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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 38-1749884
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1675 West Maple Road, Troy, Michigan 48084
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (248) 280-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x].
The aggregate market value of stock held by non-affiliates (based upon the
last sale price of such stock on the NASDAQ National Market System on September
28, 1998) was approximately $69 million. As of September 28, 1998, there were
219,913 shares of the Company's Class A Common Stock and 12,595,345 shares of
the Company's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1: Business
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OVERVIEW
Energy Conversion Devices, Inc. (the "Company") is a leader in the
synthesis of new materials and the development of advanced production technology
and innovative products. The Company was founded by Stanford R. Ovshinsky and
Iris M. Ovshinsky. Under the direction of Stanford R. Ovshinsky, principal
inventor, the Company has pioneered the development of products and production
technology based on amorphous and related materials, with an emphasis on
alternative energy and advanced information technologies. Unlike the simple,
ordered, three-dimensional arrays found in most crystalline materials, the
Company's proprietary synthetic materials--Ovonic materials--are designed to
exploit unique properties that result from engineered chemical and structural
disorder. Ovonic materials make possible the development and commercialization
of new products with unique chemical, electrical, mechanical and optical
properties and superior performance characteristics.
The Company has used an integrated approach to product development that
seeks to minimize the customary barriers between research and development,
production design and product planning. The Company's strategy has been to
develop products that have technological advantages over available alternatives
and that are capable of being produced commercially on an economically
competitive basis. The Company is also continuing its development efforts,
funded in part through contracts with U.S. Government agencies, the Company's
licensees and industrial partners, to broaden and build upon its product and
technological base.
The Company has established a multi-disciplinary business, scientific and
technical organization to commercialize products based on its technologies. It
has developed the enabling proprietary core technologies in the important fields
of energy storage (nickel metal hydride ("NiMH") batteries), energy generation
(thin-film, flexible, low-cost photovoltaic (solar) products) and information
storage and retrieval (phase-change optical memory technology used in rewritable
compact disks ("CD-RW") and rewritable digital versatile disks ("DVDs"). The
Company is currently engaged in manufacturing and selling its proprietary
products on its own, through its joint venture companies as well as
through licensing arrangements with major companies throughout the world. In
addition, in support of these activities, the Company is engaged in research and
development as well as in designing and building production machinery. The
Company has recognized the need to protect its technology and maintains an
extensive patent portfolio consisting currently of 354 issued United States
patents and 846 foreign counterparts. The patent portfolio includes numerous
basic and fundamental patents covering amorphous and related materials as well
as patents covering products and production technologies.
The Company conducts its battery business through its 93.5%-owned
subsidiary, Ovonic Battery Company, Inc. ("Ovonic Battery"). Honda Motor
Company, Ltd. ("Honda") and Sanoh Industrial Co., Ltd. ("Sanoh") own
approximately 6.5% of the outstanding stock
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of Ovonic Battery. Sanoh has been a shareholder in Ovonic Battery since 1993
and Honda acquired its interest in 1996.
The Company has two significant joint ventures in the field of alternative
energy, GM Ovonic L.L.C. ("GM Ovonic") and United Solar Systems Corp. ("United
Solar"). GM Ovonic was established to manufacture and commercialize Ovonic NiMH
rechargeable batteries for electric vehicle ("EV") and hybrid electric vehicle
("HEV") applications. Ovonic Battery owns a 40% equity interest in GM Ovonic and
General Motors Corporation ("General Motors") owns a 60% equity interest. All
significant manufacturers of consumer NiMH batteries are manufacturing products
under license from the Company. NiMH batteries have become the battery of
choice in consumer electronics and in the automotive industry worldwide for EVs
and HEVs.
The Company and Canon Inc. of Japan ("Canon") each own a 49.98% equity
interest in United Solar, a joint venture formed for the continued development,
manufacture and sale of photovoltaic ("solar energy") products under license
from the Company. Through United Solar, the Company has been producing solar
shingles that are gaining in popularity as well as other photovoltaic products
which have been described as a major breakthrough by the U.S. Government.
In the field of information technology, the Company's Ovonic phase-change
rewritable optical memory technology, already being used in phase-change dual
("PD") and CD-RW systems, has been chosen for use in the emerging DVD rewritable
optical disk systems. The international standards for rewritable DVD media and
systems, designed by major optical disk manufacturers, specify the use of
the Company's phase-change optical memory technology. The Company's licensees
in this area include Matsushita Electric Industrial Co., Ltd. ("Matsushita/
Panasonic"), Sony Corporation ("Sony"), Toshiba Corporation ("Toshiba"), Asahi
Chemical Industry Co., Ltd. ("Asahi"), Hitachi, Ltd. ("Hitachi"), Plasmon
Limited ("Plasmon"), Toray Industries, Inc. ("Toray"), TDK Corporation ("TDK"),
and Teijin, Limited ("Teijin").
The Company is developing a non-volatile thin-film semiconductor memory
technology based on its proprietary phase-change materials that can have a wide
variety of computer applications and is intended to replace conventional DRAM
and Flash EEPROM semiconductor memory devices.
The Company has entered into a variety of other strategic alliances and
license agreements for the commercialization of its technologies.
Certain technical terms used herein are defined in the section captioned
"Glossary of Technical Terms" appearing at the end of this Item 1.
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MAJOR BUSINESSES
The Company's business strategy has been to provide new and enabling
technologies for use in the fields of alternative energy and information
technologies. This strategy has produced inventions of unique, proprietary and
cost-effective products and production processes.
Energy activities, specifically in the areas of rechargeable batteries and
photovoltaic systems, represent a major element of the Company's business
strategy. Environmentally-safe methods of generating and storing energy have
become critical in today's world. The Company's battery and photovoltaic
technologies continue to gain worldwide recognition, particularly in light of
sustained concerns about air pollution, global climate change, ozone layer
depletion, dependence on imported oil and related concerns involving military
action and international political and economic instability, balance of payments
and the need for healthy economic growth.
Energy Storage.
Rechargeable Batteries. The Company's Ovonic Battery subsidiary has
developed the proprietary NiMH battery technology using Ovonic materials which
has achieved recognition by major battery manufacturers throughout the world.
The Company believes that all commercial NiMH batteries are covered by the
Company's basic patents. Ovonic Battery currently has over a dozen consumer
battery licensees and has established a dominant patent position in the field of
Ovonic NiMH batteries, with 49 issued United States patents and 227 foreign
counterparts, including a basic patent in Japan, issued in 1997, corresponding
to United States patent No. 4,623,597, specifying the fundamentals that make
NiMH batteries commercially feasible. Additional United States and foreign
patent applications are in various stages of preparation and prosecution.
Ovonic NiMH batteries are being manufactured and sold throughout the world
by major international companies under licensing and joint venture arrangements
with the Company. Ovonic Battery is also in volume production of the NiMH
battery negative electrodes for sale to its licensees and its GM Ovonic joint
venture.
Ovonic NiMH batteries store over twice as much energy as standard nickel
cadmium ("Ni-Cd") or lead acid batteries of equivalent weight. In addition,
Ovonic NiMH batteries have high power, long cycle life, are maintenance free and
have no memory effect. Moreover, Ovonic NiMH batteries do not contain cadmium or
lead, both environmentally hazardous substances. Ovonic NiMH batteries are made
in a wide range of sizes and have a wide range of applications, including
hand-held consumer electronics, EVs, HEVs and fuel cell vehicles, including
electric two- and three-wheeled vehicles, power tools, utility applications and
industrial batteries.
During the fiscal year ended June 30, 1998, Ovonic Battery produced
negative and positive electrodes for sale to certain licensees for assembly into
complete batteries for consumer, EV and HEV applications. Ovonic Battery also
has produced batteries for EV
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and HEV applications engineered and designed for volume production. The Ovonic
NiMH battery, by virtue of its engineered materials, possesses superior
performance characteristics without the limitations of conventional batteries.
Ovonic Battery continues to further improve the performance characteristics of
its Ovonic NiMH batteries.
In October 1997, Ovonic Battery was awarded a contract by the U.S.
Department of Commerce through its National Institute of Standards and
Technology Advanced Technology Program ("ATP"). Ovonic Battery, along with
several industry partners, has as its objective the development of the next
generation of high energy density NiMH batteries using low-cost magnesium-based
hydrogen storage materials and novel production technologies under this
multi-year, multi-million dollar cost-sharing program.
Ovonic Battery is currently focusing on three principal battery markets:
rechargeable batteries for portable electronics and consumer applications, EV
and HEV propulsion batteries, and batteries for the propulsion of two- and
three-wheeled vehicles. These batteries can also serve industrial applications
such as energy storage for remote power generation and battery-operated
industrial equipment.
Rechargeable Portable Electronics and Consumer Batteries. The need for
high energy density rechargeable batteries has continued to grow in recent
years. Increasing consumer dependence on portable electronic products--such as
cellular telephones, portable computers and cordless tools--has created a large
market for rechargeable batteries and has fueled development of higher energy
density battery systems. Although conventional storage batteries, such as Ni-Cd,
have been further improved in design and packaging in recent years, the demand
for higher performance batteries continues to increase. At present, conventional
Ni-Cd batteries have an energy density of 30-35 watt-hours/kilogram. Ovonic
NiMH batteries are capable of having an energy density of over 90
watt-hours/kilogram. Technology improvements have led to a demonstration of
energy density in excess of 100 watt-hours/kilogram in prototype batteries with
even higher energy densities in the process of development.
Ovonic NiMH batteries offer a convenient "drop in" replacement for Ni-Cd
batteries in portable electronic and household appliances. Consumer and
governmental awareness that cadmium contained in Ni-Cd batteries can cause
serious health problems has begun to move the industry away from Ni-Cd
batteries. The desire of the battery industry to be cadmium-free is also a major
factor in the growing interest in Ovonic NiMH batteries.
Ovonic Battery has licensing arrangements with many of the world's largest
battery manufacturing companies. Ovonic Battery's proprietary battery
technology has been licensed for consumer battery applications to GP Batteries
International Limited ("GP Batteries") (formerly Sylva Industries, Ltd.) in Hong
Kong, one of the world's largest manufacturers of 9-volt batteries and button
cells; Varta Batterie AG ("Varta"), Europe's largest battery company; Sovlux Co.
Ltd. ("Sovlux"), the Company's joint venture in Russia; Harding Energy Inc.
("Harding"); Eveready Battery Company, Inc. ("Eveready") (formerly Gates Energy
Products, Inc.), the largest United States rechargeable consumer battery
company; Walsin Technology Corporation ("Walsin") and Nan Ya Plastics
Corporation
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("Nan Ya") (an affiliate of Formosa Plastics Group and the assignee of Asia
Pacific Investment Co.), both leading Taiwanese companies; Samsung Electronics
Co., Ltd. ("Samsung") and LG Chemical, Ltd. ("LG Chem"), leading Korean
companies; Canon, Hitachi Maxell, Ltd. ("Hitachi Maxell"), Furukawa Battery Co.,
Ltd. ("Furukawa") and Matsushita Battery Industrial Co., Ltd. ("MBI"), all
leading Japanese companies. In addition, the Ovonic battery technology is being
used in consumer battery applications by three major consumer battery
manufacturers based in Japan. Saft, S.A., Saft America, Inc., GS-Saft Ltd.
("Saft Group") and Japan Storage Battery Co., Ltd. are also licensed under a
royalty-bearing license agreement to Ovonic Battery's proprietary battery
technology in the United States.
Electric, Hybrid Electric and Fuel Cell Vehicle Batteries. The strategic
importance of EVs and HEVs both in the United States and worldwide has increased
greatly in recent years. This heightened interest is due to many concerns such
as air pollution, global climate change, ozone layer depletion and dependence on
imported oil.
Most of the world's major automobile manufacturers have active programs
underway to develop and commercially market EVs and HEVs. General Motors
introduced the EV1, the first modern limited-production car designed from the
ground up to be an electric vehicle, in the Fall of 1996 at Saturn dealerships
in the Los Angeles and San Diego, California, and Phoenix and Tucson, Arizona,
areas. General Motors announced that Ovonic NiMH batteries manufactured by GM
Ovonic became available in limited quantities in the Chevrolet S-10 electric
pickup truck in late 1997 and will be available in the EV1 during 1999. Since
Ovonic NiMH battery technology provides two to two-and-a-half times the driving
range as the same mass of lead acid batteries, the NiMH battery has become the
battery of choice for several major automobile manufacturers as they prepare to
commercialize and market EVs and HEVs.
General Motors featured Ovonic NiMH batteries at the North American
International Auto Show in January 1998 as the enabling technology for EV, HEV
and fuel cell vehicles and as part of General Motors' Advanced Technology
Vehicles presentation.
GM Ovonic. In June 1994, Ovonic Battery and General Motors formed a joint
venture, GM Ovonic, to manufacture and sell Ovonic Battery's proprietary NiMH
batteries for four-wheeled electric propulsion applications to vehicle
manufacturers on a worldwide basis. GM Ovonic is owned 40% by Ovonic Battery and
60% by General Motors. Ovonic Battery has contributed intellectual property,
licenses, production processes, know-how, personnel and engineering services
pertaining to Ovonic NiMH battery technology to the joint venture. General
Motors' contribution consists of operating capital, plant, equipment and
management personnel necessary for the production of batteries.
GM Ovonic is engaged in manufacturing of NiMH batteries at its facility in
Troy, Michigan, and its wholly-owned subsidiary, Ovonic Energy Products, Inc.,
has opened a plant in Kettering (Dayton), Ohio, approximately 10 times
larger than its Troy plant, for the production of advanced NiMH batteries.
GM Ovonic is producing NiMH batteries for EVs
-6-
manufactured by General Motors and will also make the batteries available to
other original equipment manufacturers for use in their advanced technology
vehicles.
Other EV Business Agreements. In addition to its GM Ovonic joint venture,
Ovonic Battery has entered into royalty-bearing license agreements for the
manufacture of EV batteries and related products outside of the United States
with Hyundai Motor Company ("Hyundai"), Varta, Nan Ya and GP Batteries. Hyundai,
GP Batteries and Sovlux Battery have restricted rights to sell EV batteries in
North America. Varta's license includes the right to manufacture EV batteries
subject to certain limitations on access to technology and restrictions on
manufacturing in North America. Saft Group is licensed under a royalty-bearing
license agreement for the manufacture and sale of EV batteries in the United
States.
During 1997, Ovonic Battery developed a "Family of Batteries" that can
satisfy the energy storage needs of the full spectrum of EVs and HEVs, including
bicycles, two- and three-wheeled scooters, cars, trucks and vans. This
Company-sponsored development was based on the demonstrated ability of NiMH
batteries to be engineered for different energy and power densities in a wide
range of capacities. The automotive industry has expressed considerable interest
in batteries for the emerging HEV market and Ovonic Battery is positioning
itself to offer the industry a high power, durable, high charge/discharge rate
NiMH battery. Ovonic NiMH batteries for HEVs are being reviewed with a variety
of potential customers. This "Family of Batteries" was presented to General
Motors and has led to an Ovonic Battery production development program that is a
multi-million, multi-year, multi-task activity of significant value to the
Company. This program is intended to provide next- and future-generation NiMH
batteries that will be manufactured by GM Ovonic. Both EV and HEV types of NiMH
batteries are included in the program with the objective of increasing the
energy density of future batteries as well as reducing their size and cost.
Ovonic Battery's HEV battery, developed under its "Family of Batteries"
program, meets specifications set by the Partnership for Next Generation of
Vehicles, a program among Chrysler Corporation ("Chrysler"), Ford Motor Company
("Ford"), General Motors and the U.S. Department of Commerce. Ovonic NiMH
batteries tested for HEVs have the following present performance
characteristics:
Specific Energy: 70 watt-hours/kg.
Peak Power: 625 watts/kg.
Regenerative Power: 600 watts/kg.
The United States Advanced Battery Consortium ("USABC"), a partnership
among Ford, General Motors and Chrysler, with funding participation from the
United States Department of Energy ("DOE") and the Electric Power Research
Institute formed in 1991 to develop promising battery technologies for EVs, has
stated that the only battery technology with the capability to meet or exceed
USABC's mid-term goals for EV battery performance is NiMH. Ovonic Battery has
designed and built cells and modules for independent evaluation by USABC as well
as testing advanced prototype batteries with favorable results.
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USABC Mid-Term
Major Technical Current Ovonic Next Generation
Characteristic Goals Performance(1) Battery Performance(2,3)
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Energy Density 80 watt-hours/kg. 80 watt-hours/kg. 90-95 watt-hours/kg.
Power Density 150 watts/kg. 180 watts/kg. > 200 watts/kg.
Cycle Life 600 cycles 600 cycles 1000 cycles
Life 5 years 10 years 10 years
100% Recharge 6 hours or less 1 hour (60% in 15 1 hour (60% in 15
Time minutes) minutes)
(1) Indicates independently verified performance with the exception of life,
which is projected. Based on this battery performance, purpose-built EVs
have already achieved:
o More than 370 miles on a single charge
o 0 to 60 mph acceleration in 8 seconds
o Battery lifetime projected to be equal to the life of the vehicle
o Battery quick charge to 60% of its capacity in 15 minutes
Moreover, the Ovonic NiMH battery is robust, free of lead, cadmium and
other environmentally hazardous substances and is maintenance free.
(2) Indicates performance already achieved on a prototype level at Ovonic
Battery.
(3) With respect to energy density, Ovonic Battery believes that significant
potential for even higher performance exists. Based upon laboratory
measurements of advanced materials, optimized construction and designs,
Ovonic Battery projects that energy density can be improved to as high as
120-150 watt-hours/kilogram.
Powered by Ovonic NiMH batteries, a Solectria Sunrise four-passenger
prototype EV sedan traveled from Boston to New York City on a single charge in
October 1997. The Sunrise EV, with a prototype composite body, was equipped with
a 30 kWh Ovonic NiMH battery pack. A total of 28.3 kWh was used from the pack to
travel the 216 miles at an average speed of 55 with the driver, one passenger
and their luggage on board.
A Solectria Force four-passenger sedan, powered by Ovonic NiMH batteries,
achieved a range of 225 miles on a single charge and won first place, for the
fifth consecutive year, in the production category of commercially-available
electric vehicles at the Tour de Sol Road Rally in May 1998.
To illustrate the lower cost operation of battery-powered electric
vehicles, a four-door Chevrolet Geo Metro with a gasoline engine was matched
against a Solectria Force (the electric version of the Geo Metro) to measure the
operating efficiencies of the two
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vehicles over a 23.5-mile route through mid-town Manhattan (New York City) at
the 1998 Tour de Sol. Based upon a central power plant efficiency rate of 51%, a
power transmission efficiency rate of 92%, a battery charger efficiency rate of
90% and a battery energy efficiency rate of 90%, the electric car's use of 2.87
kWh of electricity was the equivalent of 0.27 gallons of gasoline. The
gasoline-fueled car used 2.28 gallons of gasoline. The gasoline Geo Metro
achieved 10.3 miles per gallon, while the Solectria Force returned an 87
miles-per-gallon equivalent. At $1.00 per gallon, it cost $2.28 for the Geo
Metro's gasoline and the equivalent of $.27 to power the Solectria.
Two- and Three-Wheeled Vehicles. Ovonic Battery has installed Ovonic NiMH
batteries in scooters converted to electric power and successfully demonstrated
the application of its battery for two- and three-wheeled electric vehicles.
Ovonic Battery considers two- and three-wheeled electric vehicles a potential
large-volume market since these types of vehicles are the primary mode of
transportation in many European and developing countries throughout the world,
such as India, China and Taiwan. Electric two-and three-wheeled vehicles using
Ovonic NiMH batteries should improve the acute air pollution problems in these
regions caused by conventional two- and three-wheeled vehicles.
The Company has entered into royalty-bearing license agreements for the
manufacture and sale of Ovonic NiMH batteries for two- and three-wheeled
vehicles with Walsin, Sanoh and Nan Ya.
Sanoh, a licensee in Japan, is expanding its production of NiMH batteries
for two-wheeled electric vehicle applications at its plant in Koga, Japan.
Among Sanoh's customers are large manufacturers of electric scooters and
bicycles such as Honda who has announced plans to introduce new products.
Ovonic Battery and Sanoh established Sanoh Ovonic Power Systems
Corporation ("Sanoh Ovonic") in December 1997, a joint venture owned 45% by
Ovonic Battery and 55% by Sanoh, for the manufacture and sale of Ovonic NiMH
batteries for electrically-powered two- and three-wheeled vehicles. Due to
Sanoh's commitment of resources to the launch of NiMH battery production for
electric scooters in Japan, Sanoh Ovonic has not become operational.
In February 1998, EV Global Motors ("EVG"), founded by Lee Iacocca, and
the Company announced a strategic alliance to cooperate in further development
and commercialization of light EVs using EVG vehicles and the Company's energy
storage technologies. In forming this strategic alliance, the Company and EVG
exchanged shares of their Common Stock. EVG also transferred to the Company
certain shares of the Common Stock of Unique Mobility Corp. ("Unique Mobility")
held by EVG. Unique Mobility is a leader in the development and manufacture of
highly efficient, power dense, permanent motors and controls primarily for
application in EVs and HEVs.
Sovlux Battery. In March 1998, the Company announced the formation of
Sovlux Battery, an affiliate of Sovlux, the Company's U.S.-Russian joint
venture, owned 50% by the Company and 50% by the Chepetsky Mechanical Plant
("Chepetsky") in Glazov,
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Udmurt Republic. Sovlux Battery plans to produce NiMH battery materials and
components for sale to Ovonic Battery and its licensees. Sovlux Battery will
also manufacture batteries for the emerging two- and three-wheeled electric
vehicle market in Europe and Asia and for four-wheeled electric vehicles in
Russia.
The availability of abundant Russian raw materials for the battery,
Chepetsky's alloy processing and production expertise, and joint collaboration
on battery research and development could provide the potential for substantial
reductions in the cost of Ovonic Battery's proprietary NiMH batteries.
Other Battery Applications. Several licensees of Ovonic NiMH battery
technology, such as Sovlux, Canon and GM Ovonic, have been granted rights to
manufacture and sell large batteries for energy storage applications for
electricity generated by photovoltaics, remote power generation, utility
applications and battery-operated industrial equipment. There are numerous other
applications for Ovonic NiMH batteries where portable energy storage is required
or convenient.
Energy Generation (Photovoltaic Technology).
Photovoltaic ("PV") systems provide a clean and simple solid-state method
for direct conversion of sunlight into electrical energy. The major barrier to
the widespread use of direct solar-to-electrical energy conversion has been the
lack of an inexpensive solar cell technology. The Company and its joint venture,
United Solar, are leaders in thin-film amorphous photovoltaic technology. The
Company has invented a unique proprietary approach to the manufacture of
photovoltaic products. Compared to PV products that are produced by other PV
technologies, the ECD/United Solar PV products are substantially lighter, more
rugged, require much less energy to produce and can be produced in high volume
at significantly lower cost. In large volume (100 MW) production, ECD/United
Solar's PV products can become price competitive to conventional fuels. The
Company's proprietary position in photovoltaics ranges from the invention
of materials and the development of products to the design and manufacture of
production equipment. The Company and United Solar have more than 165 U.S.
patents and numerous foreign counterpart patents in the area of photovoltaic
technology.
Crystalline silicon was the original materials technology used by the
photovoltaic industry. First widely used in space satellites, conventional
crystalline silicon solar cells are fabricated in a step-and-repeat, batch
process from small wafers of single crystal or polycrystalline silicon
semiconductor materials. Notwithstanding the substantial advances that have been
made in the development of this technology, the cost of crystalline photovoltaic
modules still is high because of high materials costs and because many
processing steps are needed to manufacture the modules. Crystalline silicon
solar cell modules also are bulky and break easily.
The Company has developed proprietary technology to reduce the materials
cost in a solar cell using the Company's proprietary thin-film, vapor-deposited
amorphous silicon ("a-Si") alloy materials. Because a-Si absorbs light more
efficiently than its crystalline counterpart, the a-Si solar cell thickness can
be 100 times less, thereby significantly
-10-
reducing materials cost. By utilizing a flexible, stainless steel substrate and
polymer-based encapsulants, United Solar's PV products can be very lightweight,
flexible, abuse-tolerant and particularly easy to transport to remote rural
areas and install without breakage.
Amorphous cells with different light absorption properties also can be
deposited one on top of another to capture the broad solar spectrum more
effectively, which increases the energy-conversion efficiency of the multi-cell
device and improves performance stability. This unique "triple-junction"
approach has resulted in world record efficiencies for the a-Si technology. In
August 1998, United Solar was awarded an "R&D 100" award by R&D Magazine for its
triple-junction amorphous silicon solar electric module. The magazine's editors
and staff, together with outside experts, reviewed thousands of new inventions
to determine the 100 most significant advances of 1998.
The Company and its United Solar joint venture hold current world records
for both large- and small-area conversion efficiency for amorphous silicon solar
cells, as measured by the DOE's National Renewable Energy Laboratory ("NREL").
Conversion efficiency is the percentage of sunlight that is converted into
electricity. In 1994, the DOE and United Solar announced that United Solar had
set a world record of 10.2% stabilized energy conversion efficiency for large
area (one-square foot) amorphous silicon alloy photovoltaic modules, which the
DOE characterizes as a major breakthrough. In April 1997, United Solar announced
the laboratory achievement of a new world record solar-to-electricity stabilized
efficiency of 13% for small-area amorphous silicon alloy photovoltaic cells,
surpassing its earlier record.
To further reduce the manufacturing cost of photovoltaic modules, the
Company has pioneered the development of and has the fundamental patents on a
unique approach utilizing proprietary continuous roll-to-roll solar cell
deposition process. Using a roll of flexible stainless steel that is a half-mile
long and 14 inches wide, nine thin-film layers of a-Si alloy are deposited
sequentially in a high yield, automated machine to make a continuous, stacked
three-cell structure. The roll of solar cell material then is processed further
for use in a variety of photovoltaic products. This basic approach that the
Company has pioneered is unique in the industry and has significant
manufacturing cost advantages. The Company believes that in high-volume
production its photovoltaic modules will be significantly less expensive than
conventional crystalline silicon and other thin-film solar modules produced on
glass and can be cost competitive with fossil fuels. The importance of the
Company and United Solar's work in this field has been recognized by the U.S.
Department of Energy.
The Company has formed two joint ventures to manufacture photovoltaic
modules and systems and to sell them throughout the world.
In 1990, the Company and Canon formed United Solar for the continued
development, manufacture and sale of Ovonic solar cells under license from the
Company. United Solar is owned 49.98% by the Company and 49.98% by Canon.
Canon has invested over $58 million in United Solar and has provided
United Solar with $10 million in loan guarantees. In 1997, Canon entered into an
agreement with United
-11-
Solar whereby, in consideration of an $11.5 million payment to United Solar,
Canon has been permitted, in addition to its exclusive rights to manufacture
photovoltaic products in Japan, to expand its rights to manufacture photovoltaic
products on a non-exclusive basis in Australia and one country of Europe as
determined by Canon.
United Solar is producing a variety of PV products and selling PV modules
and systems throughout the world. United Solar manufactures products for remote
power applications, telecommunications, PV-powered lighting systems, building-
integrated photovoltaic systems and marine applications at its facilities in
Troy, Michigan.
Based on research and development conducted at the Company in the early
1980s, the Company and United Solar have developed, and United Solar is
manufacturing and selling, unique products for the building industry such as PV
shingles and metal roofing products which emulate conventional roofing materials
in form, construction, function and installation. In 1996, United Solar received
the Popular Science 1996 "Best of What's New" Grand Award and, in 1997, it
received the Discover Magazine 1997 "Technology Innovation Award" for its
flexible solar shingles.
United Solar is also building on the Company's development of ultralight
weight PV technology and developing PV products for space applications. The
global telecommunications revolution is expected to result in the launch of
thousands of low earth orbit satellites and high altitude platforms in the next
decade which will require lower cost, lighter weight PV modules than those
currently used in space. United Solar's PV cells are radiation hard, perform
very well at the high temperatures encountered in space and can be significantly
lighter than conventional technologies as well as less expensive.
In April 1998, United Solar and Sky Station International, Inc. ("Sky
Station") announced the formation of a new joint venture, Sky Solar, L.L.C.
("Sky Solar"), to manufacture PV products for stratospheric platforms and space
satellites. The venture is owned 60% by United Solar which is contributing its
proprietary PV technology to the venture, and 40% by Sky Station, which is to
provide the funding to optimize United Solar's technology for stratospheric and
space applications and for construction of a dedicated PV production line. Sky
Station has developed technology that enables the deployment of a network of
stationary stratospheric airships at 70,000 feet above the world's major cities
to provide broadband telecommunication services. Sky Station will begin funding
the activities of Sky Solar upon the successful attainment of Sky Station's
required capital for the project.
In 1997, United Solar completed the upgrade of its manufacturing facility
which has more than tripled production capacity. The new machinery and
equipment, which was designed and built by the Company under an $8 million order
from United Solar, became operational in early 1997. This new machinery and
equipment, now in commercial production, incorporates advanced technology and
has the capacity to manufacture, on an annual basis, solar cells capable of
producing five megawatts of electricity.
In 1990, the Company also formed Sovlux, a joint venture with State
Research and Production Enterprise Kvant ("Kvant") to manufacture the Company's
photovoltaic products
-12-
in the countries of the former Soviet Union. Sovlux is owned 50% by the Company.
In 1990, Kvant entered into machine-building contracts with the Company for the
construction of 2MW-capacity photovoltaic manufacturing equipment. The equipment
has been installed in Sovlux's plant in Moscow. Kvant contributed this equipment
to the joint venture in exchange for its ownership interest in Sovlux. In July
1996, the Russian Ministry of Atomic Energy ("MINATOM") agreed to become an
equity partner in Sovlux. MINATOM agreed to provide operating capital to enable
Sovlux to commence production of photovoltaic products as well as capital for
new production equipment to be built by the Company's Production Technology and
Machine Building Division. Because of economic conditions in Russia, MINATOM had
been unable to fulfil its obligations. The Company's contribution to the venture
consists solely of the technology necessary to support Sovlux's operations.
Sovlux has conducted pre-production activities consisting of manufacturing
plant preparation and machinery optimization. Sovlux received two U.S.
Government contracts in 1998 in connection with certain of its operations.
However, Sovlux has not been able to commence volume production of photovoltaic
products due to MINATOM's inability to provide operating capital and current
economic conditions in Russia.
For more than 11 years, the Company has been engaged in research contracts
awarded by the DOE and NREL aimed at further development of high-efficiency
amorphous silicon-based alloy thin-film solar cells, improvement of photovoltaic
manufacturing technologies, and the development and demonstration of
photovoltaic systems to be used in roof-top construction in lieu of shingles and
other roofing materials.
In June 1998, the Company was awarded a new cost-sharing program by DOE
and NREL to further advance the Company's proprietary roll-to-roll PV
manufacturing technology. This program is part of the DOE's ongoing initiatives
to enhance U.S. leadership in the world PV market through improved PV
manufacturing processes and reduced manufacturing costs.
Another new cost-sharing contract, from DOE's Thin-Film Partnership
Program, was awarded to the Company in August 1998. The overall goal of this
program is to increase the rate at which the highly efficient "triple-junction"
a-Si solar cells are deposited onto the substrate.
Other Energy Technologies. The Company is conducting various research
programs sponsored by U.S. Government agencies to continue the Company's earlier
work on the development of high-performance materials for the storage of
hydrogen, the design of prototype metal hydride hydrogen storage devices, and
the development of integrated renewable hydrogen-generation storage systems. The
prototype hydrogen storage devices utilize the Company's proprietary
high-performance metal hydride materials and are designed to work with
applications such as hydrogen-oxygen fuel cells as well as other applications.
These storage devices offer a safe, low pressure, high density alternative to
gaseous or liquid hydrogen storage for a variety of transportation, stationary
or portable power applications.
-13-
Under a DOE-sponsored program, the Company is developing an integrated
renewable hydrogen-generation storage system. This system uses water
electrolysis to convert the electricity produced by the Company's multi-junction
PV products to hydrogen and stores the produced hydrogen in metal hydride
hydrogen storage devices. The system is being designed for residential or
small-scale commercial production of hydrogen which can be used to replace
conventional fuels as sources of energy conversion.
Information Technologies.
The Company has developed a number of key proprietary products and
processes in the field of information technology. In the past, products have
been developed by the Company for data input (image scanners), data output
(copier and laser printer drums), data display and data storage (optical and
semiconductor memory devices).
Optical Memory. The Company is the originator of phase-change rewritable
optical memory disk technology. The Company's Ovonic phase-change rewritable
optical memory technology makes it possible to store, in a convenient, removable
disk format, many times the amount of data as a conventional, removable rigid
magnetic disk of the same size. The Company's proprietary phase-change
rewritable optical memory uses a laser to write or erase digital data on a thin
film of amorphous semiconductor alloy that has been deposited onto a substrate
disk. The disk and data-reading process are similar to an ordinary CD or CD-ROM,
with the significant difference being that the phase-change rewritable optical
memory can be erased and rewritten many thousand of times.
The Company has licensed its phase-change rewritable optical memory
technology to 12 companies and expects to license others who are developing
phase-change optical memory products. Among the Company's licensees are
Matsushita/Panasonic, Sony, Toshiba, Asahi, Hitachi, Plasmon, Toray, TDK and
Teijin. The license agreements provide for royalty payments to the Company based
upon sales of phase-change rewritable optical memory disks.
A "convergence" of the information processing, communications and
entertainment industries is taking place as a result of advances in digital
electronics. A new and emerging "convergence" product offering higher-capacity
data storage is the DVD. Playback-only DVD disks and drives ("DVD-ROM") are
commercially available now. The Company's high-capacity phase-change optical
memory technology has emerged as the technology of choice for rewritable DVD
media. Rewritable DVD media and drives for computer and information technology
applications became commercially available in the Summer of 1998.
The Company's optical memory licensees now producing phase-change optical
media, as well as other storage media manufacturers, are expected to become
manufacturers of rewritable DVD products. The DVD Forum, comprised of leading
manufacturers in the optical disk industry, is targeting a wide range of
computer and information technology applications for DVD-RAM disks, including
digital television recording, due to their high data storage capacity.
-14-
The Company is also involved in several development programs under
cost-sharing contracts awarded by the U.S. Department of Commerce through its
National Institute of Standards and Technology Advanced Technology Program
("ATP") relating to the Company's optical memory technologies. Two of these
programs involve DVD media. Under one program, the Company is developing a new
manufacturing system for DVD media that is expected to increase manufacturing
throughput and significantly reduce costs. The other program involves the goal
of increasing the storage capacity of DVD-compatible optical storage
technologies by a factor of 10 and significantly increasing the data transfer
rate, making it possible to store several hours of high-definition television
content, or thousands of professional-quality high-resolution still photos, on a
single disk.
The third ATP program in which the Company is involved is for the
development of very high data capacity optical tape for affordable rapid access
mass data storage products.
Non-Volatile Semiconductor Memory. The Company, on the basis of its
pioneering technology, developed the first non-volatile semiconductor memory,
the Ovonic EEPROM, for computer data storage in the 1960s. The Company has
advanced and extended that early work and is now developing a proprietary family
of high-performance non-volatile semiconductor memory and information processing
devices. This technology is designed to provide non-volatile computer data
storage with the speed of current, volatile DRAM semiconductor system memory as
well as to decrease the cost of production. The technology also offers an
opportunity to develop new, fast computer architectures so as to eliminate the
use of multiple tiers of memory as well as data transfer bottlenecks caused by
the current computer memory hierarchy. By removing the distinction between
archival storage and system memory, data can be stored in a non-volatile fashion
and "executed in place," resulting in improved computer performance and lower
costs of data transfer than those associated with the currently used memory
hierarchy. The Company believes that its Ovonic semiconductor memory can, in a
single device, replace the multiple memory types of devices which are used in
today's personal computers.
Another application of the technology is intended for use in the rapidly
growing Flash EEPROM market. Flash EEPROMs are used in portable electronic
devices such as laptop computers, pagers, and cellular telephones as
all-solid-state, low-power replacements for magnetic hard disk storage. Still
another application of the Company's non-volatile semiconductor memory
technology can provide a basis for practical, highly complex, three-dimensional
neural network systems for use in advanced artificial intelligence and speech-
and image-pattern recognition. Because the Ovonic semiconductor memory can pro-
vide the capability to store more than one bit of information per memory cell,
it can allow the fabrication of semiconductor memory with high storage density.
An application under development is the use of this semiconductor memory in
electronic cash and smart card systems that require information to be stored in
an encrypted, secure and tamper-proof manner.
-15-
Thin-Film Synthetic Materials
The Company has developed a range of vapor-deposited thin-film materials
and cost-effective roll-to-roll production technologies, including a high-rate
microwave plasma chemical vapor deposition ("MPCVD") process. Two major
commercial applications for this technology being pursued are high-performance
optical coatings and transparent vapor barrier coatings.
Optical Films. Another important application for transparent thin-film
coatings which are deposited using the Company's cost-effective roll-to-roll
production technologies is in thin-film optical coatings which selectively
absorb, reflect or transmit certain types of electromagnetic radiation. These
coatings have a wide range of commercial applications-- from anti-glare screens
for computer and television displays to solar-controlled windows for
architectural and automotive applications.
Vapor Barrier Films. The Company's MPCVD process has been applied in the
development of a novel, low-cost, transparent vapor barrier coating for plastic
beverage containers and flexible packaging films. An extremely thin coating
(less than 1 millionth of an inch, or 1/50th of the wavelength of visible light)
of the Company's MPCVD amorphous silicon oxide (quartz glass) improved the
oxygen and water vapor barrier of commodity and rigid packaging films by about a
factor of 100. By blocking oxygen and water vapor transmission, the shelf life
of food beverages, pharmaceuticals and other types of sensitive products is
extended.
PRODUCTION TECHNOLOGY AND MACHINE BUILDING DIVISION
AND CENTRAL ANALYTICAL LABORATORY
The Production Technology and Machine Building Division operates as a
profit center for the Company's machine-building and engineering activities. It
has extensive experience in designing and building proprietary automated
production equipment. The Production Technology and Machine Building Division
has designed and built for the Company and its licensees five generations of
photovoltaic production lines, including United Solar's machinery and equipment
for solar cells capable of producing 5 megawatts of electricity on an annual
basis, as well as research, development and manufacturing equipment for
batteries, vapor barrier coating and other materials technology.
The Company's Central Analytical Laboratory conducts analysis of materials
produced by the Company and its joint venture partners and licensees as well as
materials produced by other companies. The Company also maintains an advanced
materials technology group that supports the efforts of each of the Company's
business areas.
-16-
RESEARCH AND PRODUCT DEVELOPMENT
The nature of the Company's business has required, and will continue to
require, expenditures for research and product development to support the
commercial activities of the Company. Such funds have been forthcoming from
United States government agencies and the Company's licensees and industrial
partners to partially fund these activities. The materials, production
technologies and products being developed and produced by the Company, Ovonic
Battery and the Company's joint venture partners are technologically
sophisticated and are designed for markets characterized by rapid technological
change and competition based, in large part, upon technological and product
performance advantages.
The following is a summary of the Company's consolidated direct
expenditures, excluding the allocation of patents, depreciation and general and
administrative expenses, for product research and development for the five years
ended June 30, 1998. All of the Company's research and development costs are
expensed as incurred.
Direct Research and Development Expenditures
--------------------------------------------
Year Ended June 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Sponsored $12,464,256 $ 4,996,632 $ 6,732,570 $ 9,154,263 $6,927,883
by Licensees,
Government
Agencies and
Industrial Partners
Sponsored by 8,782,943 11,735,861 6,214,848 2,808,219 1,357,341
the Company ----------- ----------- ----------- ----------- ----------
$21,247,199 $16,732,493 $12,947,418 $11,962,482 $8,285,224
=========== =========== =========== =========== ==========
SOURCES AND AVAILABILITY OF RAW MATERIALS
Materials, parts, supplies and services used in the Company's business are
generally available from a variety of sources. However, interruptions in
production or delivery of these goods and services could have an adverse impact
on the Company's manufacturing operations.
-17-
PATENTS AND PROPRIETARY RIGHTS
Since its founding in 1960, the Company's research and development efforts
have focused on amorphous, disordered and related materials, a previously
unrecognized field of materials science that has since attracted widespread
attention. The Company has established a multi-disciplinary business, scientific
and technical organization ranging from research and development to
manufacturing and selling products as well as designing and building production
machinery. The Company has recognized the need to protect carefully those
activities. The Company's extensive patent portfolio consists of 354 United
States patents and 846 foreign counterparts, including a basic patent in Japan
corresponding to United States patent No. 4,623,597 and specifying the
fundamentals that make NiMH batteries commercially feasible. The Company's
patent portfolio includes numerous basic and fundamental patents applicable to
the field of amorphous and related materials. The Company invents not only
materials, but also develops low-cost production technologies and
high-performance products. The Company's patents, therefore, cover not only
materials, but also the production technology and products developed by the
Company.
The Company believes that worldwide patent protection is important for it
to compete effectively in the marketplace. Certain of the Company's patents have
been the subject of legal actions, two of which have been resolved favorably to
the Company prior to trial. Because the validity of the Company's patents has
not to date been confirmed through legal proceedings, no assurance can be given
as to either the validity or scope of the Company's patent protection.
CONCENTRATION OF REVENUES
See Note B of the Notes to Consolidated Financial Statements on page 54
of this Report.
BACKLOG
The Company has a $1,584,000 backlog of orders as of August 31, 1998 for
electrodes. The backlog at August 31, 1997 was $3,700,000 for battery packs,
electrodes and machine-building contracts. The Company expects to fill all of
its current backlog within the current fiscal year.
COMPETITION
The principal competitive advantages of the Company are its ownership of
fundamental patents and enabling technology which cover products and production
technology in the important fields of energy and information as well as its
research and development activities. The Company has entered into joint venture
or licensing agreements with established industrial companies that the Company
believes possess the financial resources and manufacturing and marketing
capabilities to commercialize products based on the Company's technologies in
the areas of consumer rechargeable batteries, EV and hybrid automotive
batteries, scooter batteries, industrial storage batteries, photovoltaics and
information technologies.
-18-
The Company competes with firms, both domestic and foreign, that
manufacture and sell products, as well as firms that perform research and
development. Some of these firms are among the largest industrial companies in
the world and have well-established product lines, extensive resources and large
research and development staff and facilities.
The Company is currently engaged in manufacturing and selling its
proprietary products through joint ventures and licensing arrangements, as well
as through its own divisions and internal production operations. The ability of
the Company to maintain its competitive leadership in the future will depend not
only on continuing product and technological advances, but also on the strength
and ability of the Company's licensees and joint venture partners.
EMPLOYEES
As of September 18, 1998, the Company had a total of 362 employees,
including 195 Ovonic Battery employees. The aforementioned numbers do not
include employees of the Company's joint ventures or licensees. The Company
considers its relations with its employees to be excellent.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the Company's expectations, plans and strategies for the
development and commercialization of products based on its technologies. These
forward-looking statements are generally identified by the use of such terms as
"intends," "expects," "plans," "projects," "estimates," "anticipates," "should"
and "believes."
All of such forward-looking statements are based on assumptions which the
Company, as of the date of this Annual Report, believes to be reasonable and
appropriate. The Company cautions, however, that the actual facts and conditions
that may exist in the future could vary materially from the assumed facts and
conditions upon which such forward-looking statements are based.
The Company's future business prospects are substantially dependent upon
the ability of the Company, its joint venture partners and licensees to develop,
manufacture and sell products based on the Company's technologies. Additional
development efforts will be required before certain products based on the
Company's technologies can be manufactured and sold commercially. There can be
no assurance that certain products based on the Company's technologies can be
manufactured cost effectively on a commercial scale, that such products will
gain market acceptance, or that competing products and technologies will not
render products based on the Company's technologies obsolete or noncompetitive.
-19-
In certain fields, the Company has entered into licensing or joint venture
agreements with established companies. Any revenues or profits which may be
derived by the Company from these arrangements will be substantially dependent
upon the willingness and ability of the Company's licensees and joint venture
partners to devote their financial resources and manufacturing and marketing
capabilities to commercialize products based on the Company's technologies.
The Company's ability to compete effectively with other companies will
depend, in part, on its ability to protect and maintain the proprietary nature
of its technology. There can be no assurance that the Company's patents or other
proprietary rights will be determined to be valid or enforceable if challenged
in court or administrative proceedings or that the Company patents or other
proprietary rights, even if determined to be valid, will be broad enough in
scope to enable the Company to prevent third parties from producing products
using similar technologies or processes. There can also be no assurance that
the Company will not become involved in disputes with respect to the patents or
proprietary rights of third parties.
The foregoing factors, as well as other factors discussed in this Annual
Report and in other documents and reports filed by the Company with the
Securities and Exchange Commission pursuant to the requirements of the federal
securities laws, could cause the actual facts and conditions that may exist in
the future to vary materially from the assumed facts and conditions upon which
the forward-looking statements contained herein are based.
-20-
GLOSSARY OF TECHNICAL TERMS
Certain technical terms used herein have the following meanings:
Amorphous - having an atomic structure that is not periodic.
Battery Memory Effect - an undesirable phenomenon in Ni-Cd batteries where
repeated shallow discharge cycles adversely affect battery performance.
CD-ROM (CD--Read Only Memory) - a type of data-storage media using a CD
format with pre-recorded data which cannot be recorded by the user.
CD-RW (CD--Rewritable Memory) - a type of data storage media using a CD
format employing ECD's proprietary phase-change rewritable optical memory
technology capable of being recorded and re-recorded many times.
Crystalline - having a repeating atomic structure in all three dimensions.
Cycle Life - the number of times a rechargeable battery can be charged and
discharged.
Disordered - lacking order. Order is defined over some scale of length
such as short range, intermediate range or long range and may refer to
atomic position (structural order), type of atom (compositional order), or
other physical properties such as magnetic and electric polarization and
others.
DRAM (Dynamic Random Access Memory) - a type of semiconductor memory
device used for the main system memory in most computers.
Electrode (battery) - the chemically active portions of a battery.
Energy Density - the amount of energy stored in a specific volume or
weight.
EV (Electric Vehicle) - a vehicle propelled exclusively by an electric
drive system powered by an electrochemical energy storage device,
typically a rechargeable battery.
Flash EEPROM (Electrically Erasable Programmable Read Only Memory) - a
type of semiconductor memory device that retains stored data even with the
power off.
HEV (Hybrid Electric Vehicle) - a vehicle that is propelled both by an
electrochemical energy storage device coupled to an electric drive and an
auxiliary power unit powered by a conventional fuel such as reformulated
gasoline, direct injection diesel or compressed natural gas.
Hydrides - solid materials that store hydrogen.
-21-
Non-Volatile - a property of some types of computer memory which retain
stored data even when power is removed.
Optical Memory - a computer memory technology that uses lasers to record
and play back data stored on a rotating disc.
Ovonic - the term used to describe the Company's proprietary materials,
products and technologies.
PD (Phase-Change Dual) - a type of data-storage format using ECD's phase-
change rewritable optical memory technology for use in PD drives.
Peak Power - the maximum amount of energy available for a sustained period
of time, typically 10 to 30 seconds.
Phase-Change Rewritable - an optical memory technology invented by the
Company in which data is stored or erased on memory media by means of a
laser beam that switches the structural phase of a thin-film material
between crystalline and amorphous states.
Photovoltaic (PV) - direct conversion of light into electrical energy.
Power Density - the amount of power a battery can deliver per unit volume
or weight.
Regenerative Power - the amount of energy made available and returned to
the battery by the recovery of kinetic energy.
Roll-to-Roll Process - a process where a roll of substrate is continuously
converted into a roll of product.
Semiconductor - a class of materials with special electrical properties
used to fabricate solar cells, transistors, integrated circuits and other
electronic devices.
Specific Energy - the amount of energy capacity divided by the weight of
the battery.
Stabilized Energy Conversion Efficiency - the long-term ratio of
electrical output to light input.
Thin Film - a very thin layer of material formed on a substrate.
-22-
Item 2: Properties
- ------- ----------
A summary of the principal facilities of the Company and Ovonic Battery
follows:
Location Number of
Square Feet
-------- -----------
The Company:
1675 West Maple Road, Troy, 31,550
MI
1050 East Square Lake Road,
Bloomfield Township, MI 11,000
1621 Northwood, Troy, MI 27,480
Ovonic Battery:
1864 Northwood, Troy, MI 12,480
1826 Northwood, Troy, MI 12,480
1707 Northwood, Troy, MI 27,400
1334 Maplelawn, Troy, MI 28,100
1414 Combermere, Troy, MI 9,870
-------
TOTAL 160,360
=======
Except for the property located at 1050 East Square Lake Road, Bloomfield
Township, MI, which is owned by the Company, the foregoing properties, which are
generally of brick and block construction, are leased by the Company and, except
for the property located at 1334 Maplelawn, Troy, MI, which is subleased to GM
Ovonic, are devoted primarily to the product development, pre-production and
production activities and administrative and other operations of the Company and
Ovonic Battery. Management believes that the above facilities are generally
adequate for present operations.
-23-
Item 3: Legal Proceedings
- ------- -----------------
There are no legal proceedings to which the Company is a party which
management believes to be material.
Item 4: Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable.
-24-
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
- ------- ----------------------------------------------------------------------
Shares of the Company's Common Stock, par value $.01 per share ("Common
Stock"), trade on the NASDAQ National Market System under the symbol "ENER."
Shares of the Company's Class A Common Stock, par value $.01 per share ("Class A
Common Stock"), are not publicly traded.
As of September 18, 1998, there were approximately 2700 holders of record
of Common Stock and four holders of record of Class A Common Stock.
The following table sets forth the reported high and low price on the
NASDAQ National Market System for the Company's Common Stock for the following
quarters:
For the Fiscal Year Ended June 30
(in Dollars Per Share)
1999 1998 1997
High Low High Low High Low
------- ------- ------- ------- ------- -------
First Quarter $10.25 $5.188 $17.00 $10.50 $22.75 $15.50
through
September 28,
1998
Second Quarter $16.875 $11.00 $17.00 $12.375
Third Quarter $15.375 $12.125 $15.50 $11.25
Fourth Quarter $15.25 $9.125 $17.25 $ 7.25
The Company has paid no cash dividends in the past and no cash dividends
are expected to be paid in the foreseeable future.
On February 2, 1998, the Company and EV Global Motors Company ("EV
Global") entered into a Stock Purchase Agreement ("Agreement") which provided
for the transfer to EV Global of 146,924 shares of the Company's Common Stock
and warrants to
-25-
purchase 133,658 shares of the Company's Common Stock. The Agreement also pro-
vided for the transfer to the Company of 250,000 shares of EV Global Common
Stock and 129,241 shares of Unique Mobility, Inc. Common Stock, $0.01 par value.
The warrants are exercisable on or prior to February 2, 2003, with 73,462
shares exercisable at $13.6125 and 60,196 shares exercisable at $16.6125.
The Company's Common Stock and the warrants were obtained by EV Global in
a private transaction under Regulation D, Rule 505 of the Securities Act of
1933.
-26-
Item 6: Selected Financial Data
- ------- -----------------------
Set forth below is certain financial information taken from the Company's
audited consolidated financial statements (See Item 1: Description of Business).
June 30,
--------------------------------------------------------------------
Revenues: 1998 1997 1996 1995 1994
- --------- ---- ---- ---- ---- ----
Product sales $9,858,343 $ 14,897,144 $14,828,133 $10,298,019 $ 7,366,668
Royalties 2,485,981 1,394,872 1,321,117 1,205,036 228,630
Revenues from product development agreements 15,311,416 5,738,877 7,349,195 11,365,708 9,608,224
Revenues from license and other agreements 1,701,134 5,828,648 12,524,262 17,931,852 1,925,000
Other 2,200,707 1,718,933 1,289,667 543,143 228,853
----------- ------------ ----------- ----------- ----------
TOTAL REVENUES 31,557,581 29,578,474 37,312,374 41,343,758 19,357,375
----------- ------------ ----------- ----------- ----------
Net Income(Loss) $(16,664,999) $(17,954,612) $ 1,054,269 $ 5,605,664 $(3,892,656)
============ ============ =========== =========== ===========
Basic Net Income(Loss) per Common Share $ (1.50) $ (1.67) $ .11 $ .70 $ (.51)
Diluted Net Income(Loss) per Common Share $ (1.50) $ (1.67) $ .10 $ .63 $ (.51)
At year end:
Total Assets $ 51,360,816 $ 37,729,097 $57,129,439 $23,331,019 $10,494,363
Capitalized Lease Obligations $ 3,967,496 $ 585,795 $ 1,853,728 $ 3,012,079 $ 3,484,234
Working Capital (Deficit) $ 29,800,158 $ 23,161,108 $43,524,927 $ 9,310,685 $(2,330,209)
Stockholders' Equity (Deficit) $ 34,815,346 $ 26,418,659 $43,734,040 $ 7,899,667 $(4,930,135)
-27-
Item 7: Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
- -------------
Results of Operations
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
- -------------------------------------------------------------
The Company had a net loss in the year ended June 30, 1998 of $16,665,000
compared to a net loss of $17,955,000 for the year ended June 30, 1997. The loss
is primarily due to (1) expensed costs of ongoing battery product development
and continued market development; (2) losses related to electrode production as
the Company optimizes its product performance; (3) ongoing protection of the
Company's technologies and patents; (4) expenses of additional technical,
manufacturing and engineering support for GM Ovonic L.L.C. ("GM Ovonic"), the
Company's manufacturing joint venture with General Motors Corporation ("General
Motors"), in furtherance of initial nickel metal hydride ("NiMH") battery
production and ongoing technical assistance to other customers; and (5)
development of multi-state electrical memory. The net loss, excluding revenues
from license and other agreements, which are non-recurring, was reduced to
$18,366,000 for the year ended June 30, 1998 from $23,783,000 for the year ended
June 30, 1997.
Product sales consisting of positive and negative battery electrodes,
battery packs and machine building, decreased 34% to $9,858,000 in the year
ended June 30, 1998 from $14,897,000 in the year ended June 30, 1997. Sales of
negative and positive electrodes decreased $1,537,000, primarily due to lower
negative electrode prices and lower shipments to its primary customer. Battery
pack sales decreased 82% to $414,000 from $2,333,000 as GM Ovonic, formerly the
Company's principal battery pack customer, began its own production of battery
packs. Revenues from machine building were $148,000 in the year ended June 30,
1998 down from $1,732,000 in the year ended June 30, 1997 principally due to
completion of the machine building projects for GM Ovonic.
Royalties increased 78% from $1,395,000 in the year ended June 30, 1997 to
$2,486,000 in the year ended June 30, 1998 due to the issuance in Japan of a
basic NiMH battery patent in August, 1997 to the Company's Ovonic Battery
Company Inc. subsidiary ("Ovonic Battery"), causing NiMH battery sales in Japan
to be royalty bearing, and due to higher sales of NiMH batteries worldwide.
Despite the higher volume of NiMH batteries being sold, the royalties the
Company receives were adversely affected by lower sales prices and unfavorable
exchange rates with the Japanese yen. The Company experienced lower levels of
royalties from ECD's phase-change rewritable optical memory technology in 1998
as the Company's licensees prepared to introduce new types of ECD's phase-
change rewritable media products. (See NOTE B - Notes to Consolidated Financial
Statements.)
Revenues from product development agreements increased 167% from $5,739,000
in the year ended June 30, 1997 to $15,311,000 in the year ended June 30, 1998
due to substantially increased revenues from a multi-year, multi-task,
multi-million dollar program with General Motors to develop batteries for
electric and hybrid electric vehicle applications ($6,995,000 in 1998 compared
to $151,000 in 1997) and from contracts with National
-28-
Institute of Standards and Technology ("NIST") in the Company's battery and
optical memory technologies ($1,797,000 in 1998 compared to $706,000 in 1997).
Revenues from product development agreements for ECD's photovoltaic technology
increased 84% from $1,169,000 in the year ended June 30, 1997 to $2,156,000 in
the year ended June 30, 1998.
The Company has $18,461,000 in unrecognized revenues outstanding under
product development agreements with U.S. government or other agencies or
companies. Without giving effect to any new product development agreements which
may be entered into in the year ended June 30, 1999 and based upon scheduled
funding and performance, $15,479,000 is expected to be recorded in revenues from
product development agreements for the year ending June 30, 1999.
Revenues from license and other agreements decreased to $1,701,000 in the
year ended June 30, 1998 from $5,829,000 in the year ended June 30, 1997. 1997
revenues included license fees of $2,000,000 from Sanoh Industrial Co., Ltd.,
$1,000,000 from LG Chemical, Ltd. and $1,246,000 from Canon, Inc. in connection
with license agreements with these companies. 1998 revenues from license and
other agreements include fees of $1,500,000 relating to a technology transfer
agreement with Sovlux Battery and the Chepetsky Mechanical Plant, an enterprise
of the Russian Ministry of Atomic Energy. Revenues from license agreements are
non-recurring and are based upon developing new business relationships. The
Company is actively pursuing its strategy to form strategic alliances to
commercialize its products. It is in negotiations with a number of companies
which could provide additional license fees to the Company in the coming year.
The Company incurred expenses of $28,101,000 ($15,606,000 funded and
$12,495,000 unfunded) in the year ended June 30, 1998 for product development
compared to expenses of $21,422,000 ($5,871,000 funded and $15,551,000 unfunded)
in the year ended June 30, 1997. This planned increase in expenditures for
product development was primarily for continued development of the Company's
"family of batteries" products. The increased expenses of $6,679,000 for product
development were offset by the $9,573,000 increase in revenues from product
development agreements.
Other revenues increased by $482,000 from $1,719,000 in the year ended June
30, 1997 to $2,201,000 in the year ended June 30, 1998 primarily due to
increased billings for work performed for licensees of Ovonic Battery, partially
offset by certain adjustments reducing revenues in 1998 to reflect a change in
estimate of revenues based on information received by the Company pertaining to
certain customers and contracts.
The decrease in cost of product sales to $12,673,000 in the year ended June
30, 1998 from $16,964,000 in the year ended June 30, 1997 was principally due to
the reduced level of machine building for GM Ovonic and reduced sales of battery
packs as GM Ovonic ramped-up its production. The Company has made progress in
its effort to reduce product costs and its cost reduction efforts are focused
on: improving quality control through increased automation, on-line gauging,
improved process monitoring and control, early identification of non-conforming
material and operator training; investing in equipment and equipment upgrades to
minimize downtime and increase productivity; and
-29-
improving the preventive maintenance program to reduce unplanned downtime.
Despite the progress made in reducing costs, the loss on product sales increased
from $2,067,000 in 1997 to $2,815,000 in 1998 due to lower sales and high fixed
costs.
Expenses were incurred in 1998 and 1997 in connection with the defense and
prosecution of litigation with respect to Ovonic Battery's United States patents
covering its proprietary technology for NiMH batteries. These expenses were
reduced to $363,000 in the year ended June 30, 1998 from $3,011,000 in the year
ended June 30, 1997 and relate primarily to the successful conclusion of
litigation involving Matsushita Battery Industrial Co., Ltd. ("MBI") in December
1997.
Operating, general and administrative expenses decreased to $6,405,000 in
the year ended June 30, 1998 from $6,779,000 in the year ended June 30, 1997 due
to increased allocations in 1998 to cost of revenues from product development
agreements which offset higher spending.
Other income of $1,073,000 in the year ended June 30, 1997 compares to
other income of $180,000 in the year ended June 30, 1998. The reduction was due
principally to decreased interest income in 1998 and the recording of the
Company's share of losses of United Solar Systems Corp. ("United Solar") joint
venture of $384,000 for 1998 related to the Company's $2,500,000 investment in
United Solar in May 1998.
The Company does business in many different parts of the world and its
royalty revenues are affected by changes in foreign currencies and their
exchange rates relative to the U.S. dollar. However, the vast majority of the
Company's business agreements are denominated in U.S. dollars and, as such, the
Company has minimized its exposure to currency rate fluctuations.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
- -------------------------------------------------------------
The Company had a net loss in the year ended June 30, 1997 of $17,955,000
compared to net income of $1,054,000 for the year ended June 30, 1996. The
change in profitability was primarily due to the gain on the sale of $4,500,000
of Ovonic Battery stock in the prior year, the approximate $6,700,000 reduction
in one-time license fees in the year ended June 30, 1997 and the investment by
the company of its own funds in the current year to develop a new "family" of
Ovonic NiMH batteries.
The net loss in the year ended June 30, 1997 resulted primarily from (1)
investment of company funds for development of electric and hybrid vehicle
batteries; (2) decreased revenues for such development work; (3) costs related
to start up and expansion of negative electrode production equipment and
initiation of positive electrode production and equipment; (4) expenses of
additional technical, manufacturing and engineering support for the GM Ovonic
manufacturing joint venture in furtherance of initial NiMH battery production
and ongoing technical assistance to other customers; (5) development of
multi-state electrical memory; and (6) costs related to defending the Company's
patents. When revenue from license fees, which are non-recurring and sporadic,
and the gain on the sale
-30-
of Ovonic Battery stock in 1996, are excluded, the decrease in profitability
from 1996 to 1997 is approximately $7,800,000.
Product sales increased slightly to $14,897,000 in the year ended June 30,
1997 from $14,828,000 in the year ended June 30, 1996 due to a $5,900,000
increase in 1997 from sales of negative and positive electrodes, offset by a
$5,900,000 decrease in machine building revenues as a result of completion of
production machinery for GM Ovonic and United Solar.
Royalties increased to $1,395,000 in the year ended June 30, 1997 from
$1,321,000 in the year ended June 30, 1996, primarily due to increases in
royalties from battery technology, partially offset by decreases in royalties
from phase-change rewritable memory products, as prices of these products
decreased pending introduction of newer generation phase-change rewritable
products. Royalties from licensees based in Japan were also negatively impacted
by the weakness in the Japanese yen. (See NOTE B - Notes to Consolidated
Financial Statements).
Revenues from product development agreements decreased 22% from $7,349,000
in the year ended June 30, 1996 to $5,739,000 in the year ended June 30, 1997
due to reductions in 1997 revenues recognized in government sponsored programs
in photovoltaic and battery technologies. This decrease was a result of the U.S.
government spending reduction program. (See NOTE B - Notes to Consolidated
Financial Statements.)
Revenues from license agreements decreased 53% to $5,829,000 in the year
ended June 30, 1997 from $12,524,000 in the year ended June 30, 1996 due to the
reduction in 1997 of battery license agreements. (See NOTE B - Notes to
Consolidated Financial Statements.) Revenues from license agreements are
non-recurring, and are based upon developing new business relationships.
The increase in other revenues was due to increased billings in 1997 for
services performed by the Company's Central Analytical Laboratory, Production
Technology and Machine Building Division, as well as miscellaneous work
performed for Ovonic Battery licensees.
The increase in the cost of product sales to $16,964,000 in the year ended
June 30, 1997 from $15,504,000 in the year ended June 30, 1996 was principally
due to $945,000 in inventory adjustments for Ovonic Battery, primarily related
to obsolescence and changed customer specifications, higher costs related to
start-up and expansion of negative electrode production equipment and initiation
of positive electrode production in 1997.
The decrease in cost of revenues from product development agreements in the
year ended June 30, 1997 compared to the year ended June 30, 1996 was
principally due to decreases in activities during 1997 under the agreements with
USABC, National Renewable Energy Laboratory and Department of Energy.
-31-
The increase in product development expenses to $15,551,000 in the year
ended June 30, 1997 from $9,151,000 in the year ended June 30, 1996 was the
result of the aforementioned reduced funding under the agreements with USABC and
related increased Ovonic Battery product development and research expenses.
Patent defense costs were $2,467,000 in the year ended June 30, 1996 and
$3,011,000 in the year ended June 30, 1997. In 1997, patent defense costs were
incurred for litigation with MBI with respect to certain of Ovonic Battery's
United States patents covering its proprietary technology for NiMH batteries. In
1996, patent defense costs primarily related to the defense and prosecution of
litigation involving SAFT America, Inc. and certain related companies or
entities and MBI.
The change from other income-net of $5,233,000 in the year ended June 30,
1996 compared to $1,073,000 of other income-net in the year ended June 30, 1997
was due principally to the $4,500,000 gain on the sale of Ovonic Battery common
stock in 1996.
Liquidity and Capital Resources
As of June 30, 1998, the Company had unrestricted consolidated cash and
cash equivalents and investments, consisting of commercial paper maturing in
four to six months, of $25,786,000, an increase of $10,746,000 from June 30,
1997. In addition, the Company had accounts receivable at June 30, 1998 of
$8,667,000 compared to $10,801,000 at June 30, 1997. As of June 30, 1998, the
Company had consolidated working capital of $29,800,000 compared with a
consolidated working capital of $23,161,000 as of June 30, 1997.
The Company is pursuing its strategies to commercialize its products
through strategic alliances by forming joint ventures or license agreements with
third parties who can provide financial resources and marketing expertise for
the Company's technologies and products. The Company is also developing its own
capabilities for volume manufacturing of battery electrodes.
During the year ended June 30, 1998, $10,839,000 of cash was used in
operations. The difference between the net loss of $16,665,000 and the net cash
used in operations was due to depreciation expense and a reduction in accounts
receivables. In addition, during this period $1,702,000 of machinery and
equipment was purchased or constructed for the Company's operations.
During the next 12 months, the Company is considering the purchase of up to
$750,000 of machinery and equipment. The machinery and equipment would be
utilized principally for Ovonic Battery's manufacturing operation.
The Company has two major electrode customers for its battery electrode
products, GP Batteries International Limited ("GP Batteries") and GM Ovonic. The
Company and GP Batteries are currently negotiating electrode product
specifications and pricing. These negotiations could result in GP Batteries
manufacturing its own electrode products or
-32-
purchasing such products from a manufacturer other than Ovonic Battery. Sales of
electrode products to GM Ovonic are expected to increase as GM Ovonic ramps up
its production of battery packs at an expanded manufacturing facility.
Nonetheless, sales of electrode products in the near term and in fiscal year
1999 are expected to decrease. The Company has taken steps to reduce its costs
in a manner consistent with the expected lower volumes of electrode product
sales.
The Company expects significant revenues and cash flows related to product
development agreements, many of which already exist, that are entered into by
the Company with U.S. government agencies and with industry partners to develop
the Company's products and production technology. Contracts with industry
partners include a multi-task, multi-million dollar program with General Motors
to develop batteries for electric and hybrid electric vehicle applications which
is presently projected to conclude in June, 1999. This program, which is funded
on a monthly basis, builds upon the Company's earlier investments to develop a
family of batteries and is intended to provide next- and future-generation NiMH
batteries that will be manufactured by GM Ovonic. Three contracts awarded to the
Company by NIST, in the Fall of 1997, under three Advanced Technology Programs
("ATP") will also provide significant cash flows. One contract was awarded to
Ovonic Battery to develop the next generation of high energy density NiMH
batteries using low-cost magnesium-based hydrogen storage materials. The other
two NIST contracts were awarded to ECD to support development of a new, low-cost
manufacturing system for DVD (digital versatile disks) based on ECD's
proprietary phase- change technology and for further development of the optical
memory phase-change products. Generally, the agreed-upon fees for these product
development agreements reimburse the Company for its direct costs associated
with these projects, together with a portion of indirect costs (patents,
operating, general and administrative expenses and depreciation).
In April 1998, the Company entered into a one-year financing agreement with
Standard Federal Bank for a line of credit of up to $5,000,000. This financing
bears an interest rate of prime plus 1/2%, is secured by a first interest in the
Company's accounts receivable and inventory, and contains certain financial
covenants relating to the Company's tangible net worth, working capital and
total debt to tangible net worth. The Company has not borrowed under this
financing agreement.
In April 1998, the Company also entered into a $6,000,000 credit
arrangement with Finova Capital Corporation, which has two components. One
component, which has been fully utilized, provided $2,000,000 to refinance
existing leased equipment, (resulting in $1,200,000 net cash to the Company),
has a three-year term at the expiration of which the Company will be required to
purchase the equipment for $200,000. The second component provides for up to
$4,000,000 of financing through December 31, 1998 for the Company's sale and
leaseback of equipment it acquired subsequent to June 30, 1996. At the
expiration of the related five-year lease, the Company will be required to
purchase the leased equipment for 10% of the original cost. At June 30, 1998 the
Company has entered into sale and leaseback arrangements of $3,137,000 in
connection with the second component.
-33-
In May, 1998, the Company completed a limited public offering of 1,750,000
units, each consisting of one share of ECD Common Stock and one warrant to
purchase one share of ECD Common Stock for net proceeds of approximately
$21,700,000.
The Company is actively pursuing its strategy to form strategic alliances
to further commercialize its products. While the Company is in negotiations with
a number of companies which could provide additional revenue under license and
other agreements for the Company in the coming year, it is unable to predict the
amount, if any, of such revenue.
In August 1997, the Company was issued a basic patent in Japan specifying
the fundamentals that make NiMH batteries commercially feasible and causing NiMH
battery sales in Japan to be royalty bearing. The issuance of this patent has
resulted in higher royalty revenue and is expected to result in the payment of
higher running royalties in the future based upon current production rates and
selling prices of batteries produced in Japan by licensees. Other than the
foregoing, the Company is not aware of other events or circumstances that would
allow it to forecast royalty revenues significantly higher or lower for the next
12 months.
The Company is also actively negotiating new machine-building contracts
that could provide revenues in the coming year and beyond. Machine building is
cyclical but an important part of the Company's business. As of June 30, 1998,
the Company had no backlog of machine-building contracts.
Based upon the above information, the amount of cash to be received under
existing product development agreements in the year ending June 30, 1999 is
anticipated to be approximately $19,000,000 compared to $11,200,000 received
from product development agreements in the year ended June 30, 1998. The amount
of cash for royalties to be received in the year ending June 30, 1999 is
expected to be, based on historical trends, approximately $2,600,000 compared to
$1,989,000 received in the year ended June 30, 1998.
Since license fees are sporadic and difficult to predict, the Company is
unable to predict the amount of cash to be received from license fees in the
year ending June 30, 1999.
Management believes that funds generated from operations and existing cash
and cash equivalents will be adequate to support and finance planned growth,
capital expenditures and company-sponsored product development programs over the
coming year. It is the Company's intent to use its cash and investments to fund
its operations. Additional sources of cash are, however, required to sustain the
Company for the long-term and to build the business in the future. While it is
the Company's intent to fund its operations from cash and cash equivalent
balances on hand and from activities such as product sales, licensing, royalties
and product development agreements, the amount and timing of revenues from such
activities are uncertain such that the Company may be required to seek
additional equity or debt financing.
-34-
Year 2000 Issue
Historically, many computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
program failing to properly recognize a year that begins with "20" instead of
"19." This, in turn, could result in major system failures or miscalculations
and is generally referred to as the "Year 2000 Issue."
The Company has formulated a Year 2000 Plan to address the Company's Year
2000 Issues. The Company's own internal systems are a primary area of focus. The
Company installed a new computer system in July 1997 to run its financial,
business reporting and data processing software applications. The providers of
the application software used in the new computer system have represented the
software to be Year 2000 compliant.
The Company is currently evaluating its other software applications,
including, but not limited to, its computerized laboratory manufacturing
equipment and imbedded chips to identify any Year 2000 Issues that may
significantly disrupt the Company's operations in a material manner.
The Company's Year 2000 Plan is to:
. Inventory hardware, software and equipment
. Test and/or confirm hardware, software and equipment considered
Year 2000 compliant
. Identify Year 2000 issues
. Determine necessary measures to address issues
. Implement remedies
. Test and confirm.
The above steps will overlap to a significant degree and the Company is
currently in various stages of each of these steps. The Company presently plans
to have identified all issues related to critical operations by the end of
calendar 1998 and have implemented remedies no later than June 1999.
The Company believes that most non-compliant software can be upgraded from
equipment manufacturers and software providers. It is currently estimated that
the cost of Year 2000 compliance will be less than $250,000, primarily for the
purchase of upgraded software and new or upgraded computers. This preliminary
estimate is based on presently available information and will be updated as the
Company continues to implement its Year 2000 Plan.
If the Company's new computer system fails with respect to the Year 2000
Issue or if any applications or embedded chips critical to the Company's
manufacturing process are overlooked, there could be a material adverse impact
on the business operations or financial performance of the Company.
Additionally, there can be no assurance that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with
-35-
the Company's systems, would not have material adverse effect on the business
operations or financial performance of the Company. In particular, if third
party providers, due to the Year 2000 Issue, fail to provide the Company with
components, materials or energy which are necessary to timely complete
contractual requirements or to manufacture its products, then any such failure
could have a material adverse effect on the business operations and financial
performance of the Company.
The Company has not yet established a contingency plan, but intends to
formulate one to address unavoided or unavoidable risks and expects to have the
contingency plan formulated by July 1999.
-36-
Item 8: Consolidated Financial Statements and Supplementary Data
- ------- --------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
Board of Directors
Energy Conversion Devices, Inc.
Troy, Michigan
We have audited the accompanying consolidated balance sheets of Energy
Conversion Devices, Inc. and subsidiary (the "Company") as of June 30, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1998 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Detroit, Michigan
October 8, 1998
-37-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
June 30,
-----------------------
1998 1997
---------- ----------
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of
$25,780,000 at June 30, 1998 and
$14,265,000 at June 30, 1997 $25,786,112 $14,270,145
Investments (including restricted investments
of $290,000 at June 30, 1997) -- 1,059,933
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$315,000 at June 30, 1998 and $140,000
at June 30, 1997) 8,666,952 10,800,813
Amounts due from related parties 1,491,115 1,809,414
Inventories 1,074,097 1,626,065
Prepaid expenses and other current assets 374,590 404,204
---------- ----------
TOTAL CURRENT ASSETS 37,392,866 29,970,574
PROPERTY, PLANT AND EQUIPMENT (NOTES A and E)
Land and land improvements 312,588 312,588
Buildings and improvements 3,666,411 3,785,827
Machinery and other equipment (including
construction in progress of
approximately $785,000 and $1,647,000 at
June 30, 1998 and 1997) 16,870,261 19,517,585
Capitalized lease equipment 5,383,672 5,699,048
---------- ----------
26,232,932 29,315,048
Less accumulated depreciation
and amortization (17,641,505) (22,346,615)
---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT 8,591,427 6,968,433
Investments in EV Global and Unique Mobility (NOTE A) 1,953,000 --
JOINT VENTURES (NOTE D)
United Solar 2,115,914 --
GM Ovonic -- --
Sovlux -- --
OTHER ASSETS 1,307,609 790,090
---------- ----------
TOTAL ASSETS $51,360,816 $37,729,097
========== ==========
See notes to consolidated financial statements.
-38-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
--------------------------
1998 1997
----------- -----------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,443,189 $ 3,669,167
Salaries, wages and amounts withheld
from employees 1,413,217 1,144,446
Deferred revenues under business
agreements (NOTE A) 417,082 671,531
Current installments on capitalized lease
obligations (NOTE E) 1,319,220 1,324,322
----------- -----------
TOTAL CURRENT LIABILITIES 7,592,708 6,809,466
CAPITALIZED LEASE OBLIGATIONS (NOTE E) 3,967,496 585,795
DEFERRED GAIN (NOTE E) 1,551,146 223,691
NON-REFUNDABLE ADVANCE ROYALTIES
(NOTE C) 3,434,120 3,691,486
----------- -----------
TOTAL LIABILITIES 16,545,470 11,310,438
STOCKHOLDERS' EQUITY
Capital Stock (NOTES F and G)
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Common Stock, par value $0.01 per share:
Authorized - 20,000,000 shares
Issued & outstanding - 12,639,817
shares at June 30, 1998 and
10,603,251 shares at June 30, 1997 126,398 106,033
Additional paid-in capital 227,092,920 202,004,599
Unrealized loss on investment (Note A) (47,000) --
Accumulated deficit (191,750,363) (175,085,364)
Treasury stock at cost - 42,000 shares (608,808) (608,808)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 34,815,346 26,418,659
------------ -----------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 51,360,816 $ 37,729,097
============ ============
See notes to consolidated financial statements.
-39-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Years ended June 30,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
REVENUES (NOTES A and B)
Product sales $ 9,858,343 $14,897,144 $14,828,133
Royalties 2,485,981 1,394,872 1,321,117
Revenues from product development
agreements 15,311,416 5,738,877 7,349,195
Revenues from license and other agreements 1,701,134 5,828,648 12,524,262
Other 2,200,707 1,718,933 1,289,667
----------- ----------- -----------
TOTAL REVENUES 31,557,581 29,578,474 37,312,374
EXPENSES
Cost of product sales (NOTE A) 12,673,323 16,964,429 15,504,385
Cost of revenues from product
development agreements (NOTE A) 15,605,895 5,870,725 7,581,904
Product development and research (NOTE A) 12,495,195 15,550,775 9,151,167
Patent Defense (NOTE A) 363,164 3,011,133 2,467,295
Patents (NOTE A) 859,566 429,980 381,186
Operating, general and administrative 6,405,011 6,779,003 6,405,162
----------- ----------- -----------
TOTAL EXPENSES 48,402,154 48,606,045 41,491,099
----------- ----------- -----------
LOSS FROM OPERATIONS (16,844,573) (19,027,571) (4,178,725)
OTHER INCOME (EXPENSE):
Equity in loss of Joint Venture (384,000) -- --
Gain on sale of Ovonic Battery Company stock -- -- 4,500,000
Interest expense (137,541) (384,468) (445,933)
Interest income 598,940 1,308,344 1,090,952
Other nonoperating income - net 102,175 149,083 87,975
----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 179,574 1,072,959 5,232,994
----------- ----------- -----------
NET INCOME (LOSS) $(16,664,999) $(17,954,612) $ 1,054,269
============ ============ ===========
BASIC NET INCOME (LOSS) PER
COMMON SHARE (NOTE H) $ (1.50) $ (1.67) $ .11
============ ============ ===========
DILUTED NET INCOME (LOSS) PER
COMMON SHARE (NOTE H) $ (1.50) $ (1.67) $ .10
============ ============ ==========
See notes to consolidated financial statements.
-40-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES F and G)
---------------------------------------------------------------
Three years ended June 30, 1998
Class A Convertible
Common Stock Common Stock Treasury Stock
------------------- ------------------- ----------------
Number Number Additional Number Total
of of Paid-In Accumulated of Stockholders'
Shares Amount Shares Amount Capital Deficit Shares Amount Equity
------- -------- ---------- -------- ------------ ------------- ------- ------- -------------
Balance at July 1, 1995 219,913 $ 2,199 8,078,667 $ 80,787 $166,001,702 $(158,185,021) $ 7,899,667
Net income for year ended
June 30, 1996 1,054,269 1,054,269
Issuance of stock to directors
and consultants 6,899 69 59,395 59,464
Public Offering of common
stock 1,650,000 16,500 27,764,555 27,781,055
Common stock issued in
connection with exercise of
stock options and warrants
and conversion of certain
securities 754,025 7,540 6,932,045 6,939,585
------- ------- ---------- -------- ----------- ------------- ------- -------- -----------
Balance at June 30, 1996 219,913 2,199 10,489,591 104,896 200,757,697 (157,130,752) 43,734,040
Net loss for year ended
June 30, 1997 (17,954,612) (17,954,612)
Issuance of stock to directors
and consultants 3,040 31 119,172 119,203
Common stock issued in
connection with exercise of
stock options and warrants 110,620 1,106 1,127,730 1,128,836
Purchase of treasury stock (42,000) (608,808) (608,808)
------- ------- ---------- -------- ------------ ------------- ------- ---------- -----------
Balance at June 30, 1997 219,913 $ 2,199 10,603,251 $106,033 $202,004,599 $(175,085,364) (42,000) $(608,808) $26,418,659
======= ======= ========== ======== ============ ============= ======= ========= ===========
-41-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES F and G)
---------------------------------------------------------------
Three years ended June 30, 1998
(CONTINUED)
Class A Convertible
Common Stock Common Stock Treasury Stock
------------------- ----------------- ---------------
Number Number Additional Unrealized Number Total
of of Paid-In Loss on Accumulated of Stockholders'
Shares Amount Shares Amount Capital Investment Deficit Shares Amount Equity
------ ------ ---------- -------- ------------ ---------- ------------- -------- --------- -------------
Balance at
June 30, 1997 219,913 $2,199 10,603,251 $106,033 $202,004,599 $(175,085,364) (42,000) $(608,808) $ 26,418,659
Net loss for year
ended June 30, 1998 (16,664,999) (16,664,999)
Issuance of stock to
directors and
consultants 3,564 36 84,960 84,996
Public Offering of
common stock and
warrants 1,750,000 17,500 21,704,450 21,721,950
Common stock issued
in connection with
exercise of stock
options and warrants
and conversion of
certain securities 135,866 1,358 1,300,382 1,301,740
Common stock issued in
connection with
conversion of CICs 212 2 (2)
Common stock and
warrants issued to
EV Global 146,924 1,469 1,998,531 2,000,000
Unrealized loss on
investment $(47,000) (47,000)
------- ------ ---------- -------- ------------ --------- ------------- ------- ---------- ------------
Balance at
June 30, 1998 219,913 $2,199 12,639,817 $126,398 $227,092,920 $(47,000) $(191,750,363) (42,000) $(608,808) $ 34,815,346
======= ====== ========== ======== ============ ========= ============== ======== ========== ============
See notes to consolidated financial statements.
-42-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years ended June 30,
------------------------------------------------
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $(16,664,999) $ (17,954,612) $ 1,054,269
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 2,130,494 2,312,661 1,890,484
Equity in Loss of United Solar 384,000
Gain on sale of Ovonic Battery stock -- -- (4,500,000)
Creditable royalties (257,366) (62,743) (144,148)
Options issued to executive
for services rendered 453,000 453,000 453,000
Stock issued for services rendered 84,996 119,203 59,464
Loss (gain) on sale of equipment -- (13,544) 52,429
Amortization of deferred gain (274,025) (462,660) (462,660)
Changes in working capital:
Accounts receivable and amounts due from
related parties 2,452,160 277,004 (4,727,022)
Inventories 551,968 1,649,070 (1,220,385)
Prepaid expenses and other assets (487,905) (27,729) (72,765)
Accounts payable and accrued expenses 1,042,793 (272,611) 81,336
Deferred revenues under business agreements (254,449) (40,363) (172,257)
------------- -------------- ------------
NET CASH USED IN OPERATIONS (10,839,333) (14,023,324) (7,708,255)
------------- -------------- ------------
INVESTING ACTIVITIES:
Investment in United Solar (2,499,914) -- --
Purchases of capital equipment (net) (1,701,536) (3,577,478) (1,887,118)
Purchase of investments (3,085,435) (3,903,820) (10,327,352)
Sales of investments 4,145,368 13,171,239 --
Proceeds from sale of capital equipment -- 9,342 7,600
------------- -------------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,141,517) 5,699,283 (12,206,870)
------------- -------------- ------------
FINANCING ACTIVITIES:
Purchase of treasury stock -- (608,808) --
Principal payments under short-term and long-
term debt obligations and capitalized lease
obligations (1,604,599) (1,259,511) (1,505,385)
Proceeds from capital lease transactions 4,530,725 12,927 167,161
Proceeds from sale of stock of subsidiary -- -- 4,500,000
Net Proceeds from sale of stock and warrants 21,721,950 -- --
Proceeds from sale
of stock upon exercise of stock options
and warrants 848,741 675,836 34,267,640
------------- -------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 25,496,817 (1,179,556) 37,429,416
------------- -------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 11,515,967 (9,503,597) 17,514,291
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,270,145 23,773,742 6,259,451
------------- -------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,786,112 $ 14,270,145 $ 23,773,742
============= ============ ============
See notes to consolidated financial statements.
-43-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended June 30,
-----------------------------------
1998 1997 1996
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 137,541 $ 384,468 $ 445,933
The Company's non-cash investing and
financing activities were as follows:
Investments in EV Global and
Unique Mobility $2,000,000
Unrealized loss on investment (47,000)
See notes to consolidated financial statements.
-44-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies
- ---------------------------------------
Nature of Business
Energy Conversion Devices, Inc. ("ECD") has established a
multi-disciplinary business, scientific and technical organization to
commercialize products based on its technologies. Its activities range from
product development to manufacturing and selling products as well as designing
and building production machinery with an emphasis on alternative energy and
advanced information technologies.
Financial Statement Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of ECD and its
93.5%-owned subsidiary Ovonic Battery Company, Inc. ("Ovonic Battery"), a
company formed to develop and commercialize ECD's Ovonic NiMH battery technology
(collectively, the "Company"). In the year ended June 30, 1996, ECD sold
approximately 3.3% of its interest in Ovonic Battery to another entity and
realized a gain on this sale. Due to cumulative losses incurred by Ovonic
Battery, no minority interest is recorded in the consolidated financial
statements.
ECD also has two major investments accounted for by the equity method: (i)
United Solar Systems Corp. ("United Solar") (49.98%), ECD's photovoltaic (solar
energy) joint venture with Canon Inc. of Japan ("Canon") and (ii) GM Ovonic
L.L.C. ("GM Ovonic") (40%), Ovonic Battery's joint venture with General Motors
Corporation ("General Motors") to manufacture and sell the Company's proprietary
NiMH batteries for electric vehicle applications worldwide. Additionally, the
Company has a 50%-owned joint venture in Russia, Sovlux Co., Ltd. ("Sovlux").
See NOTE D for a discussion of these ventures.
Upon consolidation, all intercompany accounts and transactions are
eliminated.
Certain items for the years ended June 30, 1997 and 1996 have been
reclassified to be consistent with the classification of items in the year ended
June 30, 1998.
In preparing financial statements in conformity with Generally Accepted
Accounting Principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual results could differ
from those estimates. In addition, the Company has certain concentrations of
revenues as described in Note B. The Company is impacted by other factors such
as the continued receipt of contracts from the U.S. government and industrial
partners, its ability to protect and maintain the proprietary
-45-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
nature of its technology, its continued product and technological advances and
the strength and ability of the Company's licensees and joint venture partners
to commercialize the Company's products and technologies.
In February 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share. The Statement simplifies the
standards for computing earnings per share (for years in which there is net
income). The Company adopted this new method of accounting in its second quarter
of fiscal 1998. Adoption of this Statement did not have a material impact on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. The Statement establishes standards for reporting and display of
comprehensive income and its components and requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company will be required to adopt the provisions of this statement in fiscal
1999. Adoption of this Statement is not expected to have a material impact on
the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. This Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company has not completed
its analysis of this Statement and its impact on disclosures. In the initial
year of application, comparative information for earlier years is to be
restated. This Statement need not be applied to interim financial statements in
the initial year of its application, but comparative information for interim
periods in the initial year of application is to be reported in financial
statements for interim periods in the second year of application. The Company
will be required to adopt the provisions of this statement in fiscal 1999.
Adoption of this Statement is not expected to have an impact on the Company's
financial statements.
-46-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
Cash Equivalents
Cash equivalents consist of investments in short-term, highly liquid
securities having a maturity of three months or less from the date of
acquisition.
Short-term Investments
Investments consist of commercial paper, classified as available for sale,
maturing in four to six months from date of acquisition and are stated at cost,
which approximates fair market value.
Investments in EV Global and Unique Mobility, Inc.
- --------------------------------------------------
On February 2, 1998, the Company and EV Global Motors Company ("EV
Global") entered into a Stock Purchase Agreement ("Agreement") which provided
for the transfer to EV Global of 146,924 shares of the Company's Common Stock
and warrants to purchase 133,658 shares of the Company's Common Stock. The
Agreement also provided for the transfer to the Company of 250,000 shares of EV
Global Common Stock and 129,241 shares of Unique Mobility, Inc. Common Stock.
The warrants are exercisable prior to February 2, 2003, with 73,462 shares
exercisable at $13.6125 and 60,196 shares exercisable at $16.6125.
The Company accounts for its investment in EV Global, a non-public
company, under the cost method of accounting. The Company accounts for its
investment in Unique Mobility, Inc. in accordance with SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities, and has classified this
security as available-for-sale. Unrealized gains or losses as a result of
changes in the market value of the Unique Mobility investments are
marked-to-market, with the offset recorded to Stockholders' Equity.
Neither investment is considered impaired as of June 30, 1998.
Financial Instruments
The Company considers the carrying value of its financial instruments to
be a reasonable estimate of fair value.
-47-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
Translation Gains and Losses
Since all of the Company's contracts and transactions are denominated and
settled in U.S. dollars, there are no foreign currency gains or losses.
Accounts Receivable
The following tabulation shows the component elements of accounts
receivable from long-term contracts, royalties and other programs:
June 30,
------------------------------
1998 1997
---- ----
U.S. Government:
Amounts billed $ 717,281 $ 572,193
Unbilled 812,439 797,558
----------- ------------
Total 1,529,720 1,369,751
----------- ------------
Commercial Customers:
Amounts billed 5,480,895 1,701,006
Related party billed
- United Solar 169,847 19,840
- GM Ovonic 729,561 1,072,546
Royalties 1,157,619 714,530
License fees 300,000 6,766,262
Due per contracts 353,954 --
Related party unbilled
- GM Ovonic 591,707 717,028
Other unbilled 2,358 281,580
----------- ------------
Total 8,785,941 11,272,792
----------- ------------
Other 157,406 107,684
Allowance for Uncollectible Accounts (315,000) (140,000)
----------- ------------
TOTAL $10,158,067 $12,610,227
=========== ============
Amounts due per contracts, related party unbilled and other unbilled from
commercial customers represent revenues recognized for the present value of
license payments to be received in future periods. They also include revenues
recognized on the percentage-of-completion method of accounting related to
machine-building contracts and amounts earned under certain commercial
contracts, for which amounts are billed in subsequent months.
Certain contracts with the U.S. government require a retention that is paid
upon completion of audit of the Company's indirect rates. There are no material
retentions at June 30, 1998 and 1997. Certain U.S. government contracts remain
subject to audit.
-48-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
Management believes that adjustments, if any, which may result from an audit
would not be material to the financial position or results of operations of the
Company.
Inventories
Inventories of raw materials, work in process and finished goods for the
manufacture of electrodes, battery packs and other products, together with
supplies, are valued at the lower of actual cost or market. Cost elements
included in inventory are materials, direct labor and manufacturing overhead.
Cost of sales is removed from inventory based on actual costs of items shipped
to customers.
Inventories (principally those of Ovonic Battery) are as follows:
Years Ended June 30,
--------------------------
1998 1997
---- ----
Finished products $ 119,649 $ --
Work in process 511,582 1,010,989
Raw materials 442,866 615,076
----------- ----------
$1,074,097 $1,626,065
=========== ==========
Property, Plant and Equipment
All properties are recorded at cost. Plant and equipment are depreciated
on the straight-line method over the estimated useful lives of the individual
assets. The estimated lives of the principal classes of assets are as follows:
Years
-----
Buildings and improvements 5 to 20
Machinery and other equipment 3 to 10
Capitalized lease equipment and
leasehold improvements 3 to 5
Capitalized lease equipment and leasehold improvements are amortized over
the shorter of the term of the lease or the life of the equipment or
improvement, usually three to five years. Accumulated amortization on
capitalized lease equipment as of June 30, 1998 and June 30, 1997 was $258,800
and $3,136,000, respectively.
Costs of machinery and other equipment acquired or constructed for a
particular product development project, which have no alternative future use (in
other product
-49-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
development projects or otherwise), are charged to product development and
research costs as incurred.
Expenditure for maintenance and repairs are charged to operations.
Expenditures for betterments or major renewals are capitalized and are
depreciated over their estimated useful lives.
Product Development and Research
Total direct product development and research costs, a portion of which
are included in cost of revenues from product development agreements, were
$21,247,000, $16,732,000 and $12,947,000 for the three years ended June 30,
1998, 1997 and 1996, respectively.
Patents
Patent expenditures are charged directly to expense. Total patent
expenditures, a portion of which are allocated for financial statement purposes
to cost of revenues from product development agreements and product development
and research were $1,507,000, $1,002,000 and $945,000 for the three years ended
June 30, 1998, 1997 and 1996, respectively. Patent defense expenditures, which
are incurred by the Company to protect its patents and to defend or prosecute
claims involving the Company's patents, are charged directly to expense.
Product Sales
Product sales include battery electrodes, revenues related to building of
battery packs, and revenues related to machine-building contracts. Revenues
related to machine-building 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. In certain cases, costs of sales exceeds
product sales due to significant changes in products and manufacturing methods.
Royalties
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the
-50-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
sale of the respective licensed product. In several instances, the Company has
received cash payments for non-refundable advance royalty payments which are
creditable against future royalties under the licenses. Advance royalty payments
are deferred and recognized in revenues as the creditable sales occur, the
underlying agreement expires, or when the Company has demonstrable evidence that
no additional royalties will be creditable and, accordingly, the earnings
process is completed.
For both ECD and Ovonic Battery royalties, there are royalty trust or
contingent fee arrangements whereby the Company is obligated to pay a trust 25%
of optical memory royalties received and a law firm 25% of Ovonic Battery
royalties received relative to consumer battery licenses entered into in 1995 in
settlement of an International Trade Commission action.
Business Agreements
A substantial portion of revenues are derived through business agreements
for the development and/or commercialization of products based upon the
Company's proprietary technologies. Such agreements are of two types.
The first type of business agreement relates to licensing the Company's
proprietary technology. Licensing activities are tailored to provide each
licensee with the right to use the Company's technology, most of which is
patented, for a specific product application or, in some instances, for further
exploration of new product applications of such technologies. The terms of such
licenses, accordingly, are tailored to address a number of circumstances
relating to the use of such technology which have been negotiated between the
Company and the licensee. Such terms generally address whether the license will
be exclusive or nonexclusive, whether the licensee is limited to very narrowly
defined applications or to broader-based product manufacture or sale of products
using such technologies, whether the license will provide royalties for products
sold which employ such licensed technology and how such royalties will be
measured, as well as other factors specific to each negotiated arrangement. In
some cases, licenses relate directly to product development that the Company has
undertaken pursuant to product development agreements; in other cases, they
relate to product development and commercialization efforts of the licensee and
other agreements combine the efforts of the Company with those of the licensee.
License agreement fees are generally recognized as revenue at the time the
agreements are consummated, which is the completion-of-the-earnings process.
Typically, such fees are non-refundable, do not obligate the Company to incur
any future
-51-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
costs or require future performance by the Company and are not related to future
production or earnings of the licensee. License fees payable in installments are
recorded at the present value of the amounts to be received taking into account
the collectibility of the license fee. In some instances, a portion of such
license fees is contingent upon the commencement of production or other
uncertainties. In these cases, license fee revenues are not recognized until
commencement of production or the resolution of uncertainties. There are no
current or future direct costs associated with license fees.
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project based on the relationship of costs
incurred to estimated total project costs. Revenue from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the
agreed-upon fees for product development agreements contemplate reimbursing the
Company for costs considered associated with project activities including
expenses for direct product development and research, patents, operating,
general and administrative expenses and depreciation. Accordingly, expenses
related to product development agreements are recorded as cost of revenues from
product development agreements.
Overhead Allocations
The Company allocates overhead to product development research expenses
and to cost of revenues from research and development agreements based on a
percentage of direct labor costs. For cost of revenues from product development
agreements, this allocation is limited to the amount of revenues, after direct
expenses, under the applicable agreements. Overhead is allocated to cost of
product sales through the application of overhead to inventory costs.
Other Operating Revenues
Other operating revenues consist of billings for work performed for
licensees and third-party service revenue realized by certain of the Company's
service departments, including the Production Technology and Machine Building
Division and Central Analytical Laboratory, and changes in estimates of revenues
recognized on certain customers and contracts.
-52-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
Other Non-operating Income
Other non-operating income-net consists of rental income and gains and
losses on sale of fixed assets.
NOTE B - Product Sales, Royalties, Revenues from Product Development
- --------------------------------------------------------------------
Agreements and License and other Agreements
-------------------------------------------
The Company has product sales and business agreements with third parties
for which royalties and revenues are included in the consolidated statements of
operations. A summary of all of the Company's revenues follows:
Years Ended June 30,
-------------------------------------------
1998 1997 1996
---- ---- ----
Product Sales:
Negative and positive electrodes $ 9,295,574 $10,832,282 $ 4,902,836
Battery packs 414,469 2,333,276 2,257,971
Machine building 148,300 1,731,586 7,667,326
----------- ----------- -----------
$ 9,858,343 $14,897,144 $14,828,133
=========== =========== ===========
Royalties:
Battery technology $ 2,479,319 $ 1,258,633 $ 1,149,198
Optical Memory 6,662 136,239 171,919
----------- ----------- -----------
$ 2,485,981 $ 1,394,872 $ 1,321,117
=========== =========== ===========
Revenues from product development agreements:
Photovoltaics $ 2,156,080 $ 1,168,718 $ 1,870,946
Battery technology 10,668,813 2,660,342 3,823,403
Microelectronics 1,357,128 824,892 900,000
Hydrogen 585,103 679,174 603,056
Other 544,292 405,751 151,790
------------ ----------- -----------
$ 15,311,416 $ 5,738,877 $ 7,349,195
============ =========== ===========
License and other agreements:
Battery $ 1,701,134 $ 4,448,004 $11,024,262
Microelectronics -- 1,380,644 1,500,000
------------ ----------- -----------
$ 1,701,134 $ 5,828,648 $12,524,262
============ =========== ===========
-53-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE B - Product Sales, Royalties, Revenues from Product Development
- --------------------------------------------------------------------
Agreements and License and other Agreements - (Continued)
---------------------------------------------------------
The Company historically has entered into agreements with a relatively
small number of major customers throughout the world. Revenues from unaffiliated
foreign customers represent approximately 31%, 58% and 41% for the years ended
June 30, 1998, 1997 and 1996, respectively. There are three major customers
which represent a total of 62% of total revenue for the year ended June 30, 1998
(24% for General Motors, 15% for GM Ovonic and 23% for GP Batteries
International Limited ("GP Batteries"). There are two major customers which
represent a total of 56% of total revenue for the year ended June 30, 1997
(26% for GM Ovonic and 30% for GP Batteries). There are two major customers
which represent a total of 27% (11% for GM Ovonic and 16% for Asia Pacific
Investment Co.) of total revenue for the year ended June 30, 1996.
NOTE C - Non-Refundable Advance Royalties
- -----------------------------------------
At June 30, 1998 and 1997 the Company deferred recognition of revenue
relating to non-refundable advance royalty payments. Non-refundable advance
royalties consist of the following:
June 30,
-------------------------
1998 1997
----------- ----------
Battery $ 1,338,802 $1,647,592
Optical Memory 2,095,318 2,043,894
----------- ----------
$ 3,434,120 $3,691,486
=========== ==========
During the years ended June 30, 1998, 1997 and 1996, $257,366, $62,743 and
$144,148, respectively, of creditable royalties earned were recognized as
revenue. There are no obligations in connection with any of the advance royalty
agreements which require the Company to incur any additional costs.
NOTE D - Joint Ventures
- -----------------------
The Company's investments in its joint ventures, other than United Solar,
are recorded at zero. The Company will continue to carry its investment in each
of these joint ventures at zero until the venture becomes profitable (based upon
the venture's history of sustainable profits), at which time the Company will
start to recognize over a period of years its share, if any, of the then equity
of each of the ventures, and will recognize its share of each venture's profits
or losses on the equity method of accounting.
The Company invested $2,500,000 in United Solar in May 1998, and therefore
its investment is recorded at the amount of cash directly invested adjusted for
the net earnings or losses for each respective period. The Company will suspend
recognition of
-54-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures - (Continued)
- -------------------------------------
net earnings or losses should the calculated investment go below zero or above
$2,500,000. The Company will continue to carry its investment in United Solar at
an amount no higher than its cash investment until it becomes profitable (based
upon its history of sustainable profits), at which time the Company will start
to recognize over a period of years its share, if any, of the then equity of
United Solar, and will recognize its share of United Solar's profits or losses
on the equity method of accounting.
Based upon the opinion of legal counsel, the Company believes that it has
no obligation to fund any losses that its joint ventures incur beyond the
Company's investment. Additionally, the Company has no financial or other
guarantees with respect to liabilities incurred by its joint ventures.
United Solar
In 1990, ECD and Canon entered into a joint venture agreement for the
formation of United Solar. United Solar is owned 49.98% by ECD, 49.98% by Canon.
ECD has contributed to United Solar a license in the field of photovoltaics,
certain solar cell manufacturing and photovoltaic product development equipment,
leasehold improvements, furniture and fixtures, inventory and supplies. In
return for the contribution of these assets, ECD received 49.98% equity interest
in United Solar. In return for its 49.98% equity interest in United Solar, Canon
has invested $58,000,000, including the $2,500,000 investment in 1998 described
below.
In May 1998, ECD and Canon each invested $2,500,000 in United Solar to
fund United Solar's continuing operations. During 1998 ECD recorded $384,000 as
its share of the losses (after ECD's investment) of United Solar.
In 1997, Canon entered into an agreement with United Solar whereby, in
consideration of an $11.5 million payment to United Solar, Canon, in addition to
its exclusive rights to manufacture photovoltaic products in Japan, has been
permitted to expand its rights to manufacture photovoltaic products on a
non-exclusive basis in Australia and one country of Europe as determined by
Canon. In addition, ECD received a $500,000 fee from Canon in connection with
this agreement.
ECD performed laboratory, shop, patent and research services for the
benefit of United Solar for which ECD received approximately $ 315,000, $144,000
and $128,000 in the years ended 1998, 1997 and 1996, respectively. These amounts
are included in other revenues. In addition, in the years ended June 30, 1998,
1997 and 1996, United Solar billed ECD for approximately $180,000, $296,000 and
$289,000, respectively, for work performed in accordance with a U.S. Government
contract.
-55-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures - (Continued)
- -------------------------------------
In 1995, ECD received a $7,966,000 order from United Solar for solar cell
manufacturing equipment to provide production capacity of solar cells capable of
producing five megawatts of electricity on an annual basis. In the year ended
June 30, 1998, 1997 and 1996, ECD recognized revenue of $0, $175,000 and
$4,702,000, respectively, under this order.
The following sets forth certain financial data regarding United Solar
that are derived from United Solar's financial statements.
UNITED SOLAR STATEMENTS OF OPERATIONS
Six Months
Ended June 30, Year Ended December 31,
-------------- -----------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Revenues $ 5,040,824 $ 9,661,402 $ 5,222,970
Operating Expenses
Cost of sales 6,391,855 14,158,315 7,846,603
Product development 1,397,265 2,789,524 2,029,297
General and administrative 658,572 1,533,295 1,672,706
Sales and marketing 761,222 1,785,465 1,590,200
------------ ---------- ----------
Total 9,208,914 20,266,599 13,138,806
------------ ---------- ----------
Other Income (Expense) (345,720) 10,785,471* (191,577)
------------ ---------- ----------
Net Income (Loss) $ (4,513,810) $ 180,274 $(8,107,413)
============ ========== ==========
*Includes royalty income of $11,500,000.
-56-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures - (Continued)
- -------------------------------------
UNITED SOLAR BALANCE SHEETS
---------------------------
June 30, December 31,
------------ ------------
1998 1997
---- ----
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 4,091,047 $ 716,461
Accounts Receivable 1,748,857 2,402,559
Inventory 3,361,684 2,633,131
Other Current Assets 462,282 475,145
----------- -----------
Total Current Assets 9,663,870 6,227,296
Property, Plant and Equipment (Net) 11,575,454 12,595,857
Other Assets 183,763 216,794
----------- -----------
Total Assets $21,423,087 $19,039,947
=========== ===========
Current Liabilities:
Current Maturities of Long-Term Debt $ 1,445,703 $ 1,445,703
Accounts Payable and Accrued Expenses 2,609,402 2,815,874
----------- -----------
Total Current Liabilities 4,055,105 4,261,577
----------- -----------
Note Payable-Canon 2,500,000 --
----------- -----------
Lease Payable 7,743,143 8,139,551
----------- -----------
Total Stockholders' Equity 7,124,839 6,638,819
----------- -----------
Total Liabilities and Stockholders' Equity $21,423,087 $19,039,947
=========== ===========
GM Ovonic
In June 1994, Ovonic Battery and General Motors formed a joint venture for
the manufacture and commercialization of Ovonic NiMH batteries for electric
vehicles. General Motors has a 60% interest and Ovonic Battery has a 40%
interest in this joint venture. Ovonic Battery has contributed intellectual
property, licenses, production processes, know-how, personnel and engineering
services pertaining to Ovonic NiMH battery technology to the joint venture. The
contribution of General Motors consists of operating capital, plant, equipment
and management personnel necessary for the volume production of batteries.
In October 1995, the Company received a $3,710,000 order, as amended, from
GM Ovonic for battery manufacturing equipment. In the years ended June 30, 1998,
1997 and 1996 ECD recognized revenue of $133,000, $1,448,000 and $2,129,000,
respectively, under this order.
During the years ended June 30, 1998, 1997 and 1996, the Company had
revenues, including the aforementioned machine-building revenues, of $4,871,000,
$7,776,000 and $4,118,000, respectively, related to sales of products to GM
Ovonic and for reimbursement of services performed for GM Ovonic.
-57-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures - (Continued)
- -------------------------------------
There are no financial statements currently available for GM Ovonic. GM
Ovonic is in its developmental stage and, as such, has a history of operating
losses.
Sovlux
In 1990, the Company also formed Sovlux, a joint venture to manufacture
the Company's photovoltaic products in the countries of the former Soviet Union.
Sovlux is owned 50% by the Company and 50% by the State Research and Production
Enterprise Kvant and enterprises of the Russian Ministry of Atomic Energy
("MINATOM"). The Company's contribution to the venture consists solely of the
technology necessary to support Sovlux's operations.
Sovlux has conducted pre-production activities consisting of manufacturing
plant preparation and optimization of ECD-built manufacturing equipment to
provide 2 MW of solar cell production capacity. Sovlux received two U.S.
Government contracts in 1998 in connection with certain of its operations.
However, Sovlux has not been able to commence volume production of photovoltaic
products due to MINATOM's inability to provide the required operating capital
due to current economic conditions in Russia.
In March 1998, the Company announced the formation of Sovlux Battery, a new
affiliate of Sovlux , owned 50% by the Company and 50% by the Chepetsky
Mechanical Plant ("Chepetsky") an enterprise of MINATOM. Sovlux Battery also
plans to produce NiMH batteries and components for sale to Ovonic Battery and
its licensees. Sovlux Battery also plans to manufacture batteries for the
emerging two- and three-wheeled electric vehicle market in Europe and Asia and
for four-wheeled electric vehicles in Russia.
In 1998, the Company recorded revenues of $1,500,000 and received cash of
$1,200,000 for license fees relating to a technology transfer agreement with
Sovlux Battery and Chepetsky.
There are no financial statements currently available for Sovlux or Sovlux
Battery. Sovlux and Sovlux Battery are in their developmental stage and, as
such, have a history of operating losses.
-58-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE E- Capitalized Lease Obligations and Line of Credit
- --------------------------------------------------------
A summary of the Company's capitalized lease agreements is as follows:
June 30,
-------------------------
1998 1997
---------- ----------
Financing Lease for headquarters building with
interest at 8.2% and monthly payments of $19,250 $ 344,419 $ 540,057
Capitalized leases with Finova
(with interest rates of approximately 12% at
June 30, 1998 and ranging between 5% and 13%
at June 30, 1997) 4,799,551 1,248,597
Other capitalized leases 142,746 121,463
---------- ----------
Total 5,286,716 1,910,117
Less amounts included in current liabilities 1,319,220 1,324,322
---------- ----------
Total Long-Term Capitalized Lease Obligation $ 3,967,496 $ 585,795
========== ==========
Financing Lease
In 1990, ECD entered into a 10-year financing lease transaction relating
to certain buildings and land. The terms of the transaction included an option
for ECD to purchase the buildings and land in the sixth year of the lease for
$2,150,000, increasing 5% each year thereafter. The Company has not exercised
the option.
Capitalized Leases
In April 1998, the Company entered into a $6,000,000 capital lease
transaction with Finova Capital Corporation, which has two components. One
component, which has been fully utilized, provided $2,000,000 to refinance
existing leased equipment, (resulting in $1,200,000 net cash to the Company),
has a three-year term at the expiration of which the Company will be required to
purchase the equipment for 10% of the original cost. The second component
provides for up to $4,000,000 of financing through December 31, 1998 for the
Company's sale and leaseback of equipment it acquired subsequent to June 30,
1996. At the expiration of the related five-year lease, the Company will be
required to purchase the leased equipment for 10% of the original cost. At June
30, 1998 the Company has entered into sale-and- leaseback arrangements of
$3,137,000 in connection with the second component.
The lease agreement is secured by Ovonic Battery's plant and equipment. In
addition, ECD has guaranteed Ovonic Battery's obligations under this agreement
and has provided a first security interest in the Company's unencumbered plant
and equipment.
In 1994, ECD entered into a $1,250,000 sale and lease-back transaction for
a vapor barrier coating machine, with a net book value of zero, at an interest
rate of approximately 13%. ECD recorded a deferred gain of $1,250,000 in the
year ended June 30, 1995 and is amortizing this deferred gain over the term of
the lease. During the years
-59-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE E - Capitalized Lease Obligations - (Continued)
- ----------------------------------------------------
ended June 30, 1998, 1997 and 1996, ECD amortized approximately $208,000,
$463,000 and $417,000, respectively, of this deferred gain.
Other
The Company has operating lease agreements, principally for office and
research facilities and equipment. These leases, in some instances, include
renewal provisions at the option of the Company. Rent expense under such lease
agreements for the years ended June 30, 1998, 1997 and 1996 was approximately
$1,361,000, $1,685,000 and $1,623,000, respectively.
Future minimum payments on obligations under capital leases and
noncancellable operating leases expiring in each of the five years subsequent to
June 30, 1998 are as follows:
Capital Leases Operating Leases
-------------- ----------------
1999 $ 1,612,384 $ 698,522
2000 1,552,681 644,207
2001 1,547,249 183,466
2002 777,478 --
2003 709,761 --
---------- ----------
TOTAL 6,199,553 $ 1,526,195
Less interest & taxes included above 1,257,256 ==========
----------
Present value of minimum payments $ 4,942,297
==========
Line of Credit
In April 1998, the Company entered into a one-year financing agreement
with Standard Federal Bank for a line of credit of up to $5,000,000. This
financing bears an interest rate of prime plus 1/2%, is secured by a first
interest in the Company's accounts receivable and inventory and contains certain
financial covenants relating to the Company's tangible net worth, working
capital and total debt to tangible net worth. The Company has not borrowed under
this financing agreement.
NOTE F - Capital Stock
- ----------------------
The voting rights of ECD's two classes of stock are as follows:
Class A Convertible Common Stock - 25 votes per share
Common Stock - one vote per share
-60-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE F - Capital Stock - (Continued)
- ------------------------------------
The Class A Convertible Common Stock is automatically convertible into
Common Stock on a share-for-share basis on September 14, 1999 and is convertible
at the option of the holder any time prior to that date.
As part of an employment agreement among ECD, Ovonic Battery and Mr.
Ovshinsky, ECD granted Mr. Ovshinsky the right to vote the shares of Ovonic
Battery held by ECD following a change in control of ECD. For purposes of this
agreement, change in control means (i) any sale, lease, exchange or other
transfer of all or substantially all of ECD's assets; (ii) the approval by ECD
stockholders of any plan or proposal of liquidation or dissolution of ECD; (iii)
the consummation of any consolidation or merger of ECD in which ECD is not the
surviving or continuing corporation; (iv) the acquisition by any person of 30%
or more of the combined voting power of the then outstanding securities having
the right to vote for the election of directors; (v) changes in the constitution
of the majority of the Board of Directors; (vi) the holders of the Class A
Common Stock ceasing to be entitled to exercise their preferential voting rights
other than as provided in ECD's charter and (vii) bankruptcy. In the event of
mental or physical disability or death of Mr. Ovshinsky, the foregoing power of
attorney and proxy shall be exercised by Mr. Ovshinsky's wife, Dr. Iris
Ovshinsky, a Vice President of ECD. The initial term of the employment agreement
is six years (through September 1999) and shall be automatically renewed every
year thereafter unless terminated by the Company.
During the years ended June 30, 1998, 1997 and 1996, ECD issued restricted
shares of 3,564, 3,040 and 6,899, respectively, as compensation to employees,
consultants, contractors and directors. ECD recorded compensation expense, based
upon fair market value of these shares at the date of issuance, for the years
ended June 30, 1998, 1997 and 1996 of $45,000, $119,000 and $59,000,
respectively, relating to these restricted shares of Common Stock.
NOTE G - Options and Warrants to Purchase Stock
- -----------------------------------------------
The Company has Common Stock reserved for issuance as follows:
Number of Shares
----------------------------
June 30, 1998 June 30, 1997
------------- -------------
Conversion of Class A Convertible Common Stock 219,913 219,913
Stock options 3,207,177 3,201,892
1999 Private Placement Warrants 174,966 174,966
Warrants issued in connection with services rendered 285,000 219,000
Warrants issued to EV Global 133,658 --
Warrants issued in connection with public offering of units 1,750,000 --
Convertible Investment Certificates 6,021 6,233
--------- ---------
TOTAL RESERVED SHARES 5,776,735 3,822,004
========= =========
-61-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - Options and Warrants to Purchase Stock - (Continued)
- -------------------------------------------------------------
Stock Option Plans
The Company's 1976 Amended and Restated Stock Option Plan (the "Amended
Plan") which expired in November 1996, the 1987 Stock Option and Incentive Plan
("1987 Stock Option Plan"), which expired in December 1997, and the 1995
Non-Qualified Stock Option Plan ("1995 Stock Option Plan") authorize the
granting of stock options at such exercise prices and to such employees,
consultants and other persons as the Compensation Committee appointed by the
Board of Directors (the "Compensation Committee") shall determine. All three
stock option plans are administered by the Compensation Committee.
Options under the Amended Plan and the 1987 Stock Option Plan expire six
years from the date of grant. Options under the 1995 Stock Option Plan expire no
later than 10 years from the date of grant. Stock options under all three plans
may not be exercised during the first six months of the grant. Thereafter,
options may be exercised cumulatively each year, starting at the end of six
months after grant of the option, at a predetermined rate of the number of
shares of the Common Stock subject to the option. The exercise price of all
options granted has been equal to the fair market value of the Common Stock at
the time of grant.
The purchase price and number of shares covered by the options are subject
to adjustment under certain circumstances to protect the optionholders against
dilution.
A summary of the transactions during the years ended June 30, 1998, 1997
and 1996 with respect to the Company's Amended Plan, 1987 Stock Option Plan and
1995 Stock Option Plan follows:
1998 1997 1996
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding July 1 2,327,606 $12.82 2,129,856 $12.24 2,422,646 $10.42
Granted 19,453 15.71 291,030 14.93 358,190 17.71
Exercised 61,866 7.73 90,420 5.99 650,650 8.46
Canceled 15,780 15.10 2,860 15.74 330 11.75
--------- ------ --------- ------ --------- ------
Outstanding June 30 2,269,413 12.97 2,327,606 $12.82 2,129,856 $12.24
========= ====== ========= ====== ========= ======
Exercisable June 30 2,135,933 $12.76 1,705,546 $12.19 1,046,438 $10.79
========= ====== ========= ====== ========= ======
-62-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - Options and Warrants to Purchase Stock - (Continued)
- -------------------------------------------------------------
The following table summarizes information about stock options outstanding
at June 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices As of 6/30/98 Contractual Life Price As of 6/30/98 Price
- ---------------- ------------- ---------------- -------- ------------- --------
$ 6.75 - $11.50 227,782 1.54 $7.47 216,982 $7.32
$11.75 - $11.88 1,276,478 4.97 $11.83 1,276,478 $11.83
$15.13 - $15.88 519,083 7.72 $15.48 439,012 $15.54
$16.19 - $16.88 130,070 6.71 $16.74 122,261 $16.75
$18.63 - $23.50 116,000 7.58 $20.80 81,200 $20.80
---------- ---- ------ --------- ------
$ 6.75 - $23.50 2,269,413 5.49 $12.97 2,135,933 $12.76
In November 1993, stock options to purchase 94,367 shares of Common Stock
held by Stanford R. Ovshinsky, and stock options to purchase 49,630 shares of
Common Stock held by Dr. Iris M. Ovshinsky, issued under the aforementioned
Amended Plan, were canceled and new stock options, covering 150,000 (adjusted to
255,534 as of June 30, 1998) shares of Common Stock in the case of Mr. Ovshinsky
and 100,000 shares (adjusted to 170,105 as of June 30, 1998) of Common Stock in
the case of Dr. Ovshinsky, were granted by ECD. The stock options canceled had
an average exercise price of approximately $18.00 per share. The weighted
average exercise price of the outstanding stock options is $10.19 per share. The
number of stock options are adjusted pursuant to the antidilution provisions of
the stock option grants. The weighted average price was arrived at based upon
(i) the option price of $7.00 per share for the original number of shares and
any additional shares as adjusted for the antidilution provisions during the 18-
month period following the grant; and (ii) thereafter, the fair market value of
any additional shares as adjusted for the antidilution provisions, determined
quarterly.
The Company continues to apply APB 25 to its stock-based compensation
awards to employees instead of adopting SFAS 123. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS 123, the Company's net loss and loss per share for the
year ended June 30, 1998 would have been increased by approximately $1,268,000
and $.11 per share and the Company's net loss and loss per share for the year
ended June 30, 1997 would have been increased by approximately $1,840,000 and
$.17 per share and net income and earnings per share for the year ended June 30,
1996 would have been reduced by $1,883,000 and $.17 per share. The fair value of
the options granted during 1998, 1997 and 1996 is estimated as
-63-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - Options and Warrants to Purchase Stock - (Continued)
- -------------------------------------------------------------
$349,000, $1,710,000 and $3,195,000 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
1998 1997 1996
---------- ---------- ----------
Dividend Yield 0% 0% 0%
Volatility % 59.77% 57.96% 56.95%
Risk Free Interest Rate 5.74% 6.26% 5.83%
Expected Life 3.91 years 3.54 years 3.54 years
In February 1995, the Compensation Committee of the Board of Directors
extended the exercise period of certain stock options granted in March 1989.
These options were extended on the same terms and conditions, including
continuation of the exercise price at fair market value. The Committee extended
the options in order to afford the holders of said options the six-year exercise
period which had previously been interrupted for a period of time due to the
Company's inability to issue registered shares upon exercise of options. The
difference between the aggregate exercise price and the fair market value of the
Company's stock at February 1995, totaling $1,600,000, was recorded as a
non-cash charge to operations in the year ended June 30, 1995.
Warrants
ECD has outstanding warrants for the purchase of 174,966 shares of Common
Stock in connection with private placements of Common Stock as well as warrants
to purchase 285,000 shares of Common Stock in connection with services rendered.
The warrants are currently exercisable at a weighted average price of $13.40 per
share. The exercise price of certain of the warrants may be reduced in the
future pursuant to certain antidilution provisions.
ECD also had outstanding warrants for the purchase of 133,658 shares of
Common Stock issued to EV Global pursuant to a Stock Purchase Agreement between
EV Global and ECD entered into in February 1998. These warrants are exercisable
on or prior to February 2, 2003, with 73,462 shares exercisable at $13.6125 per
share and 60,196 shares exercisable at $16.6125 per share.
In connection with the 1998 limited public offering of units, ECD has
outstanding warrants for the purchase of 1,750,000 shares of Common Stock. These
warrants are exercisable at $17.89 on or prior to January 31, 2000, and for
$20.54 at any time thereafter on or prior to July 31, 2001.
-64-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE H - Net Income (Loss) Per Share
- ------------------------------------
Basic net income (loss) per common share is computed by dividing net
income (loss) per share by the weighted average number of common shares
outstanding. The Company used 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 years ended June 30 are computed as follows:
1998 1997 1996
------------- ------------- -----------
Weighted average number of shares outstanding 11,116,619 10,729,802 9,370,841
Net income (loss) $(16,664,999) $(17,954,612) $ 1,054,269
BASIC NET INCOME (LOSS) PER SHARE $ (1.50) $ (1.67) $ .11
============= ============= ===========
Weighted average number of shares outstanding 11,116,619 10,729,802 9,370,841
Weighted average shares for dilutive
securities -0- -0- 1,515,067
------------- ------------- -----------
Average number of shares outstanding and
potential dilutive shares 11,116,619 10,729,802 10,885,908
Net income (loss) $(16,664,999) $(17,954,612) $ 1,054,269
DILUTED NET INCOME (LOSS) PER SHARE $ (1.50) $ (1.67) $ .10
============= ============= ===========
Due to the Company's net loss in 1998 and 1997, weighted average shares of
potential dilutive securities of 450,639 and 705,056, respectively, were
excluded from the calculations of diluted loss per share, as inclusion of these
securities would have been antidilutive to the net loss per share. Additional
securities of 2,014,649, 335,430 and 26,000, respectively, were excluded from
the 1998, 1997 and 1996 calculation of weighted average shares of potential
dilutive securities. Because of the relationship between the exercise prices and
the average market price of the Company's stock during these periods, these
securities would have been antidilutive regardless of the Company's net loss.
NOTE I - Federal Taxes on Income
- --------------------------------
At June 30, 1998 and 1997, the Company has approximately $42,935,000 and
$40,223,000, respectively, of net deferred tax assets, consisting primarily of
$41,681,000 and $38,523,000, respectively, due to net operating loss
carryforwards, and $1,254,000 and $1,700,000, respectively, due to tax credit
carryforwards. However, a valuation reserve of the same amount is required due
to the Company's operating history and
-65-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE I - Federal Taxes on Income - (Continued)
- ----------------------------------------------
uncertainty regarding the future realizability of the net tax operating loss
carryforwards and tax credit carryforwards.
The Company's valuation reserve was increased by $2,712,000 in 1998,
$4,584,000 in 1997 and by $818,000 in 1996 for the impact of the 1998, 1997 and
1996 net operating income (losses), temporary differences and the expiration of
tax carryforwards.
At June 30, 1998, the Company's remaining net tax operating loss
carryforwards and tax credit carryforwards expire as follows:
Net Tax Operating Investment Tax R & D Credit
Loss Carryforward Credit Total Carryforward
----------------- -------------- ------------
1999 $5,395,000 $40,000 $202,000
2000 8,767,000 172,000 813,000
2001 23,828,000 27,000
2002 15,900,000
2003 17,460,000
2004 1,378,000
2005 --
2006 7,075,000
2007 2,854,000
2008 1,802,000
2009 4,304,000
2010 --
2011 5,430,000
2012 15,749,000
2013 12,649,000
------------- -------- ----------
$ 122,591,000 $239,000 $1,015,000
============= ======== ==========
NOTE J - Related Party Transactions
- -----------------------------------
For the three years ended June 30, 1998, 1997 and 1996, ECD incurred
expenses of $107,881, $146,000 and $90,514, respectively, for services rendered
by its directors.
For related party transactions involving United Solar, GM Ovonic and
Sovlux see Note D.
-66-
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE K - Business Segments
- --------------------------
The Company has two business segments, its subsidiary, Ovonic Battery, and
the parent company, ECD. Ovonic Battery is primarily involved in developing and
commercializing battery technology. ECD is primarily involved in photovoltaics,
microelectronics and machine building. General corporate expenses (except for
those expenses allocated to Ovonic Battery), interest expense and interest
income are classified in the ECD business segment.
The Company's operations by business segment were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
Ovonic Battery ECD Consolidated
-------------- ------- ------------
Revenues
Year ended June 30, 1998 $27,161 $4,397 $31,558
Year ended June 30, 1997 24,183 5,395 29,578
Year ended June 30, 1996 26,946 10,366 37,312
Operating Income(Loss)
Year ended June 30, 1998* $(14,462) $(2,383) $(16,845)
Year ended June 30, 1997* (12,610) (6,418) (19,028)
Year ended June 30, 1996* (2,258) (1,921) (4,179)
Depreciation and Amortization Expense
Year ended June 30, 1998 $1,307 $823 $2,130
Year ended June 30, 1997 1,065 1,248 2,313
Year ended June 30, 1996 811 1,079 1,890
Capital Expenditures
Year ended June 30, 1998 $1,357 $345 $1,702
Year ended June 30, 1997 2,807 770 3,577
Year ended June 30, 1996 915 972 1,887
Identifiable Assets
Year ended June 30, 1998 $16,340 $35,021 $51,361
Year ended June 30, 1997 18,643 19,086 37,729
Year ended June 30, 1996 17,501 39,628 57,129
* Includes intercompany interest of $3,444 for the year ended June 30, 1998,
$2,124 for the year ended June 30, 1997 and $432 for the period from April 1,
1996 to June 30, 1996 charged by ECD to Ovonic Battery in accordance with the
agreements between the parties.
-67-
Item 9: Changes in and Disagreements on Accounting and Financial Disclosure
- ------- -------------------------------------------------------------------
Not applicable.
-68-
PART III
Item 10: Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
The composition of the Board of Directors of the Company is as follows:
Director
of the
Company Principal Occupation and
Name Since Office Business Experience
---- ----- ------ ------------------------
Stanford R. Ovshinsky 1960 President, Chief Mr. Ovshinsky, 75, the founder and Chief
Executive Officer Executive Officer of the Company, has been an
and Director executive officer and director of the Company
since its inception in 1960. Mr. Ovshinsky is the
primary inventor of the Company's technology. Mr.
Ovshinsky also serves as: the Chief Executive
Officer of Ovonic Battery; President, CEO and
director of United Solar; a member of the Board of
Managers of GM Ovonic; and Co-Chairman of the
Board of Directors of Sovlux. Mr. Ovshinsky is the
husband of Dr. Iris M. Ovshinsky.
Iris M. Ovshinsky 1960 Vice President Dr. Ovshinsky, 71, co-founder and Vice President
and Director of the Company, has been an executive officer
and director of the Company since its inception in
1960. Dr. Ovshinsky also serves as a director of
Ovonic Battery. Dr. Ovshinsky is the wife of
Stanford R. Ovshinsky.
Robert C. Stempel 1995 Chairman of the Mr. Stempel, 65, is Chairman of the Board and
Board, Executive Executive Director of the Company. Prior to his
Director and election as a director in December 1995, Mr.
Director Stempel served as senior business and technical
advisor to Mr. Ovshinsky. He is also the Chairman
of Ovonic Battery and serves on the Board of
Managers of GM Ovonic. From 1990 until his
retirement in 1992, he was the Chairman and
Chief Executive Officer of General Motors
Corporation. Prior to serving as Chairman, he had
been President since 1987. Mr. Stempel serves
on the Audit Committee of the Board.
Nancy M. Bacon 1977 Senior Vice Mrs. Bacon, 52, joined the Company in 1976 as its
President Vice President of Finance and Treasurer. She
and Director became the Senior Vice President of the Company
in 1993. Mrs. Bacon also serves on the Boards of
Directors of Sovlux and United Solar.
-69-
Umberto Colombo 1995 Director Prof. Colombo, 70, is Chairman of the Scientific
Councils of the ENI Enrico Mattei Foundation and
of the Instituto Per l'Ambiente in Italy. He was
Chairman of the Italian National Agency for New
Technology, Energy and the Environment until
1993 and then served as Minister of Universities
and Scientific and Technological Research in the
Italian Government until 1994. Prof. Colombo is
also active as a consultant in international science
and technology policy institutions related to
economic growth.
Hellmut Fritzsche 1969 Vice President Dr. Fritzsche, 71, was a professor of Physics at
and Director the University of Chicago from 1957 until his
retirement in 1996. He was also Chairman of the
Department of Physics, the University of Chicago,
until 1986. Dr. Fritzsche has been a Vice
President of the Company since 1965, acting on a
part-time basis, chiefly in the Company's research
and product development activities.
Joichi Ito 1995 Director Mr. Ito, 32, is President of Digital Garage, KK and
Transoceanic Ventures, Inc. as well as a board
member of PSINet Japan, KK. He is an expert on
new computer technology and networked
information systems and writes and lectures
extensively in the United States, Japan and
Europe. Mr. Ito serves as a director and
consultant to many companies in the field of
information technology.
Seymour Liebman 1997 Director Mr. Liebman, 49, currently Executive Vice
President and General Counsel at Canon U.S.A.,
Inc., has held a variety of positions with Canon
since 1974, including Senior Vice President and
General Counsel from 1992-1996. Mr. Liebman
also serves on the Board of Directors of United
Solar. He is a director of Zygo Corporation.
Walter J. McCarthy, Jr. 1995 Director Mr. McCarthy, 73, until his retirement in 1990, was
the Chairman and Chief Executive Officer of
Detroit Edison Company. He has served as a
consultant to the Company since 1990. Until
1995, Mr. McCarthy also served on the Boards of
Comerica Bank, Detroit Edison Company and
Federal-Mogul Corporation. He is a member of the
National Academy of Engineering. Mr. McCarthy
serves as Chairman of the Compensation Committee
and on the Audit Committee of the Board.
-70-
Florence I. Metz 1995 Director Dr. Metz, 69, until her retirement in 1996, held
various executive positions with Inland Steel
Company: General Manager, New Ventures, Inland
Steel Company (1989-1991); General Manager, New
Ventures, Inland Steel Industries (1991-1992)
and Advanced Graphite Technologies (1992-1993);
Program Manager for Business and Strategic Planning
at Inland Steel (1993-1996). Dr. Metz also serves
on the Board of Directors of Ovonic Battery. She
serves on the Compensation Committee of the Board.
Nathan J. Robfogel 1990 Director Mr. Robfogel, 63, was, until his retirement in
1996, a partner with the law firm of Harter, Secrest
& Emery, which he joined in 1959. Mr. Robfogel is
currently Vice President for University Relations
of the Rochester Institute of Technology where he
was a trustee from 1985-1996. He is a member of
the Board of Directors of Genesee Valley Trust
Company and Rochester Community Baseball, Inc.
After serving for 12 years as a trustee of Monroe
Community College, he was elected an Honorary
Trustee. From 1989 to 1995, Mr. Robfogel served as
Chairman of the Board and CEO of the New York State
Facilities Development Corporation, a public benefit
corporation.
Stanley K. Stynes 1977 Director Dr. Stynes, 66, was Dean of the College of
Engineering at Wayne State University from 1970
to August 1985, and a Professor of Engineering at
Wayne State University from 1985 until his
retirement in 1992. He has been involved in
various administrative, teaching, research and
related activities. Dr. Stynes serves as Chairman
of the Audit Committee of the Board.
* * *
Mrs. Haru Reischauer, a director since 1990, died on September 23, 1998.
-71-
The executive officers of the Company are as follows:
Name Age Office Served As An Executive
Officer or Director Since
- --------------------- --- ------------------- -------------------------
Stanford R. Ovshinsky 75 President, Chief Executive 1960(1)
Officer and Director
Iris M. Ovshinsky 71 Vice President and Director 1960(1)
Robert C. Stempel 65 Executive Director and 1995
Chairman of the Board
Nancy M. Bacon 52 Senior Vice President 1976
and Director
Hellmut Fritzsche 71 Vice President and Director 1969
Subhash K. Dhar 47 President and Chief Operating 1986
Officer of Ovonic Battery
Stephan W. Zumsteg 52 Treasurer 1997
(1) The predecessor of the Company was originally founded in 1960. The present
corporation was incorporated in 1964 and is the successor by merger of the
predecessor corporation.
See above for information relating to Stanford R. Ovshinsky, Iris M.
Ovshinsky, Robert C. Stempel, Nancy M. Bacon and Hellmut Fritzsche.
Subhash K. Dhar joined the Company in 1981 and has held various positions
with Ovonic Battery since its inception in October 1982. Mr. Dhar has served as
Chief Operating Officer of Ovonic Battery since 1986 and President since 1987.
Stephan W. Zumsteg joined the Company in March 1997 and was elected
Treasurer in April 1997. Prior to joining the Company, Mr. Zumsteg was Chief
Financial Officer of the Kirlin Company from July 1996 to February 1997 and Vice
President-Finance & Administration and Chief Financial Officer of Lincoln Brass
Works from July 1991 to June 1996.
-72-
Item 11: Executive Compensation
- -------- ----------------------
The following tables set forth the compensation paid by the Company during
its last three fiscal years to its Chief Executive Officer and each of its other
four most highly compensated executive officers for the fiscal year ended June
30, 1998.
SUMMARY COMPENSATION TABLE
Annual Long Term
Compensation Compensation
--------------- ----------------------
All
Restrict Options Other
Name and Principal Fiscal Stock (Number Compen-
Position Year(1) Salary(2) Bonus Award of Shares) sation(4)
- ------------------ -------- --------- ----- -------- ---------- ---------
Stanford R. Ovshinsky 1998 $284,967 -- $14,652
President and Chief 1997 $276,016 $37,981(3) $10,017
Executive Officer (5) 1996 $267,800 $90,741(3) $10,017
Robert C. Stempel, 1998 $270,005 -- -- $ 3,159
Executive Director(6) 1997 $270,005 -- 25,000 $ 3,159
1996 $125,008 $50,312 125,000 $ 3,159
Iris M. Ovshinsky, 1998 $250,016 $13,569
Vice President 1997 $250,016 $ 8,939
1996 $250,004 $ 5,726
Nancy M. Bacon, 1998 $235,019 -- $ 5,796
Senior Vice President 1997 $235,019 -- $ 5,796
1996 $235,472 25,000 $ 5,794
Subhash K. Dhar, President 1998 $211,545 -- -- $ 5,283
and Chief Operating Officer 1997 $200,013 -- -- $ 5,283
Ovonic Battery 1996 $200,503 $15,000 62,040 $ 5,283
(1) The Company's fiscal year is July 1 to June 30. The Company's 1998 fiscal
year ended June 30, 1998.
(2) Amounts shown include compensation deferred under the Company's 401 (k)
Plan. Does not include taxable income resulting from exercise of stock
options.
(3) Computed based on net income from operations for preceding years as
provided in Mr. Ovshinsky's September 1993 Employment Agreement.
-73-
(4) "All Other Compensation" is comprised of (i) contributions made by the
Company to the accounts of each of the named executive officers under the
Company's 401(k) Plan with respect to each of the fiscal years ended June
30, 1998, 1997 and 1996, respectively, as follows: Mr. Ovshinsky $4,500
(1998); Dr. Ovshinsky $4,500, $3,269 and $2,500; Mrs. Bacon $4,500 (for
each of 1998, 1997 and 1996); Mr. Dhar $4,500 (for each of 1998, 1997 and
1996); (ii) the dollar value of any life insurance premiums paid by the
Company in the calendar years ended December 31, 1998, 1997 and 1996,
respectively, with respect to term-life insurance for the benefit of each
of the named executives as follows: Mr. Ovshinsky $10,152 (1998) and
$10,017 (for each of 1997 and 1996); Mr. Stempel $3,159 (for each of
1998, 1997 and 1996); Dr. Ovshinsky $9,069, $5,670, and $3,226; Mrs. Bacon
$1,296 (1998 and 1997) and $1,294 (1996); and Mr. Dhar $783 (for each of
1998, 1997 and 1996). Under the 401 (k) Plan, which is a qualified
defined-contribution plan, the Company makes matching contributions
periodically on behalf of the participants in the amount of 50% of each
such participant's contributions. These matching contributions were
limited to 3% of a participant's salary, up to $150,000 for 1997. The
contributions reported for 1998 are for the calendar year ended December
31, 1997.
(5) In September 1993, Mr. Ovshinsky entered into separate employment
agreements with the Company and Ovonic Battery. See "Employment
Agreements." The amounts indicated include compensation received by Mr.
Ovshinsky pursuant to the Employment Agreements with the Company and
Ovonic Battery.
(6) Mr. Stempel joined the Company in December 1995. The salary reported for
1996 is for the six month period January 1996 - June 1996.
OPTION GRANTS IN LAST FISCAL YEAR
There were no options granted to the named executive officers during the
fiscal year ended June 30, 1998.
-74-
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The following table sets forth all stock options exercised by the named
executives during the fiscal year ended June 30, 1998 and the number and value
of unexercised options held by the named executive officers at fiscal year end.
Shares Number of Securities Value of Unexercised
Acquired on Value Underlying Unexercised in-the-Money Options
Exercise Realized Options at Fiscal Year End at Fiscal Year End
Name (#) ($) Exercisable/Unexercise Exercisable/Unexercisable
- -------------------------- ----------- -------- -------------------------- -------------------------
Stanford R. Ovshinsky (1) _ - 550,491/0 $438,254/$0
Iris M. Ovshinsky (2) _ _ 351,993/0 $291,497/$0
Robert C. Stempel (3) 12,000 $80,256 308,000/30,000 $ 17,442/$0
Nancy M. Bacon (4) 10,000 $39,125 217,700/7,500 $117,520/$0
Subhash K. Dhar (5) _ _ 68,928/0 $8,721/$0
(1) Mr. Ovshinsky's exercisable options are exercisable at a weighted average
price of $11.07 per share.
(2) Dr. Ovshinsky's exercisable options are exercisable at a weighted average
price of $11.05 per share.
(3) Mr. Stempel's exercisable and unexercisable options are exercisable at a
weighted average price of $14.12 and $19.59 per share, respectively.
(4) Mrs. Bacon's exercisable and unexercisable options are exercisable at a
weighted average price of $11.60 and $20.125 per share, respectively.
(5) Mr. Dhar's exercisable options are exercisable at a weighted average price
of $15.99 per share.
EMPLOYMENT AGREEMENTS
On September 2, 1993, Stanford R. Ovshinsky entered into separate
employment agreements with each of the Company and Ovonic Battery in order to
define clearly his duties and compensation arrangements and to provide to each
company the benefits of his management efforts and future inventions. The
initial term of each employment agreement is six years. Mr. Ovshinsky's
employment agreement with the Company provides for an annual salary of not less
than $100,000, while his agreement with Ovonic Battery provides for an annual
salary of not less than $150,000. Both agreements provide
-75-
for annual increases to reflect increases in the cost of living, discretionary
annual increases as determined by the Board of Directors of the Company and an
annual bonus equal to 1% of the net income from operations of the Company
(excluding Ovonic Battery) or Ovonic Battery.
Mr. Ovshinsky's employment agreement with Ovonic Battery additionally
contains a power of attorney and proxy from the Company providing Mr. Ovshinsky
with the right to vote the shares of Ovonic Battery held by the Company
following a change in control of the Company. For purposes of the agreement,
change in control means (i) any sale, lease, exchange or other transfer of all
or substantially all of the Company's assets; (ii) the approval by the Company's
stockholders of any plan or proposal of liquidation or dissolution of the
Company; (iii) the consummation of any consolidation or merger of the Company in
which the Company is not the surviving or continuing corporation; (iv) the
acquisition by any person of 30 percent or more of the combined voting power of
the then outstanding securities having the right to vote for the election of
directors; (v) changes in the constitution of the majority of the Board of
Directors; (vi) the holders of the Class A Common Stock ceasing to be entitled
to exercise their preferential voting rights other than as provided in the
Company's charter and (vii) bankruptcy. In the event of mental or physical
disability or death of Mr. Ovshinsky, the foregoing power of attorney and proxy
will be exercised by Dr. Iris M. Ovshinsky.
Pursuant to his employment agreement with Ovonic Battery, Mr. Ovshinsky
was granted stock options, exercisable at a price of $16,129 per share to
purchase 186 shares (adjusted from a price of $50,000 per share to purchase 60
shares pursuant to the anti-dilution provisions of the option agreement) of
Ovonic Battery's common stock, representing approximately 6% of Ovonic Battery's
outstanding common stock. The Ovonic Battery stock options vest on a quarterly
basis over six years commencing with the quarter beginning October 1, 1993,
subject to Mr. Ovshinsky's continued performance of his obligations to Ovonic
Battery under his employment agreement. Vesting of the stock options will
accelerate in the event of Mr. Ovshinsky's death, mental or physical disability
or termination of employment without cause and in the event of a change in
control of the Company.
In February 1998, the Compensation Committee of the Board of Directors
recommended and the Board of Directors approved an Employment Agreement between
the Company and Dr. Iris M. Ovshinsky. The purpose of the Employment Agreement
is to clearly define Dr. Ovshinsky's duties and compensation arrangements. The
Employment Agreement also provides for the Company to have the benefits of Dr.
Ovshinsky's services as a consultant to the Company following the termination of
her active employment for consulting fees equal to 50% of the salary payable to
Dr. Ovshinsky at the date of the termination of her active employment. Dr.
Ovshinsky shall have the right to retire at any time during her services as a
consultant and receive retirement benefits equal to the consulting fees for the
remainder of Dr. Ovshinsky's life.
-76-
The initial term of Dr. Ovshinsky's employment period is until September
2, 1999 and is automatically renewed for successive one-year periods unless
terminated by Dr. Ovshinsky or the Company upon 120 days notice in advance of
the renewal date. Dr. Ovshinsky's employment agreement provides for an annual
salary of not less than $250,000, annual increases to reflect increases in the
cost of living and discretionary annual increases, as determined by the Board of
Directors of the Company.
COMPENSATION OF DIRECTORS
Directors who are officers of the Company receive no payment for service
as a director. The other directors of the Company are issued approximately
$5,000 per year in the Company's Common Stock based on the closing price of
Common Stock on the first business day of each year and are paid $500 for each
Board meeting attended (in person or via telephone conference call) as well
as $500 for each committee meeting if not coincident with a Board meeting.
Directors are also reimbursed for all expenses incurred for the purpose of
attending board of directors and committee meetings, including airfare,
mileage, parking, transportation and hotel.
COMPENSATION COMMITTEE REPORT
Compensation Committee.
The Compensation Committee is composed of Mr. McCarthy (Chairman) and
Dr. Metz. Neither of the Compensation Committee members are or were during the
last fiscal year an officer or employee of the Company or any of its
subsidiaries, or had any business relationship with the Company or any of its
subsidiaries.
The Compensation Committee is responsible for administering the policies
which govern both annual compensation of executive officers and the Company's
stock option plans. The Compensation Committee meets several times during the
year to review recommendations from management regarding stock options and
compensation. Compensation and stock option recommendations are based upon
performance, current compensation, stock option ownership, and years of service
to the Company. The Company does not have a formal bonus program for executives,
although it has awarded bonuses to its executives from time to time.
Base Salary.
The Compensation Committee considers the Company's financial position and
other factors in determining the compensation of its executive officers. These
factors include remaining competitive within the relevant hiring market--whether
scientific, managerial or otherwise--so as to enable the Company to attract and
retain high quality employees, and, where appropriate, linking a component of
compensation to the performance of the Company's Common Stock--such as by a
granting of stock option or similar equity-based compensation--to instill
ownership thinking and align the employees' and stockholders' objectives. The
Company has been successful at recruiting, retaining and motivating executives
who are highly talented, performance-focused and entrepreneurial.
-77-
Chief Executive Officer Compensation.
In September 1993, Mr. Ovshinsky entered into separate employment
agreements with each of the Company and Ovonic Battery. The purpose of these
agreements, which provide for the payment to Mr. Ovshinsky of an annual salary
of not less than $250,000 by the Company and by Ovonic Battery, was to define
clearly Mr. Ovshinsky's duties and compensation arrangements and to provide to
each company the benefits of his management efforts and future inventions. See
"Employment Agreements." Mr. Ovshinsky's compensation for fiscal year 1997 was
determined in accordance with his Employment Agreements with the Company and
Ovonic Battery.
COMPENSATION COMMITTEE
Walter J. McCarthy, Jr.
Florence I. Metz
-78-
PERFORMANCE GRAPH
The line graph below compares the cumulative total stockholder return on
the Company's Common Stock over a five-year period with the return on the NASDAQ
Stock Market - US Index and the Hambrecht & Quist Technology Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG ENERGY CONVERSION DEVICES, INC., THE NASDAQ STOCK
MARKET--U.S. INDEX AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX
Cumulative Total Return
------------------------------------------------------
6/93 6/94 6/95 6/96 6/97 6/98
---- ---- ---- ---- ---- ----
Energy Conversion Devices, Inc. 100.00 112.64 149.43 209.20 117.24 89.08
Nasdaq Stock Market (U.S.) 100.00 100.96 134.77 173.03 210.38 277.61
Hambrecht & Quist Technology 100.00 102.21 180.82 211.32 275.98 349.59
The total return with respect to NASDAQ Stock Market - US Index and the
Hambrecht & Quist Technology Index assumes that $100 was invested on June 30,
1993, including reinvestment of dividends.
ECD has paid no cash dividends in the past and no cash dividends are
expected to be paid in the foreseeable future.
The Report of the Compensation Committee on Executive Compensation and the
Performance Graph are not deemed to be filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, or Securities Exchange
Act of 1934, as amended, or incorporated by reference in any documents so filed.
-79-
Item 12: Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
CLASS A COMMON STOCK
Mr. Stanford R. Ovshinsky and his wife, Dr. Iris M. Ovshinsky (executive
officers, Directors and founders of the Company), own of record 153,420 shares
and 65,601 shares, respectively (or approximately 69.8% and 29.8%,
respectively), of the outstanding shares of Class A Common Stock. Common Stock
is entitled to one vote per share and each share of Class A Common Stock is
entitled to 25 votes per share. Class A Common Stock is convertible into Common
Stock on a share-for-share basis at any time and from time to time at the option
of the holders, and will be deemed to be converted into Common Stock on a
share-for-share basis on September 14, 1999. As of September 18, 1998, Mr.
Ovshinsky also had the right to vote 126,500 shares of Common Stock (the "Sanoh
Shares") owned by Sanoh Industrial Co., Ltd. ("Sanoh") under the terms of an
agreement dated as of November 3, 1992 between the Company and Sanoh which,
together with the Class A Common Stock and 10,574 shares of Common Stock Mr. and
Dr. Ovshinsky own, give Mr. and Dr. Ovshinsky voting control over shares
representing approximately 31.1% of the combined voting power of the Company.
The following table sets forth, as of June 30, 1998, information
concerning the beneficial ownership of Class A Common Stock by each Director and
all executive officers and Directors of the Company as a group. All shares are
owned directly except as otherwise indicated. Under the rules of the Securities
and Exchange Commission, Stanford R. Ovshinsky and Iris M. Ovshinsky may each be
considered to beneficially own the shares held by the other.
Class A
Common Stock Total Number
Name of Beneficially of Shares Percentage
Beneficial Owner Owned(1)(2) Beneficially owned of Class
- ---------------- ------------ ------------------ ----------
Stanford R. Ovshinsky 153,420 153,420 69.8%
Iris M. Ovshinsky 65,601 65,601 29.8%
All other executive
officers and directors as
a group (13 persons) __ __ __
Total 219,021 219,021 99.6%
- --------------
(1) The balance of the 219,913 shares of Class A Common Stock outstanding, 892
shares, or approximately 0.4%, are owned by other members of Mr. and Dr.
Ovshinsky's family. Neither Mr. nor Dr. Ovshinsky has voting or investment
power with respect to such shares.
(2) On November 10, 1995, the Compensation Committee recommended, and the Board
of Directors approved, an amendment to Mr. and Dr. Ovshinsky's Stock Option
Agreements dated November 18, 1993 (the "Agreements") to permit Mr. and Dr.
Ovshinsky to exercise a portion (126,082 and 84,055 shares, respectively)
of their existing Common Stock option for Class A Common Stock on the same
terms and conditions as provided in the Agreements. The shares of Class A
Common Stock issuable upon exercise of the options under the Agreements, as
amended, are not included in the number of shares indicated.
-80-
COMMON STOCK
Directors and Executive Officers. The following table sets forth, as of
September 18, 1998, information concerning the beneficial ownership of Common
Stock by each director and executive officer and for all directors and executive
officers of the Company as a group. All shares are owned directly except as
otherwise indicated.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership(1) % of Class(2)
- ------------------------ ----------------------- -------------
Stanford R. Ovshinsky 839,811 (3) 6.28%
Iris M. Ovshinsky 420,268 (4) 3.21%
Robert C. Stempel 383,404 (5) 2.95%
Nancy M. Bacon 248,715 (6) 1.93%
Subhash K. Dhar 68,928 (7) *
Haru Reischauer** 42,105 (8) *
Hellmut Fritzsche 31,490 (9) *
Walter J. McCarthy, Jr. 22,056 (10) *
Stanley K. Stynes 20,753 (11) *
Nathan J. Robfogel 16,986 (12) *
Umberto Colombo 12,020 (13) *
Florence I. Metz 10,753 (14) *
Joichi Ito 7,924 (15) *
Seymour Liebman 7,396 (16) *
Stephan W. Zumsteg 6,600 (17) *
All executive officers and
directors as a group 2,139,209 14.71%
(15 persons)
- ----------------------
* Less than 1%.
** Mrs. Reischauer died on September 23, 1998.
(1) Under the rules and regulations of the Securities and Exchange
Commission, a person is deemed to be the beneficial owner of a security
if that person has the right to acquire beneficial ownership of such
security within sixty days, whether through the exercise of options or
warrants or through the conversion of another security.
-81-
(2) Under the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock issuable upon exercise of options and
warrants or upon conversion of securities which are deemed to be
beneficially owned by the holder thereof (see Note (1) above) are deemed
to be outstanding for the purpose of computing the percentage of
outstanding securities of the class owned by such person but are not
deemed to be outstanding for the purpose of computing the percentage of
the class owned by any other person.
(3) Includes 550,491 shares (adjusted as of June 30, 1998) represented by
options exercisable within 60 days, the 126,500 Sanoh Shares over which
Mr. Ovshinsky has voting power, 153,420 shares of Class A Common Stock
which are convertible into Common Stock, and 750 shares represented by
warrants exercisable within 60 days. Under the rules and regulations of
the Securities and Exchange Commission, Mr. Ovshinsky may be deemed a
beneficial owner of the shares of Common Stock and Class A Common Stock
owned by his wife, Iris M. Ovshinsky. Such shares are not reflected in
Mr. Ovshinsky's share ownership in this table.
(4) Includes 351,993 shares (adjusted as of June 30, 1998) represented by
options exercisable within 60 days, 65,601 shares of Class A Common Stock
which are convertible into Common Stock and 750 shares represented by
warrants exercisable within 60 days. Under the rules and regulations of
the Securities and Exchange Commission, Dr. Ovshinsky may be deemed a
beneficial owner of the shares of Common Stock and Class A Common Stock
owned by her husband, Stanford R. Ovshinsky. Such shares are not
reflected in Dr. Ovshinsky's share ownership in this table.
(5) Includes 323,000 shares represented by options exercisable within 60 days
and 14,000 shares represented by warrants exercisable within 60 days.
(6) Includes 225,200 shares represented by options exercisable within 60 days
and 6,000 shares represented by warrants exercisable within 60 days.
(7) Includes 68,928 shares represented by options exercisable within 60 days.
(8) Includes 20,000 shares represented by options exercisable within 60 days,
and 17,885 shares of Common Stock held in a trust.
(9) Includes 18,980 shares represented by options exercisable within 60 days
and 1,980 shares represented by warrants exercisable within 60 days.
(10) Includes 10,000 shares represented by options exercisable within 60 days.
(11) Includes 9,000 shares represented by options exercisable within 60 days.
(12) Includes 15,000 shares represented by options exercisable within 60 days.
(13) Includes 10,000 shares represented by options exercisable within 60 days.
(14) Includes 5,000 shares represented by options exercisable within 60 days.
(15) Includes 6,743 shares represented by options exercisable within 60 days.
(16) Includes 7,000 shares represented by options exercisable within 60 days.
(17) Includes 5,600 shares represented by options exercisable within 60 days.
-82-
Principal Shareholders. The following table sets forth, as of September
18, 1998, to the knowledge of the Company, the beneficial holders of more than
5% of the Company's Common Stock (see footnotes for calculation used to
determine "percentage of class" category):
Name and Address of Amount and Nature of Percentage of
Beneficial Holder Beneficial Ownership Class(1)
- -------------------- -------------------- -------------
Stanford R. and Iris M. Ovshinsky 1,260,079(2) 9.14 %
1675 West Maple Road
Troy, Michigan 48084
- ---------------
(1) Under the rules and regulations of the Securities and Exchange Commission,
shares of Common Stock issuable upon exercise of options and warrants or
upon conversion of securities which are deemed to be beneficially owned by
the holder thereof are deemed to be outstanding for the purpose of
computing the percentage of outstanding securities of the class owned by
such person but are not deemed to be outstanding for the purpose of
computing the percentage of the class owned by any other person.
(2) Includes 219,021 shares of Class A Common Stock owned by Mr. and Dr.
Ovshinsky (which shares are convertible at any time into Common Stock and
will be deemed to be converted into Common Stock on September 14, 1999),
10,574 shares of Common Stock owned by Mr. and Dr. Ovshinsky, 126,500
shares of Sanoh Shares over which Mr. Ovshinsky has voting rights, 902,484
(adjusted as of June 30, 1998) shares represented by options exercisable
within 60 days and 1,500 shares represented by warrants exercisable within
60 days held by Mr. and Dr. Ovshinsky.
Item 13: Certain Relationships and Related Transactions
- --------- ----------------------------------------------
Canon/United Solar. In June, 1990, the Company formed United Solar, a joint
venture with Canon, in which Canon and the Company each own 49.98% of the
outstanding shares, with the balance held by Mrs. Haru Reischauer, a member of
the Company's Board of Directors until her death on September 23, 1998. Mrs.
Reischauer was also a director of United Solar. In the year ended June 30, 1998,
the Company performed various laboratory, shop, patent and research services for
United Solar for which United Solar was charged approximately $315,000. In the
year ended June 30, 1998, United Solar billed ECD for approximately $180,000 for
work performed in accordance with the DOE PV
Bonus contract.
GM Ovonic. During the year ended June 30, 1998, the Company had revenues
of $4,871,000 for sales of battery packs, electrodes, machine building and other
services performed for GM Ovonic.
-83-
Sovlux Battery. During the fiscal year ended June 30, 1998, the Company
recorded revenues of $1,500,000 and received cash of $1,200,000 for license fees
relating to a technology transfer agreement.
Miscellaneous. Herbert Ovshinsky, Stanford R. Ovshinsky's brother, is
employed by the Company as Director of the Production Technology and Machine
Building Division working principally in the design of manufacturing equipment.
He received $122,712 in salary during the year ended June 30, 1998.
HKO Media, Inc., owned by Harvey Ovshinsky, Stanford R. Ovshinsky's son,
performed video production services on behalf of the Company. HKO Media, Inc.
was paid $99,030 by the Company for its services during the fiscal year ended
June 30, 1998.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and officers to file reports of ownership and changes in ownership
with respect to the securities of the Company and its affiliates with the
Securities and Exchange Commission and to furnish copies of these reports to
the Company. Based on a review of these reports and written representations
from the Company's directors and officers regarding the necessity of filing a
report, the Company believes that during fiscal year ended June 30, 1998, all
filing requirements were met on a timely basis.
-84-
PART IV
Item 14: Exhibits, Financial Statement Schedules and Report on Form 8-K
- -------- --------------------------------------------------------------
(a) 1. Financial statements: Page
----
The following financial statements are included in Part II, Item 8:
Independent Auditors' Report.............................................. 37
Consolidated balance sheets - June 30, 1998 and 1997...................... 38
Consolidated statements of operations - years ended
June 30, 1998, 1997 and 1996........................................ 40
Consolidated statements of stockholders' equity
years ended June 30, 1998, 1997 and 1996........................... 41
Consolidated statements of cash flows - years ended
June 30, 1998, 1997 and 1996........................................ 43
Notes to consolidated financial statements................................ 45
Individual financial statements and schedules of the Company have been
omitted as permitted by the instructions.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
(c) Exhibits
Page or
Reference
---------
3.1 Restated Certificate of Incorporation filed September 29, 1967 (a)
3.2 Certificate of Amendment to Certificate of Incorporation filed (b)
February 24, 1998, increasing authorized shares of the Company's Common
Stock from 15,000,000 shares to 20,000,000 shares
3.3 Certificate of Incorporation of United Solar Systems Corp. (c)
3.4 Bylaws of United Solar Systems Corp. (d)
-85-
3.5 Certificate of Amendment to Certificate of Incorporation filed (e)
September 13, 1993 extending voting rights of the Company's Class A
Common Stock
3.6 Bylaws in effect as of July 17, 1997 (f)
3.7 Amendment to Article VIII of the Bylaws effective as of February (g)
19, 1998
4.1 Agreement among the Company, Stanford R. Ovshinsky and Iris M. (h)
Ovshinsky relating to the automatic conversion of Class A Common Stock
into the Company's Common Stock upon the occurrence of certain events,
dated September 15, 1964
10.1 Patent License Agreement between the Company and Hitachi, (i)
Ltd. dated October 29, 1984
10.2 Patent License Agreement dated September 10, 1985 between (j)
the Company and Sony Corporation relating to optical memory
technology
10.3 License Agreement effective as of June 18, 1985 between the (k)
Company and Canon Inc., as restated on September 20, 1985
10.4 Non-Assertion Agreement dated June 16, 1986 between the (l)
Company and Canon Inc.
10.5 Amendment to the Patent License Agreement dated December 5, (m)
1986 between the Company and Matsushita Electric Industrial
Co., Ltd.
10.6 Energy Conversion Devices, Inc. 1987 Stock Option and Incentive (n)
Plan
10.7 Agreement dated October 24, 1983 between the Company and (o)
Asahi Chemical Industry Co. Ltd.
10.8 License Agreement and Supplemental Understanding dated (p)
February 10, 1989 between Varta Batterie AG and the Company
and Ovonic Battery Company
10.9 Charter of the Soviet-American Joint Venture, Sovlux, dated (q)
January 11, 1990
10.10 Agreement on the Establishment and Activity of the Soviet- (r)
American Joint Venture, Sovlux, dated January 11, 1990
10.11 License and Joint R&D Agreement entered into as of February 20, 1990 (s)
by and between Hitachi Maxell, Ltd., the Company and Ovonic Battery
Company, Inc.
-86-
10.12 Joint Venture Agreement dated as of June 27, 1990 by and (t)
between Canon Inc. and the Company filed confidentially
pursuant to Rule 24b-2
10.13 Exclusive License Agreement dated July 6, 1990 made by and (u)
between the Company and United Solar Systems Corp. filed
confidentially pursuant to Rule 24b-2
10.14 Know-How Cross-License Agreement dated July 6, 1990 made by (v)
and between Canon Inc., the Company and United Solar Systems
Corp. filed confidentially pursuant to Rule 24b-2
10.15 Option License Agreement dated July 6, 1990 made by and (w)
between the Company and Canon Inc. filed confidentially
pursuant to Rule 24b-2
10.16 Option License Agreement dated July 6, 1990 made by and (x)
between the Company and United Solar Systems Corp. filed
confidentially pursuant to Rule 24b-2
10.17 Amended Master Agreement made and entered into by and (y)
between the Company and Matsushita Electric Industrial Co., Ltd.
dated January 24, 1991
10.18 Memory Patent License Agreement made and entered into by and (z)
between the Company and Matsushita Electric Industrial Co., Ltd.
dated January 24, 1991
10.19 Memory Patent License Agreement by and between the Company (aa)
and Asahi Chemical Industry Co., Ltd. dated April 26, 1991
10.20 License Agreement by and between the Company, Ovonic Battery (bb)
and Samsung Electronics Co., Ltd. dated June 10, 1991
10.21 License Agreement between the Company, Ovonic Battery and Sylva (cc)
Industries Limited dated June 14, 1991
10.22 License Agreement by and between the Company and Ovonic (dd)
Battery and Harding Energy Systems, Inc. dated August 28, 1991
10.23 License Agreement made as of November 20, 1991 by and (ee)
between the Company, Ovonic Battery and Hyundai Motor
Company
10.24 Agreement effective as of March 9, 1992 by and between the Company, (ff)
Ovonic Battery and Mitsubishi Materials Corporation
10.25 Memory Patent License Agreement effective as of April 1, 1992 by (gg)
and between the Company and Plasmon Limited
-87-
10.26 Option License Agreement effective as of September 8, 1992 by (hh)
and between the Company, Ovonic Battery and Sylva Industries
Limited
10.27 Memorandum Agreement dated as of April 22, 1993 between the (ii)
Company and Sanoh Industrial Co., Ltd. filed confidentially
pursuant to Rule 24b-2
10.28 Memory Patent License Agreement dated as of February 3, 1993 (jj)
between the Company and Toshiba Corporation
10.29 Investment Agreement dated as of July 9, 1993 among the (kk)
Company, United Solar Systems Corp. and Canon, Inc.
10.30 Amendment to Exclusive License Agreement dated as of July 22, (ll)
1993 between the Company and United Solar Systems Corp. filed
confidentially pursuant to Rule 24b-2
10.31 License Agreement dated as of July 22, 1993 between the (mm)
Company and United Solar System Corp. filed confidentially
pursuant to Rule 24b-2
10.32 Amendment to Option License Agreement dated as of July 22, 1993 (nn)
between the Company and United Solar Systems Corp.
10.33 License Agreement between the Company and a Japanese Battery (oo)
Manufacturer filed confidentially pursuant to Rule 24b-2
10.34 Intercompany Services Agreement dated as of September 2, 1993 (pp)
between the Company and Ovonic Battery Company, Inc.
10.35 Amended and Restated License Agreement and Assignment (qq)
dated as of September 2, 1993 between the Company and
Ovonic Battery Company, Inc.
10.36 Intercompany Agreement Concerning Battery License dated as of (rr)
September 2, 1993 between the Company and Ovonic Battery
Company, Inc.
10.37 Executive Employment Agreement dated as of September 2, 1993 (ss)
between the Company, Ovonic Battery Company, Inc. and
Stanford R. Ovshinsky
10.38 Executive Employment Agreement dated as of September 2, 1993 (tt)
between the Company and Stanford R. Ovshinsky
10.39 Stock Option Agreement by and between Ovonic Battery (uu)
Company, Inc. and Stanford R. Ovshinsky dated as of
November 18, 1993
-88-
10.40 Stock Option Agreement by and between the Company and (vv)
Stanford R. Ovshinsky dated as of November 18, 1993
10.41 Stock Option Agreement by and between the Company and Iris (ww)
M. Ovshinsky dated as of November 18, 1993
10.42 Stock Purchase Agreement by and between Sanoh Industrial Co., (xx)
Ltd., the Company and Ovonic Battery dated December 31, 1993
10.43 Stakeholder Agreement between Ovonic Battery Company, Inc. (yy)
and General Motors Corporation for the organization of GM
Ovonic L.L.C. dated June 14, 1994 filed confidentially pursuant to
Rule 24b-2
10.44 Letter Agreement dated June 20, 1994 between Sanoh Industrial (zz)
Co., Ltd. and the Company
10.45 Consumer Battery License Agreement effective as of December 15, (aaa)
1994 by and between the Company, Ovonic Battery Company, Inc. and Sanyo
Electric Co., Ltd., filed confidentially pursuant to Rule 24b-2.
10.46 Consumer Battery License Agreement effective as of December 20, (bbb)
1994 by and between the Company, Ovonic Battery Company, Inc. and
Toshiba Battery Co., Ltd., filed confidentially pursuant to Rule 24b-2.
10.47 Second Amendment to Sylva/ECD/OBC License Agreement effective as (ccc)
of January 1, 1995 by and between the Company, Ovonic Battery Company,
Inc. and Sylva Industries, Ltd., portions of which have been filed
confidentially pursuant to Rule 24b-2.
10.48 Consumer battery agreement effective as of January 10, 1995 by and (ddd)
between the Company, Ovonic Battery Company, Inc. and a consumer battery
manufacturer, portions of which have been filed confidentially pursuant
to Rule 24b-2.
10.49 Battery License Agreement dated March 28, 1995 by and between (eee)
Ovonic Battery Company, Inc. and Walsin Technology Corp., portions of
which have been filed confidentially pursuant to Rule 24b-2.
10.50 Amendment to License and Joint R&D Agreement effective as of (fff)
March 31, 1995 by and between Hitachi Maxell, Ltd., the
Company and Ovonic Battery Company, Inc., portions of which
have been filed confidentially pursuant to Rule 24b-2.
10.51 Energy Conversion Devices, Inc. 1995 Non-Qualified Stock (ggg)
Option Plan
-89-
10.52 Memory Patent License Agreement by and between Toray (hhh)
Industries, Inc. and the Company effective as of April 1, 1995
10.53 Amendment Agreement by and between Varta Batterie A.G., the (iii)
Company and Ovonic Battery effective as of June 8, 1995, portions of
which have been filed confidentially pursuant to Rule 24b-2
10.54 Amendment to License Agreement by and between Samsung Display (jjj)
Devices Co., Ltd., the Company and Ovonic Battery effective as of June
23, 1995, portions of which have been filed confidentially pursuant to
Rule 24b-2
10.55 Amendment Agreement by and between Eveready Battery Company, Inc., (kkk)
the Company and Ovonic Battery effective as of June 23, 1995, portions
of which have been filed confidentially pursuant to Rule 24b-2
10.56 License Agreement effective as of September 30, 1995 by and (lll)
between Ovonic Battery Company, Inc. and Sanoh Industrial Co., Ltd.,
portions of which have been filed confidentially pursuant to Rule 24b-2
10.57 Technology Transfer Agreement effective as of July 1, 1995 by (mmm)
and between Ovonic Battery Company, Inc. and Sanoh Industrial
Co., Ltd.
10.58 Consumer Battery Agreement effective as of September 29, 1995 by (nnn)
and between Ovonic Battery Company, Inc. and Furukawa Battery Co., Ltd.,
portions of which have been filed confidentially pursuant to Rule 24b-2
10.59 Battery License Agreement by and between Ovonic Battery (ooo)
Company, Inc. and Asia Pacific Investment Co. dated January 4,
1996, filed confidentially pursuant to Rule 24b-2
10.60 Amendment No. 2 to Development Agreement between United (ppp)
States Advanced Battery Consortium, the Company and Ovonic
Battery Company, Inc. effective March 8, 1996, portions of which
have been filed confidentially pursuant to Rule 24b-2
10.61 Stock Purchase Agreement executed May 14, 1996, by and (qqq)
among Honda Motor Co., Ltd., the Company and Ovonic Battery
Company, Inc.
-90-
10.62 Settlement Agreement effective as of March 28, 1996, by and among (rrr)
the Company, Ovonic Battery Company, Inc., Saft America, Inc. ("Saft")
and certain entities affiliated with Saft, portions of which have been
filed confidentially pursuant to Rule
24b-2
10.63 Executive Employment Agreement dated as of February 19, 1998 99
between the Company and Iris M. Ovshinsky
11.1 Computation of Earnings Per Share Attributable to Common Stock 109
22.1 List of all direct and indirect subsidiaries of the Company 110
23.1 Consent of Independent Auditors 111
27.1 Financial Data Schedule 112
28.1 Decision and Order dated May 25, 1993 (sss)
28.2 Order dated August 18, 1993 (ttt)
Notes to Exhibit List
(a) Filed as Exhibit 2-A to the Company's Form 8-A and incorporated
herein by reference.
(b) Filed as Exhibit 3.5 to the Company's Registration Statement on Form
S-3 (Registration No. 333-50749) and incorporated herein by
reference.
(c) Filed as Exhibit 3.9 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1990, as amended, and incorporated
herein by reference.
(d) Filed as Exhibit 3.10 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and
incorporated herein by reference.
(e) Filed as Exhibit 3.11 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(f) Filed as Exhibit 3.10 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997, as amended, and
incorporated herein by reference.
(g) Filed as Exhibit 3.7 to the Company's Registration Statement on Form
S-3 (Registration No. 333-50749) and incorporated herein by
reference.
-91-
(h) Filed as Exhibit 13-D to the Company's Registration Statement on
Form S-1 (Registration No. 2-26772) and incorporated herein by
reference.
(i) Filed as Exhibit 28.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1984 and incorporated herein by
reference.
(j) Filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the fiscal year June 30, 1986 and incorporated herein by
reference.
(k) Filed as Exhibit 10.46 to the Company's Annual Report on Form 10-K
for the fiscal June 30, 1986 and incorporated herein by reference.
(l) Filed as Exhibit 10.6 to the Company's Current Report on Form 8-K
dated June 13, 1986 and incorporated herein by reference.
(m) Filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1986 and incorporated herein by
reference.
(n) Filed as Exhibit 10.110 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1988 and incorporated herein by
reference.
(o) Filed as Exhibit 10.112 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1988 and incorporated herein by
reference.
(p) Filed as Exhibit 10.71 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1989, as amended, and
incorporated herein by reference.
(q) Filed as Exhibit 10.82 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and
incorporated herein by reference.
(r) Filed as Exhibit 10.83 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and
incorporated herein by reference.
(s) Filed as Exhibit 10.92 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and
incorporated herein by reference.
(t) Filed as Exhibit 10.94 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and
incorporated herein by reference.
-92-
(u) Filed as Exhibit 10.96 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and
incorporated herein by reference.
(v) Filed as Exhibit 10.97 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and
incorporated herein by reference.
(w) Filed as Exhibit 10.98 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and
incorporated herein by reference.
(x) Filed as Exhibit 10.99 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and
incorporated herein by reference.
(y) Filed as Exhibit 28.1 to the Company's Current Report on Form 8-K
dated February 6, 1991 and incorporated herein by reference.
(z) Filed as Exhibit 28.2 to the Company's Current Report on Form 8-K
dated February 6, 1991 and incorporated herein by reference.
(aa) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1991 and incorporated herein by
reference.
(bb) Filed as Exhibit 10.114 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1991, as amended, and
incorporated herein by reference.
(cc) Filed as Exhibit 10.115 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1991, as amended, and
incorporated herein by reference.
(dd) Filed as Exhibit 10.116 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1991, as amended, and
incorporated herein by reference.
(ee) Filed as Exhibit 10.72 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1992 , as amended, and
incorporated herein by reference.
(ff) Filed as Exhibit 10.73 to the Company's Annual Report on Form 10-K
for the quarter ended June 30, 1992, as amended, and incorporated
herein by reference.
-93-
(gg) Filed as Exhibit 10.75 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1992, as amended, and
incorporated herein by reference.
(hh) Filed as Exhibit 10.81 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1992, as amended, and
incorporated herein by reference.
(ii) Filed as Exhibit 10.86 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(jj) Filed as Exhibit 10.87 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(kk) Filed as Exhibit 10.90 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(ll) Filed as Exhibit 10.91 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(mm) Filed as Exhibit 10.92 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(nn) Filed as Exhibit 10.93 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(oo) Filed as Exhibit 10.94 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(pp) Filed as Exhibit 10.96 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(qq) Filed as Exhibit 10.97 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(rr) Filed as Exhibit 10.98 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(ss) Filed as Exhibit 10.100 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(tt) Filed as Exhibit 10.101 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
-94-
(uu) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993 and incorporated herein by
reference.
(vv) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993 and incorporated herein by
reference.
(ww) Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993 and incorporated herein by
reference.
(xx) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1993 and incorporated herein by
reference.
(yy) Filed as Exhibit 10.75 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1994 and incorporated herein by
reference.
(zz) Filed as Exhibit 10.76 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1994 and incorporated herein by
reference.
(aaa) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1994 and incorporated herein by
reference.
(bbb) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1994 and incorporated herein by
reference.
(ccc) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995 and incorporated herein by
reference.
(ddd) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995 and incorporated herein by
reference.
(eee) Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995 and incorporated herein by
reference.
(fff) Filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995 and incorporated herein by
reference.
(ggg) Filed as Exhibit 10.77 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and incorporated herein by
reference.
(hhh) Filed as Exhibit 10.78 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and incorporated herein by
reference.
(iii) Filed as Exhibit 10.79 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and incorporated herein by
reference.
-95-
(jjj) Filed as Exhibit 10.80 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and incorporated herein by
reference.
(kkk) Filed as Exhibit 10.81 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and incorporated herein by
reference.
(lll) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference.
(mmm) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference.
(nnn) Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference.
(ooo) Filed as Exhibit 28.1 to the Company's Current Report on Form 8-K
dated January 4, 1996 and incorporated herein by reference.
(ppp) Filed as Exhibit 10.72 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 and incorporated herein by
reference.
(qqq) Filed as Exhibit 10.73 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 and incorporated herein by
reference.
(rrr) Filed as Exhibit 10.74 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 and incorporated herein by
reference.
(sss) Filed as Exhibit 28.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(ttt) Filed as Exhibit 28.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
-96-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENERGY CONVERSION DEVICES, INC.
By:/S/Stanford R. Ovshinsky
----------------------------------------
Stanford R. Ovshinsky,
President and Chief Executive Officer
(Principal Executive Officer)
Dated: October 8, 1998
- ---------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Stanford R. Ovshinsky President, Chief Executive October 8, 1998
- ------------------------- Officer and Director ------------------
Stanford R. Ovshinsky (Principal Executive Officer)
/s/ Stephan W. Zumsteg Treasurer October 8, 1998
- ------------------------- ------------------
Stephan W. Zumsteg
/s/ Robert C. Stempel Director October 8, 1998
- ------------------------- (Chairman of the Board) ------------------
Robert C. Stempel
/s/ Nancy M. Bacon Director October 8, 1998
- ------------------------- ------------------
Nancy M. Bacon
-97-
/s/ Umberto Colombo Director October 8, 1998
- ------------------------- ------------------
Umberto Colombo
/s/ Hellmut Fritzsche Director October 8, 1998
- ------------------------- ------------------
Hellmut Fritzsche
/s/ Joichi Ito Director October 8, 1998
- ------------------------- ------------------
Joichi Ito
/S/ Seymour Liebman Director October 8, 1998
- ------------------------- ------------------
Seymour Liebman
/s/ Walter J. McCarthy, Jr. Director October 8, 1998
- -------------------------- ------------------
Walter J. McCarthy, Jr.
/s/ Florence I. Metz Director October 8, 1998
- ------------------------- ------------------
Florence I. Metz
/s/ Iris M. Ovshinsky Director October 8, 1998
- ------------------------- ------------------
Iris M. Ovshinsky
/s/ Nathan J. Robfogel Director October 8, 1998
- ------------------------- ------------------
Nathan J. Robfogel
/s/ Stanley K. Stynes Director October 8, 1998
- ------------------------- ------------------
Stanley K. Stynes
-98-
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.63 Executive Employment Agreement dated as of
February 19, 1998 between the Company and Iris M.
Ovshinsky
11.1 Computations of Earnings (Losses) per share
22.1 List of all direct and indirect subsidiaries
of the Company
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule