SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the period ended MARCH 31, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
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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 May 10, 2002, there were 219,913 shares of Class A Common Stock,
430,000 shares of Class B Common Stock and 21,248,973 shares of Common Stock
outstanding.
Page 1 of 48 Pages
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
------- --------------------
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES
Product sales $ 7,277,124 $ 4,572,471 $ 24,655,994 $ 7,254,156
Product sales to related parties 2,747,240 2,781,242 7,704,018 7,060,068
------------ ------------ ------------ ------------
Total product sales 10,024,364 7,353,713 32,360,012 14,314,224
Royalties 453,509 730,467 1,467,004 2,404,327
Royalties - related parties 5,824 - 16,809 -
------------ ------------ ------------ ------------
Total royalties 459,333 730,467 1,483,813 2,404,327
Revenues from product development
agreements 1,322,810 1,509,272 5,061,225 4,846,796
Revenues from product development
agreements with related parties 12,717,273 7,735,712 34,523,009 17,259,892
------------ ------------ ------------ ------------
Total revenues from product
development agreements 14,040,083 9,244,984 39,584,234 22,106,688
Revenues from license and other
agreements - - - 2,800,000
Other 30,703 53,750 102,244 216,912
Other revenues from related parties (64,505) 339,277 163,152 1,102,030
------------ ------------ ------------ ------------
Total other revenues (33,802) 393,027 265,396 1,318,942
------------ ------------ ------------ ------------
TOTAL REVENUES 24,489,978 17,722,191 73,693,455 42,944,181
EXPENSES
Cost of product sales 9,853,715 7,316,282 31,028,373 14,297,463
Cost of revenues from product
development agreements 14,286,048 8,977,216 39,330,745 20,777,552
Product development and research 3,615,509 3,486,591 8,332,883 9,096,641
Patent defense (net) 368,459 193,752 2,319,634 1,142,904
Patents 401,069 631,455 1,510,305 1,697,070
Operating, general and administrative 1,701,890 2,097,333 5,806,845 6,044,394
------------ ------------ ------------ ------------
TOTAL EXPENSES 30,226,690 22,702,629 88,328,785 53,056,024
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (5,736,712) (4,980,438) (14,635,330) (10,111,843)
OTHER INCOME (EXPENSE)
Interest income 1,229,912 1,476,915 3,955,756 4,664,127
Interest expense (144,696) (184,396) (454,155) (615,668)
Equity loss in joint ventures (1,131,266) (740,776) (2,942,738) (1,544,297)
Minority interest share of losses 485,971 241,112 1,256,915 696,059
Other nonoperating income (expense) (net) 282,175 (83,986) 723,134 178,921
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 722,096 708,869 2,538,912 3,379,142
------------ ------------ ------------ ------------
NET LOSS $ (5,014,616) $ (4,271,569) $(12,096,418) $ (6,732,701)
============ ============ ============ ============
BASIC NET LOSS PER SHARE $ (.23) $ (.22) $ (.56) $ (.35)
============ ============ ============ ============
DILUTED NET LOSS PER SHARE $ (.23) $ (.22) $ (.56) $ (.35)
============ ============ ============ ============
See notes to consolidated financial statements.
2
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
March 31, June 30,
2002 2001
------------ ------------
(Unaudited)
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of $21,734,000 at
March 31, 2002 and $33,047,000 at June 30, 2001 $ 23,381,166 $ 33,055,399
Short-term investments (NOTE G) 74,870,105 48,908,662
Accounts and notes receivable (net of allowance for
uncollectible accounts of approximately $495,000 at
March 31, 2002, and $583,000 at June 30, 2001) 22,786,377 18,809,094
Amounts due from related parties 26,214,635 16,003,632
Inventories 1,438,952 1,333,542
Other 356,162 542,930
----------- -----------
TOTAL CURRENT ASSETS 149,047,397 118,653,259
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 2,929,876 1,214,625
Machinery and other equipment (including construction
in progress of approximately $909,000 and $1,010,000
at March 31, 2002 and June 30, 2001, respectively) 23,944,740 22,261,322
Capitalized lease equipment 3,056,060 3,056,060
----------- -----------
30,197,676 26,799,007
Less accumulated depreciation and amortization (21,969,319) (20,660,619)
----------- -----------
TOTAL PROPERTY, PLANT AND EQUIPMENT 8,228,357 6,138,388
Investments in EV Global and Rare Earth Ovonic-China
(NOTE A) 2,710,000 1,000,000
Long-Term Note Receivable - Bekaert ECD Solar Systems
(NOTE A) 10,751,013 10,256,110
Deferred tax assets - 864,999
JOINT VENTURES (NOTE D)
Bekaert ECD Solar Systems 18,185,940 23,421,156
Bekaert ECD Europe 24,733 28,347
Texaco Ovonic Fuel Cell Company - -
Texaco Ovonic Hydrogen Systems - -
Texaco Ovonic Battery Systems - -
Ovonyx - -
Ovonic Media - -
Innovative Transportation Systems 3,546,629 4,000,206
Sovlux - -
OTHER ASSETS 2,822,881 1,742,922
------------ ------------
TOTAL ASSETS $195,316,950 $166,105,387
============ ============
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, June 30,
2002 2001
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 20,228,014 $ 18,413,708
Accounts payable - related parties 544,293 10,533
Salaries, wages and amounts withheld from employees 1,826,812 2,366,673
Deferred revenues under business agreements 75,000 222,730
Deferred revenues - related parties 998,576 2,346,054
Current installments on long-term liabilities 2,514,139 2,716,072
------------ ------------
TOTAL CURRENT LIABILITIES 26,186,834 26,075,770
LONG-TERM LIABILITIES 6,535,801 7,898,011
LONG-TERM NOTES PAYABLE 10,751,013 10,256,110
DEFERRED GAIN 173,955 278,328
NONREFUNDABLE ADVANCE ROYALTIES (NOTE C) 3,696,513 3,818,488
------------ ------------
TOTAL LIABILITIES 47,344,116 48,326,707
NEGATIVE GOODWILL (NOTE D) 2,332,168 2,681,993
MINORITY INTEREST (NOTE D) 3,099,061 4,355,976
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued and 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 and Outstanding - 21,242,473 shares at
March 31, 2002 and 19,053,026 shares at
June 30, 2001 212,425 190,530
Additional paid-in capital 384,651,810 339,858,798
Accumulated deficit (239,402,336) (227,305,918)
Accumulated other comprehensive income (loss) (546,553) 881,342
Unearned Compensation on Class B Convertible
Common Stock (2,380,240) (2,890,540)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 142,541,605 110,740,711
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $195,316,950 $166,105,387
============ ============
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
March 31,
---------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net loss $(12,096,418) $ (6,732,701)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,638,858 1,808,327
Equity loss in joint ventures 2,942,738 1,544,297
Profit deferred on sales to Bekaert ECD Solar Systems (1,774,172) 741,835
Creditable royalties (121,975) (27,665)
Stock and stock options issued for services rendered 771,147 566,956
Amortization of deferred gain (104,373) (330,795)
Amortization of negative goodwill (349,825) (349,825)
Minority interest (1,256,915) (696,059)
Other (16,748) 54,824
Changes in working capital:
Accounts receivable (3,977,283) (4,206,928)
Amounts due from related parties (5,687,162) (7,592,176)
Inventories (105,410) (418,850)
Other assets (893,191) (1,202,431)
Accounts payable and accrued expenses 2,714,112 5,301,586
Accounts payable - related parties 533,760 (11,837)
Deferred revenues under business agreements (147,730) 2,045,905
Deferred revenues - related parties (1,347,478) (1,971,171)
------------ ------------
NET CASH USED IN OPERATIONS (19,278,065) (11,476,708)
INVESTING ACTIVITIES:
Purchases of capital equipment (4,322,573) (1,282,771)
Proceeds from sale of capital equipment 35,826 -
Investment in Bekaert ECD Europe - (43,750)
Investment in Innovative Transportation Systems - (2,409,000)
Investment in Rare Earth (1,710,000) -
Purchase of investments (72,698,554) (23,773,397)
Sale of investments 45,309,216 13,013,573
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (33,386,085) (14,495,345)
FINANCING ACTIVITIES:
Principal payments under short-term and long-term
debt and capitalized lease obligations (1,564,143) (1,462,332)
Proceeds from sale of stock to ChevronTexaco 8,893,629 4,872,288
Proceeds from sale of stock upon exercise
of stock options 87,883 4,547,574
Proceeds from exercise of warrants 35,572,548 4,341,560
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 42,989,917 12,299,090
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,674,233) (13,672,963)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 33,055,399 44,592,017
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,381,166 $ 30,919,054
============ ============
See notes to consolidated financial statements.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
March 31,
----------------------
2002 2001
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 454,155 $ 615,668
The Company's noncash investing and
financing activities were as follows:
Accretion of interest - long-term note receivable - 494,903 464,763
Bekaert ECD Solar Systems
Accretion of interest - long-term note payable - Canon (494,903) (464,763)
Transfer deferred tax asset to accounts receivable (864,999) -
Record tax accounts receivable 864,999 -
Transfer Investment in Bekaert ECD Solar Systems
to notes receivable (4,493,166) -
Record note receivable - Bekaert ECD Solar Systems 4,493,166 -
See notes to consolidated financial statements.
6
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation
------------------------------
Information for the three months and nine months ended March 31, 2002
(fiscal 2002) and 2001 (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 policies 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 March 31,
2002, 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 a joint venture in
Belgium, Bekaert ECD Solar Systems Europe N.V. (Bekaert ECD Europe) owned 10% by
United Solar and 90% by Bekaert ECD Solar Systems. See Note D for discussion of
all of the Company's ventures.
The Company accounts for its investment ($1,000,000) 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 (total investment of $1,710,000).
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 and future developments 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 Europe, 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.
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
Certain items for the three months and nine months ended March 31, 2001
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 nine months ended
March 31, 2002.
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 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 March 31, 2002, the cash flow hedge
was 100% effective. The Company believes that it remains probable that the one
remaining payment for the machinery will take place within 60 days of the
scheduled machinery payment date.
Other Comprehensive Income (Loss)
---------------------------------
The Company's total comprehensive loss was as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ------------ -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Loss $(5,014,616) $(4,271,569) $(12,096,418) $(6,732,701)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on securities (net) (967,973) 511,375 (1,427,895) 1,290,930
----------- ----------- ------------ -----------
COMPREHENSIVE LOSS $(5,982,589) $(3,760,194) $(13,524,313) $(5,441,771)
=========== =========== ============ ===========
9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
Cash Equivalents
----------------
Cash equivalents consist of investments in short-term, highly liquid
securities having a maturity of three months or less from the date of
acquisition.
Short-Term Investments
----------------------
Short-term investments consist of commercial paper, classified as
available for sale, maturing in 91 days to 38 months from date of acquisition
and are stated at cost, which approximates fair market value.
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.
Foreign Currency Transaction Gains and Losses
---------------------------------------------
Since most of the Company's contracts and transactions are denominated and
settled in U.S. dollars, there are no significant foreign currency gains or
losses.
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
Accounts and Notes Receivable
-----------------------------
March 31, June 30,
2002 2001
----------- -----------
Long-term contracts accounted for under
percentage-of-completion accounting
Revenues recognized but unbilled
Commercial customers $17,088,383 $11,604,014
Amounts billed to customers
Commercial customers 345,157 1,215,328
----------- -----------
Sub-total 17,433,540 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 698,024 844,720
Commercial customers 1,198,271 72,970
----------- -----------
1,896,295 917,690
Amounts billed
U.S. Government 390,376 2,545,250
Commercial customers 51,020 51,020
----------- -----------
441,396 2,596,270
Retainages
U.S. Government 40,500 40,500
----------- -----------
Sub-total 2,378,191 3,554,460
Amounts unbilled for other than long-term
contracts
Commercial customers 2,858,680 2,164,631
Amounts billed for other than long-term
contracts
Commercial customers 610,966 853,661
Allowance for uncollectible accounts (495,000) (583,000)
----------- -----------
TOTAL $22,786,377 $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. Certain contracts
have been completed for more than ten years and have not been audited. There are
no material retentions at March 31, 2002 and June 30, 2001. Certain U.S.
government contracts remain subject to audit.
Included in accounts receivable at March 31, 2002 and June 30, 2001, are
$17,088,000 and $11,950,000, respectively, 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
--------------------------------
March 31, June 30,
2002 2001
----------- -----------
Long-term contracts accounted for under
percentage-of-completion accounting
Revenues recognized but unbilled
Bekaert ECD Solar Systems $ 407,298 $ 1,229,324
Amounts billed
Bekaert ECD Solar Systems 3,432,521 4,015,345
Retainages
Bekaert ECD Solar Systems 4,497,954 1,622,266
----------- -----------
Sub-total 8,337,773 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 1,611,877 6,432,859
Texaco Ovonic Fuel Cell Company 1,000,739 932,323
Texaco Ovonic Hydrogen Systems 2,576,073 777,441
----------- -----------
Sub-total 5,318,689 8,289,371
Amounts billed
Texaco Ovonic Battery Systems 6,585,367 185,830
Amounts unbilled for other than long-term contracts
Ovonyx 20,827 30,875
Texaco Ovonic Battery Systems - 20,714
----------- -----------
Sub-total 20,827 51,589
Amounts billed for other than long-term contracts
Bekaert ECD Solar Systems - 396,912
ChevronTexaco Technology Ventures 1,217,941 -
Ovonyx 40,505 25,863
Texaco Ovonic Battery Systems 200,367 187,132
----------- -----------
Sub-total 1,458,813 609,907
Note Receivable
Bekaert ECD Solar Systems 4,493,166 -
----------- -----------
TOTAL $26,214,635 $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:
March 31, June 30,
2002 2001
---------- ----------
Finished products $ 178,660 $ 109,500
Work in process 753,136 809,829
Raw materials 507,156 414,213
---------- ----------
$1,438,952 $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 1, 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 in its financial statements at zero 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 the
licenses. Advance royalty payments are deferred and recognized in revenues as
the
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
creditable sales occur, the underlying agreement expires, or when the Company
has demonstrable evidence that no additional royalties will be creditable and,
accordingly, the earnings process is completed.
In connection with a certain government contract, the Company may have to
pay, as a recoupment to the government, a share of future license or royalty
payments pertaining to certain patents.
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 these
proprietary technologies. 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.
14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Basis of Presentation (Continued)
------------------------------------------
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project based on the relationship of costs
incurred to estimated total project costs. Revenues from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the
agreed-upon fees for product development agreements contemplate reimbursing the
Company for costs considered associated with project activities including
expenses for direct product development and research, patents, operating,
general and administrative expenses and depreciation. Accordingly, expenses
related to product development agreements are recorded as cost of revenues from
product development agreements.
Overhead and General and Administrative Allocations
---------------------------------------------------
The Company allocates overhead and general and administrative expenses to
product development and research expenses and to cost of revenues from research
and development agreements based on a percentage of direct labor costs. For cost
of revenues from product development agreements, this allocation is limited to
the amount of revenues, after direct expenses, under the applicable agreements.
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:
Nine Months Ended
March 31,
--------------------------
2002 2001
----------- -----------
Product sales:
Machine building $23,806,081 $ 6,400,998
Battery packs 315,645 746,433
Metal hydride materials 534,268 106,725
----------- -----------
24,655,994 7,254,156
Product sales - related parties:
Photovoltaics 3,835,363 4,555,941
Machine building 3,667,003 2,218,409
Battery packs 19,488 108,694
Metal hydride materials 182,164 177,024
----------- -----------
7,704,018 7,060,068
----------- -----------
Total product sales $32,360,012 $14,314,224
=========== ===========
Royalties
Battery technology $ 1,402,416 $ 2,299,349
Optical memory 64,588 104,978
----------- -----------
1,467,004 2,404,327
Royalties - related parties
Microelectronics 16,809 -
----------- -----------
Total royalties $ 1,483,813 $ 2,404,327
=========== ===========
Revenues from product development agreements:
Photovoltaics $ 1,692,117 $ 2,063,813
Battery technology 2,804,721 1,694,487
Optical memory 172,695 504,752
Hydrogen 348,435 583,744
Clear coat 43,257 -
----------- -----------
5,061,225 4,846,796
Revenues from product development
agreements - related parties:
Battery technology 12,154,477 810,869
Optical memory 1,355,332 1,835,473
Hydrogen 14,184,056 8,460,663
Fuel cells 6,829,144 6,152,887
----------- -----------
34,523,009 17,259,892
----------- -----------
Total revenues from product development
agreements $39,584,234 $22,106,688
=========== ===========
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:
Nine Months Ended
March 31,
---------------------------
2002 2001
------------ ------------
United States $44,040,011 $26,941,542
China 23,820,858 8,985,750
Mexico 3,835,363 4,555,941
Japan 1,355,847 2,134,019
Hong Kong 528,434 148,976
Germany 112,725 113,525
Netherlands - 40,000
Other countries 217 24,428
----------- -----------
$73,693,455 $42,944,181
=========== ===========
NOTE C - Nonrefundable Advance Royalties
----------------------------------------
At March 31, 2002 and June 30, 2001, the Company deferred recognition of
revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
March 31, June 30,
2002 2001
---------- ----------
Battery $1,714,219 $1,819,416
Optical memory 1,982,294 1,999,072
---------- ----------
$3,696,513 $3,818,488
========== ==========
Creditable royalties earned and recognized as revenue were:
Periods Ended March 31,
-----------------------
2002 2001
---------- ----------
Three months ended $ 22,504 $ 11,774
Nine months ended 121,975 27,665
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 Nine Months Ended
March 31, March 31,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 3,396,962 $ 2,257,375 $12,363,450 $ 4,984,161
Operating Expenses:
Cost of Sales 4,356,608 3,217,147 14,180,773 6,557,243
General and Administrative 1,685,975 978,932 5,628,592 3,159,723
----------- ----------- ----------- -----------
Total Expenses 6,042,583 4,196,079 19,809,365 9,716,966
Other Income (Expense) (624,745) (80,657) (1,708,522) 48,715
----------- ----------- ----------- -----------
Net Loss $(3,270,366) $(2,019,361) $(9,154,437) $(4,684,090)
=========== =========== =========== ===========
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
-------------
March 31, June 30,
2002 2001
---------------------------
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 9,527,491 $ 10,726,490
Inventory 6,613,931 7,714,969
Other Current Assets 7,526,687 5,100,865
------------ ------------
Total Current Assets 23,668,109 23,542,324
Property, Plant and Equipment (Net) 70,481,267 26,104,169
Other Assets 34,555,304 20,908,387
------------ ------------
Total Assets $128,704,680 $ 70,554,880
============ ============
Current Liabilities:
Accounts and Notes Payable and Accrued
Expenses $ 18,081,361 $ 14,602,720
------------ ------------
Total Current Liabilities 18,081,361 14,602,720
Long-term Liabilities:
Note Payable - ECD 10,751,014 10,256,110
Capital Lease Obligation 50,599,820 -
------------ ------------
Total Long-term Liabilities 61,350,834 10,256,110
Members' Equity 49,272,485 45,696,050
------------ ------------
Total Liabilities and Members' Equity $128,704,680 $ 70,554,880
============ ============
As of March 31, 2002, an investment of $4,493,166 previously made by
United Solar in Bekaert ECD Solar Systems has been transferred to an
interest-bearing notes payable to United Solar.
The Company recorded revenues from Bekaert ECD Solar Systems of $2,701,000
and $7,502,000, respectively, for the three months and nine months ended March
31, 2002 and $2,671,000 and $6,774,000, respectively, for the three months and
nine months ended March 31, 2001, 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.
21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
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.
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
$3,927,000 and $12,155,000, respectively, for the three months and nine months
ended March 31, 2002 for services performed on behalf of Texaco Ovonic Battery
Systems (primarily for advanced product development work). The Company recorded
revenues from Texaco Ovonic Battery of $46,000 and $188,000 for the three months
and nine months ended March 31, 2002, for products sold to this joint venture.
There are no financial statements currently available for Texaco Ovonic
Battery Systems. Texaco Ovonic Battery Systems is in the developmental stage
and, as such, has a history of operating losses.
Texaco Ovonic Fuel Cell Company
In September 2000, ECD and TESI formed Texaco Ovonic Fuel Cell Company
LLC. TESI is funding initial product and market development, the primary use of
which is to fund a contract from Texaco Ovonic Fuel Cell Company to ECD to
further develop Ovonic(TM) regenerative fuel cell 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 Company that are derived from its financial statements.
TEXACO OVONIC FUEL CELL COMPANY LLC
STATEMENT OF OPERATIONS
-----------------------
Three Months Ended Nine Months Inception (9/21/00)
March 31, Ended March 31, Through March 31,
------------------------- --------------- ------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Expenses:
Product Development -
Paid or Payable to ECD $ 2,176,879 $ 2,424,638 $ 5,822,105 $ 5,138,886
Product Development -
Paid or Payable to TESI 260,003 145,508 876,699 145,508
Depreciation Expense 146,056 - 339,613 -
----------- ----------- ----------- -----------
Total Expenses 2,582,938 2,570,146 7,038,417 5,284,394
----------- ----------- ----------- -----------
Other Income:
Dividend Income 2,276 17,179 5,296 22,160
----------- ----------- ----------- -----------
Net Loss $(2,580,662) $(2,552,967) $(7,033,121) $(5,262,234)
=========== =========== =========== ===========
TEXACO OVONIC FUEL CELL COMPANY LLC
BALANCE SHEET
-------------
March 31, June 30,
2002 2001
---------------------------
(Unaudited)
Current Assets:
Cash $ 39,424 $ 9,599
Investments 48,493 121,452
----------- -----------
Total Current Assets 87,917 131,051
Fixed Assets:
Leasehold Improvements 1,257,339 674,797
Machinery and Other Equipment 1,427,630 976,466
Construction in Progress 212,772 308,759
----------- -----------
Total Fixed Assets 2,897,741 1,960,022
Less Accumulated Depreciation (405,420) (65,806)
----------- -----------
Net Fixed Assets 2,492,321 1,894,216
----------- -----------
Total Assets $ 2,580,238 $ 2,025,267
=========== ===========
Current Liabilities:
Amount Due ECD $ 931,303 $ 932,323
Amount Due TESI 300,496 311,384
----------- -----------
Total Current Liabilities 1,231,799 1,243,707
Members' Equity:
Capital Contributions 15,750,000 8,150,000
Cumulative Deficit (14,401,561) (7,368,440)
----------- -----------
Total Members' Equity 1,348,439 781,560
----------- -----------
Total Liabilities and Members' Equity $ 2,580,238 $ 2,025,267
=========== ===========
23
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
The Company recorded revenues of $2,410,000 and $6,829,000 during the
three months and nine months ended March 31, 2002, respectively, and $2,936,000
and $6,153,000 during the three months and nine months ended March 31, 2001,
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 storage 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 Nine Months Inception (10/31/00)
March 31, Ended March 31, Through March 31,
------------------------- --------------- -------------------
2002 2001 2002 2001
----------- ----------- ------------ -------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Expenses:
Product Development -
Paid or Payable to ECD $ 2,950,172 $ 3,284,289 $ 8,846,312 $ 7,120,209
Product Development -
Paid or Payable to TESI 161,333 162,224 1,314,966 162,224
Depreciation Expense 215,617 - 417,597 -
----------- ----------- ------------ -----------
Total Expenses 3,327,122 3,446,513 10,578,875 7,282,433
----------- ----------- ------------ -----------
Other Income:
Dividend Income 20,330 19,127 25,988 24,640
----------- ----------- ------------ -----------
Net Loss $(3,306,792) $(3,427,386) $(10,552,887) $(7,257,793)
=========== =========== ============ ===========
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
-------------
March 31, June 30,
2002 2001
---------------------------
(Unaudited)
Current Assets:
Cash $ 3,376 $ 1,002
Investments 277,065 150,411
----------- -----------
Total Current Assets 280,441 151,413
Fixed Assets:
Leasehold Improvements 1,454,133 900,329
Machinery and Other Equipment 1,616,644 651,953
Construction in Progress 3,666,868 408,589
----------- -----------
Total Fixed Assets 6,737,645 1,960,871
Less Accumulated Depreciation (489,281) (71,684)
----------- -----------
Net Fixed Assets 6,248,364 1,889,187
----------- -----------
Total Assets $ 6,528,805 $ 2,040,600
=========== ===========
Current Liabilities:
Amount Due ECD $ 2,078,185 $ 777,441
Amount Due TESI 348,130 434,086
Deferred Revenue 26,304 -
----------- -----------
Total Current Liabilities 2,452,619 1,211,527
Members' Equity:
Capital Contributions 25,127,000 11,327,000
Cumulative Deficit (21,050,814) (10,497,927)
----------- -----------
Total Members' Equity 4,076,186 829,073
----------- -----------
Total Liabilities and Members' Equity $ 6,528,805 $ 2,040,600
=========== ===========
The Company recorded revenues of $5,825,000 and $14,121,000 for the three
months and nine months ended March 31, 2002, respectively, and $3,888,000 and
$8,461,000 for the three months and nine months ended March 31, 2001,
respectively, for services provided to this joint venture, primarily for market
development and advanced product development work.
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,
25
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
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 $71,000 (reflecting an
adjustment of prior revenues recognized) and $155,000, respectively, for the
three months and nine months ended March 31, 2002, and $87,000 and $299,000 for
the three months and nine months ended March 31, 2001, representing services
performed for its operations which commenced on January 15, 1999.
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
$4,000,000 in Innovative Transportation Systems for an 8% investment, reducing
ECD's direct ownership to 26%.
There are no financial statements currently available for Innovative
Transportation Systems. Innovative Transportation Systems is in its
developmental stage and, as such, has a history of operating losses.
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, LLC. 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 contributed
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 $514,000 and
$1,355,000, respectively, for the three months and nine months ended March 31,
2002, and $393,000 and $1,835,000, respectively, for the three months and nine
months ended March 31, 2001, for services provided to this joint venture for
advanced product development work.
26
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
The following sets forth certain financial data regarding Ovonic Media
that are derived from its financial statements.
OVONIC MEDIA, LLC
STATEMENT OF OPERATIONS
-----------------------
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating Expenses:
Product Development $ 463,168 $ 382,707 $ 1,250,549 $ 1,208,666
General and Administrative 75,000 100,820 217,289 302,468
---------- ---------- ----------- -----------
Total Expenses 538,168 483,527 1,467,838 1,511,134
---------- ---------- ----------- -----------
Loss From Operations (538,168) (483,527) (1,467,838) (1,511,134)
Interest Expense - (1,485) - (6,584)
---------- ---------- ----------- -----------
Net Loss $ (538,168) $ (485,012) $(1,467,838) $(1,517,718)
========== ========== =========== ===========
OVONIC MEDIA, LLC
BALANCE SHEET
-------------
March 31, June 30,
2002 2001
---------------------------
(Unaudited)
Current Assets:
Advances to ECD $ 203,041 $ -
----------- -----------
Total Current Assets 203,041 -
Property, Plant and Equipment (Net) 457,117 569,579
----------- -----------
Total Assets $ 660,158 $ 569,579
=========== ===========
Current Liabilities:
Accounts Payable to ECD $ - $ 17,341
----------- -----------
Total Liabilities - 17,341
Members' Equity:
Capital Contributions 4,656,342 3,080,584
Cumulative Deficit (3,996,184) (2,528,346)
----------- -----------
Total Members' Equity 660,158 552,238
----------- -----------
Total Liabilities and Members' Equity $ 660,158 $ 569,579
=========== ===========
27
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
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, all for battery
applications for NiMH batteries. As of March 31, 2002, three of the contemplated
five joint ventures have been started. ECD and Ovonic Battery initially
contributed technology for their 19% interest in each of these joint ventures.
On February 22, 2002, ECD and Ovonic Battery made a proportionate $1,710,000
cash investment in the Rare Earth Ovonic joint ventures and maintained their 19%
interest in these entities. All of these joint ventures are being accounted for
using the cost method of accounting.
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 $50,458,000 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. As of
March 31, 2002, Ovonic Battery has received payments totaling $25,076,000 under
the three contracts, $9,171,000 for amounts not covered by Letters of Credit and
$15,905,000 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 $7,137,000 and
$23,802,000, respectively, for the three and nine months ended March 31, 2002
and $4,119,000 and $8,736,000, respectively, for the three and nine months ended
March 31, 2001.
Sovlux and Sovlux Battery
In 1990, ECD formed Sovlux Co., Ltd., 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 economic
conditions in Russia.
28
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments (Continued)
---------------------------------------------------
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.
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 nine months
ended March 31 are computed as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Weighted average number of shares
Outstanding 21,891,189 19,548,401 21,580,726 19,250,024
Net loss $(5,014,616) $(4,271,569) $(12,096,418) $(6,732,701)
BASIC NET LOSS PER SHARE $ (.23) $ (.22) $ (.56) $ (.35)
=========== =========== ============ ===========
Weighted average number of shares
outstanding 21,891,189 19,548,401 21,580,726 19,250,024
Weighted average shares for dilutive
securities - - - -
----------- ----------- ------------ -----------
Average number of shares outstanding
and potential dilutive shares 21,891,189 19,548,401 21,580,726 19,250,024
Net loss $(5,014,616) $(4,271,569) $(12,096,418) $(6,732,701)
DILUTED LOSS PER SHARE $ (.23) $ (.22) $ (.56) $ (.35)
=========== =========== ============ ===========
Due to the Company's net losses, the weighted average shares of potential
dilutive securities for 2002 of 777,457 (three months) and 789,298 (nine months)
and for 2001 of 1,777,033 (three months) and 1,952,611 (nine 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 2002 of 65,113 (three months) and 64,453 (nine months) and zero
(both periods) for 2001 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.
29
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Business Segments
--------------------------
The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar, and the parent company, ECD. Ovonic Battery is involved in
developing and commercializing battery technology. United Solar is involved in
manufacturing, developing and commercializing photovoltaic technology. ECD is
involved in microelectronics, fuel cell and hydrogen storage technologies,
machine building and photovoltaics. Some general corporate expenses have been
allocated to Ovonic Battery.
The Company's operations by business segment were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
Consolidating
ECD Ovonic Battery United Solar Entries Consolidated
----------- -------------- ------------ ------------- ------------
Revenues
Three months ended
March 31, 2002 $ 15,014 $ 12,707 $ 1,438 $ (4,669) $ 24,490
March 31, 2001 13,865 6,779 2,064 (4,986) 17,722
Nine months ended
March 31, 2002 $ 53,062 $ 41,220 $ 4,717 $(25,306) $ 73,693
March 31, 2001 30,891 15,998 5,906 (9,851) 42,944
Interest Income
Three months ended
March 31, 2002 $ 1,158 $ - $ 72 $ - $ 1,230
March 31, 2001 1,472 - 5 - 1,477
Nine months ended
March 31, 2002 $ 3,729 $ - $ 227 $ - $ 3,956
March 31, 2001 4,619 - 45 - 4,664
Interest Expense*
Three months ended
March 31, 2002 $ - $ 26 $ 119 $ - $ 145
March 31, 2001 10 44 130 - 184
Nine months ended
March 31, 2002 $ - $ 91 $ 363 $ - $ 454
March 31, 2001 12 181 423 - 616
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
----------- -------------- ------------ ------------- ------------
Operating Income (Loss)
Three months ended
March 31, 2002 $ (5,489) $ (1,159) $ (1,493) $ 2,405 $ (5,736)
March 31, 2001 (747) (4,604) (311) 682 (4,980)
Nine months ended
March 31, 2002 $ (8,991) $ (5,307) $ (3,687) $ 3,350 $(14,635)
March 31, 2001 530 (10,117) (1,400) 875 (10,112)
Equity in Net Loss of Investees
Under Equity Method
Three months ended
March 31, 2002 $ (200) $ - $ (1,057) $ 125 $ (1,132)
March 31, 2001 - - (835) 94 (741)
Nine months ended
March 31, 2002 $ (454) $ - $ (2,864) $ 375 $ (2,943)
March 31, 2001 - - (1,909) 365 (1,544)
Depreciation and
Amortization Expense
Nine months ended
March 31, 2002 $ 696 $ 858 $ 1,310 $ (1,225) $ 1,639
March 31, 2001 656 1,136 1,283 (1,267) 1,808
Capital Expenditures
Nine months ended
March 31, 2002 $ 4,042 $ 151 $ 130 $ - $ 4,323
March 31, 2001 697 32 554 - 1,283
Investments in Equity
Method Investees
March 31, 2002 $ 3,547 $ - $ 22,349 $ (4,139) $ 21,757
March 31, 2001 4,049 - 25,739 (5,587) 24,201
Identifiable Assets
March 31, 2002 $152,783 $ 33,486 $ 33,649 $(24,601) $195,317
March 31, 2001 131,983 13,961 41,850 (27,039) 160,755
--------------------
* 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 $25 million of its short-term investments to secure its portion of
the guarantee. The Company, at its sole election, can replace the investments
with $20 million of money market funds to meet the security requirement. 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 short-term
investments.
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 nine months ended March 31, 2002 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;
33
o we may experience performance problems with key suppliers or
subcontractors;
o adverse changes may occur in general economic conditions or in
political or competitive forces affecting our business;
o competition may increase in our industry or markets;
o our government product development or research contracts may be
terminated by unilateral government action or we may be unsuccessful
in obtaining new government contracts to replace those which have
been terminated or completed;
o we may become subject to legal or regulatory proceedings which may
reach unfavorable resolutions;
o there may be adverse changes in the securities markets which affect
the price of our stock; or
o we may suffer the loss of key personnel or may be unable to attract
and retain qualified personnel to maintain and expand our business.
There is also the risk that we incorrectly analyze these risks or that
strategies we develop to address them are unsuccessful.
These forward-looking statements speak only as of the date of this
Quarterly Report. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified in their
entirety by the cautionary statements in this section. Because of these risks,
uncertainties and assumptions, you should not place undue reliance on these
forward-looking statements. We are not obligated to update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
-------------------------------------------------------------------------------
The Company had a net loss of $5,015,000 on revenues of $24,490,000 in the
three months ended March 31, 2002 compared to a net loss of $4,272,000 on
revenues of $17,722,000 for the three months ended March 31, 2001. The $743,000
increase in the net loss resulted primarily from an increase of $643,000 in the
net cost of product development, reduced royalties of $271,000, reduced other
revenues of $427,000, increased patent defense expenses of $175,000 (net) to
protect the Company's intellectual property, partially offset by reduced
administrative ($395,000) (net) and patent ($230,000) expenses, and improved
margins on product sales ($133,000).
The increased loss resulted from an operating loss of $3,084,000 in 2002
for the ECD segment (net of consolidating entries) versus an operating loss of
$65,000 in 2001 primarily due to higher net cost of product development, a
$1,182,000 increased operating loss for United Solar (operating loss of
$1,493,000 in 2002 versus operating loss of $311,000 in 2001), offset by a
$3,445,000 decreased operating loss for Ovonic Battery (operating loss of
34
$1,159,000 in 2002 versus operating loss of $4,604,000 in 2001), primarily
resulting from a profitable machine-building contract and higher revenue from
product development agreements.
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. Current product
development programs include work on the Ovonic Cognitive Computer, a unique
approach to computing with a single thin-film device in the sub-micron range
that incorporates memory, logic and computing using higher, non-binary, base
arithmetic and has built-in neurosynaptic learning ability. Another current
project is the conversion of an automobile to a hybrid electric vehicle with an
internal combustion engine fueled by hydrogen (Hydrogen ICE) coupled with an
Ovonic NiMH Battery System to demonstrate driving performances similar to a
conventionally fueled gasoline vehicle, but with superior fuel economy and
virtually no exhaust emission. Such a vehicle could be a transition phase to the
hydrogen economy and fuel-cell-powered vehicles.
Expenses related to metal hydride materials production and the ongoing
protection of the Company's intellectual property also contributed to the 2002
losses. Partially offsetting the loss from operations in the three months ended
March 31, 2002 was other income (net) of $722,000 compared to other income (net)
of $709,000 in the prior year.
The increase in consolidated revenues primarily resulted from higher
product sales ($2,671,000) and higher revenues from product development
agreements ($4,795,000), partially offset by lower royalties ($271,000). The
$5,928,000 increase in Ovonic Battery's revenues was primarily due to higher
machine-building sales to Rare Earth Ovonic ($7,137,000 in 2002 versus
$4,119,000 in 2001) and increased revenues from product development agreements
($4,955,000 in 2002 versus $1,142,000 in 2001), as work was begun on the
advanced product development agreement for Texaco Ovonic Battery Systems. The
ECD segment's revenues, net of consolidating entries, increased to $10,345,000
in 2002 from $8,879,000 in 2001 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 Company, and increased 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. United Solar's 2002
revenues decreased to $1,438,000 in 2002 versus $2,064,000 in 2001 because of
lower sales prices for products sold to Bekaert ECD Solar Systems.
Product sales, consisting of machine building, photovoltaic products,
metal hydride materials and battery packs, increased 36% to $10,024,000 in the
three months ended March 31, 2002 from $7,354,000 in the three months ended
March 31, 2001. Machine-building revenues increased 67% to $8,706,000 in 2002
from $5,205,000 in 2001. The increase in machine-building revenues in 2002
relates primarily to Ovonic Battery's contracts with Rare Earth Ovonic to
provide battery-making equipment ($7,137,000 in 2002 compared to $4,119,000 in
2001) and ECD's contract with Bekaert ECD Solar Systems to design and build
35
equipment making solar products capable of producing annually 25MW of electrical
power ($1,564,000 in 2002 compared to $1,084,000 in 2001). 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 $1,137,000 for 2002 and $1,586,000 for 2001 (see
Note D). Sales of metal hydride materials were $105,000 in 2002 compared to
$156,000 in 2001. The Company currently has a product sales backlog of
$23,566,000, $8,842,000 of which is expected to be recognized as revenues in
Fiscal 2002.
Royalties decreased 37% to $459,000 in the three months ended March 31,
2002 from $730,000 in the three months ended March 31, 2001. Lower royalties
reflect increased production efficiencies of the Company's licensees, which have
resulted in lower prices as licensees move aggressively to increase market share
and unfavorable exchange rates.
Revenues from product development agreements increased 52% to $14,040,000
in the three months ended March 31, 2002 from $9,245,000 in the three months
ended March 31, 2001. The increase was primarily a result of agreements with
Texaco Ovonic Hydrogen Systems ($5,825,000 for 2002 compared to $3,888,000 for
2001), Texaco Ovonic Battery Systems ($3,927,000 for 2002 compared to zero in
2001) for advanced product development services, and Ovonic Media ($514,000 in
2002 versus $393,000 in 2001), partially offset by a reduction in revenues from
Texaco Ovonic Fuel Cell Company ($2,410,000 for 2002 compared to $2,936,000 for
2001).
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 a $34,000 negative revenue
in the three months ended March 31, 2002 from a $393,000 revenue in the three
months ended March 31, 2001. This decrease was due to reduction in revenues from
Texaco Ovonic Battery Systems (formerly GM Ovonic) ($4,000 in 2002 versus
$252,000 in 2001). Revenues from Texaco Ovonic Battery Systems were lower as it
now performs services previously provided by Ovonic Battery. Revenues from
Ovonyx were affected by a $142,000 credit reflecting an adjustment in revenues
previously recognized.
The $2,537,000 increase in cost of product sales in the three months ended
March 31, 2002 was consistent with the $2,671,000 increase in product sales and
resulted in a $171,000 gross profit on product sales in 2002, compared to
$37,000 in 2001. 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 and the maintenance of Ovonic Battery's 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.
Revenues from product development agreements continued to fund more than
75% of the Company's cost of product development. While the total cost of
product development increased by $5,438,000 for the three months ended March 31,
2002, compared to the prior year, revenues increased by $4,795,000 resulting in
a net increase of $643,000 in cost of product development.
36
Three Months Ended
March 31,
---------------------------
2002 2001
------------ ------------
Cost of revenues from product development
agreements $14,286,000 $ 8,977,000
Product development and research 3,616,000 3,487,000
----------- -----------
Total cost of product development 17,902,000 12,464,000
Revenues from product development
agreements 14,040,000 9,245,000
----------- -----------
Net cost of product development $ 3,862,000 $ 3,219,000
=========== ===========
The expenditures continued the development of the Company's core technologies in
energy storage, energy generation and information technology.
Expenses were incurred in 2002 and 2001 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. Total patent expenses decreased to $770,000 in the three months
ended March 31, 2002 from $825,000 in the three months ended March 31, 2001,
principally due to reduced patent expenses in 2002, partially offset by
increased litigation costs (net) ($368,000 in 2002 versus $194,000 in 2001) for
the protection of the Company's NiMH battery patents and technology.
ChevronTexaco has agreed to reimburse the Company for 50% of the litigation
expenses beginning in fiscal 2002. This reimbursement ($689,000) has been offset
against the patent defense costs for the three months ended March 31, 2002. In
March 2001, Ovonic Battery filed suit against Matsushita Battery Industrial Co.,
Ltd., Toyota Motor Corporation, Panasonic EV Energy Co., Ltd. and several
related entities for infringement of patents held by Ovonic Battery.
Operating, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
The decrease in operating, general and administrative expenses (net) from
$2,097,000 in the three months ended March 31, 2001 to $1,702,000 in the three
months ended March 31, 2002 was due primarily to increased allocations of
expenses to product development and research expenses and to cost of revenues
from product development agreements ($1,883,000), partially offset by increased
spending ($1,487,000) as a result of selling expenses associated with
machine-building contracts, personnel additions and other expenses associated
with the Company's growth.
37
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Three Months Ended
March 31,
---------------------------
2002 2001
------------ ------------
Gross Expenses $ 6,517,717 $ 5,030,569
Less - allocations to product development
and research (2,192,703) (596,383)
- allocations to cost of revenues from
product development agreements (2,506,515) (2,220,244)
- amortization of negative goodwill (116,609) (116,609)
----------- -----------
Remaining Expenses $ 1,701,890 $ 2,097,333
=========== ===========
The $13,000 increase in other income (net) ($722,000 income in 2002
compared to $709,000 income in 2001) resulted primarily from gains realized on
the sales of investments ($180,000 in 2002 compared to losses of $66,000 in
2001), partially offset by lower interest income ($1,230,000 in 2002 compared to
$1,477,000 in 2001) because of lower interest rates on the Company's investments
and from higher equity losses attributed to losses at Bekaert ECD Solar Systems
($932,000 in 2002 compared to $741,000 in 2001) and Innovative Transportation
Systems ($200,000 in 2002 versus zero in 2001).
The Company does business in many different parts of the world and its
royalty revenues are affected by changes in foreign currencies and their
exchange rates relative to the U.S. dollar. However, the vast majority of the
Company's business agreements are denominated in U.S. dollars and, as such, the
Company has minimized its exposure to currency rate fluctuations.
Nine Months Ended March 31, 2002 Compared to Nine Months Ended March 31, 2001
-----------------------------------------------------------------------------
The Company had a net loss of $12,096,000 on revenues of $73,693,000 in
the nine months ended March 31, 2002 compared to a net loss of $6,733,000 on
revenues of $42,944,000 for the nine months ended March 31, 2001. The $5,363,000
increase in the net loss resulted primarily from reduced license revenues of
$2,800,000, increased patent defense expenses (net) of $1,177,000 to protect the
Company's intellectual property, reduced royalties of $921,000, reduced other
revenues of $1,053,000, an increase of $313,000 in the net cost of product
development, and reduced interest income ($708,000), partially offset by
improved margins on product sales ($1,315,000) and improved other non-operating
income ($544,000).
The increased loss resulted from an operating loss of $5,641,000 in 2002
for the ECD segment (net of consolidating entries) versus operating income of
$1,405,000 in 2001, primarily due to higher net cost of product development, and
an increased operating loss of $2,287,000 for United Solar (operating loss of
$3,687,000 in 2002 versus operating loss of $1,400,000 in 2001) primarily due to
costs associated with the increased production capacity and the move to the new
Auburn Hills facility, partially offset by a $4,810,000 decreased operating loss
for Ovonic Battery (operating loss of $5,307,000 in 2002 versus operating loss
of $10,117,000 in 2001), primarily resulting from a profitable machine-building
contract and higher revenue from product development agreements.
38
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. Current product
development programs include work on the Ovonic Cognitive Computer, a unique
approach to computing with a single thin-film device in the sub-micron range
that incorporates memory, logic and computing using higher, non-binary, base
arithmetic and has built-in neurosynaptic learning ability. Another current
project is the conversion of an automobile to a hybrid electric vehicle with an
internal combustion engine fueled by hydrogen (Hydrogen ICE) coupled with an
Ovonic NiMH Battery System to demonstrate driving performances similar to a
conventionally fueled gasoline vehicle, but with superior fuel economy and
virtually no exhaust emission. Such a vehicle could be a transition phase to the
hydrogen economy and fuel-cell-powered vehicles.
Expenses related to metal hydride materials production and the ongoing
protection of the Company's intellectual property also contributed to the 2002
losses. Partially offsetting the loss from operations in the nine months ended
March 31, 2002 was other income (net) of $2,539,000 compared to other income
(net) of $3,379,000 in the prior year.
The increase in consolidated revenues primarily resulted from higher
product sales ($18,046,000) and higher revenues from product development
agreements ($17,478,000), partially offset by lower royalties ($921,000) and
license and other agreements (zero in 2002 and $2,800,000 in 2001). The ECD
segment's revenues, net of consolidating entries, increased to $27,756,000 in
2002 from $21,040,000 in 2001 due to increased revenues of $5,704,000 from
product development agreements, primarily resulting from the advanced product
development agreements with Texaco Ovonic Hydrogen Systems and Texaco Ovonic
Fuel Cell Company and due to machine-building sales to Bekaert ECD Solar Systems
to build manufacturing equipment to make solar products capable of producing
25MW of electrical power on an annual basis. The $25,222,000 increase in Ovonic
Battery's revenues was primarily due to higher machine-building sales to Rare
Earth Ovonic ($23,802,000 in 2002 versus $6,236,000 in 2001), increased revenues
from product development agreements ($14,959,000 in 2002 versus $2,505,000 in
2001), as work was begun on the advanced product development agreement for
Texaco Ovonic Battery Systems, partially offset by decreased revenues from
license and other agreements (zero in 2002 versus $2,800,000 in 2001). United
Solar's 2002 revenues decreased to $4,717,000 in 2002 versus $5,906,000 in 2001
because of lower sales prices for products sold to Bekaert ECD Solar Systems.
Product sales, consisting of machine building, photovoltaic products,
metal hydride materials and battery packs, increased 126% to $32,360,000 in the
nine months ended March 31, 2002 from $14,314,000 in the nine months ended March
31, 2001. Machine-building revenues increased 219% to $27,473,000 in 2002 from
$8,619,000 in 2001. The increase in machine-building revenues in 2002 relates
primarily to Ovonic Battery's contracts with Rare Earth Ovonic to provide
battery-making equipment ($23,802,000 in 2002 compared to $6,236,000 in 2001)
and ECD's contract with Bekaert ECD Solar Systems to design and build equipment
making solar products capable of producing annually 25MW of electrical power
($3,667,000 in 2002 compared to $2,218,000 in 2001). All machine-building
contracts are
39
accounted for using percentage-of-completion accounting. Photovoltaic sales,
which are sales of semi-finished products to an affiliate, Bekaert ECD Solar
Systems, were $4,556,000 for 2001 and $3,835,000 for 2002 (see Note D). Sales
of metal hydride materials were $716,000 in 2002 compared to $284,000 in 2001.
The Company currently has a product sales backlog of $23,566,000, $8,842,000 of
which is expected to be recognized as revenues in Fiscal 2002.
Royalties decreased 38% to $1,484,000 in the nine months ended March 31,
2002 from $2,404,000 in the nine months ended March 31, 2001. Lower royalties
reflect increased production efficiencies of the Company's licensees, which have
resulted in lower prices as licensees move aggressively to increase market
share, unfavorable exchange rates, and crediting a previous overpayment of
royalties calculated erroneously by a licensee.
Revenues from product development agreements increased 79% to $39,584,000
in the nine months ended March 31, 2002 from $22,107,000 in the nine months
ended March 31, 2001. The increase was primarily a result of agreements with
Texaco Ovonic Hydrogen Systems ($14,121,000 for 2002 compared to $8,461,000 for
2001), Texaco Ovonic Fuel Cell Company ($6,829,000 for 2002 compared to
$6,153,000 for 2001) and Texaco Ovonic Battery Systems ($12,155,000 for 2002
compared to zero in 2001) for advanced product development services, partially
offset by decreases in revenues from the services agreement with Ovonic Media
($1,355,000 in 2002 versus $1,835,000 in 2001) 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 2002
versus $1,411,000 in 2001).
Revenues from license and other agreements decreased to zero in the nine
months ended March 31, 2002, from $2,800,000 in the nine months ended March
31, 2001. The 2001 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 $265,000 in the nine
months ended March 31, 2002 from $1,319,000 in the nine months ended March 31,
2002. This decrease was due to reductions in revenues from Texaco Ovonic Battery
Systems (formerly GM Ovonic) as it now performs services previously provided by
Ovonic Battery. Revenues from Ovonyx were affected by a $142,000 credit
reflecting an adjustment in revenues previously recognized.
The $16,731,000 increase in cost of product sales in the nine months ended
March 31, 2002 resulted from the $18,046,000 increase in product sales and
resulted in a $1,332,000 gross profit on product sales in 2002, compared to
$17,000 in 2001. 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 and the maintenance of Ovonic Battery's 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.
40
Revenues from product development agreements continued to fund more than
75% of the Company's cost of product development. While the total cost of
product development increased by $17,790,000 for the nine months ended March 31,
2002, compared to the prior year, revenues increased by $17,477,000 resulting in
a net increase of $313,000 in cost of product development.
Nine Months Ended
March 31,
---------------------------
2002 2001
------------ ------------
Cost of revenues from product development
agreements $39,331,000 $20,777,000
Product development and research 8,333,000 9,097,000
----------- -----------
Total cost of product development 47,664,000 29,874,000
Revenues from product development
agreements 39,584,000 22,107,000
----------- -----------
Net cost of product development $ 8,080,000 $ 7,767,000
=========== ===========
The expenditures continued the development of the Company's core technologies in
energy storage, energy generation and information technology.
Expenses were incurred in 2002 and 2001 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. Total patent expenses increased to $3,830,000 in the nine months
ended March 31, 2002 from $2,840,000 in the nine months ended March 31, 2001,
principally due to litigation costs ($2,320,000 in 2002 versus $1,143,000 in
2001) for the protection of the Company's NiMH battery patents and technology.
ChevronTexaco has agreed to reimburse the Company for 50% of the litigation
expenses beginning in fiscal 2002. This reimbursement ($2,024,000) has been
offset against the patent defense costs for the nine months ended March 31,
2002. In March 2001, Ovonic Battery filed suit against Matsushita Battery
Industrial Co., Ltd., Toyota Motor Corporation, Panasonic EV Energy Co., Ltd.
and several related entities for infringement of patents held by Ovonic Battery.
Operating, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
The decrease in operating, general and administrative expenses (net) from
$6,044,000 in the nine months ended March 31, 2001 to $5,807,000 in the nine
months ended March 31, 2002 was due primarily to increased allocations of
expenses to product development and research expenses and to cost of revenues
from product development agreements ($5,442,000), partially offset by increased
spending ($5,205,000) as a result of selling expenses associated with
machine-building contracts, personnel additions and other expenses associated
with the Company's growth.
41
The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:
Nine Months Ended
March 31,
---------------------------
2002 2001
------------ ------------
Gross Expenses $18,051,694 $12,846,827
Less - allocations to product development
and research (3,703,557) (1,102,603)
- allocations to cost of revenues from
product development agreements (8,191,467) (5,350,005)
- amortization of negative goodwill (349,825) (349,825)
----------- -----------
Remaining Expenses $ 5,806,845 $ 6,044,394
=========== ===========
The $840,000 decrease in other income (net) ($2,539,000 income in 2002
compared to $3,379,000 income in 2001) resulted primarily from lower interest
income ($3,956,000 in 2002 compared to $4,664,000 in 2001) because of lower
interest rates on the Company's investments and from higher equity losses
attributed to losses at Bekaert ECD Solar Systems ($2,489,000 in 2002 compared
to $1,544,000 in 2001) and Innovative Transportation Systems ($454,000 in 2002
compared to zero in 2001), partially offset by gains realized on the sale of
investments ($460,000 in 2002 compared to losses of $66,000 in 2001).
The Company does business in many different parts of the world and its
royalty revenues are affected by changes in foreign currencies and their
exchange rates relative to the U.S. dollar. However, the vast majority of the
Company's business agreements are denominated in U.S. dollars and, as such, the
Company has minimized its exposure to currency rate fluctuations.
Liquidity and Capital Resources
As of March 31, 2002, the Company had consolidated cash, cash equivalents,
short-term investments and accounts receivable (including $26,215,000 of amounts
due from related parties) of $147,252,000 (see NOTE G - Commitments for
restrictions), an increase of $30,475,000 from June 30, 2001. As of March 31,
2002, the Company had consolidated working capital of $122,861,000 compared with
a consolidated working capital of $92,577,000 as of June 30, 2001. Since
June 30, 2001, ECD has received $44,554,000 from the exercise of warrants that
had been issued in connection with the Company's 1998 limited public offering,
exercise of employee stock options and the sale of additional shares to
ChevronTexaco 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.
42
Based upon the tax law recently enacted, the Company can offset 100% of
Alternative Minimum Taxable Income against its operating losses. Previously, the
Company had paid $864,999 in Alternative Minimum Taxes for certain items which
were taxable (for tax purposes only) and against which the Company could only
offset 90% of its operating losses under the previous tax law. The Company has
filed its tax return for the year ended June 30, 2001, and has requested a
refund of $864,999, which amount was recorded on the Company's Consolidated
Balance Sheet as Deferred Tax Assets as of June 30, 2001. As of March 31, 2002,
this amount had been reclassified to accounts receivable. The Company received
this refund in April 2002.
During the nine months ended March 31, 2002, of the Company's $98,251,000
cash, cash equivalents and short-term investments, the Company purchased
$72,699,000 of short-term investments consisting of commercial paper, classified
as available for sale, maturing from 91 days to 38 months. It is the Company's
policy that investments shall be rated "A" or higher by Moody's or Standard and
Poor's, no single investment shall represent more than 10% of the portfolio and
at least 20% of the total portfolio shall have maturities of less than 90 days.
As of March 31, 2002, there were two investments which, at that time, did not
comply with the rating policy and were rated BBB+. The Company believes that
this was only a temporary situation and, based on advice from its investment
advisor, has continued to hold these investments.
During the nine months ended March 31, 2002, $19,278,000 of cash was used
in operations. The difference between the net loss of $12,096,000 and the net
cash used in operations was principally due to an $8,910,000 increase in working
capital. Also contributing were non-cash costs (principally depreciation, equity
losses in joint ventures and deferred profits on sales to Bekaert ECD Solar
Systems). In addition, $4,323,000 of machinery and equipment was purchased or
constructed, principally for ECD's new wafer laboratory and for the United Solar
expansion.
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
$50,458,000 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. As of
March 31, 2002, Ovonic Battery has received payments totaling $25,076,000 under
the three contracts, $9,171,000 for amounts not covered by Letters of Credit and
$15,905,000 for amounts covered by Letters of Credit. There are currently no
outstanding amounts where payments are past due.
On February 22, 2002, the Company made a proportionate cash investment of
$1,710,000 in the Rare Earth Ovonic joint ventures, which maintained the
Company's 19% ownership.
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.
43
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 $11,963,000 for work performed under the contract in
the nine months ended March 31, 2002 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. A significant portion of
the funding is committed to 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 $14,121,000 for work performed under the contract in the
nine months ended March 31, 2002 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 has been funding initial product and market
development, which includes funding a product development contract
from Texaco Ovonic Fuel Cell Company to ECD. The contract which
began July 1, 2000, under certain circumstances, including not
achieving mutually agreed-upon milestones, may be cancelled. The
Company and TESI are currently in discussions regarding the future
business strategy of the venture. The Company received $6,829,000
for work performed under the contract in the nine months ended
March 31, 2002 and is currently budgeted to receive approximately
$9,000,000 in 2002.
o Bekaert ECD Solar Systems LLC/United Solar Systems Corp. - 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.
44
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, LLC. ECD has received $4,584,000 from a
contract from Ovonic Media to design, develop and demonstrate ECD's
proprietary continuous web roll-to-roll technology for the
ultra-high-speed manufacture of optical media products, primarily
rewritable DVDs.
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.
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.
45
PART II - OTHER INFORMATION
---------------------------
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 $96,604,000 and $81,956,000 of these investments on March 31,
2002 and June 30, 2001, respectively. On March 31, 2002, the investments had an
average maturity of 482 days, $74,870,000 of which had maturities of 91 days to
38 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 34 months. It is the
Company's policy that investments shall be rated "A" or higher by Moody's or
Standard and Poor's, no single investment shall represent more than 10% of the
portfolio and at least 20% of the total portfolio shall have maturities of less
than 90 days. As of March 31, 2002, there were two investments which, at that
time, did not comply with the rating policy and were rated BBB+. The Company
believes that this was only a temporary situation and, based on advice from its
investment advisor, 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 March 31, 2002 portfolio of approximately
$766,000.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
At the Annual Meeting of Stockholders (the "Meeting") of ECD held on
February 21, 2002, the following directors were elected for the ensuing year and
until their successors shall be duly elected and qualified:
For Withheld Authority
---------- ------------------
Stanford R. Ovshinsky 24,788,871 205,794
Iris M. Ovshinsky 24,787,920 206,745
Robert C. Stempel 24,790,550 204,115
Nancy M. Bacon 24,745,469 249,196
Umberto Colombo 24,313,451 681,214
Subhash K. Dhar 24,789,406 205,259
Hellmut Fritzsche 24,790,823 203,842
Walter J. McCarthy, Jr. 24,869,488 125,177
Florence I. Metz 24,856,551 138,114
James R. Metzger 24,864,878 129,787
Donald L. Paul 24,867,510 127,155
Stanley K. Stynes 24,870,229 124,436
Greg M. Vesey 24,866,651 128,014
William M. Wicker 24,865,103 129,562
46
Also approved at the Meeting was the appointment of Deloitte & Touche LLP
as independent accountants for the fiscal year ending June 30, 2002 (with
24,893,175 for, 65,033 against, and 36,457 abstentions).
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
A. Exhibits
--------
3.1 Amendment to Article VIII of the bylaws of Energy Conversion
Devices, Inc. as of February 21, 2002.
B. Reports on Form 8-K
-------------------
None.
47
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Energy Conversion Devices, Inc.
-------------------------------
(Registrant)
By: /s/ Stephan W. Zumsteg
----------------------------------
Stephan W. Zumsteg
Date: May 15, 2002 Vice President and Chief Financial Officer
(Principal financial and accounting officer)
By: /s/ Stanford R. Ovshinsky
----------------------------------
Stanford R. Ovshinsky
Date: May 15, 2002 President and Chief Executive Officer
48