SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the period ended DECEMBER 31, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2956 WATERVIEW DRIVE, ROCHESTER HILLS, MICHIGAN 48309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 293-0440
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
As of February 12, 2002, there were 219,913 shares of Class A Common
Stock, 430,000 shares of Class B Common Stock and 21,242,473 shares of Common
Stock outstanding.
Page 1 of 47 Pages
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES
Product sales $ 8,715,512 $ 1,453,540 $ 17,378,870 $ 2,681,686
Product sales to related parties 2,460,484 2,315,408 4,956,778 4,278,826
----------- ----------- ------------ -----------
Total product sales 11,175,996 3,768,948 22,335,648 6,960,512
Royalties 411,268 798,224 1,013,495 1,673,860
Royalties - related parties 4,368 - 10,985 -
----------- ----------- ------------ -----------
Total royalties 415,636 798,224 1,024,480 1,673,860
Revenues from product development
agreements 1,963,884 1,380,318 3,738,415 3,337,524
Revenues from product development
agreements with related parties 13,036,736 6,387,910 21,805,736 9,524,180
----------- ----------- ------------ -----------
Total revenues from product
development agreements 15,000,620 7,768,228 25,544,151 12,861,704
Revenues from license and other
agreements - 2,500,000 - 2,800,000
Other 27,251 111,659 71,541 163,161
Other revenues from related parties 125,395 140,821 227,657 762,753
---------- ----------- ------------ -----------
Total other revenues 152,646 252,480 299,198 925,914
----------- ----------- ------------ -----------
TOTAL REVENUES 26,744,898 15,087,880 49,203,477 25,221,990
EXPENSES
Cost of product sales 10,470,201 3,786,622 21,174,658 6,981,181
Cost of revenues from product
development agreements 14,896,043 7,422,280 25,216,172 11,982,880
Product development and research 2,629,654 3,048,166 4,545,899 5,427,506
Patent defense 1,345,674 561,946 1,951,175 949,152
Patents 366,086 462,214 1,109,236 1,065,615
Operating, general and administrative 2,039,104 1,845,362 4,104,955 3,947,061
----------- ----------- ------------ -----------
TOTAL EXPENSES 31,746,762 17,126,590 58,102,095 30,353,395
----------- ----------- ------------ -----------
LOSS FROM OPERATIONS (5,001,864) (2,038,710) (8,898,618) (5,131,405)
OTHER INCOME (EXPENSE)
Interest income 1,369,287 1,633,200 2,725,844 3,187,212
Interest expense (154,885) (210,579) (309,459) (431,272)
Equity loss in joint ventures (1,038,453) (597,019) (1,811,472) (803,521)
Minority interest share of losses 417,447 360,047 770,944 454,947
Other nonoperating income (net) 91,284 136,893 440,959 262,907
----------- ----------- ------------ -----------
TOTAL OTHER INCOME 684,680 1,322,542 1,816,816 2,670,273
----------- ----------- ------------ -----------
NET LOSS $(4,317,184) $ (716,168) $(7,081,802) $(2,461,132)
=========== =========== ============ ===========
BASIC NET LOSS PER SHARE $ (.20) $ (.04) $ (.33) $ (.13)
=========== =========== ============ ===========
DILUTED NET LOSS PER SHARE $ (.20) $ (.04) $ (.33) $ (.13)
=========== =========== ============ ===========
See notes to consolidated financial statements.
2
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
December 31, June 30,
2001 2001
------------ ------------
(Unaudited)
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of $55,616,000
($20,000,000 of which is restricted) at December 31,
2001 and $33,047,000 at June 30, 2001 (NOTE G) $ 55,625,413 $ 33,055,399
Short-term investments 62,359,453 48,908,662
Accounts receivable (net of allowance for uncollectible
accounts of approximately $495,000 at December 31,
2001, and $583,000 at June 30, 2001) 19,352,034 18,809,094
Amounts due from related parties 21,608,110 16,003,632
Inventories 1,433,206 1,333,542
Other 376,630 542,930
------------ ------------
TOTAL CURRENT ASSETS 160,754,846 118,653,259
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 2,886,626 1,214,625
Machinery and other equipment (including construction in
progress of approximately $814,000 and $1,010,000
at December 31, 2001 and June 30, 2001, respectively) 23,198,390 22,261,322
Capitalized lease equipment 3,056,060 3,056,060
------------ ------------
29,408,076 26,799,007
Less accumulated depreciation and amortization (21,647,004) (20,660,619)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 7,761,072 6,138,388
Investments in EV Global and Rare Earth Ovonic - China
(NOTE A) 1,000,000 1,000,000
Long-Term Note Receivable - Bekaert ECD Solar Systems
(NOTE A) 10,583,447 10,256,110
Deferred tax assets 864,999 864,999
JOINT VENTURES (NOTE D)
Bekaert ECD Solar Systems 20,266,958 23,421,156
Bekaert ECD Europa 22,117 28,347
Texaco Ovonic Fuel Cell Company - -
Texaco Ovonic Hydrogen Systems - -
Texaco Ovonic Battery Systems - -
Ovonyx - -
Ovonic Media - -
Innovative Transportation Systems 3,745,697 4,000,206
Sovlux - -
OTHER ASSETS 2,234,693 1,742,922
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TOTAL ASSETS $207,233,829 $166,105,387
============ ============
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31, June 30,
2001 2001
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 22,990,825 $ 18,413,708
Accounts payable - related parties 9,496 10,533
Salaries, wages and amounts withheld from employees 2,633,000 2,366,673
Deferred revenues under business agreements 199,933 222,730
Deferred revenues - related parties 3,061,673 2,346,054
Current installments on long-term liabilities 2,804,429 2,716,072
------------ ------------
TOTAL CURRENT LIABILITIES 31,699,356 26,075,770
LONG-TERM LIABILITIES 6,778,122 7,898,011
LONG-TERM NOTES PAYABLE 10,583,447 10,256,110
DEFERRED GAIN 208,746 278,328
NONREFUNDABLE ADVANCE ROYALTIES (NOTE C) 3,719,017 3,818,488
------------ ------------
TOTAL LIABILITIES 52,988,688 48,326,707
NEGATIVE GOODWILL (NOTE D) 2,448,777 2,681,993
MINORITY INTEREST (NOTE D) 3,585,032 4,355,976
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Class B Convertible Common Stock,
par value $0.01 per share
Authorized, Issued and Outstanding - 430,000
shares 4,300 4,300
Common Stock, par value $0.01 per share:
Authorized - 30,000,000 shares
Issued & Outstanding - 21,237,443 shares at
December 31, 2001 and 19,053,026 shares at
June 30, 2001 212,374 190,530
Additional paid-in capital 384,509,099 339,858,798
Accumulated deficit (234,387,720) (227,305,918)
Accumulated other comprehensive income 421,420 881,342
Unearned Compensation on Class B Convertible
Common Stock (2,550,340) (2,890,540)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 148,211,332 110,740,711
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $207,233,829 $166,105,387
============ ============
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
December 31,
----------------------------
2001 2000
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OPERATING ACTIVITIES:
Net loss $ (7,081,802) $ (2,461,132)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,034,935 1,164,305
Equity loss in joint ventures 1,811,472 803,521
Profit deferred on sales to Bekaert ECD Solar Systems 1,751,676 887,435
Creditable royalties (99,471) (15,891)
Stock and stock options issued for services rendered 497,400 340,200
Amortization of deferred gain (69,582) (220,530)
Amortization of negative goodwill (233,216) (233,216)
Minority interest (770,944) (454,947)
Other (4,998) 7,825
Changes in working capital:
Accounts receivable (542,940) (1,754,544)
Amounts due from related parties (5,604,478) (6,442,230)
Inventories (99,664) (48,868)
Other assets (325,472) (806,519)
Accounts payable and accrued expenses 5,418,114 2,146,233
Accounts payable - related parties (1,037) (13,829)
Deferred revenues under business agreements (22,797) 2,038,421
Deferred revenues - related parties 715,619 (461,499)
------------ ------------
NET CASH USED IN OPERATIONS (3,627,185) (5,525,265)
INVESTING ACTIVITIES:
Purchases of capital equipment (3,251,367) (828,493)
Investment in Bekaert ECD Solar Systems (126,094) -
Investment in Bekaert ECD Europa (22,117) (43,750)
Investment in Innovative Transportation Systems - (909,000)
Purchase of investments (38,076,055) (20,442,560)
Sale of investments 24,165,343 6,000,000
Proceeds from sale of capital equipment 24,076 -
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (17,286,214) (16,223,803)
FINANCING ACTIVITIES:
Principal payments under short-term and long-term
debt and capitalized lease obligations (1,031,532) (1,051,310)
Proceeds from sale of stock to ChevronTexaco 8,893,629 3,794,560
Proceeds from sale of stock upon exercise
of stock options and warrants 35,621,316 4,432,310
Proceeds from issuance of warrants - 3,276,560
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 43,483,413 10,452,120
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 22,570,014 (11,296,948)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,055,399 44,592,017
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 55,625,413 $ 33,295,069
============ ============
See notes to consolidated financial statements.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
December 31,
-----------------------
2001 2000
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SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 309,459 $ 431,272
The Company's noncash investing and
financing activities were as follows:
Accretion of interest - long-term note receivable -
Bekaert ECD Solar Systems 327,337 307,402
Accretion of interest - long-term note payable -
Canon (327,337) (307,402)
See notes to consolidated financial statements.
6
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation
------------------------------
Information for the three months and six months ended December 31, 2001
(fiscal 2002) and 2000 (fiscal 2001) is unaudited, but includes all adjustments
which Energy Conversion Devices, Inc. (ECD) considers necessary for a fair
presentation of financial condition, cash flows and results of operations.
In accordance with the instructions for the completion of the Quarterly
Report on Form 10-Q, certain information and footnotes necessary to comply with
Generally Accepted Accounting Principles in the United States (GAAP) for annual
financial statements have been condensed or omitted. These financial statements
should be read in conjunction with ECD's 2001 Annual Report on Form 10-K which
contains a summary of ECD's accounting principles and other footnote
information.
ECD is an advanced technology and manufacturing company engaged in the
invention, engineering, development, production and commercialization of new
materials, products, systems and production technology based on its atomically
engineered amorphous and disordered materials. ECD's core business is energy
and information, with enabling proprietary technologies in energy generation,
energy storage and in the field of information.
The consolidated financial statements include the accounts of ECD; its
approximately 91%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic
Battery), a company formed to develop and commercialize ECD's Ovonic NiMH
battery technology; and, effective April 11, 2000, its 81%-owned subsidiary
United Solar Systems Corp. (United Solar) (collectively the "Company"). The
remaining shares of Ovonic Battery are owned by Honda Motor Company, Ltd.,
Sanoh Industrial Company, Ltd. and Sanyo Electric Co., Ltd. The remaining
shares of United Solar are owned by N.V. Bekaert S.A. and its U.S.-based
subsidiary (Bekaert). No minority interest related to Ovonic Battery is
recorded in the consolidated financial statements because there is no
additional funding requirement by the minority shareholders. See Note D for
discussion of these ventures.
The Company has a number of strategic alliances and has, as of December
31, 2001, seven major investments accounted for by the equity method: (i) Texaco
Ovonic Battery Systems LLC, Ovonic Battery's 50% joint venture with Texaco
Energy Systems Inc., a subsidiary of ChevronTexaco Corporation (TESI), to
manufacture and sell the Company's proprietary NiMH batteries for electric,
hybrid electric and fuel cell electric vehicle applications, uninterruptible
power supplies and telecommunication applications; (ii) Texaco Ovonic Fuel Cell
Company LLC, a 50%-owned joint venture with TESI to further develop and
commercialize Ovonic(TM) Regenerative Fuel Cells technology; (iii) Texaco Ovonic
Hydrogen Systems LLC, a 50%-owned joint venture with TESI to further develop
Ovonic(TM) hydrogen storage technology; (iv) Ovonic Media, LLC, a joint venture
owned 51% by General Electric (GE) through its GE Plastics business unit and 49%
by ECD to design, develop, demonstrate and commercialize the Company's
proprietary continuous web roll-to-roll technology for the ultra-high-speed
manufacture of optical media products, primarily rewritable DVDs; (v) Ovonyx,
Inc., a 41.7%-
7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
owned joint venture with Mr. Tyler Lowrey, Intel Capital and other investors, to
commercialize ECD's Ovonic Unified Memory (OUM) technology; (vi) United Solar,
owned 81% by ECD, has a 40% joint venture, Bekaert ECD Solar Systems LLC,
to sell its photovoltaic modules and systems throughout the world; and (vii)
Innovative Transportation Systems AG, a German company owned 26% by ECD and 8%
by Texaco Ovonic Battery Systems to manufacture and sell electric vehicles,
hybrid electric vehicles and fuel cell electric vehicles. In addition, ECD has a
50%-owned joint venture in Russia, Sovlux Co., Ltd., and United Solar and
Bekaert ECD Solar Systems formed a joint venture in Belgium, N.V. Bekaert ECD
Europa (Bekaert ECD Europa), owned 10% by United Solar and 90% by Bekaert ECD
Solar Systems. See Note D for discussion of all of the Company's ventures.
Intellectual property and patents resulting from the Company's investments
in its technologies are valued at zero in the balance sheet. Intellectual
property provides the foundation for the creation of the important strategic
alliances whereby the Company provides intellectual property and patents and
joint venture partners provide cash.
The Company's investments in its joint ventures, other than Bekaert ECD
Solar Systems, Innovative Transportation Systems and Bekaert ECD Europa, are
recorded at zero. The Company will continue to carry its investment in each of
these joint ventures at zero until the venture becomes profitable (based upon
the venture's history of sustainable profits), at which time the Company will
start to recognize over a period of years its share, if any, of the then equity
of each of the ventures, and will recognize its share of each venture's profits
or losses on the equity method of accounting.
To the extent that the Company has made cash contributions, it recognizes
its proportionate share of any losses until the investment reaches zero.
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 (other than the lease guarantees in Note G) with respect to
liabilities incurred by its joint ventures.
Upon consolidation, all intercompany accounts and transactions are
eliminated. Any profits on intercompany transactions are eliminated to the
extent of the Company's ownership percentage.
Certain items for the three months and six months ended December 31, 2000
and as of June 30, 2001 have been reclassified to be consistent with the
classification of items as of and for the three months and six months ended
December 31, 2001.
In preparing financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reported period. Actual results could differ from those estimates. The Company
is impacted by other factors such as the continued receipt of
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
contracts from the U.S. government and industrial partners, its ability to
protect and maintain the proprietary nature of its technology, its continued
product and technological advances and the strength and ability of the Company's
licensees and joint venture partners to commercialize the Company's products
and technologies.
The Company entered into foreign currency forward contracts ("forward
contracts") on March 30, 2001 for $5,267,000 to hedge the foreign currency
exposure on Japanese Yen in anticipation of purchases of machinery related to a
machine-building contract. Expected amounts and payment dates for the purchase
of the machinery as stated in the purchase orders match the terms within the
forward contracts. Thus, the forward contracts have been treated as cash flow
hedges under Statement of Financial Accounting Standards (SFAS) 133. The payment
dates for both the machinery purchases and forward contracts extend from the
period April 23, 2001 to May 15, 2002. As of December 31, 2001, the cash flow
hedge was 100% effective. The Company believes that it remains probable that the
payment dates for the machinery will take place within 60 days of the scheduled
machinery payment dates.
Other Comprehensive Income (Loss)
--------------------------------
The Company's total comprehensive loss was as follows:
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ----------------------------
2001 2000 2001 2000
------------ ----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Loss $ (4,317,184) $ (716,168) $ (7,081,802) $ (2,461,132)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on
securities (net) (654,151) 587,425 (459,922) 779,555
------------ ----------- ------------ ------------
COMPREHENSIVE LOSS $ (4,971,335) $ (128,743) $ (7,541,724) $ (1,681,577)
============ =========== ============ ============
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
----------------------
Short-term investments consist of commercial paper, classified as
available for sale, maturing in 91 days to 32 months from date of acquisition
and are stated at cost, which approximates fair market value.
9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
Investments in EV Global Motors Company (EV Global) and Rare Earth Ovonic-China
-------------------------------------------------------------------------------
The Company accounts for its investment in EV Global using the cost method
of accounting. ECD's interest in EV Global is less than 1%. The Company has
three joint ventures with Rare Earth High-Tech Co. Ltd. (Rare Earth High-Tech)
of Baotou Steel Company of Inner Mongolia, China, for the manufacturing and
licensing of its battery and other related technologies. The Company accounts
for its 19% interest in each of these joint ventures using the cost method of
accounting.
Financial Instruments
---------------------
Due to the short-term maturities of cash, cash equivalents, marketable
securities, accounts receivable and accounts payable, the Company believes the
carrying value of its financial instruments to be a reasonable estimate of fair
value.
Translation Gains and Losses
----------------------------
Since most of the Company's contracts and transactions are denominated and
settled in U.S. dollars, there are no significant foreign currency gains or
losses.
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
Accounts Receivable
-------------------
December 31, June 30,
2001 2001
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Revenues recognized but unbilled
Commercial customers $ 10,217,203 $ 11,604,014
Amounts billed to customers
Commercial customers 4,146,674 1,215,328
------------ ------------
Sub-total 14,363,877 12,819,342
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
U.S. Government 403,547 844,720
Commercial customers 763,105 72,970
------------ ------------
1,166,652 917,690
Amounts billed
U.S. Government 1,011,900 2,545,250
Commercial customers 51,020 51,020
------------ ------------
1,062,920 2,596,270
Retainages
U.S. Government 10,500 40,500
------------ ------------
Sub-total 2,240,072 3,554,460
Amounts unbilled for other than long-term contracts
Commercial customers 2,324,105 2,164,631
Amounts billed for other than long-term contracts
Commercial customers 918,980 853,661
Allowance for uncollectible accounts (495,000) (583,000)
------------ ------------
TOTAL $ 19,352,034 $ 18,809,094
============ ============
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 December 31, 2001 and June 30, 2001. Certain U.S.
government contracts remain subject to audit.
Included in accounts receivable at December 31, 2001, is $14,135,000 due
from Rare Earth Ovonic joint ventures in China (see Note D).
11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
Amounts Due from Related Parties
--------------------------------
December 31, June 30,
2001 2001
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Revenues recognized but unbilled
Bekaert ECD Solar Systems $ 4,725,618 $ 1,229,324
Texaco Ovonic Battery Systems 213,431 -
----------- -----------
4,939,049 1,229,324
Amounts billed
Bekaert ECD Solar Systems 7,395,679 5,637,611
----------- -----------
Sub-total 12,334,728 6,866,935
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
Bekaert ECD Solar Systems 130,000 130,000
Ovonic Media - 16,748
Texaco Ovonic Battery Systems 2,221,171 6,432,859
Texaco Ovonic Fuel Cell Company 775,387 932,323
Texaco Ovonic Hydrogen Systems 1,950,669 777,441
----------- -----------
Sub-total 5,077,227 8,289,371
Amounts billed
Texaco Ovonic Battery Systems 3,654,751 185,830
Amounts unbilled for other than long-term contracts
ChevronTexaco Technology Ventures 20,762 -
Texaco Ovonic Battery Systems - 20,714
Ovonyx 75,923 30,875
----------- -----------
Sub-total 96,685 51,589
Amounts billed for other than long-term contracts
Bekaert ECD Solar Systems 327,857 396,912
Texaco Ovonic Battery Systems 15,979 187,132
Ovonyx 100,883 25,863
----------- -----------
Sub-total 444,719 609,907
----------- -----------
TOTAL $21,608,110 $16,003,632
=========== ===========
Inventories
-----------
Inventories of raw materials, work in process and finished goods for the
manufacture of solar cells, metal hydride materials, battery packs and other
products are valued at the lower of cost (moving average) or market. Cost
elements included in inventory are materials, direct labor and manufacturing
overhead. Cost of sales is removed from inventory based on actual costs of items
shipped to customers.
12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
Inventories for United Solar and Ovonic Battery are as follows:
December 31, June 30,
2001 2001
----------- -----------
Finished products $ 84,980 $ 109,500
Work in process 771,502 809,829
Raw materials 576,724 414,213
----------- -----------
$ 1,433,206 $ 1,333,542
=========== ===========
Long-Term Note Receivable
-------------------------
In connection with Bekaert's investment in United Solar and Bekaert ECD
Solar Systems, Bekaert ECD Solar Systems is required to pay ECD $12,000,000 no
later than January 1, 2004. This noninterest-bearing note receivable was
recorded on April 11, 2000 by ECD at a discounted value of $9,500,000 (using a
discount rate of 6.3%). ECD is required to pay Canon Inc. of Japan (Canon)
$12,000,000 no later than January 2004 in connection with the acquisition of
Canon's interest in United Solar (see Note D).
Product Development, Patents and Technology
-------------------------------------------
Product development and research costs are expensed as they are incurred
and, as such, the Company's investments in its technologies and patents are
recorded at zero in its financial statements, regardless of their values. The
technology investments are the bases by which the Company is able to enter into
license and joint venture agreements.
Product Sales
-------------
Product sales include photovoltaics, metal hydride materials, revenues
related to building of battery packs, and revenues related to machine-building
contracts. Revenues related to machine-building contracts and sales related to
other long-term contracts are recognized on the percentage-of-completion method
of accounting using the costs incurred to date as a percentage of the total
expected costs. All other product sales are recognized when the product is
shipped. These products are shipped FOB shipping point. In certain cases, low
sales volumes related to metal hydride materials combined with high fixed costs
result in losses.
Royalties
---------
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the sale of the respective licensed product. In
several instances, the Company has received cash payments for nonrefundable
advance royalty payments which are creditable against future royalties under
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
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.
ECD has a royalty trust arrangement whereby the Company is obligated to
pay a trust 25% of optical memory royalties received.
Business Agreements
-------------------
A substantial portion of revenues is derived through business agreements
for the development and/or commercialization of products based upon the
Company's proprietary technologies. The following describes two types of such
agreements.
The first type of business agreement relates to licensing the Company's
proprietary technology. Licensing activities are tailored to provide each
licensee with the right to use the Company's technology, most of which is
patented, for a specific product application or, in some instances, for further
exploration of new product applications of such technologies. The terms of such
licenses, accordingly, are tailored to address a number of circumstances
relating to the use of such technology which have been negotiated between the
Company and the licensee. Such terms generally address whether the license will
be exclusive or nonexclusive, whether the licensee is limited to very narrowly
defined applications or to broader-based product manufacture or sale of products
using such technologies, whether the license will provide royalties for products
sold which employ such licensed technology and how such royalties will be
measured, as well as other factors specific to each negotiated arrangement. In
some cases, licenses relate directly to product development that the Company has
undertaken pursuant to product development agreements; in other cases, they
relate to product development and commercialization efforts of the licensee; and
other agreements combine the efforts of the Company with those of the licensee.
License agreement fees are generally recognized as revenue at the time the
agreements are consummated, which is the completion of the earnings process.
Typically, such fees are nonrefundable, do not obligate the Company to incur any
future costs or require future performance by the Company, and are not related
to future production or earnings of the licensee. License fees payable in
installments are recorded at the present value of the amounts to be received,
taking into account the collectibility of the license fee. In some instances, a
portion of such license fees is contingent upon the commencement of production
or other uncertainties. In these cases, license fee revenues are not recognized
until commencement of production or the resolution of uncertainties. Generally,
there are no current or future direct costs associated with license fees.
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
14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
criteria and deliverables whereas others require "best efforts" with no
specified performance criteria. Revenues from product development agreements
that contain specific performance criteria are recognized on a percentage-of-
completion basis which matches the contract revenues to the costs incurred on a
project based on the relationship of costs incurred to estimated total project
costs. Revenues from product development agreements, where there are no specific
performance terms, are recognized in amounts equal to the amounts expended on
the programs. Generally, the agreed-upon fees for product development agreements
contemplate reimbursing the Company for costs considered associated with project
activities including expenses for direct product development and research,
patents, operating, general and administrative expenses and depreciation.
Accordingly, expenses related to product development agreements are recorded as
cost of revenues from product development agreements.
Overhead and General and Administrative Allocations
---------------------------------------------------
The Company allocates overhead and general and administrative expenses to
product development research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
Overhead is allocated to cost of product sales through the application of
overhead to inventory costs.
Other Operating Revenues
------------------------
Other operating revenues consist principally of revenues related to
services provided to certain related parties and third-party service revenue
realized by certain of the Company's service departments, including the
Production Technology and Machine Building Division and Central Analytical
Laboratory. Revenues related to services are recognized upon completion of
performance of the applicable service.
Other Nonoperating Income
-------------------------
Other nonoperating income-net consists of the amortization of deferred
gains and rental income.
15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
Stock Options
-------------
The Company applies SFAS 123, Accounting for Stock-Based Compensation, for
any stock options or awards granted to nonemployees of the Company. The amount
of compensation cost is determined based upon the fair value of the options at
the grant date and expense is amortized during the period over which the options
vest. The Company applies APB 25, Accounting for Stock Issued to Employees, to
its stock-based compensation awards to employees. These awards are granted at
the fair market value on the grant date in accordance with the applicable plan.
Accordingly, no compensation expense is recorded in connection with the
Company's stock options granted to employees.
16
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Product Sales, Royalties, Revenues from Product Development
-----------------------------------------------------------------------------
Agreements and License and Other Agreements
-------------------------------------------
The Company has product sales and business agreements with related parties
and with third parties for which royalties and revenues are included in the
consolidated statements of operations. A summary of all of the Company's
revenues follows:
Six Months Ended
December 31,
---------------------------
2001 2000
------------ ------------
Product sales:
Machine building $ 16,664,691 $ 2,279,971
Battery packs 258,389 342,109
Metal hydride materials 455,790 59,606
------------ ------------
17,378,870 2,681,686
------------ ------------
Product sales - related parties:
Photovoltaics 2,698,196 2,969,527
Machine building 2,102,872 1,134,270
Battery packs - 106,494
Metal hydride materials 155,710 68,535
------------ ------------
4,956,778 4,278,826
------------ ------------
Total product sales $ 22,335,648 $ 6,960,512
============ ============
Royalties
Battery technology $ 970,608 $ 1,597,034
Optical memory 42,887 76,826
------------ ------------
1,013,495 1,673,860
Royalties - related parties
Microelectronics 10,985 -
------------ ------------
Total royalties $ 1,024,480 $ 1,673,860
============ ============
Revenues from product development agreements:
Photovoltaics $ 1,448,566 $ 1,327,579
Battery technology 1,776,579 1,070,906
Optical memory 172,695 416,929
Hydrogen 308,181 522,110
Clear coat 32,394 -
------------ ------------
3,738,415 3,337,524
------------ ------------
Revenues from product development
agreements - related parties:
Battery technology 8,227,793 292,081
Optical memory 841,737 1,442,448
Hydrogen 8,316,791 4,572,363
Fuel cells 4,419,415 3,217,288
------------ ------------
21,805,736 9,524,180
------------ ------------
Total revenues from product development
agreements $ 25,544,151 $ 12,861,704
============ ============
License and other agreements:
Battery technology $ - $ 2,800,000
============ ============
17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Product Sales, Royalties, Revenues from Product Development
-----------------------------------------------------------------------------
Agreements and License and Other Agreements (Continued)
-------------------------------------------------------
The following table presents revenues by country based on the location of
the customer:
Six Months Ended
December 31,
----------------------------
2001 2000
------------ ------------
United States $ 27,460,818 $ 15,625,487
China 16,678,513 4,868,079
Mexico 3,587,513 2,969,527
Japan 913,486 1,516,580
Hong Kong 487,342 108,616
Germany 75,150 74,181
Netherlands - 40,000
Other countries 655 19,520
------------ ------------
$ 49,203,477 $ 25,221,990
============ ============
NOTE C - Nonrefundable Advance Royalties
----------------------------------------
At December 31, 2001 and June 30, 2001, the Company deferred recognition
of revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
December 31, June 30,
2001 2001
----------- -----------
Battery $ 1,748,346 $ 1,819,416
Optical memory 1,970,671 1,999,072
----------- -----------
$ 3,719,017 $ 3,818,488
=========== ===========
Creditable royalties earned and recognized as revenue were:
Periods Ended December 31,
-------------------------
2001 2000
---------- ----------
Three months ended $ 47,476 $ 11,187
Six months ended 99,471 15,891
There are no obligations in connection with any of the advance royalty
agreements which require the Company to incur any additional costs.
18
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments
---------------------------------------
Joint Ventures
--------------
United Solar/Bekaert ECD Solar Systems
Immediately prior to the April 11, 2000 transaction described below,
United Solar was owned 49.98% by ECD, 49.98% by Canon, and the remainder by a
minority shareholder. United Solar repurchased the shares of the minority
shareholder, bringing the ownership of United Solar for both ECD and Canon to
50%.
On April 11, 2000, ECD and Bekaert entered into a strategic alliance in
the field of photovoltaic (solar) products. The joint venture entails an
investment in a new manufacturing plant with an annual capacity of 25 megawatts
(MW), which has been designed and is being built by ECD, a sales and marketing
expansion program, and the purchase of Canon's interest in United Solar for a
total investment by Bekaert of $84,000,000.
This transaction involved the following:
o Bekaert invested $72,000,000 for 1,372,015 newly issued shares of
United Solar stock and its 60% share of Bekaert ECD Solar Systems
($42,000,000 in cash and $30,000,000 in the form of a note, payable
on an as-needed basis).
o Bekaert ECD Solar Systems paid to ECD $12,000,000 in cash (paid at
the closing of the transaction), and will pay to ECD $12,000,000 (to
be paid no later than January 1, 2004).
o ECD paid to Canon for all of Canon's shares in United Solar (1)
$12,000,000 in cash, (2) a note, guaranteed by Bekaert, for
$12,000,000 to be paid to Canon no later than January 1, 2004 and (3)
700,000 shares of ECD Common Stock.
o United Solar invested $28,000,000 for its 40% interest in Bekaert ECD
Solar Systems, consisting of (1) $23,056,000 in cash, (2) $5,000,000
in the form of a note, payable on an as-needed basis, but no later
than April 11, 2003, and (3) the stock of United Solar de Mexico with
a negative book value of $56,000.
As a result of this transaction, United Solar is owned 81% by ECD and 19%
by Bekaert. Bekaert ECD Solar Systems is owned 40% by United Solar and 60% by
Bekaert.
At the close of this transaction, ECD received a total of $7,000,000 from
United Solar and Bekaert ECD Solar Systems. Of this amount, $5,000,000 was an
advance on the 25MW machine-building order and $2,000,000 was a repayment by
United Solar to ECD of previous loans made by ECD to United Solar.
19
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
Effective April 11, 2000, ECD has consolidated United Solar in ECD's
financial statements. Prior to the transaction, United Solar's fiscal year end
was December 31. United Solar's year end has been changed to June 30 to coincide
with ECD's year end.
ECD valued its acquisition of Canon's interest in United Solar at
$13,214,630, which included the issuance of 700,000 shares of ECD Common Stock
which was valued at $12,758,000 and the $456,630 carrying value of ECD's
investment in United Solar on April 11, 2000. The acquisition, which resulted in
ECD's ownership in United Solar increasing from 49.98% to 81%, has been recorded
under the purchase method of accounting. The Company allocated the purchase
price for this acquisition to the net assets of United Solar. The value of the
net assets acquired exceeded the purchase price resulting in negative goodwill,
which results in a reduction of consolidated expenses. The Company allocated
this negative goodwill to reduce United Solar's long-term assets (capital
equipment) and applicable depreciation expense. The resulting negative goodwill
($3,265,000) is being amortized over seven years on a straight-line basis.
The Financial Accounting Standards Board (FASB) has issued SFAS 142,
Goodwill and Other Intangible Assets. This will require the Company to recognize
any unamortized negative goodwill as an extraordinary gain no later than July 1,
2002. The Company does not plan to implement this new standard before that date,
but will continue to amortize negative goodwill through June 30, 2002 and will
recognize the balance of approximately $2,216,000 as an extraordinary gain at
July 1, 2002.
The following sets forth certain financial data regarding Bekaert ECD
Solar Systems that are derived from its financial statements.
BEKAERT ECD SOLAR SYSTEMS LLC
STATEMENT OF OPERATIONS
-----------------------
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 4,956,673 $ 1,492,895 $ 8,966,488 $ 2,726,786
Operating Expenses:
Cost of Sales 5,805,410 2,191,689 10,303,913 3,340,096
General and Administrative 2,271,850 1,501,829 3,562,247 2,180,791
----------- ----------- ----------- -----------
Total Expenses 8,077,260 3,693,518 13,866,160 5,520,887
Other Income (Expense) (772,322) 53,225 (915,531) 129,372
----------- ----------- ----------- -----------
Net Loss $(3,892,909) $(2,147,398) $(5,815,203) $(2,664,729)
=========== =========== =========== ===========
20
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
BEKAERT ECD SOLAR SYSTEMS LLC
BALANCE SHEET
-------------
December 31,
2001
----------------
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 18,002,411
Inventory 6,925,319
Other Current Assets 6,811,770
------------
Total Current Assets 31,739,500
Property, Plant and Equipment (Net) 59,512,283
Other Assets 39,220,359
------------
Total Assets $130,472,142
============
Current Liabilities:
Accounts Payable and Accrued Expenses $ 28,126,326
------------
Total Current Liabilities 28,126,326
Long-term Liabilities:
Note Payable - ECD 10,583,447
Capital Lease Obligation 39,338,316
------------
Total Long-term Liabilities 49,921,763
------------
Members' Equity 52,424,053
------------
Total Liabilities and Members' Equity $130,472,142
============
The Company recorded revenues from Bekaert ECD Solar Systems of $2,431,000
and $4,801,000, respectively for the three months and six months ended December
31, 2001 and $2,183,000 and $4,104,000, respectively, for the three months and
six months ended December 31, 2000, representing revenues realized on ECD's
machine-building contract with Bekaert ECD Solar Systems and United Solar's
sales of product to Bekaert ECD Solar Systems.
Texaco Ovonic Battery Systems
On July 17, 2001, TESI bought General Motors Corporation's interest in GM
Ovonic, LLC. GM Ovonic had been formed in 1994 as a joint venture between Ovonic
Battery and General Motors for the manufacture and commercialization of Ovonic
NiMH batteries for electric, hybrid electric and fuel cell electric vehicles. As
of June 30, 2001, General Motors had a 60% interest and Ovonic Battery had a 40%
interest in this joint venture. Ovonic Battery contributed intellectual
property, licenses, production processes, know-how, personnel and engineering
services pertaining to Ovonic Nickel Metal Hydride (NiMH) battery technology to
the joint venture. The contribution of General Motors consisted of operating
capital, plant, equipment and management personnel.
21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
GM Ovonic was renamed Texaco Ovonic Battery Systems LLC and is owned 50%
by Ovonic Battery and 50% by TESI. The joint venture is increasing production
capacity, engaging in market development activities and implementing an advanced
product development program. These activities are being funded by TESI and
include a contract from Texaco Ovonic Battery Systems to Ovonic Battery for
advanced product development work. Ovonic Battery contributed additional
technology to the joint venture to allow it to expand the application of Ovonic
NiMH battery technology to include telecommunications and uninterruptible power
supply (UPS).
The Company recorded revenue from Texaco Ovonic Battery Systems of
$5,076,000 and $8,140,000, respectively, for the three months and six months
ended December 31, 2001 for services performed on behalf of Texaco Ovonic
Battery Systems (primarily for advanced product development work).
There are no financial statements currently available for Texaco Ovonic
Battery Systems.
Ovonyx
In January 1999, ECD and Mr. Tyler Lowrey, the former vice chairman and
chief technology officer of Micron Technology, Inc., formed a strategic alliance
(Ovonyx, Inc.) to commercialize ECD's Ovonic Unified Memory (the corporation was
formed on June 23, 1999, and was initially owned 50% by ECD with the balance
owned by Mr. Lowrey and an affiliate of his). In February 2000, Ovonyx formed a
strategic alliance with Intel Corporation pursuant to which Intel Capital, and
other investors, made an equity investment in Ovonyx. Additionally, Ovonyx
granted Intel a nonexclusive royalty-bearing license and began a joint
development program with Intel utilizing one of Intel's wafer fabrication
facilities. Presently, ECD owns 41.7% of Ovonyx, Mr. Lowrey and his affiliate
own 41.7% of Ovonyx, and Intel and other investors own the remainder. ECD has
contributed intellectual property and licenses for its interest in Ovonyx.
The Company recorded revenues from Ovonyx of $124,000 and $225,000,
respectively, for the three months and six months ended December 31, 2001, and
$119,000 and $213,000 for the three months and six months ended December 31,
2000, representing services performed for its operations which commenced on
January 15, 1999.
Texaco Ovonic Fuel Cell
In September 2000, ECD and TESI formed Texaco Ovonic Fuel Cell. TESI is
funding initial product and market development, the primary use of which is to
fund a contract from Texaco Ovonic Fuel Cell Company LLC to ECD to further
develop Ovonic(TM) Regenerative Fuel Cells technology. The joint venture is
owned 50% by TESI and 50% by ECD. ECD has contributed intellectual property and
licenses.
22
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
The following sets forth certain financial data regarding Texaco Ovonic
Fuel Cell that are derived from its financial statements.
TEXACO OVONIC FUEL CELL COMPANY LLC
STATEMENT OF OPERATIONS
-----------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2001 2001
------------ ------------
(Unaudited) (Unaudited)
Expenses:
Product Development - Paid or
Payable to ECD $ 2,133,450 $ 3,645,226
Product Development - Paid or
Payable to TESI 278,460 616,696
Depreciation Expense 118,973 193,557
------------ ------------
Total Expenses 2,530,883 4,455,479
------------ ------------
Other Income:
Dividend Income $ 1,587 $ 3,020
------------ ------------
Net Loss $ (2,529,296) $ (4,452,459)
============= =============
TEXACO OVONIC FUEL CELL COMPANY LLC
BALANCE SHEET
-------------
December 31,
2001
----------------
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 822,604
------------
Total Current Assets 822,604
Fixed Assets:
Leasehold Improvements 1,257,339
Machinery and Other Equipment 1,237,995
Construction in Progress 238,913
------------
Total Fixed Assets 2,734,247
Less Accumulated Depreciation and Amortization (259,363)
------------
Net Fixed Assets 2,474,884
------------
Total Assets $ 3,297,488
============
Current Liabilities:
Amount Due ECD $ 775,387
Amount Due TESI 93,000
------------
Total Current Liabilities 868,387
Members' Equity:
Capital Contributions 14,250,000
Cumulative Deficit (11,820,899)
------------
Total Members' Equity 2,429,101
------------
Total Liabilities and Members' Equity $ 3,297,488
============
23
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
The Company recorded revenues of $2,483,000 and $4,419,000 during the
three months and six months ended December 31, 2001, and of $2,320,000 and
$3,217,000 during the three months and six months ended December 31, 2000,
respectively, for services provided to this joint venture (primarily for
advanced product development work).
Texaco Ovonic Hydrogen Systems
In October 2000, ECD and TESI formed Texaco Ovonic Hydrogen Systems LLC.
TESI is funding initial product and market development, the primary use of which
is to fund a contract from Texaco Ovonic Hydrogen Systems to ECD to further
develop the Ovonic(TM) hydrogen technology. The joint venture is owned 50% by
TESI and 50% by ECD. ECD has contributed intellectual property and licenses.
The following sets forth certain financial data regarding Texaco Ovonic
Hydrogen Systems that are derived from its financial statements.
TEXACO OVONIC HYDROGEN SYSTEMS LLC
STATEMENT OF OPERATIONS
-----------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2001 2001
------------ ------------
(Unaudited) (Unaudited)
Expenses:
Product Development - Paid or
Payable to ECD $ 3,091,951 $ 5,896,140
Product Development - Paid or
Payable to TESI 727,905 1,153,633
Depreciation Expense 114,854 201,980
----------- -----------
Total Expenses 3,934,710 7,251,753
----------- -----------
Revenues
Dividend Income 4,186 5,658
----------- -----------
Net Loss $(3,930,524) $(7,246,095)
=========== ===========
24
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
TEXACO OVONIC HYDROGEN SYSTEMS LLC
BALANCE SHEET
-------------
December 31,
2001
--------------
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 5,504,637
------------
Total Current Assets 5,504,637
Fixed Assets:
Leasehold Improvements 1,091,108
Machinery and Other Equipment 1,314,094
Construction in Progress 1,955,729
------------
Total Fixed Assets 4,360,931
Less Accumulated Depreciation and Amortization (273,664)
------------
Net Fixed Assets 4,087,267
------------
Total Assets $ 9,591,904
============
Current Liabilities:
Amount Due ECD 1,950,669
Amount Due TESI 243,000
Deferred Revenue 15,257
------------
Total Current Liabilities 2,208,926
Members' Equity:
Capital Contributions 25,127,000
Cumulative Deficit (17,744,022)
------------
Total Members' Equity 7,382,978
------------
Total Liabilities and Members' Equity $ 9,591,904
============
The Company recorded revenues from Texaco Ovonic Hydrogen Systems of
$4,998,000 and $8,296,000, respectively, for the three months and six months
ended December 31, 2001, and of $3,132,000 and $4,572,000, respectively, for the
three months and six months ended December 31, 2000, respectively, for services
provided to this joint venture (primarily for market development and advanced
product development work).
Innovative Transportation Systems
Innovative Transportation Systems, a German company formed to manufacture
battery-driven electric, hybrid-electric and fuel cell electric vehicles, was
initially capitalized with a minor amount of cash and a contribution of 625,000
shares of Unique Mobility, Inc. Common Stock. At the inception of Innovative
Transportation Systems, ECD's interest was 5.7%. ECD's interest increased to 30%
as of March 8, 2001 as a result of additional investments. As of March 8, 2001,
ECD is using the equity method to account for its investment in Innovative
Transportation Systems. In October 2001, Texaco Ovonic Battery Systems invested
25
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
$4,000,000 in Innovative Transportation Systems for an 8% investment, reducing
ECD's ownership to 26%.
Innovative Transportation Systems is in its formative stage and there are
no financial statements currently available.
Ovonic Media
In March 2000, ECD and GE formed a strategic alliance, the first activity
of which resulted in the creation of a joint venture, Ovonic Media. This joint
venture is owned 51% by GE through its GE Plastics business unit and 49% by ECD.
ECD has contributed intellectual property and licenses and will contribute other
assets in the form of tangible personal property to the joint venture. GE will
make cash and other contributions to the joint venture.
The Company recorded revenues from Ovonic Media of $436,000 and $842,000,
respectively, for the three months and six months ended December 31, 2001, and
of $775,000 and $1,442,000, respectively, for the three months and six months
ended December 31, 2000.
The following sets forth certain financial data regarding Ovonic Media
that are derived from its financial statements.
OVONIC MEDIA, LLC
STATEMENT OF OPERATIONS
-----------------------
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ - $ - $ - $ -
Operating Expenses:
Product Development 368,922 315,097 659,291 825,959
General and Administrative 179,501 100,824 270,379 201,648
----------- ---------- ---------- -----------
Total Expenses 548,423 415,921 929,670 1,027,607
----------- ---------- ---------- -----------
Loss From Operations (548,423) (415,921) (929,670) (1,027,607)
Interest Expense - (2,177) - (5,099)
----------- ---------- ---------- -----------
Net Loss $ (548,423) $ (418,098) $ (929,670) $(1,032,706)
=========== ========== ========== ===========
26
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
OVONIC MEDIA, LLC
BALANCE SHEET
-------------
December 31,
2001
--------------
(Unaudited)
Current Assets
Advances to ECD $ 716,274
------------
Total Current Assets 716,274
Property, Plant and Equipment (Net) 482,052
------------
Total Assets $ 1,198,326
============
Members' Equity:
Capital Contributions $ 4,656,342
Accumulated Deficit (3,458,016)
------------
Total Members' Equity 1,198,326
------------
Total Liabilities and Members' Equity $ 1,198,326
============
Investment in EV Global and Rare Earth Ovonic
In February 1998, ECD and EV Global, a Lee Iacocca company, entered into a
Stock Purchase Agreement which provided for the transfer to EV Global of 146,924
shares of ECD Common Stock and warrants to purchase 133,658 shares of ECD Common
Stock. The agreement also provided for the transfer to ECD of 250,000 shares of
EV Global Common Stock and 129,241 shares of Unique Mobility Common Stock.
Pursuant to the terms of the warrant agreement, EV Global elected to exchange,
in March 2000, the warrants for 49,888 shares of ECD Common Stock. ECD's
interest in EV Global is less than 1%.
During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech of Inner Mongolia, China. The agreement
called for the creation of joint ventures for manufacturing and licensing of
advanced NiMH battery technology, hydrogen storage alloy powders, advanced
Ovonic nickel hydroxide materials and production equipment for NiMH batteries.
As of December 31, 2001, three of the contemplated five joint ventures have been
started. ECD and Ovonic Battery contributed technology for their 19% interest in
each of these joint ventures. All of these joint ventures are being accounted
for using the cost method of accounting. ECD and Ovonic Battery intend to make a
$1,710,000 cash investment in the Rare Earth Ovonic joint ventures on February
22, 2002 and will maintain its 19% interest in these entities.
Ovonic Battery has three contracts totaling $63,600,000 to supply
equipment and technology to its Rare Earth Ovonic joint ventures in China. To
ensure payments from China, Ovonic Battery has received Letters of Credit
totaling $49,100,000 from the Bank of
27
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
Communications of Baotou, China, and has received payment guarantees from
LaSalle Bank that cover all risks of nonpayment or dishonor of these Letters of
Credit, including and not limited to, nonpayment due to force majeure, acts of
war, or other political or economic events. Of the Letters of Credit totaling
$49,100,000, LaSalle Bank has accepted the risk of nonpayment due to
nonconforming documents for payments totaling $18,500,000. As of February 12,
2002, Ovonic Battery has received payments totaling $24,800,000 under the three
contracts, $8,900,000 for amounts not covered by Letters of Credit and
$15,900,000 for amounts covered by Letters of Credit. There are currently no
outstanding amounts where payments are past due.
The Company recorded revenues from Rare Earth of $8,252,000 and
$16,664,000, respectively, for the three and six months ended December 31, 2001
and $3,733,000 and $4,617,000, respectively, for the three and six months ended
December 31, 2000.
Sovlux and Sovlux Battery
In 1990, ECD formed Sovlux, a joint venture to manufacture ECD's
photovoltaic products in the countries of the former Soviet Union. Sovlux is
owned 50% by ECD and 50% by the State Research and Production Enterprise Kvant
and enterprises of the Russian Ministry of Atomic Energy (Minatom). Sovlux has
not been able to continue production of photovoltaic products due to current
economic conditions in Russia.
In 1998, ECD formed Sovlux Battery to produce NiMH batteries and
components for sale to Ovonic Battery and its licensees. Sovlux Battery is owned
50% by ECD and 50% by the Chepetsky Mechanical Plant (Chepetsky), an enterprise
of Minatom. ECD's contribution to the ventures consists solely of technology.
There are no financial statements currently available for Sovlux or Sovlux
Battery. Sovlux and Sovlux Battery are in their developmental stage and, as
such, have a history of operating losses.
28
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Net Loss Per Share
---------------------------
Basic net loss per common share is computed by dividing the net loss by
the weighted average number of common shares outstanding. ECD uses the treasury
stock method to calculate diluted earnings per share. Potential dilution exists
from stock options and warrants. Weighted average number of shares outstanding
and basic and diluted earnings per share for the three months and six months
ended December 31 are computed as follows:
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Weighted average number of shares
Outstanding 21,884,850 19,324,355 21,428,864 19,104,079
Net loss $(4,317,184) $ (716,168) $(7,081,802) $(2,461,132)
BASIC NET LOSS PER SHARE $ (.20) $ (.04) $ (.33) $ (.13)
=========== ============ =========== ===========
Weighted average number of shares
Outstanding 21,884,850 19,324,355 21,428,864 19,104,079
Weighted average shares for dilutive
Securities - - - -
----------- ------------ ----------- -----------
Average number of shares
outstanding and potential
dilutive shares 21,884,850 19,324,355 21,428,864 19,104,079
Net loss $(4,317,184) $ (716,168) $(7,081,802) $(2,461,132)
DILUTED LOSS PER SHARE $ (.20) $ (.04) $ (.33) $ (.13)
=========== ============ =========== ===========
Due to the Company's net losses, the weighted average shares of potential
dilutive securities for 2001 of 640,259 (three months) and 793,195 (six months)
and for 2000 of 1,809,002 (three months) and 2,030,660 (six months) 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 for 2001 of 93,002 (three months) and 64,142 (six months) and for
2000 zero (three months and six months) were excluded from the calculations of
the weighted average shares due to their antidilutive effect to the net loss per
share because of the relationship between the exercise prices and the average
market price of ECD's Common Stock during these periods.
NOTE F - Business Segments
--------------------------
The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar, and the parent company, ECD. Ovonic Battery is involved in
developing and commercializing battery technology. United Solar is involved in
manufacturing, developing and commercializing photovoltaic technology. ECD is
involved in microelectronics, fuel cell and hydrogen storage technologies,
machine building and photovoltaics. Some general corporate expenses have been
allocated to Ovonic Battery.
29
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Business Segments (Continued)
--------------------------------------
The Company's operations by business segment were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
Consolidating
ECD Ovonic Battery United Solar Entries Consolidated
--------- -------------- ------------ ------------- ------------
Revenues
Three months ended
December 31, 2001 $ 19,936 $ 15,544 $ 1,631 $(10,367) $ 26,744
December 31, 2000 11,106 5,798 1,591 (3,407) 15,088
Six months ended
December 31, 2001 $ 39,747 $ 28,513 $ 3,279 $(22,336) $ 49,203
December 31, 2000 17,026 9,219 3,842 (4,865) 25,222
Interest Income
Three months ended
December 31, 2001 $ 1,292 $ - $ 77 $ - $ 1,369
December 31, 2000 1,623 - 10 - 1,633
Six months ended
December 31, 2001 $ 2,571 $ - $ 155 $ - $ 2,726
December 31, 2000 3,146 - 41 - 3,187
Interest Expense*
Three months ended
December 31, 2001 $ - $ 30 $ 124 $ - $ 154
December 31, 2000 1 64 146 - 211
Six months ended
December 31, 2001 $ - $ 65 $ 244 $ - $ 309
December 31, 2000 1 137 293 - 431
Operating Income (Loss)
Three months ended
December 31, 2001 $ (1,399) $ (2,142) $(1,144) $ (317) $ (5,002)
December 31, 2000 899 (1,949) (911) (78) (2,039)
Six months ended
December 31, 2001 $ (1,857) $ (4,148) $(2,194) $ (700) $ (8,899)
December 31, 2000 1,278 (5,513) (1,089) 193 (5,131)
30
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Business Segments (Continued)
--------------------------------------
Consolidating
ECD Ovonic Battery United Solar Entries Consolidated
--------- -------------- ------------ ------------- ------------
Equity in Net Loss of Investees
Under Equity Method
Three months ended
December 31, 2001 $ (125) $ - $ (1,038) $ 125 $ (1,038)
December 31, 2000 - - (868) 271 (597)
Six months ended
December 31, 2001 $ (254) $ - $ (1,807) $ 250 $ (1,811)
December 31, 2000 - - (1,075) 271 (804)
Depreciation and
Amortization Expense
Six months ended
December 31, 2001 $ 411 $ 573 $ 870 $ (819) $ 1,035
December 31, 2000 390 766 856 (848) 1,164
Capital Expenditures
Six months ended
December 31, 2001 $ 3,017 $ 116 $ 118 $ - $ 3,251
December 31, 2000 304 200 324 - 828
Investments in Equity
Method Investees
December 31, 2001 $ 3,746 $ - $ 20,289 $ - $ 24,035
December 31, 2000 - - 20,748 - 20,748
Identifiable Assets
December 31, 2001 $172,552 $ 27,032 $ 35,909 $(28,259) $207,234
December 31, 2000 134,874 10,374 43,633 (27,772) 161,109
------------
*Excludes intercompany interest
31
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Commitments
--------------------
On February 12, 2001, ECD signed an agreement with the landlord of the
Bekaert ECD Solar Systems' new facility in Auburn Hills, Michigan, guaranteeing
50% of the rent obligation ($3,015,000) of Bekaert ECD Solar Systems due for the
first five years of the term of this lease agreement. ECD's maximum exposure and
liability under this guaranty is reduced by 50% of monthly rental installments
paid. In addition, Bekaert has guaranteed this rent obligation to the same
extent as ECD.
In December 2001, Bekaert ECD Solar Systems and LaSalle National Leasing
Corporation entered into a $40 million sale-and-leaseback transaction. Bekaert
ECD Solar Systems' 25MW machinery and equipment are being sold to LaSalle and
leased back for a period of seven years. In connection with this transaction,
ECD and Bekaert have severally guaranteed Bekaert ECD Solar Systems' lease
payments for two years after the final draw down of the principal amount and ECD
has pledged $20 million of its cash equivalents to secure its portion of the
guarantee. After the first two-year period has expired, ECD and Bekaert will
guarantee the remaining payments on a joint and several basis for the remaining
term of the lease and ECD will no longer be required to pledge the $20 million
in cash equivalents.
Note H - Contingent Liabilities
-------------------------------
The Company's contracts with the U.S. government and its agencies are
subject to the audits by the Defense Contract Audit Agency (DCAA). DCAA is in
the process of auditing the Company's indirect rates, including its methodology
of computing these rates, for the year ended June 30, 1999. In its draft report,
DCAA has questioned the allowability, and the allocability, of certain costs. In
addition, DCAA has stated that there could be penalties imposed. The Company,
together with its government consultants, is in the process of discussing each
of these items in detail with DCAA. Management believes that some of these DCAA
assertions are without merit. It is not possible to estimate the effect of the
resolution of all of the issues, but management believes the range of additional
cost to be from zero dollars to $2,200,000.
32
Item 2. Management's Discussion and Analysis of Financial Condition and
------- -------------------------------------------------------------------
Results of Operations
---------------------
The following discussion should be read in conjunction with the
accompanying Quarterly Financial Information and Notes thereto and the Company's
Annual Report on Form 10-K for the year ended June 30, 2001 and is qualified in
its entirety by the foregoing. The results of operations for the three months
and six months ended December 31, 2001 are not necessarily indicative of results
to be expected in future periods.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements
about our financial condition, results of operations, plans, objectives, future
performance and business. In addition, from time to time we and our
representatives have made or may make forward-looking statements orally or in
writing. The words "may," "will," "believes," "expects," "intends,"
"anticipates," "estimates," and similar expressions have been used in this
Quarterly Report to identify forward-looking statements.
We have based these forward-looking statements on our current expectations
with respect to future events and occurrences. Investors are cautioned that our
actual results in the future may differ materially from the expected results
reflected in our forward-looking statements. The expected results reflected in
our forward-looking statements are subject to various significant risks and
uncertainties, including the following:
O we may be unable to continue to protect and maintain the proprietary
nature of our technology, or to convince others of the necessity of
licensing our technology without litigation;
O other companies may be successful in asserting patent infringement or
other claims against us which prevent us from commercializing
products based on our technology or which force us to make royalty or
other payments to competitors;
O other companies may develop competing technologies which cause our
technology to become obsolete or noncompetitive;
O our licensees and joint venture partners may be unwilling or unable
to meet their commitments or devote their financial resources and
manufacturing and marketing capabilities to commercialize products
based on our technologies;
O we may be unable to successfully execute our internal business plans;
O we may need to obtain additional debt or equity financing to continue
to operate our business and financing may be unavailable or available
only on disadvantageous terms;
O we may experience performance problems with key suppliers or
subcontractors;
33
O adverse changes may occur in general economic conditions or in
political or competitive forces affecting our business;
O competition may increase in our industry or markets;
O our government product development or research contracts may be
terminated by unilateral government action or we may be unsuccessful
in obtaining new government contracts to replace those which have
been terminated or completed;
O we may become subject to legal or regulatory proceedings which may
reach unfavorable resolutions;
O there may be adverse changes in the securities markets which affect
the price of our stock; or
O we may suffer the loss of key personnel or may be unable to attract
and retain qualified personnel to maintain and expand our business.
There is also the risk that we incorrectly analyze these risks or that
strategies we develop to address them are unsuccessful.
These forward-looking statements speak only as of the date of this
Quarterly Report. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified in their
entirety by the cautionary statements in this section. Because of these risks,
uncertainties and assumptions, you should not place undue reliance on these
forward-looking statements. We are not obligated to update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
Results of Operations
Three Months Ended December 31, 2001 Compared to Three Months Ended
--------------------------------------------------------------------
December 31, 2000
-----------------
The Company has continued to invest to further advance its technologies.
These investments in its technologies have led to strategic alliances with
ChevronTexaco, Bekaert, Intel, General Electric and China's Rare Earth High-Tech
Co., Ltd. of Baotou Steel Company. According to Generally Accepted Accounting
Principles as practiced in the United States (GAAP), the investments the Company
makes in its technologies are expensed as research and development expense in
the periods in which they are incurred and the value of these technologies are
not carried as assets in the Company's balance sheet.
The Company had a net loss of $4,317,000 on revenues of $26,745,000 in the
three months ended December 31, 2001 compared to a net loss of $716,000 on
revenues of $15,088,000 for the three months ended December 31, 2000. The
$3,601,000 increase in the net loss resulted primarily from $784,000 in higher
litigation expenses to protect the Company's intellectual property; lower
revenues from licenses and other agreements (zero in 2001 versus $2,500,000 in
2000); reduced royalties ($416,000 in 2001 versus $798,000 in 2000); higher
administrative expenses to support expanded operations to commercialize the
Company's products; and higher costs at the United Solar segment related to its
move to its Auburn Hills,
34
Michigan, facility associated with its expansion in connection with the 25MW
production capacity scheduled to be on line in 2002.
The increased loss resulted from an operating loss of $1,399,000 in 2001
for the ECD segment versus operating income of $899,000 in 2000, a $233,000
increased operating loss for United Solar (operating loss of $1,144,000 in 2001
versus operating loss of $911,000 in 2000), and a $193,000 increased operating
loss for Ovonic Battery (operating loss of $2,142,000 in 2001 versus operating
loss of $1,949,000 in 2000).
The ECD/Ovonic Battery programs in the Ovonic nickel metal hydride (NiMH)
battery technology have led to a family of batteries not only for hybrid
electric vehicles, electric vehicles and fuel cell electric vehicles, but also
for a new universal battery platform that has included a much-needed 36/42 volt
battery to meet the emerging requirements for higher voltages, power and energy
of next-generation vehicle applications. Expenses related to metal hydride
materials production and the ongoing protection of the Company's intellectual
property also contributed to the 2001 losses. Partially offsetting the loss from
operations in the three months ended December 31, 2001 was other income (net) of
$685,000 compared to other income (net) of $1,323,000 in the prior year.
The increase in revenues primarily resulted from higher product sales
($7,407,000) and higher revenues from product development agreements
($7,232,000), partially offset by lower royalties ($382,000) and license and
other agreements (zero in 2001 and $2,500,000 in 2000). The ECD segment's
revenues increased to $19,936,000 in 2001 from $11,106,000 in 2000 due to
increased revenues from product development agreements, primarily resulting from
the advanced product development agreements with Texaco Ovonic Hydrogen Systems
and Texaco Ovonic Fuel Cell, and due to machine-building sales to Bekaert ECD
Solar Systems to build manufacturing equipment to make solar panels capable of
producing 25MW of electrical power on an annual basis. The $9,746,000 increase
in Ovonic Battery's revenues was primarily due to higher machine-building sales
to Rare Earth Ovonic ($8,252,000 in 2001 versus $1,233,000 in 2000) and
increased revenues from product development agreements ($6,394,000 in 2001
versus $569,000 in 2000), as work was begun on the advanced product development
agreement for Texaco Ovonic Battery Systems, partially offset by decreased
revenues from license and other agreements (zero in 2001 versus $2,500,000 in
2000). United Solar's 2001 revenues increased to $1,631,000 in 2001 versus
$1,591,000 in 2000.
Product sales, consisting of machine building, photovoltaic products,
metal hydride materials and battery packs, increased 197% to $11,176,000 in the
three months ended December 31, 2001 from $3,769,000 in the three months ended
December 31, 2000. Machine-building revenues increased 398% to $9,214,000 in
2001 from $1,851,000 in 2000. The increase in machine-building revenues in 2001
relates primarily to Ovonic Battery's contracts with Rare Earth Ovonic to
provide battery-making equipment ($8,252,000 in 2001 compared to $1,233,000 in
2000) and ECD's contract with Bekaert ECD Solar Systems to design and build
equipment making solar panels capable of producing annually 25MW of electrical
power ($962,000 in 2001 compared to $595,000 in 2000). All machine-building
contracts are accounted for using percentage-of-completion accounting.
Photovoltaic sales, which are sales of semi-finished products to an affiliate,
Bekaert ECD Solar Systems, were $1,588,000 for 2000 and $1,469,000 for 2001 (see
Note D). Sales of metal hydride materials were $409,000 in 2001 compared to
$59,000 in 2000. The Company currently has a product sales backlog of
$30,736,000, $23,599,000 of which is expected to be recognized as revenues in
Fiscal 2002.
35
Royalties decreased 48% to $416,000 in the three months ended December 31,
2001 from $798,000 in the three months ended December 31, 2000. Lower royalties
reflect increased production efficiencies of the Company's licensees, which have
resulted in lower prices as licensees move aggressively to increase market
share, unfavorable exchange rates, and crediting a previous overpayment of
royalties calculated erroneously by a licensee.
Revenues from product development agreements increased 93% to $15,001,000
in the three months ended December 31, 2001 from $7,768,000 in the three months
ended December 31, 2000. The increase was primarily a result of agreements with
Texaco Ovonic Hydrogen Systems ($4,998,000 for 2001 compared to $3,132,000 for
2000), Texaco Ovonic Fuel Cell ($2,483,000 for 2001 compared to $2,320,000 for
2000) and Texaco Ovonic Battery Systems ($5,076,000 for 2001 compared to zero in
2000) for advanced product development services, all of which began in Fiscal
2001. Partially offsetting these increases were decreases in revenues from the
services contract with Ovonic Media ($435,000 in 2001 versus $775,000 in 2000)
and the completion of programs with National Institute of Standards and
Technology, which advanced the Company's hydrogen storage and optical memory
technologies ($61,000 in 2001 versus $545,000 in 2000).
Revenues from license and other agreements decreased to zero in the three
months ended December 31, 2001 from $2,500,000 in the three months ended
December 31, 2000. The 2000 license fees resulted from a license to Inner
Mongolia Rare Earth Ovonic Metal Hydride Co. Ltd., one of the three Rare Earth
Ovonic joint ventures. Revenues from license and other agreements depend on a
small number of new business arrangements, are sporadic and vary dramatically
from period to period.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues decreased to $153,000 in the three
months ended December 31, 2001 from $252,000 in the three months ended December
31, 2000. This decrease was due to reduction in revenues from Texaco Ovonic
Battery Systems (formerly GM Ovonic) ($450 in 2001 versus $388,000 in 2000),
partially offset by United Solar ($369,000 management fee from Bekaert ECD Solar
Systems in 2000). Revenues from Texaco Ovonic Battery Systems were lower since
they now perform these services in-house. Revenues from Bekaert ECD Solar
Systems were lower due to lower management fees in 2001.
The $6,684,000 increase in cost of product sales in the three months ended
December 31, 2001 was due to the $7,407,000 increase in product sales and
resulted in a $706,000 gross profit on product sales in 2001, an improvement of
$723,000 compared to 2000. The improvement primarily results from
machine-building contracts with positive margins. Partially offsetting the
profitability of the machine-building contracts is the continued loss on the
sales of metal hydride materials which resulted from Ovonic Battery maintaining
its production capacity to produce hydride powders to meet the future needs of
Texaco Ovonic Battery Systems and Texaco Ovonic Hydrogen Systems. Low sales
volumes for metal hydride materials, combined with high fixed costs, result in
the loss on product sales for these products.
For the three months ended December 31, 2001, compared to the three months
ended December 31, 2000, the net cost of product development to the Company
decreased by $177,000 despite an increase in expenditures for the development of
products by $7,056,000
36
because the amount of funding received from joint ventures and customers
increased by $7,233,000.
Three Months Ended
December 31,
----------------------------
2001 2000
------------ ------------
Cost of revenues from product development
agreements $14,896,000 $ 7,422,000
Product development and research 2,630,000 3,048,000
----------- -----------
Total cost of product development 17,526,000 10,470,000
Revenues from product development
agreements 15,001,000 7,768,000
----------- -----------
Net cost of product development $ 2,525,000 $ 2,702,000
=========== ===========
The expenditures continued the development of the Company's core technologies in
energy storage, energy generation and information technology.
Expenses were incurred in 2001 and 2000 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. Total patent expenses increased to $1,712,000 in the three months
ended December 31, 2001 from $1,024,000 in the three months ended December 31,
2000, principally due to litigation costs ($1,346,000 in 2001 versus $562,000 in
2000) for the protection of the Company's NiMH battery patents and technology.
In March 2001, Ovonic Battery filed suit against Matsushita Battery Industrial
Co., Ltd., Toyota Motor Corporation, Panasonic EV Energy Co., Ltd. and several
related entities for infringement of patents held by Ovonic Battery.
The increase in operating, general and administrative expenses from
$1,845,000 in the three months ended December 31, 2000 to $2,039,000 in the
three months ended December 31, 2001 was due primarily to increased spending
($1,513,000) as a result of selling expenses associated with machine-building
contracts, personnel additions and other expenses associated with the Company's
growth and $167,000 increased United Solar expenses for 2001, partially offset
by increased allocations to product development research expenses and to cost of
revenues from product development agreements ($1,487,000).
The $638,000 decrease in other income (net) ($685,000 income in 2001
compared to $1,323,000 income in 2000) resulted primarily from lower interest
income ($1,369,000 in 2001 compared to $1,633,000 in 2000) because of lower
interest rates on the Company's investments and from higher equity losses in
joint ventures at Bekaert ECD Solar Systems ($913,000 in 2001 compared to
$597,000 in 2000) and at Innovative Transportation Systems ($125,000 in 2001
versus zero in 2000).
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.
37
Six Months Ended December 31, 2001 Compared to Six Months Ended December 31,
----------------------------------------------------------------------------
2000
----
The Company has continued to invest to further advance its technologies.
These investments in its technologies have led to strategic alliances with
ChevronTexaco, Bekaert, Intel, General Electric and China's Rare Earth High-Tech
Co., Ltd. of Baotou Steel Company. According to GAAP, the investments the
Company makes in its technologies are expensed as research and development
expense in the periods in which they are incurred and the value of these
technologies are not carried as assets in the Company's balance sheet.
The Company had a net loss of $7,082,000 on revenues of $49,203,000 in the
six months ended December 31, 2001 compared to a net loss of $2,461,000 on
revenues of $25,222,000 for the six months ended December 31, 2000. The
$4,621,000 increase in the net loss resulted primarily from $1,002,000 in higher
litigation expenses to protect the Company's intellectual property; lower
revenues from licenses and other agreements (zero in 2001 versus $2,800,000 in
2000); reduced royalties ($1,024,000 in 2001 versus $1,674,000 in 2000); higher
administrative expenses to support expanded operations to commercialize the
Company's products; and higher costs at the United Solar segment related to its
move to its Auburn Hills, Michigan, facility associated with its expansion in
connection with the 25MW production capacity scheduled to be on line in 2002.
The increased loss resulted from an operating loss of $1,857,000 in 2001
for the ECD segment versus operating income of $1,278,000 in 2000 and an
increased operating loss of $1,105,000 for United Solar (operating loss of
$2,194,000 in 2001 versus operating loss of $1,089,000 in 2000), partially
offset by a $1,365,000 improvement for Ovonic Battery (operating loss of
$4,148,000 in 2001 versus operating loss of $5,513,000 in 2000).
The ECD/Ovonic Battery programs in the Ovonic NiMH battery technology have
led to a family of batteries not only for hybrid electric vehicles, electric
vehicles and fuel cell electric vehicles, but also for a new universal battery
platform that has included a much-needed 36/42 volt battery to meet the emerging
requirements for higher voltages, power and energy of next-generation vehicle
applications. Expenses related to metal hydride materials production and the
ongoing protection of the Company's intellectual property also contributed to
the 2001 losses. Partially offsetting the loss from operations in the six months
ended December 31, 2001 was other income (net) of $1,817,000 compared to other
income (net) of $2,670,000 in the prior year.
The increase in revenues primarily resulted from higher product sales
($15,375,000) and higher revenues from product development agreements
($12,682,000), partially offset by lower royalties ($649,000) and license and
other agreements (zero in 2001 and $2,800,00 in 2000). The ECD segment's
revenues increased to $39,747,000 in 2001 from $17,026,000 in 2000 due to
increased revenues of $4,041,000 from product development agreements, primarily
resulting from the advanced product development agreements with Texaco Ovonic
Hydrogen Systems and Texaco Ovonic Fuel Cell and due to machine-building sales
to Bekaert ECD Solar Systems to build manufacturing equipment to make solar
panels capable of producing 25MW of electrical power on an annual basis. The
$19,294,000 increase in Ovonic Battery's revenues was primarily due to higher
machine-building sales to Rare Earth Ovonic ($16,664,000 in 2001 versus
$2,117,000 in 2000), increased revenues from product development agreements
($10,004,000 in 2001 versus $1,363,000 in 2000), as work was begun on the
advanced product development agreement for Texaco Ovonic Battery Systems,
partially offset by decreased
38
revenues from license and other agreements (zero in 2001 versus $2,800,000 in
2000). United Solar's 2001 revenues decreased to $3,279,000 in 2001 versus
$3,842,000 in 2000.
Product sales, consisting of machine building, photovoltaic products,
metal hydride materials and battery packs, increased 221% to $22,336,000 in the
six months ended December 31, 2001 from $6,961,000 in the six months ended
December 31, 2000. Machine-building revenues increased 450% to $18,768,000 in
2001 from $3,414,000 in 2000. The increase in machine-building revenues in 2001
relates primarily to Ovonic Battery's contracts with Rare Earth Ovonic to
provide battery-making equipment ($16,664,000 in 2001 compared to $2,117,000 in
2000) and ECD's contract with Bekaert ECD Solar Systems to design and build
equipment making solar panels capable of producing annually 25MW of electrical
power ($2,103,000 in 2001 compared to $1,134,000 in 2000). All machine-building
contracts are accounted for using percentage-of-completion accounting.
Photovoltaic sales, which are sales of semi-finished products to an affiliate,
Bekaert ECD Solar Systems, were $2,970,000 for 2000 and $2,698,000 for 2001 (see
Note D). Sales of metal hydride materials were $612,000 in 2001 compared to
$128,000 in 2000. The Company currently has a product sales backlog of
$30,736,000, $23,599,000 of which is expected to be recognized as revenues in
Fiscal 2002.
Royalties decreased 39% to $1,024,000 in the six months ended December 31,
2001 from $1,674,000 in the six months ended December 31, 2000. Lower royalties
reflect increased production efficiencies of the Company's licensees, which have
resulted in lower prices as licensees move aggressively to increase market
share, unfavorable exchange rates, and crediting a previous overpayment of
royalties calculated erroneously by a licensee.
Revenues from product development agreements increased 99% to $25,544,000
in the six months ended December 31, 2001 from $12,862,000 in the six months
ended December 31, 2000. The increase was primarily a result of agreements with
Texaco Ovonic Hydrogen Systems ($8,297,000 for 2001 compared to $4,572,000 for
2000), Texaco Ovonic Fuel Cell ($4,419,000 for 2001 compared to $3,217,000 for
2000) and Texaco Ovonic Battery Systems ($8,140,000 for 2001 compared to zero in
2000) for advanced product development services, all of which began in Fiscal
2001. Partially offsetting these increases were decreases in revenues from the
services contract with Ovonic Media ($842,000 in 2001 versus $1,442,000 in 2000)
and the completion of programs with National Institute of Standards and
Technology, which advanced the Company's hydrogen storage and optical memory
technologies ($173,000 in 2001 versus $1,206,000 in 2000).
Revenues from license and other agreements decreased to zero in the six
months ended December 31, 2001, from $2,800,000 in the six months ended
December 31, 2000. The 2000 license fees resulted from licenses to Inner
Mongolia Rare Earth Ovonic Metal Hydride Co. Ltd., one of the three Rare
Earth Ovonic joint ventures; to BYD Battery Co., Ltd.; and, to SANIK Battery
Co., Ltd. Revenues from license and other agreements depend on a small
number of new business arrangements, are sporadic and vary dramatically from
period to period.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues decreased to $299,000 in the six months
ended December 31, 2001 from $926,000 in the six months ended December 31, 2000.
This decrease was due to reductions in revenues from Texaco Ovonic Battery
Systems (formerly GM Ovonic), which now performs
39
these services in-house ($1,300 in 2001 versus $723,000 in 2000) and United
Solar ($175,000 management fee from Bekaert ECD Solar Systems in 2000).
Revenues from Bekaert ECD Solar Systems were lower due to lower management fees
in 2001.
The $14,193,000 increase in cost of product sales in the six months ended
December 31, 2001 was due to the $15,375,000 increase in product sales and
resulted in a $1,161,000 gross profit on product sales in 2001, an improvement
of $1,182,000 compared to 2000. The improvement primarily results from
machine-building contracts with positive margins. Partially offsetting the
profitability of the machine-building contracts is the continued loss on the
sales of metal hydride materials which resulted from Ovonic Battery maintaining
its production capacity to produce hydride powders to meet the future needs of
Texaco Ovonic Battery Systems and Texaco Ovonic Hydrogen Systems. Low sales
volumes for metal hydride materials, combined with high fixed costs, result in
the loss on product sales for these products.
For the six months ended December 31, 2001, compared to the six months
ended December 31, 2000, the net cost of product development to the Company
decreased by $331,000 despite an increase in expenditures for the development of
products by $12,351,000 because the amount of funding received from joint
ventures and customers increased by $12,682,000.
Six Months Ended
December 31,
----------------------------
2001 2000
------------ ------------
Cost of revenues from product development
agreements $ 25,216,000 $ 11,983,000
Product development and research 4,546,000 5,428,000
------------ ------------
Total cost of product development 29,762,000 17,411,000
Revenues from product development
agreements 25,544,000 12,862,000
------------ ------------
Net cost of product development $ 4,218,000 $ 4,549,000
============ ============
The expenditures continued the development of the Company's core technologies in
energy storage, energy generation and information technology.
Expenses were incurred in 2001 and 2000 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. Total patent expenses increased to $3,060,000 in the six months
ended December 31, 2001 from $2,015,000 in the six months ended December 31,
2000, principally due to litigation costs ($1,951,000 in 2001 versus $949,000 in
2000) for the protection of the Company's NiMH battery patents and technology.
In March 2001, Ovonic Battery filed suit against Matsushita Battery Industrial
Co., Ltd., Toyota Motor Corporation, Panasonic EV Energy Co., Ltd. and several
related entities for infringement of patents held by Ovonic Battery.
The increase in operating, general and administrative expenses from
$3,947,000 in the six months ended December 31, 2000 to $4,105,000 in the six
months ended December 31, 2001 was due primarily to increased spending
($3,443,000) as a result of selling expenses associated with machine-building
contracts, personnel additions and other expenses associated with the Company's
growth and $274,000 increased expenses of United Solar
40
expenses for 2001, partially offset by increased allocations to product
development research expenses and to cost of revenues from product development
agreements ($3,560,000).
The $854,000 decrease in other income (net) ($1,816,000 income in 2001
compared to $2,670,000 income in 2000) resulted primarily from lower interest
income ($2,726,000 in 2001 compared to $3,187,000 in 2000) because of lower
interest rates on the Company's investments and from higher equity losses in
joint ventures at Bekaert ECD Solar Systems ($1,557,000 in 2001 compared to
$804,000 in 2000) and at Innovative Transportation Systems ($254,000 in 2001
compared to zero in 2000).
The Company does business in many different parts of the world and its
royalty revenues are affected by changes in foreign currencies and their
exchange rates relative to the U.S. dollar. However, the vast majority of the
Company's business agreements are denominated in U.S. dollars and, as such, the
Company has minimized its exposure to currency rate fluctuations.
Liquidity and Capital Resources
As of December 31, 2001, the Company had consolidated cash, cash
equivalents, short-term investments and accounts receivable (including
$21,608,000 of amounts due from related parties) of $158,945,000 ($20,000,000 of
which is restricted), an increase of $42,168,000 from June 30, 2001. As of
December 31, 2001, the Company had consolidated working capital of $129,055,000
compared with a consolidated working capital of $92,577,000 as of June 30, 2001.
Since June 30, 2001, ECD has received approximately $45,128,000 from the
exercise of warrants, stock options and additional shares purchased by Texaco to
maintain its 20% ownership.
The Company expects the amount of cash to be received under existing
product development agreements in the year ending June 30, 2002 to increase to
approximately $51,565,000, compared to $27,508,000 received from product
development agreements in the year ended June 30, 2001. Certain of the Company's
product development and product purchase agreements contain provisions allowing
for the termination of such agreements for failure of the Company to meet
agreement milestones or for breach of material contractual provisions.
Generally, the termination provisions allow for the Company to recover any costs
incurred through the termination date.
During the six months ended December 31, 2001, of the Company's
$117,985,000 cash, cash equivalents and short-term investments, the Company
purchased $38,076,000 of short-term investments consisting of commercial paper,
classified as available for sale, maturing from 91 days to 32 months. It is the
Company's policy that investments shall be rated "A" or higher by Moody's or
Standard and Poor's, no single investment shall represent more than 10% of the
portfolio and at least 20% of the total portfolio shall have maturities of less
than 90 days. As of December 31, 2001, there were two investments which, at that
time, did not comply with this policy. The Company believes that this was only a
temporary situation and, based on advice from its bank, has continued to hold
these investments.
During the six months ended December 31, 2001, $3,627,000 of cash was used
in operations. The difference between the net loss of $7,082,000 and the net
cash used in operations was principally due to increases in accounts payable and
accrued expenses, deferred revenues,
41
non-cash costs (principally depreciation, equity losses in joint ventures and
deferred profits on sales to Bekaert ECD Solar Systems), partially offset by
increases in accounts receivable (primarily related party). In addition,
$3,251,000 of machinery and equipment was purchased or constructed, principally
for ECD's expansion and for United Solar, during this period.
Ovonic Battery has three contracts to supply equipment and technology
totaling $63,600,000 to its Rare Earth Ovonic joint ventures in China. To ensure
payments from China, Ovonic Battery has received Letters of Credit totaling
$49,100,000 from the Bank of Communications of Baotou, China, and has received
payment guarantees from LaSalle Bank that cover all risks of nonpayment or
dishonor of these Letters of Credit, including and not limited to, nonpayment
due to force majeure, acts of war, or other political or economic events. Of the
Letters of Credit totaling $49,100,000, LaSalle Bank has accepted the risk of
nonpayment due to nonconforming documents for payments totaling $18,500,000. As
of February 12, 2002, Ovonic Battery has received payments totaling $24,800,000
under the three contracts, $8,900,000 for amounts not covered by Letters of
Credit and $15,900,000 for amounts covered by Letters of Credit. There are
currently no outstanding amounts where payments are past due.
On February 22, 2002, the Company plans on making a cash investment of
$1,710,000 in the Rare Earth Ovonic joint ventures.
As part of its long-standing strategy, the Company has made investments in
its technologies, which have resulted in enabling intellectual property and
products. This has allowed the Company to finance its operations and growth
through strategic alliances (joint ventures and license agreements) with third
parties who can provide financial resources and marketing expertise for the
Company's technologies and products.
The resultant strategic alliances and joint ventures with some of the
world's leading corporations listed below form the basis for the
commercialization of the Company's technologies and products. Highlights are:
o Texaco Ovonic Battery Systems LLC - a 50/50 joint venture between
Ovonic Battery and TESI formed to bring advanced NiMH batteries into
widespread commercial production for hybrid and electric vehicles as
well as to further develop them for nonautomotive applications. TESI is
funding approximately $150,000,000 to increase the manufacturing
capacity at Texaco Ovonic Battery Systems' facilities in Troy,
Michigan, and in Kettering, Ohio, and for market development and
advanced product development. The advanced product development is being
accomplished through a $48,000,000 product development contract from
Texaco Ovonic Battery Systems to Ovonic Battery. The contract, which
began October 1, 2000, will last up to three years and may be cancelled
if mutually agreed-upon milestones are not achieved. The Company
received $8,140,000 for work performed under the contract in the six
months ended December 31, 2001 and is budgeted to receive approximately
$17,000,000 in 2002.
o Texaco Ovonic Hydrogen Systems LLC - a 50/50 joint venture between
ECD and TESI formed to further develop and advance the
commercialization of ECD's technology to store hydrogen in metal
hydrides. TESI is funding an initial amount of up to $104,000,000,
including product and market development. The principal
42
use of the funds is to fund a product development contract from Texaco
Ovonic Hydrogen Systems to ECD. The contract, which began July 1, 2000,
will last up to three years and may be cancelled if mutually agreed-
upon milestones are not achieved. The Company received $8,296,000 for
work performed under the contract in the six months ended December 31,
2001 and is budgeted to receive approximately $16,000,000 in 2002.
o Texaco Ovonic Fuel Cell Company LLC - a 50/50 joint venture between
ECD and TESI formed with the initial mission of further developing the
Ovonic regenerative fuel cell technology, validating the manufacturing
methodologies and producing production-ready prototypes. TESI is
funding initial product and market development of up to $70,000,000,
the primary use of which is to fund a product development contract
from Texaco Ovonic Fuel Cell to ECD. The contract, which began July 1,
2000, will last up to three years, and may be cancelled if mutually
agreed-upon milestones are not achieved. The Company received
$4,419,000 for work performed under the contract in the six months
ended December 31, 2001 and is budgeted to receive approximately
$14,000,000 in 2002.
o Bekaert ECD Solar Systems/United Solar - ECD and Bekaert have
formed a strategic alliance whereby Bekaert invested $84,000,000 in
the combined businesses ($24,000,000 of which is being used as partial
payment to buy out United Solar's previous joint venture partner). The
remaining funds will be used to fund a fivefold capacity expansion,
and a sales and marketing expansion program. The capacity expansion
resulted in an order from Bekaert ECD Solar Systems to ECD for
production equipment valued at approximately $55,000,000 with an
annual capacity of 25MW.
o Ovonic Media, LLC - a strategic alliance formed with General
Electric, the first activity of which resulted in the creation of a
joint venture, Ovonic Media. ECD received a $3,000,000 contract from
Ovonic Media to design, develop and demonstrate ECD's proprietary
continuous web roll-to-roll technology for the ultra-high-speed
manufacture of optical media products, primarily rewritable DVDs.
Following a successful demonstration, the partners approved a
commercialization and financing plan totaling an additional $4,000,000
for a period from July 1, 2001 to March 31, 2002.
o Ovonyx, Inc. - a joint venture owned 41.7% by ECD and the remainder
by Tyler Lowrey, Intel and others with a purpose to commercialize
ECD's proprietary nonvolatile semiconductor memory technology, OUM.
OUM memory technology promises to enable significantly faster write
and erase speeds and higher cycling endurance than conventional memory
types. It has been used in rewritable CD and DVD disks and may have
potential as a replacement for such memory types as FLASH, SRAM and
DRAM. Ovonyx has granted nonexclusive royalty-bearing licenses to
Intel, STMicroelectronics and BAE Systems. In addition, ECD receives
royalties from Ovonyx equal to .5% of Ovonyx's revenues.
43
These strategic alliances and new business agreements have both near-term
and long-term impacts on the Company's capital resources. The ChevronTexaco,
Bekaert, Ovonyx and General Electric agreements have resulted in the
acceleration of the commercialization and development of the Company's products
and technologies. The Company's business partners have funded most of its
product development activities which has allowed the Company to preserve its
financial resources.
44
PART II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds
------- -----------------------------------------
On October 9, 2001, the shareholders of Texaco Inc. and Chevron Corp.
voted on the merger of Texaco and Chevron. The combined companies have been
renamed ChevronTexaco Corporation and TRMI Holdings is a wholly owned
subsidiary of ChevronTexaco.
So long as ChevronTexaco owns more than 5% of ECD Stock and in the event
ECD issues additional ECD Stock other than to ChevronTexaco, ChevronTexaco has
the right to purchase additional ECD Stock in order for ChevronTexaco to
maintain its same proportionate interest in ECD Stock as ChevronTexaco held
prior to the issuance of the additional ECD Stock. If ChevronTexaco elects to
purchase ECD Common Stock, the purchase price shall be the average of the
closing price on NASDAQ of the ECD Common Stock as reported in The Wall Street
Journal for the five trading days prior to the closing date of the sale
multiplied by the number of shares of the ECD Common Stock which ChevronTexaco
is entitled to purchase.
If ChevronTexaco does not exercise its right to purchase additional ECD
Stock within 15 days after delivery of a Rights Notice from ECD, ChevronTexaco's
right to purchase such additional ECD Stock which are the subject of the Rights
Notice shall terminate.
ChevronTexaco purchased 448,358 shares of ECD Common Stock on August 29,
2001 for $8,894,000 to maintain its 20% proportionate interest in ECD.
Previously, ChevronTexaco purchased 125,233 shares of ECD Common Stock on
October 26, 2000 for $3,795,000, 39,805 shares for approximately $1,078,000 on
January 31, 2001 and 20,437 additional shares for approximately $572,000 on May
8, 2001.
ChevronTexaco acquired the ECD Common Stock in a private transaction and
had access to all material information relating to ECD. We claim exemption from
the registration requirements of Section 5 of the Securities Act of 1933
pursuant to Section 4(2) of that Act, no public offering having been involved.
45
Item 3. Quantitative and Qualitative Disclosures about Market Risk
------- ----------------------------------------------------------
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities and
time deposits. All such instruments are classified as securities available for
sale. We do not invest in portfolio equity securities, or commodities, or use
financial derivatives for trading purposes. Our debt security portfolio
represents funds held temporarily, pending use in our business and operations.
The Company had $117,215,000 and $81,956,000 of these investments on December
31, 2001 and June 30, 2001, respectively. On December 31, 2001, the investments
had an average maturity of 198 days, $62,359,000 of which had maturities of 91
days to 29 months. On June 30, 2001, the investments had an average maturity of
224 days, $48,909,000 of which had maturities of 91 days to 33 months. It is the
Company's policy that investments shall be rated "A" or higher by Moody's or
Standard and Poor's, no single investment shall represent more than 10% of the
portfolio and at least 20% of the total portfolio shall have maturities of less
than 90 days. As of December 31, 2001, there were two investments which, at that
time, did not comply with this policy. The Company believes that this was only a
temporary situation and, based on advice from its bank, has continued to hold
these investments. Our market risk exposure consists of exposure to changes in
interest rates and to the risks of changes in the credit quality of issuers. An
interest rate change of 1% would result in a change in the value of our December
31, 2001 portfolio of approximately $920,000.
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
A. Exhibits
--------
None
B. Reports on Form 8-K
-------------------
None
46
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
-------------------------------------------
(Registrant)
By: /s/ Stephan W. Zumsteg
-------------------------------------------
Stephan W. Zumsteg
Date: February 14, 2002 Vice President and Chief Financial Officer
(Principal financial and accounting officer)
By: /s/ Stanford R. Ovshinsky
-------------------------------------------
Stanford R. Ovshinsky
Date: February 14, 2002 President and Chief Executive Officer
47