SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the period ended DECEMBER 31, 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
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Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2956 Waterview Drive, Rochester Hills, Michigan 48309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 293-0440
---------------------------
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Former name, former address and former Fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
--- ---
As of February 13, 2004, there were 219,913 shares of ECD's Class A Common
Stock, 430,000 shares of ECD's Class B Common Stock and 24,523,001 shares of
ECD's Common Stock outstanding.
Page 1 of 50 Pages
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------- --------------------
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
--------------------------- ---------------------------
REVENUES
Product sales $ 7,364,399 $ 3,243,546 $ 14,063,095 $ 7,055,404
Product sales to related parties - 1,268,843 2,422 2,791,174
------------ ------------ ------------ ------------
Total product sales 7,364,399 4,512,389 14,065,517 9,846,578
Royalties 609,260 369,657 1,068,759 899,334
Revenues from product development agreements 3,287,914 1,895,468 6,259,709 3,033,756
Revenues from product development agreements
with related parties 4,247,918 8,330,670 8,114,787 16,945,049
------------ ------------ ------------ ------------
Total revenues from product development
agreements 7,535,832 10,226,138 14,374,496 19,978,805
Revenues from license and other agreements 25,000 3,269,114 75,000 3,419,114
Other revenues 80,951 34,168 162,567 69,647
Other revenues from related parties 58,400 66,310 132,638 118,958
------------ ------------ ------------ ------------
Total other revenues 139,351 100,478 295,205 188,605
------------ ------------ ------------ ------------
TOTAL REVENUES 15,673,842 18,477,776 29,878,977 34,332,436
EXPENSES
Cost of product sales 9,006,021 5,475,255 17,975,287 10,295,590
Cost of revenues from product development agreements 7,006,575 9,380,534 13,130,191 18,882,763
Product development and research 4,866,096 4,718,173 12,666,219 8,580,450
Patent defense (net) 3,360,077 668,914 5,471,057 908,299
Patents 435,285 504,246 955,674 1,173,358
Selling, general and administrative (net) 4,086,888 1,766,215 7,180,394 4,915,876
------------ ------------ ------------ ------------
TOTAL EXPENSES 28,760,942 22,513,337 57,378,822 44,756,336
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (13,087,100) (4,035,561) (27,499,845) (10,423,900)
OTHER INCOME (EXPENSE)
Interest income 256,787 1,050,237 572,928 2,090,435
Interest expense (593,049) (122,338) (835,737) (249,610)
Equity in losses of joint ventures (303,699) (2,870,380) (548,081) (3,733,935)
Minority interest share of losses - 212,053 - 755,079
Gain (loss) on sales of investments 55,266 (59,756) 364,416 102,002
Other nonoperating income (net) 255,370 46,348 248,311 28,513
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (329,325) (1,743,836) (198,163) (1,007,516)
------------ ------------ ------------ ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (13,416,425) (5,779,397) (27,698,008) (11,431,416)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - - - 2,215,560
------------ ------------ ------------ ------------
NET LOSS $(13,416,425) $ (5,779,397) $(27,698,008) $ (9,215,856)
============ ============ ============ ============
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (.57) $ (.26) $ (1.22) $ (.52)
BASIC NET LOSS PER SHARE FOR CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - - - .10
------------ ------------ ------------ ------------
BASIC NET LOSS PER SHARE $ (.57) $ (.26) $ (1.22) $ (.42)
============ ============ ============ ============
DILUTED NET LOSS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (.57) $ (.26) $ (1.22) $ (.52)
DILUTED NET LOSS PER SHARE FOR CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - - - .10
------------ ------------ ------------ ------------
DILUTED NET LOSS PER SHARE $ (.57) $ (.26) $ (1.22) $ (.42)
============ ============ ============ ============
See notes to consolidated financial statements.
2
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
December 31, June 30,
2003 2003
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash, including cash equivalents of $14,781,000
at December 31, 2003 and $6,193,000 at June 30,
2003 ($1,600,000 of which is restricted at
December 31, 2003 and $2,000,000 of which is
restricted at June 30, 2003) $ 16,898,399 $ 8,567,261
Short-term investments (including restricted
investments of $5,000,000 at June 30, 2003) 7,978,076 26,801,506
Accounts receivable (net of allowance for
uncollectible accounts of approximately $265,000
at December 31, 2003 and at June 30, 2003) 12,801,790 10,520,719
Accounts receivable due from related parties 4,167,137 6,977,280
Note receivable 12,000,000 11,629,489
Inventories 15,026,537 12,448,172
Other 1,508,431 1,017,659
------------ ------------
TOTAL CURRENT ASSETS 70,380,370 77,962,086
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 14,251,399 13,982,830
Machinery and other equipment 75,059,589 75,587,068
Capitalized leases 10,000,000 10,000,000
------------ ------------
99,577,988 99,836,898
Less accumulated depreciation and amortization (32,305,659) (29,137,648)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 67,272,329 70,699,250
Investment in Rare Earth Ovonic-China 1,710,000 1,710,000
INVESTMENT IN JOINT VENTURES
Ovonyx 96,139 594,220
Texaco Ovonic Battery Systems - -
Texaco Ovonic Hydrogen Systems - -
ITS Innovative Transportation Systems - -
Ovonic Media - -
OTHER ASSETS 3,774,900 2,729,094
------------ ------------
TOTAL ASSETS $143,233,738 $153,694,650
============ ============
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31, June 30,
2003 2003
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 11,580,360 $ 18,608,052
Accounts payable and accrued expenses - related
parties 27,066 -
Salaries, wages and amounts withheld from
employees 3,405,577 4,574,357
Deferred revenues under business agreements 3,216,545 5,089,597
Deferred revenues - related parties 30,453 36,972
Current installments on long-term liabilities 12,292,153 11,858,378
------------ ------------
TOTAL CURRENT LIABILITIES 30,552,154 40,167,356
LONG-TERM LIABILITIES 10,178,191 10,187,127
NONREFUNDABLE ADVANCE ROYALTIES 3,487,268 3,507,995
------------ ------------
TOTAL LIABILITIES 44,217,613 53,862,478
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Class B Convertible Common Stock,
par value $0.01 per share:
Authorized, issued and
outstanding - 430,000 shares 4,300 4,300
Common Stock, par value $0.01 per share:
Authorized - 30,000,000 shares
Issued & outstanding - 23,947,522 shares at
December 31, 2003 and 21,252,207 shares at
June 30, 2003 239,475 212,522
Additional paid-in capital 411,858,512 384,987,156
Accumulated deficit (312,090,119) (284,392,111)
Accumulated other comprehensive income 189,498 546,646
Unearned compensation on Class B Convertible
Common Stock (1,187,740) (1,528,540)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 99,016,125 99,832,172
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $143,233,738 $153,694,650
============ ============
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
December 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net loss $(27,698,008) $ (9,215,856)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
License agreement (exchange for debt and related interest) - (3,269,114)
Depreciation and amortization 4,093,802 1,422,897
Amortization of premium/discount on investments 73,083 325,899
Equity in losses of joint ventures 548,081 3,733,935
Changes in nonrefundable advance royalties (20,727) (100,093)
Stock and stock options issued for services rendered 376,800 393,000
Loss (gain) on sales of investments (364,416) -
Loss on sale of property, plant and equipment 11,393 -
Amortization of deferred gain - (69,594)
Minority interest - (755,079)
Cumulative effect of change in accounting principle - (2,215,560)
Retirement liability 153,516 144,122
Other - 34,830
Changes in working capital:
Accounts receivable (2,281,071) 3,127,463
Accounts and note receivable due from related parties 2,810,143 4,483,530
Inventories (2,578,365) (524,958)
Other assets (1,536,578) (32,355)
Accounts payable and accrued expenses (8,196,472) (55,327)
Accounts payable and accrued expenses - related parties 27,066 544,766
Deferred revenues under business agreements (1,873,052) 8,673,002
Deferred revenues - related parties (6,519) (2,203,753)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS (36,461,324) 4,441,755
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (809,350) (5,304,057)
Advances to Bekaert ECD Solar Systems - (1,857,156)
Advance to ITS Innovative Transportation Systems - (2,000,000)
Investment in Ovonyx (50,000) (1,000,000)
Purchases of investments (7,978,076) (23,520,621)
Sales of investments 26,661,685 11,044,852
Proceeds from sale of property, plant and equipment 131,076 23,000
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 17,955,335 (22,613,982)
FINANCING ACTIVITIES:
Principal payments under short-term and long-term debt
obligations and capitalized lease obligations (99,188) (1,088,985)
Proceeds from sale of stock upon exercise of stock options 24,451 -
Proceeds from sale of stock and warrants net of expenses 26,837,858 -
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 26,763,121 (1,088,985)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 74,006 -
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,331,138 (19,261,212)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,567,261 42,221,015
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,898,399 $ 22,959,803
============ ============
See notes to consolidated financial statements.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
December 31,
2003 2002
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 835,737 $ 249,610
The Company's noncash investing and
financing activities were as follows:
Short-term and long-term note receivable -
United Solar Ovonic LLC 370,511 348,566
Short-term and long-term note payable -
Canon (370,511) (348,566)
Debt principal exchanged for license - United Solar
Ovonic/Canon 2,500,000
Accounts Payable and Accrued Expenses - Accrued
interest on United Solar Ovonic/Canon debt 769,114
See notes to consolidated financial statements.
6
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies
- ---------------------------------------
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements have been prepared
assuming that the Company (see page 8 for definition of 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.
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.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial statements for the interim periods have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K (which is available
on the Company's website www.ovonic.com).
The results of operations for the three-month and six-month periods ended
December 31, 2003 and 2002 are not necessarily indicative of the results to be
expected for the full year.
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 (see Note B).
Nature of Business
- ------------------
Energy Conversion Devices, Inc. (ECD) is 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.
7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Financial Statement Presentation, Principles of Consolidation and Equity
- ------------------------------------------------------------------------
Accounting
- ----------
The consolidated financial statements include the accounts of ECD and its
100%-owned thin-film amorphous silicon photovoltaic manufacturing and sales
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)
(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 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 a unit of 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 a unit of 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 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. 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 discussions of all of the Company's
ventures.
Intellectual property, including patents resulting from the Company's
investments in its technologies, is valued at zero in the balance sheet.
Intellectual property provides the foundation for the creation of the important
strategic alliances whereby the Company provides intellectual property and
patents and joint venture partners provide cash.
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).
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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 (U.S. GAAP)
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 Fiscal
2004 presentation.
Other Nonoperating Income
- -------------------------
Other nonoperating income-net consists of gains and losses on sales of
property, plant and equipment, amortization of deferred gains, rental income,
and other miscellaneous income.
Recent Pronouncements
- ---------------------
In April 2003, the Financial Accounting Statements Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which is
effective for contracts entered into or modified after June 30, 2003. This
statement amends and clarifies financial accounting and reporting for derivative
instruments. The Company implemented this Statement on July 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 May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities & Equity," which
is effective for financial instruments entered into or modified after May 31,
2003 and is effective for the first interim period after June 15, 2003. The
Company implemented this Statement on July 1, 2003. The adoption of this
Statement did not have a material effect on the Company's consolidated financial
position or results of operations.
9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings and Liquidity
- ---------------------------------
Since July 2003, the Company has implemented 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. The Company has met these initiatives
through the following actions taken:
o Reductions in staffing by 15% at ECD and Ovonic Battery through
reallocation and reductions ($4,500,000 in annual savings).
o Changes in the healthcare benefit program ($2,200,000 in annual
savings).
o A salary freeze for all ECD and Ovonic Battery employees and a 10%
salary reduction by the executive management team ($1,900,000 in
annual savings).
o Reduced purchased services and contract employees.
o Lower capital expenditures.
These cost-containment initiatives were fully implemented by January 1,
2004 and are expected to result in total savings of $19 million annually. The
Company is reviewing other areas for cost reduction, as well as organizational
changes to improve administrative and operating efficiencies.
In November 2003, the Company received $27,868,000 in connection with
stock purchase agreements with respect to an offering of 2,692,915 units of its
securities to a group of three institutional investors at an average price per
unit of $10.35 based upon the closing price of ECD Common Stock plus $.125. Each
unit consists of one share of ECD Common Stock and one warrant to purchase one
share of ECD Common Stock for $13.96, if exercised, on or prior to May 2, 2005
and for $16.03, if exercised, at any time thereafter but prior to October 31,
2006.
On January 12, 2004, the Company received $5,593,000 in connection with
an additional rights agreement from two of the institutional investors (see
Note M - Subsequent Event).
Nolan Securities Corporation acted as placement agent and was paid
$978,000 and issued 79,828 warrants on the same terms as the warrants issued in
the unit offering. ECD filed a registration statement (related to the November
sales of stock and warrants) on Form S-1 with the Securities and Exchange
Commission on December 23, 2003 for the resale of the shares issued and the
shares issuable upon exercise of the warrants, which was declared effective on
January 8, 2004.
Certain members of management agreed to the suspension of the exercise of
their stock options until additional authorized shares are made available to
allow that a sufficient
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings and Liquidity (Continued)
- ---------------------------------------------
number of authorized but unissued shares of Common Stock be available for
issuance to the investors in the offering.
The Company will use these proceeds for working capital and to support its
development and other operating activities.
The Company is engaged in a number of negotiations and discussions to fund
its operations, including raising additional capital through equity and debt
financings and forming new strategic alliances to fund and grow its photovoltaic
and other businesses. In addition, the Company is engaged in negotiations with
government agencies for contracts to fund its development activities. 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.
(See Management's Discussion and Analysis of Financial Condition on Liquidity
and Capital Resources.)
NOTE C - Accounts Receivable
- ----------------------------
December 31, June 30,
2003 2003
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Amounts billed to customers
Commercial customers $ 564,598 $ 564,598
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
U.S. Government 1,069,076 698,634
Commercial customers 63,856 9,060
----------- -----------
1,132,932 707,694
Amounts billed
U.S. Government 1,603,145 1,773,824
Amounts unbilled for other than long-term contracts
Commercial customers 1,873,913 1,892,532
Amounts billed for other than long-term contracts
Commercial customers 7,892,202 5,847,071
Allowance for uncollectible accounts (265,000) (265,000)
----------- -----------
TOTAL $12,801,790 $10,520,719
=========== ===========
Certain contracts with the U.S. government require a retention that is
paid upon completion of an audit of the Company's indirect rates. Certain
contracts have been
11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable (Continued)
- ----------------------------------------
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
December 31, 2003 and June 30, 2003. Most U.S. government contracts remain
subject to audit.
Accounts Receivable Due from Related Parties
- --------------------------------------------
December 31, June 30,
2003 2003
------------ ------------
Amounts earned which are billed in the
subsequent month on long-term contracts
ChevronTexaco Technology Ventures $ 125,549 $ -
Texaco Ovonic Battery Systems 723,014 2,072,138
Texaco Ovonic Hydrogen Systems 660,587 1,603,147
---------- ----------
Sub-total 1,509,150 3,675,285
Amounts billed
Texaco Ovonic Battery Systems 2,136,741 3,221,059
Texaco Ovonic Hydrogen Systems 259,824 -
---------- ----------
Sub-total 2,396,565 3,221,059
Other unbilled
Ovonyx 12,680 412
Other billed
ChevronTexaco Technology Ventures 223,390 5,721
Ovonyx 11,300 48,053
Texaco Ovonic Battery Systems 14,052 18,386
Texaco Ovonic Hydrogen Systems - 8,364
---------- ----------
Sub-total 248,742 80,524
---------- ----------
TOTAL $4,167,137 $6,977,280
========== ==========
Short-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 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
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable (Continued)
- ----------------------------------------
$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. On
January 2, 2004, Bekaert paid the $12,000,000 to Canon in full satisfaction of
ECD's obligation to Canon.
NOTE D - Inventories
- --------------------
Inventories for United Solar Ovonic Corp., United Solar Ovonic LLC and
Ovonic Battery are as follows:
December 31, June 30,
2003 2003
------------- -------------
Finished products $ 5,320,128 $ 5,282,156
Work in process 3,845,506 1,825,839
Raw materials 5,860,903 5,340,177
----------- -----------
$15,026,537 $12,448,172
=========== ===========
NOTE E - Joint Ventures and Investments
- ---------------------------------------
Joint Ventures
- --------------
United Solar Ovonic
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 paid on December 22, 2003). Additionally, the
Company provided $40 million to United Solar Ovonic LLC to terminate its
sale-and-leaseback arrangement with LaSalle National Leasing Corporation and
another financial institution and, as a result, freed up the $25 million of
Company funds that had been restricted in support of its guarantee of the
LaSalle lease. 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. 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. 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.
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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
recorded its $1,000,000 investment in Ovonyx and accounts for this investment on
the equity method and is recognizing its proportionate share of Ovonyx losses to
the extent of its $1,000,000 investment. In the three months and six months
ended December 31, 2003, ECD recorded an equity loss of $304,000 and $548,000,
respectively, related to its investment in Ovonyx; in the three months and six
months ended December 31, 2002, ECD recorded an equity loss of $280,000.
ECD recorded revenues from Ovonyx of $34,000 and $71,000, for the three
months and six months ended December 31, 2003 representing services provided to
this joint venture. For the three months and six months ended December 31, 2002,
ECD recorded revenues of $41,000 and $86,000, respectively.
Texaco Ovonic Battery Systems
In July 2001, ChevronTexaco bought General Motors' interest in GM Ovonic
L.L.C., a joint venture of Ovonic Battery. ChevronTexaco will invest up to
$178,000,000 ($118,000,000 of which has been received as of December 31, 2003)
in the venture, renamed Texaco Ovonic Battery Systems LLC. Ovonic Battery
contributed additional technology. Texaco Ovonic Battery Systems is owned 50% by
Ovonic Battery and 50% by a unit of ChevronTexaco.
The Company recorded revenues from Texaco Ovonic Battery Systems of
$1,935,000 and $3,351,000 for the three months and six months ended December 31,
2003, respectively, and $2,754,000 and $5,465,000 for the three months and six
months ended December 31, 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 zero and $2,000 for
the three months and six months ended December 31, 2003, respectively, and
$16,000 and $39,000 for the three months and six months ended December 31, 2002,
respectively, for products sold to Texaco Ovonic Battery Systems.
The Company also recorded revenues from Texaco Ovonic Battery Systems of
$45,000 and $90,000 for each of the three months and six months ended December
31, 2003 and 2002, respectively, for rent of a portion of one of the Company's
facilities.
The following sets forth certain financial data regarding Texaco Ovonic
Battery Systems that are derived from its financial statements:
14
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
STATEMENTS OF OPERATIONS
------------------------
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Product Sales $ 367,190 $ 150,903 $ 554,164 $ 173,495
Other Revenues 1,682,927 736,310 2,009,989 736,310
------------ ------------ ------------ ------------
Total Revenues 2,050,117 887,213 2,564,153 909,805
Expenses
Research and Development costs 5,397,557 5,115,719 8,685,404 9,065,636
Other Expenses 3,669,179 4,172,749 7,666,240 7,704,252
------------ ------------ ------------ ------------
Total Expenses 9,066,736 9,288,468 16,351,644 16,769,888
------------ ------------ ------------ ------------
Net Loss $ (7,016,619) $ (8,401,255) $(13,787,491) $(15,860,083)
============ ============ ============ ============
TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY
BALANCE SHEETS
--------------
December 31, June 30,
2003 2003
------------- ------------
Current Assets:
Cash and Equivalents $ 3,832,801 $ 6,849,235
Accounts Receivable 821,626 145,972
Inventory 2,682,200 2,503,650
------------ ------------
Total Current Assets 7,336,627 9,498,857
Property, Plant and Equipment 32,088,845 30,496,884
Less Accumulated Depreciation (4,611,693) (3,311,109)
------------ ------------
Net Property, Plant and Equipment 27,477,152 27,185,775
Other Assets 134,914 85,180
------------ ------------
Total Assets $ 34,948,693 $ 36,769,812
============ ============
Liabilities and Members' Equity
Current Liabilities:
Amounts Due to Related Parties, Net $ 2,740,773 $ 4,639,003
Accounts Payable 2,772,020 4,910,191
Short-term Deferred Revenues 583,773 -
------------ ------------
Total Current Liabilities 6,096,566 9,549,194
Members' Equity 28,852,127 27,220,618
------------ ------------
Total Liabilities and Members' Equity $ 34,948,693 $ 36,769,812
============ ============
15
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 $104,000,000 ($54,298,000 of which was
received as of December 31, 2003) for 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
------------------------
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Other Income $ 2,668 $ 1,944 $ 5,123 $ 2,075
Expenses
Product Development - Paid or
Payable to ECD 1,476,574 3,148,048 3,993,551 6,238,408
Product Development - Paid or
Payable to ChevronTexaco _ 448,518 275,974 774,876
Depreciation Expense 625,361 355,040 1,236,495 684,610
Loss on Disposal of Assets 44,000 _ 44,000 _
----------- ----------- ----------- -----------
Total Expenses 2,145,935 3,951,606 5,550,020 7,697,894
----------- ----------- ----------- -----------
Net Loss $(2,143,267) $(3,949,662) $(5,544,897) $(7,695,819)
=========== =========== =========== ===========
16
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
--------------
December 31, June 30,
2003 2003
------------- -------------
Current Assets:
Cash and Equivalents $ 1,277,854 $ 1,742,437
Accounts Receivable 10,746 10,746
----------- -----------
Total Current Assets 1,288,600 1,753,183
Property, Plant and Equipment 9,683,672 9,501,712
Less Accumulated Depreciation and Amortization (3,792,923) (2,556,428)
----------- -----------
Net Property, Plant and Equipment 5,890,749 6,945,284
----------- -----------
Total Assets $ 7,179,349 $ 8,698,467
=========== ===========
Current Liabilities:
Amount Due to Related Parties, Net $ 186,225 $ 2,130,446
Deferred Revenue 85,257 15,257
----------- -----------
Total Current Liabilities 271,482 2,145,703
Noncurrent Liabilities
Deferred Revenue 112,000 112,000
Members' Equity 6,795,867 6,440,764
----------- -----------
Total Liabilities and Members' Equity $ 7,179,349 $ 8,698,467
=========== ===========
During the three months and six months ended December 31, 2003, the
Company recorded revenues of $2,313,000 and $4,764,000, respectively, for
services provided to this joint venture, primarily for market development and
advanced product development work. During the three months and six months ended
December 31, 2002, the Company recorded revenues of $3,270,000 and $6,744,000,
respectively.
Ovonic Media
For the three months and six months ended December 31, 2002, the Company
recorded revenues of $272,000 and $605,000, respectively, for services provided
to this joint venture for advanced product development work. GE informed the
Company that additional funding after January 3, 2003 was suspended. GE and ECD
have been discussing as how to best position the joint venture in order to meet
the needs of the marketplace, and secure new equity investors and strategic
partners to fund the joint venture's operations. As the next business step, we
are trying to secure a partner that is a leader in this industry to facilitate
the commercialization of our technology. In the interim, ECD is directly funding
continued product development activities for this technology at a reduced level.
17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
Investments in Rare Earth Ovonic
During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech. 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 December 31, 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.
In the first phase of the project, Ovonic Battery has three contracts
totaling $63,600,000 for supplying equipment and technology to its Rare Earth
Ovonic joint ventures in China. As of December 31, 2003, Ovonic Battery has
received payments totaling $59,484,000 under the three contracts.
The Company recorded revenues from Rare Earth Ovonic of $159,000 and
$1,889,000 for the three months and six months ended December 31, 2003,
respectively, and $2,922,000 and $6,505,000 for the three months and six months
ended December 31, 2002, respectively.
Ovonic Fuel Cell
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% 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 at a reduced level and is currently funding all development
costs.
During the three months and six months ended December 31, 2003, the
Company did not record any revenue for services provided to this joint venture.
For the three months and six months ended December 31, 2002, the Company
recorded revenues of $1,922,000 and $3,942,000, respectively.
18
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Liabilities
- --------------------
The Company estimates the liability for product warranty costs based upon
its past experience and best estimate of future warranty claims. The following
is a summary of the changes in the product warranty liability during the six
months ended December 31, 2003 and 2002:
December 31,
2003 2002
------------ ------------
Liability beginning of the period $ 2,990,661 $ 2,489,024
Amounts accrued for as warranty costs
for the six-month period (net) (1,234,927)* 7,981
Warranty claims (130,000) -
----------- -----------
Liability at December 31 $ 1,625,734 $ 2,497,005
=========== ===========
* During the six months ended December 31, 2003, the Company revised its
estimated warranty liability (primarily on its Rare Earth Ovonic
contract), based upon its recent experience, and recorded a reduction in
this liability.
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 and equipment sales).
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 to its indirect cost pools. In addition, DCAA has stated that
there could be penalties imposed. The Company, together with its government
consultants, is 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 $1,757,000 at December 31, 2003 related to
these issues.
19
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Nonrefundable Advance Royalties
- ----------------------------------------
At December 31, 2003 and June 30, 2003, the Company deferred recognition
of revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
December 31, June 30,
2003 2003
----------- -----------
Battery $ 1,560,902 $ 1,560,902
Optical memory 1,926,366 1,947,093
----------- -----------
$ 3,487,268 $ 3,507,995
=========== ===========
Creditable royalties earned and recognized as revenue were:
Period Ended
December 31,
2003 2002
------------ ------------
Three months ended $ 12,202 $ 45,038
Six months ended $ 20,727 $ 100,093
There are no obligations in connection with any of the advance royalty
agreements which require the Company to incur any additional costs.
NOTE H - 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. Product sales include photovoltaic
products, revenues related to machine-building and equipment sales contracts,
nickel hydroxide and metal hydride materials. Revenues related to
machine-building and equipment sales 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.
20
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Product Sales, Royalties, Revenues from Product Development
- --------------------------------------------------------------------
Agreements, and License and Other Agreements (Continued)
- --------------------------------------------------------
A summary of all of the Company's revenues follows:
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Product sales
Photovoltaics $ 6,633,927 $ - $11,355,254 $ -
Machine building, machine
division and equipment sales 238,916 3,128,091 1,968,796 6,711,037
Battery packs - - 8,000 578
Nickel hydroxide and metal
hydride materials 491,556 115,455 731,045 343,789
----------- ----------- ----------- -----------
7,364,399 3,243,546 14,063,095 7,055,404
----------- ----------- ----------- -----------
Product sales-related parties
Photovoltaics - 1,087,657 - 2,361,362
Machine building - 165,202 - 304,684
Battery packs - - - 86,363
Nickel hydroxide and metal
hydride materials - 15,984 2,422 38,765
----------- ----------- ----------- -----------
- 1,268,843 2,422 2,791,174
----------- ----------- ----------- -----------
Total product sales $ 7,364,399 $ 4,512,389 $14,065,517 $ 9,846,578
=========== =========== =========== ===========
Royalties
Battery technology $ 595,887 $ 359,553 $ 1,046,315 $ 879,380
Optical memory 13,373 10,104 22,444 19,954
----------- ----------- ----------- -----------
Total royalties $ 609,260 $ 369,657 $ 1,068,759 $ 899,334
=========== =========== =========== ===========
Revenues from product
development agreements
Photovoltaics $ 2,560,225 $ 654,637 $ 5,092,349 $ 1,263,353
Battery technology 473,564 1,167,763 894,558 1,662,604
Optical memory 121,076 36,411 121,076 36,411
Hydrogen 133,049 - 133,049 -
Other - 36,657 18,677 71,388
----------- ----------- ----------- -----------
3,287,914 1,895,468 6,259,709 3,033,756
----------- ----------- ----------- -----------
Revenues from product development
agreements - related parties
Battery technology 1,934,552 2,754,404 3,351,086 5,465,249
Optical memory - 272,491 - 604,670
Hydrogen 2,313,366 3,381,309 4,763,701 6,932,973
Fuel cells - 1,922,466 - 3,942,157
----------- ----------- ----------- -----------
4,247,918 8,330,670 8,114,787 16,945,049
----------- ----------- ----------- -----------
Total revenues from product
development agreements $ 7,535,832 $10,226,138 $14,374,496 $19,978,805
=========== =========== =========== ===========
License and other agreements
Battery technology $ 25,000 $ - $ 75,000 $ 150,000
Photovoltaics - 3,269,114 - 3,269,114
----------- ----------- ----------- -----------
Total license and other agreements $ 25,000 $ 3,269,114 $ 75,000 $ 3,419,114
=========== =========== =========== ===========
21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Product Sales, Royalties, Revenues from Product Development
- --------------------------------------------------------------------
Agreements, and License and Other Agreements (Continued)
- --------------------------------------------------------
The following table presents revenues by country based on the location of
the customer:
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
United States $10,954,112 $10,734,316 $21,781,682 $20,857,648
China 125,460 2,931,650 1,914,046 6,574,547
Germany 1,618,282 - 1,723,996 -
Luxembourg 953,954 - 1,096,727 -
Japan 523,203 3,632,776 891,054 4,065,593
Hong Kong 538,538 - 808,150 -
Australia 196,530 - 419,148 -
United Kingdom 310,890 - 380,313 -
Canada 60,245 - 188,645 -
Taiwan 122,184 - 122,184 -
Kenya 74,215 - 110,903 -
Mexico - 1,087,657 - 2,361,362
Other 196,229 91,377 442,129 473,286
----------- ----------- ----------- -----------
$15,673,842 $18,477,776 $29,878,977 $34,332,436
=========== =========== =========== ===========
22
NOTE I - Other Comprehensive Income (Loss)
- ------------------------------------------
The Company's total comprehensive loss was as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Loss $(13,416,425) $ (5,779,397) $(27,698,008) $ (9,215,856)
OTHER COMPREHENSIVE INCOME
(LOSS) (net of taxes):
Unrealized holding gains
arising during period - 183,608 - 774,252
Less: reclassification adjustments
for gains realized in net income 68,053 (27,851) 431,153 (4,751)
------------ ------------ ------------ ------------
Net unrealized gains (losses) (68,053) 211,459 (431,153) 779,003
Foreign currency translation adjustments 126,591 - 74,005 -
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $(13,357,887) $ (5,567,938) $(28,055,156) $ (8,436,853)
============ ============ ============ ============
NOTE J - Stock Options
- ----------------------
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 the three and six months ended December 31,
2003 and 2002 would have increased as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Loss, as reported $(13,416,425) $ (5,779,397) $(27,698,008) $ (9,215,856)
Add:
Total stock-based compensation
expense determined under fair
value based method, net of tax 899,837 1,392,401 2,008,667 2,489,862
------------ ------------ ------------ ------------
Pro-forma net loss $(14,316,262) $ (7,171,798) $(29,706,675) $(11,705,718)
============ ============ ============ ============
Loss per share:
Basic - as reported $ (.57) $ (.26) $ (1.22) $ (.42)
Basic - pro forma $ (.61) $ (.33) $ (1.31) $ (.53)
Diluted - as reported $ (.57) $ (.26) $ (1.22) $ (.42)
Diluted - pro forma $ (.61) $ (.33) $ (1.31) $ (.53)
23
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K - Basic and Diluted Net Loss Per Share
- ---------------------------------------------
Basic net loss per common share is computed by dividing the net loss by
the weighted average number of common shares outstanding. ECD uses the treasury
stock method to calculate diluted earnings per share. Potential dilution exists
from stock options and warrants. Weighted average number of shares outstanding
and basic and diluted earnings per share for the three months and six months
ended December 31 are computed as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Weighted average number of shares
outstanding 23,480,898 21,898,995 22,691,678 21,898,945
Net loss before cumulative effect of
change in accounting principle $(13,416,425) $ (5,779,397) $(27,698,008) $(11,431,416)
Cumulative effect of change in
accounting principle - - - 2,215,560
------------ ------------ ------------ ------------
Net loss $(13,416,425) $ (5,779,397) $(27,698,008) $ (9,215,856)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER
SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE $ (.57) $ (.26) $ (1.22) $ (.52)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (.57) $ (.26) $ (1.22) $ (.42)
============ ============ ============ ============
The per-share amount related to the cumulative effect of change in
accounting principle was $.10 (benefit) for both the basic net loss per share
and the diluted net loss per share for the six months ended December 31, 2002.
Due to the Company's net losses, 2003 and 2002 total weighted average
shares of potential dilutive securities of 2,512,393 and 2,878,802,
respectively, were excluded from the calculations of diluted net loss per share
as inclusion of these securities would have been antidilutive to the net loss
per share.
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.
24
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Business Segments (Continued)
- --------------------------------------
The Company's operations by business segment were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
United Solar Consolidating
ECD Ovonic Battery Ovonic Entries Consolidated
----------- -------------- ------------ ------------- -------------
Revenues
Three months ended
December 31, 2003 $ 3,806 $ 3,688 $ 8,918 $ (738) $ 15,674
December 31, 2002 7,236 7,337 4,886 (981) 18,478
Six months ended
December 31, 2003 $ 7,553 $ 8,006 $ 15,858 $ (1,538) $ 29,879
December 31, 2002 13,816 15,135 6,688 (1,307) 34,332
Interest Income
Three months ended
December 31, 2003 $ 972 $ - $ (7) $ (708) $ 257
December 31, 2002 1,028 - 22 - 1,050
Six months ended
December 31, 2003 $ 1,509 $ - $ 7 $ (943) $ 573
December 31, 2002 2,045 - 45 - 2,090
Interest Expense*
Three months ended
December 31, 2003 $ 189 $ - $ 1,053 $ (649) $ 593
December 31, 2002 - 24 99 - 123
Six months ended
December 31, 2003 $ 373 $ - $ 2,081 $ (1,618) $ 836
December 31, 2002 - 53 197 - 250
Operating Income (Loss)
Three months ended
December 31, 2003 $ (3,842) $ (7,004) $ (2,240) $ (1) $(13,087)
December 31, 2002 (5,217) (1,498) 1,832 847 (4,036)
Six months ended
December 31, 2003 $ (9,023) $(13,115) $ (5,525) $ 163 $(27,500)
December 31, 2002 (11,065) (2,990) 559 3,072 (10,424)
- --------------
* Excludes intercompany interest between ECD and Ovonic Battery.
25
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Business Segments (Continued)
- --------------------------------------
United Solar Consolidating
ECD Ovonic Battery Ovonic Entries Consolidated
----------- -------------- ------------ ------------- -------------
Equity in Net Loss of Investees
Under Equity Method
Three months ended
December 31, 2003 $ (304) $ - $ (37) $ 37 $ (304)
December 31, 2002 (480) - (2,547) 157 (2,870)
Six months ended
December 31, 2003 $ (548) $ - $ (37) $ 37 $ (548)
December 31, 2002 (642) - (3,404) 312 (3,734)
Depreciation Expense
Six months ended
December 31, 2003 $ 1,120 $ 355 $ 2,619 $ - $ 4,094
December 31, 2002 800 570 849 (796) 1,423
Capital Expenditures
Six months ended
December 31, 2003 $ 149 $ 89 $ 571 $ - $ 809
December 31, 2002 4,955 316 33 - 5,304
Investments and Advances to
Equity Method Investees
December 31, 2003 $ 96 $ - $ - $ - $ 96
December 31, 2002 5,643 - 26,036 - 31,679
Identifiable Assets
December 31, 2003 $140,970 $ 9,206 $115,613 $(122,555) $143,234
December 31, 2002 166,071 9,632 20,891 (12,566) 184,028
NOTE M - Subsequent Event
- -------------------------
On January 12, 2004, the Company received $5,593,000 in connection with
stock purchase agreements with respect to an offering of 573,339 units of its
securities to two institutional investors at a price per unit of $9.755. Each
unit consists of one share of ECD Common Stock and one warrant to purchase one
share of ECD Common Stock for $13.96, if exercised, on or prior to May 2, 2005
and for $16.03, if exercised, at any time thereafter but prior to October 31,
2006.
26
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ----------------------------------------------------------------
Results of Operations
---------------------
The following discussion should be read in conjunction with the
accompanying Quarterly Financial Information and Notes thereto and the Company's
Annual Report on Form 10-K for the year ended June 30, 2003 and is qualified in
its entirety by the foregoing. The results of operations for the three months
and six months ended December 31, 2003 are not necessarily indicative of results
to be expected in future periods.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements
about our financial condition, results of operations, plans, objectives, future
performance and business. In addition, from time to time we and our
representatives have made or may make forward-looking statements orally or in
writing. The words "may," "will," "believes," "expects," "intends,"
"anticipates," "estimates," and similar expressions have been used in this
Quarterly Report to identify forward-looking statements.
We have based these forward-looking statements on our current expectations
with respect to future events and occurrences. Investors are cautioned that our
actual results in the future may differ materially from the expected results
reflected in our forward-looking statements. The expected results reflected in
our forward-looking statements are subject to various significant risks and
uncertainties, including the following:
o 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 be 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;
27
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;
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
Quarterly Report. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified in their
entirety by the cautionary statements in this section. Because of these risks,
uncertainties and assumptions, you should not place undue reliance on these
forward-looking statements. We are not obligated to update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
28
Results of Operations
Overview
- --------
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 accounting principles generally accepted in
the United States of America (U.S. 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.
The Company had a net loss of $13,416,000 on revenues of $15,674,000 in
the three months ended December 31, 2003 compared to a net loss of $5,779,000 on
revenues of $18,478,000 in the three months ended December 31, 2002. The Company
had a net loss of $27,698,000 on revenues of $29,879,000 in the six months ended
December 31, 2003 compared to a net loss of $9,216,000 on revenues of
$34,332,000 in the six months ended December 31, 2002.
The $7,637,000 and $18,482,000 increase in net loss for the three months
and six months ended December 31, 2003, respectively, resulted primarily from
the following:
o Increased loss, including intercompany interest, for the three months
and six months ended December 31, 2003, of $2,295,000 and $4,434,000,
respectively, from United Solar Ovonic is due to the fact that United
Solar Ovonic is consolidated 100% in 2003 compared to approximately 50%
of United Solar Ovonic losses recorded in 2002.
o Included in the consolidation of United Solar Ovonic LLC are
increased selling, general and administrative expenses of $1,906,000
and $4,138,000.
o Partially offsetting the above is a reduction in United Solar
Ovonic's loss from operations for the three months and six months ended
December 31, 2003 of approximately $2,067,000 and $1,910,000,
respectively, compared to 2002 due to higher revenues in 2003.
o A decrease for the three months and six months ended December 31, 2003,
to $25,000 and $75,000, respectively, for revenues from license and
other agreements compared to $3,269,000 and $3,419,000, respectively,
in 2002.
o Increased patent defense costs for the three months and six months
ended December 31, 2003, of $2,691,000 and $4,563,000, respectively,
primarily due to the arbitration with Matsushita Battery Industrial
Co., Ltd. (MBI) and its related parties. The Company expects patent
defense costs related to the arbitration proceedings to be
significantly lower in the future.
29
o Increased net product and development expenses for the three months
and six months ended December 31, 2003 of $464,000 and $3,938,000,
respectively.
o Reduced interest income for the three months and six months ended
December 31, 2003, of $793,000 and $1,518,000, respectively, due to
lower level of investments and lower interest rates in 2003.
o Income of $2,216,000 in 2002 attributable to the cumulative effect of
a change in accounting principle.
Three Months Ended December 31, 2003 Compared to Three Months Ended
- -------------------------------------------------------------------
December 31, 2002
- -----------------
The loss from operations increased to $13,087,000 in 2003 from $4,036,000
in 2002 because of:
o an increased operating loss of $4,072,000 for United Solar Ovonic
(operating loss of $2,240,000 in 2003 versus operating income of
$1,832,000 in 2002) primarily due to the impact of 100% ownership of
United Solar Ovonic in 2003, a license fee of $3,269,000 in 2002,
start-up and other costs, including depreciation expense associated
with increasing production capacity, partially offset by $2,067,000
reduction in its loss from operations due to higher revenues in 2003;
o an increased operating loss, excluding litigation, of $2,815,000 for
Ovonic Battery (operating loss of $3,644,000 in 2003 versus operating
loss of $829,000 in 2002) primarily resulting from lower revenues from
the profitable equipment contract with Rare Earth Ovonic in 2003
compared to 2002, partially offset by higher royalties in 2003.
Additionally, Ovonic Battery incurred $2,691,000 in higher costs for
patent defense.
o an operating loss of $3,843,000 in 2003 for the ECD segment versus
operating loss of $4,370,000 in 2002, primarily due to higher revenues
in 2003, partially offset by higher investment in product development
as the Company increased spending on its core technologies.
The decrease in consolidated revenues primarily resulted from a reduction
in revenues from product development agreements of $2,690,000 and decreased
license and other agreements ($25,000 in 2003 versus $3,269,000 in 2002),
partially offset by an increase in product sales of $2,852,000 and royalties of
$240,000. (See Note H of Notes to Consolidated Financial Statements - Product
Sales, Royalties, Revenues from Product Development Agreements, and License and
Other Agreements and Note L - Business Segments.)
o United Solar Ovonic's 2003 revenues increased substantially, as a
result of the consolidation of United Solar Ovonic LLC's operating
results into the Company's operating results following the May 14, 2003
acquisition, to $8,918,000 in 2003 versus $4,886,000 in 2002. Product
sales increased to $6,634,000 in 2003 from $1,088,000 in 2002,
$3,569,000 of the increase resulted from consolidating third-
30
party sales in 2003 and $1,975,000 due to higher third-party sales.
Third-party product sales are included in revenues in 2003 while they
were not in 2002. Also contributing to higher revenues in 2003 were
revenues from product development agreements, principally from the
recently signed Air Force contract. The 2002 revenues included a
license fee of $3,269,000.
o The $3,649,000 decrease in Ovonic Battery's revenues was primarily due
to lower equipment sales to Rare Earth Ovonic ($159,000 in 2003 versus
$2,922,000 in 2002) due to the near completion of phase one of this
program and reduced revenues from product development agreements
($2,408,000 in 2003 versus $3,922,000 in 2002) principally related to
decreased activities under the advanced product development agreement
from Texaco Ovonic Battery Systems, partially offset by a $236,000
increase in royalty revenues.
o The ECD segment's revenues decreased to $3,068,000 in 2003 from
$6,255,000 in 2002, primarily due to a decrease of $2,745,000 from
product development agreements, the most significant of which were
reduced revenues for Ovonic Fuel Cell Company (zero in 2003 compared
to $1,922,000 in 2002), Texaco Ovonic Hydrogen Systems ($2,313,000 in
2003 compared to $3,270,000 in 2002) and Ovonic Media (zero in 2003
compared to $272,000 in 2002), partially offset by new contracts with
the National Institute of Standards and Technology (NIST) and the
Department of Defense (DOD) (totaling $300,000).
Product sales, consisting of photovoltaic products, machine building and
equipment sales, and nickel hydroxide and metal hydride materials, increased 63%
to $7,364,000 in the three months ended December 31, 2003 from $4,512,000 in the
three months ended December 31, 2002. Photovoltaic sales were $6,634,000 for
2003, which were sales to third parties, and $1,088,000 for 2002, which were
sales to an affiliate. Machine-building and equipment sales revenues decreased
99% to $239,000 in 2003 from $3,293,000 in 2002, primarily due to Ovonic Battery
contracts with Rare Earth Ovonic to provide battery-manufacturing equipment, the
first phase of which is nearing completion, ($159,000 in 2003 compared to
$2,922,000 in 2002). All machine-building and equipment sales contracts are
accounted for using percentage-of-completion accounting. Sales of nickel
hydroxide and metal hydride materials increased to $492,000 in 2003 compared to
$131,000 in 2002. (See Note H of Notes to Consolidated Financial Statements.)
The Company currently has a product sales backlog of $9,166,000, all of which is
expected to be recognized as revenues in Fiscal 2004.
Royalties increased 65% to $609,000 in the three months ended December 31,
2003 from $370,000 in the three months ended December 31, 2002. Higher royalties
reflect higher sales of large propulsion batteries by one of our licensees.
Revenues from product development agreements decreased 26% to $7,536,000
in the three months ended December 31, 2003 from $10,226,000 in the three months
ended December 31, 2002, primarily due to reduced battery activities under
advanced product development agreements with Texaco Ovonic Battery Systems
($1,935,000 for 2003 compared to $2,754,000 in 2002), the suspension of funding
to Ovonic Media (zero in 2003 versus $272,000 in 2002), a decrease in revenues
from Texaco Ovonic Hydrogen Systems ($2,313,000 for 2003 compared to $3,270,000
for 2002) and Ovonic Fuel Cell (zero for
31
2003 - Ovonic Fuel Cell is now 100% owned and included in our consolidated
financial results - compared to $1,922,000 for 2002), partially offset by
increased photovoltaic product development revenues in 2003 ($2,560,000
compared to $655,000 in 2002), primarily due to the new Air Force contract and
new contracts with National Institute of Standards and Technology (NIST) and
DOD totaling $300,000.
Revenues from license and other agreements decreased to $25,000 in the
three months ended December 31, 2003, from $3,269,000 in the three months ended
December 31, 2002. The 2003 license fee resulted from a license to Linghao
Battery in 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. The license revenue in 2002 resulted from United Solar Ovonic
issuing to Canon a notice whereby United Solar Ovonic granted Canon rights to
manufacture in two countries of its choice in Southeast Asia, excluding India
and the People's Republic of China. This notice was issued in satisfaction of
the outstanding obligation ($2,500,000 plus accrued interest of $769,000) due
Canon in connection with a previous loan made to United Solar Ovonic by Canon.
United Solar Ovonic recorded the satisfaction of the loan from Canon
($3,269,000) as revenue from license agreements in its statement of operations
for the three months ended December 31, 2002.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues increased to $139,000 in the three
months ended December 31, 2003 from $101,000 in the three months ended December
31, 2002, primarily due to increased laboratory billings to third parties.
Cost of product sales increased by $3,531,000 in the three months ended
December 31, 2003 ($9,006,000 in 2003 compared to $5,475,000 in 2002). This
resulted in a loss of $1,642,000 on product sales in 2003 compared to a loss of
$963,000 in 2002. There were negative margins on photovoltaic sales of
$1,314,000 on sales of finished products in 2003 compared to negative margins of
$763,000 on sales of semi-finished products to an affiliate in 2002, as well as
planned optimization costs for the photovoltaic production machine. In addition,
the negative margin on sales at Ovonic Battery increased to $446,000 in 2003
from $98,000 in 2002 due to negative margins on sales of metal hydride materials
and lower margins on equipment sales because of the near completion of the first
phase of the Rare Earth Ovonic contract.
Revenues from product development agreements currently fund 63% of the
Company's cost of product development as the Company continues to develop its
core technologies. Revenues from product development agreements decreased by
$2,690,000, and spending decreased by $2,226,000, resulting in an increase of
$464,000 in net cost of product development.
32
Three Months Ended
December 31,
2003 2002
----------- -----------
Cost of revenues from product
development agreements $ 7,007,000 $ 9,381,000
Product development and research 4,866,000 4,718,000
----------- -----------
Total cost of product development 11,873,000 14,099,000
Revenues from product development
agreements 7,536,000 10,226,000
----------- -----------
Net cost of product development $ 4,337,000 $ 3,873,000
=========== ===========
The expenditures continued the development of the Company's core
technologies in energy storage, energy generation and information technology.
Also, product development programs include work on the Ovonic(TM) Cognitive
Computer technology - a unique approach to develop computing based on the
learning capability that mimics the functionality of the human brain to combine
memory and processing in a single sub-micron device. The Company is also
developing a unique 3-terminal Ovonic(TM) threshold/memory device which we
expect to have high speed, high current capabilities. Included in the
development costs for the Ovonic(TM) Cognitive Computer technology is
depreciation related to the new state-of-the-art clean room and the related
equipment. The Company, together with ChevronTexaco, has modified and
demonstrated a hybrid electric vehicle (a 2002 Toyota Prius) to operate on clean
hydrogen fuel stored in an Ovonic(TM) solid hydrogen system. This solid on-board
storage system can potentially be applied to hydrogen-powered fuel cell vehicles
and demonstrates the principles of utilizing metal hydrides to address hydrogen
infrastructure.
Expenses were incurred in 2003 and 2002 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. Total patent expenses (net) increased to $3,795,000 in the three
months ended December 31, 2003 from $1,173,000 in the three months ended
December 31, 2002, principally due to higher patent defense costs ($3,360,000 in
2003 versus $669,000 in 2002) for the protection of the Company's NiMH battery
patents and technology. ChevronTexaco has agreed to share 50% of the patent
defense costs relating to batteries for non-consumer applications beginning in
Fiscal 2002. ChevronTexaco's share of the patent defense costs were $3,780,000
and $642,000 for the three months ended December 31, 2003 and 2002,
respectively. 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 October 2001, Texaco Ovonic Battery Systems LLC joined the
litigation as a co-plaintiff. 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 arbitration proceeding was held in New York City, with a hearing
before the Arbitral Tribunal in November 2003. Post trial briefs were filed in
December and closing oral arguments were delivered on January 21, 2004. A
decision is expected around the beginning of May 2004. The Company expects
patent defense costs related to its arbitration proceedings to be significantly
lower in the future.
33
Selling, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
The increase in selling, general and administrative expenses (net) to
$4,087,000 in the three months ended December 31, 2003 from $1,766,000 in the
three months ended December 31, 2003 was due primarily to $1,906,000 increased
expenses associated with United Solar Ovonic, primarily as a result of
consolidation of United Solar Ovonic LLC following the May 14, 2003 acquisition
and decreased allocations ($300,000) to product development research and cost of
revenue from product development agreements.
The following is a summary of the gross selling, general and
administrative expenses and the aforementioned allocations:
Three Months Ended
December 31,
2003 2002
----------- -----------
Gross Expenses $ 7,689,000 $ 5,667,000
Less - allocations to product development
and research (1,886,000) (2,615,000)
- allocations to cost of revenues
from product development agreements (1,716,000) (1,286,000)
----------- -----------
Net Expenses $ 4,087,000 $ 1,766,000
=========== ===========
The $1,415,000 decrease in other income (net) ($329,000 expense in 2003
compared to $1,744,000 expense in 2002) resulted primarily from lower equity
losses attributed to losses at ITS (zero in 2003 compared to $200,000 in 2002),
at United Solar Ovonic LLC (zero in 2003 - fully consolidated in 2003 and no
longer on the equity basis - compared to $2,390,000 in 2002) and higher equity
losses at Ovonyx ($304,000 in 2003 versus $280,000 in 2002), partially offset by
lower short-term investments causing lower interest income ($257,000 in 2003
compared to $1,050,000 in 2002) on the Company's investments.
Six Months Ended December 31, 2003 Compared to Six Months Ended
- ---------------------------------------------------------------
December 31, 2002
- -----------------
The loss from operations increased to $27,500,000 in 2003 from $10,424,000
in 2002 because of:
o An increased operating loss of $6,084,000 for United Solar Ovonic
(operating loss of $5,525,000 in 2003 versus operating income of
$559,000 in 2002) primarily due to the impact of 100% ownership of
United Solar Ovonic in 2003, a license fee of $3,269,000 in 2002,
start-up and other costs, including depreciation expense associated
with increasing production capacity, partially offset by $1,910,000
improvement in its loss from operations due to higher revenues in
2003.
o An increased operating loss, excluding litigation, of $5,562,000 for
Ovonic Battery (operating loss of $7,644,000 in 2003 versus operating
loss of $2,082,000 in 2002) primarily from lower revenues for the
profitable equipment contract with Rare
34
Earth Ovonic in 2003 compared to 2002, partially offset by higher
royalties in 2003. Additionally, Ovonic Battery incurred $4,563,000 in
higher costs for patent defense.
o An operating loss of $8,860,000 in 2003 for the ECD segment versus
operating loss of $7,993,000 in 2002, primarily due to higher
investment in product development as the Company increased spending on
its core technologies.
The decrease in consolidated revenues primarily resulted from a reduction
in revenues from product development agreements of $5,604,000, decreased license
and other agreements ($75,000 in 2003 versus $3,419,000 in 2002), partially
offset by an increase in product sales of $4,219,000 and a $169,000 increase in
royalty revenues. (See Note H - Product Sales, Royalties, Revenues from Product
Development Agreements, and License and Other Agreements and Note L - Business
Segments.)
o United Solar Ovonic's 2003 revenues increased substantially, as a
result of the consolidation of United Solar Ovonic LLC's operating
results into the Company's operating results following the May 14, 2003
acquisition, to $15,858,000 in 2003 versus $6,688,000 in 2002. Product
sales increased to $11,355,000 in 2003 from $2,361,000 in 2002;
$5,930,000 of the increase resulted from consolidating third-party
sales in 2003 and $3,064,000 due to higher third-party sales.
Third-party product sales are included in revenues in 2003 while they
were not in 2002, partially offset by higher royalties in 2003. Also
contributing to higher revenues in 2003 were revenues from product
development agreements, principally from the recently signed Air Force
contract. The 2002 revenues included a license fee of $3,269,000.
o The $7,129,000 decrease in Ovonic Battery's revenues was primarily due
to lower equipment sales to Rare Earth Ovonic ($1,889,000 in 2003
versus $6,505,000 in 2002) due to the near completion of phase one of
this program, reduced revenues from product development agreements
($4,246,000 in 2003 versus $7,128,000 in 2002) principally related to
decreased activities under the advanced product development agreement
from Texaco Ovonic Battery Systems.
o The ECD segment's revenues decreased to $6,015,000 in 2003 from
$12,509,000 in 2002, primarily due to a decrease of $6,001,000 from
product development agreements, due to reduced revenues for Ovonic Fuel
Cell Company (zero in 2003 compared to $3,942,000 in 2002), Texaco
Ovonic Hydrogen Systems ($4,764,000 in 2003 compared to $6,744,000 in
2002) and Ovonic Media (zero in 2003 compared to $605,000 in 2002).
Product sales, consisting of photovoltaic products, machine building and
equipment sales, and nickel hydroxide and metal hydride materials, increased 43%
to $14,066,000 in the six months ended December 31, 2003 from $9,847,000 in the
six months ended December 31, 2002. Photovoltaic sales were $11,355,000 for
2003, which were sales to third parties, and $2,361,000 for 2002, which were
sales to an affiliate. Machine-building and equipment sales revenues decreased
72% to $1,969,000 in 2003 from $7,016,000 in 2002, primarily due to Ovonic
Battery contracts with Rare Earth Ovonic to provide battery-manufacturing
equipment, the first phase of which is nearing completion, ($1,889,000 in 2003
compared to $6,505,000 in 2002). All machine-building and equipment sales
contracts are accounted for using percentage-of-completion accounting. Sales of
nickel
35
hydroxide and metal hydride materials increased to $733,000 in 2003 compared to
$383,000 in 2002. (See Note H of Notes to Consolidated Financial Statements.)
The Company currently has a product sales backlog of $9,166,000, all of which is
expected to be recognized as revenues in Fiscal 2004.
Royalties increased 19% to $1,069,000 in the six months ended December 31,
2003 from $899,000 in the six months ended December 31, 2002. Higher royalties
reflect higher sales of large propulsion batteries by one of our licensees.
Revenues from product development agreements decreased 28% to $14,374,000
in the six months ended December 31, 2003 from $19,979,000 in the six months
ended December 31, 2002 primarily due to reduced battery activities under
advanced product development agreements with Texaco Ovonic Battery Systems
($3,351,000 for 2003 compared to $5,465,000 in 2002), the suspension of funding
to Ovonic Media (zero in 2003 versus $605,000 in 2002), a decrease in revenues
from Texaco Ovonic Hydrogen Systems ($4,764,000 for 2003 compared to $6,744,000
for 2002) and Ovonic Fuel Cell (zero for 2003 - Ovonic Fuel Cell is now 100%
owned and included in our consolidated financial results - compared to
$3,942,000 for 2002), partially offset by increased photovoltaic product
development revenues in 2003 ($5,092,000 compared to $1,263,000 in 2002),
primarily due to the new Air Force contract.
Revenues from license and other agreements decreased to $75,000 in the six
months ended December 31, 2003, from $3,419,000 in the six months ended December
31, 2002. The 2003 license fees resulted from licenses to Linghao Battery and
Mcnair-tech 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. The license revenue in 2002 resulted from
United Solar Ovonic issuing to Canon a notice whereby United Solar Ovonic
granted Canon rights to manufacture in two countries of its choice in Southeast
Asia, excluding India and the People's Republic of China. This notice was issued
in satisfaction of the outstanding obligation ($2,500,000 plus accrued interest
of $769,000) due Canon in connection with a previous loan made to United Solar
Ovonic by Canon. United Solar Ovonic recorded the satisfaction of the loan from
Canon ($3,269,000) as revenue from license agreements in its statement of
operations for the six months ended December 31, 2002.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues increased to $295,000 in the six months
ended December 31, 2003 from $188,000 in the six months ended December 31, 2002,
primarily due to increased laboratory billings to third parties.
Cost of product sales increased by $7,679,000 in the six months ended
December 31, 2003 ($17,975,000 in 2003 compared to $10,296,000 in 2002). This
resulted in a loss of $3,910,000 on product sales in 2003 compared to a loss of
$449,000 in 2002. There were negative margins on photovoltaic sales of
$1,700,000 on sales of finished products in 2003 compared to negative margins of
$1,487,000 on sales of semi-finished products to an affiliate in 2002, as well
as planned optimization costs of $937,000 for the photovoltaic production
machine. In addition, the margin on sales at Ovonic Battery decreased to
negative $904,000 in 2003 from positive $733,000 in 2002 due to negative margins
on sales
36
of metal hydride materials and lower margins on equipment sales because of the
near completion of the first phase of the Rare Earth Ovonic contract.
Revenues from product development agreements currently fund 56% of the
Company's cost of product development as the Company continues to develop its
core technologies. Revenues from product development agreements decreased by
$5,605,000, and spending decreased by $1,667,000, resulting in an increase of
$3,938,000 in net cost of product development.
Six Months Ended
December 31,
2003 2002
----------- -----------
Cost of revenues from product
development agreements $13,130,000 $18,883,000
Product development and research 12,666,000 8,580,000
----------- -----------
Total cost of product development 25,796,000 27,463,000
Revenues from product development
agreements 14,374,000 19,979,000
----------- -----------
Net cost of product development $11,422,000 $ 7,484,000
=========== ===========
The expenditures continued the development of the Company's core
technologies in energy storage, energy generation and information technology.
Also, product development programs include work on the Ovonic(TM) Cognitive
Computer technology - a unique approach to develop computing based on the
learning capability that mimics the functionality of the human brain to combine
memory and processing in a single sub-micron device. The Company is also
developing a unique 3-terminal Ovonic(TM) threshold/memory device which we
expect to have high speed, high current capabilities. Included in the
development costs for the Ovonic(TM) Cognitive Computer technology is
depreciation related to the new state-of-the-art clean room and the related
equipment. The Company, together with ChevronTexaco, has modified and
demonstrated a hybrid electric vehicle (a 2002 Toyota Prius) to operate on
clean hydrogen fuel stored in an Ovonic(TM) solid hydrogen system. This on-board
solid storage system can potentially be applied to hydrogen-powered fuel cell
vehicles and demonstrates the principles of utilizing metal hydrides to address
hydrogen infrastructure.
Expenses were incurred in 2003 and 2002 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. Total patent expenses increased to $6,427,000 in the six months
ended December 31, 2003 from $2,082,000 in the six months ended December 31,
2002, principally due to higher patent defense costs ($5,471,000 in 2003 versus
$908,000 in 2002) for the protection of the Company's NiMH battery patents and
technology. ChevronTexaco has agreed to share 50% of the patent defense costs
relating to batteries for non-consumer applications beginning in Fiscal 2002.
ChevronTexaco's share of the patent defense costs were $6,119,000 and $739,000
for the six months ended December 31, 2003 and 2002, respectively. In March
2001, Ovonic Battery filed suit against Matsushita Battery Industrial
37
Co., Ltd., Toyota Motor Corporation, Panasonic EV Energy Co., Ltd. and several
related entities for infringement of patents held by Ovonic Battery. In October
2001, Texaco Ovonic Battery Systems LLC joined the litigation as a co-plaintiff.
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 arbitration proceeding
was held in New York City, with a hearing before the Arbitral Tribunal in
November 2003. Post trial briefs were filed in December and closing oral
arguments were delivered on January 21, 2004. A decision is expected around
the beginning of May 2004. The Company expects patent defense costs related to
its arbitration proceedings to be significantly lower in the future.
Selling, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
The increase in selling, general and administrative expenses (net) from
$4,916,000 in the six months ended December 31, 2002 to $7,180,000 in the six
months ended December 31, 2003 was due primarily to increased expenses
associated with United Solar Ovonic ($4,138,000), primarily as a result of
consolidation of United Solar Ovonic LLC following the May 14, 2003 acquisition,
partially offset by increased allocations ($339,000) to product development
research and cost of revenue from product development agreements.
The following is a summary of the gross selling, general and
administrative expenses and the aforementioned allocations:
Six Months Ended
December 31,
2003 2002
----------- -----------
Gross Expenses $15,101,000 $12,497,000
Less - allocations to product development
and research (4,702,000) (4,039,000)
- allocations to cost of revenues
from product development agreements (3,219,000) (3,542,000)
----------- -----------
Net Expenses $ 7,180,000 $ 4,916,000
=========== ===========
The $810,000 decrease in other income (net) ($198,000 expense in 2003
compared to $1,008,000 expense in 2002) resulted primarily from lower equity
losses attributed to losses at ITS (zero in 2003 compared to $362,000 in 2002),
at United Solar Ovonic LLC (zero in 2003 - fully consolidated in 2003 and no
longer on the equity basis - compared to $3,092,000 in 2002) and higher equity
losses at Ovonyx ($548,000 in 2003 versus $280,000 in 2002), partially offset by
lower short-term investments causing lower interest income ($573,000 in 2003
compared to $2,090,000 in 2002) on the Company's investments.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 required the
Company to recognize, at the adoption of SFAS 142, the unamortized negative
goodwill of approximately $2,216,000 (a favorable benefit) as the cumulative
effect of a change in accounting principle in the Company's statements of
operations on July 1, 2002.
38
Liquidity and Capital Resources
As of December 31, 2003, the Company had consolidated cash, cash
equivalents, short-term investments and accounts and short-term note receivable
(including $4,167,000 of amounts due from related parties) of $53,845,000, a
decrease of $10,651,000 from June 30, 2003. As of December 31, 2003, the Company
had consolidated working capital of $39,828,000 compared with a consolidated
working capital of $37,795,000 as of June 30, 2003.
In November 2003, the Company raised a total of $27,940,000 in
connection with a sale of units to institutional investors. In January 2004, the
Company received $5,593,000 in connection with a sale of additional units of its
securities to two of the institutional investors (see Note B of Notes to
Consolidated Financial Statements).
The Company plans to use these proceeds for working capital and to support
its development and other operating activities.
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 $33,648,000, compared to $42,383,000 received in the year ended
June 30, 2003, substantially due to reduced funding to be received in the year
ending June 30, 2004 from ChevronTexaco. 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. 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.
In September 2003, ECD was awarded two new contracts by NIST. One contract
is a three-year, cost-sharing contract (ECD to receive $1,972,000) for the
development of new optical routing devices, based on ECD's phase-change
materials, for telecommunication and broadband information delivery. The second
contract is a four-year, cost-sharing contract (ECD to receive $2,645,000) with
GE as the team leader for further development of ECD's roll-to-roll processing
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.
In October 2003, ECD was awarded a contract for $500,000 by the U.S. Army
Tank-Automotive and Armaments Command for the development, on behalf of Texaco
Ovonic Hydrogen Systems, of a transportable, solid-hydrogen storage and
refueling system for hydrogen fuel-cell-powered, off-road military vehicles.
In January 2004, United Solar Ovonic was awarded a four-month, $465,000
contract for the development of solar cells for an airship.
39
In the first phase of an equipment supply agreement with Rare Earth
Ovonic, Ovonic Battery has three contracts to supply equipment and technology
totaling $63,600,000 to its Rare Earth Ovonic joint ventures in China. As of
December 31, 2003, Ovonic Battery has received payments totaling $59,484,000
under the three contracts. Ovonic Battery has recorded revenues of $55,982,000
for the contracts, $3,502,000 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 of December 31, 2003, the Company had $24,876,000 consolidated cash,
cash equivalents and short-term investments ($1,600,000 of which was restricted)
consisting of mortgage and asset-backed securities and corporate notes,
classified as available-for-sale, maturing from 42 days to three 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, two investments
represent more than 10% of the portfolio at December 31, 2003.
During the six months ended December 31, 2003, $36,461,000 of cash was
used in operations. The difference between the net loss of $27,698,000 and the
net cash used in operations was principally due to a $13,635,000 decrease in
working capital (other than cash). Also contributing were noncash costs,
principally depreciation ($4,094,000) and equity in losses of joint ventures
($548,000).
The Company spent $809,000 on property, plant and equipment that was
placed in service during the six months ended December 31, 2003 and a balance of
$1,844,000 was in other assets at December 31, 2003 that represents deposits and
progress payments for property, plant and equipment, all of which is expected to
be placed in service during Fiscal 2004. In total, the Company expects to spend
$3,500,000 for capital expenditures in Fiscal 2004, primarily for additions to
the Company's state-of-the-art clean room and leasehold improvements.
The Company had contractual obligations of $49,148,000 at June 30, 2003
and $50,118,000 at December 31, 2003. In the six months ending December 31,
2003, the Company incurred additional contractual obligations of $3,800,000 for
gases and stainless steel in its photovoltaic operations. On January 2, 2004,
Bekaert paid $12,000,000 to Canon in full satisfaction of ECD's $12,000,000
obligation to Canon (see Note C - Accounts Receivable).
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 third parties who can provide financial resources
and marketing expertise for the Company's technologies and products.
The resultant strategic alliances and joint ventures form the basis for
advancement of the commercialization of the Company's technologies and products:
40
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
($118,000,000 of which has been funded as of December 31, 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
$1,935,000 and $3,351,000 for work performed under the contract in the
three months and six months ended December 31, 2003, respectively,
and expects to record approximately $5 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 ($54,298,000 received through December 31, 2003),
including product and market development. A significant portion of the
funding is committed to a product development contract from Texaco
Ovonic Hydrogen Systems to ECD. The contract began July 1, 2000, and
may be cancelled if mutually agreed-upon milestones are not materially
satisfied. The Company has revenues for work performed under the
contract of $2,313,000 and $4,764,000 for the three months and six
months ended December 31, 2003, respectively, and is expected to
record approximately $12 million in Fiscal 2004.
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), (ii) Ovonic
Fuel Cell (after December 31, 2002) and (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.
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
41
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.
Since July 2003, the Company has implemented 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. The Company has met these initiatives
through the following actions taken:
o Reductions in staffing by 15% at ECD and Ovonic Battery through
reallocation and reductions ($4,500,000 in annual savings).
o Changes in the healthcare benefit program ($2,200,000 in annual
savings).
o A salary freeze for all ECD and Ovonic Battery employees and a 10%
salary reduction by the executive management team ($1,900,000 in annual
savings).
o Reduced purchased services and contract employees.
o Lower capital expenditures.
The Company is reviewing additional cost-containment initiatives. The
Company is engaged in a number of 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 development
activities. The Company is also in discussions with third parties to refinance
the 30MW production equipment. The Company obtained an independent appraisal
from a well-known third party that valued the 30MW equipment higher than the
$67 million equipment cost.
Management believes that funds generated from operations, new business
agreements, equity and debt financings, new government contracts and the
cost-containment initiatives described above, 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 Company has
recurring losses from operations and is actively engaged in discussions to
obtain the needed additional working capital.
42
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities
and time deposits. All such instruments are classified as securities
available-for-sale. We do not invest in portfolio equity securities, or
commodities, or use financial derivatives for trading purposes. Our debt
security portfolio represents funds held temporarily, pending use in our
business and operations. The Company had $22,759,000 and $32,995,000 of these
investments on December 31, 2003 and June 30, 2003, respectively, including
restricted amounts of $1,600,000 at December 31, 2003 and $7,000,000 at June 30,
2003. On December 31, 2003, the investments had an average maturity of 24 days,
$7,978,000 of which had maturities of 42 days to three months. On June 30, 2003,
the investments had an average maturity of 292 days, $26,802,000 of which had
maturities of 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, two investments represent more than 10% of
the portfolio at December 31, 2003. Our market risk primarily relates to the
risks of changes in the credit quality of issuers. As of December 31, 2003, the
risk associated with changes in interest rates is minimal due to the short
average maturity of the investments.
Item 4. Controls and Procedures
- ------- -----------------------
In Item 9A, Controls and Procedures of the Company's Form 10-K for the
year ended June 30, 2003 the following two matters were identified as reportable
conditions:
1. 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.
2. 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 has taken the following actions to address and correct these
conditions:
The Board of Directors, the Audit Committee and management established the
Sarbanes-Oxley Section 404 Internal Control Committee comprised of the Chief
Executive Officer, the Chief Financial Officer and the Chief Operating Officer.
This Committee is responsible for assessing the current internal controls,
developing improvements to internal controls and testing internal controls, all
leading to management's assessment of internal control effectiveness and the
Company's independent public accountants' report on management's attestation of
control effectiveness by June 30, 2004 in accordance with
43
Section 404 of the Sarbanes-Oxley Act of 2002. The Committee has accomplished
the following to date:
o Named the Director of Corporate Risk Management and Internal Audit as
the Section 404 project manager, who developed a project plan and
retained outside professional advisors who are assisting in the
evaluation of existing internal controls and procedures and providing
recommendations for improvement.
o Developed and published the Company's Code of Conduct and Business
Ethics.
o Established a confidential and anonymous reporting process for the
receipt of concerns regarding questionable accounting, auditing or
other business matters from employees or other Company stakeholders.
o Instituted certain process changes to enhance the Company's monitoring
and expectations regarding expense reporting and personal use of
Company's assets.
The Company has completed its evaluation of resources to address its
financial reporting and believes its resources are sufficient and will provide
the time necessary 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.
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-14(c) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective for gathering, analyzing and
disclosing information required to be disclosed in connection with the Company's
filing of its Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2003. Except as discussed above, no significant changes were made
in our internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
44
PART II - OTHER INFORMATION
---------------------------
Item 1. 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, or 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 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 International
Chamber of Commerce also agreed to hold its proceedings in abeyance pending
settlement discussions.
In December 2002, we and our related companies entered into an arbitration
agreement with MBI and Toyota Motor Corporation and related companies. The
agreement established 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 our related companies in the
U.S. District Court, Eastern District of Michigan. The arbitration proceeding
was held in New York City from November 4-19, 2003 and concluded on January 21,
2004. The parties' arbitration agreement calls for a ruling by the arbitration
panel within two months. Because of administrative handling of the ruling
through the International Chamber of Commerce, International Court of
Arbitration, in Paris, France, the decision is not expected to be released until
May 2004.
On July 24, 2001, an individual, Kaplesh Kumar, filed a lawsuit against
Ovonic Battery, ECD and Mr. 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
45
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 Court of Appeals for the Federal Circuit on
September 19, 2003. In December 2003, the Court of Appeals for the Federal
Circuit issued an opinion vacating the District Court's dismissal of Kumar's
complaint and remanded the case to the District Court for further proceedings
concerning the meaning of certain terms in Kumar's now expired patent. We
believe that the suit is without merit and that we will prevail.
Due to the uncertainty of the ultimate outcome of these matters, the
impact on future financial results is not subject to reasonable estimates.
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
In November 2003, we sold 2,388,915 and 304,000 units of unregistered
securities at a price per unit of $10.465 and $9.435, respectively, to three
institutional investors. Each unit consists of one share of ECD Common Stock and
one warrant to purchase one share of ECD Common Stock for $13.96 if exercised on
or prior to May 2, 2005, and for $16.03 if exercised at any time thereafter, but
prior to October 31, 2006. Nolan Securities Corporation acted as placement
agent. The aggregate proceeds to us, net of placement agent fees of $978,000 and
other expenses of $124,000, was approximately $26,838,000.
On January 8, 2004, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (file number 333-111500)
relating to the registration of the above securities.
In January 2004, we sold an additional 573,339 units of unregistered
securities at a price per unit of $9.755, to two of the institutional investors
who had acquired units in November 2003. Each unit consists of one share of ECD
Common Stock and one warrant to purchase one share of ECD Common Stock for
$13.96 if exercised on or prior to May 2, 2005, and for $16.03 if exercised at
any time thereafter, but prior to October 31, 2006. Nolan Securities Corporation
acted as placement agent. The aggregate proceeds to us, net of placement agent
fees of approximately $131,000 and other expenses of $56,000, was approximately
$5,406,000.
The three institutional investors acquired the units of ECD securities in
a private transaction and had access to all material information relating to
ECD. 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.
46
Item 5. Other Information
- ------- -----------------
b) Nominating Directors
---------------------
The Compensation and Nominating Committee identifies nominees for
directors from various sources, including third-party consultants, to assist in
identifying and evaluating potential nominees. The Committee has specified the
following minimum qualifications that it believes must be met by a nominee for a
position on the Board:
o have the highest personal and professional ethics and integrity and
whose values are compatible with the Company's values;
o have had experiences and achievements that have given them the ability
to exercise good business judgment;
o can make significant contributions to the Company's success;
o have the ability to provide wise, informed and thoughtful counsel to
top management on a range of issues;
o are willing to devote the necessary time to the work of the Board and
its committees;
o understand and meet their responsibilities to the Company's
stockholders including the duty of care (making informed decisions)
and the duty of loyalty (maintaining confidentiality and avoiding
conflicts of interest); and
o backgrounds that provide a portfolio of experience and knowledge
commensurate with the Company's needs.
The Committee will consider persons recommended by the stockholders in the
same manner as a Committee-recommended nominee. Notice of proposed stockholder
nominations for director must be delivered to the Secretary of the Company not
less than 120 days prior to any meeting at which directors are to be elected.
Nominations must include (i) as to each nominee, all information required to be
disclosed in solicitation of proxies for elections of directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, (ii) the name and
address of the stockholder giving the notice, (iii) a representation that the
stockholder is a holder of the Company's Common Stock and intends to appear at
the meeting to make the nomination, (iv) a description of all arrangements or
understandings among the stockholder and the nominee; and (v) the written
consent of each nominee to serve as a director if so elected.
47
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
3.1 Amendment to Article II of the bylaws effective as of
January 29, 2004.
3.2 Amendment to Article VIII of the bylaws effective as of
March 18, 2004.
31.1 Chief Executive Officer's Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certification Pursuant 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 to 18
U.S.C. Section 1350, as Adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
During the quarter ended December 31, 2003, the Registrant filed or
furnished the following reports on Form 8-K or Form 8-K/A:
1. On October 1, 2003, we filed a Current Report on Form 8-K for
the purpose of filing the press release announcing the filing of
a Form 12b-25, Notification of Late Filing, with the Securities
and Exchange Commission to extend the due date for the filing of
our Annual Report on Form 10-K for the fiscal year ended June
30, 2003 for a period of 15 calendar days.
2. On October 14, 2003, we filed a Current Report on Form 8-K for
the purpose of filing the press release announcing the release
on October 15, 2003 of our unaudited financial results for the
fiscal year ended June 30, 2003.
3. On October 15, 2003, we filed a Current Report on Form 8-K for
the purpose of furnishing the press release announcing our
financial results for the fiscal year ended June 30, 2003.
4. On October 22, 2003, we filed a Current Report on Form 8-K for
the purpose of filing the press release announcing receipt of
notification from NASDAQ that, as a result of the delayed filing
of our Annual Report on Form 10-K for the fiscal year ended
June 30, 2003, NASDAQ will change the trading symbol for our
securities from ENER to ENERE.
5. On October 23, 2003, we filed a Current Report on Form 8-K for
the purpose of filing the press release announcing receipt of
notification from NASDAQ that, at the opening of business on
October 23, 2003, NASDAQ will restore the Company's trading
symbol from ENERE to ENER.
48
6. On November 4, 2003, we filed a Current Report on Form 8-K for
the purpose of filing the press release reporting that on
October 29, 2003, the Company was advised by its independent
auditors, Deloitte & Touche LLP, that it declined to stand for
reelection as the Company's independent auditors.
7. On November 14, 2003, we filed a Current Report on Form 8-K for
the purpose of reporting the engagement of Grant Thornton LLP as
the Company's independent auditors.
8. On November 12, 2003, we filed a Current Report on Form 8-K for
the purpose of furnishing the press release announcing our
financial results for the quarter ended September 30, 2003.
9. On November 26, 2003, we filed a Current Report on Form 8-K for
the purpose of reporting receipt of notification from NASDAQ
that, as a result of the delayed filing of our Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003, NASDAQ
will change the trading symbol for our securities from ENER to
ENERE at the opening of business on November 28, 2003.
10. On December 10, 2003, we filed a Current Report on Form 8-K/A
amending the Form 8-K filed on November 4, 2003.
49
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
-----------------------------------------
(Registrant)
By: /s/ Stephan W. Zumsteg
--------------------------------------------
Stephan W. Zumsteg
Date: February 17, 2004 Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Robert C. Stempel
--------------------------------------------
Robert C. Stempel
Date: February 17, 2004 Chief Executive Officer
50