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, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 38-1749884
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2956 Waterview Drive, Rochester Hills, Michigan 48309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 293-0440
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Former name, former address and former Fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
--- ---
As of May 13, 2004, there were 219,913 shares of ECD's Class A Common
Stock, 430,000 shares of ECD's Class B Common Stock and 24,523,001 shares of
ECD's Common Stock outstanding.
Page 1 of 48 Pages
ENERGY CONVERSION DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements...............................................3
Consolidated Statements of Operations....................................3
Consolidated Balance Sheets - Assets.....................................4
Consolidated Balance Sheets - Liabilities and Stockholders' Equity.......5
Consolidated Statements of Cash Flows....................................6
Note A - Summary of Accounting Policies..................................8
Note B - Financings and Liquidity.......................................11
Note C - Accounts Receivable............................................12
Note D - Inventories....................................................14
Note E - Joint Ventures and Investments.................................14
Note F - Liabilities....................................................20
Note G - Nonrefundable Advance Royalties................................21
Note H - Product Sales, Royalties, Revenues from Product Development
Agreements, and License and Other Agreements.................21
Note I - Other Comprehensive Income (Loss)..............................24
Note J - Stock Options..................................................24
Note K - Basic and Diluted Net Loss Per Share...........................25
Note L - Business Segments..............................................26
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................28
Item 3. Quantitative and Qualitative Disclosures about Market Risk........44
Item 4. Controls and Procedures...........................................44
PART II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities............................................46
Item 4. Submission of Matters to a Vote of Security Holders...............46
Item 6. Exhibits and Reports on Form 8-K..................................47
SIGNATURES..................................................................48
2
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,
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES
Product sales $ 8,584,232 $ 2,901,294 $ 22,647,327 $ 9,956,698
Product sales to related parties 627 1,955,857 3,049 4,747,031
------------ ------------ ------------ ------------
Total product sales 8,584,859 4,857,151 22,650,376 14,703,729
Royalties 975,766 530,191 2,044,525 1,429,525
Revenues from product development agreements 3,917,117 1,074,438 10,176,826 4,108,194
Revenues from product development agreements
with related parties 2,890,720 7,038,633 11,005,507 23,983,682
------------ ------------ ------------ ------------
Total revenues from product development
agreements 6,807,837 8,113,071 21,182,333 28,091,876
Revenues from license and other agreements - - 75,000 3,419,114
Other revenues 83,303 55,004 245,870 124,651
Other revenues from related parties 93,412 39,794 226,050 158,752
------------ ------------ ------------ ------------
Total other revenues 176,715 94,798 471,920 283,403
------------ ------------ ------------ ------------
TOTAL REVENUES 16,545,177 13,595,211 46,424,154 47,927,647
EXPENSES
Cost of product sales 10,051,509 5,918,247 28,026,796 16,213,837
Cost of revenues from product development
agreements 6,566,234 8,672,832 19,696,425 27,555,595
Product development and research 5,537,940 5,737,613 18,204,159 14,318,063
Patent defense (net) 887,485 1,485,772 6,358,542 2,394,071
Patents 623,128 529,520 1,578,802 1,702,878
Selling, general and administrative (net) 4,958,912 598,705 12,139,306 5,514,581
------------ ------------ ------------ ------------
TOTAL EXPENSES 28,625,208 22,942,689 86,004,030 67,699,025
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (12,080,031) (9,347,478) (39,579,876) (19,771,378)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 62,346 958,566 635,274 3,049,001
Interest expense (78,107) (80,988) (913,844) (330,598)
Equity in losses of joint ventures (96,139) (1,494,480) (644,220) (5,228,415)
Minority interest share of losses - 734,175 - 1,489,254
Gain on sales of investments - - 364,416 -
Other nonoperating income (expense) (net) (73,589) 154,576 174,722 285,091
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (185,489) 271,849 (383,652) (735,667)
------------ ------------ ------------ ------------
NET LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (12,265,520) (9,075,629) (39,963,528) (20,507,045)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - - 2,215,560
------------ ------------ ------------ ------------
NET LOSS $(12,265,520) $ (9,075,629) $(39,963,528) $(18,291,485)
============ ============ ============ ============
BASIC NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ (.49) $ (.41) $ (1.70) $ (.94)
BASIC NET LOSS PER SHARE FOR
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - - .10
------------ ------------ ------------ ------------
BASIC NET LOSS PER SHARE $ (.49) $ (.41) $ (1.70) $ (.84)
============ ============ ============ ============
DILUTED NET LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ (.49) $ (.41) $ (1.70) $ (.94)
DILUTED NET LOSS PER SHARE FOR
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - - .10
------------ ------------ ------------ ------------
DILUTED NET LOSS PER SHARE $ (.49) $ (.41) $ (1.70) $ (.84)
============ ============ ============ ============
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
March 31, June 30,
2004 2003
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash, including cash equivalents of $18,110,000
at March 31, 2004 and $6,193,000 at June 30,
2003 ($1,450,000 of which is restricted at
March 31, 2004 and $2,000,000 of which is
restricted at June 30, 2003) $ 18,318,319 $ 8,567,261
Short-term investments (including restricted
investments of $5,000,000 at June 30, 2003) - 26,801,506
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$271,000 at March 31, 2004 and
$265,000 at June 30, 2003) 14,173,453 10,520,719
Accounts receivable due from related parties 2,029,472 6,977,280
Note receivable - 11,629,489
Inventories 14,817,629 12,448,172
Other 1,271,074 1,017,659
------------ ------------
TOTAL CURRENT ASSETS 50,609,947 77,962,086
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 14,596,816 13,982,830
Machinery and other equipment 75,928,412 75,587,068
Capitalized leases 10,000,000 10,000,000
------------ ------------
100,792,228 99,836,898
Less accumulated depreciation and amortization (33,532,501) (29,137,648)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 67,259,727 70,699,250
Investment in Rare Earth Ovonic 1,710,000 1,710,000
INVESTMENT IN JOINT VENTURES
Ovonyx - 594,220
COBASYS (f/k/a Texaco Ovonic Battery Systems) - -
Texaco Ovonic Hydrogen Systems - -
Ovonic Media - -
OTHER ASSETS 2,502,759 2,729,094
------------ ------------
TOTAL ASSETS $122,082,433 $153,694,650
============ ============
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, June 30,
2004 2003
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 10,006,191 $ 18,608,052
Accounts payable and accrued expenses - related parties 307,898 -
Salaries, wages and amounts withheld from employees 3,658,809 4,574,357
Deferred revenues under business agreements 2,114,631 5,089,597
Deferred revenues - related parties 23,626 36,972
Current installments on long-term liabilities 325,011 11,858,378
------------ ------------
TOTAL CURRENT LIABILITIES 16,436,166 40,167,356
LONG-TERM LIABILITIES 10,170,576 10,187,127
NONREFUNDABLE ADVANCE ROYALTIES 3,092,011 3,507,995
------------ ------------
TOTAL LIABILITIES 29,698,753 53,862,478
STOCKHOLDERS' EQUITY
Capital Stock
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Class B Convertible Common Stock,
par value $0.01 per share:
Authorized, issued and outstanding - 430,000 shares 4,300 4,300
Common Stock, par value $0.01 per share:
Authorized - 50,000,000 shares
Issued & outstanding - 24,523,001 shares at
March 31, 2004 and 21,252,207 shares at
June 30, 2003 245,230 212,522
Additional paid-in capital 417,300,489 384,987,156
Accumulated deficit (324,355,639) (284,392,111)
Accumulated other comprehensive income 204,441 546,646
Unearned compensation on Class B Convertible
Common Stock (1,017,340) (1,528,540)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 92,383,680 99,832,172
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $122,082,433 $153,694,650
============ ============
See notes to consolidated financial statements.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
March 31,
2004 2003
------------ ------------
OPERATING ACTIVITIES:
Net loss $(39,963,528) $(18,291,485)
Adjustments to reconcile net loss to net cash
used in operating activities:
License agreement (exchange for debt
and related interest) - (3,269,114)
Depreciation and amortization 6,099,374 2,252,989
Amortization of premium/discount on investments 73,083 465,419
Equity in losses of joint ventures 644,220 5,228,415
Changes in nonrefundable advance royalties (415,984) (107,507)
Stock and stock options issued for services
rendered 585,209 619,503
Loss (gain) on sales of investments (364,416) 67,089
Loss on sale of property, plant and equipment 10,378 33,578
Amortization of deferred gain - (34,809)
Minority interest - (1,489,254)
Cumulative effect of change in accounting principle - (2,215,560)
Retirement liability 230,274 216,179
Changes in working capital:
Accounts receivable (3,652,734) 3,009,839
Accounts and note receivable due from related parties 4,947,808 5,024,335
Inventories (2,369,457) (1,798,710)
Other assets (27,080) 396,166
Accounts payable and accrued expenses (9,517,408) (44,586)
Accounts payable and accrued expenses -
related parties 307,898 308,236
Deferred revenues under business agreements (2,974,966) 6,292,180
Deferred revenues - related parties (13,346) (2,842,788)
------------ ------------
NET CASH USED IN OPERATIONS (46,400,675) (6,179,885)
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (2,831,696) (7,455,809)
Advances to United Solar Ovonic - (2,594,466)
Advance to ITS Innovative Transportation Systems - (2,000,000)
Investment in Ovonyx (50,000) (1,000,000)
Purchases of investments (11,969,949) (25,536,196)
Sales of investments 38,631,634 18,712,036
Proceeds from sale of property, plant and equipment 161,466 24,251
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 23,941,455 (19,850,184)
FINANCING ACTIVITIES:
Principal payments under short-term and long-term
debt obligations and capitalized lease obligations (150,703) (1,867,784)
Proceeds from sale of stock upon exercise of
stock options 24,451 -
Proceeds from sale of stock and warrants, net
of expenses 32,247,582 -
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 32,121,330 (1,867,784)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 88,948 -
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,751,058 (27,897,853)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,567,261 42,221,015
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,318,319 $ 14,323,162
============ ============
See notes to consolidated financial statements.
6
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
March 31,
2004 2003
------------ ------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 913,844 $ 330,598
The Company's noncash investing and
financing activities were as follows:
Short-term and long-term note receivable -
United Solar Ovonic LLC (11,629,489) 526,999
Short-term and long-term note payable -
Canon 11,629,489 (526,999)
Debt principal exchanged for license - United
Solar Ovonic/Canon - 2,500,000
Accounts Payable and Accrued Expenses - Accrued
interest on United Solar Ovonic/Canon debt - 769,114
See notes to consolidated financial statements.
7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies
---------------------------------------
Basis of Presentation
---------------------
The accompanying consolidated financial statements have been prepared
assuming that the Company (see page 9 for definition of Company) will continue
as a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
recurring losses from operations and needs additional working capital.
Management believes that funds generated from operations, equity and debt
financing, new government contracts and the cost-containment initiatives
(see Note B), together with existing cash and cash equivalents, will be adequate
to support the Company's operations for the coming year. However, the amount and
timing of such activities are uncertain. Accordingly, no assurances can be given
as to the timing or success of the aforementioned plans, negotiations,
discussions and programs.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial statements for the interim periods have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. The Company believes that the disclosures
are adequate to make the information presented not misleading. It is suggested
that these condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K (which is available
on the Company's website www.ovonic.com).
The results of operations for the three-month and nine-month periods ended
March 31, 2004 and 2003 are not necessarily indicative of the results to be
expected for the full year.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of assets carrying
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern (see Note B).
Nature of Business
------------------
Energy Conversion Devices, Inc. (ECD) is a multidisciplinary business,
scientific, technical and manufacturing organization to commercialize products
based on its technologies. Its activities range from product development to
manufacturing and selling products, as well as designing and building production
machinery with an emphasis on alternative energy and advanced information
technologies.
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
Financial Statement Presentation, Principles of Consolidation and Equity
------------------------------------------------------------------------
Accounting
----------
The consolidated financial statements include the accounts of ECD and its
100%-owned thin-film amorphous silicon photovoltaic manufacturing and sales
subsidiaries United Solar Ovonic Corp. (previously called United Solar Systems
Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic LLC
(previously called Bekaert ECD Solar Systems LLC and 40% owned by United Solar
Ovonic Corp. prior to May 14, 2003) (jointly referred to as United Solar Ovonic)
(see Note E) and its approximately 91%-owned subsidiary Ovonic Battery Company,
Inc. (Ovonic Battery), a company formed to develop and commercialize ECD's
Ovonic nickel metal hydride (NiMH) battery technology (collectively the
"Company"). The remaining shares of Ovonic Battery are owned by Honda Motor
Company, Ltd., Sanoh Industrial Company, Ltd. and Sanyo Electric Co., Ltd. No
minority interest related to Ovonic Battery is recorded in the consolidated
financial statements because there is no additional funding requirement by the
minority shareholders.
The Company has a number of strategic alliances and has four major
investments accounted for using the equity method: (i) COBASYS LLC (formerly
known as Texaco Ovonic Battery Systems LLC), a joint venture between Ovonic
Battery and a unit of ChevronTexaco Corporation, each having 50% interest in the
joint venture, to manufacture and sell proprietary Ovonic NiMH batteries for
transportation and stationary applications; (ii) Texaco Ovonic Hydrogen Systems
LLC, a joint venture between ECD and a unit of ChevronTexaco Corporation, each
having 50% interest in the joint venture, to further develop and commercialize
Ovonic solid hydrogen storage technology; (iii) Ovonyx, Inc., a 41.7%-owned
joint venture with Mr. Tyler Lowrey, Intel Capital and other investors, to
further develop and commercialize ECD's Ovonic Unified Memory (OUM) technology;
and (iv) Ovonic Media, LLC, a joint venture owned 51% by General Electric
through its GE Plastics business unit and 49% by ECD, formed to design, develop,
demonstrate and commercialize our proprietary continuous web roll-to-roll
technology for ultra-high-speed manufacture of optical media products. In
addition, ECD has a 30% beneficial interest in ITS Innovative Transportation
Systems A.G. (ITS), a German company formed to manufacture battery-powered
electric vehicles, and has two 50%-owned joint ventures in Russia, Sovlux Co.,
Ltd. (Sovlux) and Sovlux Battery Closed-Stock Company (Sovlux Battery). See Note
E for discussions of all of the Company's ventures.
Intellectual property, including patents resulting from the Company's
investments in its technologies, is valued at zero in the balance sheet.
Intellectual property provides the foundation for the creation of the important
strategic alliances whereby the Company provides intellectual property and
patents and joint venture partners provide cash.
While the Company believes, based upon the opinion of legal counsel, that
it has no obligation to fund any losses that its joint ventures incur beyond the
Company's investment, the Company has decided to fund certain of its joint
ventures (see Note E).
9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
Upon consolidation, all intercompany accounts and transactions are
eliminated. Any profits on intercompany transactions are eliminated to the
extent of the Company's ownership percentage.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (U.S. GAAP)
requires management to make estimates and assumptions that affect amounts
reported therein. Due to the inherent uncertainty involved in making estimates,
actual results reported in future periods may be based upon amounts that differ
from those estimates.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform with fiscal
2004 presentation.
Other Nonoperating Income
-------------------------
Other nonoperating income-net consists of gains and losses on sales of
property, plant and equipment, amortization of deferred gains, rental income,
and other miscellaneous income.
Recent Pronouncements
---------------------
In April 2003, the Financial Accounting Statements Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which is
effective for contracts entered into or modified after June 30, 2003. This
statement amends and clarifies financial accounting and reporting for derivative
instruments. The Company implemented this Statement on July 1, 2003. The
adoption of this Statement did not have a material effect on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities & Equity," which
is effective for financial instruments entered into or modified after May 31,
2003 and is effective for the first interim period after June 15, 2003. The
Company implemented this Statement on July 1, 2003. The adoption of this
Statement did not have a material effect on the Company's consolidated financial
position or results of operations.
Off-Balance Sheet Arrangements
------------------------------
The Company has no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the registrant's
financial condition, changes in
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
NOTE B - Financings and Liquidity
---------------------------------
Since July 2003, we have implemented a series of initiatives aimed at
aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. In order to meet our cost-reduction
goals, we took the following actions:
o Reduced staffing by 15% at ECD and Ovonic Battery through reallocation
and reductions ($4,500,000 in annual savings).
o Changed the healthcare benefit program ($2,200,000 in annual savings).
o Implemented a salary freeze for all ECD and Ovonic Battery employees and
a 10% salary reduction by the executive management team ($1,900,000 in
annual savings).
o Reduced purchased services and contract employees.
o Lowered capital expenditures.
The Company is reviewing other areas for cost reduction, as well as
organizational changes to improve administrative and operating efficiencies.
In November 2003, the Company received $27,868,000 in connection with the
sale of 2,692,915 units of its securities to a group of three institutional
investors at an average price per unit of $10.35 based upon the closing price of
ECD Common Stock plus $.125. Each unit consists of one share of ECD Common Stock
and one warrant to purchase one share of ECD Common Stock for $13.96, if
exercised, on or prior to May 2, 2005 and for $16.03, if exercised, at any time
thereafter but prior to October 31, 2006.
On January 12, 2004, the Company received $5,593,000 in connection with
the sale of 573,339 units of its securities to two institutional investors who
participated in the November 2003 offering at a price per unit of $9.755. Each
unit consists of one share of ECD Common Stock and one warrant to purchase one
share of ECD Common Stock for $13.96, if exercised, on or prior to May 2, 2005
and for $16.03, if exercised, at any time thereafter but prior to October 31,
2006.
Nolan Securities Corporation acted as placement agent with respect to both
offerings and was paid $1,108,000 and issued 90,481 warrants on the same terms
as the warrants issued in the unit offering.
11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings and Liquidity (Continued)
---------------------------------------------
We filed a registration statement (related to the November sales of stock
and warrants) on Form S-1 with the Securities and Exchange Commission on
December 23, 2003 for the resale of the shares issued and the shares issuable
upon exercise of the warrants, which was declared effective on January 8, 2004.
We filed a registration statement (related to the January sales of stock and
warrants) on Form S-1 with the SEC on March 9, 2004, which the SEC declared
effective on March 12, 2004.
The Company has been using the proceeds from these sales for working
capital and to support its development and other operating activities.
The Company is engaged in a number of negotiations and discussions to fund
its operations, including raising additional capital through equity and debt
financings and forming new strategic alliances to fund and grow its photovoltaic
and other businesses. In addition, the Company is engaged in negotiations with
government agencies for contracts to fund its development activities. The
Company is also in discussions with third parties to refinance the 30MW
photovoltaic equipment. (See Management's Discussions and Analysis of Financial
Condition on Liquidity and Capital Resources.)
NOTE C - Accounts Receivable
----------------------------
March 31, June 30,
2004 2003
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Amounts billed to customers
Commercial customers $ 564,598 $ 564,598
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in the
subsequent month
U.S. Government 751,498 698,634
Commercial customers 172,113 9,060
----------- -----------
923,611 707,694
Amounts billed
U.S. Government 1,609,996 1,773,824
Amounts unbilled for other than long-term contracts
Commercial customers 1,730,731 1,892,532
Amounts billed for other than long-term contracts
Commercial customers 9,452,138 5,847,071
U.S. Government 163,379 -
----------- -----------
9,615,517 5,847,071
Allowance for uncollectible accounts (271,000) (265,000)
----------- -----------
TOTAL $14,173,453 $10,520,719
=========== ===========
12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable (Continued)
----------------------------------------
Certain contracts with the U.S. government require a retention that is
paid upon completion of an audit of the Company's indirect cost rates. Certain
contracts have been completed for more than 10 years and have not been audited.
U.S. Government retentions totaling $103,447 are included in long-term other
assets at March 31, 2004 and $103,947 at June 30, 2003. Most U.S. government
contracts remain subject to audit.
Accounts Receivable Due from Related Parties
--------------------------------------------
March 31, June 30,
2004 2003
------------ ------------
Amounts earned which are billed in the
subsequent month on long-term contracts
ChevronTexaco Technology Ventures $ 13,769 $ -
COBASYS 494,346 2,072,138
Texaco Ovonic Hydrogen Systems 858,673 1,603,147
---------- ----------
Sub-total 1,366,788 3,675,285
Amounts billed
COBASYS 453,215 3,221,059
Texaco Ovonic Hydrogen Systems 3,420 -
---------- ----------
Sub-total 456,635 3,221,059
Other unbilled
Ovonyx 16,864 412
Other billed
ChevronTexaco Technology Ventures 121,376 5,721
Ovonyx 24,145 48,053
COBASYS 18,072 18,386
Texaco Ovonic Hydrogen Systems 25,592 8,364
---------- ----------
Sub-total 189,185 80,524
---------- ----------
TOTAL $2,029,472 $6,977,280
========== ==========
Short-Term Note Receivable
--------------------------
In connection with the April 2000 investment in United Solar Ovonic Corp.
and United Solar Ovonic LLC by N.V. Bekaert S.A. and its U.S.-based subsidiary
(Bekaert): (1) Bekaert was obligated to invest an additional $12,000,000 in
United Solar Ovonic LLC no later than January 1, 2004, (2) United Solar Ovonic
LLC was required to pay ECD $12,000,000 no later than January 1, 2004, and (3)
ECD was required to pay Canon Inc. of Japan (Canon) $12,000,000 no later than
January 1, 2004. These noninterest-bearing notes were recorded in April 2000 at
a discounted value of $9,500,000 (using a discount rate of 6.3%). In May 2003,
we purchased Bekaert's 60% interest in United Solar Ovonic
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable (Continued)
----------------------------------------
LLC and 19% interest in United Solar Ovonic Corp. (see Note E). While ECD
continued to be contractually obligated to pay Canon, Bekaert agreed to pay the
$12,000,000 directly to Canon, which, when made, would satisfy Bekaert's
obligation to United Solar Ovonic LLC and ECD's obligation to Canon. On
January 2, 2004, Bekaert paid the $12,000,000 directly to Canon in full
satisfaction of Bekaert's obligation to United Solar Ovonic and ECD's obligation
to Canon.
NOTE D - Inventories
--------------------
Inventories for United Solar Ovonic Corp., United Solar Ovonic LLC and
Ovonic Battery are as follows:
March 31, June 30,
2004 2003
------------ ------------
Finished products $ 5,384,207 $ 5,282,156
Work in process 3,581,268 1,825,839
Raw materials 5,852,154 5,340,177
----------- -----------
$14,817,629 $12,448,172
=========== ===========
NOTE E - Joint Ventures and Investments
---------------------------------------
Joint Ventures
--------------
United Solar Ovonic
On May 14, 2003, ECD acquired Bekaert's 19% interest in United Solar
Ovonic Corp. and 60% interest in United Solar Ovonic LLC (bringing the Company's
interest in each of these joint ventures to 100%) for $6 million ($4 million
paid at closing and $2 million paid on December 22, 2003). Additionally, the
Company provided $40 million to United Solar Ovonic LLC to terminate its
sale-and-leaseback arrangement with LaSalle National Leasing Corporation and
another financial institution and, as a result, freed up the $25 million of
Company funds that had been restricted in support of its guarantee of the
LaSalle lease. Bekaert retained rights from United Solar Ovonic for its
technologies outside the field of photovoltaics and rights limited to build
sputtering machines outside the field of triple-junction photovoltaics. In
addition, Bekaert assigned to ECD its $12.2 million note receivable for its
bridge loans to United Solar Ovonic LLC.
Since May 14, 2003, ECD has been funding and continues to fund 100% of
United Solar Ovonic's cash requirements. Historically, as a consequence of ECD's
81% ownership of United Solar Ovonic Corp. and United Solar Ovonic Corp.'s 40%
membership interest in United Solar Ovonic LLC, the Company's financial results
have included approximately 50% of the combined operating losses of these
entities. After May 14, 2003, the Company has reflected 100% of the operating
losses of United Solar Ovonic. ECD is in discussions with
14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------
potential new equity investors to meet United Solar Ovonic's future cash
requirements, as well as refinance the 30MW equipment.
Ovonyx
In October 2002, ECD, through a newly formed company, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by ECD to Ovonyx and an exclusive, royalty-bearing license, which
requires annual minimum royalty payments in order to maintain its exclusivity.
ECD made a $50,000 minimum royalty payment in November 2003. ECD recorded its
$1,050,000 investment in Ovonyx and accounts for this investment on the equity
method and is recognizing its proportionate share of Ovonyx losses to the extent
of its $1,050,000 investment. In the three months and nine months ended March
31, 2004, ECD recorded an equity loss of $96,000 and $644,000, respectively,
related to its investment in Ovonyx. In the three months ended March 31, 2003
ECD recorded zero equity income and in the nine months ended March 31, 2003 ECD
recorded an equity loss of $280,000.
ECD recorded revenues from Ovonyx of $38,000 and $109,000, for the three
months and nine months ended March 31, 2004 representing compensation for
services provided to this joint venture. For the three months and nine months
ended March 31, 2003, ECD recorded revenues of $32,000 and $115,000,
respectively.
COBASYS (formerly Texaco Ovonic Battery Systems)
In July 2001, Ovonic Battery and ChevronTexaco formed a strategic alliance
named Texaco Ovonic Battery Systems LLC (renamed COBASYS LLC in March 2004).
ChevronTexaco will invest up to $178,000,000 ($124,000,000 of which has been
received as of March 31, 2004) in the venture. COBASYS is owned 50% by Ovonic
Battery and 50% by a unit of ChevronTexaco.
The Company recorded revenues from COBASYS of $916,000 and $4,267,000 for
the three months and nine months ended March 31, 2004, respectively, and
$3,338,000 and $8,803,000 for the three months and nine months ended March 31,
2003, respectively, for services performed on behalf of COBASYS (primarily for
advanced product development work).
The Company also recorded revenues from COBASYS of $45,000 and $135,000
for each of the three months and nine months ended March 31, 2004 and 2003,
respectively, for rent of a portion of one of the Company's facilities.
The following sets forth certain financial data regarding COBASYS that are
derived from its financial statements:
15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------
COBASYS LLC AND SUBSIDIARY
STATEMENTS OF OPERATIONS
-----------------------
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues
Product Sales $ 647,444 $ 392,461 $ 1,201,608 $ 565,956
Other Revenues 66,583 704,081 2,076,572 1,440,391
------------ ------------ ------------ ------------
Total Revenues 714,027 1,096,542 3,278,180 2,006,347
Expenses
Research and Development Costs 6,204,163 5,972,865 14,889,567 15,038,501
Other Expenses 3,174,805 4,115,526 10,841,045 11,819,779
------------ ------------ ------------ ------------
Total Expenses 9,378,968 10,088,391 25,730,612 26,858,280
------------ ------------ ------------ ------------
Net Loss $ (8,664,941) $ (8,991,849) $(22,452,432) $(24,851,933)
============ ============ ============ ============
COBASYS LLC AND SUBSIDIARY
BALANCE SHEETS
--------------
March 31, June 30,
2004 2003
------------ ------------
Current Assets:
Cash and Equivalents $ 262,892 $ 6,849,235
Accounts Receivable 1,312,602 145,972
Inventory 3,623,133 2,503,650
----------- -----------
Total Current Assets 5,198,627 9,498,857
Property, Plant and Equipment 33,133,134 30,496,884
Less Accumulated Depreciation (5,323,503) (3,311,109)
----------- -----------
Net Property, Plant and Equipment 27,809,631 27,185,775
Other Assets 590,393 85,180
----------- -----------
Total Assets $33,598,651 $36,769,812
=========== ===========
Liabilities and Members' Equity
Current Liabilities:
Amounts Due to Related Parties, Net $ 1,585,436 $ 4,639,003
Accounts Payable 4,489,756 4,910,191
Short-term Deferred Revenues 536,273 -
----------- -----------
Total Current Liabilities 6,611,465 9,549,194
Members' Equity 26,987,186 27,220,618
----------- -----------
Total Liabilities and Members' Equity $33,598,651 $36,769,812
=========== ===========
16
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------
Texaco Ovonic Hydrogen Systems
In October 2000, ECD and ChevronTexaco formed Texaco Ovonic Hydrogen
Systems. ChevronTexaco is funding $104,000,000 ($56,248,000 of which was
received as of March 31, 2004) for initial product and market development, the
primary use of which is to fund a contract from Texaco Ovonic Hydrogen Systems
to ECD to further develop the Ovonic solid hydrogen storage technology. The
joint venture is owned 50% by ChevronTexaco and 50% by ECD. ECD has contributed
intellectual property and licenses.
The following sets forth certain financial data regarding Texaco Ovonic
Hydrogen Systems that are derived from its financial statements.
TEXACO OVONIC HYDROGEN SYSTEMS LLC
STATEMENTS OF OPERATIONS
------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues
Prototype Sales $ 29,973 $ - $ 29,973 $ -
Other Income 2,122 7,519 7,245 9,594
------------ ------------ ------------ ------------
Total Revenues 32,095 7,519 37,218 9,594
Expenses
Product Development - Paid or
Payable to ECD 2,694,221 2,950,992 6,687,772 9,189,400
Product Development - Paid or
Payable to ChevronTexaco 303,145 1,261,046 579,119 2,035,922
Depreciation Expense 627,014 591,570 1,863,508 1,276,180
Loss on Disposal of Assets (44,000) - - -
------------ ------------ ------------ ------------
Total Expenses 3,580,380 4,803,608 9,130,399 12,501,502
------------ ------------ ------------ ------------
Net Loss $ (3,548,285) $ (4,796,089) $ (9,093,181) $(12,491,908)
============ ============ ============ ============
17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------
TEXACO OVONIC HYDROGEN SYSTEMS LLC
BALANCE SHEETS
--------------
March 31, June 30,
2004 2003
------------ ------------
Current Assets:
Cash and Equivalents $ 911,324 $ 1,742,437
Accounts Receivable 23,106 10,746
----------- -----------
Total Current Assets 934,430 1,753,183
Property, Plant and Equipment 9,767,357 9,501,712
Less Accumulated Depreciation (4,421,770) (2,556,428)
----------- ------------
Net Property, Plant and Equipment 5,345,587 6,945,284
----------- ------------
Total Assets $ 6,280,017 $ 8,698,467
=========== ===========
Current Liabilities:
Amount Due to Related Parties, Net $ 834,264 $ 2,130,446
Deferred Revenue 136,170 15,257
----------- -----------
Total Current Liabilities 970,434 2,145,703
Noncurrent Liabilities
Deferred Revenue 112,000 112,000
Members' Equity 5,197,583 6,440,764
----------- -----------
Total Liabilities and Members' Equity $ 6,280,017 $ 8,698,467
=========== ===========
During the three months and nine months ended March 31, 2004, the Company
recorded revenues of $1,975,000 and $6,738,000, respectively, for services
provided to this joint venture, primarily for advanced product development work
and market development work. During the three months and nine months ended March
31, 2003, the Company recorded revenues of $3,584,000 and $10,328,000,
respectively.
Ovonic Media
For the three months and nine months ended March 31, 2003, the Company
recorded revenues of $11,000 and $615,000, respectively, for services provided
to this joint venture for advanced product development work. GE informed the
Company that additional funding after January 3, 2003 was suspended. GE and ECD
have been discussing as how to best position the joint venture in order to meet
the needs of the marketplace, and secure new equity investors and strategic
partners to fund the joint venture's operations. As the next business step, we
are trying to secure a partner that is a leader in this industry to facilitate
the commercialization of our technology. In the interim, ECD is directly funding
continued product development activities for this technology at a reduced level.
18
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------
Investments in Rare Earth Ovonic
During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech. The agreement called for the creation of
joint ventures for manufacturing and licensing of advanced NiMH battery
technology, alloy powders, advanced Ovonic nickel hydroxide materials and
production equipment, all for certain battery applications for NiMH batteries.
As of March 31, 2004, three of the contemplated five joint ventures have been
formed. ECD and Ovonic Battery initially contributed technology for their 19%
interest in each of these joint ventures. In February 2002, ECD and Ovonic
Battery jointly made a proportionate $1,710,000 cash investment in the Rare
Earth Ovonic joint ventures and maintained their 19% interest in these entities.
All of these joint ventures are being accounted for using the cost method of
accounting.
In the first phase of the project, Ovonic Battery has three contracts
totaling $63,600,000 for supplying equipment and technology to its Rare Earth
Ovonic joint ventures in China. As of March 31, 2004, Ovonic Battery has
received payments totaling $59,484,000 under the three contracts.
The Company recorded revenues from Rare Earth Ovonic of $1,283,000 and
$3,172,000 for the three months and nine months ended March 31, 2004,
respectively, and $2,528,000 and $9,033,000 for the three months and nine months
ended March 31, 2003, respectively.
Ovonic Fuel Cell
On June 24, 2003, the Company acquired ChevronTexaco's interest in Texaco
Ovonic Fuel Cell Company LLC for $1, effective as of December 31, 2002. The
venture, which is now owned 100% by ECD, was renamed Ovonic Fuel Cell Company
LLC. Effective December 31, 2002, the Company has included the operations of
Ovonic Fuel Cell in its consolidated financial statements. ECD is continuing its
development work at a reduced level and is currently funding all development
costs.
During the nine months ended March 31, 2003, while ChevronTexaco was
funding the fuel cell operation, the Company recorded revenues of $3,940,000.
19
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Liabilities
--------------------
The Company estimates the liability for product warranty costs based upon
its past experience and best estimate of future warranty claims. The following
is a summary of the changes in the product warranty liability during the nine
months ended March 31, 2004 and 2003:
March 31,
2004 2003
------------ ------------
Liability beginning of the period $ 2,990,661 $ 2,489,024
Amounts accrued for as warranty costs
for the nine-month period (net) (1,093,228)* 122,961
Warranty claims (130,000) -
----------- -----------
Liability at March 31 $ 1,767,433 $ 2,611,985
=========== ===========
* During the nine months ended March 31, 2004, the Company revised
its estimated warranty liability (primarily on its Rare Earth
Ovonic contract), based upon its recent experience, and recorded
a reduction in this liability.
Warranty liability is recorded at the time that the product is sold (for
sales of photovoltaic products) and at the time that revenue is recognized (for
machine-building and equipment sales).
Government Contract Reserve
---------------------------
The Company's contracts with the U.S. government and its agencies are
subject to audits by the Defense Contract Audit Agency (DCAA). DCAA has audited
the Company's indirect rates, including its methodology of computing these
rates, for the years ended June 30, 1994 through June 30, 1998 for United Solar
Ovonic and the years ended June 30, 2000 and June 30, 2001 for ECD. In its
reports, DCAA has questioned the allowability of and the allocability of certain
costs as well as the Company's methodology for allocating independent research
and development to its indirect cost pools. In addition, DCAA has stated that
there could be penalties imposed. The Company, together with its government
consultants, is in the process of discussing each of these items in detail with
DCAA. Management believes that some of these DCAA assertions are without merit.
The Company has recorded a reserve of $1,757,000 at March 31, 2004 and
$1,682,000 at June 30, 2003 related to these issues.
20
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Nonrefundable Advance Royalties
----------------------------------------
At March 31, 2004 and June 30, 2003, the Company deferred recognition of
revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:
March 31, June 30,
2004 2003
------------ ------------
Battery $ 1,560,902 $ 1,560,902
Optical memory 1,531,109 1,947,093
----------- -----------
$ 3,092,011 $ 3,507,995
=========== ===========
Creditable royalties earned and recognized as revenue were:
Period Ended
March 31,
2004 2003
-------- --------
Three months ended $ 35,257 $ 7,414
Nine months ended $ 55,984 $107,507
In 2004, the Company also recognized royalties of $360,000 related to an
advance royalty payment received by the Company in 1985 associated with a
license agreement under which the licensee no longer has a contractual
obligation to make payments.
There are no obligations in connection with any of the advance royalty
agreements which require the Company to incur any additional costs.
NOTE H - Product Sales, Royalties, Revenues from Product Development Agreements,
--------------------------------------------------------------------------------
and License and Other Agreements
--------------------------------
The Company has product sales and business agreements with related parties
and with third parties for which royalties and revenues are included in the
consolidated statements of operations. Product sales include photovoltaic
products, revenues related to machine-building and equipment sales contracts,
nickel hydroxide and metal hydride materials. Revenues related to
machine-building and equipment sales contracts are recognized on the
percentage-of-completion method of accounting using the costs incurred to date
as a percentage of the total expected costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point. Currently, low sales volumes combined with high fixed costs result in
losses.
21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Product Sales, Royalties, Revenues from Product Development Agreements,
--------------------------------------------------------------------------------
and License and Other Agreements (Continued)
--------------------------------------------
A summary of all of the Company's revenues follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Product sales
Photovoltaics $ 6,966,658 $ - $18,321,912 $ -
Machine building and
equipment sales 1,283,041 2,545,269 3,251,837 9,256,306
Battery packs - 137,601 8,000 138,179
Nickel hydroxide and metal
hydride materials 334,533 218,424 1,065,578 562,213
------------ ------------ ------------ ------------
8,584,232 2,901,294 22,647,327 9,956,698
------------ ------------ ------------ ------------
Product sales-related parties
Photovoltaics - 1,767,488 - 4,128,850
Machine building - 141,756 - 446,440
Battery packs - - - 86,363
Nickel hydroxide and metal
hydride materials 627 46,613 3,049 85,378
------------ ------------ ------------ ------------
627 1,955,857 3,049 4,747,031
------------ ------------ ------------ ------------
Total product sales $ 8,584,859 $ 4,857,151 $22,650,376 $14,703,729
============ ============ ============ ============
Royalties
Battery technology $ 496,308 $ 494,857 $ 1,542,623 $ 1,374,237
Optical memory 479,458 35,334 501,902 55,288
------------ ------------ ------------ ------------
Total royalties $ 975,766 $ 530,191 $ 2,044,525 $ 1,429,525
============ ============ ============ ============
Revenues from product
development agreements
Photovoltaics $ 2,869,975 $ 453,883 $ 7,962,324 $ 1,717,236
Battery technology 531,767 595,849 1,426,325 2,258,453
Optical memory 80,465 - 201,541 36,411
Hydrogen 434,910 - 567,959 -
Other - 24,706 18,677 96,094
------------ ------------ ------------ ------------
3,917,117 1,074,438 10,176,826 4,108,194
------------ ------------ ------------ ------------
Revenues from product development
agreements - related parties
Battery technology 916,064 3,338,087 4,267,150 8,803,336
Optical memory - 10,660 - 615,330
Hydrogen 1,974,656 3,692,292 6,738,357 10,625,265
Fuel cells - (2,406) - 3,939,751
------------ ------------ ------------ ------------
2,890,720 7,038,633 11,005,507 23,983,682
------------ ------------ ------------ ------------
Total revenues from product
development agreements $ 6,807,837 $ 8,113,071 $21,182,333 $28,091,876
============ ============ ============ ============
License and other agreements
Battery technology $ - $ - $ 75,000 $ 150,000
Photovoltaics - - - 3,269,114
------------ ------------ ------------ ------------
Total license and other agreements $ - $ - $ 75,000 $ 3,419,114
============ ============ ============ ============
22
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Product Sales, Royalties, Revenues from Product Development Agreements,
--------------------------------------------------------------------------------
and License and Other Agreements (Continued)
--------------------------------------------
The following table presents revenues by country based on the location of
the customer:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
United States $ 9,535,025 $ 8,601,371 $31,316,707 $29,459,019
Germany 3,514,356 - 5,238,352 -
China 1,354,012 2,537,182 3,268,058 9,111,729
Japan 927,476 427,483 1,818,530 4,493,076
Hong Kong 360,879 712,346 1,169,029 712,346
Australia 308,400 - 727,548 -
United Kingdom 134,498 - 514,811 -
Kenya 97,446 - 208,349 -
Canada 92,045 - 280,690 -
Taiwan 1,808 - 123,992 -
Mexico - 1,767,488 - 4,128,850
Luxembourg (199,474) - 897,253 -
Other 418,706 (450,659) 860,835 22,627
----------- ----------- ----------- -----------
$16,545,177 $13,595,211 $46,424,154 $47,927,647
=========== =========== =========== ===========
23
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I - Other Comprehensive Income (Loss)
------------------------------------------
The Company's total comprehensive loss was as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Loss $(12,265,520) $ (9,075,629) $(39,963,528) $(18,291,485)
OTHER COMPREHENSIVE
INCOME (LOSS) (net of taxes):
Unrealized holding gains
arising during period - 694,872 - 1,448,255
Less: reclassification adjustments
for gains realized in net income - 26,268 431,153 648
------------ ------------ ------------ ------------
Net unrealized gains (losses) - 668,604 (431,153) 1,447,607
Foreign currency translation
adjustments 14,943 - 88,948 -
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $(12,250,577) $ (8,407,025) $(40,305,733) $(16,843,878)
============ ============ ============ =============
NOTE J - Stock Options
----------------------
Had compensation costs for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, the Company's
net loss and net loss per share for the three and nine months ended March 31,
2004 and 2003 would have increased as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Loss, as reported $(12,265,520) $ (9,075,629) $(39,963,528) $(18,291,485)
Add:
Total stock-based compensation
expense determined under fair
value based method, net of tax 1,028,081 1,454,253 3,036,748 2,845,769
------------ ------------ ------------ ------------
Pro-forma net loss $(13,293,601) $(10,529,882) $(43,000,276) $(21,137,254)
============ ============ ============ ============
Loss per share:
Basic and Diluted - as reported $ (.49) $ (.41) $ (1.70) $ (.84)
Basic and Diluted - pro forma $ (.53) $ (.48) $ (1.83) $ (.97)
24
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K - Basic and Diluted Net Loss Per Share
---------------------------------------------
Basic net loss per common share is computed by dividing the net loss by
the weighted average number of common shares outstanding. ECD uses the treasury
stock method to calculate diluted earnings per share. Potential dilution exists
from stock options and warrants. Weighted average number of shares outstanding
and basic and diluted earnings per share for the three months and nine months
ended March 31 are computed as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Weighted average number of
shares outstanding 25,122,487 21,901,776 23,505,848 21,899,875
Net loss before cumulative
effect of change in
accounting principle $(12,265,520) $(9,075,629) $(39,963,528) $(20,507,045)
Cumulative effect of change
in accounting principle - - - 2,215,560
------------ ----------- ------------- ------------
Net loss $(12,265,520) $(9,075,629) $(39,963,528) $(18,291,485)
============ =========== ============ ============
BASIC AND DILUTED NET LOSS
PER SHARE BEFORE
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE $ (.49) $ (.41) $ (1.70) $ (.94)
============= ========== ============ ============
BASIC AND DILUTED NET LOSS
PER SHARE $ (.49) $ (.41) $ (1.70) $ (.84)
============= ========== ============ ============
The per-share amount related to the cumulative effect of change in
accounting principle was $.10 (benefit) for both the basic net loss per share
and the diluted net loss per share for the nine months ended March 31, 2003.
Due to the Company's net losses, total weighted average shares of
potential dilutive securities of 21,701 and 5,491 for the three months ended
March 31, 2004 and 2003, respectively, and 69,886 and 18,679 for the nine months
ended March 31, 2004 and 2003, respectively, were excluded from the calculations
of diluted net loss per share as inclusion of these securities would have been
antidilutive to the net loss per share.
25
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Business Segments
--------------------------
The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar Ovonic, and the parent company, ECD. Ovonic Battery is involved
in developing and commercializing battery technology. United Solar Ovonic is
involved in manufacturing and selling photovoltaic products. ECD is involved in
microelectronics, fuel cells, hydrogen storage and photovoltaics technologies
and machine building. 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)
United
Ovonic Solar Consolidating
ECD Battery Ovonic Entries Consolidated
--------- --------- --------- ------------- --------------
Revenues
Three months ended
March 31, 2004 $ 3,779 $ 3,576 $ 9,232 $ (42) $ 16,545
March 31, 2003 4,519 7,361 2,139 (423) 13,596
Nine months ended
March 31, 2004 $ 11,332 $ 11,582 $ 25,090 $ (1,580) $ 46,424
March 31, 2003 18,335 22,496 8,827 (1,730) 47,928
Interest Income
Three months ended
March 31, 2004 $ 1,108 $ - $ 8 $ (1,054) $ 62
March 31, 2003 946 - 13 - 959
Nine months ended
March 31, 2004 $ 2,617 $ - $ 15 $ (1,997) $ 635
March 31, 2003 2,991 - 58 - 3,049
Interest Expense*
Three months ended
March 31, 2004 $ - $ - $ 457 $ (379) $ 78
March 31, 2003 - 18 62 - 80
Nine months ended
March 31, 2004 $ 373 $ - $ 2,538 $ (1,997) $ 914
March 31, 2003 - 71 259 - 330
-----------------------
* Excludes intercompany interest between ECD and Ovonic Battery.
26
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Business Segments (Continued)
--------------------------------------
United
Ovonic Solar Consolidating
ECD Battery Ovonic Entries Consolidated
--------- --------- --------- ------------- --------------
Operating Loss
Three months ended
March 31, 2004 $ (5,617) $ (3,468) $ (2,832) $ (163) $(12,080)
March 31, 2003 (6,301) (1,180) (1,866) - (9,347)
Nine months ended
March 31, 2004 $(18,077) $(13,146) $ (8,357) $ - $(39,580)
March 31, 2003 (14,020) (4,170) (1,581) - (19,771)
Equity in Net Income (Loss) of
Investees Under Equity Method
Three months ended
March 31, 2004 $ (96) $ - $ - $ - $ (96)
March 31, 2003 (54) - (1,597) 157 (1,494)
Nine months ended
March 31, 2004 $ (644) $ - $ (37) $ 37 $ (644)
March 31, 2003 (696) - (5,001) 469 (5,228)
Depreciation Expense
Nine months ended
March 31, 2004 $ 1,629 $ 534 $ 3,936 $ - $ 6,099
March 31, 2003 1,308 865 80 - 2,253
Capital Expenditures
Nine months ended
March 31, 2004 $ 1,727 $ 408 $ 697 $ - $ 2,832
March 31, 2003 6,564 844 48 - 7,456
Investments and Advances
in Equity Method Investees
March 31, 2004 $ - $ - $ - $ - $ -
March 31, 2003 5,590 - 25,332 - 30,922
Identifiable Assets
March 31, 2004 $137,561 $ 6,913 $109,362 $(131,754) $122,082
March 31, 2003 155,030 9,138 19,649 (13,345) 170,472
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------- -----------------------------------------------------------------------
of Operations
-------------
The following discussion should be read in conjunction with the
accompanying Quarterly Financial Information and Notes thereto and the Company's
Annual Report on Form 10-K for the year ended June 30, 2003 and is qualified in
its entirety by the foregoing. The results of operations for the three months
and nine months ended March 31, 2004 are not necessarily indicative of results
to be expected in future periods.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements
about our financial condition, results of operations, plans, objectives, future
performance and business. In addition, from time to time we and our
representatives have made or may make forward-looking statements orally or in
writing. The words "may," "will," "believes," "expects," "intends,"
"anticipates," "estimates," and similar expressions have been used in this
Quarterly Report to identify forward-looking statements.
We have based these forward-looking statements on our current expectations
with respect to future events and occurrences. Investors are cautioned that our
actual results in the future may differ materially from the expected results
reflected in our forward-looking statements. The expected results reflected in
our forward-looking statements are subject to various significant risks and
uncertainties, including the following:
o we need to obtain debt or additional equity financing to continue to
operate our business and financing may be unavailable, reduce our stock
price or be available only on disadvantageous terms;
o our licensees and joint venture partners may be unwilling or unable to
devote their financial resources and manufacturing and marketing
capabilities to commercialize products based on our technologies;
o we may be unable to continue to protect and maintain the proprietary
nature of our technology, or to convince others of the necessity of
licensing our technology without litigation;
o other companies may be successful in asserting patent infringement or
other claims against us which prevent us from commercializing products
based on our technology or which force us to make royalty or other
payments to competitors;
o other companies may develop competing technologies which cause our
technology to become obsolete or non-competitive;
o we may be unable to successfully execute our internal business plans;
o we may experience performance problems with key suppliers or
subcontractors;
o adverse changes may occur in general economic conditions or in
political or competitive forces affecting our business;
o competition may increase in our industry or markets;
28
o our government product development or research contracts may be
terminated by unilateral government action or we may be unsuccessful in
obtaining new government contracts to replace those which have been
terminated or completed;
o we may become subject to legal or regulatory proceedings which may
reach unfavorable resolutions;
o there may be adverse changes in the securities markets which affect
the price of our stock;
o we may suffer the loss of key personnel or may be unable to attract
and retain qualified personnel to maintain and expand our business;
o our product development and commercialization programs involve a number
of uncertainties and we may never generate sufficient revenues to
become profitable;
o we may not achieve the designed output capabilities of certain
manufacturing equipment designed and built by us;
o we rely on collaborative relationships and termination of any of these
relationships and the underlying contracts could reduce the financial
resources available to us, including future revenues;
o some of our key technologies have not been used to produce commercial
products and may not be capable of producing such products;
o our commercialization programs will require substantial additional
future funding which could hurt our operational and financial
condition;
o future sales of our securities may depress the price of our securities;
or
o our securities may not allow our holders to receive a return on such
securities other than through the sale of the securities.
There is also the risk that we incorrectly analyze these risks or that
strategies we develop to address them are unsuccessful.
These forward-looking statements speak only as of the date of this
Quarterly Report. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified in their
entirety by the cautionary statements in this section. Because of these risks,
uncertainties and assumptions, you should not place undue reliance on these
forward-looking statements. We are not obligated to update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
Results of Operations
Overview
--------
The Company has continued to invest to further advance its technologies.
These investments in its technologies have led to strategic alliances with
companies such as ChevronTexaco, General Electric and China's Rare Earth
High-Tech Co., Ltd. of Baotou Steel Company and our Ovonyx joint venture which
includes Intel. In accordance with accounting principles generally accepted in
the United States of America (U.S. GAAP), the
29
investments the Company makes in developing its technologies are expensed as
research and development expense in the periods in which they are incurred
and the value of these technologies are not carried as assets on the Company's
balance sheet.
The Company had a net loss of $12,266,000 on revenues of $16,545,000 in
the three months ended March 31, 2004 compared to a net loss of $9,076,000 on
revenues of $13,595,000 in the three months ended March 31, 2003. The Company
had a net loss of $39,964,000 on revenues of $46,424,000 in the nine months
ended March 31, 2004 compared to a net loss of $18,291,000 on revenues of
$47,928,000 in the nine months ended March 31, 2003.
The $3,190,000 and $21,672,000 increase in net loss for the three months
and nine months ended March 31, 2004, respectively, resulted primarily from the
following:
o United Solar Ovonic is fully consolidated in the 2004 results because
of the May 14, 2003 acquisition of our former partner's interests,
whereas the 2003 loss included approximately 50% of United Solar
Ovonic's loss. Had United Solar Ovonic been fully consolidated in 2003,
the Company would have reported losses that were $3,083,000 and
$6,106,000 higher for the three-month and nine-month period ended March
31, 2003.
o Partially offsetting the above is an improvement in United Solar
Ovonic's operating performance resulting in a reduced operating loss
for the three months and nine months ended March 31, 2004 of
approximately $2,151,000 and $4,884,000, respectively, compared to 2003
due to higher revenues and cost reductions in 2004.
o Selling, general and administrative expenses (net) increased by
$4,360,000 and $6,625,000 for the three months and nine months ended
March 31, 2004. This was caused, in part, by the aforementioned
consolidation of United Solar Ovonic ($1,813,000 increase for the
quarter and $5,298,000 increase for the year-to-date). The remainder
of the increase in selling, general and administrative expenses (net)
results from reduced allocations of the expenses to cost of revenues
from product development agreements, partially offset by savings in
connection with our cost containment program. Selling expenses for
2003 were lower as a result of a contractual agreement reducing such
expenses in connection with equipment sales.
o A decrease for the nine months ended March 31, 2004, to $75,000 for
revenues from license and other agreements compared to $3,419,000 in
2003.
o Patent defense costs for the three months ended March 31, 2004
decreased by $598,000 while for the nine months ended March 31, 2004
they increased by $3,964,000 as compared to the same periods last year,
primarily due to the arbitration with Matsushita Battery Industrial
Co., Ltd. (MBI) and its related parties which is expected to be
completed in July 2004 as the parties are engaged in settlement
negotiations.
30
o Increased net product and development expenses for the nine months
ended March 31, 2004 of $2,936,000 due to reduced funding from third
parties in 2004.
o Reduced interest income for the three months and nine months ended
March 31, 2004 of $896,000 and $2,414,000, respectively, due to lower
levels of investments and lower interest rates in 2004.
o Income of $2,216,000 in 2003 attributable to the cumulative effect of a
change in accounting principle.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
-------------------------------------------------------------------------------
The loss from operations increased to $12,080,000 in 2004 from $9,347,000
in 2003 because of:
o an increased operating loss of $966,000 for United Solar Ovonic
(operating loss of $2,832,000 in 2004 versus operating loss of
$1,866,000 in 2003) primarily due to the impact of 100% ownership of
United Solar Ovonic in 2004, start-up and other costs, including
depreciation expense associated with increasing production capacity,
partially offset by $2,151,000 reduction in its loss from operations
due to higher revenues and cost reductions in 2004;
o an increased operating loss of $2,288,000 for Ovonic Battery (an
operating loss of $3,468,000 in 2004 versus operating loss of
$1,180,000 in 2003) primarily resulting from lower revenues from the
profitable equipment contract with Rare Earth Ovonic in 2004 compared
to 2003 and lower revenues from product development agreements,
partially offset by $598,000 in lower costs in 2004 for patent defense.
o a reduced operating loss of $5,617,000 in 2004 for the ECD segment
versus the operating loss of $6,301,000 in 2003, primarily due to the
Company's cost containment initiatives, lower costs relating to the
30MW production equipment produced for United Solar Ovonic, and an
increase in royalties relating to an advance royalty payment associated
with a license agreement under which the licensee no longer has a
contractual obligation to make royalty payments.
The increase in consolidated revenues primarily resulted from increases in
product sales of $3,728,000, other revenues of $82,000, and royalties of
$446,000, partially offset by a reduction in revenues from product development
agreements of $1,305,000. (See Note H of Notes to Consolidated Financial
Statements - Product Sales, Royalties, Revenues from Product Development
Agreements, and License and Other Agreements and Note L - Business
Segments.)
o United Solar Ovonic's 2004 revenues increased substantially, as a
result of consolidation of United Solar Ovonic LLC's operating results
into the Company's operating results following the May 14, 2003
acquisition ($9,232,000 in 2004 versus $2,139,000 in 2003). A major
component of the increase resulted from higher product sales
($6,967,000 in 2004 from $1,767,000 in 2003, $2,686,000 of the increase
resulted from consolidating third-party sales in 2004 and $2,514,000
due to higher third-party sales). Third-party product sales are
included in revenues in 2004
31
while they were not in 2003. Also contributing to higher revenues in
2004 were revenues from product development agreements, principally
from an Air Force contract ($1,430,000) to develop new solar cell
technology to be used in space and airship vehicles.
o The $3,785,000 decrease in Ovonic Battery's revenues was primarily due
to lower equipment sales to Rare Earth Ovonic ($1,283,000 in 2004
versus $2,528,000 in 2003) due to the near completion of phase one of
this program and reduced revenues from product development agreements
($1,448,000 in 2004 versus $3,934,000 in 2003) principally related to
decreased activities under the advanced product development agreement
from COBASYS.
o The ECD segment's revenues, net of consolidating entries, decreased to
$3,737,000 in 2004 from $4,096,000 in 2003, primarily due to a decrease
of $844,000 from revenues from product development agreements,
partially offset by increased royalties. The decrease in revenues from
product development agreements primarily resulted from reduced revenues
from Texaco Ovonic Hydrogen Systems ($1,975,000 in 2004 compared to
$3,584,000 in 2003), partially offset by two new contracts with the
National Institute of Standards and Technology (NIST) and the
Department of Defense (DoD) (the three totaling $582,000).
Product sales, consisting of photovoltaic products, machine building and
equipment sales, and nickel hydroxide and metal hydride materials, increased 77%
to $8,585,000 in the three months ended March 31, 2004 from $4,857,000 in the
three months ended March 31, 2003. Photovoltaic sales were $6,967,000 for 2004,
which were sales to third parties, and $1,767,000 for 2003, which were sales to
an affiliate. Machine-building and equipment sales revenues decreased 52% to
$1,283,000 in 2004 from $2,687,000 in 2003, primarily due to Ovonic Battery
contracts with Rare Earth Ovonic to provide battery-manufacturing equipment, the
first phase of which is nearing completion, ($1,283,000 in 2004 compared to
$2,528,000 in 2003). All machine-building and equipment sales contracts are
accounted for using percentage-of-completion accounting. Sales of nickel
hydroxide and metal hydride materials increased to $335,000 in 2004 compared to
$265,000 in 2003. (See Note H of Notes to Consolidated Financial Statements.)
The Company currently has a product sales backlog of $7,821,000, $6,097,000 of
which is expected to be recognized as revenues in fiscal 2004.
Royalties increased 84% to $976,000 in the three months ended March 31,
2004 from $530,000 in the three months ended March 31, 2003. Higher royalties
reflect a payment for optical memory royalties from a licensee who had not
previously made payments and covered amounts owed for a four-year period. The
Company also recognized in 2004 royalties of $360,000 related to an advance
royalty payment received by the Company in 1985 associated with a license
agreement under which the licensee no longer has an obligation to make royalty
payments.
Revenues from product development agreements decreased 16% to $6,808,000
in the three months ended March 31, 2004 from $8,113,000 in the three months
ended March 31, 2003, primarily due to reduced battery activities under advanced
product development agreements with COBASYS ($916,000 for 2004 compared to
$3,338,000 in 2003) and a decrease in revenues from Texaco Ovonic Hydrogen
Systems ($1,975,000 for 2004
32
compared to $3,584,000 for 2003), partially offset by increased photovoltaic
product development revenues in 2004 ($2,870,000 compared to $454,000 in 2003),
primarily due to an Air Force contract ($1,430,000) to develop new solar cell
products to be used in space and airship applications.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues increased to $177,000 in the three
months ended March 31, 2004 from $95,000 in the three months ended March 31,
2003, primarily due to increased laboratory billings to third parties.
Cost of product sales increased by $4,133,000 in the three months ended
March 31, 2004 ($10,052,000 in 2004 compared to $5,918,000 in 2003). This
resulted in a loss of $1,467,000 on product sales in 2004 compared to a loss of
$1,061,000 in 2003, primarily from costs associated with the optimization of the
30MW production equipment and lower sales from a profitable equipment sales
contract with Rare Earth Ovonic, partially offset by improved margins on
photovoltaic sales (negative margins of $590,000 on sales of finished products
in 2004 compared to negative margins of $1,132,000 on sales of semi-finished
products to an affiliate in 2003).
Revenues from product development agreements currently fund 56% of the
Company's cost of product development as the Company continues to develop its
core technologies. Revenues from product development agreements decreased by
$1,305,000, and spending decreased by $2,307,000, resulting in a decrease of
$1,002,000 in net cost of product development.
Three Months Ended
March 31,
2004 2003
----------- -----------
Cost of revenues from product
development agreements $ 6,566,000 $ 8,673,000
Product development and research 5,538,000 5,738,000
----------- -----------
Total cost of product development 12,104,000 14,411,000
Revenues from product development
agreements 6,808,000 8,113,000
----------- -----------
Net cost of product development $ 5,296,000 $ 6,298,000
=========== ===========
The expenditures continued the development of the Company's core
technologies in energy storage, energy generation and information technology.
Product development programs include work on the Ovonic Cognitive Computer
technology - a unique approach to develop computing based on the learning
capability that mimics the functionality of the human brain to combine memory
and processing in a single sub-micron device. The Company is also developing a
unique 3-terminal Ovonic threshold/memory device technology to have high speed,
high current capabilities. Included in the development costs for the Ovonic
Cognitive Computer technology is depreciation ($227,000) related to the new
state-of-the-art clean room and the related equipment.
33
Expenses were incurred in 2004 and 2003 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. Total patent expenses (net) decreased to $1,511,000 in the three
months ended March 31, 2004 from $2,015,000 in the three months ended March 31,
2003, principally due to lower patent defense costs ($887,000 in 2004 versus
$1,486,000 in 2003) for the protection of the Company's NiMH battery patents and
technology. ChevronTexaco has agreed to share 50% of the patent defense costs
relating to batteries for non-consumer applications beginning in fiscal 2002.
ChevronTexaco's share of the patent defense costs were $1,587,000 and $770,000
for the three months ended March 31, 2004 and 2003, respectively. In March 2001,
Ovonic Battery filed suit against Matsushita Battery Industrial Co., Ltd.,
Toyota Motor Corporation, Panasonic EV Energy Co., Ltd. and several related
entities for infringement of patents held by Ovonic Battery. In October 2001,
COBASYS LLC joined the litigation as a co-plaintiff. In December 2002, we and
our related companies entered into an arbitration agreement with Matsushita
Battery Industrial Co., Ltd. and its related companies and Toyota Motor
Corporation and a related company. The arbitration proceeding was held in New
York City, with a hearing before the Arbitral Tribunal in November 2003. Post
trial briefs were filed in December and closing oral arguments were delivered on
January 21, 2004. The parties to the arbitration have requested that the
Arbitral Tribunal postpone its decision until July 2004 because the parties are
engaged in settlement negotiations. It is expected that the Company will not
incur significant expenses associated with the arbitration after the fourth
fiscal quarter.
Selling, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
The increase in selling, general and administrative expenses (net) to
$4,959,000 in the three months ended March 31, 2004 from $598,000 in the three
months ended March 31, 2003 was due primarily to $2,120,000 increased gross
expenses associated with United Solar Ovonic, primarily as a result of
consolidation of United Solar Ovonic LLC following the May 14, 2003 acquisition
and decreased allocations ($1,707,000) to product development research and cost
of revenue from product development agreements, partially offset by savings in
connection with our cost containment program. Selling expenses for 2003 were
lower as a result of a contractual agreement reducing such expenses in
connection with equipment sales.
The following is a summary of the gross selling, general and
administrative expenses and the aforementioned allocations:
Three Months Ended
March 31,
2004 2003
------------ ------------
Gross Expenses $ 7,666,000 $ 5,012,000
Less - allocations to product development
and research (2,283,000) (1,768,000)
- allocations to cost of revenues from
product development agreements (424,000) (2,646,000)
----------- -----------
Net Expenses $ 4,959,000 $ 598,000
=========== ===========
34
The $457,000 decrease in other income (net) ($185,000 expense in 2004
compared to $272,000 income in 2003) resulted primarily from lower interest
income ($62,000 in 2004 compared to $959,000 in 2003) due to lower short-term
investments and lower interest rates, partially offset by lower equity losses
attributed to losses at ITS (zero in 2004 compared to $53,000 in 2003), at
United Solar Ovonic LLC (zero in 2004 - fully consolidated in 2004 and no longer
on the equity basis - compared to $1,441,000 in 2003) and higher equity losses
at Ovonyx ($96,000 in 2004 versus zero in 2003).
Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003
-----------------------------------------------------------------------------
The loss from operations increased to $39,580,000 in 2004 from $19,771,000
in 2003 because of:
o An increased operating loss of $6,776,000 for United Solar Ovonic
(operating loss of $8,357,000 in 2004 versus an operating loss of
$1,581,000 in 2003) primarily due to the impact of 100% ownership of
United Solar Ovonic in 2004, a license fee of $3,269,000 in 2003,
start-up and other costs, including depreciation expense associated
with increasing production capacity, partially offset by $4,884,000
improvement in United Solar Ovonic's loss from operations due to higher
revenues and cost reductions in 2004.
o An increased operating loss of $8,976,000 for Ovonic Battery (operating
loss of $13,146,000 in 2004 versus operating loss of $4,170,000 in
2003) primarily from lower revenues for the profitable equipment
contract with Rare Earth Ovonic in 2004 compared to 2003, lower
revenues from product development agreements and $3,964,000 in higher
costs for patent defense, partially offset by higher royalties and
higher sales of nickel hydroxide in 2004.
o An operating loss of $18,077,000 in 2004 for the ECD segment versus
operating loss of $14,020,000 in 2003, primarily due to higher
investment in product development as the Company received reduced
funding from third parties in 2004.
The decrease in consolidated revenues primarily resulted from a reduction
in revenues from product development agreements of $6,910,000, decreased license
and other agreements ($75,000 in 2004 versus $3,419,000 in 2003), partially
offset by a $7,947,000 increase in product sales and a $615,000 increase in
royalty revenues. (See Note H - Product Sales, Royalties, Revenues from Product
Development Agreements, and License and Other Agreements and Note L - Business
Segments.)
o United Solar Ovonic's 2003 revenues increased substantially, as a
result of consolidation of United Solar Ovonic LLC's operating results
into the Company's operating results following the May 14, 2003
acquisition, to $25,090,000 in 2004 versus $8,827,000 in 2003. A major
component of the increase resulted from higher product sales
($18,322,000 in 2004 from $4,129,000 in 2003; $8,661,000 of the
increase resulted from consolidating third-party sales in 2004 and
$5,532,000 due to higher third-party sales). Third-party product sales
are included in revenues in 2004 while they were not in 2003. Also
contributing to higher revenues in 2004 were revenues from product
development agreements, principally from the recently signed
35
Air Force contract (revenues of $5,304,000). The 2003 revenues
included a license fee of $3,269,000.
o The $10,914,000 decrease in Ovonic Battery's revenues was primarily due
to lower equipment sales to Rare Earth Ovonic ($3,172,000 in 2004
versus $9,033,000 in 2003) due to the near completion of phase one of
this program, reduced revenues from product development agreements
($5,693,000 in 2004 versus $11,062,000 in 2003) principally related to
decreased activities under the advanced product development agreement
from COBASYS.
o The ECD segment's revenues, net of consolidating entries, decreased to
$9,752,000 in 2004 from $16,605,000 in 2003, primarily due to a
decrease of $6,845,000 from product development agreements, which was
due to reduced revenues for Ovonic Fuel Cell Company (zero in 2004
compared to $3,940,000 in 2003), Texaco Ovonic Hydrogen Systems
($6,738,000 in 2004 compared to $10,328,000 in 2003) and Ovonic Media
(zero in 2004 compared to $615,000 in 2003). Partially offsetting
these reductions are a new contract with NREL ($752,000 in 2004 versus
zero in 2003) and two new contracts with NIST ($388,000 in 2004 versus
zero in 2003).
Product sales, consisting of photovoltaic products, machine building and
equipment sales, and nickel hydroxide and metal hydride materials, increased 54%
to $22,650,000 in the nine months ended March 31, 2004 from $14,704,000 in the
nine months ended March 31, 2003. Photovoltaic sales were $18,322,000 for 2004,
which were sales to third parties, and $4,129,000 for 2003, which were sales to
an affiliate. Machine-building and equipment sales revenues decreased 66% to
$3,252,000 in 2004 from $9,703,000 in 2003, primarily due to Ovonic Battery
contracts with Rare Earth Ovonic to provide battery-manufacturing equipment, the
first phase of which is nearing completion, ($3,172,000 in 2004 compared to
$9,033,000 in 2003). All machine-building and equipment sales contracts are
accounted for using percentage-of-completion accounting. Sales of nickel
hydroxide and metal hydride materials increased to $1,069,000 in 2004 compared
to $648,000 in 2003. (See Note H of Notes to Consolidated Financial Statements.)
The Company currently has a product sales backlog of $7,821,000, $6,097,000 of
which is expected to be recognized as revenues in fiscal 2004.
Royalties increased 43% to $2,045,000 in the nine months ended March 31,
2004 from $1,430,000 in the nine months ended March 31, 2003. Higher royalties
reflect higher sales of large propulsion batteries by one of our licensees and
payment for optical memory royalties from a licensee who had not previously made
payments that covered amounts owed for a four-year period. The Company also
recognized in 2004 royalties of $360,000 related to an advance royalty payment
received by the Company in 1985 associated with a license agreement under which
the licensee no longer has an obligation to make royalty payments.
Revenues from product development agreements decreased 25% to $21,182,000
in the nine months ended March 31, 2004 from $28,092,000 in the nine months
ended March 31, 2003 primarily due to reduced battery activities under advanced
product development agreements with COBASYS ($4,267,000 for 2004 compared to
$8,803,000 in 2003), the suspension of funding to Ovonic Media (zero in 2004
versus $615,000 in 2003), a decrease
36
in revenues from Texaco Ovonic Hydrogen Systems ($6,738,000 for 2004 compared
to $10,328,000 for 2003) and Ovonic Fuel Cell (zero for 2004 - Ovonic Fuel Cell
is now 100% owned and included in our consolidated financial results - compared
to $3,940,000 for 2003). These decreases were partially offset by increased
photovoltaic product development revenues in 2004 ($7,962,000 compared to
$1,717,000 in 2003), primarily due to the new Air Force contract ($5,304,000),
a new contract with NREL ($752,000 in 2004 versus zero in 2003) and two new
contracts with NIST ($388,000 in 2004 versus zero in 2003).
Revenues from license and other agreements decreased to $75,000 in the
nine months ended March 31, 2004, from $3,419,000 in the nine months ended March
31, 2003. The 2004 license fees resulted from licenses to Linghao Battery and
Mcnair-tech Co., Ltd. of China. Revenues from license and other agreements
depend on a small number of new business arrangements, are sporadic and vary
dramatically from period to period. The license revenue in 2003 resulted from
United Solar Ovonic issuing to Canon a notice whereby United Solar Ovonic
granted Canon rights to manufacture in two countries of its choice in Southeast
Asia, excluding India and the People's Republic of China. This notice was issued
in satisfaction of the outstanding obligation ($2,500,000 plus accrued interest
of $769,000) due Canon in connection with a previous loan made to United Solar
Ovonic by Canon. United Solar Ovonic recorded the satisfaction of the loan from
Canon ($3,269,000) as revenue from license agreements in its statement of
operations for the nine months ended March 31, 2003.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of the
Company's joint ventures. Other revenues increased to $472,000 in the nine
months ended March 31, 2004 from $283,000 in the nine months ended March 31,
2003, primarily due to increased laboratory billings to third parties.
Cost of product sales increased by $11,813,000 in the nine months ended
March 31, 2004 ($28,027,000 in 2004 compared to $16,214,000 in 2003). This
resulted in an increased loss on product sales of $5,376,000 in 2004 compared to
a loss of $1,510,000 in 2003. There were negative margins on photovoltaic sales
of $2,743,000 on sales of finished products in 2004 compared to negative margins
of $1,843,000 on sales of semi-finished products to an affiliate in 2003, as
well as planned optimization costs of $1,530,000 for the photovoltaic production
machine. In addition, the margin on sales at Ovonic Battery decreased to
negative $1,203,000 in 2004 from positive $562,000 in 2003 due to negative
margins on sales of metal hydride materials because of low sales volumes and
high fixed costs and lower revenues on equipment sales because of the near
completion of the first phase of the profitable Rare Earth Ovonic contract.
Revenues from product development agreements currently fund 56% of the
Company's cost of product development as the Company continues to develop its
core technologies. Revenues from product development agreements decreased by
$6,910,000, and spending decreased by $3,974,000, resulting in an increase of
$2,936,000 in net cost of product development.
37
Nine Months Ended
March 31,
2004 2003
---------- -----------
Cost of revenues from product
development agreements $19,696,000 $27,556,000
Product development and research 18,204,000 14,318,000
----------- -----------
Total cost of product development 37,900,000 41,874,000
Revenues from product development
agreements 21,182,000 28,092,000
----------- -----------
Net cost of product development $16,718,000 $13,782,000
=========== ===========
The expenditures continued the development of the Company's core
technologies in energy storage, energy generation and information technology.
Product development programs include work on the Ovonic Cognitive Computer
technology - a unique approach to develop computing based on the learning
capability that mimics the functionality of the human brain to combine memory
and processing in a single sub-micron device. The Company is also developing a
unique 3-terminal Ovonic threshold/memory device technology to have high speed,
high current capabilities. Included in the development costs for the Ovonic
Cognitive Computer technology is depreciation ($736,000) related to the new
state-of-the-art clean room and the related equipment. The Company, together
with ChevronTexaco, has modified and demonstrated a hybrid electric vehicle (a
2002 Toyota Prius) to operate on clean hydrogen fuel stored in an Ovonic solid
hydrogen system. This on-board solid storage system can potentially be applied
to hydrogen-powered fuel cell vehicles and demonstrates the principles of
utilizing metal hydrides to address hydrogen infrastructure.
Expenses were incurred in 2004 and 2003 in connection with the protection
of the Company's United States and foreign patents covering its proprietary
technologies. Total patent expenses increased to $7,937,000 in the nine months
ended March 31, 2004 from $4,097,000 in the nine months ended March 31, 2003,
principally due to higher patent defense costs ($6,359,000 in 2004 versus
$2,394,000 in 2003) for the protection of the Company's NiMH battery patents and
technology. ChevronTexaco has agreed to share 50% of the patent defense costs
relating to batteries for non-consumer applications beginning in fiscal 2002.
ChevronTexaco's share of the patent defense costs were $7,705,000 and $1,509,000
for the nine months ended March 31, 2004 and 2003, respectively. In March 2001,
Ovonic Battery filed suit against Matsushita Battery Industrial Co., Ltd.,
Toyota Motor Corporation, Panasonic EV Energy Co., Ltd. and several related
entities for infringement of patents held by Ovonic Battery. In October 2001,
COBASYS joined the litigation as a co-plaintiff. In December 2002, we and our
related companies entered into an arbitration agreement with Matsushita Battery
Industrial Co., Ltd. and its related companies and Toyota Motor Corporation and
a related company. The arbitration proceeding was held in New York City, with a
hearing before the Arbitral Tribunal in November 2003. Post trial briefs were
filed in December and closing oral arguments were delivered on January 21, 2004.
The parties to the arbitration have requested that the Arbitral Tribunal
postpone its decision until July 2004 because the parties are engaged in
settlement negotiations. It is expected that the Company will not incur
significant expenses associated with the arbitration after the fourth fiscal
quarter.
38
Selling, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
Selling, general and administrative expenses (net) increased from
$5,515,000 in the nine months ended March 31, 2003 to $12,139,000 in the nine
months ended March 31, 2004. As a result of consolidation of United Solar Ovonic
LLC following the May 14, 2003 acquisition, gross selling, general and
administrative expenses increased by $5,006,000 and net expenses by $4,170,000.
The remainder of the increase in net selling, general and administrative
expenses resulted from lower allocations to product development and research and
cost of revenues from product development agreements. Selling expenses for 2003
were lower as a result of a contractual agreement reducing such expenses in
connection with equipment sales.
The following is a summary of the gross selling, general and
administrative expenses and the aforementioned allocations:
Nine Months Ended
March 31,
2004 2003
----------- -----------
Gross Expenses $22,767,000 $17,510,000
Less - allocations to product development
and research (6,985,000) (5,807,000)
- allocations to cost of revenues from
product development agreements (3,643,000) (6,188,000)
----------- -----------
Net Expenses $12,139,000 $ 5,515,000
=========== ===========
The $352,000 improvement in other income (net) ($384,000 expense in 2004
compared to $736,000 expense in 2003) resulted primarily from lower equity
losses attributed to losses at ITS (zero in 2004 compared to $416,000 in 2003),
at United Solar Ovonic LLC (zero in 2004 - fully consolidated in 2003 and no
longer on the equity basis - compared to $4,532,000 in 2003) and higher equity
losses at Ovonyx ($644,000 in 2004 versus $280,000 in 2003), partially offset by
lower short-term investments and lower interest rates causing lower interest
income ($635,000 in 2004 compared to $3,049,000 in 2003) on the Company's
investments.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 required the
Company to recognize, at the adoption of SFAS 142, the unamortized negative
goodwill of approximately $2,216,000 (a favorable benefit) as the cumulative
effect of a change in accounting principle in the Company's statements of
operations on July 1, 2002.
Liquidity and Capital Resources
As of March 31, 2004, the Company had consolidated cash, cash equivalents,
short-term investments and accounts and short-term note receivable (including
$2,029,000 of amounts due from related parties) of $34,521,000, a decrease of
$29,975,000 from June
39
30, 2003. As of March 31, 2004, the Company had consolidated working capital of
$34,174,000 compared with a consolidated working capital of $37,795,000 as of
June 30, 2003.
In November 2003, the Company received a total of $27,940,000 in
connection with a sale of units to institutional investors. In January 2004, the
Company received $5,593,000 in connection with a sale of additional units of its
securities to two of the institutional investors who had acquired units in
November 2003 (see Note B of Notes to Consolidated Financial Statements).
The Company has been using the proceeds from these sales for working
capital and to support its development and other operating activities.
The Company expects the amount of cash to be received under existing
product development agreements in the year ending June 30, 2004 to decrease to
approximately $27,500,000, compared to $42,383,000 received in the year ended
June 30, 2003, substantially due to reduced funding to be received in the year
ending June 30, 2004 from ChevronTexaco. Certain of the Company's product
development and product purchase agreements contain provisions allowing for the
termination of such agreements for, among other things, failure of the Company
to meet agreement milestones or for breach of material contractual provisions.
Generally, the termination provisions allow for the Company to recover any costs
incurred through the termination date.
The Company is engaged in discussions and negotiations with other parties,
including the U.S. government, which are expected to provide additional funding
for product development activities.
In September 2003, ECD was awarded two new contracts by NIST. One contract
is a three-year, cost-sharing contract (ECD to receive $1,972,000) for the
development of new optical routing devices, based on ECD's phase-change
materials, for telecommunication and broadband information delivery. The second
contract is a four-year, cost-sharing contract (ECD to receive $2,645,000) with
GE as the team leader for further development of ECD's roll-to-roll processing
for the mass production of products such as flexible electronic paper displays,
portable TV screens the size of posters, embedded sensors, solar powered cells
and high-efficiency lighting devices.
In October 2003, ECD was awarded a contract for $500,000 by the U.S. Army
Tank-Automotive and Armaments Command for the development, on behalf of Texaco
Ovonic Hydrogen Systems, of a transportable, solid-hydrogen storage and
refueling system for hydrogen fuel-cell-powered, off-road military vehicles.
In January 2004, United Solar Ovonic was awarded a four-month, $465,000
contract from Lockheed Martin for the development of solar cells for an airship.
In February and March 2004, United Solar Ovonic received an order for 1MW
of photovoltaic panels from ThyssenKrupp Hoesch Bausysteme GmbH of Germany and
for 1.25MW of photovoltaic panels from Sunset Energietechnik GmbH of Germany,
respectively. In April 2004, United Solar Ovonic entered into an agreement with
Solar
40
Integrated Technologies to purchase more than 5MW of products from United
Solar Ovonic in calendar 2004.
In March 2004, we were awarded a cost-sharing contract by the U.S.
Department of Energy to convert internal combustion engine (ICE) 3-wheeled
vehicles to run on clean hydrogen instead of polluting gasoline or diesel fuel.
The U.S. Agency for International Development is providing $500,000 for this
one-year program and we are providing the additional funds to complete this
program.
In the first phase of an equipment supply agreement with Rare Earth
Ovonic, Ovonic Battery has three contracts to supply equipment and technology
totaling $63,600,000 to its Rare Earth Ovonic joint ventures in China. As of
March 31, 2004, Ovonic Battery has received payments totaling $59,484,000 under
the three contracts. Ovonic Battery has recorded revenues of $57,265,000 for the
contracts, $2,219,000 less than the cash received. Therefore, in future periods,
the Company will receive less cash than revenues recognized to the extent of the
deferred revenues.
As of March 31, 2004, the Company had $18,318,000 consolidated cash and
cash equivalents ($1,450,000 of which was restricted) consisting of mortgage and
asset-backed securities and corporate notes, classified as available-for-sale,
maturing from one day to 20 days. It is the Company's policy that investments
(including cash equivalents) 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 90 days or
less. Due to reductions in the total portfolio, two investments each represent
more than 10% of the portfolio at March 31, 2004.
During the nine months ended March 31, 2004, $46,400,000 of cash was used
in operations. The difference between the net loss of $39,964,000 and the net
cash used in operations was principally due to a $13,372,000 decrease in working
capital (other than cash). Also contributing were noncash costs, principally
depreciation ($6,099,000) and equity in losses of joint ventures ($644,000).
The Company spent $2,832,000 on property, plant and equipment that was
placed in service during the nine months ended March 31, 2004. A balance of
$514,000 was in other assets at March 31, 2004 which represents deposits and
progress payments for property, plant and equipment, all of which is expected to
be placed in service during fiscal 2004. In total, the Company expects to spend
$3,500,000 for capital expenditures in fiscal 2004, primarily for additions to
the Company's state-of-the-art clean room and leasehold improvements.
The Company had contractual obligations of $49,148,000 at June 30, 2003
and $37,275,000 at March 31, 2004. In the nine months ending March 31, 2004, the
Company incurred additional contractual obligations of $3,800,000 for gases and
stainless steel in its photovoltaic operations. On January 2, 2004, Bekaert paid
$12,000,000 to Canon in full satisfaction of Bekaert's $12,000,000 obligation to
United Solar Ovonic and ECD's $12,000,000 obligation to Canon (see Note C -
Accounts Receivable).
As part of its long-standing strategy, the Company has made investments in
its technologies, which have resulted in enabling intellectual property and
products. The
41
technology emerging from these investments has enabled the Company to finance
its operations and growth through strategic alliances (joint ventures and
license agreements) with third parties who can provide financial resources
and marketing expertise for the Company's technologies and products.
The resultant strategic alliances and joint ventures form the basis for
advancement of the commercialization of the Company's technologies and products:
o COBASYS LLC - a 50/50 joint venture between Ovonic Battery and
ChevronTexaco formed to bring advanced NiMH batteries into widespread
commercial production for hybrid and electric vehicles as well as for
telecommunications and stationary applications. ChevronTexaco is
funding an initial amount up to $178,000,000 ($124,000,000 of which has
been funded as of March 31, 2004) to increase the manufacturing
capacity at COBASYS' facilities in Michigan and Ohio, and for market
development and advanced product development. The advanced product
development is being accomplished through a product development
contract from COBASYS to Ovonic Battery. The contract may be cancelled
if mutually agreed-upon business objectives and milestones are not
materially satisfied. The objectives and milestones were developed
three years ago, have been modified from time to time and may no longer
be relevant. Certain of the business objectives have not been
materially satisfied and the COBASYS management committee has requested
that the management of COBASYS prepare a new business and marketing
plan that will guide the strategic direction of the venture and form
the basis for revised business objectives. A new business plan is
under review by the Management Committee. The Company recorded
revenues of $916,000 and $4,267,000 for work performed under the
contract in the three months and nine months ended March 31, 2004,
respectively, and expects to record approximately $5 million in fiscal
2004.
o Texaco Ovonic Hydrogen Systems LLC - a 50/50 joint venture between ECD
and ChevronTexaco formed to further develop and advance the
commercialization of ECD's proprietary technology to store hydrogen in
metal hydrides. ChevronTexaco is funding an initial amount of up to
$104,000,000 ($56,248,000 received through March 31, 2004), including
product and market development. A significant portion of the funding
is committed to a product development contract from Texaco Ovonic
Hydrogen Systems to ECD. The contract began July 1, 2000, and may be
cancelled if mutually agreed-upon milestones are not materially
satisfied. The Company has revenues for work performed under the
contract of $1,975,000 and $6,738,000 for the three months and nine
months ended March 31, 2004, respectively, and is expected to record
approximately $9 million in fiscal 2004.
These strategic alliances, in addition to the purchase of our former
partners' interests in the photovoltaic and fuel cell ventures, have both
near-term and long-term impacts on the Company's capital resources. While the
Company was able to purchase the interests in the photovoltaic and fuel cell
ventures for only $6,000,000 and $1, respectively, it is now funding 100% of the
cash requirements for (i) United Solar Ovonic (after May 14, 2003), (ii) Ovonic
Fuel Cell (after December 31, 2002) and (iii) Ovonic Media (after January 3,
2003). Also in connection with the purchase of Bekaert's United Solar Ovonic
interests, the
42
Company provided approximately $40 million to United Solar Ovonic to terminate
the sale and leaseback agreements related to the 30MW and 5MW photovoltaic
production equipment and extinguish related guarantees provided by Bekaert
and ECD.
Agreements with ChevronTexaco, Bekaert, Ovonyx and General Electric have
resulted in the acceleration of the commercialization and development of the
Company's products and technologies. While the Company's business partners have
funded most of its product development activities, additional sources of cash
are required to sustain the Company's operations. The Company expects to
continue to use significant cash to fund its operations in the coming year and
is engaged in a number of activities to raise capital, grow revenues and reduce
costs.
Since July 2003, we have implemented a series of initiatives aimed at
aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. In order to meet our cost-reduction
goals, we took the following actions:
o Reduced staffing by 15% at ECD and Ovonic Battery through reallocation
and reductions ($4,500,000 in annual savings).
o Changed the healthcare benefit program ($2,200,000 in annual savings).
o Implemented a salary freeze for all ECD and Ovonic Battery employees
and a 10% salary reduction by the executive management team ($1,900,000
in annual savings).
o Reduced purchased services and contract employees.
o Lowered capital expenditures.
The Company is reviewing additional cost containment initiatives. The
Company is engaged in a number of negotiations and discussions to fund its
operations, including forming new strategic alliances to fund and grow its
photovoltaic, fuel cell and other businesses and raise additional capital
through equity and debt financings. In addition, the Company is engaged in
negotiations with government agencies for contracts to fund its development
activities. The Company is also in discussions with third parties to refinance
the 30MW production equipment.
Management believes that funds generated from operations, new business
agreements, equity and debt financings, new government contracts and the
cost-containment initiatives described above, together with existing cash and
cash equivalents, will be adequate to support the Company's operations for the
coming year. However, the amount and timing of such activities are uncertain.
Accordingly, no assurances can be given as to the timing or success of the
aforementioned plans, negotiations, discussions and programs. The Company has
recurring losses from operations and is actively engaged in discussions to
obtain the needed additional working capital.
43
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 $18,110,000 and $32,995,000 of these
investments (including cash equivalents) on March 31, 2004 and June 30, 2003,
respectively, including restricted amounts of $1,450,000 at March 31, 2004 and
$7,000,000 at June 30, 2003. On March 31, 2004, the investments had an average
maturity of six days. On June 30, 2003, the investments had an average maturity
of 292 days, $26,802,000 of which had maturities of 35 days to 31 months. It is
the Company's policy that investments shall be rated "A" or higher by Moody's or
Standard and Poor's, no single investment shall represent more than 10% of the
portfolio and at least 20% of the total portfolio shall have maturities of 90
days or less. Due to reductions in the total portfolio, two investments each
represent more than 10% of the portfolio at March 31, 2004. Our market risk
primarily relates to the risks of changes in the credit quality of issuers. As
of March 31, 2004, the risk associated with changes in interest rates is minimal
due to the short average maturity of the investments.
Item 4. Controls and Procedures
------ -----------------------
In Item 9A, Controls and Procedures of the Company's Form 10-K for the
year ended June 30, 2003 the following two matters were identified as reportable
conditions:
1. Policies and procedures regarding employee conduct and acceptable business
practices, including expense reporting and personal use of Company assets,
were not well-documented and did not adequately communicate the Company's
expectations regarding these matters.
2. The Company was not able to meet the filing deadline for this Form 10-K
because it lacked the resources to address the financial reporting related
to significant and complex business transactions entered into in fiscal
year 2003.
The Company has taken the following actions to address and correct these
conditions:
The Board of Directors, the Audit Committee and management established the
Sarbanes-Oxley Section 404 Internal Control Committee comprised of the Chief
Executive Officer, the Chief Financial Officer and the Chief Operating Officer.
This Committee is responsible for assessing the current internal controls,
developing improvements to internal controls and testing internal controls, all
leading to management's assessment of internal control effectiveness and the
Company's independent public accountants' report on management's attestation of
control effectiveness by June 30, 2005 in accordance with
44
Section 404 of the Sarbanes-Oxley Act of 2002. The Committee has accomplished
the following to date:
o Named the Director of Corporate Risk Management and Internal Audit as
the Section 404 project manager, who developed a project plan and
retained outside professional advisors who assisted in the evaluation
of existing internal controls and procedures and provided
recommendations for improvement.
o Developed and published the Company's Code of Conduct and Business
Ethics.
o Established a confidential and anonymous reporting process for the
receipt of concerns regarding questionable accounting, auditing or
other business matters from employees or other Company stakeholders.
o Instituted certain policies and process changes to enhance the
Company's monitoring and expectations regarding expense reporting and
personal use of Company's assets.
The Company has completed its evaluation of resources to address its
financial reporting and believes its resources are sufficient and will provide
the time necessary to prepare, and provide for reviews by management, the Audit
Committee and the Board of Directors, and file periodic reports within the time
periods specified in the SEC's rules and regulations.
As part of the Company's effort to ensure compliance with provisions of
Sarbanes-Oxley Section 404, certain issues within internal controls and
information systems have been identified which management believes need to be
improved. These improvements primarily relate to the (1) formalization and
communication of the corporate organization structure, delegation of authority,
and policies and procedures, (2) implementation of additional monitoring
controls surrounding expense reporting, and (3) information systems regarding
formation of information system development life cycles, change management
procedures, data protection/backup plans, and defining employee access rights.
In response, the Company has created a plan and allocated resources to address
these issues on a timely basis.
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-14(c) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective for gathering, analyzing and
disclosing information required to be disclosed in connection with the Company's
filing of its Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2004. Except as discussed above, no significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
45
PART II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
------ ---------------------------------------------------------------------
Securities
-----------
In November 2003, we sold 2,388,915 and 304,000 units of unregistered
securities at a price per unit of $10.465 and $9.435, respectively, to three
institutional investors. Each unit consists of one share of ECD Common Stock and
one warrant to purchase one share of ECD Common Stock for $13.96 if exercised on
or prior to May 2, 2005, and for $16.03 if exercised at any time thereafter, but
prior to October 31, 2006. Nolan Securities Corporation acted as placement
agent. The aggregate proceeds to us, net of placement agent fees of $978,000 and
other expenses of $124,000, was approximately $26,838,000.
In December 2003, we filed a Registration Statement on Form S-1 (file
number 333-111500) with the Securities and Exchange Commission (SEC) relating to
the registration of the securities sold to three institutional investors in
November 2003. On March 9, 2004, we filed a Post-Effective Amendment No. 1 on
Form S-1 to this registration statement, which was declared effective by the
Securities and Exchange Commission on March 18, 2004.
In January 2004, we sold an additional 573,339 units of unregistered
securities at a price per unit of $9.755, to two of the institutional investors
who had acquired units in November 2003. Each unit consists of one share of ECD
Common Stock and one warrant to purchase one share of ECD Common Stock for
$13.96 if exercised on or prior to May 2, 2005, and for $16.03 if exercised at
any time thereafter, but prior to October 31, 2006. Nolan Securities Corporation
acted as placement agent. The aggregate proceeds to us, net of placement agent
fees of approximately $131,000 and other expenses of $56,000, was approximately
$5,406,000.
On March 12, 2004, the SEC declared effective our Registration Statement
on Form S-1 (file number 333-113435) relating to the registration of the
securities sold in January 2004.
The three institutional investors acquired the units of ECD securities in
a private transaction and had access to all material information relating to
ECD. At the time of the sales, we claimed exemption from the registration
requirements of Section 5 of the Securities Act of 1933 pursuant to Section 4(2)
of that Act, no public offering having been involved.
During the three months ended March 31, 2004, there were no purchases by
or on behalf of ECD or any "affiliated purchaser" of ECD's equity securities.
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
At the Annual Meeting of Stockholders (the "Meeting") held on March 18,
2004, the following directors were elected for the ensuing year and until their
successors are duly elected and qualified:
46
For Withheld
---------- --------
Robert C. Stempel 26,738,632 803,713
Stanford R. Ovshinsky 26,688,484 853,861
Iris M. Ovshinsky 26,356,615 1,185,730
Umberto Colombo 26,732,213 810,132
Walter J. McCarthy, Jr. 26,724,364 817,981
Florence I. Metz 26,731,819 810,526
Stanley K. Stynes 26,734,484 807,861
Also approved at the Meeting was the appointment of Grant Thornton LLP as
independent auditors for the fiscal year ending June 30, 2004 (with 26,991,426
votes For, 454,734 votes Against and 96,185 Abstentions).
At the Meeting, the stockholders approved a proposal to increase the
number of authorized shares of the Company's Common Stock from 30,000,000 to
50,000,000 with 20,479,573 Common Stock votes, 5,497,825 Class A Common Stock
votes and 430,000 Class B Common Stock votes cast for the proposal. There were
987,770 Common Stock votes cast against the proposal and 147,177 Common Stock
abstentions.
Item 6. Exhibits and Reports on Form 8-K
------ --------------------------------
(a) Exhibits
--------
3.1 Certificate of Amendment to Certificate of Incorporation filed
March 18, 2004, increasing the number of authorized shares from
30,000,000 to 50,000,000.
3.2 Amendment to Article VIII of the Bylaws effective as of April 20, 2004.
3.3 Amendment to Article XV of the Bylaws effective as of April 20, 2004.
31.1 Certificate of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
During the quarter ended March 31, 2004, the Registrant filed or furnished
the following reports on Form 8-K or Form 8-K/A:
1. On February 11, 2004, we filed a Current Report on Form 8-K for the
purpose of filing the press release announcing director nominees
and executive management changes.
2. On February 17, 2004, we filed a Current Report on Form 8-K for the
purpose of furnishing the press release announcing our financial
results for the quarter ended December 31, 2003.
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 17, 2004 Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Robert C. Stempel
-------------------------------------------
Robert C. Stempel
Date: May 17, 2004 Chairman and Chief Executive Officer
48