ----------- ------------ ------------
Total Expenses 4,803,608 3,327,122 12,501,502 10,578,875
----------- ----------- ------------ ------------
Net Loss $(4,796,089) $(3,306,792) $(12,491,908) $(10,552,887)
=========== =========== ============ ============
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
--------------
March 31, June 30,
2003 2002
------------ ------------
(Unaudited) (Audited)
Current Assets:
Cash and Cash Equivalents $ 3,632,387 $ 134,823
Accounts Receivable 122,746 10,746
----------- -----------
Total Current Assets 3,755,133 145,569
Fixed Assets:
Leasehold Improvements 6,125,233 3,226,570
Machinery and Other Equipment 2,850,728 2,543,163
Construction in Progress 458,499 2,736,571
----------- -----------
Total Fixed Assets 9,434,460 8,506,304
Less Accumulated Depreciation (1,942,224) (666,044)
------------ -----------
Net Fixed Assets 7,492,236 7,840,260
----------- -----------
Total Assets $11,247,369 $ 7,985,829
=========== ===========
Current Liabilities:
Amount Due ECD, Net $ 1,201,019 $ 3,335,178
Amount Due ChevronTexaco 1,281,046 376,439
Deferred Revenue 15,257 15,257
----------- -----------
Total Current Liabilities 2,497,322 3,726,874
Noncurrent Liabilities:
Deferred Revenue 112,000 -
Members' Equity:
Capital Contributions 45,898,000 29,027,000
Cumulative Deficit (37,259,953) (24,768,045)
------------ -----------
Total Members' Equity 8,638,047 4,258,955
----------- -----------
Total Liabilities and Members' Equity $11,247,369 $ 7,985,829
=========== ===========
During the three months and nine months ended March 31, 2003, the Company
recorded revenues of $3,584,000 and $10,328,000, respectively, and during the
three months and nine months ended March 31, 2002 the Company recorded revenues
of $5,825,000 and $14,121,000, respectively, for services provided to this joint
venture.
28
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 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, in the form of a note, to ITS on July 1,
2002, followed by an additional advance of $1,000,000 to ITS on November 8,
2002.
Ovonic Media
Ovonic Media 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 nine months ended March 31, 2003, the Company had
revenues of $11,000 and $615,000, respectively, and for the three months and
nine months ended March 31, 2002, the Company had revenues of $514,000 and
$1,355,000, respectively, from Ovonic Media for services provided to this joint
venture for advanced product development work. 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 how to best position the joint venture in order to meet the
needs of the marketplace, expand the joint venture's operations, and secure
new equity investors and strategic partners to fund the joint venture's
operations. In the interim, ECD will fund continued product development
activities until new partners who will provide funding, marketing and
distribution are brought into the venture or GE resumes funding.
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 Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2003* 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ - $ - $ - $ -
Operating Expenses
Product Development 8,241 432,736 454,122 1,159,255
General and Administrative 2,419 75,000 152,419 217,289
Depreciation Expense 33,961 30,432 90,065 91,294
----------- ----------- ----------- -----------
Total Expenses 44,621 538,168 696,606 1,467,838
----------- ----------- ----------- -----------
Net Loss $ (44,621) $ (538,168) $ (696,606) $(1,467,838)
=========== =========== =========== ===========
- ------------------
* Excludes amounts funded by ECD on additional product
development activities.
OVONIC MEDIA, LLC
BALANCE SHEETS
--------------
March 31, June 30,
2003 2002
------------ ------------
(Unaudited) (Unaudited)
Property, Plant and Equipment (Net) $ 378,965 $ 460,241
------------ -----------
Total Assets $ 378,965 $ 460,241
============ ===========
Current Liabilities:
Accounts Payable to ECD $ 282,054 $ 364,263
------------ -----------
Total Current Liabilities 282,054 364,263
Members' Equity:
Capital Contributions 5,353,881 4,656,342
Cumulative Deficit (5,256,970) (4,560,364)
------------ -----------
Total Members' Equity 96,911 95,978
------------ -----------
Total Liabilities and Members' Equity $ 378,965 $ 460,241
============ ===========
Investments in Rare Earth Ovonic
During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech of Inner Mongolia, China. The agreement
called for the creation of joint ventures for manufacturing and licensing of
advanced NiMH battery technology, hydrogen storage alloy powders, advanced
Ovonic(TM) nickel hydroxide materials and production equipment, all for battery
applications for NiMH batteries. As of March 31, 2003, three of the
30
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
contemplated five joint ventures have been formed. ECD and Ovonic Battery
initially contributed technology for their 19% interest in each of these joint
ventures. In February 2002, ECD and Ovonic Battery jointly made a proportionate
$1,710,000 cash investment in the Rare Earth Ovonic joint ventures and
maintained their 19% interest in these entities. All of these joint ventures
are being accounted for using the cost method of accounting.
In the first phase of the project, Ovonic Battery has three contracts
totaling $63,600,000 to supply equipment and technology to its Rare Earth Ovonic
joint ventures in China. As of March 31, 2003, Ovonic Battery has received
payments totaling $58,605,000 under the three contracts.
The Company recorded revenues from Rare Earth Ovonic of $2,528,000 and
$9,033,000 for the three months and nine months ended March, 2003, respectively,
and $7,137,000 and $23,802,000 for the three months and nine months ended March
31, 2002, 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 developmental
phase and will not commence production until funding is secured for 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 nine months ended March 31 are computed as
follows:
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
Weighted average number of shares
outstanding 21,901,776 21,891,189 21,899,875 21,580,726
Net loss before cumulative effect of
change in accounting principle $(9,075,629) $(5,014,616) $(20,507,045) $(12,096,418)
Cumulative effect of change in
accounting principle - - 2,215,560 -
Net loss $(9,075,629) $(5,014,616) $(18,291,485) $(12,096,418)
BASIC NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ (.41) $ (.23) $ (.94) $ (.56)
=========== =========== ============ ============
BASIC NET LOSS PER SHARE $ (.41) $ (.23) $ (.84) $ (.56)
=========== =========== ============ ============
Weighted average number of shares
outstanding 21,901,776 21,891,189 21,899,875 21,580,726
Weighted average shares for dilutive
securities - - - -
Average number of shares outstanding
and potential dilutive shares 21,901,776 21,891,189 21,899,875 21,580,726
Net loss before cumulative effect of
change in accounting principle $(9,075,629) $(5,014,616) $(20,507,045) $(12,096,418)
Cumulative effect of change in
accounting principle - - 2,215,560 -
Net loss $(9,075,629) $(5,014,616) $(18,291,485) $(12,096,418)
DILUTED NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ (.41) $ (.23) $ (.94) $ (.56)
=========== =========== ============ ============
DILUTED NET LOSS PER SHARE $ (.41) $ (.23) $ (.84) $ (.56)
=========== =========== ============ ============
The per-share amount related to the cumulative effect of change in
accounting principle was $.10 (favorable benefit) for both the basic and diluted
net loss per share.
Due to the Company's net losses, 2003 and 2002 weighted average shares of
potential dilutive securities of 5,491 and 18,679, 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
3,324,442 and 2,544,716 potentially dilutive securities, which were respectively
excluded from the 2003 and 2002 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
March 31, 2003 $ 4,519 $ 7,361 $ 2,139 $ (423) $ 13,596
March 31, 2002 15,014 12,707 1,438 (4,669) 24,490
Nine months ended
March 31, 2003 $ 18,335 $ 22,496 $ 8,827 $ (1,730) $ 47,928
March 31, 2002 53,062 41,220 4,717 (25,306) 73,693
Interest Income
Three months ended
March 31, 2003 $ 946 $ - $ 13 $ - $ 959
March 31, 2002 1,158 - 72 - 1,230
Nine months ended
March 31, 2003 $ 2,991 $ - $ 58 $ - $ 3,049
March 31, 2002 3,729 - 227 - 3,956
Interest Expense*
Three months ended
March 31, 2003 $ - $ 18 $ 62 $ - $ 80
March 31, 2002 - 26 119 - 145
Nine months ended
March 31, 2003 $ - $ 71 $ 259 $ - $ 330
March 31, 2002 - 91 363 - 454
Operating Income (Loss)
Three months ended
March 31, 2003 $ (7,144) $ (1,180) $(2,263) $ 1,240 $ (9,347)
March 31, 2002 (5,489) (1,159) (1,493) 2,405 (5,736)
- --------------
* 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
--------- -------------- ------------ ------------- ------------
Operating Income (Loss)
Nine months ended
March 31, 2003 $(18,209) $ (4,170) $(2,773) $ 5,381 $(19,771)
March 31, 2002 (8,991) (5,307) (3,687) 3,350 (14,635)
Equity in Net Income (Loss) of
Investees Under Equity Method
Three months ended
March 31, 2003 $ (54) $ - $(1,597) $ 157 $ (1,494)
March 31, 2002 (200) - (1,057) 125 (1,132)
Nine months ended
March 31, 2003 $ (696) $ - $(5,001) $ 469 $ (5,228)
March 31, 2002 (454) - (2,864) 375 (2,943)
Depreciation Expense
Nine months ended
March 31, 2003 $ 1,308 $ 865 $ 1,273 $ (1,193) $ 2,253
March 31, 2002 696 858 1,310 (1,225) 1,639
Capital Expenditures
Nine months ended
March 31, 2003 $ 6,564 $ 844 $ 48 $ - $ 7,456
March 31, 2002 4,042 151 130 - 4,323
Investments and Advances
in Equity Method Investees
March 31, 2003 $ 5,590 $ - $25,332 $ - $ 30,922
March 31, 2002 3,547 - 18,210 - 21,757
Identifiable Assets
March 31, 2003 $155,030 $ 9,138 $19,649 $(13,345) $170,472
March 31, 2002 152,783 33,486 33,649 (24,601) 195,317
NOTE G - Commitments
- --------------------
On February 12, 2001, ECD signed an agreement with the landlord of Bekaert
ECD Solar Systems guaranteeing 50% of the rent obligation ($3,015,000) of
Bekaert ECD Solar Systems' facility for the first five years of the term of the
lease agreement for this facility. ECD's maximum exposure under this guaranty is
reduced by 50% of monthly rental installments paid, and was $1,849,000 as of
March 31, 2003. Bekaert also has guaranteed this rent obligation to the same
extent as ECD. ECD acquired Bekaert's interest in Bekaert ECD Solar Systems and
34
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Commitments (Continued)
- -------------------------------
United Solar on May 14, 2003 and provided back-up guarantees to Bekaert for its
portion of the guarantee, which is backed up by a standby letter of credit.
(See Note H - Subsequent Events.)
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 guaranteed Bekaert ECD Solar Systems' lease
payments 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. On May 14, 2003, ECD acquired Bekaert's interest
in Bekaert ECD Solar Systems and United Solar and advanced $36 million to
Bekaert ECD Solar Systems, which repaid this lease and all guarantees were
released. (See Note H - Subsequent Events.)
Also, upon ECD's acquiring of Bekaert's interest in United Solar, ECD
provided a guarantee to Bekaert for the remaining balance (approximately $3.4
million) of the Fuji lease. This guarantee is backed up by a standby letter of
credit.
Beginning October 1, 2002, it was estimated that Bekaert ECD Solar
Systems/United Solar would require additional funding, an estimated $40,000,000
for the twelve months ending September 30, 2003, in order to cover operating
expenses, including ramp-up of production and implementation of marketing
programs, and for working capital purposes. While neither ECD nor Bekaert was
obligated to provide any portion of the required additional funding, ECD and
Bekaert 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 advised the Company that it was focusing on its core businesses
and would 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 funded operations through April 30, 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 has agreed to provide 100% of Bekaert ECD Solar Systems/United
Solar's funding requirements after April 30, 2003 until new equity investors who
would 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 100% of the
operating losses when it funds 100% of the cash requirements until new equity
investors are brought into the joint venture.
During the period from October 1, 2002 through March 31, 2003, ECD
provided bridge loans to Bekaert ECD Solar Systems and United Solar of
$2,984,000 and $2,247,000, respectively, and Bekaert provided bridge loans to
Bekaert ECD Solar Systems of $9,669,000.
35
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Commitments (Continued)
- --------------------------------
During the period from April 1, 2003 through April 18, 2003, ECD provided
additional bridge loans to United Solar of $1,369,000 and Bekaert has provided
additional bridge loans to Bekaert ECD Solar Systems of $2,531,000.
As of April 18, 2003, Bekaert ECD Solar Systems and United Solar have
fully drawn down the bridge loans committed by Bekaert and ECD (except for the
final $9.5 million, which is the remaining amount due ECD under the 30MW
equipment contract).
NOTE H - Subsequent Events
- --------------------------
Subsequent to March 31, 2003, ECD entered into an agreement with Bekaert
to purchase their interests in the photovoltaic ventures, and signed a non-
binding memorandum of understanding with ChevronTexaco to purchase their
interest in Texaco Ovonic Fuel Cell (see Management's Discussion and Analysis -
Liquidity and Capital Resources):
o Bekaert ECD Solar Systems/United Solar - On May 14, 2003, ECD acquired
Bekaert's 19% interest in United Solar and 60% interest in Bekaert ECD
Solar Systems for $6 million ($4 million paid at closing and $2 million to
be paid no later than December 22, 2003). Additionally, ECD provided $36
million to Bekaert ECD Solar Systems to terminate its sale and leaseback
arrangement with LaSalle National Leasing and, as a result, freed up the
$20 million of Company funds that had been restricted in support of its
guarantee of this lease. ECD also provided back-up guarantees to
Bekaert for its guarantee of United Solar's Fuji lease ($3.4 million) and
Bekaert's share of the guarantee of the Auburn Hills facility
($1.8 million) (see Note G - Commitments). Bekaert will receive rights
to United Solar's technologies outside the field of photovoltaics and
rights limited to build sputtering machines outside the field of
triple-junction photovoltaics. In addition, Bekaert assigned to ECD its
$12.2 million note receivable of its bridge loans to Bekaert ECD Solar
Systems.
This acquisition will be accounted for as a step acquisition using the
purchase method of accounting. The Company is currently in the process of
allocating the purchase price to assets acquired and liabilities assumed,
including assessing what amount of goodwill, if any, will result from this
transaction. With this transaction, ECD increased its ownership of Bekaert
ECD Solar Systems from 40% to 100%, necessitating a change from the equity
method of accounting to a consolidated entity effective May 2003. As ECD's
ownership interest in United Solar increased from 81% to 100%, United
Solar will continue to be accounted for as a consolidated entity.
36
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Subsequent Events (Continued)
- --------------------------------------
The following table is prepared on a proforma basis for the three- and
nine-month periods ended March 31, 2003 and March 31, 2002 as though the
Company had acquired the remaining 60% interest in Bekaert ECD Solar
Systems and 19% interest in United Solar as of the beginning of the
periods presented.
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue $ 17,935,243 $ 26,747,555 $ 60,986,935 $ 84,031,820
Net loss $(13,697,023) $ (8,779,254) $(28,616,176) $(21,660,052)
Net loss per share $ (.63) $ (.40) $ (1.31) $ (1.00)
The proforma results have been prepared for comparative purposes only and
do not reflect the impact of certain adjustments which would result from
the allocation of the purchase price. The proforma results are not
necessarily indicative of the results of operations had the acquisition
been consummated at the beginning of the periods presented, and are not
intended to be a projection of future results.
o Texaco Ovonic Fuel Cell Company LLC - On April 30, 2003, ECD signed a
memorandum of understanding with ChevronTexaco whereby ECD will acquire
ChevronTexaco's 50% interest in Texaco Ovonic Fuel Cell for $1 effective
December 31, 2002. When this transaction is completed, ECD will include
this joint venture in its consolidated financial statements. Since January
1, 2003, ECD has been funding all of this joint venture's development
costs.
37
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 nine months ended March 31, 2003 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 noncompetitive;
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;
38
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 March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
The Company has continued to invest to further advance its technologies.
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. The Company does not carry the value of its intellectual property and
technologies as assets in its balance sheet. 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.
The Company had a net loss of $9,076,000 on revenues of $13,595,000 in the
three months ended March 31, 2003 compared to a net loss of $5,015,000 on
revenues of $24,490,000 for the three months ended March 31, 2002. The Company
had a decrease of $262,000 in general and administrative expense (net) that was
more than offset by a
39
$1,117,000 increase in patent defense expenses, an increase of $1,596,000 in
the net cost of product development, a $363,000 increase in equity loss in
joint ventures, a decrease in margins on product sales of $1,232,000, a $271,000
reduction in interest income due to lower interest rates and a $128,000
reduction of other nonoperating income.
The loss from operations increased to $9,347,000 in 2003 from $5,737,000
in 2002 because of:
o an operating loss of $5,904,000 in 2003 for the ECD segment (net of
consolidating entries) versus operating loss of $3,084,000 in 2002,
primarily due to higher investment in product development on its core
technologies as a result of reduced third-party funding and higher costs
related to the 30MW machine-building contract;
o an increased operating loss of $770,000 for United Solar (operating loss
of $2,263,000 in 2003 versus operating loss of $1,493,000 in 2002)
primarily due to increased negative margins of $886,000.
The decrease in consolidated revenues primarily resulted from a reduction
in product sales of $5,167,000 and a reduction in revenues from product
development agreements of $5,927,000.
o The ECD segment's revenues, net of consolidating entries, decreased to
$4,096,000 in 2003 from $10,345,000 in 2002 due to decreased revenues of
$1,422,000 related to the 30MW machine-building contract, which is now
producing product, and a decrease of $5,165,000 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 $5,346,000 decrease in Ovonic Battery's revenues was primarily due to
lower equipment sales to Rare Earth Ovonic ($2,528,000 in 2003 versus
$7,137,000 in 2002) as the first phase of that project nears completion
and reduced revenues from product development agreements ($3,934,000 in
2003 versus $4,955,000 in 2002), primarily resulting from reduced revenues
related to product development contracts from Texaco Ovonic Battery
Systems and General Motors.
o United Solar's 2003 revenues increased to $2,139,000 in 2003 versus
$1,438,000 in 2002 due to increased product sales (as the 30MW production
facility began operations) of $630,000 and increased product development
revenues of $74,000.
Product sales, consisting of machine building and equipment sales,
photovoltaic products and metal hydride materials, decreased 52% to $4,857,000
in the three months ended March 31, 2003 from $10,024,000 in the three months
ended March 31, 2002. Machine-building and equipment sales revenues decreased
69% to $2,687,000 in 2003 from $8,706,000 in 2002, primarily due to reduced
product sales in connection with Ovonic Battery's contracts with Rare Earth
Ovonic to provide battery-making equipment, the first phase of which is nearing
completion, ($2,528,000 in 2003 compared to $7,137,000 in 2002). All
machine-building and equipment sales contracts are accounted for using
percentage-of-completion accounting. Photovoltaic sales, which are sales of
semi-finished products, increased significantly as the new 30MW facility began
producing products for an affiliate, Bekaert ECD Solar Systems, and
40
were $1,767,000 for the three months ended March 31, 2003 and $1,137,000 for
the three months ended March 31, 2002 (see Note D of Notes to Consolidated
Financial Statements). Sales of metal hydride materials were $265,000 in 2003
compared to $105,000 in 2002. The Company currently has a product sales backlog
of $12,347,000, of which $4,206,000 is expected to be recognized as revenues
in Fiscal 2003. (See Note B of Notes to Consolidated Financial Statements.)
Royalties increased 15% to $530,000 in the three months ended March 31,
2003 from $459,000 in the three months ended March 31, 2002, principally due to
the fact that there was a credit in 2002 for a previous overpayment of royalties
calculated by a licensee.
Revenues from product development agreements decreased 42% to $8,113,000
in the three months ended March 31, 2003 from $14,040,000 in the three months
ended March 31, 2002 primarily due to lower revenues under advanced product
development agreements with Texaco Ovonic Battery Systems ($3,338,000 for 2003
compared to $3,927,000 in 2002), from Texaco Ovonic Hydrogen Systems ($3,584,000
for 2003 compared to $5,825,000 for 2002), Texaco Ovonic Fuel Cell (zero for
2003 compared to $2,410,000 for 2002 (ChevronTexaco is no longer funding this
joint venture after December 31, 2002)) and General Motors (zero for 2003
versus $255,000 for 2002) and reduced activity related to Ovonic Media ($11,000
in 2003 versus $514,000 in 2002 as GE suspended funding pending its evaluation
of the marketplace and discussions with third parties to join Ovonic Media).
Increased product development revenues for United Solar ($347,000 in 2003
compared to $77,000 in 2002) partially offset the decreases. (See Note B of
Notes to Consolidated Financial Statements.)
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 increased to $95,000 in the three
months ended March 31, 2003 from a negative $34,000 in the three months ended
March 31, 2002. This increase was due to increases in revenues from Ovonyx.
Cost of product sales decreased by $3,935,000 in the three months ended
March 31, 2003 due to the $5,167,000 decrease in product sales. This resulted in
a loss of $1,061,000 on product sales in 2003 compared to a profit of $171,000
on product sales in 2002. The decreased profit primarily relates to additional
costs for the 30MW 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 56% (compared
to 75% in the same quarter in 2002) of the Company's cost of product
development. The total cost of product development decreased by $4,331,000 for
the three months ended March 31, 2003. Some product development expenses were
shifted from funded programs to self-funded programs and were accompanied by
reduced revenues of $5,927,000, resulting in an increase of $1,596,000 in net
cost of product development.
41
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
Cost of revenues from product
development agreements $ 8,673,000 $14,289,000
Product development and research 5,738,000 4,453,000
----------- -----------
Total cost of product development 14,411,000 18,742,000
Revenues from product development
agreements 8,113,000 14,040,000
----------- -----------
Net cost of product development $ 6,298,000 $ 4,702,000
=========== ===========
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 technology - 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 technology is depreciation ($232,000)
related to the new state-of-the-art clean room and the related equipment.
Another joint project with ChevronTexaco is to convert a 2-liter internal
combustion engine (ICE) to run on hydrogen. This converted engine will be used
to power a hybrid electric vehicle using metal hydride storage tanks. We and
ChevronTexaco are equally sharing the cost of this $1,000,000 development
program.
Expenses were incurred in 2003 and 2002 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. Total patent expenses, including patent defense expenses,
increased to $2,015,000 in the three months ended March 31, 2003 from $770,000
in the three months ended March 31, 2002, principally due to higher litigation
costs ($1,486,000 in 2003 versus $368,000 in 2002) 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 nonconsumer
applications beginning in Fiscal 2002. In March 2001, Ovonic Battery filed suit
against Matsushita Battery Industrial Co., Ltd., Toyota Motor Corporation,
Panasonic EV Energy Co., Ltd. and several related entities for infringement of
patents held by Ovonic Battery. 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
$861,000 in the three months ended March 31, 2002 to $598,000 in the three
months ended March 31, 2003 was due to decreased costs of $1,678,000 as a result
of selling expenses associated with machine-building contracts, partially offset
by the amortization of negative goodwill in 2002 and decreased allocation of
expenses in 2003.
42
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
Gross Expenses $ 5,194,000 $ 6,518,000
Less - allocations to product development
and research (1,768,000) (2,859,000)
- allocations to cost of revenues from
product development agreements (2,828,000) (2,681,000)
- amortization of negative goodwill - (117,000)
----------- ------------
Remaining Expenses $ 598,000 $ 861,000
=========== ===========
The $450,000 decrease in other income (net) ($272,000 income in 2003
compared to $722,000 income in 2002) resulted primarily from lower interest
income on the Company's investments as a result of lower interest rates
($959,000 in 2003 compared to $1,230,000 in 2002) and from equity losses
attributed to losses at Bekaert ECD Solar Systems ($1,441,000, principally due
to increased sales and marketing expenses and pre-production costs related to
the new 30MW production equipment, in 2003 compared to $932,000 in 2002),
partially offset by lower losses at ITS ($53,000 in 2003 compared to $200,000 in
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.
Nine Months Ended March 31, 2003 Compared to Nine Months Ended March 31, 2002
- -----------------------------------------------------------------------------
The Company has continued to invest to further advance its technologies.
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. The Company does not carry the value of its intellectual property and
technologies as assets in the Company's balance sheet. 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.
The Company had a net loss of $18,291,000 on revenues of $47,928,000 in
the nine months ended March 31, 2003 compared to a net loss of $12,096,000 on
revenues of $73,693,000 for the nine months ended March 31, 2002. The Company
had increased license fees of $3,419,000 that were more than offset by an
increase of $385,000 in general and administrative expenses (net), an increase
of $5,025,000 in the net cost of product development, a decrease in margin on
product sales of $2,842,000, increased equity losses of $2,286,000, a $907,000
reduction in interest income due to lower interest rates, a $438,000 reduction
of other nonoperating income and increased patent expenses of $267,000. In
addition, the Company recognized income of $2,216,000 attributable to the
cumulative effect of a change in accounting principle (see Note A of Notes to
Consolidated Financial Statements).
43
The loss from operations increased to $19,771,000 in 2003 from $14,635,000
in 2002 because of:
o an operating loss of $12,828,000 in 2003 for the ECD segment (net of
consolidating entries) versus operating loss of $5,641,000 in 2002,
primarily due to higher investment in product development on its core
technologies as a result of reduced third-party funding and higher costs
related to the 30MW machine-building contract;
o a reduced operating loss of $914,000 for United Solar (operating loss of
$2,773,000 in 2003 versus operating loss of $3,687,000 in 2002) due to a
license fee of $3,269,000 and reduced product development costs (net),
partially offset by increased negative margins of $2,014,000;
o a decreased operating loss of $1,137,000 for Ovonic Battery (operating
loss of $4,170,000 in 2003 versus operating loss of $5,307,000 in 2002)
primarily resulting from a profitable equipment sales contract to Rare
Earth Ovonic in China and higher revenues from license agreements,
partially offset by higher costs for litigation and a write-off ($272,000)
of an intangible asset associated with a license agreement.
The decrease in consolidated revenues primarily resulted from a reduction
in product sales of $17,656,000 and a reduction in revenues from product
development agreements of $11,492,000, partially offset by increased license and
other agreements ($3,419,000 in 2003 versus zero in 2002).
o The ECD segment's revenues, net of consolidating entries, decreased to
$16,605,000 in 2003 from $27,756,000 in 2002 due to decreased revenues of
$3,221,000 related to the 30MW machine-building contract, which is now
producing product, and a decrease of $8,358,000 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 $18,724,000 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 ($9,033,000 in 2003 versus $23,802,000 in 2002),
reduced revenues from product development agreements ($11,062,000 in 2003
versus $14,959,000 in 2002) and a $28,000 reduction in royalty revenues,
partially offset by increased revenues from license and other agreements
($150,000 in 2003 versus zero in 2002).
o United Solar's 2003 revenues increased to $8,827,000 in 2003 versus
$4,717,000 in 2002 due to increased product sales of $294,000 as the 30MW
production facility began operations, and a $3,269,000 license fee.
Product sales, consisting of machine building and equipment sales,
photovoltaic products and metal hydride materials, decreased 55% to $14,704,000
in the nine months ended March 31, 2003 from $32,360,000 in the nine months
ended March 31, 2002. Machine-building and equipment sales revenues decreased
65% to $9,703,000 in 2003 from $27,473,000 in 2002, primarily due to Ovonic
Battery's contracts with Rare Earth Ovonic to provide battery-making equipment,
the first phase of which is nearing completion, ($9,033,000 in 2003 compared to
$23,802,000 in 2002). All machine-building and equipment sales
44
contracts are accounted for using percentage-of-completion accounting.
Photovoltaic sales, which are sales of semi-finished products, increased
significantly as the new 30MW facility began producing products for an
affiliate, Bekaert ECD Solar Systems, and were $4,129,000 for 2003 and
$3,835,000 for 2002 (see Note D of Notes to Consolidated Financial Statements).
Sales of metal hydride materials were $648,000 in 2003 compared to $716,000 in
2002. The Company currently has a product sales backlog of $12,347,000, of
which $4,206,000 is expected to be recognized as revenues in Fiscal 2003.
(See Note B of Notes to Consolidated Financial Statements.)
Royalties decreased 4% to $1,430,000 in the nine months ended March 31,
2003 from $1,484,000 in the nine months ended March 31, 2002. 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. In
addition, there was a credit in 2002 for a previous overpayment of royalties
calculated by a licensee.
Revenues from product development agreements decreased 29% to $28,092,000
in the nine months ended March 31, 2003 from $39,584,000 in the nine months
ended March 31, 2002, primarily due to reduced battery activities under an
advanced product development agreement with Texaco Ovonic Battery Systems
($8,803,000 for 2003 compared to $12,155,000 in 2002); reduced activity related
to Ovonic Media ($615,000 in 2003 versus $1,355,000 in 2002, as GE suspended
funding pending its evaluation of the marketplace and discussions by Ovonic
Media with third parties to join this joint venture); and the completion of
programs with the NIST and the DOE, which advanced the Company's hydrogen
storage and optical memory technologies (zero in 2003 versus $521,000 in 2002).
In addition, there was a decrease in revenues from Texaco Ovonic Hydrogen
Systems ($10,328,000 for 2003 compared to $14,121,000 for 2002) and Texaco
Ovonic Fuel Cell ($3,940,000 for 2003 (ChevronTexaco is no longer funding this
joint venture after December 31, 2002) compared to $6,829,000 for 2002).
Increased product development revenues for United Solar ($1,320,000 in 2003
compared to $546,000 in 2002) 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
nine months ended March 31, 2003, from zero in the nine months ended March 31,
2002. In December 2002, United Solar issued to Canon a notice whereby United
Solar granted Canon rights to manufacture in two countries of its choice in
Southeast Asia, excluding India and the People's Republic of China. This notice
was issued in satisfaction of the outstanding obligation ($2,500,000 plus
accrued interest) 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 nine months ended March 31, 2003. 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 increased to $283,000 in the nine
months ended March 31, 2003 from
45
$265,000 in the nine months ended March 31, 2002. This increase was due to
increases in revenues from the Production Technology and Machine Building
Division and the Central Analytical Laboratory.
Cost of product sales decreased by $14,815,000 in the nine months ended
March 31, 2003 due to the $17,656,000 decrease in product sales. This resulted
in a loss of $1,510,000 on product sales in 2003, compared to a profit of
$1,332,000 in 2002. The decreased profit primarily relates to additional costs
for the 30MW machine-building contract and negative margins at United Solar.
Revenues from product development agreements currently fund 67% (compared
to 82% in the same period in 2002) of the Company's cost of product development.
The total cost of product development decreased by $6,467,000 for the nine
months ended March 31, 2003. 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 $11,492,000, resulting in an increase of
$5,025,000 in net cost of product development.
Nine Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
Cost of revenues from product development
agreements $ 27,556,000 $ 39,202,000
Product development and research 14,318,000 9,139,000
------------ ------------
Total cost of product development 41,874,000 48,341,000
Revenues from product development
agreements 28,092,000 39,584,000
------------ ------------
Net cost of product development $ 13,782,000 $ 8,757,000
============ ============
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 technology - 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 technology is depreciation related to the
new state-of-the-art clean room and the related equipment. Another joint project
with ChevronTexaco is to convert a 2-liter internal combustion engine (ICE) to
run on hydrogen. This converted engine will be used to power a hybrid electric
vehicle using metal hydride storage tanks. We and ChevronTexaco are equally
sharing the cost of this $1,000,000 development program.
Expenses were incurred in 2003 and 2002 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. Total patent expenses, including patent defense expenses,
increased to $4,097,000 in the nine months ended March 31, 2003 from $3,830,000
in the nine months ended March 31, 2002, principally due to higher litigation
costs ($2,394,000 in 2003 versus $2,320,000 in 2002) 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 nonconsumer
applications beginning in Fiscal 2002. This reimbursement of $301,000 for the
nine months ended March 31, 2003 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
46
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 increase in operating, general and administrative expenses (net) from
$5,130,000 in the nine months ended March 31, 2002 to $5,515,000 in the nine
months ended March 31, 2003 was due primarily to increased computer software
upgrades ($655,000), the write-off ($272,000) of the intangible asset associated
with a license agreement and increased costs at United Solar primarily
associated with increased selling expenses and higher costs at the Auburn Hills
facility and $577,000 in decreased allocations of expenses.
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Nine Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
Gross Expenses $17,510,000 $18,052,000
Less - allocations to product development
and research (5,807,000) (4,510,000)
- allocations to cost of revenues from
product development agreements (6,188,000) (8,062,000)
- amortization of negative goodwill (350,000)
----------- ------------
Remaining Expenses $ 5,515,000 $ 5,130,000
=========== ===========
The $3,275,000 decrease in other income (net) ($736,000 expense in 2003
compared to $2,539,000 income in 2002) resulted primarily from lower interest
income on the Company's investments as a result of lower interest rates
($3,049,000 in 2003 compared to $3,956,000 in 2002) and from higher equity
losses attributed to Bekaert ECD Solar Systems ($4,532,000, principally due to
increased sales and marketing expenses and pre-production costs related to the
new 30MW production equipment, in 2003 compared to $2,489,000 in 2002), and at
Ovonyx ($280,000 in 2003 compared to zero in 2002), partially offset by lower
losses at ITS ($416,000 in 2003 compared to $454,000 in 2002).
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.
47
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.
Liquidity and Capital Resources
As of March 31, 2003, the Company had consolidated cash, cash equivalents,
short-term investments and accounts and note receivable (including $17,954,000
of amounts due from related parties) of $115,378,000 (see Note G of Notes to
Consolidated Financial Statements for restrictions), a decrease of $17,639,000
from June 30, 2002. As of March 31, 2003, the Company had consolidated working
capital of $73,535,000 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 $36,027,000, compared to $53,546,000 received from product
development agreements in the year ended June 30, 2002. However, the Company is
engaged in discussions and negotiations with other parties, including the U.S.
government, which are expected to 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 March 31, 2003, the Company had $93,165,000 cash, cash equivalents
and short-term investments consisting of commercial paper, classified as
available for sale, maturing from 91 days to 28 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 March 31, 2003, due to investment yield considerations, only 18% of the
total portfolio had maturities of less than 90 days. As of March 31, 2003, there
were two investments totaling $7,500,000 which, at that time, did not comply
with the rating policy (one was rated BBB+ and the other was rated BBB). The
Company has continued to hold these investments based on advice from its
investment advisor.
During the nine months ended March 31, 2003, $6,396,000 of cash was used
in operations. The difference between the net loss of $18,291,000 and the net
cash used in operations was principally due to a $10,345,000 decrease in
working capital (other than cash). Also contributing were noncash costs
(principally depreciation ($2,253,000) and equity losses in joint ventures
($5,228,000)). In addition, $7,456,000 of machinery and equipment was purchased,
principally for ECD's state-of-the-art clean room ($2,029,000) and for United
Solar's expansion to 30MW of production capacity ($4,243,000). The Company is
still in the process of optimizing the production capacity of its 30MW machine
and will have to spend additional funds to complete this optimization.
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
48
Rare Earth Ovonic joint ventures in China. As of March 31, 2003, Ovonic
Battery has received payments totaling $58,605,000 under the three contracts.
Ovonic Battery has recorded revenues of $52,400,000 for the contracts,
$6,205,000 less than the cash received. Therefore, in future periods, the
Company will receive less cash than revenues recognized to the extent of the
deferred revenues. The Company's ability to timely receive the remaining funds
under this contract will be affected by the SARS outbreak in China. The Company
has brought all of its employees back home and the date of their return to
China is indeterminable at this time.
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 advancement of 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 $8,803,000
for work performed under the contract in the nine months ended March 31,
2003 and is expected to receive approximately $13 million for all of
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 ($45,898,000 received
through March 31, 2003), including product and market development. A
significant portion of the funding is committed to a product development
contract from Texaco Ovonic Hydrogen Systems to 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
$47,472,000 for work performed under the contract, $10,328,000 of which
was in the nine months ended March 31, 2003, and is expected to receive
approximately $15 million for all of Fiscal 2003.
o Bekaert ECD Solar Systems LLC/United Solar Systems Corp. - Bekaert has
provided this strategic alliance with a total of $96.2 million (see Note
D for background information on this joint venture). On May 14, 2003,
ECD acquired Bekaert's 19% interest in United Solar and 60% interest in
Bekaert ECD Solar Systems for $6 million ($4 million paid at closing and
$2 million to be paid no later than December 22, 2003).
49
Additionally, ECD provided $36 million to Bekaert ECD Solar Systems to
terminate its sale and leaseback arrangement with LaSalle National
Leasing and, as a result, freed up the $20 million of Company funds that
had been restricted in support of its guarantee of this lease. ECD also
provided back-up guarantees to Bekaert for its guarantee of United Solar's
Fuji lease ($3.4 million) and Bekaert's share of the guarantee of the
Auburn Hills facility ($1.8 million) (see Note G - Commitments). As a
result, the Company will include the results of these ventures in its
financial results of operations and fund 100% of these operations until
new strategic equity investors are brought into the ventures. The Company
plans to refinance the 30MW production facility and to seek new equity
investors for its now wholly owned Uni-Solar business.
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 $615,000 for
work performed in the nine months ended March 31, 2003, 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 Phase I 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 how to best position the joint venture in order to meet
the needs of the marketplace, expand the joint venture's operations, and
secure new equity investors and strategic partners to fund the joint
venture's operations. ECD will fund continued product development
activities until new partners who will provide funding, marketing and
distribution are brought into the venture or GE resumes funding. The
other activities of the strategic alliance are continuing on schedule.
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, ECD made a capital contribution of $1,000,000 in Ovonyx
in exchange for technology, which had previously been contributed by ECD
to Ovonyx, and for 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
accounts for this investment on the equity method and recognizes its
proportionate share of Ovonyx losses to the extent of its $1,000,000
investment. In the three months ended March 31, 2003, ECD recorded zero
equity income and $280,000 equity loss for the nine months ended March
31, 2003 related to its investment in Ovonyx.
50
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 recent purchases of our partners' interests
in the photovoltaic and fuel cell ventures 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.
While the Company's business partners have funded most of its product
development activities, additional sources of cash are required to sustain the
Company's operations.
The Company is engaged in a number of discussions and negotiations to fund
its operations, including forming new strategic alliances to fund and grow its
photovoltaic, fuel cell and other businesses. The Company is also engaged in
negotiations with government agencies for contracts to fund its development
activities. In addition, it plans to refinance the 30MW photovoltaic
manufacturing equipment. Management believes that funds generated from
operations, new business agreements, new government contracts and the
refinancing of the photovoltaic equipment, together with existing cash and cash
equivalents, will be adequate to support the Company's operations and planned
growth for the coming year.
While it is the Company's intent to fund its near-term operations from
cash and cash equivalents on hand and from product sales, product development
agreements, strategic alliances and new financings, the amount and timing of
such activities are uncertain. Accordingly, the Company will also consider
equity or debt financing and cost reduction programs in order to have sufficient
cash to fund its operations. No assurances, however, can be given as to the
timing or success of the aforementioned plans, negotiations, discussions and
programs.
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 $92,948,000 and $114,207,000 of these investments on March 31,
2003 and June 30, 2002, respectively. On March 31, 2003, the investments had an
average maturity of 422 days, $78,842,000 of which had maturities of 91 days to
28 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 March 31, 2003, due to investment yield considerations, only
18% of the total portfolio had maturities of less than 90 days. As of March 31,
2003, there were two investments totaling $7,500,000 which, at that time, did
not comply with the rating policy (one was rated BBB+ and the other was 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 March
31, 2003 portfolio of approximately $725,000.
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 March
31, 2003. 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 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
At the Annual Meeting of Stockholders (the "Meeting") of ECD held on
February 20, 2003, the following directors were elected for the ensuing year and
until their successors shall be duly elected and qualified:
For Withheld Authority
------------ ------------------
Stanford R. Ovshinsky 24,700,652 673,962
Iris M. Ovshinsky 24,721,546 653,068
Robert C. Stempel 24,703,924 670,690
Nancy M. Bacon 24,700,275 674,339
Umberto Colombo 24,937,355 437,259
Subhash K. Dhar 24,725,079 649,535
Hellmut Fritzsche 24,326,776 1,047,838
Walter J. McCarthy, Jr. 24,936,752 437,862
Florence I. Metz 24,935,321 439,293
James R. Metzger 24,723,496 651,118
Donald L. Paul 24,913,700 460,914
Stanley K. Stynes 24,347,244 1,027,370
Greg M. Vesey 24,928,185 446,429
Also approved at the Meeting was the appointment of Deloitte & Touche LLP
as independent accountants for the fiscal year ending June 30, 2003 (with
19,111,856 for, 299,432 against, and 35,501 abstentions).
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
A. Exhibits
--------
99.1 Chief Executive Officer's Certification Pursuant to 18 U.S.C.
Section 1350
99.2 Chief Financial Officer's Certification Pursuant to 18 U.S.C.
Section 1350
B. Reports on Form 8-K
-------------------
None
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
Date: May 15, 2003 Vice President and Chief Financial Officer
(Principal financial and accounting officer)
By: /s/ Stanford R. Ovshinsky
-------------------------------------------
Stanford R. Ovshinsky
Date: May 15, 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: May 15, 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: May 15, 2003 /s/ Stephan W. Zumsteg
-------------------------------
Stephan W. Zumsteg
Chief Financial Officer
56