SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 38-1749884
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
2956 Waterview Drive, Rochester Hills, Michigan 48309
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (248) 293-0440
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
--- ---
The aggregate market value of the voting and non-voting common equity held
by non-affiliates (based upon the closing price of such voting and non-voting
common equity on the NASDAQ National Market System on December 31, 2002, the
last business day of the registrant's most recently completed second fiscal
quarter) was approximately $207 million.
As of October 3, 2003, there were 219,913 shares of ECD's Class A Common
Stock, 430,000 shares of ECD's Class B Common Stock and 21,254,607 shares of
ECD's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1: Business
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OVERVIEW
Energy Conversion Devices, Inc. (ECD) is a technology, product
development and manufacturing company, founded by Stanford R. Ovshinsky and
Iris M. Ovshinsky, engaged in the invention, engineering, development and
commercialization of new materials, products and production technology. Under
the direction of Stanford R. Ovshinsky, principal inventor, we have established
a leadership role in the development of proprietary materials, products and
production technology based on our atomically engineered amorphous and
disordered materials using chemical and structural disorder to provide multiple
degrees of freedom that result in our ability to make many new materials.
We develop materials that permit us to design and commercialize
products such as nickel metal hydride (NiMH) batteries, thin-film solar cell
(photovoltaic) products and phase-change optical memory media. These products
have unique chemical, electrical, mechanical and optical properties and superior
performance characteristics. Our proprietary materials, products and
technologies are referred to as Ovonic(TM).
We have established a multi-disciplinary business, scientific, technical
and manufacturing organization to commercialize products based on our
technologies. We have enabling proprietary technologies in the important fields
of:
Alternative Energy Technology
Energy Storage and Related Technologies
o Ovonic(R) Rechargeable NiMH batteries
o Ovonic(TM) solid hydrogen storage systems
o Alternative energy vehicles
Energy Generation
o Ovonic(TM) Thin-film photovoltaic modules and systems
o Ovonic(TM) regenerative fuel cell technology
Information Technology
o Ovonic(TM) rewritable optical memory technology
o Ovonic(TM) Unified Memory
o Ovonic(TM) Cognitive Computer technology
We manufacture and sell our proprietary products through our subsidiaries
and joint venture companies and through licensing arrangements with major
companies throughout the world. In addition, in support of these activities, we
are engaged in research and development, production of our proprietary materials
and products, as well as in designing and building production machinery. Our
extensive patent portfolio includes numerous basic and fundamental patents
applicable to each of our lines of business. We invent not only materials, but
also develop low-cost production technologies and high-performance products. Our
patents, therefore, cover not only materials, but also the production technology
and products we develop.
2
Our corporate structure and the activities we conduct directly and through
our subsidiaries and joint ventures are summarized below:
ALTERNATIVE ENERGY TECHNOLOGY OWNERSHIP
- ----------------------------- ---------
ENERGY STORAGE AND RELATED TECHNOLOGIES
---------------------------------------
Batteries
---------
Ovonic Battery Company, Inc. 1 ECD -- 91.4%
Honda Motor Company, Ltd. -- 3.2%
Sanoh Industrial Co., Ltd. -- 3.2%
Sanyo Electric Co. Ltd. -- 2.2%
Texaco Ovonic Battery Systems LLC Ovonic Battery Company, Inc.-- 50%
Texaco Energy Systems LLC, a unit of
ChevronTexaco Corporation -- 50%
Rare Earth Ovonic Metal ( ECD & Ovonic Battery Company, Inc.-- 19%
Hydride Joint Venture Co. Ltd. (
Rare Earth Ovonic High Power NiMH ( Inner Mongolia Baotou Steel Rare-Earth
Battery Joint Venture Co. Ltd. ( High Tech Holding Co. Ltd.-- 75%
Rare Earth Ovonic NiMH Battery (
Electrode Joint Venture Co. Ltd. ( American Wako Koeki Corp.-- 6%
Sovlux Battery Closed-stock Company ECD -- 50%
Chepetsky Mechanical Plant -- 50%
(an enterprise of the Russian Ministry of Atomic
Energy (Minatom))
Hydrogen
--------
Texaco Ovonic Hydrogen Systems LLC ECD -- 50%
Texaco Energy Systems LLC, a unit of
ChevronTexaco Corporation -- 50%
Alternative Energy Vehicles
---------------------------
ITS Innovative Transportation Systems A.G. ECD -- 26%
Neville D. Chamberlain Family and Related Entity -- 66%
Texaco Ovonic Battery Systems LLC -- 8%
(Continued on next page)
3
ENERGY GENERATION OWNERSHIP
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Photovoltaics
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United Solar Ovonic Corp. 1,2 ECD -- 100%
United Solar Ovonic LLC 1,3 ECD -- 60%
United Solar Ovonic Corp. -- 40%
Sovlux Co., Ltd. ECD -- 50%
State Research & Production Enterprise Kvant and
enterprises of Minatom -- 50%
Fuel Cell Technology
--------------------
Ovonic Fuel Cell Company LLC 1,4 ECD-- 100%
INFORMATION TECHNOLOGY
- ------------------------
Optical Memory
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Ovonic Media, LLC ECD -- 49%
General Electric -- 51%
Ovonic(TM) Unified Memory
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Ovonyx, Inc. ECD -- 41.7%
Tyler Lowrey; Intel Capital; private investors -- 58.3%
Ovonic(TM) Cognitive Computer 1
-----------------------------
Ovonic Cognitive Computer, Inc. ECD -- 95%
Ovonyx -- 5%
- -------------------
1 The revenues and/or expenses of these entities are included in our
consolidated financial statements. The revenues and/or expenses of United
Solar Ovonic LLC are included in our consolidated financial statements
effective May 15, 2003 upon our acquisition of the 60% interest in United
Solar Ovonic LLC formerly owned by a unit of N.V. Bekaert S.A. The
revenues and/or expenses of Ovonic Fuel Company are included in our
consolidated financial statements effective January 1, 2003 upon our
acquisition of the 50% interest formerly owned by a unit of ChevronTexaco.
2 Formerly known as United Solar Systems Corp.
3 Formerly known as Bekaert ECD Solar Systems LLC.
4 Formerly known as Texaco Ovonic Fuel Cell Company LLC.
4
Our technologies have been commercialized in products such as NiMH
consumer batteries and NiMH batteries for transportation applications,
photovoltaic products and phase-change rewritable optical memory disks. Other of
our technologies require further technical development and financial resources
from us, our joint venture partners and/or third parties in order to achieve
commercial production.
Product manufacturing activities are conducted through our subsidiaries
and joint ventures. ECD's principal manufacturing activity consists of machine
building by its Production Technology and Machine Building Division. The
principal manufacturing activities of Ovonic Battery Company, Inc. are limited
production of our metal hydride negative electrode materials and nickel
hydroxide positive electrode materials for NiMH batteries and metal hydride
materials. Texaco Ovonic Battery Systems LLC manufactures prismatic NiMH modules
and battery packs. United Solar Ovonic Corp. and United Solar Ovonic LLC
manufacture our photovoltaic products.
The critical factor to large-scale market penetration of products
incorporating our technologies is the manufacturing of such products in
sufficient quantities to achieve economies of scale, reduce product cost and
deliver to the marketplace products that answer basic industry and consumer
needs.
Certain technical terms used in this Annual Report are defined in the
section captioned "Glossary of Technical Terms" appearing at the end of this
Item 1.
5
MAJOR BUSINESSES
Our business strategy is to develop and commercialize enabling
technologies for use in the fields of alternative energy and information
technologies. We are pursuing our business strategy by developing and
commercializing new products and production technologies based on our
proprietary Ovonic(TM) materials. We have established joint ventures, licensing
arrangements and other strategic alliances with major companies around the world
to achieve our strategic objectives. Our United Solar Ovonic subsidiary
manufactures our continuous web, thin-film multijunction photovoltaic products.
Energy activities, specifically complete systems for energy generation,
storage and infrastructure, represent a major element of our business.
Environmentally safe methods of generating and storing energy have become
critical in today's world. Our battery and photovoltaic products as well as our
hydrogen storage materials and technologies have gained worldwide recognition,
particularly in light of continued concerns about energy security, air
pollution, global climate change, ozone layer depletion, dependence on imported
oil and related concerns which contribute to international political, military
and economic instability.
Our information technology activities include our Ovonic(TM) phase-change
rewritable optical memory technology which is directed to applications in the
emerging DVD rewritable optical disk market. Due to their high data storage
capacity, leading manufacturers in the optical disk industry are targeting a
wide range of computer and information technology applications for
DVD-Rewritable disks, including digital television broadcast recording. We are
also applying our optical phase-change technology under a three-year contract
from the National Institute of Standards and Technology's (NIST) Advanced
Technology Program (ATP) to develop new optical switching devices for active
optical routing devices in digital signal processing. Information technology
activities also include Ovonic(TM) Unified Memory (OUM(TM)), which is based on
our proprietary electrical phase-change materials that have a wide variety of
computer and information technology applications. OUM(TM) is being developed to
replace conventional FLASH and DRAM semiconductor memory and information
processing devices. We are developing 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.
Consolidated revenues for our last three fiscal years (including revenues
of ECD, Ovonic Battery, United Solar Ovonic Corp., and United Solar Ovonic LLC
(from May 15, 2003), but excluding revenues of licensees and joint ventures in
our major business groups were as follows:
6
2003 2002 2001
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(000's) (000's) (000's)
Alternative energy technology
Energy storage $ 32,041 $ 42,366 $ 32,727
Energy generation 20,176 17,189 17,406
Information technology 907 2,398 3,336
Other
Machine building and equipment sales 11,450 29,533 16,934
Services to joint ventures - - 677
Other 605 224 324
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Total Revenues $ 65,179 $ 91,710 $ 71,404
======== ======== ========
We have historically entered into agreements with a relatively small
number of major customers throughout the world. In the year ended June 30, 2003,
three customers represented 58% of our total revenues (21% Texaco Ovonic
Hydrogen Systems, 21% Texaco Ovonic Battery Systems and 16% Rare Earth Ovonic
joint ventures). In the year ended June 30, 2002, three customers represented
67% of our total revenues (28% Rare Earth Ovonic joint ventures, 20% Texaco
Ovonic Hydrogen Systems and 19% Texaco Ovonic Battery Systems).
Alternative Energy Technology
Energy Storage
Rechargeable Batteries. Using Ovonic(TM) materials, our battery
subsidiary, Ovonic Battery, has developed the proprietary materials and
technology for NiMH batteries which have been licensed to all significant NiMH
battery manufacturers throughout the world. NiMH batteries were not commercially
viable prior to Ovonic Battery's development of disordered electrode technology.
Ovonic(R) NiMH batteries store over twice as much energy as standard
nickel cadmium (Ni-Cd) or lead acid batteries of equivalent weight and size. In
addition, Ovonic(R) NiMH batteries have high power, long cycle life, are
maintenance free and have no memory effect. Moreover, Ovonic(R) NiMH batteries
do not contain cadmium or lead, both environmentally hazardous substances.
Ovonic(R) NiMH batteries are capable of being made in a wide range of sizes and
have a wide range of applications, including hand-held consumer electronics such
as digital cameras; hybrid electric vehicles and electric vehicles; power tools,
utility and industrial applications; and 36/42 volt batteries to meet the
emerging requirements for higher voltages, power and energy of next-generation
fuel-efficient vehicle applications.
7
Our basic patents cover all commercial NiMH batteries. Ovonic Battery has
established a dominant patent position in the field of NiMH batteries, with 81
issued U.S. patents and 287 foreign counterparts. While all of our patents
involving Ovonic(R) NiMH battery technology are important to our licensing
activities, there are approximately 11 patents which we believe to be
particularly important. These patents have various dates of expiration through
2013. Additional U.S. and foreign patent applications are in various stages of
preparation, prosecution and allowance. In view of the overall strength of our
patent position relating to NiMH batteries, and with the realization that the
validity of newer patents has not been tested in court, we do not believe that
the expiration of any of our NiMH battery patents during the next five years
will have a material adverse effect on our business. We are, however, involved
in arbitration, asserting certain of our patents against infringement by third
parties. In another matter, a Federal District Court has dismissed the lawsuit
of a party claiming that we infringe such party's patent. The Federal District
court's dismissal is being appealed by the other party. See Item 3: Legal
Proceedings on page 32.
Ovonic(R) NiMH batteries are manufactured and sold throughout the world by
such major companies as Sanyo Electric Co. Ltd. under a licensing arrangement
and by Texaco Ovonic Battery Systems, our joint venture with Texaco Energy
Systems LLC, a unit of ChevronTexaco. In the last three years, we have licensed
our NiMH patents to nine battery manufacturers in the People's Republic of
China. We are also in discussions with other Chinese companies for additional
license agreements. Ovonic Battery also produces limited quantities of the metal
hydride negative electrode materials and nickel hydroxide positive electrode
materials for sale to several of our licensees. Limited quantities of metal
hydride materials for use in Ovonic(TM) solid hydrogen storage systems are also
being manufactured and sold by Ovonic Battery to Texaco Ovonic Hydrogen Systems.
During the fiscal year ended June 30, 2003, Ovonic Battery produced metal
hydride negative electrode materials and nickel hydroxide positive electrode
materials generating revenues of $973,000 from sales to licensees for assembly
into complete batteries for consumer and transportation applications.
Our royalty-bearing NiMH battery licenses have provided for upfront
nonrefundable license fees of up to $5 million paid to us at the time we enter
into the license agreement. A license fee of $3 to $5 million, depending on
factors such as geographical scope and fields of application, requires licensees
to pay us a royalty of 0.5% (for consumer applications) or 3.0% (for
transportation applications) of the selling price of NiMH batteries. Licensees
of NiMH batteries for consumer applications are granted nonexclusive,
royalty-bearing licenses under our NiMH battery patents (and, in the case of
certain licensees, our NiMH battery technology) to make, have made, use, sell,
lease or otherwise dispose of NiMH batteries. Certain licensees, particularly
our Chinese licensees, have paid modest upfront, nonrefundable license fees, but
are required to pay royalty rates considerably higher than 0.5% and to pay
additional license fees as their sales of NiMH batteries increase, or have been
granted substantially narrower rights to geographical areas in which licensed
products can be made or sold. Our joint ventures established to manufacture NiMH
batteries are licensees of Ovonic Battery. Typically, we acquired our ownership
interest in the NiMH battery joint ventures by the contribution of patents or
technology, or both. These licenses to our NiMH battery joint ventures do not
require the payment of royalties and, depending on the scope of the license, may
not require the payment of upfront nonrefundable license fees.
8
All licenses can be terminated by us if the licensee fails to make royalty
payments. The licensee also can terminate the license should it determine the
license is unnecessary; however, the licensee's rights to make NiMH batteries
under our patents would also terminate. Generally, the term of the license
agreements extends for so long as the patents being licensed are in force. Some
licenses have fixed terms but provide for extensions of additional one-year
periods. Based upon our NiMH battery patent portfolio (and should a market for
NiMH batteries remain for the next 10 years), we believe that patents applicable
to NiMH batteries can provide us with royalty revenues through 2013.
Through our joint venture, Texaco Ovonic Battery Systems, and our
subsidiary, Ovonic Battery, we are currently focusing on seven principal battery
markets:
o portable electronics, portable power tools and consumer applications;
o Hybrid electric vehicle (HEV), electric vehicle (EV), fuel cell
electric vehicle (FCEV) and fuel cell hybrid electric vehicle (FCHEV)
batteries for propulsion in vehicles and light trucks;
o 36/42 volt batteries to meet the emerging requirements for higher
voltages, power and energy of next-generation fuel-efficient vehicle
applications;
o hybrid electric and electric buses and trucks;
o two- and three-wheeled electric vehicle propulsion including power-
assisted bicycles;
o industrial applications such as utility applications, energy storage
for remote power generation and battery-operated industrial
equipment;
o other stationary and telecommunications applications.
Rechargeable Portable Electronics, Portable Power Tools and Consumer
Batteries. The need for high energy density rechargeable batteries has continued
to grow in recent years. Increasing consumer dependence on portable electronic
products (such as cellular telephones, digital cameras and cordless tools) has
created a large market for rechargeable batteries and has fueled development of
higher energy density battery systems. Consumer and governmental awareness that
cadmium contained in Ni-Cd batteries can cause serious health problems is moving
the industry away from Ni-Cd batteries. Although conventional storage batteries,
such as Ni-Cd, have been further improved in design and packaging in recent
years, the demand for higher performance batteries continues to increase.
Ovonic(R) NiMH batteries are now commercially available from one of our
licensees having a specific energy of over 100 watt-hours/kilogram, which is
more than two times that of Ni-Cd batteries. Over 1,500 watts/kilogram of
specific power has been achieved in prototype batteries for transportation
applications, with higher energy and power in the process of development.
Lithium-Ion (Li-Ion) batteries compete with NiMH batteries in applications
for consumer electronic devices and have a stronger market share than NiMH in
certain laptop computers and cell phones. NiMH technology has numerous
advantages over Li-Ion technology such as lower cost, higher power, safety and
abuse tolerance. NiMH batteries
9
are most favored by manufacturers of mass-market consumer products incorporating
rechargeable batteries where cost is a factor, and are the batteries of choice
by the manufacturers of hybrid electric vehicles where safety considerations
in large, high-energy battery systems are extremely important.
Ovonic Battery has licensing arrangements with the most significant
battery manufacturing companies throughout the world. Its proprietary battery
technology and/or patents have been licensed for consumer battery applications
to Sanyo Electric Co., Ltd., Toshiba Battery Co., Ltd., (which sold its former
NiMH battery manufacturing business to Sanyo), Canon Inc., Hitachi Maxell, Ltd.,
Yuasa Corporation; GP Batteries International Limited; Varta Batterie AG;
Sovlux Battery Co. Ltd., our joint venture in Russia; Harding Energy Inc.;
Walsin Technology Corporation; Nan Ya Plastics Corporation; and Samsung
Electronics Co., Ltd. Saft, S.A., Saft America, Inc., GS-Saft Ltd. (Saft Group)
and Japan Storage Battery Co., Ltd. are also licensed under a royalty-bearing
license agreement to Ovonic Battery's proprietary battery patents in the United
States.
In addition to our three Rare Earth Ovonic joint ventures in China with
Rare Earth High-Tech Co., Ltd., which are licensed for consumer and propulsion
battery applications, we have entered into royalty-bearing consumer battery
license agreements with eight other Chinese companies - BYD Battery Co., Ltd.,
SANIK Battery Co., Ltd., Lexel Battery (Shenzhen) Co., Ltd., Henan Huanyu Power
Source Co., Ltd., TWD Battery Co., Ltd., Guangdong Shida Battery Co., Ltd.,
Linghao Battery (H.K.) Co., Ltd., and Mcnair-tech Co., Ltd.
Licensees engaged in manufacturing NiMH batteries for consumer
applications are Sanyo, Hitachi Maxell, GP Batteries, Varta, Saft Group, Japan
Storage, Yuasa, BYD Battery, SANIK Battery, Lexel Battery, Henan Huanyu Power
Source, TWD Battery, Guangdong Shida Battery, Linghao Battery and Mcnair-tech.
Hybrid Electric, Electric, Fuel Cell Electric, and Fuel Cell Hybrid
Electric Vehicle Batteries. The strategic importance of HEVs, EVs, FCEVs and
FCHEVs both in the United States and worldwide has increased greatly in recent
years. This heightened interest is due to many concerns such as air pollution,
energy security, global climate change, ozone layer depletion, dependence on
imported oil and the high cost of fuel.
Most of the world's major automobile manufacturers have active programs
underway to develop and commercialize HEVs, EVs, FCEVs and FCHEVs. The
proprietary Ovonic(R) NiMH battery is the enabling technology that has made HEVs
practical. It has, therefore, become the battery of choice for several major
automobile manufacturers as they commercialize and market HEVs due to a variety
of factors such as energy, power, life, cost, abuse resistance and safety.
Currently, Toyota Motor Corporation and Honda are manufacturing HEVs using NiMH
batteries incorporating our Ovonic(R) battery technology (see Item 3: Legal
Proceedings on page 32) and, to date, over 100,000 HEVs have been sold
worldwide.
In July 2001, we and ChevronTexaco Corporation (ChevronTexaco) formed
Texaco Ovonic Battery Systems LLC, a 50/50 joint venture between Ovonic Battery
and Texaco Energy Systems LLC, a unit of ChevronTexaco, for the purpose of
bringing advanced
10
Ovonic(R) NiMH batteries into widespread commercial production for both
transportation and stationary applications. Texaco Ovonic Battery Systems is
also investing in the development of proof-of-concept prototypes of the new
Ovonic(R) NiMH monoblock battery, a compact design for high-voltage (36-42 volt)
automotive electrical systems for future gasoline-powered automobiles which
will permit automobiles to have far more electrical power.
ChevronTexaco is contributing up to $178 million to Texaco Ovonic Battery
Systems to increase the manufacturing capacity at Texaco Ovonic Battery Systems'
facilities in Michigan and Ohio, and for market and advanced product
development. Through June 30, 2003, ChevronTexaco has contributed $102 million
to Texaco Ovonic Battery Systems. Ovonic Battery has contributed intellectual
property, licenses, production processes, know-how, personnel and engineering
services relating to Ovonic(R) NiMH battery technology to the joint venture.
Texaco Ovonic Battery has a new 170,000 square foot state-of-the-art
battery production facility with new automated manufacturing equipment in
Springboro, Ohio. The new facility is more than twice the size of the former
production facility in Kettering, Ohio. Texaco Ovonic Battery is in the process
of obtaining the necessary quality certifications to become a validated supplier
to original equipment manufacturers.
The advanced product development is being accomplished through a product
development contract from Texaco Ovonic Battery Systems to Ovonic Battery. We
recorded revenues of approximately $12.4 million and $16.3 million for work
performed under the contract in the years ended June 30, 2003 and 2002,
respectively, and is budgeted to receive approximately $8 million in 2004.
Sovlux Battery. Sovlux Battery, a 50/50 joint venture between us and the
Chepetsky Mechanical Plant, an enterprise of the Russian Ministry of Atomic
Energy (Minatom), in Glazov, Russia, plans to produce NiMH battery materials and
components for sale to Ovonic Battery and its licensees. No significant battery
or battery materials manufacturing activities have been undertaken by Sovlux
Battery. In the longer term, Sovlux Battery expects to manufacture batteries for
the emerging two- and three-wheeled electric vehicle market in Europe and Asia
and for four-wheeled electric vehicles in Russia. Our contribution to Sovlux
Battery in return for our 50% interest consisted of licenses, know-how and
proprietary technology.
The availability of Russian raw materials for the battery, Chepetsky's
alloy processing and production expertise, and joint collaboration on battery
research and development could provide the potential for reductions in the cost
of Ovonic Battery's proprietary NiMH batteries.
Other Battery Applications. Several licensees of Ovonic(R) NiMH battery
technology, have been granted rights to manufacture and sell NiMH batteries for
energy storage applications for electricity generated by photovoltaics, remote
power generation, utility applications and battery-operated industrial
equipment. Our licensees presently are not engaged in manufacturing NiMH
batteries for such applications. There are numerous
11
other applications for Ovonic(R) NiMH batteries where standby, uninterruptible
and portable energy storage is required or convenient.
Ovonic(TM) Solid Hydrogen Storage Systems. Hydrogen energy technology has
been a part of our scientific work and business strategy since our founding in
1960. Our approach to the hydrogen economy encompasses a complete system - from
generation to storage to infrastructure to products. Our integrated systems
approach will bring together the whole range of our technologies and products
from the Ovonic(TM) solar cell to Ovonic(R) NiMH batteries to solid hydrogen
storage.
No potential fuel source approaches the ideal fuel other than hydrogen. It
is clean and efficient and it yields more energy per unit of weight than any
other existing combustible fuel. Hydrogen's only waste product is water vapor.
Because hydrogen is a major component of water and of hydrocarbons, it is in
abundant supply and has been referred to as the ultimate fuel.
The principal stumbling block to the use of hydrogen as a fuel has been
the inability to store hydrogen safely and efficiently. Conventional methods of
storing hydrogen have been high-pressure compressed gas and liquifaction at
extremely low temperatures. Using these methods of storage allows just 23 grams
of hydrogen per liter to be stored in gaseous form at a high pressure of 5,000
pounds per square inch (psi) and 71 grams per liter in liquid form at the
extremely low temperature of -253(0)C. Hydrogen liquifaction requires a
tremendous amount of energy (approximately 10 kWh of electric energy to liquify
1 kilogram of hydrogen) and expensive cryogenic storage tanks. In addition,
liquid hydrogen evaporates at a rate of approximately 1-3% per day.
We have developed a new, practical approach to store hydrogen in a safe
and economical manner using a family of new efficient metal hydrides based upon
our proprietary, atomically-engineered materials technology which stores
hydrogen in a solid metal matrix at low practical pressures. Our Ovonic(TM)
solid hydrogen storage systems technology is capable of storing up to 125 grams
of hydrogen per liter. Our advanced hydride materials have been shown to store
up to 7% hydrogen by weight, or the equivalent of 780 standard liters of
hydrogen per kilogram of hydride materials. We have a basic patent position in
the solid storage of hydrogen with 33 U.S. patents and 167 foreign counterparts
applicable to hydrogen storage in a metal hydride, as well as patent
applications in various stages of prosecution.
In October 2000, we and ChevronTexaco formed a joint venture, Texaco
Ovonic Hydrogen Systems LLC, to further develop and advance the
commercialization of the Ovonic(TM) solid hydrogen systems. ChevronTexaco is
focused on commercialization efforts in hydrogen storage systems in conjunction
with its development of viable fuel-processing technology. We and ChevronTexaco
each own 50% of Texaco Ovonic Hydrogen Systems. The initial funding of Texaco
Ovonic Hydrogen Systems from ChevronTexaco for initial product and market
development provides for up to $104 million. We recorded revenues of
approximately $13.7 million, $18.6 million and $11.8 million in the years ended
June 30, 2003, 2002 and 2001, respectively, for work performed for Texaco Ovonic
Hydrogen Systems under product development and service contracts, and are
budgeted to receive approximately $11.8 million in 2004. Through June 30, 2003,
ChevronTexaco has
12
contributed $48.4 million to Texaco Ovonic Hydrogen Systems. Our contribution
to Texaco Ovonic Hydrogen Systems in return for our 50% interest consisted of
licenses, know-how and proprietary technology.
Our solid hydrogen storage materials can be packaged in a variety of sizes
and shapes to meet application requirements - from automobiles to consumer
electronic devices. For example, Texaco Ovonic Hydrogen Systems is currently
producing prototype compact hydrogen storage canisters that can store hydrogen
in a portable form to operate lawnmowers, garden equipment, power generators or
barbecue grills once such hydrogen-powered products become commercially
available.
Our prototype metal hydride systems have functioned safely in tests
conducted in cooperation with automobile manufacturers. Our tests indicate that
metal hydride materials will provide more than 2,000 refilling cycles
(equivalent to more than 200,000 miles in an automobile) with no performance
degradation. Among other applications, our advancements in metal hydrides may
facilitate storing sufficient hydrogen to power an FCEV for several hundred
miles. To provide 300 miles of range in an advanced FCEV, four to six kilograms
of hydrogen storage capacity are expected to be required, depending on the size
of the vehicle.
Our Ovonic(TM) solid hydrogen storage systems technology, based on our
atomically engineered materials, is being further improved and developed and
requires additional financial resources to reach commercial product status.
Hydrogen can also be used to power internal combustion engines. Such
engines can be designed to be very clean, meeting or exceeding California's
Ultra Low Emission Vehicles regulations, and virtually eliminate CO2 and
hydrocarbon emissions. In fiscal year 2002, we completed a program sponsored by
the U.S. Department of Energy (DOE) to develop an integrated renewable
hydrogen-generation storage system. This system uses our multijunction
photovoltaics to electrolyze water into oxygen and hydrogen and stores the
produced hydrogen in metal hydride hydrogen storage devices. In connection with
this program, we have converted a 4-stroke gasoline-powered scooter to run on
hydrogen stored in our solid hydrogen storage materials and devices.
Many of the more fundamental patents applicable to our NiMH battery
technology also provide us with a proprietary position in our solid hydrogen
storage in metal hydride materials technology. We do not believe that the
expiration of any patent applicable to our solid hydrogen storage materials
technology during the next five years will have a material adverse effect on our
business, and we expect to replace expiring patents with new applications and
patents.
We have completed a joint project with ChevronTexaco for the conversion of
a 2-liter internal combustion engine (ICE) to run on hydrogen. This converted
engine is being used to power a hybrid electric vehicle (a 2002 Toyota Prius)
using a low-pressure solid hydrogen storage system. The modified Prius is being
used to demonstrate solid hydrogen storage technology with a trunk-mounted
60-liter pressure vessel storing three kilograms of hydrogen to provide a
130-mile vehicle range. Refueling at 1,500 psi takes 10 minutes. We and
ChevronTexaco equally shared the cost of this $1,000,000-development program. We
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have recognized revenues of $500,000 under this hydrogen ICE program with
ChevronTexaco, of which $203,000 was recognized as revenue in the year ended
June 30, 2002 and $297,000 was recognized as revenue in the year ended June 30,
2003. This program was completed as of June 30, 2003.
Alternative Energy Vehicles
ITS Innovative Transportation Systems A.G. In May 1999, we participated in
the founding of Unique Mobility Europa, GmbH to manufacture and sell EVs, HEVs
and FCHEVs for world markets. The business and assets of Unique Mobility Europa
have been reorganized into a new company, ITS Innovative Transportation Systems
A.G. (ITS), based in Germany. As of October 2001, we own a direct 26% interest
in ITS and an indirect beneficial ownership of approximately 4% through Ovonic
Battery's membership interest in Texaco Ovonic Battery Systems. ITS has built a
running prototype of its product, the InnoVan, a new, purpose-built minivan
using a composite body structure and an advanced battery-powered electric
drivetrain. The InnoVan can be configured as either a 2-passenger cargo van or a
6-passenger commuter van and is designed to serve urban transportation
requirements where urban pollution concerns have restricted the use of
conventional vehicles. The vehicle has been specifically designed to utilize our
Ovonic(R) NiMH batteries. ITS requires significant additional investments as it
continues commercialization of its products and currently lacks funds to
continue operations without new equity and neither current partner in the
venture has an obligation nor has committed to provide additional funding.
Four-Wheeled Vehicle Battery Business Arrangements. In addition to its
Texaco Ovonic Battery Systems joint venture, Ovonic Battery has entered into
royalty-bearing, nonexclusive license agreements granting limited rights for the
manufacture of Ovonic(R) NiMH four-wheeled vehicle propulsion batteries and
related products outside of the United States with Sanyo, Toshiba, Hyundai Motor
Company, Varta, Nan Ya, GP Batteries and Sovlux Battery. Sanyo, Toshiba,
Hyundai, GP Batteries, the Rare Earth Ovonic joint ventures and Sovlux Battery
have restricted rights to export vehicle propulsion batteries to North America.
Varta's license includes the right to manufacture vehicle propulsion batteries
subject to certain limitations on access to technology and restrictions on
manufacturing in North America. Saft Group and the United States Advanced
Battery Consortium are licensed under a royalty-bearing, nonexclusive license
agreement for the manufacture and sale of vehicle propulsion batteries in the
United States. Among our licensees of Ovonic(R) NiMH batteries for four-wheeled
vehicle propulsion applications, Sanyo and GP Batteries are engaged in
manufacturing batteries for such applications.
Texaco Ovonic Battery Systems is responding to significant interest by bus
manufacturers seeking to comply with government initiatives for providing
pollution-free mass transportation in urban areas. It has a bus demonstration
program in the city of Rome, Italy, pursuant to which an Ovonic(R) NiMH battery
pack replaced an existing lead acid battery. The NiMH batteries provide three
times the range on a single charge which permits continuous operation over an
entire shift service, thus eliminating expensive downtime and labor costs.
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In June 2001, Ovonic Battery was awarded a contract by the U.S. Army
Tank-Automotive and Armaments Command (TACOM), a division of the Department of
the Army, U.S. Department of Defense (DOD), to develop an advanced
liquid-cooled, plastic monoblock battery for heavy-duty HEVs. This 30-month, $5
million contract requires us to share 50% of the program cost and calls for
coordinated research and development to be carried out by Ovonic Battery, in
collaboration with Texaco Ovonic Battery Systems, and TACOM. The program is
linked to the 21st Century Truck Initiative, a government/industry partnership
aimed at doubling to tripling the fuel economy of heavy-duty vehicles. The
products developed under this program will find application in both the public
and private sectors, satisfying the "dual use" requirement established by the
DOD.
Based on the demonstrated ability of NiMH batteries to be engineered for
different energy and power densities in a wide range of applications, Texaco
Ovonic Battery Systems is developing a "Family of Batteries" that can satisfy
the energy storage needs of the full spectrum of HEVs, EVs, FCEVs and FCHEVs,
including bicycles, two- and three-wheeled scooters, cars, trucks and vans. The
automotive industry has expressed considerable interest in batteries for the
emerging HEV market and Texaco Ovonic Battery Systems is positioning itself to
offer the industry a high performance NiMH battery. Ovonic(R) NiMH batteries for
HEVs are being reviewed with a variety of potential customers.
Texaco Ovonic Battery Systems' HEV battery is intended to meet
specifications set by the DOE's FreedomCar Initiative and its predecessor, the
Partnership for Next Generation of Vehicles, a program among automakers,
suppliers, the DOE, the U.S. Department of Commerce, the DOD and the national
laboratories. In July 2002, Texaco Ovonic Battery Systems announced that it had
received a $5.2 million, two-year cost-sharing contract, sponsored by DOE's
FreedomCar Initiative, to continue the development work on its proprietary
liquid-cooled 12V monoblock NiMH battery technology for HEVs focusing on
complete battery systems, performance and production costs. Texaco Ovonic
Battery Systems is funding a program, conducted by Ovonic Battery, to increase
the energy and power densities of future NiMH batteries for both HEVs and EVs as
well as reducing their size and cost.
Two- and Three-Wheeled Vehicles. We have installed Ovonic(R) NiMH
batteries in scooters converted to electric power and successfully demonstrated
the application of our battery for two- and three-wheeled electric vehicles
including power-assisted electric bicycles. We consider two- and three-wheeled
electric vehicles and power-assisted bicycles a potentially large-volume market
since these types of vehicles are the primary mode of transportation in many
European and developing countries throughout the world, such as India, China and
Taiwan. Electric two- and three-wheeled vehicles using Ovonic(R) NiMH batteries
should improve the acute air pollution problems in these regions caused by
conventional internal-combustion-engine-powered two- and three-wheeled vehicles.
Scooters powered by Ovonic(R) NiMH batteries have won many awards. At the 2000
Tour de Sol, the Ovonic(TM) scooter was the overall first place winner among the
one-person vehicle entries, achieving a range of 73 miles with an efficiency
equivalent to more than 300 miles per gallon of gasoline.
Ovonic Battery has entered into royalty-bearing license agreements for the
manufacture and sale of Ovonic(R) NiMH batteries for two- and three-wheeled
vehicles with
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Sanyo, Walsin, Sanoh Industrial Co., Ltd., Nan Ya and our Rare Earth Ovonic
joint ventures. Subject to these agreements, Texaco Ovonic Battery Systems has
been granted an exclusive royalty-free license for the manufacture and sale of
batteries for two- and three-wheeled vehicles. We believe that Sanyo and Sanoh
are engaged in the manufacture of Ovonic(R) NiMH batteries for two- and three-
wheeled vehicle applications.
Energy Generation
Photovoltaic Technology. Photovoltaic (PV) systems provide a clean and
simple solid-state method for direct conversion of sunlight into electrical
energy. The major barrier to the widespread use of direct solar-to-electrical
energy conversion has been the lack of an inexpensive solar cell technology.
Based on Stan Ovshinsky's basic pioneering inventions in the field of renewable
energy, we originated and have patented our proprietary continuous web,
multilayer, large-area thin-film amorphous silicon (a-Si) technology, and,
together with our wholly owned subsidiaries United Solar Ovonic Corp. and United
Solar Ovonic LLC (together hereafter referred to as "United Solar Ovonic") are
leaders in thin-film amorphous photovoltaic technology.
We have invented a unique proprietary approach to the manufacture of
thin-film photovoltaic products. Compared to PV products that are produced using
other PV technologies, our PV products are substantially lighter, more rugged,
require much less energy to produce and can be manufactured in high volume at
significantly lower cost. We believe that with large-volume production equipment
incorporating improved technology and making solar products capable of producing
on an annual basis 100 megawatts of electrical power, the costs of our PV
products can be lowered dramatically to open up new opportunities in the energy
markets which are now dominated by fossil fuels. Our proprietary position in
photovoltaic technology ranges from the invention of materials and the
development of products to the design and manufacture of production equipment.
We have 130 U.S. patents and 215 foreign counterparts in photovoltaic
technology.
Using our proprietary thin-film, vapor-deposited a-Si alloy materials, we
have developed proprietary technology to reduce the materials cost in a solar
cell. Because a-Si absorbs light more efficiently than its crystalline
counterpart, the a-Si solar cell thickness can be 100 times less than that of
crystalline technology, thereby significantly reducing materials cost. By
utilizing a flexible, stainless steel substrate and polymer-based encapsulants,
United Solar Ovonic's PV products can be very lightweight, flexible and
abuse-tolerant. They do not break during shipping, are particularly easy to
transport to remote rural areas, thus saving shipping costs, and can be
installed without breakage.
Through United Solar Ovonic, we have advanced our pioneering work in a-Si
alloy photovoltaic technology and hold current world records for both large- and
small-area conversion efficiency for a-Si solar cells, as measured by NREL.
Conversion efficiency is the percentage of sunlight that is converted into
electricity. United Solar Ovonic has achieved a world record of 10.2%
stabilized energy conversion efficiency for large area (one-square foot) a-Si
alloy photovoltaic modules, which the DOE characterized in 1994 as a major
breakthrough. United Solar Ovonic holds the world records for amorphous silicon
alloy photovoltaic cells, including solar-to-electricity stabilized efficiency
of 13% for small-area a-Si alloy photovoltaic cells.
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To further reduce the manufacturing cost of photovoltaic modules, we have
pioneered the development of and have the fundamental patents on a unique
approach utilizing proprietary continuous roll-to-roll solar cell deposition
process. Using a roll of flexible stainless steel that is a mile and one-half
long and 14 inches wide, nine thin-film layers of a-Si alloy with different
light absorption properties are deposited sequentially, one on top of another,
in a high yield, automated machine to make a continuous, stacked three-
cell structure to capture the broad solar spectrum more effectively, increase
energy conversion efficiency and improve performance stability, The roll of
solar cell material then is processed further for use in a variety of
photovoltaic products. This basic approach, pioneered by us, is unique in the
industry and has significant manufacturing cost advantages. We believe that, in
high-volume production, our photovoltaic modules will be significantly less
expensive than conventional crystalline silicon and other thin-film solar
modules produced on glass and can be cost competitive with fossil fuels.
Because many of our patents are broad and because our patent portfolio is
extensive, we do not believe that the expiration of any of our PV technology
patents occurring in the next five years will have a material adverse effect on
our business.
On May 14, 2003, we acquired the 19% interest of N.V. Bekaert S.A.
(Bekaert) in United Solar Ovonic Corp. (formerly known as United Solar Systems
Corp.), Bekaert's 60% interest in United Solar Ovonic LLC (formerly known as
Bekaert ECD Solar Systems LLC) bringing our direct and indirect interest in each
of these entities to 100%. The purchase price was $6 million, with $4 million
paid at closing and $2 million to be paid no later than December 22, 2003.
Additionally, we provided approximately $36 million to United Solar Ovonic LLC
to terminate its sale and leaseback arrangement with third parties. In
addition, we provided letters of credit of approximately $5 million to
extinguish guarantees provided by Bekaert. As part of the transaction, Bekaert
received rights to United Solar'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 United Solar Ovonic LLC.
The Company incurred expenses of $953,000 in connection with the acqusition.
United Solar Ovonic operates its 30-megawatt (MW) solar products
manufacturing equipment, the world's largest thin-film solar cell manufacturing
machine, designed and built by our Production Technology and Machine Building
Division using our roll-to-roll technology, at its manufacturing plant in Auburn
Hills, Michigan. Approximately $67 million has been invested in this new,
state-of-the-art manufacturing equipment. The solar-cell manufacturing
equipment, is being optimized to its designed manufacturing capability of
producing on an annual basis solar products generating 30MW of electrical power
through a program of maintenance time-reduction and improved operational
efficiency.
United Solar Ovonic is producing a variety of PV products and selling PV
modules and systems throughout the world. It manufactures products for remote
power applications, telecommunications, PV-powered lighting systems,
building-integrated photovoltaic systems and marine applications at its Michigan
facilities.
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United Solar Ovonic has developed and is manufacturing and selling, unique
products for the building and construction industries such as PV shingles, metal
roofing products and PV laminate products which emulate conventional roofing
materials in form, construction, function and installation. In December 2002,
United Solar Ovonic unveiled its SmartRoof(SM) residential solar electric system
for homeowners. This system offers ease of installation, lower maintenance and
full integration into a home's roof. The SmartRoof(SM) system can generate 50 to
90 percent of a typical household's daily electrical needs.
The PV roofing products are receiving enthusiastic market response. In
2001, United Solar Ovonic shipped solar panels capable of producing 100
kilowatts of electrical power to Sacramento Municipal Utilities District,
California, and solar panels for 148 kilowatts to Energy Australia. United Solar
Ovonic has completed a contract with ChevronTexaco and has installed a PV system
in California capable of producing 500 kilowatts of electrical power to help
power oil field operations. It is one of the largest photovoltaic installations
in the United States and the largest array of flexible amorphous silicon solar
technology in the world.
In May 2003, U.S. Air Force Research Laboratory, Kirtland AFB, NM (AFRL),
awarded United Solar Ovonic an $11.5 million, 18-month contract to develop its
continuous web, thin-film, multijunction solar cell technology to be used in
space and airship vehicles addressing defense and homeland security
applications. AFRL has an option to fund an additional $7.8 million. This
contract builds upon the success of earlier contracts with the Air Force and
will fund research activities to develop ultra-lightweight solar arrays as the
next-generation solar power technology for Air Force missions using advanced
materials and innovative manufacturing technology.
United Solar Ovonic space photovoltaic products offer an ultra-light,
low-cost alternative to conventional space PV modules made of crystalline
silicon or gallium arsenide. The United Solar Ovonic triple-junction modules,
originally developed for terrestrial applications, are made of a-Si based
thin-film alloys, which are deposited on a 5-mil flexible stainless steel
substrate. By utilizing a polymeric or a thinner stainless substrate, new space
cells will be developed that have a specific power density greater than 600
watts per kilogram (W/kg). A high specific power density is required for airship
application and, considering the high launching cost of satellites, lightweight
cells also are economically attractive for space application. The radiation
hardness and superior high-temperature performance of a-Si make it an attractive
material for space application.
In 1998, United Solar Ovonic has successfully installed its space solar
modules on the MIR Space Station. Cell data was sent by telemetry, and virtually
no change in performance was detected during the 19 months and 252 million miles
flown in 1998-2000.
Also in May 2003, we were awarded a subcontract by the DOE's National
Renewable Energy Laboratory (NREL) to develop new solar cell manufacturing
technology based on our continuous web, thin-film, multijunction technology.
This subcontract will provide matching funds for a research and development
program aimed at lowering the manufacturing cost of solar cells. NREL will fund
about $3 million of the approximately $6 million three-year, phased subcontract,
with ECD providing the balance of the funds.
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In October 2002, we were awarded a cost-shared, three-phase subcontract by
NREL to develop new optically enhanced back reflector and improved deposition
processes for amorphous silicon-based solar cells. NREL will fund more than $1.1
million of the approximately $1.4 million three-year, phased subcontract, with
ECD providing the balance of the funds. The achievement of the goals of this
program and application of the advances to United Solar Ovonic's 30MW solar
products manufacturing equipment could lead to an immediate improvement in
module light input to electrical output efficiencies.
In May 2002, we were awarded a cost-shared, three-phase contract by NREL
to carry out research work on high efficiency amorphous silicon based solar
cells and modules. The estimated amount for the three-year contract is $4.9
million, of which United Solar Ovonic will provide $2 million. Continuation of
the contract after each phase is determined by performance and availability of
funds.
Ovonic(R) Regenerative Fuel Cell. In September 2000, we and ChevronTexaco
formed a joint venture, Texaco Ovonic Fuel Cell Company LLC, to further develop
and advance the commercialization of the Ovonic(R) regenerative fuel cell
technology. Until December 31, 2002, we and ChevronTexaco each owned 50% of
Texaco Ovonic Fuel Cell. The funding of Texaco Ovonic Fuel Cell from
ChevronTexaco for initial product and market development was $9.4 million (of
which we recorded $8.8 million in revenue) and $9.8 million (of which we
recorded $8.9 million in revenue) in fiscal years 2001 and 2002, respectively.
For fiscal year 2003, ChevronTexaco provided $5.5 million in funding of which we
recorded $4 million in revenue. Our contribution to Texaco Ovonic Fuel Cell in
return for our 50% interest consisted of licenses, know-how and proprietary
technology. Effective as of December 31, 2002, ECD purchased ChevronTexaco's 50%
interest in Texaco Ovonic Fuel Cell Company for $1. The company is now owned
100% by ECD and has been renamed Ovonic Fuel Cell Company. Since January 1,
2003, we have funded 100% of the activities of Ovonic Fuel Cell Company.
The Ovonic(R) regenerative fuel cell technology employs electrochemical
devices that include two electrodes, an anode and a cathode. Between the two
electrodes is a solid or liquid electrolyte that allows ions to pass through,
but prevents electrons from passing through. Hydrogen enters the anode and is
oxidized, and oxygen in air enters the cathode and is consumed, thereby
releasing electrical energy and byproducts of water and heat.
The Ovonic(R) regenerative fuel cell technology is being developed for
commercial use in a full range of stationary, portable power and transportation
applications, which can supply electricity as an alternative or supplement to
electricity supplied through grid distribution or portable fossil-fuel-powered
generators.
Many of the patents applicable to our NiMH battery technology are also
applicable to our Ovonic(R) regenerative fuel cell technology. These patents
have various dates of expiration through 2018. We do not believe that the
expiration of any patent applicable to Ovonic(R) regenerative fuel cell
technology during the next five years will have a material adverse effect on our
business.
Our Ovonic(R) regenerative fuel cell technology is being further improved
and developed and requires additional financial resources to reach commercial
product status.
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Information Technology
We have developed a number of key proprietary products and processes in
the field of information technology. The phase-change optical, electrical memory
and Ovonic(TM) Cognitive Computer technologies are based on Stanford Ovshinsky's
basic pioneering inventions.
Optical Memory. We are the inventor and originator of phase-change
rewritable optical memory disk technology. Our Ovonic(TM) phase-change
rewritable optical memory technology makes it possible to store, in a
convenient, removable disk format, many times the amount of data as a
conventional floppy magnetic disk, and is a much more robust product having much
lower cost than removable rigid magnetic disks. Our proprietary phase-change
rewritable optical memory uses a laser to write or erase digital data on a thin
film of amorphous semiconductor alloy that has been deposited onto a substrate
disk. The disk and data-reading process are similar to an ordinary CD-ROM or
DVD-ROM, with the significant difference being that the phase-change rewritable
optical memory can be erased and rewritten many times (up to 1,000 times in the
case of CD-RW and up to 500,000 times in the case of DVD-RAM).
We have licensed our Ovonic(TM) phase-change rewritable optical memory
technology to a number of data storage media companies, including Matsushita
Electric Industrial Co., Ltd., Ricoh Company Limited, Sony Corporation, Toshiba
Corporation, Pioneer Corporation, Hitachi, Ltd., Plasmon Limited, Toray
Industries, Inc., TDK Corporation and Teijin, Limited. Licensees engaged in
limited production of phase-change optical memory products are Matsushita and
Ricoh.
Our rewritable phase-change optical memory licenses provide for a
nonrefundable advance royalty payment of $25,000 paid to us at the inception of
the license agreement. Generally, licensees pay us a royalty of 1-1/2% of the
net selling price of the rewritable optical memory disks for the first one
million sold and 1% of the net selling price thereafter. Licensees are granted
nonexclusive, royalty-bearing, worldwide licenses under our rewritable
phase-change optical memory patents in existence at the time the license is
granted to make, have made, use, sell, lease or otherwise dispose of rewritable
optical memory disks. The licenses can be terminated by us if the licensee fails
to make royalty payments or can be terminated by the licensee, in which event
the licensee's rights to make optical memory disks under our patents would also
terminate. The term of the license agreements extends as long as the patents are
in force. Our portfolio of patents relating to rewritable optical memory
products contains patents expiring beginning in 2005 through 2015 and we expect
to replace expiring patents with new applications and patents.
A convergence of the information processing, communications and
entertainment industries is taking place as a result of advances in digital
electronics. A new and emerging product offering higher-capacity data storage is
the DVD. Playback-only DVD disks and drives (DVD-ROM) are commercially available
now, as well as DVD-RAM, DVD-RW and DVD+RW, three formats that use our
phase-change rewritable optical memory technology. These products are used for
storage of both video and computer data.
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We are also applying our Ovonic(TM) optical phase-change technology under
a three-year contract awarded in September 2003 by NIST's ATP to develop new
optical switching devices for active optical routing devices in digital signal
processing.
Following the successful development of technology under a project funded
by NIST's ATP, we and General Electric, through its GE Plastics business unit,
formed a strategic alliance in 2000. We and GE Plastics also formed a joint
venture, Ovonic Media, LLC, to design, develop, demonstrate and commercialize
our proprietary continuous web roll-to-roll technology for the ultra-high-speed
manufacture of optical media products, primarily rewritable DVDs. GE owns 51% of
Ovonic Media and we own 49%. We have contributed intellectual property,
know-how, licenses and equipment to the joint venture. GE has made cash and
other contributions to the joint venture. Since its inception, Ovonic Media has
paid us $5.6 million through the end of fiscal year 2003 for services to the
joint venture. We recorded revenues of approximately $615,000, $1.9 million
and $2.3 million in the years ended June 30, 2003, 2002 and 2001, respectively,
for work performed for Ovonic Media under service contracts.
Ovonic Media has successfully met its Phase I milestones. GE suspended
additional funding after January 3, 2003 and is evaluating the current market
situation to determine next steps. 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. Currently,
ECD is in discussions with global electronic companies in connection with future
funding of Ovonic Media.
Ovonic(TM) Unified Memory. We developed the first nonvolatile
semiconductor memory, the Ovonic(TM) Electrically Erasable Programmable Read
Only Memory, for computer data storage in the 1960s. We have advanced and
extended that early work and have developed with our Ovonyx joint venture a
proprietary family of high-performance nonvolatile semiconductor memory and
information processing devices called Ovonic(TM) Unified Memory (OUM(TM)).
In 1999, we and Tyler Lowrey, the former vice chairman and chief
technology officer of Micron Technology, Inc., formed Ovonyx, Inc. (initially
owned 50% by ECD and the balance owned by Mr. Lowrey and a colleague) to further
develop and commercialize OUM(TM). Our contribution to Ovonyx, in return for our
ownership interest, consisted of licenses, know-how and proprietary technology.
In February 2000, Ovonyx and Intel entered into a collaboration and
royalty-bearing license agreement to jointly develop and commercialize OUM(TM)
technology. The investment by Intel Capital and other investors in Ovonyx has
brought our ownership of Ovonyx to 41.7%.
Ovonyx's strategy for OUM(TM) is to initially target the direct
replacement of FLASH memory in products such as cell phones, digital cameras and
PDAs where a single OUM(TM) device can replace DRAM and FLASH devices. OUM(TM)
is a high-speed, nonvolatile
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memory with advantages such as reduced cost per bit, low power and low voltage,
and a robust temperature range. It also is a random-access, non-destructive read
memory that is scalable, radiation hard and provides a user-friendly PC
interface. OUM(TM) technology has demonstrated 1 million times the cycle life of
FLASH and 100 times the write speed of FLASH. It offers a way to realize full
system-on-a-chip capability through integrating unified memory, linear, and
logic on the same silicon chip.
In 1999, Ovonyx and BAE Systems (formerly Lockheed Martin Space
Electronics & Communications) entered into a royalty-bearing agreement to
commercialize the OUM(TM) technology in radiation-hardened space and military
applications. Ovonyx and BAE Systems are engaged in a joint development program
directed toward application of OUM(TM) in BAE Systems' space products.
In 2000, Ovonyx and STMicroelectronics signed a nonexclusive
royalty-bearing agreement whereby STMicroelectronics was granted a license
to use the thin-film nonvolatile semiconductor memory technology of Ovonyx in
the STMicroelectronics product line. The two companies also established a joint
development program. In February 2003, Ovonyx and STMicroelectronics agreed to
expand the scope of the technology license and agreed to extend their joint
development program.
OUM(TM) technology will require further technical development and may
require additional financial resources to reach commercial product status.
Ovonic(TM) Cognitive Computer Technology. In October 2002, we formed
Ovonic Cognitive Computer, Inc. as the exclusive licensee of certain
technologies, which previously had been licensed to Ovonyx, for the development
of the Ovonic(TM) Cognitive Computer technology. We own 95% of Ovonic Cognitive
Computer, Inc. and Ovonyx owns the balance. The Ovonic(TM) Cognitive Computer
technology is a unique multifunctional approach to computing that is basically
different than the Von Neumann concept, the prototype of today's computers. It
can accomplish many tasks in a simple manner impossible to perform on
conventional computers and has learning capability that mimics the functionality
of the human brain by combining memory and processing in single sub-micron
device. The Ovonic(TM) Cognitive Computer technology incorporates nanostructural
Ovonic materials deposited as a thin film with the capability to execute
ordinary arithmetic and logic operations as well as advanced functions such as
non-binary processing, higher mathematics, pattern recognition and encryption in
a densely interconnected and parallel fashion. The Ovonic(TM) Cognitive Computer
technology requires further technical and product development and additional
financial resources to reach commercial product status.
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PRODUCTION TECHNOLOGY AND MACHINE BUILDING DIVISION
AND CENTRAL ANALYTICAL LABORATORY
Our Production Technology and Machine Building Division has been an
important element in our strategy and has extensive experience in designing and
building proprietary automated production equipment. The Production Technology
and Machine Building Division has designed and built for us and certain of our
licensees multiple generations of photovoltaic production lines, including
machinery and equipment for manufacturing solar products which is being
optimized to designed manufacturing capability to produce on an annual basis 30
megawatts of electrical power for United Solar Ovonic, as well as research,
development and manufacturing equipment for high-rate microwave plasma-enhanced
chemical vapor deposition (MPCVD) and other materials technology.
In September 2003, we and GE Global Research, the centralized research
organization of General Electric, announced that we had been awarded a grant
from NIST's ATP to develop a low-cost, roll-to-roll process for the production
of large-area organic electronic devices. The cost of the $13 million, four-year
project will be shared among NIST, GE and us. The program goal is to create a
cost-effective system for the mass production of products such as flexible
electronic paper displays, portable TV screens the size of posters, embedded
sensors, solar powered cells and high-efficiency lighting devices. The proposed
roll-to-roll research prototype line will input a roll of plastic film and
output working organic electronic devices. GE will design and provide the
organic electronic technology, while we will provide our unique roll-to-roll
equipment-building expertise. The key is to form the active organic layers using
low-cost printing techniques such as gravure or screen printing. If successful,
the program will demonstrate that organic electronic devices can be made on
flexible material in a continuous roll-to-roll process without the huge capital
investment normally required for batch-processed inorganic semiconductor
technology. The two major technology challenges that scientists face are:
ensuring that roll-to-roll processing is compatible with the materials and
device designs, and integrating all of the fabrication steps into one line.
Our Central Analytical Laboratory conducts analysis of materials produced
by us and our joint venture partners and licensees as well as materials produced
by other companies and manufactures high quality sputtering targets.
RESEARCH AND PRODUCT DEVELOPMENT
The nature of our business has required, and will continue to require,
expenditures for research and product development to achieve our objective of
product commercialization. Agencies of the U.S. government and our licensees and
industrial partners have partially funded our research and product development
activities. We believe the materials, production technologies and products being
developed and produced by us and our joint venture partners are technologically
sophisticated and are designed for markets characterized by rapid technological
change and competition based, in large part, upon technological and product
performance advantages.
We have completed the installation of a new state-of-the-art Clean Room
fabrication facility. This facility will allow us to extend the application of
Ovonic(TM) materials and
23
fabricate amorphous semiconductor devices, including devices that will be used
in the development of the Ovonic(TM) Cognitive Computer technology.
The sophisticated capability of this fabrication facility and electronic
test equipment enables us to conduct work not only for ourselves in advanced
materials, optical and memory activities, but for our Ovonyx joint venture, as
well as others who could utilize our advanced capabilities.
As of June 30, 2003, the amount of future revenues to be billed and
recognized as revenue, as earned, under contracts with government agencies
totaled approximately $11,341,000, $2,000,000 of which has not yet been
approved by the government as of June 30, 2003. These contracts are cancelable
at any time with provisions to reimburse us for any costs through the
termination date. Our government contracts, which have partially funded
development of specific segments of our technologies, provide the government
with "march-in rights" to use, or have others use, technologies developed under
the applicable contract on a royalty-free basis under certain conditions. We
retain the technology rights for any inventions or other discoveries under
these contracts. The U.S. government has not exercised its "march-in rights"
with respect to any technologies developed by us under such product development
contracts.
The following is a summary of our consolidated direct expenditures,
excluding the allocation of patents, depreciation and general and administrative
expenses, for product research and development for the three years ended June
30, 2003. All of our research and development costs are expensed as incurred and
are included in our Consolidated Statements of Operations as cost of revenues
from product development agreements and product development and research.
Direct Research and Development Expenditures
--------------------------------------------
Year Ended June 30,
--------------------------------------------
2003 2002 2001
------------- ------------ ------------
Sponsored by industrial
partners, government
agencies and licensees $28,139,630 $40,358,618 $26,936,302
Sponsored by us 12,539,628 7,467,157 7,809,453
----------- ----------- -----------
$40,679,258 $47,825,775 $34,745,755
=========== =========== ===========
SOURCES AND AVAILABILITY OF RAW MATERIALS
Materials, parts, supplies and services used in our business are generally
available from a variety of sources. However, interruptions in production or
delivery of these goods and services could have an adverse impact on our
manufacturing operations. The key raw materials used in our business are metals,
primarily nickel, titanium, manganese, cobalt and stainless steel, as well as
various rare-earth elements; high purity industrial gases, primarily argon,
nitrogen, hydrogen, silane, disilane and germane; and polymer materials.
24
PATENTS AND PROPRIETARY RIGHTS
Since our founding in 1960, we have focused our research and product
development efforts on amorphous, disordered and related materials, a previously
unrecognized field of physics and materials science that has since attracted
widespread attention. We have established a multi-disciplinary business,
scientific and technical organization ranging from research and development to
product development and manufacturing and selling products, as well as designing
and building production machinery. We recognize that all of our activities need
to be carefully protected. Our extensive patent portfolio, including patents
assigned to our joint ventures, consists of 374 U.S. patents and 737 foreign
counterparts, and includes numerous basic and fundamental patents applicable to
each of our lines of business. We invent not only materials, but also develop
low-cost production technologies and high-performance products. Our patents,
therefore, cover not only materials, but also the production technology and
products we develop.
Because we generate patents which basically and broadly cover our
business, we believe that our proprietary patent position will be sustained
notwithstanding the expiration of certain patents and do not expect the
expiration of the patents to adversely affect our business prospects.
We believe that worldwide patent protection is important for us to compete
effectively in the marketplace. Certain of our patents have been the subject of
legal actions, all of which, to date, have been resolved in our favor prior to
trial. See Item 3: Legal Proceedings on page 32 for pending and recently
resolved legal proceedings.
CONCENTRATION OF REVENUES
See Note B of the Notes to Consolidated Financial Statements of this
Report.
BACKLOG
Our backlog of orders as of June 30, 2003 for machine-building and
equipment sales contracts, photovoltaic products and metal hydride materials is
$8,531,000. The comparable backlog at June 30, 2002 was $21,910,000. In fiscal
2004, we expect to recognize revenues of $8,531,000 from our backlog.
COMPETITION
Because each of our technologies has the potential to replace certain
existing energy storage, energy generation and information technology products,
competition for products based on our technologies comes from new technologies,
improvements to current technologies and improved products from current
technologies.
We also compete with companies that currently manufacture and distribute
products based on well-established technologies in the fields of energy
generation and storage and information technology. Some of the firms with which
we compete are among the largest industrial companies in the world. Many of our
competitors have established product lines, extensive financial, manufacturing
and marketing resources, and large research and development staffs and
facilities.
25
We believe our success depends primarily on our ability to apply our
technologies to the development and production of proprietary products and
production technologies that offer significant advantages in performance,
efficiency, cost and environmental friendliness over competing products and
technologies, as well as to package our technologies and products with those of
others into fully integrated systems. We expect to maintain our competitive
position by diligently prosecuting patents, designing and obtaining patents for
innovative applications for our technologies, removing costs from our technology
applications, developing volume manufacturing processes, and continuing to form
strategic relationships with leading companies.
Many of our technologies, such as those in the field of energy generation
and storage, compete with well-established existing conventional technologies.
There are likely to be transition costs incurred in switching from existing
technologies to new technologies in these fields. Until we are able to achieve
cost reductions through increased production volumes, the costs to produce
products based on our technologies may also be higher than the cost of products
based on existing technologies. These factors may combine to provide companies
offering products based on existing technologies with a competitive advantage.
EMPLOYEES
As of October 3, 2003, we and our subsidiaries, United Solar Ovonic,
Ovonic Battery and Ovonic Fuel Cell Company, had a total of 538 employees. The
above numbers do not include employees of our joint ventures or licensees.
AVAILABLE INFORMATION
Our Internet address is www.ovonic.com. We make available, free of charge,
on our Internet website our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. Our SEC reports can be
accessed through the investor relations section of our website. The information
found on our website is not part of this or any other report we file with or
furnish to the SEC.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking statements about
our financial condition, results of operations, plans, objectives, future
performance and business. In addition, from time to time we and our
representatives have made or may make forward-looking statements orally or in
writing. The words "may," "will," "believes," "expects," "intends,"
"anticipates," "estimates," and similar expressions have been used in this
Annual Report to identify forward-looking statements.
We have based these forward-looking statements on our current expectations
with respect to future events and occurrences. Investors are cautioned that our
actual results in the future may differ materially from the expected results
reflected in our forward-looking
26
statements. The expected results reflected in our forward-looking statements
are subject to various significant risks and uncertainties, including the
following:
o we need to obtain debt or additional equity financing to continue
to operate our business and financing may be unavailable, reduce our
stock price or available only on disadvantageous terms;
o our licensees and joint venture partners may be unwilling or unable
to devote their financial resources and manufacturing and marketing
capabilities to commercialize products based on our technologies;
o we may be unable to continue to protect and maintain the proprietary
nature of our technology, or to convince others of the necessity of
licensing our technology without litigation;
o other companies may be successful in asserting patent infringement or
other claims against us which prevent us from commercializing
products based on our technology or which force us to make royalty or
other payments to competitors;
o other companies may develop competing technologies which cause our
technology to become obsolete or non-competitive;
o we may be unable to successfully execute our internal business plans;
o we may 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;
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;
o our product development and commercialization programs involve a
number of uncertainties and we may never generate sufficient revenues
to become profitable;
o we may not achieve the designed output capabilities of certain
manufacturing equipment designed and built by us;
o we rely on collaborative relationships and termination of any of
these relationships and the underlying contracts could reduce the
financial resources available to us, including future revenues;
o some of our key technologies have not been used to produce commercial
products and may not be capable of producing such products;
27
o our commercialization programs will require substantial additional
future funding which could hurt our operational and financial
condition;
o future sales of our securities may depress the price of our
securities; or
o our securities may not allow our holders to receive a return on such
securities other than through the sale of the securities.
There is also the risk that we incorrectly analyze these risks or that
strategies we develop to address them are unsuccessful.
These forward-looking statements speak only as of the date of this Annual
Report. All subsequent written and oral forward-looking statements attributable
to us or any person acting on our behalf are qualified in their entirety by the
cautionary statements in this section. Because of these risks, uncertainties and
assumptions, you should not place undue reliance on these forward-looking
statements. We are not obligated to update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
28
GLOSSARY OF TECHNICAL TERMS
Certain technical terms used herein have the following meanings:
Amorphous - having an atomic structure that is not periodic.
CD-ROM (CD--Read Only Memory) - a type of data-storage media using a CD format
with pre-recorded data which cannot be recorded by the user.
CD-RW (CD--Rewritable Memory) - a type of data storage media using a CD format
employing ECD's proprietary phase-change rewritable optical memory technology
capable of being recorded and re-recorded many times.
Crystalline - having a repeating atomic structure in all three dimensions.
Cycle Life - the number of times a device can be switched or can be charged and
discharged.
Disordered - Minimizing and lifting of lattice constraints which provides new
degrees of freedom, permitting the placement of elements in multi-dimensional
spaces where they interact in ways not previously available. This allows the use
of multi-elements and complex materials where positional, translational and
compositional disorder remove restrictions so new local order environments can
be generated controlling the physical, electronic and chemical properties of the
material, thereby permitting the synthesis of new materials with new mechanisms.
DRAM (Dynamic Random Access Memory) - a type of semiconductor memory device used
for the main system memory in most computers.
Electrode (battery) - the chemically active portions of a battery.
Energy Density - the amount of energy stored in a specific volume or weight.
EV (Electric Vehicle) - a vehicle propelled exclusively by an electric drive
system powered by an electrochemical energy storage device, typically a
rechargeable battery.
FLASH - a type of semiconductor memory device that retains stored data even with
the power off.
Encryption - encoding of information.
FCEV (Fuel Cell Electric Vehicle) - an electric vehicle that derives its
electricity from a fuel cell.
FCHEV (Fuel Cell Hybrid Electric Vehicle) - a vehicle that is propelled both by
a fuel cell and an electrochemical energy storage device coupled to an electric
drive.
Fuel Cell - a device which produces electric power by oxidizing hydrogen and
exhausting only water and heat as byproducts.
HEV (Hybrid Electric Vehicle) - a vehicle that is propelled both by an
electrochemical energy storage device coupled to an electric drive and an
auxiliary power unit powered by a
29
conventional fuel such as reformulated gasoline, direct injection diesel,
compressed natural gas or hydrogen.
Nanostructural - refers to materials having functional features on the nanometer
length scale.
Nonbinary processing - computation in a base other than the binary base 2 used
in conventional computers.
Nonvolatile - a property of some types of computer memory which retain stored
data even when power is removed.
Optical Memory - a computer memory technology that uses lasers to record and
play back data stored on a rotating disc.
Ovonic - [after S.R. Ov(shinsky) + (electr)onic] - the term used to describe our
proprietary materials, products and technologies.
Peak Power - the maximum rate of energy output available for a sustained period
of time, typically 10 to 30 seconds.
Phase-Change Rewritable - an optical memory technology invented by Ovshinsky in
which data is stored or erased on memory media by means of a laser beam that
switches the structural phase of a thin-film material between crystalline and
amorphous states.
Photovoltaic (PV) - direct conversion of light into electrical energy.
Regenerative Power - the process of restoring energy to the battery by absorbing
kinetic energy of the vehicle as it slows down.
Roll-to-Roll Process - a process where a roll of substrate is continuously
converted into a roll of product.
Semiconductor - a class of materials with special electrical properties used to
fabricate solar cells, transistors, integrated circuits and other electronic
devices.
Specific Energy - the amount of energy capacity divided by the weight of the
battery.
Specific Power - the amount of energy available for a sustained period of time
divided by the weight of the battery.
Stabilized Energy Conversion Efficiency - the long-term ratio of electrical
output to light input.
System-on-a-chip - an ASIC (application specific integrated circuit) that
integrates, on a single silicon die, processors, memories, logic, I/O
(input/output), and analog functions previously implemented as multiple discrete
chips.
Thin Film - a very thin layer of material formed on a substrate.
Von Neumann concept - classical sequential method of computing.
30
Item 2: Properties
- ------ ----------
A summary of our principal facilities and those of our consolidated
subsidiaries, Ovonic Battery, United Solar Ovonic and Ovonic Fuel Cell Company,
follows:
Number of
Location Square Feet
-------- -----------
ECD:
2956 Waterview, Rochester Hills, MI 49,550
1050 East Square Lake Road, Bloomfield Hills, MI 11,000
1621 Northwood, Troy, MI 24,900
Ovonic Battery:
1864 Northwood, Troy, MI 12,480
1826 Northwood, Troy, MI 12,480
1707 Northwood, Troy, MI 27,400
2968 Waterview, Rochester Hills, MI 33,804
1414 Combermere, Troy, MI 9,870
United Solar Ovonic:
1100 West Maple Road, Troy, MI 47,775
3800 Lapeer Road, Auburn Hills, MI 167,526
Av. La Paz. No. 10009, Parque Industrial
Pacifico, Tijuana, B.C., Mex. C.P. 22670 67,362
Ovonic Fuel Cell Company
2983 Waterview, Rochester Hills, MI 27,080
-------
TOTAL 491,227
=======
Except for the property located at 1050 East Square Lake Road, Bloomfield
Hills, MI, which is owned by us, the foregoing properties, which are generally
of brick and block construction, are leased by us. The foregoing properties are
devoted primarily to the product development, production and pre-production
activities and administrative and other operations of ECD, Ovonic Battery and
United Solar Ovonic. We expect to vacate the property located at 1707 Northwood,
Troy, MI., upon expiration of the lease term at the end of December 2003.
Management believes that the above facilities are adequate for present
operations.
31
A summary of the facilities of our North American joint ventures follows:
Number of
Location Square Feet
-------- -----------
Texaco Ovonic Hydrogen Systems:
2983 Waterview, Rochester Hills, MI 50,292
Texaco Ovonic Battery Systems:
1334 Maplelawn, Troy, MI 28,122
1250 Maplelawn, Troy, MI 21,000
1104 West Maple Road, Troy, MI 15,000
50 Ovonic Way, Springboro, OH 170,000
-------
TOTAL 284,414
=======
Item 3: Legal Proceedings
- ------ -----------------
In March 2001, Ovonic Battery initiated litigation in Federal District
Court for the Eastern District of Michigan against Matsushita Battery Industrial
Co. Ltd. and related companies ("MBI"), Panasonic EV Energy Co. Ltd., Toyota
Motor Corporation and related companies, and five employees of MBI for
infringement of Ovonic Battery's U.S. Patent Nos. 5,348,822 and 5,536,591 in
connection with hybrid electric vehicle battery and consumer battery sales in
the United States; U.S. Patent No. 5,879,831 in connection with hybrid electric
vehicle sales in the United States; for misappropriating confidential
information and filing applications for U.S. Patent No. 6,013,390 and
corresponding foreign patents incorrectly naming MBI employees instead of Ovonic
Battery employees as inventors. In July 2001, Texaco Ovonic Battery Systems LLC
sought to join the litigation as a co-plaintiff. The plaintiffs presented a
motion for a preliminary injunction against MBI and its affiliates to enjoin the
sale of infringing batteries in the United States. After a hearing held on
October 10, 2001, the Court allowed Texaco Ovonic Battery Systems to join the
case, found that certain counts of our Amended Complaint should be arbitrated,
and scheduled a hearing on our request for a preliminary injunction to prevent
MBI from infringing our patents by offering or selling batteries to U.S.
manufacturers of hybrid electric vehicles, pending the outcome of the
arbitration. On December 12, 2001, we filed an arbitration demand with the
International Chamber of Commerce (ICC) on the counts held to be arbitrable by
the Federal District Court as well as additional patent infringement claims. In
December 2001, the Parties initiated settlement discussions and the Court, on
January 16, 2002, granted a joint motion to stay further proceedings in the
litigation pending the outcome of the settlement discussions. The ICC also
agreed to hold its proceedings in abeyance pending settlement discussions.
32
In December 2002, we and our related companies entered into an arbitration
agreement with Matsushita Battery Industrial Co., Ltd. and its related companies
and Toyota Motor Corporation and a related company. The agreement established
the basic terms, conditions and procedures to resume arbitration before the ICC
of the existing patent infringement disputes involving nickel metal hydride
batteries used in gasoline-electric hybrid vehicles and other products. Pursuant
to the arbitration agreement, the existing disputes among the parties will be
resolved in the arbitration and, therefore, the parties have agreed to dismiss
the patent infringement litigation previously initiated by ECD's related
companies in the U.S. District Court, Eastern District of Michigan. The
arbitration proceeding will be held in New York City, with a hearing before the
Arbitral Tribunal expected to occur in November 2003.
On July 24, 2001, an individual, Kaplesh Kumar, filed a lawsuit against
Ovonic Battery, ECD and Stanford Ovshinsky, in the Federal District Court of
Massachusetts, alleging infringement of Kumar's U.S. Patent No. 4,565,686 and
other acts of unfair competition for inducing others to infringe. On July 8,
2002, the Court granted our motion for summary judgment and dismissed Kumar's
complaint. Kumar has appealed the decision of the Federal District Court
granting our motion for summary judgment of non-infringement and the Court's
dismissal of Kumar's complaint to the United States Court of Appeals for the
Federal Circuit. Oral arguments were presented before a panel of the U.S. Court
of Appeals for the Federal Circuit on September 19, 2003. We believe that the
suit is without merit and that we will prevail. It is presently unknown as to
when the Court of Appeals will issue its opinion.
Due to the uncertainty of the ultimate outcome of these matters, the
impact on future financial results is not subject to reasonable estimates.
Item 4: Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Not applicable.
33
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
- ------ ---------------------------------------------------------------------
Shares of our Common Stock, par value $.01 per share, trade on the NASDAQ
National Market System under the symbol "ENER." Shares of our Class A Common
Stock, par value $.01 per share, and Class B Common Stock, par value $.01 per
share, are not publicly traded.
As of October 3, 2003, there were approximately 2,140 holders of record of
Common Stock, four holders of record of Class A Common Stock and one holder of
record of Class B Common Stock.
Below is the reported high and low price on the NASDAQ National Market
System for our Common Stock for the following quarters:
For the Fiscal Year Ended June 30
(in Dollars Per Share)
-------------------------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
High Low High Low High Low
------ ----- ------ ----- ------ -----
First Quarter $19.24 $9.06 $15.90 $9.47 $28.00 $12.64
(July - September)
Second Quarter $12.88 $7.21 $22.00 $15.26
(October - December)
Third Quarter $11.85 $7.95 $24.53 $18.18
(January - March)
Fourth Quarter $11.32 $8.002 $25.73 $14.01
(April - June)
- ----------
We have not paid any cash dividends in the past and do not expect
to pay any in the foreseeable future.
34
During the fiscal year ended June 30, 2003, we issued the following
securities to the following persons for the consideration noted. In each case,
the issuances were to persons who had complete access to all material
information relating to the Company. Accordingly, we claim exemption from the
registration requirements of Section 5 of the Securities Act of 1933 pursuant to
Section 4(2) of that Act, no public offering having been involved.
Party/ies Security Issued Number of Securities Consideration
- ---------- --------------- -------------------- -------------
6 members of our Common Stock 2,844 shares Services rendered valued
Board of Directors at approximately $30,000
During the fiscal year ended June 30, 2003, we issued 390 shares of our
Common Stock to four persons for no consideration pursuant to their exchange of
certain Convertible Investment Certificates for Common Stock. We claim exemption
from the registration requirements of Section 5 of the Securities Act of 1933
pursuant to Section 3(a)(9) of that Act, for an exchange of securities with an
existing security holder exclusively, where no commission or other remuneration
is paid for soliciting such exchange.
The independent outside directors of the Company are issued approximately
$5,000 per year in ECD Common Stock based on the closing price of the Common
Stock on the first business day of each year. See Part III, Item 10, Directors
and Executive Officers of the Registrant, for compensation of directors.
35
Item 6: Selected Financial Data
- ------- -----------------------
Set forth below is certain financial information derived from the
Company's audited consolidated financial statements (See Item 1: Description of
Business).
June 30,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Revenues:
Product sales $ 22,415,790 $ 36,634,167 $ 24,239,970 $ 6,892,355 $ 4,524,238
Royalties 1,843,647 2,000,914 2,898,956 3,440,164 2,735,622
Revenues from product
development agreements 37,335,248 52,685,717 37,582,138 10,418,985 17,240,615
Revenues from license
and other agreements 3,444,114 25,000 5,300,000 3,138,000 4,753,995
Other 140,061 364,487 1,383,429 6,089,581 3,717,826
------------ ------------ ------------ ------------ ------------
TOTAL REVENUES 65,178,860 91,710,285 71,404,493 29,979,085 32,972,296
------------ ------------ ------------ ------------ ------------
NET LOSS BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $(38,413,719) $(20,888,034) $ (5,121,838) $(16,656,128) $(13,777,589)
------------ ------------ ------------ ------------ ------------
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING
PRINCIPLE (NOTE A) 2,215,560 - - - -
------------ ------------ ------------ ------------ ------------
Net Loss $(36,198,159) $(20,888,034) $ (5,121,838) $(16,656,128) $(13,777,589)
============ ============ ============ ============ ============
BASIC NET LOSS PER SHARE
BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE (NOTE I) $ (1.75) $ (.96) $ (.26) $ (1.16) $ (1.06)
BASIC NET INCOME PER SHARE
FOR CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (NOTE I) $ .10 $ - $ - $ - $ -
------------ ------------ ------------ ------------ ------------
Basic Net Loss per Common Share $ (1.65) $ (.96) $ (.26) $ (1.16) $ (1.06)
DILUTED NET LOSS PER SHARE
BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE (NOTE I) $ (1.75) $ (.96) $ (.26) $ (1.16) $ (1.06)
DILUTED NET INCOME PER SHARE
FOR CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (NOTE I) $ .10 $ - $ - $ - $ -
------------ ------------ ------------ ------------ ------------
Diluted Net Loss per
Common Share $ (1.65) $ (.96) $ (.26) $ (1.16) $ (1.06)
At year end:
Cash and Cash Equivalents s 8,567,261 $ 42,221,015 $ 33,055,399 $ 44,592,017 $ 19,076,983
Short-Term Investments $ 26,801,506 $ 71,997,154 $ 48,908,662 $ 44,723,500 $ -
Total Assets $153,694,650 $192,118,594 $166,105,387 $148,905,642 $ 39,807,998
Long-Term Liabilities $ 10,187,127 $ 14,428,769 $ 18,154,121 $ 20,059,353 $ 2,679,936
Working Capital $ 37,794,730 $100,796,311 $ 92,577,489 $ 89,789,457 $ 18,438,953
Stockholders' Equity $ 99,832,172 $135,254,960 $110,740,711 $ 98,776,560 $ 23,188,627
36
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------- -----------------------------------------------------------------
Critical Accounting Policies
- ----------------------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America (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.
We have identified the following as critical accounting policies to our
company: principles of consolidation, equity accounting and revenue recognition
for product sales, royalties, and business agreements.
Principles of Consolidation and Equity Accounting
- -------------------------------------------------
The consolidated financial statements include the accounts of ECD and its
100%-owned subsidiaries United Solar Ovonic Corp. (previously called United
Solar Systems Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic
LLC (previously called Bekaert ECD Solar Systems LLC and 40% owned by United
Solar Ovonic Corp. prior to May 14, 2003) (jointly referred to as United Solar
Ovonic), a business formed to develop and commercialize the Company's continuous
web, multilayer, large-area thin-film amorphous silicon photovoltaic technology
(see Note E to the Consolidated Financial Statements), and its approximately
91%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic Battery), a company
formed to develop and commercialize ECD's Ovonic(R) nickel metal hydride (NiMH)
battery technology (collectively the "Company"). The remaining shares of Ovonic
Battery are owned by Honda Motor Company, Ltd., Sanoh Industrial Company, Ltd.
and Sanyo Electric Co., Ltd. No minority interest related to Ovonic Battery is
recorded in the consolidated financial statements because there is no additional
funding requirement by the minority shareholders.
The Company has a number of strategic alliances and has five major
investments accounted for using the equity method: (i) Texaco Ovonic Battery
Systems LLC, a joint venture between Ovonic Battery and ChevronTexaco
Corporation, each having 50% interest, to manufacture and sell the Company's
proprietary NiMH batteries for transportation and stationary applications; (ii)
Texaco Ovonic Hydrogen Systems LLC, a joint venture between ECD and
ChevronTexaco, each having 50% interest, to further develop and commercialize
Ovonic(TM) solid hydrogen storage technology; (iii) Ovonyx, Inc., a 41.7%-owned
joint venture with Mr. Tyler Lowrey, Intel Capital and other investors, to
further develop and commercialize ECD's Ovonic Unified Memory(TM) (OUM(TM))
technology; (iv) Ovonic Media, LLC, a joint venture owned 51% by General
Electric (GE) through its GE Plastics business unit and 49% by ECD formed to
design, develop, demonstrate and commercialize our proprietary continuous web
roll-to-roll technology for ultra-high-speed manufacture of optical media
products; and (v) ITS
37
Innovative Transportation Systems A.G. (ITS), a German company beneficially
owned 30% by ECD formed to manufacture battery-powered electric vehicles. In
addition, prior to May 14, 2003, the Company accounted for United Solar Ovonic
LLC, owned 40% by United Solar Ovonic Corp. (now 100% owned by the Company)
using the equity method of accounting. Also, ECD has two 50%-owned joint
ventures in Russia, Sovlux Co., Ltd. (Sovlux) and Sovlux Battery Closed-Stock
Company (Sovlux Battery). See Note E to the Consolidated Financial Statements
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.
The Company has three joint ventures, Rare Earth Ovonic, with Rare Earth
High-Tech Co. Ltd. (Rare Earth High-Tech) of Baotou Steel Company of Inner
Mongolia, China, for the manufacture of its battery and other related products
and components. The Company accounts for its 19% interest in each of these joint
ventures using the cost method of accounting (total cash investment of
$1,710,000).
In October 2002, the Company, through a newly formed company, Ovonic
Cognitive Computer, Inc., which is owned 95% by the Company and 5% by Ovonyx,
made a capital contribution of $1,000,000 in Ovonyx in exchange for technology
previously contributed by ECD to Ovonyx. ECD received an exclusive,
royalty-bearing license, subject to existing agreements, for the use of all
OUM(TM) and Ovonic Threshold Switch and other Ovonyx technology for use in the
field of cognitive computers. The Company has recorded its $1,000,000 investment
in Ovonyx and accounts for this investment on the equity method and will
recognize its proportionate share of Ovonyx losses to the extent of its
$1,000,000 investment. In the year ended June 30, 2003, the Company recorded an
equity loss of $406,000.
While the Company believes, based upon the opinion of legal counsel, that
it has no obligation to fund any losses that its joint ventures incur beyond the
Company's investment, the Company has decided to fund certain of its joint
ventures.
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.
38
Product Sales
- -------------
Product sales include revenues related to photovoltaic products,
machine-building and equipment sales contracts, nickel hydroxide and metal
hydride materials and battery packs. Revenues related to machine-building and
equipment sales contracts and sales related to other long-term contracts are
recognized on the percentage-of-completion method of accounting using the costs
incurred to date as a percentage of the total expected costs. All other product
sales are recognized when the product is shipped. These products are shipped FOB
shipping point.
Royalties
- ---------
Most license agreements, other than those granted to certain joint
ventures, provide for 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.
Business Agreements
- -------------------
A substantial portion of revenues is derived through business agreements
for the development and/or commercialization of products based upon the
Company's proprietary technologies. The Company has two major types of business
agreements.
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
39
amounts to be received, taking into account the collectibility of the license
fee. In some instances, a portion of such license fees is contingent upon the
commencement of production or other uncertainties. In these cases, license fee
revenues are not recognized until commencement of production or the resolution
of uncertainties. Generally, there are no current or future direct costs
associated with license fees.
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project, based on the relationship of costs
incurred to estimated total project costs. Revenues from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the
agreed-upon fees for product development agreements contemplate reimbursing the
Company for costs considered associated with project activities including
expenses for direct product development and research, patents, operating,
general and administrative expenses and depreciation. Accordingly, expenses
related to product development agreements are recorded as cost of revenues from
product development agreements.
Results of Operations
Year Ended June 30, 2003 Compared to Year Ended June 30, 2002
- -------------------------------------------------------------
The Company has continued to invest to further advance its technologies.
These investments in its technologies have led to strategic alliances with
companies such as ChevronTexaco, General Electric and China's Rare Earth
High-Tech Co., Ltd. of Baotou Steel Company and our Ovonyx joint venture which
includes Intel. In accordance with GAAP, the investments the Company makes in
developing its technologies are expensed as research and development expense in
the periods in which they are incurred and the value of these technologies are
not carried as assets on the Company's balance sheet.
For the period July 1, 2002 through May 14, 2003, the Company owned 81% of
United Solar Ovonic Corp. (formerly United Solar Systems Corp.) and consolidated
that entity with a 19% minority interest recognized, and accounted for United
Solar Ovonic Corp.'s 40% interest in United Solar Ovonic LLC (formerly Bekaert
ECD Solar Systems LLC) on the equity basis. Effective May 15, 2003, with the
purchase by the Company from Bekaert Corporation of the remaining interests in
United Solar Ovonic Corp. and United Solar Ovonic LLC, the Company owns 100%
of each of the entities and has consolidated the entities in their entirety for
the period from May 15, 2003 through June 30, 2003.
The Company had a net loss of $36,198,000 on revenues of $65,179,000 in
the year ended June 30, 2003 compared to a net loss of $20,888,000 on revenues
of $91,710,000 for the year ended June 30, 2002. The $15,310,000 increase in the
net loss resulted primarily from increased patent defense expenses (net) of
$2,680,000 to protect Ovonic Battery's intellectual property, increased losses
on product sales of $2,992,000, an increase of $7,672,000 in the net cost of
product development as the Company received lower third-party
40
funding to offset its spending on its core technologies, reduced interest
income of $1,166,000 due to a lower cash balance and lower interest rates and
increased equity in losses and writedown of joint ventures of $8,136,000,
partially offset by increased license revenues of $3,419,000. In addition, the
Company recognized income of $2,216,000 attributable to the cumulative effect of
a change in accounting principle (see Note A of Notes to Consolidated Financial
Statements).
The loss from operations increased to $33,277,000 in 2003 from $22,233,000
in 2002 because of:
o a $5,690,000 increased operating loss for the ECD segment, net of
consolidating entries, which includes machine building, optical memory,
fuel cell technology, support services for hydrogen storage, and
Ovonic(TM) Cognitive Computer technology ($16,924,000 in 2003 versus
$11,234,000 in 2002), primarily due to higher investment in product
development as ECD received lower third-party funding to offset its
spending on its core technologies;
o an increased operating loss of $1,816,000 for United Solar Ovonic
(operating loss of $6,355,000 in 2003 versus operating loss of $4,539,000
in 2002) primarily due to costs associated with increasing production
capacity with the February 2003 start-up of new manufacturing equipment
which, when fully optimized, is capable of producing 30MW of photovoltaic
products annually and due to, after May 14, 2003, recognition of 100% of
United Solar Ovonic's operating results;
o a $3,538,000 increased operating loss for Ovonic Battery (operating loss
of $9,998,000 in 2003 versus operating loss of $6,460,000 in 2002)
primarily resulting from higher costs for patent defense and lower
revenues from product development agreements.
The decrease in consolidated revenues primarily resulted from lower
product sales ($14,218,000), lower revenues from product development agreements
($15,351,000) and lower royalties ($157,000), partially offset by higher license
and other agreements ($3,444,000 in 2003 versus $25,000 in 2002).
o The ECD segment's revenues, net of consolidating entries, decreased to
$21,463,000 in 2003 from $36,024,000 in 2002 primarily due to an
$11,293,000 decrease in revenues from product development agreements,
principally from the reduced work from the advanced product development
agreement with Texaco Ovonic Hydrogen Systems, and due to the
discontinuance of funding by joint venture partners for both Ovonic Media
and the development of work related to Ovonic(R) fuel cell technology
(beginning January 2003).
o The $19,703,000 decrease in Ovonic Battery's revenues was primarily due to
lower equipment sales to Rare Earth Ovonic ($10,726,000 in 2003 versus
$25,287,000 in 2002) as the first phase of this program nears completion,
decreased revenues from product development agreements ($14,942,000 in
2003 versus $20,078,000 in 2002) due to reduced work on advanced product
development for Texaco Ovonic Battery Systems and decreased royalties
($136,000 reduction), partially offset by increased
41
revenues from license and other agreements ($175,000 in 2003 versus
$25,000 in 2002).
o United Solar Ovonic's consolidated 2003 revenues increased to $14,890,000
in 2003 versus $7,157,000 in 2002 due to: (i) increased product sales as
it continues to expand its manufacturing capacity from the previous 5MW
manufacturing equipment to the current equipment which, when fully
optimized, is capable of producing 30MW of photovoltaic products annually,
(ii) the acquisition of 100% of United Solar Ovonic LLC on May 14, 2003
and the resultant consolidation of their revenues from third parties after
that date, and (iii) higher revenues from product development agreements.
Product sales, consisting of machine building and equipment sales,
photovoltaic products and nickel hydroxide and metal hydride materials,
decreased 39% to $22,416,000 in the year ended June 30, 2003 from $36,634,000 in
the year ended June 30, 2002. Machine-building and equipment sales revenues
decreased 61% to $11,450,000 in 2003 from $29,533,000 in 2002, primarily due to
the near completion of the first phase of Ovonic Battery's contracts with Rare
Earth Ovonic to provide battery-making equipment ($10,726,000 in 2003 compared
to $25,287,000 in 2002). All machine-building and equipment sales contracts are
accounted for using percentage-of-completion accounting. Partially offsetting
this decrease were photovoltaic sales (sales of semi-finished products to an
affiliate, United Solar Ovonic LLC, prior to May 14, 2003, and are sales of
finished products to third parties after that date) which were $9,769,000 for
2003 and $5,883,000 for 2002 (see Note E of Notes to Consolidated Financial
Statements). Sales of nickel hydroxide and metal hydride materials were $973,000
in 2003 compared to $940,000 in 2002. The Company currently has a product sales
backlog of $8,531,000, all of which is expected to be recognized as revenues in
Fiscal 2004. (See Note B - Notes to Consolidated Financial Statements.)
Royalties decreased 8% to $1,844,000 in the year ended June 30, 2003 from
$2,001,000 in the year ended June 30, 2002. Lower royalties reflect lower sales
of small consumer batteries and increased production efficiencies of the
Company's licensees, which have resulted in lower prices.
Revenues from product development agreements decreased 29% to $37,335,000
in the year ended June 30, 2003 from $52,686,000 in the year ended June 30,
2002. The decrease was primarily a result of reduced funding from ChevronTexaco
for agreements with Texaco Ovonic Hydrogen Systems ($13,651,000 for 2003
compared to $18,581,000 for 2002), Ovonic Fuel Cell which is now self-funded by
the Company ($4,022,000 for 2003 compared to $8,887,000 for 2002) and Texaco
Ovonic Battery Systems ($12,367,000 for 2003 compared to $16,315,000 for 2002)
for advanced product development agreements. Also contributing were lower
revenues from a service agreement with Ovonic Media ($615,000 in 2003 versus
$1,923,000 in 2002) and the completion of programs with National Institute of
Standards and Technology (NIST) and U.S. Department of Energy (DOE), which
advanced the Company's hydrogen storage and optical memory technologies (zero
in 2003 versus $521,000 in 2002). (See Research and Development in Item 1 and
Note B - Notes to Consolidated Financial Statements.)
Revenues from license and other agreements increased to $3,444,000 in the
year ended June 30, 2003 from $25,000 in the year ended June 30, 2002. The
increase primarily
42
resulted from United Solar Ovonic Corp. issuing to Canon Inc. a notice whereby
United Solar Ovonic Corp. granted Canon rights to manufacture photovoltaic
products in two countries of its choice in Southeast Asia, excluding India and
the People's Republic of China. These rights were granted in satisfaction of
the outstanding obligation ($2,500,000 plus accrued interest) due Canon in
connection with a previous loan made to United Solar Ovonic Corp. by Canon.
United Solar Ovonic Corp. recorded the satisfaction of the loan and accrued
interest from Canon ($3,269,000) as revenue from license agreements in its
statement of operations for the year ended June 30, 2003. Also, Ovonic Battery
entered into license agreements with four Chinese companies for a total of
$175,000. (See Note B - Notes to Consolidated Financial Statements.) Revenues
from license and other agreements depend on a small number of new business
arrangements, are sporadic and vary dramatically from period to period.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues decreased to $140,000 in the year ended
June 30, 2003 from $364,000 in the year ended June 30, 2002. This decrease was
primarily due to certain adjustments which reduced revenues to reflect a change
in estimate based on information received by the Company pertaining to certain
customers and contracts, partially offset by increases in revenues for services
provided by the Company's Central Analytical Lab and Production Technology and
Machine Building Division to affiliates and others.
The $11,226,000 decrease in cost of product sales in the year ended June
30, 2003 resulted from the $14,218,000 decrease in product sales and resulted in
a $3,523,000 loss on product sales in 2003, compared to a $531,000 loss in 2002.
The increased loss primarily relates to sales of photovoltaic products as the
new manufacturing equipment for photovoltaic products was brought on line.
Partially offsetting this increased loss was improved profitability on the
contract to provide battery manufacturing equipment to Rare Earth Ovonic and a
smaller loss on the sales of metal hydride materials.
Revenues from product development agreements funded 66% (compared to 82%
last year) of the Company's cost of product development. While the Company
continued to spend aggressively on its core technologies, the total cost of
product development decreased by $7,679,000 for the year ended June 30, 2003.
However, third-party funding decreased by $15,351,000, resulting in an increase
of $7,672,000 in net cost of product development.
43
Year Ended June 30,
-----------------------------
2003 2002
------------ ------------
Cost of revenues from product
development agreements $ 37,001,000 $ 51,703,000
Product development and research 19,798,000 12,775,000
------------ ------------
Total cost of product development 56,799,000 64,478,000
Revenues from product development
agreements 37,335,000 52,686,000
------------ ------------
Net cost of product development $ 19,464,000 $ 11,792,000
============ ============
The expenditures continued the development of 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 multifunctional approach to computing basically
different than today's computers - which has the potential to accomplish many
tasks in a simple manner impossible to perform on conventional computers. It is
based on the learning capability that mimics the functionality of the human
brain by combining memory and processing in single sub-micron device. Included
in the development costs for the Ovonic(TM) Cognitive Computer technology is
depreciation ($886,000) related to the new state-of-the-art clean room and the
related equipment. Another project, in collaboration with ChevronTexaco, was the
conversion of a 2-liter internal combustion engine (ICE) to run on hydrogen.
This converted engine is being used to power a hybrid electric vehicle (a 2002
Toyota Prius) using our Ovonic(TM) low-pressure solid hydrogen storage system.
This solid storage system can potentially be applied to hydrogen-powered fuel
cell vehicles and demonstrates the principles of utilizing hydrides to address
the hydrogen infrastructure.
Expenses were incurred in 2003 and 2002 in connection with the protection
of the Company's U.S. and foreign patents covering its proprietary technologies.
Total patent expenses increased to $7,618,000 in the year ended June 30, 2003
from $4,932,000 in the year ended June 30, 2002, principally due to litigation
costs ($5,429,000 in 2003 versus $2,749,000 in 2002) for the protection of the
Company's NiMH battery patents and technology. ChevronTexaco has agreed to share
50% of the battery litigation expenses, other than those related to consumer
batteries, beginning in fiscal 2002. The reimbursements of $624,000 in fiscal
year 2003 and $2,167,000 in fiscal year 2002 have been offset against the patent
defense costs. 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, we and our related companies entered into an
arbitration agreement with MBI and its related companies and Toyota and a
related company which establishes the basic terms, conditions and procedures to
resume arbitration before the International Chamber of Commerce of the existing
patent infringement disputes involving nickel metal hydride batteries used in
gasoline-electric hybrid vehicles and other products. Pursuant to the
arbitration agreement, the existing disputes among the parties will be resolved
in the arbitration and, therefore, the parties have agreed to dismiss the patent
infringement litigation previously initiated by ECD's related companies in the
U.S. District Court, Eastern District of Michigan.
Operating, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
development agreements
44
based on a percentage of direct labor costs. For cost of revenues from product
development agreements, this allocation is limited to the amount of revenues,
after direct expenses, under the applicable agreements.
The increase in operating, general and administrative expenses (net of
allocations) from $7,368,000 in the year ended June 30, 2002 to $8,099,000 in
the year ended June 30, 2003 was due primarily to reduced allocations of
expenses to cost of revenues from product development agreements ($2,945,000),
partially offset by increased allocations to product development and research
($2,412,000).
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Year Ended June 30,
-----------------------------
2003 2002
------------ ------------
Gross Expenses $ 24,219,000 $ 24,487,000
Less - allocations to product
development and research (7,667,000) (5,255,000)
- allocations to cost of revenues
from product development agreements (8,453,000) (11,398,000)
- amortization of negative goodwill - (466,000)
------------ ------------
Remaining Expenses $ 8,099,000 $ 7,368,000
============ ============
The $6,482,000 decrease in other income (expense) ($5,137,000 expense in
2003 compared to $1,345,000 income in 2002) resulted primarily from increased
equity losses attributed to losses at United Solar Ovonic LLC ($6,103,000 in
2003 compared to $2,944,000 in 2002), equity losses and the writedown of the
Company's investment in ITS Innovative Transportation Systems ($5,286,000 loss
in 2003) and from lower interest income on the Company's investments as a result
of lower interest rates and a lower level of investments ($3,561,000 in 2003
compared to $4,727,000 in 2002), partially offset by increased realized gains
on the sale of investments ($1,427,000 in 2003 versus $304,000 in 2002) and
because 2002 had a $1,000,000 write-off of the Company's investment in EV
Global.
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." SFAS
141 required the Company to recognize, at the adoption of SFAS 142, the
unamortized negative goodwill of approximately $2,216,000. This is a favorable
adjustment to the Company and is the cumulative effect of a change in accounting
principle in the Company's statements of operations on July 1, 2002. The Company
had an amortization of negative goodwill of $466,000 in 2002 and zero in 2003.
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.
45
Year Ended June 30, 2002 Compared to Year Ended June 30, 2001
- -------------------------------------------------------------
The Company has continued to invest to further advance its technologies.
These investments in its technologies have led to strategic alliances with such
companies as ChevronTexaco, Bekaert, General Electric and China's Rare Earth
High-Tech Co., Ltd. of Baotou Steel Company and our Ovonyx joint venture which
includes Intel. In accordance with GAAP, the investments the Company makes in
developing its technologies are expensed as research and development expense in
the periods in which they are incurred and the value of these technologies are
not carried as assets in the Company's balance sheet.
The Company had a net loss of $20,888,000 on revenues of $91,710,000 in
the year ended June 30, 2002 compared to a net loss of $5,122,000 on revenues of
$71,404,000 for the year ended June 30, 2001. The $15,766,000 increase in the
net loss resulted primarily from reduced license revenues of $5,275,000,
increased patent defense expenses (net) of $836,000 to protect the Company's
intellectual property, reduced royalties of $898,000, an increase of $3,466,000
in the net cost of product development as the Company increased spending on its
core technologies, reduced interest income of $1,137,000 due to lower interest
rates, decreased margins on product sales of $1,395,000, increased equity losses
(net of minority interest) of $1,195,000, and a $1,000,000 write-off of its
investment in EV Global Motors Company.
The loss from operations increased to $22,233,000 in 2002 from $10,067,000
in 2001 because of:
o an operating loss of $11,234,000 in 2002 for the ECD segment (net of
consolidating entries) versus operating income of $302,000 in 2001,
primarily due to higher investment in product development as the Company
increased spending on its core technologies and an increase in the cost
estimate to complete ECD's contract with United Solar Ovonic LLC to design
and build equipment making solar products which, when fully optimized, is
capable of producing on an annual basis 30MW of electrical power;
o an increased operating loss of $1,797,000 for United Solar Ovonic Corp.
(operating loss of $4,539,000 in 2002 versus operating loss of $2,742,000
in 2001) primarily due to costs associated with the increased production
capacity and the move to the Auburn Hills facility;
o a $1,167,000 decreased operating loss for Ovonic Battery (operating loss
of $6,460,000 in 2002 versus operating loss of $7,627,000 in 2001)
primarily resulting from a profitable equipment sales contract and higher
revenue from product development agreements, partially offset by higher
costs for litigation and lower revenues from license agreements and
royalties.
The increase in consolidated revenues primarily resulted from higher
product sales ($12,394,000) and higher revenues from product development
agreements ($15,104,000), partially offset by lower royalties ($898,000) and
license and other agreements ($25,000 in 2002 versus $5,300,000 in 2001).
46
o The ECD segment's revenues, net of consolidating entries, increased to
$36,024,000 in 2002 from $29,356,000 in 2001 due to increased revenues of
$6,549,000 from product development agreements, primarily resulting from
the advanced product development agreement with Texaco Ovonic Hydrogen
Systems.
o The $14,155,000 increase in Ovonic Battery's revenues was primarily due to
higher equipment sales to Rare Earth Ovonic ($25,287,000 in 2002 versus
$12,931,000 in 2001) and increased revenues from product development
agreements ($20,078,000 in 2002 versus $10,771,000 in 2001) as work was
begun on the advanced product development agreement for Texaco Ovonic
Battery Systems, partially offset by decreased revenues from license and
other agreements ($25,000 in 2002 versus $5,300,000 in 2001) and
decreased royalties ($933,000).
o United Solar Ovonic Corp.'s 2002 revenues decreased to $7,157,000 in 2002
versus $7,674,000 in 2001 due to lower sales prices for semi-finished
products sold to United Solar Ovonic LLC and lower revenues from product
development agreements.
Product sales, consisting of machine building and equipment sales,
photovoltaic products, and nickel hydroxide and metal hydride materials,
increased 51% to $36,634,000 in the year ended June 30, 2002 from $24,240,000 in
the year ended June 30, 2001. Machine-building and equipment sales revenues
increased 74% to $29,533,000 in 2002 from $16,934,000 in 2001, primarily due to
Ovonic Battery's contracts with Rare Earth Ovonic to provide battery-making
equipment ($25,287,000 in 2002 compared to $12,931,000 in 2001). Photovoltaic
sales, which are sales of semi-finished products to an affiliate, United Solar
Ovonic LLC, were $5,883,000 for 2002 and $5,975,000 for 2001 (see Note B of
Notes to Consolidated Financial Statements). Sales of nickel hydroxide and metal
hydride materials were $940,000 in 2002 compared to $355,000 in 2001.
Royalties decreased 31% to $2,001,000 in the year ended June 30, 2002 from
$2,899,000 in the year ended June 30, 2001. Lower royalties reflect increased
production efficiencies of the Company's licensees, which have resulted in lower
prices as licensees move aggressively to increase market share, unfavorable
exchange rates, and crediting a previous overpayment of royalties calculated
erroneously by a licensee.
Revenues from product development agreements increased 40% to $52,686,000
in the year ended June 30, 2002 from $37,582,000 in the year ended June 30,
2001. The increase was primarily a result of agreements with Texaco Ovonic
Hydrogen Systems ($18,581,000 for 2002 compared to $11,818,000 for 2001), Ovonic
Fuel Cell ($8,887,000 for 2002 compared to $8,831,000 for 2001) and Texaco
Ovonic Battery Systems ($16,315,000 for 2002 compared to $6,433,000 in 2001) for
advanced product development agreements, partially offset by decreases in
revenues from the services agreement with Ovonic Media ($1,923,000 in 2002
versus $2,298,000 in 2001) and the completion of programs with NIST, which
advanced the Company's hydrogen storage and optical memory technologies
($173,000 in 2002 versus $1,744,000 in 2001). (See Research and Development in
Item 1 and Note B - Notes to Consolidated Financial Statements.)
Revenues from license and other agreements decreased to $25,000 in the
year ended June 30, 2002, from $5,300,000 in the year ended June 30, 2001. The
2002 license fee
47
resulted from a license to Lexel Battery (Shenzhen) Co., Ltd. of China. Revenues
from license and other agreements depend on a small number of new business
arrangements, are sporadic and vary dramatically from period to period.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues decreased to $364,000 in the year ended
June 30, 2002 from $1,383,000 in the year ended June 30, 2001. This decrease was
due to reductions in revenues from Texaco Ovonic Battery Systems as it now
performs in-house services previously provided by Ovonic Battery. Revenues from
Ovonyx were affected by a $142,000 offset to revenues reflecting an adjustment
in revenues previously recognized.
The $13,789,000 increase in cost of product sales in the year ended June
30, 2002 resulted from the $12,394,000 increase in product sales and resulted in
a $531,000 loss on product sales in 2002, compared to $864,000 profit in 2001.
The reduced margin primarily relates to a change in estimate for ECD's contract
with United Solar Ovonic LLC to design and build equipment making solar products
that is expected to be capable of producing on an annual basis 30MW of
electrical power.
Revenues from product development agreements funded 82% of the Company's
cost of product development in both years. The total cost of product development
increased by $18,570,000 for the year ended June 30, 2002, as the Company
increased spending on its core technologies. This increase in the total cost of
product development was partially offset by increased revenues of $15,104,000,
resulting in an increase of $3,466,000 in net cost of product development.
Year Ended June 30,
-----------------------------
2002 2001
------------ ------------
Cost of revenues from product development
agreements $ 51,703,000 $ 36,553,000
Product development and research 12,775,000 9,355,000
------------ ------------
Total cost of product development 64,478,000 45,908,000
Revenues from product development
agreements 52,686,000 37,582,000
------------ ------------
Net cost of product development $ 11,792,000 $ 8,326,000
============ ============
The expenditures continued the development of the Company's core
technologies in energy storage, energy generation and information technology. In
addition, product development programs include work on the Ovonic(TM) Cognitive
Computer technology - a unique multifunctional approach to computing basically
different than today's computers - which has the potential to accomplish many
tasks in a simple manner impossible to perform on conventional computers. It is
based on the learning capability that mimics the functionality of the human
brain to combine memory and processing in a single sub-micron device. Another
project, in collaboration with ChevronTexaco, was the conversion of a 2-liter
internal combustion engine (ICE) to run on hydrogen. This converted engine is
being used to power a hybrid electric vehicle (a 2002 Toyota Prius) using our
Ovonic(TM) low-pressure solid hydrogen storage system. This solid storage
system can potentially be applied to hydrogen-powered fuel
48
cell vehicles and demonstrates the principles of utilizing hydrides to address
the hydrogen infrastructure.
Expenses were incurred in 2002 and 2001 in connection with the protection
of the Company's U.S. and foreign patents covering its proprietary technologies.
Total patent expenses increased to $4,932,000 in the year ended June 30, 2002
from $3,766,000 in the year ended June 30, 2001, principally due to litigation
costs ($2,749,000 in 2002 versus $1,913,000 in 2001) for the protection of the
Company's NiMH battery patents and technology. ChevronTexaco has agreed to share
50% of the battery litigation expenses, other than those related to consumer
batteries, beginning in fiscal 2002. This reimbursement ($2,167,000) has been
offset against the patent defense costs for the year ended June 30, 2002. In
March 2001, Ovonic Battery filed suit against Matsushita Battery Industrial Co.,
Ltd., Toyota Motor Corporation, Panasonic EV Energy Co., Ltd. and several
related entities for infringement of patents held by Ovonic Battery.
Operating, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
The decrease in operating, general and administrative expenses (net) from
$8,421,000 in the year ended June 30, 2001 to $7,368,000 in the year ended June
30, 2002 was due primarily to increased allocations of expenses because of the
increased level of activity for product development and research expenses and to
cost of revenues from product development agreements ($5,521,000), partially
offset by increased spending ($4,468,000) as a result of selling expenses
associated with equipment sales, personnel additions and other expenses
associated with the Company's growth.
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Year Ended June 30,
-----------------------------
2002 2001
------------ ------------
Gross Expenses $ 24,487,000 $ 20,019,000
Less - allocations to product development
and research (5,255,000) (1,714,000)
- allocations to cost of revenues from
product development agreements (11,398,000) (9,418,000)
- amortization of negative goodwill (466,000) (466,000)
------------ ------------
Remaining Expenses $ 7,368,000 $ 8,421,000
============ ============
The $3,600,000 decrease in other income (net) ($1,345,000 income in 2002
compared to $4,945,000 income in 2001) resulted primarily from lower interest
rates causing lower interest income ($4,727,000 in 2002 compared to $5,864,000
in 2001) on the Company's investments and from higher equity losses attributed
to losses at United Solar Ovonic LLC ($2,944,000 in 2002 compared to $1,948,000
in 2001) and ITS ($714,000 in 2002 compared to $48,000 in 2001) and the
$1,000,000 write-off of the Company's interest in EV Global.
49
The Company had an amortization of negative goodwill of $466,000 in both
2002 and 2001.
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 June 30, 2003, the Company had consolidated cash, cash equivalents,
short-term investments and accounts and short-term note receivable (including
$6,977,000 of amounts due from related parties) of $64,496,000 (see Note C of
Notes to Consolidated Financial Statements for restrictions), a decrease of
$68,521,000 from June 30, 2002. As of June 30, 2003, the Company had
consolidated working capital of $37,795,000 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, 2004 to decrease to
approximately $30,796,000, compared to $42,383,000 received in the year ended
June 30, 2003. 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 June 30, 2003, the Company had $35,369,000 consolidated cash, cash
equivalents and short-term investments ($7,000,000 of which was restricted)
consisting of mortgage and asset-backed securities and corporate notes,
classified as available for sale, maturing from 35 days to 31 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. Due to reductions in the total portfolio, three investments each
represent more than 10% of the portfolio at June 30, 2003. As of June 30, 2003,
due to investment yield considerations, only 19% of the total portfolio had
original maturities of less than 90 days. Also, there were two investments
totaling $4,500,000 which, at that time, did not comply with the rating policy
(both were rated BBB). Subsequent to June 30, 2003, the Company sold these
investments to fund its operations.
During the year ended June 30, 2003, $22,882,000 of cash was used in
operations. The difference between the net loss of $36,198,000 and the net cash
used in operations was principally due to a $5,261,000 decrease in working
capital (other than cash). Also contributing were noncash costs (principally
depreciation ($3,956,000) and equity in losses and writedown of joint ventures
($11,795,000)).
50
Machinery and equipment was purchased totalling $5,135,000, principally
for ECD's state-of-the-art clean room ($2,194,000). The Company expects to spend
$3,500,000 for capital expenditures in Fiscal 2004.
The following table delineates the Company's contractual obligations:
Payments Due by Period
----------------------------------------------------------------------
Contractual Obligations Total Less than 1-3 years 3-5 years More than
1 year 5 years
Long-term Debt $12,000,000 $12,000,000 $ - $ - $ -
Capital Lease Obligations 17,520,000 1,191,000 2,533,000 2,659,000 11,137,000
Operating Leases 9,927,000 2,660,000 3,616,000 1,615,000 2,036,000
Purchase Obligations 9,701,000 9,017,000 404,000 280,000 -
----------- ----------- ----------- ----------- -----------
Total $49,148,000 $24,868,000 $ 6,553,000 $ 4,554,000 $13,173,000
=========== =========== =========== =========== ===========
On May 9, 2003, the Company announced the award of a subcontract by the
DOE's National Renewable Energy Laboratory (NREL) to develop new solar cell
manufacturing technology based on our continuous web, thin-film multijunction
approach. The subcontract will provide matching funds for a research and
development program aimed at lowering the manufacturing cost of solar cells.
NREL will fund about $3 million of the approximately $6 million three-year,
phased subcontract, with ECD providing the balance of the funds.
On May 28, 2003, United Solar Ovonic Corp. announced that the U.S. Air
Force Research Laboratory, Kirtland AFB, NM (AFRL), has awarded United Solar
Ovonic Corp. an $11.5 million, 18-month contract to develop new solar cell
technology to be used in space and airship vehicles addressing defense and
homeland security applications. AFRL has an option to fund the company an
additional $7.8 million.
In September 2003, ECD was advised by NIST that it would be awarded two
new contracts by NIST. One contract is a three-year, cost-sharing contract (ECD
would receive $1,972,000) for the development of new optical switching devices
based on ECD's phase-change materials. The second contract is a four-year,
cost-sharing contract (ECD would receive $2,645,000) with GE as the team leader
for further development of ECD's roll-to-roll processing for printing of
large-area organic electronic devices.
In the first phase of an equipment supply agreement with Rare Earth
Ovonic, Ovonic Battery has three contracts to supply equipment and technology
totaling $63,600,000 to its Rare Earth Ovonic joint ventures in China. As of
June 30, 2003, Ovonic Battery has received payments totaling $58,605,000 under
the three contracts. Ovonic Battery has recorded revenues of $54,093,000 for the
contracts, $4,512,000 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.
As part of its long-standing strategy, the Company has made investments in
its technologies, which have resulted in enabling intellectual property and
products. The technology emerging from these investments has enabled the Company
to finance its operations and growth through strategic alliances (joint ventures
and license agreements) with
51
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:
o Texaco Ovonic Battery Systems LLC - a 50/50 joint venture between Ovonic
Battery and ChevronTexaco formed to bring advanced NiMH batteries into
widespread commercial production for hybrid and electric vehicles as well
as for telecommunications and stationary applications. ChevronTexaco is
funding an initial amount up to $178,000,000 ($102,000,000 of which has
been funded as of June 30, 2003) to increase the manufacturing capacity at
Texaco Ovonic Battery Systems' facilities in Michigan and Ohio, and for
market development and advanced product development. The advanced product
development is being accomplished through a product development contract
from Texaco Ovonic Battery Systems to Ovonic Battery. The contract may
be cancelled if mutually agreed-upon business objectives and milestones
are not materially satisfied. The objectives and milestones were
developed three years ago, have been modified from time to time and may
no longer be relevant. One of the business objectives has not been
materially satisfied and the Texaco Ovonic Battery Systems management
committee has requested that the management of Texaco Ovonic Battery
Systems prepare a new business and marketing plan that will guide the
strategic direction of the venture and form the basis for revised business
objectives. The Company recorded revenues of $12,367,000 for work
performed under the contract in the year ended June 30, 2003 and expects
to record approximately $8 million in Fiscal 2004.
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 proprietary technology to store hydrogen in metal hydrides.
ChevronTexaco is funding an initial amount of up to $104,000,000
($48,398,000 received through June 30, 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 $44,049,000 for work performed under the contract,
$13,651,000 of which was in the year ended June 30, 2003, and is expected
to record approximately $12 million in Fiscal 2004.
o Ovonyx, Inc. - a joint venture owned 41.7% by ECD and the remainder by
Tyler Lowrey, Intel and others to further develop and 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, DRAM and
SRAM. It offers a way to realize full system-on-a-chip capability through
integrating unified memory, linear, and logic on the same silicon chip -
hence its name OUM(TM). Ovonyx has granted nonexclusive royalty-bearing
licenses to Intel, STMicroelectronics and BAE Systems. In addition, ECD
52
receives royalties from Ovonyx equal to .5% of Ovonyx' revenues. Ovonyx
has sufficient capital resources to implement its business plans and will
not require additional funding in the near term.
In October 2002, ECD, through a newly formed company, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by ECD to Ovonyx. ECD received an exclusive, royalty-bearing
license, subject to existing agreements, for the use of all OUM(TM) and
Ovonic Threshold Switch and other Ovonyx technology for use in the field
of cognitive computers. ECD has recorded its $1,000,000 investment in
Ovonyx and accounts for this investment on the equity method and
recognizes its proportionate share of Ovonyx losses to the extent of its
$1,000,000 investment. For the year ended June 30, 2003, ECD recorded
$406,000 in equity losses related to its investment in Ovonyx.
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. ITS requires significant additional investments as it
continues commercialization of its products and currently lacks funds to
continue operations without new equity investors. Neither current partner in
the venture has an obligation nor has committed to provide additional funding.
While the Company believes that new equity investors will be found, no
assurances can be given. As a result, ECD wrote down its investment in ITS in
the year ended June 30, 2003 to zero.
These strategic alliances, in addition to recent purchases of our former
partners' interests in the photovoltaic and fuel cell ventures, have both near-
term and long-term impacts on the Company's capital resources. While the
Company was able to purchase the interests in the photovoltaic and fuel cell
ventures for only $6,000,000 and $1 respectively, it is now funding 100% of the
cash requirements for (i) United Solar Ovonic (after May 14, 2003) and (ii)
Ovonic Fuel Cell (after December 31, 2002) as well as (iii) Ovonic Media (after
January 3, 2003). Also in connection with the purchase of Bekaert's United
Solar Ovonic interests, the Company provided approximately $40 million to United
Solar Ovonic to terminate the sale and leaseback agreements related to the 30MW
and 5MW photovoltaic production equipment and extinguish related guarantees
provided by Bekaert. As of September 30, 2003, the Company had consolidated
cash, cash equivalents and short-term investments of $16,418,000 ($3,827,000 of
which was restricted), which is sufficient to sustain operations through
December 31, 2003.
Agreements with ChevronTexaco, Bekaert, Ovonyx and General Electric 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 expects to
continue to use significant cash to fund its operations in the coming year and
is engaged in a number of activities to raise capital, grow revenues and reduce
costs.
53
The Company is presently in negotiations and discussions with third
parties to refinance the 30MW production equipment. The Company obtained an
independent appraisal that valued the 30MW equipment higher than the $67 million
equipment cost. The Company is also engaged in a number of other negotiations
and discussions to fund its operations, including forming new strategic
alliances to fund and grow its photovoltaic, fuel cell and other businesses and
raise additional capital through equity and debt financings. In addition, the
Company is engaged in negotiations with government agencies for contracts to
fund its developments activities.
Management believes that funds generated from operations, new business
agreements, equity, and debt financings, new government contracts and the cost-
containment initiatives described below, together with existing cash and cash
equivalents, will be adequate to support the Company's operations for the coming
year. However, the amount and timing of such activities are uncertain.
Accordingly, no assurances can be given as to the timing or success of the
aforementioned plans, negotiations, discussions and programs. The independent
auditors' report states that "the Company's recurring losses from operations and
need for additional working capital raise substantial doubt about its ability to
continue as a going concern."
On July 31, 2003, the Company announced a series of initiatives aimed at
aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. Workforce reallocation and reductions
of up to 20% are being implemented to meet the Company's aggressive cost
reduction targets, and business units have begun to reduce discretionary
spending and other costs associated with the Company's operations. A salary
freeze has been implemented and the Company's executive management team has
voluntarily taken 10% salary reductions. Additional cost-reduction initiatives
will include attrition, reduced purchased services and contract employees and
lower capital expenditures. The cost containment initiatives should be fully
implemented by January 1, 2004. In aggregate, they are expected to reduce
spending by approximately $20,000,000 annually.
54
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
- -------- ----------------------------------------------------------
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities and
time deposits. All such instruments are classified as securities available for
sale. We do not invest in portfolio equity securities, or commodities, or use
financial derivatives for trading purposes. Our debt security portfolio
represents funds held temporarily, pending use in our business and operations.
The Company had $32,995,000 and $114,207,000 of these investments on June 30,
2003 and June 30, 2002, respectively. On June 30, 2003, the investments had an
average maturity of 292 days, $26,802,000 of which had maturities of 91 days to
31 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. Due to reductions in the total portfolio, three investments each
represent more than 10% of the portfolio at June 30, 2003. As of June 30, 2003,
due to investment yield considerations, only 19% of the total portfolio had
maturities of less than 90 days. As of June 30, 2003, there were two investments
totaling $4,500,000 which, at that time, did not comply with the rating policy
(both were rated BBB). Subsequent to June 30, 2003, the Company sold these
investments to fund its operations. Our market risk exposure consists of
exposure to changes in interest rates and to the risks of changes in the credit
quality of issuers. An interest rate change of 1% would result in a change in
the value of our June 30, 2003 portfolio of approximately $233,000.
55
Item 8: Consolidated Financial Statements and Supplementary Data
- ------- --------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Energy Conversion Devices, Inc.
Rochester Hills, Michigan
We have audited the accompanying consolidated balance sheets of Energy
Conversion Devices, Inc. and subsidiaries (the "Company") as of June 30, 2003
and 2002 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2003. Our audits also included the financial statement schedule listed in the
Index at Item 14. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 2003 and
2002 and the results of their operations and their cash flows for the three
years in the period ended June 30, 2003 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, effective July
1, 2002, the Company changed its method of accounting for goodwill and other
intangible assets to conform to Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company's recurring losses from
operations and need for additional working capital raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note A. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Deloitte & Touche LLP
Detroit, Michigan
October 21, 2003
56
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
June 30,
---------------------------
2003 2002
------------ ------------
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of $6,193,000
at June 30, 2003, ($2,000,000 of which is
restricted) and $42,210,000 at June 30,
2002 (NOTE C) $ 8,567,261 $ 42,221,015
Short-term investments (including restricted
investments of $5,000,000 at June 30, 2003
and $25,000,000 at June 30, 2002) (NOTE C) 26,801,506 71,997,154
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$265,000 at June 30, 2003 and $563,000
at June 30, 2002) 10,520,719 7,268,447
Accounts receivable due from related parties 6,977,280 9,935,880
Note receivable due from related party - 1,594,275
Note receivable (NOTE F) 11,629,489 -
Inventories 12,448,172 1,163,273
Other 1,017,659 387,901
------------ ------------
TOTAL CURRENT ASSETS 77,962,086 134,567,945
PROPERTY, PLANT AND EQUIPMENT (NOTES A and F)
Land and land improvements 267,000 267,000
Buildings and improvements 13,982,830 3,456,088
Machinery and other equipment (including
construction in progress of approximately
$163,000 at June 30, 2003 and $694,000
at June 30, 2002) 75,587,068 26,713,253
Capitalized lease equipment 10,000,000 3,053,295
------------ ------------
99,836,898 33,489,636
Less accumulated depreciation and amortization (29,137,648) (22,551,768)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 70,699,250 10,937,868
Investment in Rare Earth Ovonic-China (NOTE A) 1,710,000 1,710,000
Long-Term Note Receivable - Related Party
(NOTE A) - 10,921,232
INVESTMENT IN AND ADVANCES TO JOINT
VENTURES (NOTE E)
Texaco Ovonic Battery Systems - -
Texaco Ovonic Hydrogen Systems - -
Ovonyx 594,220 -
ITS Innovative Transportation Systems - 3,285,757
Ovonic Media - -
United Solar Ovonic LLC - 27,269,793
OTHER ASSETS 2,729,094 3,425,999
------------ ------------
TOTAL ASSETS $153,694,650 $192,118,594
============ ============
See notes to consolidated financial statements.
57
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
---------------------------
2003 2002
------------ ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 18,608,052 $ 18,249,591
Accounts payable and accrued expenses - related parties - 34,218
Salaries, wages and amounts withheld from employees 4,574,357 2,908,213
Deferred revenues under business agreements (NOTE A) 5,089,597 640,019
Deferred revenues - related parties (NOTE A) 36,972 6,677,846
Current installments on long-term liabilities (NOTE F) 11,858,378 5,261,747
------------ ------------
TOTAL CURRENT LIABILITIES 40,167,356 33,771,634
LONG-TERM LIABILITIES (NOTE F) 10,187,127 3,507,537
LONG-TERM NOTES PAYABLE (NOTE F) - 10,921,232
NONREFUNDABLE ADVANCE ROYALTIES (NOTE D) 3,507,995 3,627,931
------------ ------------
TOTAL LIABILITIES 53,862,478 51,828,334
NEGATIVE GOODWILL (NOTE A) - 2,215,560
MINORITY INTEREST (NOTE E) - 2,819,740
STOCKHOLDERS' EQUITY
Capital Stock (NOTES G and H)
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Class B Convertible Common Stock,
par value $0.01 per share
Authorized, Issued and Outstanding - 430,000 shares 4,300 4,300
Common Stock, par value $0.01 per share:
Authorized - 30,000,000 shares
Issued & Outstanding - 21,252,207 shares at
June 30, 2003 and 21,248,973 shares at
June 30, 2002 212,522 212,490
Additional paid-in capital 384,987,156 384,952,113
Accumulated deficit (284,392,111) (248,193,952)
Accumulated other comprehensive income 546,646 487,950
Unearned Compensation on Class B Convertible
Common Stock (1,528,540) (2,210,140)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 99,832,172 135,254,960
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $153,694,650 $192,118,594
============ ============
See notes to consolidated financial statements.
58
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUES (NOTES A and B)
Product sales $ 15,942,438 $ 26,252,235 $ 13,925,029
Product sales to related parties 6,473,352 10,381,932 10,314,941
------------ ------------ ------------
Total product sales 22,415,790 36,634,167 24,239,970
Royalties 1,810,762 1,980,746 2,898,956
Royalties - related party 32,885 20,168 -
------------ ------------ ------------
Total royalties 1,843,647 2,000,914 2,898,956
Revenues from product development agreements 6,382,432 6,776,976 7,421,512
Revenues from product development agreements
with related parties 30,952,816 45,908,741 30,160,626
------------ ------------ ------------
Total revenues from product development
agreements 37,335,248 52,685,717 37,582,138
Revenues from license and other agreements 3,444,114 25,000 5,300,000
Other revenues (79,312) 136,577 265,015
Other revenues from related parties 219,373 227,910 1,118,414
------------ ------------ ------------
Total other revenues 140,061 364,487 1,383,429
------------ ------------ ------------
TOTAL REVENUES 65,178,860 91,710,285 71,404,493
EXPENSES (NOTE A)
Cost of product sales 25,938,925 37,165,211 23,376,373
Cost of revenues from product development
agreements 37,001,106 51,703,118 36,552,685
Product development and research 19,798,126 12,775,128 9,354,940
Patent defense (net) 5,429,042 2,749,176 1,913,212
Patents 2,189,290 2,183,166 1,853,129
Operating, general and administrative (net) 8,098,941 7,367,813 8,421,047
------------ ------------ ------------
TOTAL EXPENSES 98,455,430 113,943,612 81,471,386
------------ ------------ ------------
LOSS FROM OPERATIONS (33,276,570) (22,233,327) (10,066,893)
OTHER INCOME (EXPENSE):
Interest income 3,561,326 4,727,246 5,864,202
Interest expense (881,284) (910,134) (800,911)
Equity in losses and writedown of joint ventures (11,794,552) (3,658,480) (1,996,689)
Minority interest share of losses 2,079,845 1,536,236 1,069,518
Loss on write-off of investment in EV Global
(NOTE A) - (1,000,000) -
Other nonoperating income 1,897,516 650,425 808,935
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (5,137,149) 1,345,293 4,945,055
------------ ------------ ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (38,413,719) (20,888,034) (5,121,838)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NOTE A) 2,215,560 - -
------------ ------------ ------------
NET LOSS $(36,198,159) $(20,888,034) $ (5,121,838)
============ ============ ============
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(NOTE I) $ (1.75) $ (.96) $ (.26)
BASIC NET INCOME PER SHARE FOR CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(NOTE I) .10 - -
------------ ------------ ------------
BASIC NET LOSS PER SHARE (NOTE I) $ (1.65) $ (.96) $ (.26)
============ ============ ============
DILUTED NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE I) $ (1.75) $ (.96) $ (.26)
DILUTED NET INCOME PER SHARE FOR
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE I) .10 - -
------------ ------------ ------------
DILUTED NET LOSS PER SHARE (NOTE I) $ (1.65) $ (.96) $ (.26)
============ ============ ============
See notes to consolidated financial statements.
59
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
---------------------------------------------------------------
Three years ended June 30, 2003
Class A and
Class B Unearned
Convertible Compen-
Common Stock Common Stock sation on
--------------- ------------------- Accumulated Class B
Number Number Additional Other Convertible Total
of of Paid-In Comprehen- Accumulated Common Stockholders'
Shares Amount Shares Amount Capital sive Income Deficit Stock Equity
--------------- ------------------- ------------ ----------- ------------- ------------ -------------
Balance at July 1, 2000 649,913 $ 6,499 18,098,646 $180,986 $324,293,312 $ 50,783 $(222,184,080) $(3,570,940) $ 98,776,560
Net loss for year ended
June 30, 2001 (5,121,838) (5,121,838)
Unrealized gain on
investments (net of
reclassification
adjustment) 830,559 830,559
--------
Comprehensive loss (4,291,279)
Earned compensation
on Class B stock 680,400 680,400
Issuance of stock to
directors and
consultants 2,000 20 40,636 40,656
Common stock issued in
connection with exercise
of stock options and
warrants 766,905 7,669 9,970,428 9,978,097
Stock options issued to
non-employees 111,671 111,671
Common stock sold to
ChevronTexaco 185,475 1,855 5,442,751 5,444,606
------- ------- ---------- -------- ------------ -------- ------------- ----------- ------------
Balance at June 30, 2001 649,913 $ 6,499 19,053,026 $190,530 $339,858,798 $881,342 $(227,305,918) $(2,890,540) $110,740,711
======= ======= ========== ======== ============ ======== ============= =========== ============
See notes to consolidated financial statements.
(Continued on next page)
60
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
---------------------------------------------------------------
Three years ended June 30, 2003
(CONTINUED)
Class A and
Class B Unearned
Convertible Compen-
Common Stock Common Stock sation on
--------------- ------------------- Accumulated Class B
Number Number Additional Other Convertible Total
of of Paid-In Comprehen- Accumulated Common Stockholders'
Shares Amount Shares Amount Capital sive Income Deficit Stock Equity
--------------- ------------------- ------------ ----------- ------------- ------------ -------------
Balance at July 1, 2001 649,913 $ 6,499 19,053,026 $190,530 $339,858,798 $881,342 $(227,305,918) $(2,890,540) $110,740,711
Net loss for year ended
June 30, 2002 (20,888,034) (20,888,034)
Unrealized loss on
investments (net of
reclassification
adjustment) (393,392) (393,392)
-------------
Comprehensive loss (21,281,426)
Earned compensation on
Class B stock 680,400 680,400
Issuance of stock to
directors and
consultants 1,310 13 25,034 25,047
Common stock issued in
connection with exercise
of stock options
and warrants 1,746,279 17,463 35,727,718 35,745,181
Expense options granted
below market 197,838 197,838
Stock options issued to
non-employees 253,579 253,579
Common stock sold to
ChevronTexaco 448,358 4,484 8,889,146 8,893,630
------- ------- ---------- -------- ------------ -------- ------------- ----------- ------------
Balance at June 30, 2002 649,913 $ 6,499 21,248,973 $212,490 $384,952,113 $487,950 $(248,193,952) $(2,210,140) $135,254,960
======= ======= ========== ======== ============ ======== ============= =========== ============
See notes to consolidated financial statements.
(Continued on next page)
61
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
---------------------------------------------------------------
Three years ended June 30, 2003
(CONTINUED)
Class A and
Class B Unearned
Convertible Compen-
Common Stock Common Stock sation on
--------------- ------------------- Accumulated Class B
Number Number Additional Other Convertible Total
of of Paid-In Comprehen- Accumulated Common Stockholders'
Shares Amount Shares Amount Capital sive Income Deficit Stock Equity
--------------- ------------------- ------------ ----------- ------------- ------------ -------------
Balance at July 1, 2002 649,913 $ 6,499 21,248,973 $212,490 $384,952,113 $487,950 $(248,193,952) $(2,210,140) $135,254,960
Net loss for year ended
June 30, 2003 (36,198,159) (36,198,159)
Unrealized loss on
investments (net of
reclassification
adjustment) (56,797) (56,797)
Foreign currency
translation gains 115,493 115,493
----------
Comprehensive loss (36,139,463)
Earned compensation
on Class B stock 681,600 681,600
Issuance of stock to
directors and
consultants 2,844 28 29,976 30,004
Common stock issued in
connection with
convertible investment
certificates 390 4 (4) -
Stock options issued
to non-employees 5,071 5,071
------- ------- ---------- -------- ------------ -------- ------------- ----------- ------------
Balance at June 30, 2003 649,913 $ 6,499 21,252,207 $212,522 $384,987,156 $546,646 $(284,392,111) $(1,528,540) $ 99,832,172
======= ======= ========== ======== ============ ======== ============= =========== ============
See notes to consolidated financial statements.
62
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------
Year Ended June 30,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss $(36,198,159) $(20,888,034) $ (5,121,838)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,955,641 2,273,010 2,301,798
Amortization of premium/discount on investments 660,316 362,172 -
Equity in losses and writedown of joint ventures 11,794,552 3,658,480 1,996,689
License Agreement (exchange for debt and related interest) (3,269,114) - -
Profit deferred on sales to United Solar Ovonic LLC - (1,774,172) 1,564,777
Creditable royalties (119,936) (213,057) (120,179)
Stock and stock options issued for services rendered 716,675 1,156,864 832,727
Gain on sales of investments (1,427,241) (335,757) (450,870)
(Gain)/loss on sale of equipment 40,257 (16,245) 61,228
Amortization of deferred gain - (139,164) (390,744)
Amortization of negative goodwill - (466,433) (466,433)
Minority interest (2,079,845) (1,536,236) (1,069,518)
Cumulative effect of change in accounting principle (2,215,560) - -
Loss on write-off of investment in EV Global - 1,000,000 -
Changes in working capital:
Accounts receivable 1,744,131 11,540,647 (11,636,928)
Accounts and note receivable due from related parties 2,958,600 (516,672) (7,110,278)
Inventories (1,207,889) 170,269 (339,465)
Other assets 1,334,471 (1,528,048) (682,675)
Accounts payable and accrued expenses 2,770,204 974,592 12,647,873
Accounts payable and accrued expenses - related parties (34,218) 23,685 (7,013)
Deferred revenues under business agreements 4,509,489 278,125 61,399
Deferred revenues - related parties (6,640,874) 4,331,792 (4,030,590)
Deferred tax assets and other (173,012) 864,999 (864,999)
------------ ------------ ------------
NET CASH USED IN OPERATIONS (22,881,512) (779,183) (12,825,039)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of capital equipment (5,134,579) (7,666,791) (2,240,193)
Acquisition of United Solar Ovonic (net of cash acquired) (3,773,365) - -
Investment in and advances to United Solar Ovonic LLC (2,984,370) - (4,523,841)
Investment in Bekaert ECD Europe - - (43,750)
Investment in and advances to ITS (2,000,000) - (2,409,000)
Investment in Rare Earth Ovonic - (1,710,000) -
Investment in Ovonyx (1,000,000) - -
Purchase of investments (30,907,063) (79,490,214) (49,067,511)
Sales of investments 76,812,839 55,981,916 46,163,777
Proceeds from sale of capital equipment 24,251 35,876 50
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 31,037,713 (32,849,213) (12,120,468)
------------ ------------ ------------
FINANCING ACTIVITIES:
Principal payments under short-term and long-term
debt obligations and capitalized lease obligations (41,764,836) (1,844,799) (2,013,814)
Proceeds from sale of stock, including treasury
stock, to ChevronTexaco - 8,893,630 5,444,606
Proceeds from sale of stock upon exercise of stock
options and warrants - 35,745,181 9,978,097
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (41,764,836) 42,794,012 13,408,889
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (45,119) - -
-------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (33,653,754) 9,165,616 (11,536,618)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,221,015 33,055,399 44,592,017
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,567,261 $ 42,221,015 $ 33,055,399
============ ============ ============
See notes to consolidated financial statements.
63
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended June 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 881,284 $ 910,134 $ 800,911
Short-term and long-term note
receivable - United Solar Ovonic LLC - 665,122 624,615
Short-term and long-term note
payable - Canon - (665,122) (624,615)
Debt principal and interest exchanged
for license with Canon 3,269,114 - -
Transfer investment in United Solar
Ovonic LLC to note receivable - (4,523,841) -
Record note receivable - Bekaert ECD
Solar Systems - 4,523,841 -
See notes to consolidated financial statements.
64
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies
- ---------------------------------------
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has recurring losses from operations and needs
additional working capital which raises substantial doubt about its ability to
continue as a going concern.
The recent purchases of our former partners' interests in the photovoltaic
and fuel cell ventures have both near-term and long-term impacts on the
Company's capital resources. While the Company was able to purchase the
interests in the photovoltaic and fuel cell ventures for only $ 6,000,000 and
$1 respectively, it is now funding 100% of the cash requirements for (i) United
Solar Ovonic (after May 14, 2003) and (ii) Ovonic Fuel Cell (after December 31,
2002) as well as (iii) Ovonic Media (after January 3, 2003). Also in connection
with the purchase of Bekaert's United Solar Ovonic interests, we provided
approximately $40 million to United Solar Ovonic to terminate the sale and
leaseback agreements related to the 30MW and 5MW photovoltaic production
equipment and to extinguish related guarantees provided by Bekaert.
Agreements with ChevronTexaco, Bekaert, Ovonyx and General Electric have
funded much of the Company's product development activities. However,
additional sources of cash are required to sustain the Company's operations.
The Company expects to continue to use significant cash to fund its operations
in the coming year and is engaged in a number of activities to raise capital,
grow revenues and reduce costs. As of September 30, 2003, the Company had
consolidated cash, cash equivalents and short-term investments of $16,418,000
($3,827,000 of which was restricted), which is sufficient to sustain operations
through December 31, 2003.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern in the absence of sufficient additional
funds and the achievement of profitable operations. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company is presently in negotiations and discussions with third
parties to refinance the 30MW equipment. The Company obtained an independent
appraisal of the 30MW equipment that valued it higher than the $67 million
equipment cost. The Company is also engaged in a number of other negotiations
and discussions to fund its operations, including raising additional capital
through equity and debt financings, forming new strategic alliances to fund and
grow its photovoltaic, fuel cell and other businesses. In addition the Company
is engaged in negotiations with government agencies for contracts to fund its
development activities.
65
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Management believes that funds generated from operations, equity and debt
financing, new government contracts and the cost-containment initiatives
described below, together with existing cash and cash equivalents, will be
adequate to support the Company's operations for the coming year. However the
amount and timing of such activities are uncertain. Accordingly, no assurances
can be given as to the timing or success of the aforementioned plans,
negotiations, discussions and programs. The independent auditors' report states
that "the Company's recurring losses from operations and need for additional
working capital raise substantial doubt about its ability to continue as a going
concern."
On July 31, 2003, the Company announced a series of initiatives aimed at
aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. Workforce reallocation and reductions
of up to 20% are being implemented to meet the Company's aggressive cost
reduction targets, and business units have begun to reduce discretionary
spending and other costs associated with the Company's operations. A salary
freeze has been implemented and the Company's executive management team has
voluntarily taken 10% salary reductions. Additional cost-reduction initiatives
will include attrition, reduced purchased services and contract employees and
lower capital expenditures. The cost containment initiatives should be fully
implemented by January 1, 2004. In aggregate, they are expected to reduce
spending by approximately $20,000,000 annually.
Nature of Business
- ------------------
Energy Conversion Devices, Inc. (ECD) has established a multidisciplinary
business, scientific, technical and manufacturing organization to commercialize
products based on its technologies. Its activities range from product
development to manufacturing and selling products, as well as designing and
building production machinery with an emphasis on alternative energy and
advanced information technologies.
Financial Statement Presentation, Principles of Consolidation and Equity
- ------------------------------------------------------------------------
Accounting
- ----------
The consolidated financial statements include the accounts of ECD and its
100%-owned subsidiaries United Solar Ovonic Corp. (previously called United
Solar Systems Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic
LLC (previously called Bekaert ECD Solar Systems LLC and 40% owned by United
Solar Ovonic Corp. prior to May 14, 2003) (jointly referred to as United Solar
Ovonic), a business formed to develop and commercialize the Company's continuous
web, multilayer, large-area thin-film amorphous silicon photovoltaic technology
(see Note E), and its approximately 91%-owned subsidiary Ovonic Battery Company,
Inc. (Ovonic Battery), a company formed to develop and commercialize ECD's
Ovonic(R) nickel metal hydride (NiMH) battery technology (collectively the
"Company"). The remaining shares of Ovonic Battery are owned by Honda Motor
Company, Ltd., Sanoh Industrial Company, Ltd. and Sanyo Electric Co., Ltd. No
minority interest related to Ovonic
66
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Battery is recorded in the consolidated financial statements because there is no
additional funding requirement by the minority shareholders.
The Company has a number of strategic alliances and has five major
investments accounted for using the equity method: (i) Texaco Ovonic Battery
Systems LLC, a joint venture between Ovonic Battery and ChevronTexaco
Corporation, each having 50% interest in the joint venture, to manufacture and
sell the Company's proprietary NiMH batteries for transportation and stationary
applications; (ii) Texaco Ovonic Hydrogen Systems LLC, a joint venture between
ECD and ChevronTexaco, each having 50% interest in the joint venture, to further
develop and commercialize Ovonic(TM) solid hydrogen storage technology; (iii)
Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler Lowrey, Intel Capital
and other investors, to further develop and commercialize ECD's Ovonic Unified
Memory(TM) (OUM(TM)) technology; (iv) Ovonic Media, LLC, a joint venture owned
51% by General Electric (GE) through its GE Plastics business unit and 49% by
ECD, formed to design, develop, demonstrate and commercialize our proprietary
continuous web roll-to-roll technology for ultra-high-speed manufacture of
optical media products; and (v) ITS Innovative Transportation Systems A.G.
(ITS), a German company beneficially owned 30% by ECD formed to manufacture
battery-powered electric vehicles. In addition, prior to May 14, 2003, the
Company accounted for United Solar Ovonic LLC, owned 40% by United Solar Ovonic
Corp. (now 100% owned by the Company) by the equity method of accounting. Also,
ECD has two 50%-owned joint ventures in Russia, Sovlux Co., Ltd. (Sovlux) and
Sovlux Battery Closed-Stock Company (Sovlux Battery). See Note E for discussion
of all of the Company's ventures.
For the period July 1, 2002 through May 14, 2003, ECD owned 81% of United
Solar Ovonic Corp. (formerly United Solar Systems Corp.) and consolidated that
entity with a 19% minority interest recognized, and accounted for United Solar
Ovonic Corp.'s 40% interest in United Solar Ovonic LLC on the equity basis.
Effective May 15, 2003, with the purchase by the Company from Bekaert
Corporation of the remaining interests in United Solar Ovonic Corp. and United
Solar Ovonic LLC, the Company owns 100% of each of the entities and has
consolidated the entities in their entirety for the period from May 15, 2003
through June 30, 2003. (See Note C - Acquisitions.)
The Company's investments in Texaco Ovonic Battery Systems, Texaco Ovonic
Hydrogen Systems and Ovonic Media are recorded at zero. The Company will
continue to carry its investment in each of these joint ventures at zero until
the venture becomes profitable (based upon the venture's history of sustainable
profits), at which time the Company will start to recognize over a period of
years its share, if any, of the then equity of each of the ventures, and will
recognize its share of each venture's profits or losses on the equity method of
accounting. To the extent that the Company has made cash or other contributions,
it recognizes its proportionate share of any losses until the investment reaches
zero.
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
67
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
foundation for the creation of the important strategic alliances whereby the
Company provides intellectual property and patents and joint venture partners
provide cash.
In October 2002, ECD, through a newly formed company, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by ECD to Ovonyx.
ECD also received an exclusive, royalty-bearing license, subject to existing
agreements, for the use of all OUM(TM) and Ovonic Threshold Switch and other
Ovonyx technology for use in the field of cognitive computers. ECD has recorded
its $1,000,000 investment in Ovonyx and accounts for this investment on the
equity method and will recognize its proportionate share of Ovonyx losses to the
extent of its $1,000,000 investment. In the year ended June 30, 2003, ECD
recorded an equity loss of $406,000.
While the Company believes, based upon the opinion of legal counsel, that
it has no obligation to fund any losses that its joint ventures incur beyond the
Company's investment, the Company has decided to fund certain of its joint
ventures (see Note E).
Upon consolidation, all intercompany accounts and transactions are
eliminated. Any profits on intercompany transactions are eliminated to the
extent of the Company's ownership percentage.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts reported
therein. Due to the inherent uncertainty involved in making estimates, actual
results reported in future periods may be based upon amounts that differ from
those estimates.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with 2003
presentation.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The
Company adopted these statements on July 1, 2002 and recognized the unamortized
negative goodwill of approximately $2,216,000. This is a favorable adjustment
to the Company and is the cumulative effect of a change in accounting principle
in the Company's statements of operations.
68
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
The following is the effect on the years ended June 30, 2003, 2002 and
2001 of this change in accounting principle:
Year Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net Loss $(36,198,159) $(20,888,034) $ (5,121,838)
Deduct:-
Amortization of negative goodwill - (466,433) (466,433)
Cumulative effect of change in
accounting principle (2,215,560) - -
------------ ------------ ------------
Adjusted Net Loss before cumulative
effect of change in accounting
principle $(38,413,719) $(21,354,467) $ (5,588,271)
============ ============ ============
Basic Net Loss Per Share $ (1.75) $ (.96) $ (.26)
Amortization of negative goodwill - (.02) (.02)
Cumulative effect of change in
accounting principle (.10) - -
------------ ------------ ------------
Adjusted Basic Net Loss Per Share
before cumulative effect of change
in accounting principle $ (1.65) $ (.98) $ (.28)
============ ============ ============
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement requires that
discontinued operations are measured at the lower of carrying value or fair
value less cost to sell and that future operating losses of discontinued
operations are not recognized until they occur. The Company implemented this
statement on July 1, 2002. On July 1, 2002, in accordance with the provisions of
SFAS 144, the Company assessed for impairment an intangible asset it had on its
balance sheet since 1995. This intangible asset, which was the result of a
license agreement entered into in 1995, was originally valued at $330,000 and
was being amortized over 40 years. After a review of this intangible asset,
including the associated cash flows represented by recent royalties from one
licensee, the Company determined that this intangible asset was impaired. The
Company wrote off the balance ($272,250) of this intangible asset as of July 1,
2002 and recorded this amount in operating, general and administrative expense
in its consolidated statements of operations for the year ended June 30, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date of an entity's commitment to
an exit plan. The Company implemented this statement on January 1, 2003. The
adoption of this statement did not have a material effect on the Company's
consolidated financial position or results of operations.
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
69
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Company currently applies Accounting Principles
Board (APB) 25, "Accounting for Stock Issued to Employees," to its stock-based
compensation grants to employees. Most grants are awarded at the fair market
value on the grant date in accordance with the applicable plan and, as such, no
compensation expense is recorded for these grants. The Company has no current
plans to change to the fair value based method of accounting for these stock
option grants.
In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted this
requirement with the financial statements for the year ended June 30, 2003.
Had compensation costs for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, the Company's
net loss and net loss per share for years ended June 30, 2003, 2002 and 2001
would have increased as follows:
Year Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net Loss, as reported $(36,198,159) $(20,888,034) $(5,121,838)
Add:
Total stock-based compensation
expense determined under fair
value based method, net of tax 5,054,000 10,880,000 4,018,000
------------ ------------ ------------
Pro-forma net loss $(41,252,159) $(31,768,034) $(9,139,838)
============ ============ ============
Loss per share:
Basic - as reported $ (1.65) $ (.96) $ (.26)
============ ============ ============
Basic - pro forma $ (1.88) $ (1.47) $ (.47)
============ ============ ============
Diluted - as reported $ (1.65) $ (.96) $ (.26)
============ ============ ============
Diluted - pro forma $ (1.88) $ (1.47) $ (.47)
============ ============ ============
The Company applies SFAS 123 for any stock options or awards granted to
nonemployees of the Company. When the measurement date (i.e., when the options
are fully vested) is reached, the amount of compensation cost is determined
based upon the fair value of the options. Prior to the measurement date, the
amount of compensation cost of the options is estimated at each reporting date
and the expense is amortized during the period during which the options vest.
70
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
There are two executive stock option agreements which contain antidilution
provisions. Options are priced based on the lower of the sales price of the
additional securities sold by the Company or the fair market value of the Common
Stock as of the date of issuance (see Note H - Equity Compensation Plans Not
Approved by Security Holders). When the resultant option exercise price is lower
than the fair market value on the grant date, the difference is recorded as
compensation expense.
Other Comprehensive Income (Loss)
- ---------------------------------
The Company's total comprehensive loss was as follows:
Year Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net Loss $(36,198,159) $(20,888,034) $ (5,212,838)
OTHER COMPREHENSIVE INCOME
(LOSS) (net of taxes):
Foreign currency translation adjustments 115,493 - -
Unrealized holding gains arising during
period 219,147 476,980 839,149
Less: reclassification adjustments for
gains realized in net income 275,944 870,372 8,590
------------ ------------ ------------
Net unrealized gains (losses) (56,797) (393,392) 830,559
------------ ------------ ------------
COMPREHENSIVE LOSS $(36,139,463) $(21,281,426) $ (4,382,279)
============ ============ ============
Cash Equivalents
- ----------------
Cash equivalents consist of investments in short-term, highly liquid
securities having a maturity of three months or less from the date of
acquisition.
Short-Term Investments
- ----------------------
The Company has evaluated its investment policies consistent with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
determined that all of its investment securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Stockholders' Equity under the
caption "Accumulated Other Comprehensive Income." The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and accretions are included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in other nonoperating
income (expense). The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
71
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Short-term investments consist of mortgage and asset-backed securities and
corporate notes which mature 91 days or more from date of acquisition. At June
30, 2003, these short-term investments mature in 35 days to 31 months.
Investment in Rare Earth Ovonic-China
- -------------------------------------
The Company has three joint ventures, collectively Rare Earth Ovonic, with
Rare Earth High-Tech Co. Ltd. (Rare Earth High-Tech) of Baotou Steel Company of
Inner Mongolia, China, for the manufacturing of its battery and other related
technologies. The Company accounts for its 19% interest in each of these joint
ventures using the cost method of accounting (total cash investment of
$1,710,000).
Financial Instruments
- ---------------------
Due to the short-term maturities of cash, cash equivalents, short-term
investments, accounts receivable and accounts payable, the Company believes that
the carrying value of its financial instruments is a reasonable estimate of fair
value.
Foreign Currency Transaction Gains and Losses
- ---------------------------------------------
Since most of the Company's contracts and transactions are denominated and
settled in U.S. dollars, there are no significant foreign currency gains or
losses.
72
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Accounts Receivable
- -------------------
June 30, June 30,
2003 2002
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Revenues recognized but unbilled
Commercial customers $ - $ 505,857
Amounts billed to customers
Commercial customers 564,598 676,462
----------- -----------
Sub-total 564,598 1,182,319
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
U.S. Government 698,634 371,577
Commercial customers 9,060 172,210
----------- -----------
707,694 543,787
Amounts billed
U.S. Government 1,773,824 1,272,208
Commercial customers - 1,575,020
----------- -----------
1,773,824 2,847,228
----------- -----------
Sub-total 2,481,518 3,391,015
Amounts unbilled for other than long-term contracts
Commercial customers 1,892,532 2,146,983
Amounts billed for other than long-term contracts
U.S. Government - 370
Commercial customers 5,847,071 1,110,760
----------- -----------
Sub-total 5,847,071 1,111,130
Allowance for uncollectible accounts (265,000) (563,000)
----------- -----------
TOTAL $10,520,719 $ 7,268,447
=========== ===========
Certain contracts with the U.S. government require a retention that is
paid upon completion of audit of the Company's indirect rates. Certain
contracts have been completed for more than 10 years and have not been audited.
U.S. Government retentions totaling $103,947 are included in long-term other
assets at June 30, 2003 and June 30, 2002. Most U.S. government contracts
remain subject to audit.
73
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Accounts Receivable Due from Related Parties
- --------------------------------------------
June 30, June 30,
2003 2002
------------ ------------
Amounts earned which are billed in the subsequent
month on long-term contracts
United Solar Ovonic LLC $ - $ 130,000
Ovonic Media - 364,263
Texaco Ovonic Battery Systems 2,072,138 2,182,575
Ovonic Fuel Cell - 788,894
Texaco Ovonic Hydrogen Systems 1,603,147 1,874,463
----------- -----------
Sub-total 3,675,285 5,340,195
Amounts billed
Texaco Ovonic Battery Systems 3,221,059 1,738,990
Ovonic Fuel Cell - 671,358
Texaco Ovonic Hydrogen Systems - 1,508,948
----------- -----------
Sub-total 3,221,059 3,919,296
Other unbilled
Ovonyx 412 21,248
Other billed
ChevronTexaco Technology Ventures 5,721 536,569
Ovonyx 48,053 21,068
Texaco Ovonic Battery Systems 18,386 97,504
Texaco Ovonic Hydrogen Systems 8,364 -
----------- -----------
Sub-total 80,524 655,141
----------- -----------
TOTAL $ 6,977,280 $ 9,935,880
=========== ===========
Inventories
- -----------
Inventories of raw materials, work in process and finished goods for the
manufacture of solar cells, metal hydride materials and battery packs are valued
at the lower of cost (moving average) or market. Cost elements included in
inventory are materials, direct labor and manufacturing overhead.
Inventories for United Solar Ovonic Corp., United Solar Ovonic LLC (for
June 30, 2003 only) and Ovonic Battery are as follows:
74
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
June 30, June 30,
2003 2002
------------ ------------
Finished products $ 5,282,156 $ 250,370
Work in process 1,825,839 478,997
Raw materials 5,340,177 433,906
----------- -----------
$12,448,172 $ 1,163,273
=========== ===========
Property, Plant and Equipment
- -----------------------------
All properties are recorded at cost. Plant and equipment are depreciated
on the straight-line method over the estimated useful lives of the individual
assets. The estimated lives of the principal classes of assets are as follows:
Years
--------------
Buildings and improvements 5 to 20
Machinery and other equipment 3 to 12.5
Capitalized leased 3 to 15
United Solar Ovonic LLC capitalized the total costs ($66,812,000) of the
30MW machine (equipment which, when fully optimized, is expected to annually
make solar products capable of producing 30MW of electricity) and began
depreciating this equipment over a 12.5-year period (its estimated useful life)
beginning February 1, 2003. See Note C - Acquisitions.
Capitalized leases are amortized over the shorter of the term of the
lease or the life of the equipment, usually three to 15 years. Accumulated
amortization on capitalized leases as of June 30, 2003 and June 30, 2002 was
$1,444,000 and $2,443,000, respectively.
Costs of machinery and other equipment acquired or constructed for a
particular product development project, which have no alternative future use (in
other product development projects or otherwise), are charged to product
development and research costs as incurred.
Expenditures for maintenance and repairs are charged to operations.
Expenditures for betterments or major renewals are capitalized and are
depreciated over their estimated useful lives.
Long-Term Note Receivable
- -------------------------
In connection with N.V. Bekaert S.A. and its U.S.-based subsidiary's
(Bekaert) investment in United Solar Ovonic Corp. and United Solar Ovonic LLC in
April 2000: (1) Bekaert was obligated to invest an additional $12,000,000 in
United Solar Ovonic LLC no later than January 1, 2004, (2) United Solar Ovonic
LLC was required to pay ECD $12,000,000 no later than January 1, 2004, and (3)
ECD was required to pay Canon Inc. of Japan (Canon) $12,000,000 no later than
January 1, 2004. These noninterest-bearing notes were recorded in
75
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
April 2000 at a discounted value of $9,500,000 (using a discount rate of 6.3%).
In connection with the purchase of Bekaert's 60% interest in United Solar Ovonic
LLC and 19% interest in United Solar Ovonic Corp. on May 14, 2003, and while ECD
continues to be contractually obligated to pay Canon, Bekaert agreed to pay the
$12,000,000 directly to Canon, which, when made, will satisfy Bekaert's
obligation to United Solar Ovonic LLC and ECD's obligation to Canon.
Product Development, Patents and Technology
- -------------------------------------------
Product development and research costs are expensed as they are incurred
and, as such, the Company's investments in its technologies and patents are
recorded at zero in its financial statements, regardless of their values. The
technology investments are the bases by which the Company is able to enter into
strategic alliances, joint ventures and license agreements.
Patents and Patent Defense
- --------------------------
Patent expenditures are charged directly to expense. Net patent
expenditures were $2,189,000, $2,183,000 and $1,853,000 for the three years
ended June 30, 2003, 2002 and 2001, respectively. Patent defense expenditures of
$5,429,000 in 2003, $2,749,000 in 2002 and $1,913,000 in 2001, which are
incurred by the Company to protect its patents and to defend or prosecute claims
involving the Company's patents, are charged directly to expense. ChevronTexaco
has agreed to share 50% of the battery litigation expenses, other than those
related to consumer batteries, beginning in fiscal 2002. The reimbursements of
$624,000 in fiscal year 2003 and $2,167,000 in fiscal year 2002 have been offset
against the patent defense costs.
Product Sales
- -------------
Product sales include revenues related to machine-building and equipment
sales contracts, photovoltaic products, nickel hydroxide and metal hydride
materials and battery packs. Revenues related to machine-building and equipment
sales contracts and sales related to other long-term contracts are recognized on
the percentage-of-completion method of accounting using the costs incurred to
date as a percentage of the total expected costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point. Currently, low sales volumes combined with high fixed costs result in
losses.
The Company estimates product warranty cost liability based upon its past
experience and best estimate of future warranty claims. The Company has
recognized a liability for these product warranties. The following is a summary
of the changes in the product warranty liability during the years ended June 30,
2003, 2002 and 2001:
76
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Year Ended June 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Liability beginning of the period $2,489,024 $ 978,895 $ 70,284
Amounts accrued for as warranty costs 1,212,949 1,510,129 908,611
Amounts acquired in connection with
United Solar Ovonic 728,503 - -
Amounts reversed in connection with
acquiring United Solar Ovonic (1,439,815) - -
Warranty claims - - -
---------- ---------- ----------
Liability at June 30 $2,990,661 $2,489,024 $ 978,895
---------- ---------- ----------
Warranty liability is recorded at the time that the product is sold (for
sales of photovoltaic products) and at the time that revenue is recognized (for
machine-building revenues).
Royalties
- ---------
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the sale of the respective licensed product. In
several instances, the Company has received cash payments for nonrefundable
advance royalty payments which are creditable against future royalties under the
licenses. Advance royalty payments are deferred and recognized in revenues as
the creditable sales occur, the underlying agreement expires, or when the
Company has demonstrable evidence that no additional royalties will be
creditable and, accordingly, the earnings process is completed.
In connection with a 1992 battery development contract with the United
States Advanced Battery Consortium (USABC), partially funded by the U.S.
Department of Energy (DOE), the Company has agreed to reimburse USABC and DOE,
as their recoupment for payments to the Company under the 1992 Contract, a 15%
share of royalty payments the Company receives through May 3, 2012 where
Ovonic(R) NiMH batteries serve as the primary source of power for battery-
propelled vehicles. The Company has accrued as an expense 15% of such royalty
payments.
ECD has a royalty trust arrangement whereby ECD is obligated to pay a
trust 25% of optical memory royalties received.
Business Agreements
- -------------------
A substantial portion of revenues is derived through business agreements
for the development and/or commercialization of products based upon the
Company's proprietary technologies. The Company has two major types of business
agreements.
77
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
The first type of business agreement relates to licensing the Company's
proprietary technology. Licensing activities are tailored to provide each
licensee with the right to use the Company's technology, most of which is
patented, for a specific product application or, in some instances, for further
exploration of new product applications of such technologies. The terms of such
licenses, accordingly, are tailored to address a number of circumstances
relating to the use of such technology which have been negotiated between the
Company and the licensee. Such terms generally address whether the license will
be exclusive or nonexclusive, whether the licensee is limited to very narrowly
defined applications or to broader-based product manufacture or sale of products
using such technologies, whether the license will provide royalties for products
sold which employ such licensed technology and how such royalties will be
measured, as well as other factors specific to each negotiated arrangement. In
some cases, licenses relate directly to product development that the Company has
undertaken pursuant to product development agreements; in other cases, they
relate to product development and commercialization efforts of the licensee; and
other agreements combine the efforts of the Company with those of the licensee.
License agreement fees are generally recognized as revenue at the time the
agreements are consummated, which is the completion of the earnings process.
Typically, such fees are nonrefundable, do not obligate the Company to incur any
future costs or require future performance by the Company, and are not related
to future production or earnings of the licensee. License fees payable in
installments are recorded at the present value of the amounts to be received,
taking into account the collectibility of the license fee. In some instances, a
portion of such license fees is contingent upon the commencement of production
or other uncertainties. In these cases, license fee revenues are not recognized
until commencement of production or the resolution of uncertainties. Generally,
there are no current or future direct costs associated with license fees.
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project, based on the relationship of costs
incurred to estimated total project costs. Revenues from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the agreed-
upon fees for product development agreements contemplate reimbursing the Company
for costs considered associated with project activities including expenses for
direct product development and research, patents, operating, general and
administrative expenses and depreciation. Accordingly, expenses related to
product development agreements are recorded as cost of revenues from product
development agreements.
78
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Deferred Revenues
- -----------------
Deferred revenues represent amounts received under business agreements in
excess of amounts recognized as revenues. At June 30, 2003, approximately
$5,074,000 in deferred revenues relates to the Rare Earth Ovonic contracts.
Overhead and General and Administrative Allocations
- ---------------------------------------------------
The Company allocates overhead and general and administrative expenses to
product development research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
Overhead is allocated to cost of product sales through the application of
overhead to inventory costs.
Other Operating Revenues
- ------------------------
Other operating revenues consist principally of revenues related to
services provided to certain related parties and third-party service revenue
realized by certain of the Company's service departments, including the
Production Technology and Machine Building Division and Central Analytical
Laboratory. Revenues related to services are recognized upon completion of
performance of the applicable service.
Other Nonoperating Income
- -------------------------
Other nonoperating income-net consists of the gains and losses on the
sales of short-term investments, amortization of deferred gains and rental
income.
Government Contract Reserve
- ---------------------------
The Company's contracts with the U.S. government and its agencies are
subject to audits by the Defense Contract Audit Agency (DCAA). DCAA has audited
the Company's indirect rates, including its methodology of computing these
rates, for the years ended June 30, 1994 through June 30, 1998 for United Solar
Ovonic and the years ended June 30, 2000 and June 30, 2001 for ECD. In its
reports, DCAA has questioned the allowability of and the allocability of certain
costs as well as the Company's methodology for allocating independent research
and development of its indirect cost pools. In addition, DCAA has stated that
there could be penalties imposed. The Company is, together with its government
consultants, in the process of discussing each of these items in detail with
DCAA. Management believes that some of these DCAA assertions are without
merit. The Company has recorded a reserve of $1,682,000 related to these
issues.
79
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Product Sales, Royalties, Revenues from Product Development Agreements
- -------------------------------------------------------------------------------
and License and Other Agreements
- --------------------------------
The Company has product sales and business agreements with related parties
and with third parties for which royalties and revenues are included in the
consolidated statements of operations. A summary of all of the Company's
revenues follows:
Year Ended June 30,
---------------------------------------
2003* 2002 2001
----------- ----------- -----------
Product sales
Photovoltaics $ 4,001,937 $ - $ -
Machine building and equipment sales 10,949,828 25,295,959 12,961,589
Battery packs 138,179 257,637 844,895
Nickel hydroxide and metal hydride materials 852,494 698,639 118,545
----------- ----------- -----------
15,942,438 26,252,235 13,925,029
Product sales-related parties
Photovoltaics 5,767,035 5,883,442 5,975,424
Machine building 499,793 4,237,201 3,972,778
Battery packs 86,363 19,998 130,000
Metal hydride materials 120,161 241,291 236,739
----------- ----------- -----------
6,473,352 10,381,932 10,314,941
----------- ----------- -----------
Total product sales $22,415,790 $36,634,167 $24,239,970
=========== =========== ===========
Royalties
Battery technology $ 1,778,170 $ 1,913,914 $ 2,846,795
Optical memory 32,592 66,832 52,161
----------- ----------- -----------
1,810,762 1,980,746 2,898,956
Royalty-related party
Microelectronics 32,885 20,168 -
----------- ----------- -----------
Total royalties $ 1,843,647 $ 2,000,914 $ 2,898,956
=========== =========== ===========
Revenues from product development agreements
Photovoltaics $ 3,615,674 $ 2,419,332 $ 2,600,216
Battery technology 2,575,376 3,762,186 3,557,618
Optical memory 64,387 172,695 603,724
Solid hydrogen storage systems - 348,435 659,954
Other 126,995 74,328 -
----------- ----------- -----------
6,382,432 6,776,976 7,421,512
Revenues from product development
agreements - related parties
Battery technology 12,366,964 16,315,424 7,213,698
Optical memory 615,330 1,923,273 2,297,977
Solid hydrogen storage systems 13,948,178 18,783,190 11,818,301
Fuel cell technology 4,022,344 8,886,854 8,830,650
----------- ----------- ------------
30,952,816 45,908,741 30,160,626
----------- ----------- ------------
Total revenues from product development
agreements $37,335,248 $52,685,717 $37,582,138
=========== =========== ===========
License and other agreements
Battery technology $ 3,444,114 $ 25,000 $ 5,300,000
=========== =========== ===========
- -----------------------------
* United Solar Ovonic LLC is included in ECD's consolidated
financial statements effective May 15, 2003.
80
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Product Sales, Royalties, Revenues from Product Development Agreements
- -------------------------------------------------------------------------------
and License and Other Agreements (Continued)
- --------------------------------------------
In the year ended June 30, 2003, the Company recognized $3,269,000 in
revenues from license and other agreements as a result of United Solar Ovonic
Corp. granting Canon rights to manufacture photovoltaic products in two
countries of its choice in Southeast Asia, excluding India and the People's
Republic of China. These rights were granted in satisfaction of the outstanding
obligation ($2,500,000 plus accrued interest) due Canon in connection with a
previous loan made to United Solar Corp. by Canon. Additionally, the Company
entered into license agreements with four Chinese battery companies, Henan
Huanyu Power Source Co., Ltd. ($50,000), Ghandong Shida Battery Co. Ltd.
($50,000), TWD Battery Co., Ltd. ($50,000) and Linghao Battery (Shenzhen) Co.,
Ltd. ($25,000).
In the year ended June 30, 2002, the Company entered into a license
agreement with Lexel Battery (Shenzhen) Co., Ltd. of China ($25,000).
In the year ended June 30, 2001, the Company entered into license
agreements with three Chinese companies (BYD Battery Co., Ltd. ($250,000),
SANIK Battery Co., Ltd. ($50,000) and Rare Earth Ovonic ($5,000,000).
The Company has historically entered into agreements with a relatively
small number of major customers throughout the world. In the year ended June 30,
2003, three customers represented 58% of the Company's total revenues (21%
Texaco Ovonic Hydrogen Systems, 21% Texaco Ovonic Battery Systems and 16% Rare
Earth Ovonic joint ventures). In the year ended June 30, 2002, three customers
represented 67% of the Company's total revenues (28% Rare Earth Ovonic joint
ventures, 20% Texaco Ovonic Hydrogen Systems and 19% Texaco Ovonic Battery
Systems). In the year ended June 30, 2001, three customers represented 54% of
the Company's total revenues (25% Rare Earth Ovonic joint ventures, 17% Texaco
Ovonic Hydrogen Systems and 12% Ovonic Fuel Cell). Texaco Ovonic Battery
Systems, Texaco Ovonic Hydrogen Systems, Ovonic Fuel Cell and Rare Earth
Ovonic are joint ventures of the Company (See Note E - Joint Ventures and
Investments.)
The following table presents revenues by country based on the location of
the customer:
Year Ended June 30,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
United States $38,707,587 $57,804,373 $44,190,933
China 10,846,690 25,344,459 18,227,952
Mexico 9,768,972 5,883,442 5,975,424
Japan 4,703,822 1,815,399 2,304,348
Hong Kong 1,101,598 711,950 275,405
Germany 50,191 150,300 151,125
The Netherlands - - 40,000
Other countries - 362 239,306
----------- ----------- -----------
$65,178,860 $91,710,285 $71,404,493
=========== =========== ===========
81
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Acquisitions
- ---------------------
As a result of Bekaert's decision to focus on its core business, on May
14, 2003, ECD purchased Bekaert's 19% interest in United Solar Ovonic Corp. and
60% interest in United Solar Ovonic LLC for $6 million ($4 million paid at
closing and $2 million to be paid no later than December 22, 2003) thereby
increasing the Company's ownership in both entities to 100%. ECD had previously
acquired its 81% interest in United Solar Ovonic Corp. and its 40% interest in
United Solar Ovonic LLC in April 2000 (see Note E). In accordance with the
purchase and sale agreement, Bekaert assigned to ECD its $12.2 million note
receivable of its bridge loans to United Solar Ovonic LLC and ECD provided $36
million to United Solar Ovonic LLC to terminate its master sale-and-leaseback
agreement with LaSalle National Leasing ("LaSalle") pursuant to which United
Solar Ovonic LLC's machinery and equipment were sold to LaSalle and leased back
for a period of seven years. This transaction was accounted for as a step
acquisition using the purchase method of accounting.
The $2 million to be paid to Bekaert no later than December 22, 2003, has
been deposited in an escrow account and, as such, its use is restricted. ECD
also provided backup guarantees, secured with standby letters of credit, to
Bekaert relating to guarantees that Bekaert had provided for United Solar Ovonic
relating to a sale/leaseback with Fuji Bank and the lease of the Auburn Hills
facility. ECD's standby guarantees are secured by restricting the use of $1.8
million of ECD's short-term investments.
The purchase price was allocated to identifiable assets acquired and
liabilities assumed based on their fair values. United Solar Ovonic Corp. and
United Solar Ovonic LLC did not have any intangible assets subject to
revaluation. Based on the valuation of machinery and equipment, there is an
excess of the aggregate fair value of the identifiable net assets acquired over
the purchase price, which resulted in negative goodwill. In accordance with the
provisions of SFAS No. 141 "Business Combinations," the negative goodwill is
allocated to reduce the carrying value of the fixed assets of United Solar
Ovonic Corp. and United Solar Ovonic LLC.
The following is a summary of the fair value of the assets acquired and
liabilities assumed (representing 60% of United Solar Ovonic LLC and 19% of
United Solar Ovonic Corp.) as of the date of the acquisition. The fair value of
property, plant and equipment shown below is net of the allocated negative
goodwill:
82
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Acquisitions (Continued)
- ---------------------------------
ASSETS
Current Assets
Accounts receivable $ 5,600,657
Accounts receivable - Bekaert 11,536,530
Inventory 6,625,688
Prepaids and other assets 704,419
------------
Total current assets 24,467,294
PROPERTY, PLANT AND EQUIPMENT 26,671,416
OTHER ASSETS 6,699,314
------------
TOTAL ASSETS $ 57,838,024
============
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 6,447,455
Notes payable - affiliates 5,395,573
Current portion of long-term debt 3,252,867
Other current liabilities 9,053
------------
Total current liabilities 15,104,948
LONG-TERM DEBT 36,716,661
------------
TOTAL LIABILITIES 51,821,609
------------
PURCHASE PRICE, NET OF CASH ACQUIRED $ 6,016,415
============
With this transaction, ECD increased its ownership of United Solar Ovonic
LLC from 32.4% to 100%, necessitating a change from the equity method of
accounting to consolidation effective May 15, 2003. As ECD's ownership interest
in United Solar Ovonic Corp. increased from 81% to 100%, United Solar Ovonic
Corp. will continue to be accounted for as a consolidated entity; however,
minority interest will cease to be recognized.
The following unaudited pro forma consolidated (pro forma) financial
information has been prepared to give effect to the acquisition of United Solar
Ovonic LLC and United Solar Ovonic Corp. using the purchase method of
accounting. The pro forma information for the years ended June 30, 2003 and
2002 has been prepared as if the transaction had been completed on July 1,
2001. The unaudited pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations that would have actually been reported had the
transaction occurred on those dates, nor is it necessarily indicative of the
Company's future financial position or results of operations.
83
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Acquisitions (Continued)
- ---------------------------------
Year Ended June 30,
(unaudited)
----------------------------
2003 2002
------------ ------------
Revenues $ 71,871,031 $ 97,887,808
Net Loss before cumulative effect of
change in accounting principle $(45,478,654) $(24,310,831)
Net Loss $(43,263,094) $(24,310,831)
Net Loss per common share
Basic $ (1.98) $ (1.12)
Diluted $ (1.98) $ (1.12)
The pro forma financial information includes adjustments, which reflect
the allocation of the purchase price to the acquired assets and assumed
liabilities of United Solar Ovonic LLC and United Solar Ovonic Corp.
NOTE D - Nonrefundable Advance Royalties
- ----------------------------------------
At June 30, 2003 and 2002, the Company deferred recognition of revenue
relating to nonrefundable advance royalty payments. Nonrefundable advance
royalties consist of the following:
June 30,
---------------------------
2003 2002
------------ ------------
Battery $1,560,902 $1,642,822
Optical memory 1,947,093 1,985,109
---------- ----------
$3,507,995 $3,627,931
========== ==========
During the years ended June 30, 2003, 2002 and 2001, $119,936, $213,057
and $120,179, respectively, of creditable royalties earned were recognized as
revenue. During the year ended June 30, 2001, a nonrefundable advance royalty of
$100,000 was received from Japan Storage. There are no obligations in connection
with any of the advance royalty agreements which require the Company to incur
any additional costs.
84
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments
- ---------------------------------------
Joint Ventures
- --------------
United Solar Ovonic
On April 11, 2000, ECD and Bekaert entered into a strategic alliance in
the field of photovoltaic (solar) products. The strategic alliance 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 Ovonic Corp. for an initial investment by
Bekaert of $84,000,000. For its investment, Bekaert acquired a 19% interest in
United Solar Ovonic Corp. and 60% interest in the newly created United Solar
Ovonic LLC with United Solar Ovonic Corp. owning the remaining 40% interest.
In October 2002, ECD and Bekaert agreed to make bridge loans to the joint
ventures. Bridge loans in the amount of $12,200,000 and $6,600,000 were provided
by Bekaert and ECD, respectively.
Bekaert advised the Company that it was focusing on its core businesses
and would not provide any additional funds to United Solar Ovonic 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
Ovonic Corp. and 60% interest in United Solar Ovonic LLC (bringing the Company's
interest in each of these joint ventures to 100%) for $6 million ($4 million
paid at closing and $2 million to be paid no later than December 22, 2003).
Additionally, the Company provided $36 million to United Solar Ovonic LLC to
terminate its sale and leaseback arrangement with LaSalle and, as a result,
freed up the $25 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 Ovonic Corp.'s lease with Fuji
($3.4 million) and Bekaert's share of the guarantee of the Auburn Hills facility
($1.8 million). Bekaert retained rights from United Solar Ovonic for its
technologies outside the field of photovoltaics and rights limited to build
sputtering machines outside the field of triple-junction photovoltaics. In
addition, Bekaert assigned to ECD its $12.2 million note receivable for its
bridge loans to United Solar Ovonic LLC.
Effective after May 14, 2003, ECD is funding 100% of United Solar Ovonic's
cash requirements. ECD is in discussions with potential new equity investors to
meet United Solar Ovonic's future cash requirements, as well as refinance the
30MW equipment. Historically, as a consequence of ECD's 81% ownership of United
Solar Ovonic Corp. and United Solar Ovonic Corp.'s 40% membership interest in
United Solar Ovonic LLC, the Company's financial results have included
approximately 50% of the combined operating losses of these entities. After May
14, 2003, the Company has reflected 100% of the operating losses of United Solar
Ovonic.
85
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
During the period from October 1, 2002 through April 18, 2003, ECD
provided bridge loans to United Solar Ovonic LLC and United Solar Ovonic Corp.
of $2,984,000 and $3,616,000, respectively, and Bekaert provided bridge loans to
United Solar Ovonic LLC of $12,200,000.
The Company recorded revenues from United Solar Ovonic LLC of $6,267,000,
$10,121,000 and $9,948,000, respectively, for the period July 1, 2002 to May 14,
2003 and for the years ended June 30, 2002 and June 30, 2001, representing
revenues realized on ECD's machine-building contract with United Solar Ovonic
LLC and United Solar Ovonic Corp.'s sales of product to United Solar Ovonic LLC.
Texaco Ovonic Battery Systems
In July 2001, ChevronTexaco bought General Motors' interest in GM Ovonic
LLC, a joint venture of Ovonic Battery. ChevronTexaco will invest up to
$178,000,000 in the venture, renamed Texaco Ovonic Battery Systems LLC, and
Ovonic Battery contributed additional technology. Texaco Ovonic Battery Systems
is owned 50% by Ovonic Battery and 50% by ChevronTexaco.
The Company recorded revenues from Texaco Ovonic Battery Systems of
$12,367,000 and $16,315,000 for the years ended June 30, 2003 and 2002,
respectively, for services performed on behalf of Texaco Ovonic Battery Systems
(primarily for advanced product development and market development work). The
Company recorded revenues of $207,000 and $261,000 for the years ended June 30,
2003 and 2002, respectively, for products sold to Texaco Ovonic Battery Systems.
During the year ended June 30, 2001, the Company had revenues of $2,127,000
related to sales of products and services to GM Ovonic.
The Company also recorded revenues from Texaco Ovonic Battery Systems of
$179,000 and $116,000 for the years ended June 30, 2003 and 2002, respectively,
for rent of a portion of one of the Company's facilities.
86
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
The following sets forth certain financial data regarding Texaco Ovonic
Battery Systems that are derived from its financial statements:
TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY
STATEMENTS OF OPERATIONS
------------------------
Year Ended Year Ended
June 30, 2003 June 30, 2002
------------- -------------
Revenues
Product Sales $ 653,802 $ 423,728
Other Revenues 2,776,952 -
------------ ------------
Total Revenues 3,430,754 423,728
Expenses
Cost of Product Sales, exclusive of
depreciation and amortization 653,802 423,728
Research and Development costs 24,560,781 23,837,938
Sales and Marketing costs 3,243,541 275,687
General and Administrative costs 4,596,838 3,997,460
Realized loss on impairment 4,000,000 -
Other (Income)/Expenses 5,207,374 4,692,070
Depreciation Expense 1,918,836 1,392,273
------------ ------------
Total Expenses 44,181,172 34,619,156
------------ ------------
Net Loss $(40,750,418) $(34,195,428)
============ =============
87
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY
BALANCE SHEETS
--------------
June 30, 2003 June 30, 2002
------------- -------------
Current Assets:
Cash and Equivalents $ 6,849,235 $ 4,185,765
Accounts Receivable 145,972 28,311
Inventory 2,503,650 2,204,004
----------- ------------
Total Current Assets 9,498,857 6,418,080
Property, Plant and Equipment:
Leasehold Improvements 139,052 135,502
Land 665,121 -
Buildings 6,774,475 -
Machinery and Other Equipment 22,669,236 16,272,233
Construction in Progress 249,000 -
------------ ------------
30,496,884 16,407,735
Less Accumulated Depreciation (3,311,109) (1,392,273)
------------ ------------
Net Property, Plant and Equipment 27,185,775 15,015,462
------------ ------------
Investments in Non-Subsidiaries - 4,000,000
Other Assets 85,180 33,254
------------ ------------
Total Assets $ 36,769,812 $ 25,466,796
============ ============
Liabilities and Members' Equity
Current Liabilities:
Amounts Due to Related Parties, Net $ 4,720,548 $ -
Accounts Payable 4,828,646 4,511,312
------------ ------------
Total Current Liabilities 9,549,194 4,511,312
Members' Equity:
Members' Interest 102,166,464 55,150,912
Loss Accumulated During the
Development Stage (74,945,846) (34,195,428)
------------ ------------
Total Members' Equity 27,220,618 20,955,484
------------ ------------
Total Liabilities and Members' Equity $ 36,769,812 $ 25,466,796
============ ============
88
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 year ended June 30, 2003, ECD
recorded an equity loss of $406,000 and recorded zero for the prior two years.
ECD recorded revenues from Ovonyx of $162,000, $215,000 and $382,000,
respectively, for the years ended June 30, 2003, 2002 and 2001 representing
services provided to this joint venture.
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(R) regenerative fuel cell technology.
The joint venture was owned 50% by ChevronTexaco and 50% by ECD. ECD contributed
intellectual property and licenses.
On June 24, 2003, the Company acquired ChevronTexaco's interest in Texaco
Ovonic Fuel Cell Company LLC for $1, effective as of December 31, 2002. The
venture, which is now owned 100 percent by ECD, was renamed Ovonic Fuel Cell
Company LLC. Effective December 31, 2002, the Company has included the
operations of Ovonic Fuel Cell in its consolidated financial statements. ECD is
continuing its development work and is currently funding all of this venture's
development costs.
During the years ended June 30, 2003, 2002 and 2001, the Company recorded
revenues of $4,022,000, $8,887,000 and $8,831,000, respectively, for services
provided to this joint venture.
89
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
Texaco Ovonic Hydrogen Systems
In October 2000, ECD and ChevronTexaco formed Texaco Ovonic Hydrogen
Systems. ChevronTexaco is funding initial product and market development, the
primary use of which is to fund a contract from Texaco Ovonic Hydrogen Systems
to ECD to further develop the Ovonic(TM) hydrogen storage technology. The joint
venture is owned 50% by ChevronTexaco and 50% by ECD. ECD has contributed
intellectual property and licenses.
The following sets forth certain financial data regarding Texaco Ovonic
Hydrogen Systems that are derived from its financial statements.
TEXACO OVONIC HYDROGEN SYSTEMS LLC
STATEMENTS OF OPERATIONS
------------------------
Year Ended June 30, From Date of Inception
--------------------------- (October 31, 2000)
2003 2002 Through June 30, 2001
--------------------------- ----------------------
Revenues
Other Income $ 17,480 $ 26,581 $ 27,520
Prototype Sales - 21,793 -
------------ ------------ ------------
Total Revenues 17,480 48,374 27,520
Expenses
Product Development - Paid or
Payable to ECD 12,656,468 11,979,981 9,857,453
Product Development - Paid or
Payable to ChevronTexaco 2,659,819 1,691,406 596,310
Depreciation Expense 1,890,384 596,193 71,684
Loss on Disposal of Assets - 50,912 -
------------ ------------ ------------
Total Expenses 17,206,671 14,318,492 10,525,447
------------ ------------ ------------
Net Loss $(17,189,191) $(14,270,118) $(10,497,927)
============ ============ ============
90
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
TEXACO OVONIC HYDROGEN SYSTEMS LLC
BALANCE SHEETS
--------------
June 30, 2003 June 30, 2002
------------- -------------
Current Assets:
Cash and Equivalents $ 1,742,437 $ 134,823
Accounts Receivable 10,746 10,746
----------- -----------
Total Current Assets 1,753,183 145,569
Fixed Assets:
Leasehold Improvements 6,271,733 3,226,570
Machinery and Other Equipment 3,078,564 2,543,163
Construction in Progress 151,415 2,736,571
----------- -----------
Total Fixed Assets 9,501,712 8,506,304
Less Accumulated Depreciation and Amortization (2,556,428) (666,044)
----------- -----------
Net Fixed Assets 6,945,284 7,840,260
----------- -----------
Total Assets $ 8,698,467 $ 7,985,829
=========== ===========
Current Liabilities:
Amount Due to Related Parties, Net $ 2,130,446 $ 3,711,617
Deferred Revenue 15,257 15,257
----------- -----------
Total Current Liabilities 2,145,703 3,726,874
Noncurrent Liabilities
Deferred Revenue 112,000 -
Members' Equity:
Capital Contributions 48,398,000 29,027,000
Cumulative Deficit (41,957,236) (24,768,045)
----------- -----------
Total Members' Equity 6,440,764 4,258,955
----------- -----------
Total Liabilities and Members' Equity $ 8,698,467 $ 7,985,829
=========== ===========
During the years ended June 30, 2003, 2002 and 2001, the Company recorded
revenues of $13,651,000, $18,581,000 and $11,818,000, respectively, for services
provided to this joint venture, primarily for market development and advanced
product development work.
ITS Innovative Transportation Systems
ITS Innovative Transportation Systems is a German company formed to
manufacture battery-powered electric vehicles. 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. In October 2000, ECD
invested an additional amount of $909,000 in ITS, increasing its ownership
interest to 19%. In March 2001, ECD invested an additional amount of $1,500,000,
increasing its ownership interest to 30%. As of March 2001, ECD is using the
equity method to
91
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 in July 2002, followed by an additional advance of $1,000,000 to
ITS on November 8, 2002. During the years ended June 30, 2003, 2002 and 2001,
the Company recorded equity in losses and writedown of $5,286,000, $714,000 and
$48,000 respectively.
ITS requires significant additional investments as it continues
commercialization of its products and currently lacks funds to continue
operations without new equity investors. Neither current partner in the venture
has an obligation nor has committed to provide additional funding. As a result,
ECD wrote down its investment in ITS to zero in the year ended June 30, 2003.
Ovonic Media
In March 2000, ECD and GE formed a strategic alliance, the first activity
of which resulted in the creation of a joint venture, Ovonic Media. This joint
venture is owned 51% by GE through its GE Plastics business unit and 49% by ECD.
ECD has contributed intellectual property, know-how, licenses and equipment to
the joint venture. GE made cash and other contributions to the joint venture.
For the years ended June 30, 2003, 2002 and 2001, the Company recorded
revenues of $615,000, $1,923,000 and $2,298,000, respectively, from Ovonic Media
for services provided to this joint venture for product development work. GE is
evaluating the current market situation to determine next steps and 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 is directly funding continued product
development activities for this technology until new partners who will provide
funding, marketing and distribution are brought into the venture or GE resumes
funding.
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 June 30, 2003, three of the contemplated
five joint ventures have been formed. ECD and Ovonic Battery initially
contributed technology for their 19% interest in each of these joint ventures.
In February 2002, ECD and Ovonic Battery jointly made a proportionate $1,710,000
cash investment in the Rare Earth Ovonic joint ventures and maintained their 19%
interest in these entities. All of these joint ventures are being accounted for
using the cost method of accounting.
92
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 June 30, 2003, Ovonic Battery has received
payments totaling $58,605,000 under the three contracts.
The Company recorded revenues from Rare Earth Ovonic of $10,726,000,
$25,287,000 and $12,931,000 for the years ended June 30, 2003, 2002 and 2001,
respectively.
Sovlux and Sovlux Battery
In 1990, ECD formed Sovlux, a joint venture to manufacture the Company's
photovoltaic products in the countries of the former Soviet Union. Sovlux is
owned 50% by ECD and 50% by the State Research and Production Enterprise Kvant
and enterprises of the Russian Ministry of Atomic Energy (Minatom).
In 1998, ECD formed Sovlux Battery to produce NiMH batteries and
components for sale to Ovonic Battery and its licensees. Sovlux Battery is owned
50% by ECD and 50% by the Chepetsky Mechanical Plant (Chepetsky), an enterprise
of Minatom. ECD's contribution to the ventures consists solely of technology.
Sovlux and Sovlux Battery are in their developmental stage and, as such,
have a history of operating losses. Both ventures 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 F - Long-Term Liabilities and Line of Credit
- -------------------------------------------------
A summary of the Company's long-term liabilities is as follows:
June 30,
---------------------------
2002 2001
------------ ------------
Capital leases - 3800 Lapeer LLC $ 9,526,739 $ -
Capital leases - Finova - 936,358
Capital leases - Fuji - 4,800,343
Note Payable - Canon (discount rate of 6.3%) 11,629,489 10,921,232
Note Payable - Canon (interest rate of 6.21%) - 2,500,000
Other 889,277 532,583
----------- -----------
Total 22,045,505 19,690,516
Less amounts included in current liabilities 11,858,378 5,261,747
----------- -----------
Total Long-Term Liabilities $10,187,127 $14,428,769
=========== ===========
93
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Long-Term Liabilities and Line of Credit (Continued)
- -------------------------------------------------------------
Capitalized Leases
- ------------------
In April 2001, the Company entered a 15-year lease for a 167,526 square
foot corporate facility in Auburn Hills, Michigan. The terms of the lease with
3800 Lapeer LLC allow for two renewal terms of five years each subject to
certain provisions. The Company has accounted for this transaction as a capital
lease, and has recorded a fixed asset and a related capital lease obligation of
$10,000,000 equal to the present value of the minimum lease payments.
In April 1998, the Company entered into a capital lease transaction with
Finova Capital Corporation. The lease transaction matured on June 30, 2003
and as was required by the lease terms, on June 30, 2003, the Company purchased
the equipment under the lease for a total cost of $310,000.
The Company was obligated under a capital lease with Fuji Bank for certain
machinery and equipment. In the years ended June 30, 2003, 2002 and 2001, United
Solar Ovonic made regular lease payments of $2,097,000, $2,097,000 and
$1,446,000, respectively. On June 23, 2003, United Solar Ovonic Corp. paid
$3,282,919, including $129,100 in a breakage fee, to terminate this lease and
repurchase these assets. The lease had been guaranteed by Canon and Bekaert and,
as a result, Canon had a lien on United Solar Ovonic Corp.'s assets.
Notes Payable and Other Long-Term Liabilities
- ---------------------------------------------
In connection with the 2000 acquisition of Canon's interest in United
Solar Ovonic Corp., ECD issued a noninterest-bearing note payable to Canon for
$12,000,000 due no later than January 1, 2004. This note payable was recorded in
April 2000, by ECD at a value of $9,500,000 (at a discount rate of 6.3%). In
connection with the Company's purchase of Bekaert's 60% interest in United Solar
Ovonic LLC and 19% interest in United Solar Ovonic Corp., and while ECD
continues to be contractually obligated to pay Canon, Bekaert assumed ECD's
obligation to pay this $12,000,000 to Canon no later than January 1, 2004. (See
Note A - Long-Term Note Receivable.)
In January 1998, United Solar Ovonic Corp. entered into a term loan with
Canon in the amount of $2,500,000. Interest accrued at a rate of 6.21% per annum
and the loan was payable in full on January 17, 2003. At the Company's option,
certain additional rights could be given to Canon under a license currently in
effect in lieu of a cash payment. In December 2002, United Solar Ovonic Corp.
granted Canon rights to manufacture photovoltaic products in two countries of
its choice in Southeast Asia, excluding India and the People's Republic of
China. These rights were granted in satisfaction of the outstanding obligation
($2,500,000 plus accrued interest) due Canon in connection with this previous
loan made to United Solar Ovonic Corp. by Canon. United Solar Ovonic Corp.
recorded the satisfaction of the loan and accrued interest from Canon
($3,269,000) as revenue from license agreements in its statement of operations
for the year.
94
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Long-Term Liabilities and Line of Credit (Continued)
- -------------------------------------------------------------
The Company has retirement plans for certain executives that provide for
benefits after retirement. The Company recorded retirement expense of $289,000,
$301,000 and $208,000 in the years ended June 30, 2003, 2002 and 2001
respectively. The balance recorded in long-term liabilities was $814,000 and
$528,000 at June 30, 2003 and 2002, respectively.
Other
- -----
The Company has operating lease agreements, principally for office and
research facilities and equipment. These leases, in some instances, include
renewal provisions at the option of the Company. Rent expense under such lease
agreements for the years ended June 30, 2003, 2002 and 2001 was approximately
$2,738,000, $2,443,000 and $1,941,000, respectively.
Future Minimum Payments
- -----------------------
Future minimum payments on long-term notes payable and other long-term
liabilities, obligations under capital leases and noncancellable operating
leases expiring in each of the five years subsequent to June 30, 2003 are as
follows:
Long-Term Note
Payable and
Other Long-Term
Liabilities Capital Leases Operating Lease
--------------- -------------- ---------------
2004 $12,000,000* $ 1,191,109 $ 2,659,998
2005 - 1,266,497 2,195,071
2006 - 1,266,497 1,421,582
2007 - 1,291,625 832,132
2008 - 1,367,012 783,234
Thereafter 889,277 11,137,128 2,035,836
----------- ----------- -----------
TOTAL $12,889,277 $17,519,868 $ 9,927,853
Less interest included above 370,511 7,993,129
----------- -----------
Present value of minimum payments $12,518,766 $ 9,526,739
=========== ===========
- ------------
* In connection with the Company's purchase of Bekaert's 60% interest in
United Solar Ovonic LLC and 19% interest in United Solar Ovonic Corp.,
Bekaert assumed ECD's obligation to pay this $12,000,000 to Canon no
later than January 1, 2004. (See Note A - Long-Term Note Receivable.)
Line of Credit
- --------------
In April 2001, the Company entered into a two-year financing agreement
with Standard Federal Bank for a line of credit of up to $3,000,000. On May 14,
2003, this line of credit was increased to $8,000,000 and, on September 12,
2003, was extended to August 31, 2004. This line of credit has been used for a
standby letter of credit, which expired on September 30,
95
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Long-Term Liabilities and Line of Credit (Continued)
- -------------------------------------------------------------
2003, for $3,291,435 covering the Fuji Lease (which was paid off on June 23,
2003) and for another standby letter of credit, which expires October 31, 2003,
for $1,827,322 covering the Auburn Hills lease guarantee. ECD has granted
Standard Federal a security interest in a $5,000,000 short-term investment. This
security interest was reduced to $1,827,000 on September 30, 2003. This
financing bears an interest rate of prime, is secured by a first interest in the
Company's accounts receivable and inventory and contains certain financial
covenants relating to the Company's tangible net worth, working capital and
total debt to tangible net worth.
NOTE G - Capital Stock
- ----------------------
The voting rights of ECD's three classes of stock are as follows:
Class A Convertible Common Stock - 25 votes per share
Class B Convertible Common Stock - one vote per share
Common Stock - one vote per share
The Class A Convertible Common Stock is automatically convertible into
Common Stock on a share-for-share basis on September 30, 2005 and is convertible
at the option of the holder any time prior to that date.
As part of an employment agreement among ECD, Ovonic Battery and Mr.
Stanford R. Ovshinsky, president and CEO of ECD, ECD granted Mr. Ovshinsky the
right to vote the shares of Ovonic Battery held by ECD following a change in
control of ECD. For purposes of this agreement, change in control means (i) any
sale, lease, exchange or other transfer of all or substantially all of ECD's
assets, (ii) the approval by ECD stockholders of any plan or proposal of
liquidation or dissolution of ECD, (iii) the consummation of any consolidation
or merger of ECD in which ECD is not the surviving or continuing corporation,
(iv) the acquisition by any person of 30% or more of the combined voting power
of the then-outstanding securities having the right to vote for the election of
directors, (v) changes in the constitution of the majority of the Board of
Directors, (vi) the holders of the Class A Common Stock ceasing to be entitled
to exercise their preferential voting rights other than as provided in ECD's
charter and (vii) bankruptcy. In the event of mental or physical disability or
death of Mr. Ovshinsky, the foregoing power of attorney and proxy shall be
exercised by Mr. Ovshinsky's wife, Dr. Iris Ovshinsky, a vice president of ECD.
In February 1999, the Board of Directors of the Company renewed each of Mr.
Ovshinsky's employment agreements for an additional term ending September 30,
2005.
As part of an Executive Employment Agreement between ECD and Mr. Robert C.
Stempel, chairman and executive director of ECD, dated January 15, 1999, ECD
issued to Mr. Stempel 430,000 shares of its Common Stock ($.01 par value),
having a total value of $4,595,840 based upon the closing price of ECD common
stock on January 15, 1999, for $4,300, representing an amount equal to the
aggregate par value of the Common Stock. The Restricted Stock Agreement entered
into between the Company and Mr. Stempel states that
96
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Capital Stock (Continued)
- ----------------------------------
the stock fully vests to Mr. Stempel on September 30, 2005, 81 months after the
date of the agreement. The Company is amortizing the total value of the stock
grant on a straight-line basis, and recorded compensation expense of $682,000 in
the year ended June 30, 2003 and $680,400 in each of the years ended June 30,
2002 and 2001 in connection with this transaction. Following stockholder
approval on March 25, 1999 authorizing 430,000 shares of a new Class B Common
Stock, par value $.01, Mr. Stempel surrendered to ECD the shares of Common Stock
issued for an equal number of shares of Class B Common Stock. After the
conversion of the Class A Common Stock into Common Stock, the Class B Common
Stock will be entitled to 25 votes per share.
The Class B Common Stock is automatically convertible into Common Stock on
a share-for-share basis on September 30, 2005.
During the years ended June 30, 2003, 2002 and 2001, ECD issued 2,844,
1,310 and 2,000 shares of restricted Common Stock, respectively, as compensation
to directors. ECD recorded compensation expense, based upon fair market value of
these shares at the date of issuance, for the years ended June 30, 2003, 2002
and 2001 of $30,000, $25,000 and $40,000, respectively, relating to these
restricted shares of Common Stock.
NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase Stock
- ------------------------------------------------------------------------
ECD has Common Stock reserved for issuance as follows:
Number of Shares
-----------------------------
June 30, 2003 June 30, 2002
------------- -------------
Conversion of Class A Convertible Common Stock 219,913 219,913
Conversion of Class B Convertible Common Stock 430,000 430,000
Stock options 5,273,477 5,276,107
Warrants 400,000 400,000
Convertible Investment Certificates 5,210 5,600
--------- ---------
TOTAL RESERVED SHARES 6,328,600 6,331,620
========= =========
Equity Compensation Plans Approved by Security Holders
- ------------------------------------------------------
The Company's 1987 Stock Option and Incentive Plan (1987 Stock Option
Plan), which expired in December 1997, the 1995 Non-Qualified Stock Option Plan
(1995 Stock Option Plan) and the 2000 Non-Qualified Stock Option Plan (2000
Stock Option Plan) authorize the granting of stock options at such exercise
prices and to such employees, consultants and other persons as the Compensation
and Nominating Committee appointed by the Board of Directors (the "Compensation
and Nominating Committee") shall determine. All three stock option plans are
administered by the Compensation and Nominating Committee.
97
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase Stock
(Continued)
- ------------------------------------------------------------------------
Options under the 1987 Stock Option Plan expire six years from the date of
grant. Options under the 1995 and the 2000 Stock Option plans expire no later
than 10 years from the date of grant. Stock options under the 1995 stock option
plan may not be exercised during the first six months of the grant. Thereafter,
options may be exercised cumulatively each year, starting at the end of six
months after grant of the option, at a predetermined rate of the number of
shares of the Common Stock subject to the option. Stock options under the 2000
Stock Option Plan may not be exercised during the first year of the grant.
Thereafter, options may be exercised cumulatively each year, starting at the end
of the first year after grant of the option, at a predetermined rate of the
number of shares of the Common Stock subject to the option. The exercise price
of all options granted has been equal to the fair market value of the Common
Stock at the time of grant.
The purchase price and number of shares covered by the options are subject
to adjustment under certain circumstances to protect the optionholders against
dilution.
A summary of the transactions during the years ended June 30, 2003, 2002
and 2001 with respect to ECD's 1987 Stock Option Plan, 1995 Stock Option Plan
and 2000 Stock Option Plan follows:
2003 2002 2001
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------- --------------------- ---------------------
Outstanding July 1 2,531,753 $ 18.67 2,444,545 $ 18.50 1,453,865 $ 13.50
Granted 653,825 $ 10.46 120,000 $ 21.88 1,334,400 $ 22.66
Exercised - - 14,412 $ 11.98 341,345 $ 13.43
Cancelled 18,455 $ 19.01 18,380 $ 22.57 2,375 $ 23.51
--------- ------- --------- ------- --------- -------
Outstanding June 30 3,167,123 $ 16.97 2,531,753 $ 18.67 2,444,545 $ 18.50
========= ======= ========= ======= ========= =======
Exercisable June 30 2,002,253 $ 17.66 1,730,668 $ 16.90 1,058,820 $ 13.72
========= ======= ========= ======= ========= =======
Weighted average fair
value of options
granted during the
year $ 6.00 $ 18.78 $ 14.30
====== ======= =======
98
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase Stock
(Continued)
- ------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at June 30, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices As of 6/30/03 Contractual Life Price As of 6/30/03 Price
- ------------------- ------------- ---------------- -------- ------------- --------
$10.05 - $11.88 1,371,613 5.54 $11.08 729,513 $11.65
$12.35 - $22.43 386,065 3.35 $17.05 353,365 $16.97
$22.63 - $22.63 1,296,045 7.70 $22.63 833,375 $22.63
$22.88 - $27.04 113,400 6.96 $23.39 86,000 $23.39
--------- ---- ------ --------- ------
$10.05 - $27.04 3,167,123 6.21 $16.97 2,002,253 $17.66
========= ==== ====== ========= ======
Equity Compensation Plans Not Approved by Security Holders
- ----------------------------------------------------------
In November 1993, stock options to purchase 94,367 shares of Common Stock
held by Stanford R. Ovshinsky, and stock options to purchase 49,630 shares of
Common Stock held by Dr. Iris M. Ovshinsky, issued under the Company's Amended
and Restated Stock Option Plan, were cancelled and new stock options, covering
150,000 (adjusted to 401,499 as of June 30, 2003) shares of Common Stock in the
case of Mr. Ovshinsky and 100,000 shares (adjusted to 258,250 as of June 30,
2003) of Common Stock in the case of Dr. Ovshinsky, were granted by ECD. The
stock options cancelled had an average exercise price of approximately $18.00
per share. The weighted average exercise price of these outstanding stock
options is $14.84 per share. The weighted average price was arrived at based
upon (i) the option price of $7.00 per share for the original number of shares
and any additional shares resulting from adjustments for the antidilution
provisions during the 18-month period following the original grant; and (ii)
thereafter the option exercise price will be the lower of the sales price of
the additional securities or the fair market value of the Common Stock as of the
date of such issuance. The Company recorded $198,000 compensation expense in
the year ended June 30, 2003 related to options granted at a price lower than
market.
The number of stock options granted to Mr. and Dr. Ovshinsky is adjusted
pursuant to the antidilution provisions of the stock option agreements. There
were no grants in fiscal year 2003. For the three years ended June 30, 2003,
2002 and 2001, Mr. Ovshinsky was granted stock options to purchase 0, 44,530 and
18,239 shares of ECD Common Stock, respectively. For the three years ended June
30, 2003, 2002 and 2001, Dr. Ovshinsky was granted stock options to purchase 0,
29,687 and 12,160 shares of ECD Common Stock, respectively. The weighted average
exercise price of options granted to Mr. and Dr. Ovshinsky during the two years
ended June 30, 2002 and 2001 was $20.38 and $30.53 per share, respectively. The
weighted average fair value of options granted to Mr. and Dr. Ovshinsky during
the two years ended June 30, 2002 and 2001 was $16.77 and $10.52 per share,
respectively.
99
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase Stock
(Continued)
- ------------------------------------------------------------------------
On January 15, 1999, ECD entered into a Stock Option Agreement with Robert
C. Stempel that granted Mr. Stempel an option to purchase up to 300,000 shares
of Common Stock at an exercise price of $10.688 per share, the fair market value
of the Common Stock as of the date of the Stock Option Agreement. The option,
which is not subject to vesting requirements, may be exercised from time to
time, in whole or in part, commencing as of the date of the Stock Option
Agreement and ending on the tenth anniversary of such date.
The Company continues to apply APB 25 to its stock-based compensation
awards to employees. Had compensation cost for the Company's stock option plans
been determined based upon the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss and loss per share for the years ended June 30, 2003, 2002
and 2001 would have been increased by approximately $5,054,000, $10,880,000 and
$4,018,000 and $.23, $.50 and $.21 per share, respectively. The fair value of
the options granted during 2003, 2002 and 2001 is estimated as $3,926,000,
$2,253,000 and $19,078,000 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
2003 2002 2001
---------- ---------- ----------
Dividend Yield 0% 0% 0%
Volatility % 69.87% 76.53% 82.84%
Risk Free Interest Rate 2.20% 3.71% 4.48%
Expected Life 5.11 years 5.11 years 5.10 years
Warrants
- --------
As of June 30, 2003, ECD had outstanding warrants for the purchase of
400,000 shares of Common Stock granted to General Electric pursuant to a Common
Stock Warrant between General Electric and ECD entered into in March 2000. These
warrants are exercisable on or prior to March 10, 2010 at $22.93 per share.
Other Rights to Purchase Stock
- ------------------------------
Pursuant to the Stock Purchase Agreement between ECD and Texaco Inc. dated
as of May 1, 2000, Texaco purchased a 20% equity stake in ECD for $67.4 million.
As part of this Stock Purchase Agreement, Texaco received rights to purchase
additional shares of ECD Common Stock or other ECD securities (ECD Stock). On
October 9, 2001, the shareholders of Texaco and Chevron Corp. voted on the
merger of Texaco and Chevron. The combined companies have been renamed
ChevronTexaco Corporation, which holds its equity stake in ECD in TRMI Holdings,
a wholly owned subsidiary of ChevronTexaco.
So long as ChevronTexaco owns more than 5% of ECD Stock and in the event
ECD issues additional ECD Stock other than to ChevronTexaco, ChevronTexaco has
the right to purchase additional ECD Stock in order for ChevronTexaco to
maintain its same proportionate
100
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase Stock
(Continued)
- ------------------------------------------------------------------------
interest in ECD Stock as ChevronTexaco held prior to the issuance of the
additional ECD Stock. If ChevronTexaco elects to purchase ECD Common Stock, the
purchase price will be the average of the closing price on NASDAQ of the ECD
Common Stock as reported in The Wall Street Journal for the five trading days
prior to the closing date of the sale multiplied by the number of shares of the
ECD Common Stock which ChevronTexaco is entitled to purchase.
If ChevronTexaco does not exercise its right to purchase additional ECD
Stock within 15 days after delivery of a Rights Notice from ECD, ChevronTexaco's
right to purchase such additional ECD Stock which are the subject of the Rights
Notice will terminate.
NOTE I - Net Loss Per Share
- ---------------------------
Basic net loss per common share is computed by dividing the net loss by
the weighted average number of common shares outstanding. ECD uses the treasury
stock method to calculate diluted earnings per share. Potential dilution exists
from stock options and warrants. Weighted average number of shares outstanding
and basic and diluted earnings per share for the years ended June 30 are
computed as follows:
2003 2002 2001
------------ ------------ ------------
Weighted average number of shares
outstanding 21,900,416 21,659,933 19,348,954
Net loss before cumulative effect
of change in accounting principle $(38,413,719) $(20,888,034) $(5,121,838)
Cumulative effect of change in
accounting principle 2,215,560 - -
Net loss $(36,198,159) $(20,888,034) $(5,121,838)
BASIC NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ (1.75) $ (.96) $ (.26)
============= ============= ===========
BASIC NET LOSS PER SHARE $ (1.65) $ (.96) $ (.26)
============= ============= ===========
Weighted average number of shares
outstanding 21,900,416 21,659,933 19,348,954
Weighted average shares for dilutive
securities - - -
Average number of shares outstanding
and potential dilutive shares 21,900,416 21,659,933 19,348,954
Net loss before cumulative effect
of change in accounting principle $(38,413,719) $(20,888,034) $(5,121,838)
Cumulative effect of change in
accounting principle 2,215,560 - -
Net loss $(36,198,159) $(20,888,034) $(5,121,838)
DILUTED NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ (1.75) $ (.96) $ (.26)
============= ============= ===========
DILUTED NET LOSS PER SHARE $ (1.65) $ (.96) $ (.26)
============= ============= ===========
101
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I - Net Loss Per Share (Continued)
- ---------------------------------------
The per-share amount related to the cumulative effect of change in
accounting principle was $.10 (favorable adjustment) for both the basic and
diluted net loss per share for the year ended June 30, 2003.
Due to the Company's net losses, the 2003, 2002 and 2001 weighted average
shares of potential dilutive securities of 8,406, 532,151 and 1,872,516,
respectively, were excluded from the calculations of diluted loss per share, as
inclusion of these securities would have been antidilutive to the net loss per
share. Additional securities of 2,700,473, 62,799 and 0, respectively, were
excluded from the 2003, 2002 and 2001 calculations of weighted average shares of
potential dilutive securities. Because of the relationship between the exercise
prices and the average market price of ECD's Common Stock during these periods,
these securities would have been antidilutive regardless of the Company's net
loss.
NOTE J - Federal Taxes on Income
- --------------------------------
At June 30, 2003 and 2002, the Company has approximately $88,932,000 and
$78,763,000, respectively, of net deferred tax assets, consisting primarily
of $63,908,000 and $58,540,000, respectively, due to net operating loss
carryforwards, and $487,000 and $487,000, respectively, due to tax credit
carryforwards and at June 30, 2003, $24,537,000 in temporary differences,
including $18,360,000 due to a basis difference in the Company's investments in
the Ovonic Fuel Cell and Texaco Ovonic Hydrogen Systems joint ventures.
However, a valuation reserve of $88,932,000 is required due to the Company's
operating history and uncertainty regarding the future realizability of the net
tax operating loss carryforwards and tax credit carryforwards.
The Company's valuation reserve was increased by $10,169,000 in 2003,
$6,528,000 in 2002 and $1,531,000 in 2001 for the impact of the 2003, 2002 and
2001 net operating losses, temporary differences and the expiration of tax
carryforwards. The increases in 2003 and 2002 are mainly the result of the
Company's net operating losses. The Company's utilization of United Solar
Ovonic's net operating losses is limited to approximately $10,000,000 per year
under the Internal Revenue code.
102
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE J - Federal Taxes on Income (Continued)
- --------------------------------------------
At June 30, 2003, the Company's remaining net tax operating loss
carryforwards and tax credit carryforwards expire as follows:
Net Tax Operating R&D Credit
Loss Carryforward Carryforward
----------------- -------------
2004 $ 4,245,000
2005 5,307,000
2006 14,651,000
2007 10,548,000 $ 276,000
2008 9,302,000 41,000
2009 11,923,000 30,000
2010 9,313,000 15,000
2011 6,854,000 40,000
2012 26,121,000 14,000
2013 12,447,000 29,000
2014 7,219,000 42,000
2015 - -
2016 - -
2017 - -
2018 6,825,000 -
2019 993,000 -
2020 10,170,000 -
2021 - -
2022 23,002,000 -
2023 29,042,000 -
------------ -----------
Total $187,962,000 $ 487,000
============ ===========
NOTE K - Related Party Transactions
- -----------------------------------
For the three years ended June 30, 2003, 2002 and 2001, ECD incurred
expenses of $97,301, $72,038 and $45,656, respectively, for services rendered by
its directors.
For related party transactions involving United Solar Ovonic LLC, Ovonic
Media, Ovonyx, Texaco Ovonic Fuel Cell, Texaco Ovonic Hydrogen Systems, Texaco
Ovonic Battery Systems, ITS Innovative Transportation Systems and Sovlux see
Note D.
103
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Business Segments
- --------------------------
The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar Ovonic, and the parent company, ECD. Ovonic Battery is involved
in developing and commercializing battery technology. United Solar Ovonic is
involved in manufacturing, developing and commercializing photovoltaic
technology. ECD is involved in microelectronics, fuel cells and hydrogen storage
technologies, machine building and photovoltaics. Some general corporate
expenses have been allocated to Ovonic Battery.
The Company's operations by business segments were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
Ovonic Consolidating
ECD Battery United Solar Entries Consolidated
---------- ---------- ------------ ------------- ------------
Revenues
Year ended June 30, 2003 $ 27,062 $28,826 $ 14,890 $ (5,599) $ 65,179
Year ended June 30, 2002 61,636 48,529 7,157 (25,612) 91,710
Year ended June 30, 2001 48,218 34,374 7,674 (18,862) 71,404
Interest Income
Year ended June 30, 2003 $ 3,518 $ - $ 67 $ (24) $ 3,561
Year ended June 30, 2002 4,439 - 288 - 4,727
Year ended June 30, 2001 5,816 - 48 - 5,864
Interest Expense*
Year ended June 30, 2003 $ 61 $ 83 $ 818 $ (81) $ 881
Year ended June 30, 2002 51 375 484 - 910
Year ended June 30, 2001 12 220 569 - 801
Operating Income (Loss)
Year ended June 30, 2003 $(20,745) $(9,998) $(6,355) $ 3,821 $(33,277)
Year ended June 30, 2002 (17,560) (6,460) (4,539) 6,326 (22,233)
Year ended June 30, 2001 (285) (7,627) (2,742) 587 (10,067)
Equity in Losses and Writedown
of Joint Ventures
Year ended June 30, 2003 $ (5,692) $ - $ (6,103) $ - $(11,795)
Year ended June 30, 2002 (714) - (3,472) 528 (3,658)
Year ended June 30, 2001 (49) - (2,434) 486 (1,997)
104
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Business Segments (Continued)
- --------------------------------------
Ovonic Consolidating
ECD Battery United Solar Entries Consolidated
---------- ---------- ------------ ------------- ------------
Depreciation Expense
Year ended June 30, 2003 $ 1,784 $ 1,136 $ 2,577 $ (1,541) $ 3,956
Year ended June 30, 2002 1,008 1,146 1,750 (1,631) 2,273
Year ended June 30, 2001 825 1,442 1,720 (1,685) 2,302
Capital Expenditures
Year ended June 30, 2003 $ 4,220 $ 783 $ 132 $ - $ 5,135
Year ended June 30, 2002 7,340 172 155 - 7,667
Year ended June 30, 2001 1,349 106 786 - 2,241
Investments in Equity
Method Investees
Year ended June 30, 2003 $ 594 $ - $ - $ - $ 594
Year ended June 30, 2002 3,286 - 27,270 - 30,556
Year ended June 30, 2001 - - 23,450 - 23,450
Identifiable Assets
Year ended June 30, 2003 $141,199 $ 10,916 $142,036 $(140,456) $153,695
Year ended June 30, 2002 171,018 13,588 25,819 (18,306) 192,119
Year ended June 30, 2001 127,462 27,106 38,909 (27,372) 166,105
- ----------------------------
* Excludes intercompany interest.
105
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE M - Quarterly Financial Data (Unaudited)
- ---------------------------------------------
(In thousands)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- ---------
Year Ended June 30, 2003
Revenues $ 15,855 $ 18,478 $ 13,595 $ 17,251 $ 65,179
Operating loss $ (6,388) $ (4,036) $ (9,347) $(13,506) $(33,277)
Net loss before cumulative effect of
change in accounting principle $ (5,652) $ (5,779) $ (9,076) $(17,907) $(38,414)
Cumulative effect of change in
accounting principle $ 2,216 $ - $ - $ - $ 2,216
Net loss $ (3,436) $ (5,779) $ (9,076) $(17,907) $(36,198)
Basic net loss per share before
cumulative effect of change in
accounting principle $ (.26) $ (.26) $ (.41) $ (.82) $ (1.75)
Basic net income per share for
cumulative effect of change in
accounting principle $ .10 $ - $ - $ - $ .10
Basic net loss per share $ (.16) $ (.26) $ (.41) $ (.82) $ (1.65)
Diluted net loss per share before
cumulative effect of change in
accounting principle $ (.26) $ (.26) $ (.41) $ (.82) $ (1.75)
Diluted net income per share for
cumulative effect of change in
accounting principle $ .10 $ - $ - $ - $ .10
Diluted net loss per share $ (.16) $ (.26) $ (.41) $ (.82) $ (1.65)
Year Ended June 30, 2002
Revenues $ 22,459 $ 26,745 $ 24,490 $ 18,016 $ 91,710
Operating income (loss) $ (3,897) $ (5,002) $ (5,737) $ (7,597) $(22,233)
Net income (loss) $ (2,765) $ (4,317) $ (5,015) $ (8,791) $(20,888)
Basic earnings per share $ (.13) $ (.20) $ (.23) $ (.40) $ (.96)
Diluted earnings per share $ (.13) $ (.20) $ (.23) $ (.40) $ (.96)
106
Item 9: Changes in and Disagreements on Accounting and Financial Disclosure
- ----------------------------------------------------------------------------
Not applicable.
Item 9A: Controls and Procedures
- --------------------------------
As of June 30, 2003, 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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, with the exception of the items listed below, the design and
operation of these disclosure controls and procedures were effective for
gathering, analyzing and disclosing information required to be disclosed in
connection with the Company's filing of its Annual Report on Form 10-K for the
year ended June 30, 2003.
In reviewing the Company's internal controls, it was identified that the
policies and procedures regarding employee conduct and acceptable business
practices, including expense reporting and personal use of Company assets, were
not well-documented and did not adequately communicate the Company's
expectations regarding these matters. The Company has recently appointed a
Director of Risk Management and Internal Audit who is responsible for leading
the assessment of the Company's internal controls and recommending any required
changes. Additionally, the Company intends to retain outside professional
advisors to assist in the evaluation of existing disclosure controls and
procedures and provide recommendations for improvement.
Recent filings of the Company's Annual Reports on Form 10-K have been
filed in a timely manner. However, the Company was not able to meet the filing
deadline for this Form 10-K because it lacked the resources to address the
financial reporting related to significant and complex business transactions
entered into in fiscal year 2003. The Company intends to evaluate its resources
and make appropriate changes to provide sufficient resources and time to
prepare, and provide for reviews by management, the Audit Committee and the
Board of Directors, and file periodic reports within the time periods specified
in the SEC's rules and regulations.
Our independent auditors have advised the Company that the above matters
represent reportable conditions.
Since the date of the evaluation, there have been no significant changes
to the Company's disclosure controls and procedures or significant changes in
other factors that could affect the Company's disclosure controls and
procedures. However, as noted above, the Company has taken, and is continuing to
take, certain actions designed to enhance its disclosure controls and
procedures.
107
PART III
Item 10: Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
The ECD directors are elected by the stockholders to serve until the next
annual meeting of stockholders and until their successors are duly elected and
qualified. The composition of the Board of Directors of ECD is as follows:
Director
of the
Company Principal Occupation and
Name Since Office Business Experience
- ------------------------ -------- ----------- ------------------------------------------
Stanford R. Ovshinsky 1960 President, Mr. Ovshinsky, 80, the founder, Chief
Chief Executive Officer and President of ECD,
Executive has been an executive officer and
Officer and director of ECD since its inception in
Director 1960. Mr. Ovshinsky is the principal
inventor of ECD's technologies. He also
serves as the chief executive officer and
a director of Ovonic Battery; chief
executive officer and chairman of United
Solar Ovonic Corp. and United Solar Ovonic
LLC; president of Ovonic Fuel Cell
Company; president and member of the
Management Committees of Texaco Ovonic
Hydrogen Systems; a member of the
Management Committee of Texaco Ovonic
Battery Systems; chairman and director
of Ovonyx; a member of the Alliance Board
of Ovonic Media; and co-chairman of the
board of directors of Sovlux. Mr. Ovshinsky
is the husband of Dr. Iris M. Ovshinsky.
Iris M. Ovshinsky 1960 Vice Dr. Ovshinsky, 76, co-founder and Vice
President President of ECD, has been an executive
and Director officer and director of ECD since its
inception in 1960. Dr. Ovshinsky also
serves as a director of Ovonic Battery.
Dr. Ovshinsky is the wife of Stanford R.
Ovshinsky.
Robert C. Stempel 1995 Chairman of Mr. Stempel, 70, is Chairman of the
the Board Board and Executive Director of ECD.
and Prior to his election as a director in
Executive December 1995, Mr. Stempel served as
Director senior business and technical advisor
to Mr. Ovshinsky. He is also the chairman
of Ovonic Battery; a director of United
Solar Ovonic Corp. and United Solar
Ovonic LLC; vice chairman and director
of Ovonyx; a member of the Management
Committee of Texaco Ovonic Hydrogen
Systems and Texaco Ovonic Battery
Systems and a member of the Alliance
Board of Ovonic Media. From 1990 until
his retirement in 1992, he was the
chairman and chief executive officer
of General Motors Corporation; prior
to serving as chairman, he was GM's
president since 1987. He is a director
of Southwall Technologies, Inc. and
serves as chairman of its Audit Committee.
108
Nancy M. Bacon 1977 Senior Vice Mrs. Bacon, 57, Senior Vice President,
President joined ECD in 1976 as its Vice
and Director President of Finance and Treasurer.
Mrs. Bacon also serves as a director
of United Solar Ovonic Corp., United
Solar Ovonic LLC and Sovlux.
Umberto Colombo 1995 Director Professor Colombo, 75, is Chairman of
the Scientific Councils of the ENI
Enrico Mattei Foundation and of the
Instituto Per l'Ambiente in Italy. He
was chairman of the Italian National
Agency for New Technology, Energy and
the Environment until 1993 and then
served as Minister of Universities and
Scientific and Technological Research
in the Italian Government until 1994.
Professor Colombo is a member of the
board of directors of several Italian-
based public companies. He is also
active as a consultant in international
science and technology policy institutions
related to economic growth.
Walter J. McCarthy, Jr. 1995 Director Mr. McCarthy, 78, until his retirement
in 1990, was the chairman and chief
executive officer of Detroit Edison
Company. Prior to his election to the
ECD Board, he served as a consultant to
ECD. Mr. McCarthy also served as a
director and a member of the Audit
Committee of Comerica Bank, Federal-Mogul
Corporation and Perry Drug Company.
He is a member of the National Academy of
Engineering. Mr. McCarthy serves as
chairman of the Compensation and
Nominating Committee and is on the Audit
Committee of the ECD Board.
109
Florence I. Metz 1995 Director Dr. Metz, 74, until her retirement in 1996,
held various executive positions with Inland
Steel: General Manager, New Ventures, Inland
Steel Company (1989-1991); General Manager,
New Ventures, Inland Steel Industries
(1991-1992) and Advanced Graphite Technologies
(1992-1993); Program Manager for Business and
Strategic Planning at Inland Steel (1993-1996).
Dr. Metz also serves on the Board of Directors
of Ovonic Battery and is on the Audit Committee
and the Compensation and Nominating Committee
of the ECD Board.
James R. Metzger 2000 Chief Mr. Metzger, 56, Chief Operating Officer
Operating and Vice Chairman, was Executive Vice
Officer and President of Administration at Mercy
Vice College in Dobbs Ferry, New York from
Chairman of March 2002 - October 2003. Prior to
the Board his retirement from ChevronTexaco on
March 1, 2002 following the merger of
Chevron and Texaco on October 9, 2001, he
was Vice President and Chief Technology
Officer at Texaco Inc. Mr. Metzger's
responsibilities at Texaco included all
aspects of technology, corporate planning
and economics, safety, health and environment,
corporate services and purchasing. He was a
member of the Diversity Council, chaired the
Corporate Technology Council and served on
Texaco's Executive Council, the company's
senior management committee.
Stanley K. Stynes 1977 Director Dr. Stynes, 71, was Dean, College of
Engineering at Wayne State University from
1970 to August 1985, and a professor of
engineering at Wayne State University from
1985 until his retirement in 1992. He has
been involved in various administrative,
teaching, research and related activities.
Dr. Stynes serves as chairman of the Audit
Committee of the ECD Board.
Until their departures from the Board of Directors in September 2003, the
following persons served on ECD's Board of Directors since the year indicated:
Hellmut Fritzsche, 1969; Subhash K. Dhar, 1999; Donald L. Paul, 2001; and Greg
M. Vesey, 2001.
COMPENSATION OF DIRECTORS
Officers of ECD who serve on ECD's Board do not receive compensation for
their services as a director. The other directors of the Company are issued
approximately $5,000 per year in ECD Common Stock based on the closing price of
the Common Stock on the first business day of each year and are paid $1,000 for
attendance at each Board meeting and each Compensation and Nominating Committee
meeting (in person or via telephone conference call). Directors serving on the
Audit Committee are paid $2,000 for attendance (in person or via telephone
conference call) at each meeting. Directors who are not employed by the Company
are also reimbursed for all expenses incurred for the
110
purpose of attending board of directors and committee meetings, including
airfare, mileage, parking, transportation and hotel. On November 8, 2002,
Messrs. Colombo, McCarthy and Stynes and Dr. Metz each received options to
purchase 5,000 shares of ECD Common Stock at $10.40 per share under the terms
of ECD's 2000 Non-Qualified Stock Option Plan. Messrs. Paul and Vesey had
waived any entitlement to compensation for serving as directors of ECD.
The executive officers of ECD are as follows:
Served as an
Executive
Officer or
Name Age Office Director Since
- -------------------- ------- -------------------------- --------------
Stanford R. Ovshinsky 80 President, Chief 1960(1)
Executive Officer and
Director
Iris M. Ovshinsky 76 Vice President and 1960(1)
Director
Robert C. Stempel 70 Executive Director and 1995
Chairman of the Board
James R. Metzger 56 Chief Operating Officer 2002
and Vice Chairman of
the Board
Nancy M. Bacon 57 Senior Vice President 1976
and Director
Hellmut Fritzsche 76 Vice President 1969
Subhash K. Dhar 52 President and Chief 1986
Operating Officer of
Ovonic Battery
Jeffrey P. Harvey 47 Senior Vice President, 2002
Marketing
Stephan W. Zumsteg 57 Vice President and 1997
Chief Financial Officer
- ---------------------
(1) The predecessor of ECD was originally founded in 1960. The present
corporation was incorporated in 1964 and is the successor by merger of the
predecessor corporation.
See pages 107-109 for information relating to Stanford R. Ovshinsky,
Iris M. Ovshinsky, Robert C. Stempel, James R. Metzger and Nancy M. Bacon.
Subhash K. Dhar joined ECD in 1981 and has held various positions with
Ovonic Battery since its inception in 1982. He has served as Chief Operating
Officer of Ovonic Battery since 1986 and President since 1987. He serves as the
Chief Operating Officer of Ovonic Fuel Cell Company LLC, a wholly owned
subsidiary of ECD.
Dr. Hellmut Fritzsche was a professor of physics at the University of
Chicago from 1957 until his retirement in 1996. He was chairman of the
Department of Physics at the University of Chicago until 1986. Dr. Fritzsche
has been a vice president of ECD since 1965, acting on a part-time basis,
chiefly in ECD's research and product development activities. He serves on the
board of directors of United Solar Ovonic Corp.
111
Jeffrey P. Harvey joined ECD in May 2002. Prior to joining ECD, he was
director of product development at Chevron Energy Solutions LP. He has over 20
years of energy engineering experience and was previously director of
engineering at PG&E Energy Services.
Stephan W. Zumsteg joined ECD in March 1997. He was elected Treasurer in
April 1997 and Vice President and Chief Financial Officer in February 2001. Mr.
Zumsteg also serves as Treasurer of Ovonic Battery, Ovonic Fuel Cell and Texaco
Ovonic Hydrogen Systems.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and officers and persons who own 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with respect to our securities and those of our affiliates with the
Securities and Exchange Commission and to furnish copies of these reports to
us. Based on a review of these reports and written representations from our
directors and officers regarding the necessity of filing a report, we believe
that during fiscal year ended June 30, 2003, all Section 16(a) filing
requirements applicable to the Company's directors, officers and greater than
10% beneficial owners were met on a timely basis.
112
Item 11: Executive Compensation
- -------- ----------------------
The following table sets forth the compensation paid to ECD's Chief
Executive Officer and the next four most highly compensated executive officers
for the fiscal years ended June 30, 2003, 2002 and 2001.
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
---------------------------------- --------------------------------------
All
Restricted Options Other
Name and Principal Fiscal Stock (Number Compen-
Position Year(1) Salary(2) Bonus Award of Shares) sation(3)
- ----------------- ------- ---------- ---------- ---------- ---------- ----------
Stanford R. Ovshinsky, 2003 $367,668 40,000 $10,781
President and Chief 2002 $349,713 $24,076 44,530(4) $12,362
Executive Officer 2001 $334,408 118,239(5) $10,361
Iris M. Ovshinsky, 2003 $314,727 25,000 $13,562
Vice President 2002 $299,730 29,687(4) $12,362
2001 $284,636 82,160(5) $10,361
Robert C. Stempel, 2003 $300,019 40,000 $ 4,191
Chairman and 2002 $294,247 25,000 $ 4,191
Executive 2001 $270,004 100,000 $ 4,191
Director(6)
Nancy M. Bacon, 2003 $289,441 30,000 $10,322
Senior Vice 2002 $275,017 12,000 $ 8,942
President 2001 $264,243 60,000 $ 6,041
Subhash K. Dhar, 2003 $280,779 25,000 $ 9,407
President and Chief 2002 $274,241 10,000 $ 8,111
Operating Officer, 2001 $247,703 50,000 $ 5,528
Ovonic Battery
- ---------------------
(1) ECD's fiscal year is July 1 to June 30. ECD's 2003 fiscal year ended June
30, 2003.
(2) Amounts shown include compensation deferred under ECD's 401(k) Plan.
(3) "All Other Compensation" is comprised of (i) contributions made by ECD to
the accounts of each of Mr. Ovshinsky, Dr. Ovshinsky, Mrs. Bacon and Mr.
Dhar under ECD's 401(k) Plan in the amount of $8,000, $6,800 and $4,800
with respect to calendar year ended December 31, 2002, 2001 and 2000; and
(ii) the dollar value of any life insurance premiums paid by ECD in the
fiscal years ended June 30, 2003 and 2002 and calendar year ended December
31, 2000 with respect to term-life insurance for the benefit of each of
the named executives as follows: Mr. Ovshinsky $2,781, $5,562 and $5,561;
Dr. Ovshinsky $5,562, $5,562 and $5,561; Mr. Stempel $4,191 (all three
years); Mrs. Bacon $2,322, $2,142 and $1,241; Mr. Dhar $1,407, $1,311 and
$728. Under the 401(k) Plan, which is a qualified defined-contribution
plan, ECD makes matching contributions periodically on
113
behalf of the participants. Effective October 2000, the Board of Directors
approved employer matching contribution in the amount of 100% of the first
2% and 50% of the next 4% of each such participant's contributions. These
matching contributions were limited to 4% of a participant's salary, up to
$200,000, for calendar year 2002, 4% of salary, up to $170,000, for
calendar year 2001 and 3% of salary, up to $160,000, for calendar year
2000. Mr. Stempel does not participate in the Company's 401(k) plan.
(4) The stock options were issued to Mr. and Dr. Ovshinsky pursuant to Stock
Option Agreements dated November 1993 which are subject to periodic
antidilution protection adjustments based on changes in the number of
outstanding shares of ECD Common Stock. Under those Stock Option Agreements,
if ECD issues any equity securities, other than pursuant to the exercise of
options by Mr. and Dr. Ovshinsky under their respective Stock Option
Agreements, ECD is obligated to grant to Mr. and Dr. Ovshinsky additional
options covering sufficient additional shares of ECD Common Stock so that
their respective proportionate equity interest is maintained on a
fully-diluted basis. Such adjustments are calculated quarterly as of the
last day of each of our fiscal quarters and coincident with significant
issuances of ECD Common Stock. (See Note H of the Notes to Consolidated
Financial Statements - Stock Option Plans, Warrants and Other Rights to
Purchase Stock.)
(5) In fiscal year 2001, of the stock options issued to Mr. and Dr. Ovshinsky
in the amount of 118,239 shares and 82,160 shares, respectively, 18,239
shares (Mr. Ovshinsky) and 12,160 shares (Dr. Ovshinsky) were issued
pursuant to Stock Option Agreements dated November 1993 which are subject to
periodic antidilution protection adjustments based on changes in the number
of outstanding shares of ECD Common Stock. The balance of the stock options
issued to Mr. and Dr. Ovshinsky (100,000 shares and 70,000 shares,
respectively) were granted under the 2000 Non-Qualified Stock Option Plan.
(6) See Item 12, Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters for a description of Class B Common Stock
awarded to Mr. Stempel under a Restricted Stock Agreement dated January 15,
1999. All shares of Restricted Stock will be deemed to vest if Mr. Stempel
is serving as a director and officer of ECD on September 30, 2005 or upon
the occurrence of a change in control of ECD.
114
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all options granted to the named executive
officers during the fiscal year ended June 30, 2003.
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term(1)
--------------------------------------------------- -----------------------------
Number of Percent of
Securities Total
Underlying Options Exercise
Options Granted of Base
Granted to Employees Price Expiration
Name (#) in Fiscal Year ($/Sh) Date 5% 10%
- -------------------- ---------- -------------- -------- ---------- ------------ -------------
Stanford R. Ovshinsky 40,000 6.27% $10.40 11/08/12 $261,620 $662,997
Robert C. Stempel 40,000 6.27% $10.40 11/08/12 $261,620 $662,997
Nancy M. Bacon 30,000 4.70% $10.40 11/08/12 $196,215 $497,248
Iris M. Ovshinsky 25,000 3.92% $10.40 11/08/12 $163,513 $414,373
Subhash K. Dhar 25,000 3.92% $10.40 11/08/12 $163,513 $414,373
- ---------------------
(1) The potential realizable value amounts shown illustrate the values that
might be realized upon exercise immediately prior to the expiration of
their term using 5% and 10% appreciation rates as required to be used in
this table by the Securities and Exchange Commission, compounded
annually, and are not intended to forecast possible future appreciation,
if any, of ECD's stock price. Additionally, these values do not take into
consideration the provisions of the options providing for
nontransferability or termination of the options following termination of
employment.
115
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
None of the named executives exercised any stock options during the
fiscal year ended June 30, 2003. The following table sets forth the number and
value of unexercised options held by the named executive officers at fiscal
year end.
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised in-the-Money Options
on Exercise Realized Options at Fiscal Year End at Fiscal Year End
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---------------------- ----------- -------- -------------------------- -------------------------
Robert C. Stempel(1) _ _ 656,500/87,500 $0/$0
Stanford R. Ovshinsky(2) _ _ 656,456/80,000 $0/$0
Iris M. Ovshinsky(3) _ _ 447,138/53,000 $0/$0
Nancy M. Bacon(4) _ _ 194,600/57,600 $0/$0
Subhash K. Dhar(5) _ _ 81,040/48,000 $0/$0
- -----------------
(1) Mr. Stempel's exercisable and unexercisable options are exercisable at a
weighted average price of $14.09 and $17.10 per share, respectively.
(2) Mr. Ovshinsky's exercisable and unexercisable options are exercisable at a
weighted average price of $14.61 and $16.51 per share, respectively.
(3) Dr. Ovshinsky's exercisable and unexercisable options are exercisable at a
weighted average price of $14.70 and $16.90 per share, respectively.
(4) Mrs. Bacon's exercisable and unexercisable options are exercisable at a
weighted average price of $15.42 and $16.30 per share, respectively.
(5) Mr. Dhar's exercisable and unexercisable options are exercisable at a
weighted average price of $19.50 and $16.30 per share, respectively.
116
EMPLOYMENT AGREEMENTS
On September 2, 1993, Stanford R. Ovshinsky entered into separate
employment agreements with each of ECD and Ovonic Battery in order to define
clearly his duties and compensation arrangements and to provide to each company
the benefits of his management efforts and future inventions. The initial term
of each employment agreement was six years. In February 1999, the Board of
Directors of ECD and Ovonic Battery renewed each of Mr. Ovshinsky's employment
agreements for an additional term ending September 30, 2005. Mr. Ovshinsky's
employment agreement with ECD provides for an annual salary of not less than
$100,000, while his agreement with Ovonic Battery provides for an annual salary
of not less than $150,000. Both agreements provide for annual increases to
reflect increases in the cost of living, discretionary annual increases and an
annual bonus equal to 1% of pre-tax income of ECD (excluding Ovonic Battery)
and 1% of the operating income of Ovonic Battery. Mr. Ovshinsky's annual salary
increases are determined based upon increases in the cost of living as
determined by the Compensation Committee using as a guide the percentage
increase in the Consumer Price Index for the Detroit-metropolitan area
published by the Bureau of Labor Statistics. In recognition and acknowledgement
of Mr. Ovshinsky's invaluable contributions, the Compensation Committee
determined that Mr. Ovshinsky's salary increase in fiscal years 2003, 2002 and
2001 should be above the nominal cost-of-living increase.
Mr. Ovshinsky's employment agreement with Ovonic Battery additionally
contains a power of attorney and proxy from ECD providing Mr. Ovshinsky with
the right to vote the shares of Ovonic Battery held by ECD following a change
in control of ECD. For purposes of the agreement, change in control means (i)
any sale, lease, exchange or other transfer of all or substantially all of
ECD's assets; (ii) the approval by ECD's stockholders of any plan or proposal
of liquidation or dissolution of ECD; (iii) the consummation of any
consolidation or merger of ECD in which ECD is not the surviving or continuing
corporation; (iv) the acquisition by any person of 30 percent or more of the
combined voting power of the then outstanding securities having the right to
vote for the election of directors; (v) changes in the constitution of the
majority of the Board of Directors; (vi) the holders of the Class A Common
Stock ceasing to be entitled to exercise their preferential voting rights other
than as provided in ECD's charter and (vii) bankruptcy. In the event of mental
or physical disability or death of Mr. Ovshinsky, the foregoing power of
attorney and proxy will be exercised by Dr. Iris M. Ovshinsky.
Pursuant to his employment agreement with Ovonic Battery, Mr. Ovshinsky
was granted stock options, exercisable at a price of $16,129 per share to
purchase 186 shares (adjusted from a price of $50,000 per share to purchase 60
shares pursuant to the anti-dilution provisions of the option agreement) of
Ovonic Battery's common stock, representing approximately 6 percent of Ovonic
Battery's outstanding common stock. The Ovonic Battery stock options vested on
a quarterly basis over six years commencing with the quarter beginning October
1, 1993, and are now fully vested.
117
In February 1998, the Compensation Committee of the Board of Directors
recommended and the Board of Directors approved an Employment Agreement between
ECD and Dr. Iris M. Ovshinsky. The purpose of the Employment Agreement is to
clearly define Dr. Ovshinsky's duties and compensation arrangements. The
Employment Agreement also provides for ECD to have the benefits of Dr.
Ovshinsky's services as a consultant to ECD following the termination of her
active employment for consulting fees equal to 50 percent of the salary payable
to Dr. Ovshinsky at the date of the termination of her active employment. Dr.
Ovshinsky shall have the right to retire at any time during her services as a
consultant and receive retirement benefits equal to the consulting fees for the
remainder of Dr. Ovshinsky's life.
The initial term of Dr. Ovshinsky's employment period was until September
2, 1999 and is automatically renewed for successive one-year periods unless
terminated by Dr. Ovshinsky or ECD upon 120 days' notice in advance of the
renewal date. Dr. Ovshinsky's employment agreement provides for an annual
salary of not less than $250,000, annual increases to reflect increases in the
cost of living and discretionary annual increases.
On January 15, 1999, ECD entered into an Executive Employment Agreement
with Mr. Stempel and a Restricted Stock Agreement awarding Mr. Stempel 430,000
shares of Class B Common Stock. See Class B Common Stock under Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters on page 125. The Executive Employment Agreement provides
that Mr. Stempel will serve as the Executive Director of ECD for a term ending
September 30, 2005. During the term of his employment, Mr. Stempel will be
entitled to receive an annual salary as determined from time to time. The
Executive Employment Agreement also provides for discretionary bonuses based on
Mr. Stempel's individual performance and the financial performance of ECD. The
Executive Employment Agreement also requires ECD to provide Mr. Stempel with
non-wage benefits of the type provided generally by ECD to its senior executive
officers.
The Executive Employment Agreement permits Mr. Stempel to retire as an
officer and employee of ECD and will permit him to resign his employment at any
time in the event he becomes subject to any mental or physical disability
which, in the good faith determination of Mr. Stempel, materially impairs his
ability to perform his regular duties as an officer of ECD. The Executive
Employment Agreement permits ECD to terminate Mr. Stempel's employment upon the
occurrence of certain defined events, including the material breach by Mr.
Stempel of certain non-competition and confidentiality covenants contained in
the Executive Employment Agreement, his conviction of certain criminal acts or
his gross dereliction or malfeasance of his duties as an officer and employee
of ECD (other than as a result of his death or mental or physical disability).
Mr. Stempel's entitlement to compensation and benefits under the
Executive Employment Agreement will generally cease effective upon the date of
the termination of his employment, except that ECD will be required to continue
to provide Mr. Stempel and his spouse with medical, disability and life
insurance coverage for the remainder of their lives or until the date they
secure comparable coverage provided by another employer.
118
COMPENSATION AND NOMINATING COMMITTEE REPORT
Effective July 17, 2003, ECD management recommended and the Board of
Directors approved the restructuring of the Compensation Committee to include
the functions of a nominating committee and renaming it the Compensation and
Nominating Committee. The Compensation and Nominating Committee is composed of
Mr. McCarthy (Chairman) and Dr. Metz, both independent outside directors.
Neither of the Compensation and Nominating Committee members is or was during
the last fiscal year an officer or employee of ECD or any of its subsidiaries,
or had any business relationship with ECD or any of its subsidiaries.
The Compensation and Nominating Committee is responsible for
administering the policies which govern both annual compensation of executive
officers and ECD's stock option plans. The Compensation and Nominating
Committee meets several times during the year to review recommendations from
management regarding stock options and compensation. Compensation and stock
option recommendations are based upon performance, current compensation, stock
option ownership, and years of service to ECD. ECD does not have a formal bonus
program for executives, although it has awarded bonuses to its executives from
time to time.
The Compensation and Nominating Committee assists in identifying and
recommending qualified individuals for the Board and proposes a slate of
nominees for election at the annual meeting of stockholders.
Compensation of Executive Officers
The Compensation and Nominating Committee considers ECD's financial
position and other factors in determining the compensation of its executive
officers. These factors include remaining competitive within the relevant
hiring market - whether scientific, managerial or otherwise - so as to enable
ECD to attract and retain high quality employees, and, where appropriate,
linking a component of compensation to the performance of ECD's Common Stock,
such as by a granting of stock option or similar equity-based compensation,
to instill ownership thinking and align the employees' and stockholders'
objectives. ECD has been successful at recruiting and retaining and motivating
executives who are highly talented, performance-focused and entrepreneurial.
Salary and Bonus
- ----------------
Salary is paid for ongoing performance. During ECD's fiscal year 2003,
the Compensation and Nominating Committee determined that ECD had achieved
several important scientific and business milestones. The Committee also
concluded that the achievement of these milestones had not yet been fully
reflected in ECD's financial results. However, the Compensation and Nominating
Committee determined that it was advisable to raise executive base salaries.
ECD does not have a formal bonus program for executives. There were no bonuses
awarded to ECD executives for the fiscal year ended June 30, 2003.
In light of the ECD's cost-containment initiatives, the salaries of
senior executives were reduced by 10 percent effective September 1, 2003.
119
Stock Options
- -------------
The Compensation and Nominating Committee considers stock options to be
an extremely effective incentive for executive officers and other employees.
Such options also encourage executives to remain with ECD because they vest
over a period of years. During fiscal year 2003, the Compensation and
Nominating Committee approved the grant of stock options to senior executives.
The number of stock options granted to our five most highly paid executive
officers is shown in the table on page 114.
Employees of ECD and its majority-owned subsidiaries also participate in
the broad-based stock option program.
Chief Executive Officer Compensation
In September 1993, Mr. Ovshinsky entered into separate employment
agreements with each of ECD and Ovonic Battery. The purpose of these
agreements, which provide for the payment to Mr. Ovshinsky of an annual salary
of not less than $250,000 by ECD and by Ovonic Battery, was to define clearly
Mr. Ovshinsky's duties and compensation arrangements and to provide to each
company the benefits of his management efforts and future inventions. See
"Employment Agreements." Mr. Ovshinsky's compensation for fiscal year 2003 was
determined in accordance with his Employment Agreements with ECD and Ovonic
Battery and included a discretionary increase above the nominal cost-of-living
increase. Mr. Ovshinsky did not receive a bonus during fiscal year 2003.
COMPENSATION AND NOMINATING COMMITTEE
Walter J. McCarthy, Jr.
Florence I. Metz
120
PERFORMANCE GRAPH
The line graph below compares the cumulative total stockholder return on
ECD's Common Stock over a five-year period with the return on the NASDAQ Stock
Market - U.S. Index and the Russell 2000 Index.
Cumulative Total Return
-------------------------------------------------------------------
6/98 6/99 6/00 6/01 6/02 6/03
ENERGY CONVERSION DEVICES, INC. 100.00 102.58 261.94 289.03 161.96 97.03
NASDAQ STOCK MARKET (U.S.) 100.00 143.67 212.43 115.46 78.65 87.33
RUSSELL 2000 100.00 101.50 116.04 116.80 106.67 104.92
The total return with respect to NASDAQ Stock Market - U.S. Index and the
Russell 2000 Index assumes that $100 was invested on June 30, 1998, including
reinvestment of dividends.
We have not paid any cash dividends in the past and do not expect to pay
any in the foreseeable future.
The Report of the Compensation and Nominating Committee on Executive
Compensation and the Performance Graph are not deemed to be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, or Securities Exchange Act of 1934, as amended, or incorporated by
reference in any documents so filed.
121
AUDIT COMMITTEE REPORT
The Audit Committee is comprised of three outside directors, all of whom
presently are independent under the rules of the Nasdaq Stock Market, Inc.
In accordance with its written charter adopted by the Board of Directors,
the Audit Committee assists the Board of Directors in fulfilling its
responsibility for oversight of the quality and integrity of the accounting,
auditing, and financial reporting practices of the Company. During fiscal year
2003, the Audit Committee met six times with management and the independent
auditors, Deloitte & Touche LLP (Deloitte) and discussed the interim financial
information contained in each quarterly earnings report prior to public
release.
In discharging its oversight responsibility as to the audit process, the
Audit Committee obtained from Deloitte a formal written statement describing
all relationships between Deloitte and the Company that might bear on the
auditors' independence consistent with Independence Standards Board Standard
No. 1, "Independence Discussions with Audit Committees," discussed with the
auditors any relationships that may impact their objectivity and independence
and satisfied itself as to the auditors' independence. The Audit Committee also
discussed with management and Deloitte the quality and adequacy of the
Company's internal controls. The Audit Committee reviewed with Deloitte their
audit plans, audit scope, and identification of audit risks.
The Audit Committee discussed and reviewed with Deloitte all
communications required by generally accepted auditing standards, including
those described in Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees," and, with and without management
present, discussed and reviewed the results of Deloitte's examination of the
financial statements.
The Audit Committee reviewed with management and Deloitte the audited
financial statements of the Company as of and for the fiscal year ended June
30, 2003. Management has the responsibility for the preparation of the
Company's financial statements and Deloitte has the responsibility for the
examination of those statements.
Based on the above-mentioned reviews and discussions with management and
Deloitte, the Audit Committee recommended to the Board of Directors that the
Company's audited financial statements be included in its Annual Report on Form
10-K for the fiscal year ended June 30, 2003, for filing with the Securities
and Exchange Commission.
122
AUDIT FEES
The aggregate fees billed or expected to be billed to the Company for the
fiscal year ended June 30, 2003 by the Company's principal accounting firm,
Deloitte & Touche LLP, are as follows:
Audit Fees ........................................... $ 603,000
Financial Information Systems Design and Implementation Fees -0-
All Other Fees........................................ 127,000
----------
Total........................................ $ 730,000
==========
The Audit Committee, based on its reviews and discussions with management
and Deloitte noted above, determined that the provision of All Other Fees by
Deloitte was compatible with maintaining Deloitte's independence.
AUDIT COMMITTEE
Stanley K. Stynes, Chairman
Walter J. McCarthy Jr.
Florence I. Metz
123
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
- -------- ------------------------------------------------------------------
Equity Compensation Plan Information
The following table sets forth aggregate information regarding grants
under all equity compensation plans of ECD as of June 30, 2003.
Number of securities
remaining available for
Number of secu- future issuance under
rities to be issued Weighted-average equity compensation plans
upon exercise of exercise price of (excluding securities
Plan category outstanding options outstanding options reflected in 1st column)
- ------------------------------- ------------------- ------------------- --------------------------
Equity compensation plans
approved by security holders(1) 3,167,123 $17.66 1,146,605
Equity compensation plans
not approved by security holders 959,749(2)(3) $13.55 (2)(3)
Total 4,126,872 $16.70 1,146,605
- -----------------
(1) These plans consist of: (i) the 1987 Stock Option and Incentive Plan, (ii)
the 1995 Non-Qualified Stock Option Plan and (iii) the 2000 Non-Qualified
Stock Option Plan.
(2) Of the 959,749 shares issuable upon exercise, options to acquire 659,749
shares (adjusted as of June 30, 2003) were issued to Mr. and Dr. Ovshinsky
pursuant to Stock Option Agreements dated November 1993 which are subject
to periodic antidilution protection adjustments based on changes in the
number of outstanding shares of ECD Common Stock. Under those Stock Option
Agreements, if ECD issues any equity securities, other than pursuant to the
exercise of options by Mr. and Dr. Ovshinsky under their respective Stock
Option Agreements, ECD is obligated to grant to Mr. and Dr. Ovshinsky
additional options covering sufficient additional shares of ECD Common
Stock so that their respective proportionate equity interest in ECD as of
November 1993 is maintained on a fully-diluted basis. Such adjustments are
calculated quarterly as of the last day of each of ECD's fiscal quarters
and coincident with significant issuances of ECD Common Stock.
(3) Of the 959,749 shares issuable upon exercise, options to acquire 300,000
shares were issued to Mr. Robert Stempel pursuant to a Stock Option
Agreement dated January 15, 1999. There are no securities available for
future issuance under this Stock Option Agreement.
124
Security Ownership of Certain Beneficial Owners and Management
CLASS A COMMON STOCK
Mr. Stanford R. Ovshinsky and his wife, Dr. Iris M. Ovshinsky (executive
officers, directors and founders of ECD), own of record 153,420 shares and
65,601 shares, respectively (or approximately 69.8% and 29.8%, respectively),
of the outstanding shares of Class A Common Stock. Such shares are owned
directly or indirectly through certain trusts of which Mr. and Dr. Ovshinsky
are co-trustees. Common Stock is entitled to one vote per share and each share
of Class A Common Stock is entitled to 25 votes per share. Class A Common Stock
is convertible into Common Stock on a share-for-share basis at any time and
from time to time at the option of the holders, and will be deemed to be
converted into Common Stock on a share-for-share basis on September 30, 2005.
Under applicable Delaware law, the September 30, 2005 mandatory conversion date
may be extended in the future from time to time with approval of ECD's
stockholders voting together as a single class.
As of October 3, 2003, Mr. Ovshinsky also had the right to vote 126,500
shares of Common Stock (Sanoh Shares) owned by Sanoh Industrial Co., Ltd.
(Sanoh) under the terms of an agreement dated as of November 3, 1992 between
ECD and Sanoh which, together with the Class A Common Stock and 19,749 shares
of Common Stock Mr. and Dr. Ovshinsky own, give Mr. and Dr. Ovshinsky voting
control over shares representing approximately 20.68% of the combined voting
power of ECD's outstanding stock.
The following table sets forth, as of October 3, 2003, information
concerning the beneficial ownership of Class A Common Stock by each director
and all executive officers and directors of ECD as a group. All shares are
owned directly except as otherwise indicated. Under the rules of the Securities
and Exchange Commission, Stanford R. Ovshinsky and Iris M. Ovshinsky may each
be considered to beneficially own the shares held by the other.
Class A
Name of Common Stock Total Number of Shares
Beneficial Owner Beneficially Owned(1)(2) Beneficially Owned Percentage of Class
- ------------------------ ------------------------ ---------------------- -------------------
Stanford R. Ovshinsky 153,420 153,420 69.8%
Iris M. Ovshinsky 65,601 65,601 29.8%
All other executive
officers and directors as
a group (11 persons) -- -- --
--------- --------- ---------
Total 219,021 219,021 99.6%
========= ========= =========
- -----------------
(1) The balance of the 219,913 shares of Class A Common Stock outstanding, 892
shares, or approximately 0.4%, are owned by other members of Mr. and Dr.
Ovshinsky's family. Neither Mr. nor Dr. Ovshinsky has voting or investment
power with respect to such shares.
125
(2) On November 10, 1995, the Compensation Committee recommended, and the Board
of Directors approved, an amendment to Mr. and Dr. Ovshinsky's Stock Option
Agreements dated November 18, 1993 (the "Agreements") to permit Mr. and Dr.
Ovshinsky to exercise a portion (126,082 and 84,055 shares, respectively) of
their existing Common Stock option for Class A Common Stock on the same
terms and conditions as provided in the Agreements. The shares of Class A
Common Stock issuable upon exercise of the options under the Agreements, as
amended, are not included in the number of shares indicated in the above
table, but are included in the shares of Common Stock beneficially owned by
Mr. and Dr. Ovshinsky (see table of beneficial ownership of Common Stock on
page 126).
CLASS B COMMON STOCK
At ECD's Annual Meeting held on March 25, 1999, ECD's stockholders
approved a proposal to increase ECD's authorized capital stock and to authorize
430,000 shares of a new Class B Common Stock. All of the authorized shares of
Class B Common Stock were awarded to Mr. Robert C. Stempel pursuant to the
terms of a Restricted Stock Agreement dated as of January 15, 1999 between ECD
and Mr. Stempel.
The terms of the Class B Common Stock are substantially similar to those
of ECD's Class A Common Stock. The principal difference between the Class A
Common Stock and the Class B Common Stock is with respect to voting rights.
Each share of Class B Common Stock will initially entitle the holder to one
vote on all matters to be voted upon by ECD's stockholders. However, each share
of Class B Common Stock will become entitled to 25 votes as of the first date
upon which all of the outstanding shares of Class A Common Stock have been
converted into Common Stock and no shares of Class A Common Stock are
outstanding. The preferential voting rights of the Class B Common Stock, if
triggered, will expire on September 30, 2005.
The Class B Common Stock are convertible into Common Stock on a share-
for-share basis at any time at the option of the holder. In addition, the
Class B Common Stock will be deemed to be converted into Common Stock on
September 30, 2005. Under applicable Delaware law, the September 30, 2005
mandatory conversion date may be extended in the future from time to time with
the approval of ECD stockholders voting together as a single class.
126
COMMON STOCK
Directors and Executive Officers. The following table sets forth, as of
October 3, 2003, information concerning the beneficial ownership of Common
Stock by each director and executive officer and for all directors and
executive officers of ECD as a group. All shares are owned directly except as
otherwise indicated.
Amount and Nature of Percentage
Name of Beneficial Owner Beneficial Ownership(1) of Class(2)
- ------------------------------------ ----------------------- -----------
Robert C. Stempel 1,147,904 (3) 5.14%
Stanford R. Ovshinsky 948,616 (4) 4.30%
Iris M. Ovshinsky 520,248 (5) 2.39%
Nancy M. Bacon 219,615 (6) 1.02%
Subhash K. Dhar 82,540 (7) *
Hellmut Fritzsche 24,250 (8) *
Stephan W. Zumsteg 21,800 (9) *
Walter J. McCarthy, Jr. 17,173 (10) *
Stanley K. Stynes 16,054 (11) *
Florence I. Metz 13,870 (12) *
Umberto Colombo 12,137 (13) *
James R. Metzger 6,974 (14) *
Jeffrey P. Harvey 4,058 (15) *
All executive officers and directors
as a group (13 persons) 3,035,239 12.65%
========= ======
- -----------------
* Less than 1%.
(1) Under the rules and regulations of the Securities and Exchange
Commission, a person is deemed to be the beneficial owner of a
security if that person has the right to acquire beneficial
ownership of such security within sixty days, whether through the
exercise of options or warrants or through the conversion of another
security.
(2) Under the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock issuable upon exercise of options
and warrants or upon conversion of securities which are deemed to be
beneficially owned by the holder thereof (see Note (1) above) are
deemed to be outstanding for the purpose of computing the percentage
of outstanding securities of the class owned by such person but are
not deemed to be outstanding for the purpose of computing the
percentage of the class owned by any other person.
(3) Includes 430,000 shares of Class B Common Stock and 656,500 shares
represented by options exercisable within 60 days.
127
(4) Includes 656,456 shares (adjusted as of June 30, 2003) represented
by options exercisable within 60 days, the 126,500 Sanoh Shares over
which Mr. Ovshinsky has voting power and 153,420 shares of Class A
Common Stock which are convertible into Common Stock. Under the
rules and regulations of the Securities and Exchange Commission, Mr.
Ovshinsky may be deemed a beneficial owner of the shares of Common
Stock and Class A Common Stock owned by his wife, Iris M. Ovshinsky.
Such shares are not reflected in Mr. Ovshinsky's share ownership in
this table.
(5) Includes 447,138 shares (adjusted as of June 30, 2003) represented
by options exercisable within 60 days and 65,601 shares of Class A
Common Stock which are convertible into Common Stock. Under the
rules and regulations of the Securities and Exchange Commission, Dr.
Ovshinsky may be deemed a beneficial owner of the shares of Common
Stock and Class A Common Stock owned by her husband, Stanford R.
Ovshinsky. Such shares are not reflected in Dr. Ovshinsky's share
ownership in this table.
(6) Includes 194,600 shares represented by options exercisable within 60
days.
(7) Includes 81,040 shares represented by options exercisable within 60
days.
(8) Includes 14,388 shares represented by options exercisable within 60
days.
(9) Includes 19,800 shares represented by options exercisable within 60
days.
(10) Includes 3,000 shares represented by options exercisable within 60
days.
(11) Includes 3,000 shares represented by options exercisable within 60
days.
(12) Includes 6,000 shares represented by options exercisable within 60
days.
(13) Includes 8,000 shares represented by options exercisable within 60
days.
(14) Includes 4,000 shares represented by options exercisable within 60
days.
(15) Includes 4,000 shares represented by options exercisable within 60
days.
Principal Shareholders. The following table sets forth, as of October 3,
2003, to the knowledge of ECD, the beneficial holders of more than 5% of ECD's
Common Stock (see footnotes for calculation used to determine "percentage of
class" category):
Name and Address of Amount and Nature of Percentage
Beneficial Holder Beneficial Ownership of Class(1)
- ---------------------------------- -------------------- -----------
TRMI Holdings Inc. 4,376,633(2) 19.98%
(a unit of ChevronTexaco)
6001 Bollinger Canyon Road
San Ramon, CA 94583
Stanford R. and Iris M. Ovshinsky
2956 Waterview Drive
Rochester Hills, Michigan 48309 1,468,864(3) 6.69%(4)
Robert C. Stempel
2956 Waterview Drive
Rochester Hills, Michigan 48309 1,147,904(5) 5.14%
- -----------------
(1) Under the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock issuable upon exercise of options
and warrants or upon conversion of
128
securities which are deemed to be beneficially owned by the holder
thereof are deemed to be outstanding for the purpose of computing the
percentage of outstanding securities of the class owned by such person
but are not deemed to be outstanding for the purpose of computing the
percentage of the class owned by any other person.
(2) Pursuant to the Stock Purchase Agreement dated as of May 1, 2000, TRMI
Holdings Inc. (TRMI), a unit of ChevronTexaco, has agreed that (i) so
long as it beneficially owns an aggregate of 5% of ECD's Common Stock
and (ii) so long as Mr. and Dr. Ovshinsky are the beneficial owners of
Class A Common Stock, or Mr. Stempel is the beneficial owner of Class B
Common Stock, ChevronTexaco will vote its ECD Common Stock in accordance
with the votes cast by the holders of Class A Common Stock (prior to its
conversion) or Class B Common Stock (after conversion of the Class A
Common Stock). ChevronTexaco's percentage of class is computed based on
21,254,607 shares of Common Stock outstanding, 219,913 shares of Class
A Common Stock outstanding and 430,000 shares of Class B Common Stock
outstanding.
(3) Includes 219,021 shares of Class A Common Stock owned by Mr. and Dr.
Ovshinsky (which shares are convertible at any time into Common Stock
and will be deemed to be converted into Common Stock on September 30,
2005), 19,749 shares of Common Stock owned by Mr. and Dr. Ovshinsky,
126,500 shares of Sanoh Shares over which Mr. Ovshinsky has voting
rights and 1,103,594 (adjusted as of June 30, 2003) shares represented
by options exercisable within 60 days.
(4) Represents the sum of Mr. and Dr. Ovshinsky's respective ownership
interests calculated separately.
(5) Includes 430,000 shares of Class B Common Stock owned by Mr. Stempel
(which shares are convertible at any time into Common Stock and will be
deemed to be converted into Common Stock on September, 30, 2005) 61,404
shares of Common Stock and 656,500 shares represented by options
exercisable within 60 days.
129
Item 13: Certain Relationships and Related Transactions
- -------- ----------------------------------------------
TRMI (ChevronTexaco). Pursuant to the Stock Purchase Agreement between
ECD and TRMI dated as of May 1, 2000, ChevronTexaco, through its TRMI unit,
purchased a 20% equity stake in ECD for $67.4 million. As part of this Stock
Purchase Agreement, ChevronTexaco received rights to purchase additional shares
of ECD Common Stock or other ECD securities (ECD Stock).
So long as ChevronTexaco owns more than 5% of ECD Stock and in the event
ECD issues additional ECD Stock other than to ChevronTexaco, ChevronTexaco has
the right to purchase additional ECD Stock in order for ChevronTexaco to
maintain its same proportionate interest in ECD Stock as ChevronTexaco held
prior to the issuance of the additional ECD Stock. If ChevronTexaco elects to
purchase ECD Common Stock, the purchase price will be the average of the closing
price on NASDAQ of the ECD Common Stock as reported in The Wall Street Journal
for the five trading days prior to the closing date of the sale multiplied by
the number of shares of the ECD Common Stock which ChevronTexaco is entitled to
purchase. If ChevronTexaco does not exercise its right to purchase additional
ECD Stock within 15 days after delivery of a Rights Notice from ECD,
ChevronTexaco's right to purchase such additional ECD Stock which are the
subject of the Rights Notice will terminate.
Donald L. Paul, Vice President and Chief Technology Officer of
ChevronTexaco, and Greg M. Vesey, President of ChevronTexaco Technology
Ventures, served as directors of ECD from 2001 through September 2003.
ChevronTexaco is entitled to designate one nominee to ECD's Board of Directors
for so long as it owns more than 5% of ECD Stock and is entitled to designate
two nominees or one-fifth of the number of directors on ECD's Board then serving
for so long as ChevronTexaco owns 10% of ECD Stock. There presently are no
ChevronTexaco designated nominees serving on ECD's Board of Directors.
Ovonic Fuel Cell. Effective as of December 31, 2002, ECD purchased the
50% interest of TES in Texaco Ovonic Fuel Cell Company. The company is now
owned 100% by ECD and has been renamed Ovonic Fuel Cell Company. Stanford R.
Ovshinsky, a director of ECD, serves as president of Ovonic Fuel Cell Company
and, until December 31, 2002, served as a member of the Management Committee of
Texaco Ovonic Fuel Cell Company.
Until December 31, 2002, Robert C. Stempel, a director of ECD, served on
the Management Committee of Texaco Ovonic Fuel Cell Company. Greg M. Vesey, a
former director of ECD, served on the Management Committee of Texaco Ovonic
Fuel Cell Company until December 31, 2002.
For the years ended June 30, 2003, 2002 and 2001, ECD recorded revenues
of $4,022,000, $8,887,000 and $8,831,000, respectively, from Texaco Ovonic Fuel
Cell for product development services. For the period subsequent to December 31,
2002, ECD has not recorded revenues from Ovonic Fuel Cell Company.
130
Texaco Ovonic Hydrogen Systems. Stanford R. Ovshinsky and Robert C.
Stempel, directors of ECD, are members of the Management Committee of Texaco
Ovonic Hydrogen Systems. Stanford R. Ovshinsky serves as president of Texaco
Ovonic Hydrogen Systems. Greg M. Vesey, a former director of ECD, is a member
of the Management Committee of Texaco Ovonic Hydrogen Systems. ECD owns 50% of
Texaco Ovonic Hydrogen Systems.
For the years ended June 30, 2003, 2002 and 2001, ECD recorded revenues
of $13,651,000, $18,581,000 and $11,818,000, respectively, from Texaco Ovonic
Hydrogen Systems, primarily for market development and advanced product
development work.
Texaco Ovonic Battery Systems. Stanford R. Ovshinsky and Robert C.
Stempel, directors of ECD and Ovonic Battery, are members of the Management
Committee of Texaco Ovonic Battery Systems. Greg M. Vesey, a former director of
ECD, is a member of the Management Committee of Texaco Ovonic Battery Systems.
Ovonic Battery owns 50% of Texaco Ovonic Battery Systems.
For the year ended June 30, 2003 and 2002, Ovonic Battery recorded
revenues of $12,367,000 and $16,315,000 from Texaco Ovonic Battery Systems
primarily for advanced product development and market development work.
Ovonyx. Stanford R. Ovshinsky, a director of ECD, is chairman and a
director of Ovonyx. Robert C. Stempel, a director of ECD, is vice chairman and
a director of Ovonyx. ECD currently owns 41.7% of Ovonyx.
ECD recorded revenues from Ovonyx of $162,000, $215,000 and $382,000 for
the years ended June 30, 2003, 2002 and 2001, respectively, representing
services performed for its operations which commenced on January 15, 1999.
ECD made a capital contribution of $1,000,000 to Ovonyx in the year ended
June 30, 2003 in exchange for technology previously contributed by ECD to Ovonyx
and an exclusive royalty-bearing license.
Ovonic Media. Stanford R. Ovshinsky and Robert C. Stempel, directors of
ECD, are members of the Alliance Board of Ovonic Media. ECD has a 49% interest
in this joint venture.
For the years ended June 30, 2003, 2002 and 2001, the Company had
revenues of $615,000, $1,923,000 and $2,298,000, respectively, from Ovonic
Media for providing product development services.
United Solar Ovonic LLC. This entity was formed on April 11, 2000 as
Bekaert ECD Solar Systems LLC. 60% of the membership interest was owned by
Bekaert Corporation and the remaining 40% was and continues to be owned by
United Solar Ovonic Corp. (formerly known as United Solar Systems Corp.). From
April 11, 2000 to May 14, 2003, when ECD acquired Bekaert's 60% interest, the
financial statements of United Solar Ovonic LLC were not included in the
consolidated financial statements of ECD. Beginning May 15, 2003, ECD
consolidated the financial statements of United Solar Ovonic LLC within its own
financial statements.
131
For the years ended June 30, 2003, 2002 and 2001, the Company recorded
revenues from United Solar Ovonic LLC of $6,267,000, $10,121,000 and
$9,948,000, respectively, for product sales.
Southwall. Robert C. Stempel, a director of ECD, is a member of the Board
of Directors of Southwall.
For the years ended June 30, 2003, 2002 and 2001, the Company had
revenues of $223,000, $9,000 and $30,000, respectively, from Southwall under a
contract to build large-area deposition equipment. The completed equipment was
shipped to Southwall in July 2000.
Herbert Ovshinsky, Stanford R. Ovshinsky's brother, is employed by ECD as
Director of the Production Technology and Machine Building Division working
principally in the design of manufacturing equipment. He received $200,012 in
salary during the year ended June 30, 2003.
Benjamin Ovshinsky, Stanford R. Ovshinsky's son, is employed by ECD as
its business representative for Western United States. He received compensation
of $82,044 during the year ended June 30, 2003.
HKO Media, Inc., owned by Harvey Ovshinsky, Stanford R. Ovshinsky's son,
performed video production services on behalf of ECD. HKO Media, Inc. was paid
$343,479 by ECD for its services during the fiscal year ended June 30, 2003.
132
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- --------------------------------------------------------------
(a) 1. Financial Statements:
Page
The following is included in Part II, Item 8: ----
Independent Auditors' Report..................... 56
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts. 137
Other financial statements and financial statement schedules are omitted
(1) because of the absence of the conditions under which they are required
or (2) because the information called for is shown in the financial
statements and notes thereto.
3. Exhibits (including those incorporated by reference)
Page or
Reference
---------
3.1 Restated Certificate of Incorporation filed (a)
September 29, 1967
3.2 Certificate of Amendment to Certificate of (b)
Incorporation filed February 24, 1998, increasing
authorized shares of the Company's Common Stock
from 15,000,000 shares to 20,000,000 shares
3.3 Certificate of Amendment of Incorporation filed (c)
January 27, 2000 increasing authorized shares of
the Company's Common Stock from 20,000,000 shares
to 30,000,000
3.4 Certificate of Amendment to Certificate of (d)
Incorporation filed March 25, 1999 extending
voting rights of the Company's Class A Common
Stock, increasing the authorized capital stock of
the Company's Common Stock to 20,930,000 shares,
and authorizing 430,000 shares of Class B Common
Stock
3.5 Bylaws in effect as of July 17, 1997 (e)
3.6 Amendment to Article VIII of the Bylaws effective 140
as of September 18, 2003
4.1 Agreement among the Company, Stanford R. (f)
Ovshinsky and Iris M. Ovshinsky relating to the
automatic conversion of Class A Common Stock into
the Company's Common Stock upon the occurrence of
certain events, dated September 15, 1964
133
10.1 Executive Employment Agreement dated as of (g)
September 2, 1993 between the Company, Ovonic
Battery Company, Inc. and Stanford R. Ovshinsky
10.2 Executive Employment Agreement dated as of (h)
September 2, 1993 between the Company and
Stanford R. Ovshinsky
10.3 Stock Option Agreement by and between Ovonic (i)
Battery Company, Inc. and Stanford R. Ovshinsky
dated as of November 18, 1993
10.4 Stock Option Agreement by and between the Company (j)
and Stanford R. Ovshinsky dated as of
November 18, 1993
10.5 Stock Option Agreement by and between the Company (k)
and Iris M. Ovshinsky dated as of November 18,
1993
10.6 Energy Conversion Devices, Inc. 1995 (l)
Non-Qualified Stock Option Plan
10.7 Executive Employment Agreement dated as of (m)
February 19, 1998 between the Company and Iris M.
Ovshinsky
10.8 Executive Employment Agreement, Restricted Stock (n)
Agreement and Stock Option Agreement dated as of
January 15, 1999 between the Company and Robert
C. Stempel
10.9 Stock Purchase Agreement by and between the (o)
Company and TRMI Holdings Inc. dated as of May 1,
2000
10.10 Limited Liability Agreement of Texaco Ovonic (p)
Hydrogen Systems LLC dated as of October 31, 2000
by and between Texaco Energy Systems Inc. and
Energy Conversion Devices, Inc.
10.11 Amended and Restated Operating Agreement of (q)
Texaco Ovonic Battery Systems LLC (f/k/a GM
Ovonic L.L.C.) dated as of July 17, 2001 by and
between Texaco Energy Systems Inc. and Ovonic
Battery Company, Inc.
10.12 Purchase, Sale and Termination Agreement by and (r)
between Bekaert Corporation, N.V. Bekaert S.A.,
and Energy Conversion Devices, Inc. dated May 14,
2003
21.1 List of all direct and indirect subsidiaries of (s)
the Company
23.1 Consent of Independent Auditors 141
31.1 Chief Executive Officer's Certification Pursuant 142
to Section 302 of the Sarbanes-Oxley Act of 2002
134
31.2 Chief Financial Officer's Certification Pursuant 143
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer's Certification Pursuant 144
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Chief Financial Officer's Certification Pursuant 145
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Notes to Exhibit List
(a) Filed as Exhibit 2-A to the Company's Form 8-A and incorporated herein by
reference.
(b) Filed as Exhibit 3.5 to the Company's Registration Statement on Form S-3
(Registration No. 333-50749) and incorporated herein by reference.
(c) Filed as Exhibit 3.6 to the Company's Registration Statement on Form S-3
(Registration No. 333-33266) and incorporated herein by reference.
(d) Filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999 and incorporated herein by reference.
(e) Filed as Exhibit 3.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997, as amended, and incorporated herein by
reference.
(f) Filed as Exhibit 13-D to the Company's Registration Statement on Form S-1
(Registration No. 2-26772) and incorporated herein by reference.
(g) Filed as Exhibit 10.100 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 and incorporated herein by reference.
(h) Filed as Exhibit 10.101 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 and incorporated herein by reference.
(i) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 and incorporated herein by
reference.
(j) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 and incorporated herein by
reference.
(k) Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 and incorporated herein by
reference.
135
(l) Filed as Exhibit 10.77 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1995 and incorporated herein by reference.
(m) Filed as Exhibit 10.63 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 and incorporated herein by reference.
(n) Filed as Exhibits B, C and D, respectively, to the Company's Proxy Notice
and Statement dated February 23, 1999.
(o) Filed as Exhibit 10.43 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000, as amended, and incorporated herein
by reference.
(p) Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2001.
(q) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001.
(r) Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on
May 29, 2003.
(s) Filed as Exhibit 21.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000, as amended, and incorporated herein by
reference.
(b) Reports on Form 8-K
Report on Form 8-K/A filed on August 1, 2003 furnishing the financial
information of Bekaert ECD Solar Systems LLC and the pro forma financial
statements of Energy Conversion Devices, Inc. upon the acquisition of the
interests of Bekaert Corporation and N.V. Bekaert S.A. in United Solar
Systems Corp. and Bekaert ECD Solar Systems LLC by Energy Conversion
Devices, Inc. on May 14, 2003.
Report on Form 8-K filed on May 29, 2003 reporting the acquisition on May
14, 2003 of the interests of Bekaert Corporation and N.V. Bekaert S.A. in
United Solar Systems Corp. and Bekaert ECD Solar Systems LLC by Energy
Conversion Devices, Inc.
Report on Form 8-K filed on June 27, 2003 reporting the acquisition of
the interest of Texaco Energy Systems LLC in Texaco Ovonic Fuel Cell
Company effective as of December 31, 2002.
Report on Form 8-K filed on May 15, 2003 furnishing, pursuant to Item 12,
the "Results of Operations and Financial Condition," the results of its
operations for the quarter ended March 31, 2003.
Report on Form 8-K filed on May 14, 2003 reporting an agreement with N.V.
Bekaert S.A. whereby Energy Conversion Devices, Inc. acquired the
interests of Bekaert in United Solar Systems Corp. and Bekaert ECD Solar
Systems LLC.
136
Schedule II - Valuation and Qualifying Accounts
-----------------------------------------------
Additions
-----------------------
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Description Period Expenses Accounts Deductions End of Period
============================ ============ ======================= ========== =============
Allowance for Uncollectible
Accounts:
Year Ended June 30, 2003 $ 563,000 $ 23,000 $127,000* $ (448,000)*** $ 265,000
Year Ended June 30, 2002 583,000 28,000 (48,000)*** 563,000
Year Ended June 30, 2001 579,000 824,000 (820,000)*** 583,000
Reserve for Losses on
Government Contracts:
Year Ended June 30, 2003 $1,400,000 $ 281,636 $ $1,681,636
Year Ended June 30, 2002 1,650,000 (250,000)** 1,400,000
Year Ended June 30, 2001 1,350,000 300,000 1,650,000
Reserve for Warranty:
Year Ended June 30, 2003 $2,489,024 $1,212,949 $728,503* $(1,439,815) $2,990,661
Year Ended June 30, 2002 978,895 1,510,129 2,489,024
Year Ended June 30, 2001 70,284 908,611 978,895
- ------------------
* Represents amounts applicable to United Solar Ovonic at May 14, 2003 (the
date at which United Solar Ovonic was consolidated).
** Represents change in estimated reserve.
*** Represents write-off of uncollectible accounts.
137
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ENERGY CONVERSION DEVICES, INC.
By: /s/ Stanford R. Ovshinsky
--------------------------------------------
Stanford R. Ovshinsky,
President and Chief Executive Officer
Dated: October 22, 2003 (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Stanford R. Ovshinsky President, Chief
- ------------------------- Executive Officer and October 21, 2003
Stanford R. Ovshinsky Director (Principal
Executive Officer)
/s/ Stephan W. Zumsteg Vice President and Chief
- ------------------------- Financial Officer October 22, 2003
Stephan W. Zumsteg (Principal Financial and
Accounting Officer)
/s/ Robert C. Stempel Director October 22, 2003
- ------------------------- (Chairman of the Board)
Robert C. Stempel
/s/ Nancy M. Bacon Director October 22, 2003
- -------------------------
Nancy M. Bacon
/s/ Umberto Colombo Director October 22, 2003
- -------------------------
Umberto Colombo
138
/s/ Walter J. McCarthy, Jr. Director October 22, 2003
- -------------------------
Walter J. McCarthy, Jr.
/s/ Florence I. Metz Director October 22, 2003
- -------------------------
Florence I. Metz
/s/ James R. Metzger Director October 22, 2003
- -------------------------
James R. Metzger
/s/ Iris M. Ovshinsky Director October 22, 2003
- -------------------------
Iris M. Ovshinsky
/s/ Stanley K. Stynes Director October 22, 2003
- -------------------------
Stanley K. Stynes
139