SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2004
-----------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- --------------
Commission file number 1-8403
------
ENERGY CONVERSION DEVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 38-1749884
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
2956 Waterview Drive, Rochester Hills, Michigan 48309
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (248) 293-0440
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
--- ---
The aggregate market value of the voting and non-voting common equity held
by non-affiliates (based upon the closing price of such voting and non-voting
common equity on the NASDAQ National Market System on December 31, 2003, the
last business day of the registrant's most recently completed second fiscal
quarter) was approximately $215 million.
As of September 3, 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.
DOCUMENTS INCORPORATED BY REFERENCE
None
===============================================================================
PART I
Item 1: Business
------ --------
OVERVIEW
Energy Conversion Devices, Inc. (ECD) is a technology, product development
and manufacturing company engaged in the invention, engineering, development and
commercialization of new materials, products and production technology in the
fields of alternative energy technology and information technology. Based upon
the fundamental and pioneering inventions of Stanford R. Ovshinsky, principal
inventor, we have established a leadership role in the development of
proprietary materials, products and production technology based on our
atomically engineered amorphous and disordered materials using chemical and
structural disorder to provide multiple degrees of freedom that result in our
ability to make many new materials.
We have developed materials that permit us to design and commercialize
products such as thin-film solar cell (photovoltaic) products, nickel metal
hydride (NiMH) batteries, and phase-change memory devices. These products have
unique chemical, electrical, mechanical and optical properties and superior
performance characteristics. Our proprietary materials, products and
technologies are referred to as Ovonic.
We have established a multi-disciplinary business, scientific, technical
and manufacturing organization to commercialize products based on our
technologies, and have enabling proprietary technologies in the important fields
of energy generation and storage and information technology.
We manufacture and sell our proprietary products through our subsidiaries
and joint venture companies and through licensing arrangements with major
companies throughout the world. In addition, in support of these activities, we
are engaged in research and development, production of our proprietary materials
and products, as well as in designing and building production machinery. Our
extensive patent portfolio includes numerous basic and fundamental patents
applicable to each of our lines of business. We invent not only materials, but
also develop low-cost production technologies and high-performance products. Our
patents, therefore, cover not only materials, but also the production technology
and products we develop.
2
Our corporate organization and the activities we conduct directly and
through our subsidiaries and joint ventures are divided into the following three
segments summarized below (see Item 8 regarding revenues and expenses of Ovonic
Cognitive Computer, Inc., Ovonic Fuel Cell Company LLC, Ovonic Battery Company,
Inc., United Solar Ovonic Corp. and United Solar Ovonic LLC which are included
in our consolidated financial statements):
ECD Segment Ownership as of September 13, 2004
----------- -----------------------------------
Ovonic Unified Memory(TM)
-------------------------
Ovonyx, Inc. ECD -- 41.7%
Tyler Lowrey; Intel Capital; private
investors -- 58.3%
Optical Memory
--------------
Ovonic Media, LLC ECD -- 49%
General Electric -- 51%
Ovonic Cognitive Computer(TM)
-----------------------------
Ovonic Cognitive Computer, Inc. ECD -- 95%
Ovonyx -- 5%
Hydrogen Technology
-------------------
Texaco Ovonic Hydrogen Systems LLC ECD -- 50%
ChevronTexaco Technology Ventures LLC, a unit
of ChevronTexaco Corporation -- 50%
Fuel Cell Technology
--------------------
Ovonic Fuel Cell Company LLC ECD -- 100%
Ovonic Battery Segment
----------------------
Energy Storage and Related Technologies
---------------------------------------
Ovonic Battery Company, Inc. ECD -- 91.4%
Honda Motor Company, Ltd. -- 3.2%
Sanoh Industrial Co., Ltd. -- 3.2%
Sanyo Electric Co. Ltd. -- 2.2%
Cobasys LLC (formerly Texaco Ovonic Ovonic Battery Company, Inc. -- 50%
Battery Systems LLC) ChevronTexaco Technology Ventures LLC -- 50%
Rare Earth Ovonic Metal
Hydride Joint Venture Co. Ltd. ECD & Ovonic Battery Company, Inc. -- 19%
Rare Earth Ovonic High Power NiMH Inner Mongolia Baotou Steel Rare-Earth
Battery Joint Venture Co. Ltd. High Tech Holding Co. Ltd. -- 75%
Rare Earth Ovonic NiMH Battery American Wako Koeki Corp. -- 6%
Electrode Joint Venture Co. Ltd.
United Solar Ovonic Segment
---------------------------
United Solar Ovonic Corp. ECD -- 100%
United Solar Ovonic LLC ECD -- 60%
United Solar Ovonic Corp. -- 40%
3
MAJOR BUSINESSES
Our business strategy is to develop and commercialize enabling
technologies for use in the fields of alternative energy and information
technologies. We are pursuing our business strategy by developing and
commercializing new products and production technologies based on our
proprietary Ovonic materials. We have established joint ventures, licensing
arrangements and other strategic alliances with major companies around the world
to achieve our strategic objectives.
Energy activities, specifically complete systems for energy generation,
storage and infrastructure, represent a major element of our business.
Environmentally safe methods of generating and storing energy have become
critical in today's world. Our United Solar Ovonic subsidiary manufactures our
continuous web, thin-film multilayer photovoltaic products. Photovoltaics (PV)
is the direct conversion of sunlight into electricity and a source of clean
energy. United Solar Ovonic's products are lightweight, rugged and flexible,
unique characteristics which differentiate them from other solar products, and
include a complete line of power panels and a line of roofing products for
residential and commercial applications. The multilayer PV cells are
manufactured using a proprietary continuous roll-to-roll process. Alliances with
roofing manufacturers and contractors have expanded United Solar Ovonic's market
for building-integrated PV roofing products.
Cobasys, formerly Texaco Ovonic Battery Systems LLC, is bringing advanced
NiMH batteries into widespread commercial production for transportation and
stationary applications. Cobasys offers complete advanced NiMH battery pack
system solutions for hybrid electric vehicles (HEVs), electric vehicles (EVs),
heavy-duty vehicles (HDVs) and vehicles with 42-volt electrical systems. It also
offers advanced stationary battery systems for telecommunications and
uninterruptible power supply systems.
In July 2004, Cobasys and Panasonic EV Energy Co., Ltd. (PEVE) agreed to
cross license each other for current and future patents and agreed to a
technical cooperation agreement to advance the state-of-the-art of NiMH
batteries which are widely used in HEVs. Cobasys and PEVE have also established
a joint development program to collaborate on the development of a
next-generation high-performance NiMH battery module for HEVs.
Through our Texaco Ovonic Hydrogen Systems joint venture with
ChevronTexaco Technology Ventures, we are further developing and advancing the
commercialization of our reversible solid metal-hydride-based low-pressure
hydrogen storage systems for a variety of stationary and transportation
applications.
Another joint venture, Ovonyx, Inc., is commercializing its proprietary
electrical phase-change semiconductor memory technology, Ovonic Unified Memory
(OUM), through a series of joint development programs with industrial partners.
OUM offers significantly faster write and erase speeds and higher cycling
endurance than conventional FLASH and DRAM semiconductor memory.
ECD's principal manufacturing activity consists of machine building by its
Production Technology and Machine Building Division. The principal manufacturing
activities of Ovonic Battery Company, Inc. are production of nickel hydroxide
positive electrode materials for
4
NiMH batteries and limited production of metal hydride materials for NiMH
battery and hydrogen storage applications.
The critical factor to large-scale market penetration of products
incorporating our technologies is the manufacturing of such products in
sufficient quantities to achieve economies of scale, reduce product cost and
deliver to the marketplace products that answer basic industry and consumer
needs.
We announced on August 12, 2004, that our Board of Directors approved
Management's business restructuring plan to take full advantage of the favorable
battery settlement agreement announced on July 7, 2004 and the increasing market
interest in solar energy systems and hybrid electric vehicles. Our strategy is
to move ECD from a highly successful research-oriented company to the next phase
of development, which is to commercialize the products and technologies we have
developed and concentrate on growing sales revenues and equity value in our core
commercial businesses with the goal to move the Company into a position of
having sustained profitability by July 2006.
The restructuring will increase product revenues while enabling us to
carry out major cost-reduction measures, including significant reductions in the
workforce to right size activities to support our core commercial businesses. As
part of the restructuring, we will manage a reduced portfolio of advanced
product development activities to grow future businesses.
Consolidated revenues for our last three fiscal years (excluding revenues
of licensees and joint ventures) in our three business segments were as follows:
2004 2003 2002
------ ------ ------
(000's) (000's) (000's)
ECD Segment $16,155 $27,062 $61,636
Ovonic Battery Segment 15,279 28,826 48,529
United Solar Ovonic Segment 36,959 14,890 7,157
Less Intersegment Revenues (2,088) (5,599) (25,612)
------- ------- -------
Total Revenues $66,305 $65,179 $91,710
======= ======= =======
ECD Segment
-----------
Information Technology
We have developed a number of key proprietary products and processes in
the field of information technology. OUM, phase-change optical storage and
Ovonic Cognitive Computer technologies are based on Stanford Ovshinsky's basic
pioneering inventions.
Ovonic Unified Memory(TM). Building on our earlier work, we and our Ovonyx
joint venture are developing a proprietary family of high-performance
nonvolatile semiconductor memory and information processing devices called
Ovonic Unified Memory (OUM).
5
In 1999, we and Tyler Lowrey, the former vice chairman and chief
technology officer of Micron Technology, Inc., formed Ovonyx, Inc. (initially
owned 50% by ECD and the balance owned by Mr. Lowrey and a colleague) to further
develop and commercialize OUM. Our contribution to Ovonyx, in return for our
ownership interest, consisted of licenses, know-how and proprietary technology.
In February 2000, Ovonyx and Intel entered into a collaboration and
royalty-bearing license agreement to jointly develop and commercialize OUM
technology. The investment by Intel Capital and other investors in Ovonyx has
brought our ownership of Ovonyx to 41.7% of the shares outstanding. Presently,
on a fully diluted basis after giving effect to the exercise of stock options
and warrants, our ownership of Ovonyx would be 31.4%.
Ovonyx's strategy for OUM is to initially target the direct replacement of
FLASH memory in products such as cell phones, digital cameras and PDAs where a
single OUM device can replace DRAM and FLASH devices. OUM is a high-speed,
nonvolatile memory with advantages such as reduced cost per bit, low power and
low voltage, and a robust temperature range. It also is a random-access,
non-destructive read memory that is scalable, radiation hard and provides a
user-friendly PC interface. OUM technology has demonstrated one million times
the cycle life of FLASH and 100 times the write speed of FLASH. It offers a way
to realize full system-on-a-chip capability through integrating unified memory,
linear, and logic on the same silicon chip.
Ovonyx and BAE Systems have entered into a royalty-bearing agreement to
commercialize the OUM technology in radiation-hardened space and military
applications. Ovonyx and BAE Systems are engaged in a joint development program
directed toward application of OUM in BAE Systems' space products. BAE has
announced plans to make available sample devices late in calendar year 2004 and
to use the devices in space applications in the middle of calendar year 2005.
Ovonyx and STMicroelectronics have signed a nonexclusive royalty-bearing
agreement whereby STMicroelectronics was granted a license to use the thin-film
nonvolatile semiconductor memory technology of Ovonyx in the STMicroelectronics
product line. The two companies also established a joint development program. In
February 2003, Ovonyx and STMicroelectronics agreed to expand the scope of the
technology license and agreed to extend their joint development program.
OUM technology will require further technical development and may require
additional financial resources to reach commercial product status.
Optical Memory. Our Ovonic phase-change rewritable optical memory
technology makes it possible to store, in a convenient, removable disk format,
many times the amount of data as a conventional floppy magnetic disk, and is a
much more robust product having much lower cost than removable rigid magnetic
disks. Our phase-change rewritable optical memory uses a laser to write or erase
digital data on a thin film of amorphous semiconductor alloy that has been
deposited onto a substrate disk. The disk and data-reading process are similar
to an ordinary CD-ROM or DVD-ROM, with the significant difference being that the
phase-change rewritable optical memory can be erased and rewritten many times
(up to 1,000 times in the case of CD-RW and up to 500,000 times in the case of
DVD-RAM).
6
We have licensed our Ovonic phase-change rewritable optical memory
technology to a number of data storage media companies, including Matsushita
Electric Industrial Co., Ltd., Ricoh Company Limited and Sony Corporation.
Our rewritable phase-change optical memory licenses provide for a
nonrefundable advance royalty payment of $25,000 and a royalty of 1-1/2% of the
net selling price of the rewritable optical memory disks for the first one
million sold and 1% of the net selling price thereafter. Licensees are granted
nonexclusive, royalty-bearing, worldwide licenses under our rewritable
phase-change optical memory patents in existence at the time the license is
granted to make, have made, use, sell, lease or otherwise dispose of rewritable
optical memory disks. Our portfolio of patents relating to rewritable optical
memory products contains patents expiring beginning in 2005 through 2015, and we
expect to replace expiring patents with new applications and patents.
We are also applying our Ovonic optical phase-change technology under a
three-year cost-sharing contract awarded in September 2003 by the National
Institute of Standards and Technology's (NIST) Advanced Technology Program (ATP)
to develop new optical switching devices for active optical routing devices in
digital signal processing.
In 2000, we and General Electric, through its GE Plastics business unit,
formed a joint venture, Ovonic Media, LLC, to design, develop, demonstrate and
commercialize our proprietary continuous web roll-to-roll technology for the
ultra-high-speed manufacture of optical media products, primarily rewritable
DVDs. GE owns 51% of Ovonic Media and we own 49%. We have contributed
intellectual property, know-how, licenses and equipment to the joint venture. GE
has made cash and other contributions to the joint venture. Since its inception,
Ovonic Media has paid us $5.6 million through the end of fiscal year 2003 for
services to the joint venture.
GE informed the Company that additional funding after January 3, 2003 was
suspended. GE and ECD have been discussing 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 seeking to secure a partner who is a leader in the
storage media industry to facilitate the commercialization and participate in
the funding of our technology. In the interim, ECD is directly funding continued
product development of the phase-change optical memory technology at a reduced
level.
Ovonic Cognitive Computer(TM) Technology. In October 2002, we formed
Ovonic Cognitive Computer, Inc. as the exclusive licensee of certain
technologies, which previously had been licensed to Ovonyx, for the development
of the Ovonic Cognitive Computer technology. We own 95% of Ovonic Cognitive
Computer, Inc. and Ovonyx owns the balance. The Ovonic Cognitive Computer
technology is a unique multifunctional approach to computing that is basically
different than the Von Neumann concept, the prototype of today's computers. We
are developing technology to accomplish many tasks in a simple manner impossible
to perform on conventional computers with learning capability that mimics the
functionality of the human brain by combining memory and processing in a single
sub-micron device. The Ovonic Cognitive Computer technology incorporates
nanostructural Ovonic materials deposited as a thin film which, when fully
developed, will
7
have the capability to execute ordinary arithmetic and logic operations as well
as advanced functions such as non-binary processing, higher mathematics, pattern
recognition and encryption in a densely interconnected and parallel fashion. The
Ovonic Cognitive Computer technology requires further technical and product
development and additional financial resources to reach commercial product
status.
Ovonic(R) Solid Hydrogen Storage Systems. Hydrogen is an ideal fuel
source. It is clean and efficient and it yields more energy per unit of weight
than any other existing combustible fuel. Hydrogen's only waste product is water
vapor. Because hydrogen is a major component of water and of hydrocarbons, it is
in abundant supply. The principal stumbling block to the use of hydrogen as a
fuel has been the inability to store hydrogen safely and efficiently.
Conventional methods of storing hydrogen have been high-pressure compressed gas
and liquefaction at extremely low temperatures.
We have developed a new, practical approach to store hydrogen in a safe
and economical manner using a family of new efficient metal hydrides based upon
our proprietary, atomically-engineered materials technology whereby hydrogen is
stored in a solid metal matrix at low practical pressures. Our inventions have
resulted in the issuance of 41 U.S. patents and 70 foreign counterparts
applicable to hydrogen storage in a metal hydride, as well as patent
applications in various stages of prosecution. Many of the more fundamental
patents applicable to our NiMH battery technology also provide us with a
proprietary position in our solid hydrogen storage in metal hydride materials
technology. We do not believe that the expiration of any patent applicable to
our solid hydrogen storage materials technology during the next five years will
have a material adverse effect on our business, and we expect to replace
expiring patents with new applications and patents.
Our solid hydrogen storage materials can be packaged in a variety of sizes
and shapes to meet application requirements - from automobiles to consumer
electronic devices. For example, Texaco Ovonic Hydrogen Systems has produced
prototype compact hydrogen storage canisters that can store hydrogen in a
portable form to operate lawnmowers, garden equipment, power generators or
barbecue grills once such hydrogen-powered products become commercially
available.
In April 2004, the U.S. Department of Transportation approved the
transport of hydrogen in metal hydride storage systems developed by Texaco
Ovonic Hydrogen Systems for portable applications. This new exemption authorizes
the manufacture, labeling, sale, and use of metal hydride hydrogen storage
systems applicable to the family of portable canisters currently under
development at Texaco Ovonic Hydrogen Systems, allowing hydrogen storage
capacity up to 1300 standard liters. The exemption also authorizes
re-qualification by ultrasonic inspection, effectively extending the service
life of a metal hydride canister well beyond the 5-year limit of previous
exemptions and authorizes use of the internationally recognized UN3468
identification number for "Hydrogen in a Metal Hydride Storage System."
Our Ovonic solid hydrogen storage systems technology, based on our
atomically engineered materials, is being further improved and developed and
requires additional financial resources to reach commercial product status.
8
Hydrogen can also be used to power internal combustion engines. Such
engines can be designed to be very clean, meeting or exceeding California's
Ultra Low Emission Vehicles regulations, and virtually eliminate CO2 and
hydrocarbon emissions. In June 2003, we completed a joint project with
ChevronTexaco for the conversion of a 2-liter internal combustion engine (ICE)
to run on hydrogen. This converted engine is being used to power a hybrid
electric vehicle (a 2002 Toyota Prius) using a low-pressure solid hydrogen
storage system. The modified Prius is being used to demonstrate solid hydrogen
storage technology with a trunk-mounted 60-liter pressure vessel storing three
kilograms of hydrogen to provide a 130-mile vehicle range. Refueling at 1,500
psi to 90% capacity takes 10 minutes.
In October 2000, we and ChevronTexaco formed a joint venture, Texaco
Ovonic Hydrogen Systems LLC, to further develop and advance the
commercialization of the Ovonic solid hydrogen systems. As of June 30, 2004,
ChevronTexaco has funded $59,948,000 for initial product and market development,
the primary use of which has been to fund a contract from Texaco Ovonic Hydrogen
Systems to ECD to further develop the Ovonic solid hydrogen storage technology.
Funding may be cancelled if mutually agreed-upon milestones are not satisfied.
At its meeting on June 30, 2004, the Management Committee of Texaco Ovonic
Hydrogen Systems did not approve the accomplishment of three of the joint
venture's milestones. The Management Committee will review and determine the
satisfaction of these milestones at a future meeting. Our contribution to Texaco
Ovonic Hydrogen Systems in return for our 50% interest consisted of licenses,
know-how and proprietary technology.
Ovonic(R) Regenerative Fuel Cell Technology. A fuel cell is an
environmentally clean power generator, combining hydrogen with oxygen to produce
electricity without combustion, with the only byproducts being water and heat.
It is an electrochemical device consisting of an anode and a cathode separated
by an ionically conductive electrolyte. Hydrogen is oxidized at the anode and
oxygen in air is consumed at the cathode. In the Ovonic regenerative fuel cell,
means for hydrogen storage, such as metal hydrides, are provided in the anode.
This fundamentally new approach results in unique and favorable features of our
technology, such as the intrinsic ability to store energy in the fuel cell stack
and instant-start capability down to sub-zero temperatures. We believe this can
be accomplished in a lower cost approach without the use of noble metal
catalysts.
Our fuel cell technology is being developed for commercial use in a full
range of stationary, portable power and transportation applications, which can
supply electricity as an alternative or supplement to electricity supplied
through grid distribution or portable fossil-fuel-powered generators.
Since 2002, we have been issued six U.S. patents directly applicable to
our fuel cell technology. Additionally, many of the patents applicable to our
NiMH battery and solid state hydrogen technologies are also applicable to our
Ovonic regenerative fuel cell technology. These patents have various dates of
expiration through 2018. We do not believe that the expiration of any patent
applicable to Ovonic regenerative fuel cell technology during the next five
years will have a material adverse effect on our business.
9
Our Ovonic regenerative fuel cell technology is being further developed
and requires additional financial resources to reach commercial product status.
Production Technology and Machine-Building Division. Our Production
Technology and Machine Building Division has been an important element in our
strategy and has extensive experience in designing and building proprietary
automated production equipment. The Production Technology and Machine Building
Division has designed and built for us and certain of our licensees multiple
generations of photovoltaic production lines, including United Solar Ovonic's
machinery and equipment for manufacturing solar products which is being
optimized to designed manufacturing capability to produce on an annual basis
solar products generating 30 megawatts of electrical power. Research,
development and manufacturing equipment for high-rate microwave plasma-enhanced
chemical vapor deposition (MPCVD) and other materials technology have also been
designed and built by this Division.
In September 2003, we and GE Global Research, the centralized research
organization of General Electric, announced that we had been awarded a grant
from NIST's ATP to develop a low-cost, roll-to-roll process for the production
of large-area organic electronic devices. The cost of the $13 million, four-year
project will be shared among NIST, GE and us. The program goal is to create a
cost-effective system for the mass production of organic electronic devices such
as high-efficiency lighting devices. The proposed roll-to-roll research
prototype line will input a roll of plastic film and output working organic
electronic devices. GE will design and provide the organic electronic
technology, while we will provide our unique roll-to-roll equipment-building
expertise. The key is to form the active organic layers using low-cost printing
techniques such as gravure or screen printing. If successful, the program will
demonstrate that organic electronic devices can be made on flexible material in
a continuous roll-to-roll process without the huge capital investment normally
required for batch-processed inorganic semiconductor technology. The two major
technology challenges that scientists face are: ensuring that roll-to-roll
processing is compatible with the materials and device designs, and integrating
all of the fabrication steps into one line.
Ovonic Battery Segment
----------------------
Cobasys. Cobasys LLC (Cobasys), formerly known as Texaco Ovonic Battery
Systems LLC, is the joint venture formed in July 2001 by our subsidiary, Ovonic
Battery, and ChevronTexaco Technology Ventures LLC. Cobasys was organized to
bring advanced NiMH batteries into widespread commercial production for
transportation and stationary applications.
Cobasys offers complete advanced NiMH battery pack system solutions in
transportation applications for HEVs, EVs, HDVs and vehicles with 42-volt
electrical systems.
Cobasys also offers complete advanced stationary battery applications for
telecommunications and uninterruptible power supply systems.
In July 2004, we, Ovonic Battery, Cobasys, Matsushita Electric Industrial
Co., Ltd. (MEI), PEVE and Toyota Motor Corporation entered into a settlement
agreement with respect to patent infringement disputes initiated by us and
counterclaims involving NiMH
10
batteries pending before the International Chamber of Commerce, International
Court of Arbitration.
Under the arrangement, we, Cobasys, MEI, PEVE and Toyota have entered into
an agreement pursuant to which the parties have cross-licensed current and
future patents related to NiMH batteries filed through December 31, 2014,
effective upon the date of settlement. The licenses granted by us and Cobasys do
not grant rights to MEI, PEVE or Toyota to use the licensed patents to (i) offer
for sale certain NiMH batteries for certain transportation applications in North
America until after June 30, 2007 or (ii) sell commercial quantities of certain
transportation and certain stationary power NiMH batteries in North America
until after June 30, 2010.
Further, under the terms of the settlement, Cobasys and PEVE have agreed
to a technical cooperation arrangement, including access to suppliers, to
advance the state-of-the-art of NiMH batteries, which are widely used in HEVs.
Cobasys and PEVE have also agreed to collaborate on the development of a
next-generation high-performance NiMH battery module for HEVs. In addition to
manufacturing their own line of NiMH batteries, Cobasys will be the distributor
of PEVE's NiMH batteries to certain markets in North America through June 30,
2010. See Item 3: Legal Proceedings on page 22.
ChevronTexaco is contributing up to $178 million to Cobasys to increase
the manufacturing capacity at Cobasys' facilities in Michigan and Ohio, and for
market and advanced product development. Through June 30, 2004, ChevronTexaco
has contributed $134 million to Cobasys. Ovonic Battery has contributed
intellectual property, licenses, production processes, know-how, personnel and
engineering services relating to Ovonic NiMH battery technology to the joint
venture.
A new 170,000 square foot state-of-the-art battery production facility
with new automated manufacturing equipment has been established by Cobasys in
Springboro, Ohio. The new facility is ISO and QS certified and is capable of
producing 1.2 million battery modules annually at full capacity when fully
equipped.
The advanced product development has been accomplished through a product
development contract from Cobasys to Ovonic Battery. We recorded revenues of
approximately $5.6 million, $12.4 million and $16.3 million for work performed
under the contract in the years ended June 30, 2004, 2003 and 2002,
respectively, and are budgeted to receive approximately $1.5 million in 2005.
Ovonic Battery. Our battery subsidiary, Ovonic Battery, has developed the
proprietary materials and technology for NiMH batteries which have been licensed
to all significant NiMH battery manufacturers throughout the world. NiMH
batteries were not commercially viable prior to Ovonic Battery's development of
disordered electrode technology.
Ovonic NiMH batteries store approximately twice as much energy as standard
nickel cadmium (Ni-Cd) or lead acid batteries of equivalent weight and size. In
addition, Ovonic NiMH batteries have high power, long cycle life, are
maintenance free and have no memory effect. Moreover, Ovonic NiMH batteries do
not contain cadmium or lead, both environmentally hazardous substances. Our
batteries are capable of being made in a wide
11
range of sizes and have a wide range of applications, including hand-held
consumer electronics such as digital cameras; hybrid electric vehicles and
electric vehicles; power tools, utility and industrial applications; and 36/42
volt batteries to meet the emerging requirements for higher voltages, power and
energy of next-generation fuel-efficient vehicle applications.
Lithium-Ion (Li-Ion) batteries compete with NiMH batteries in applications
for consumer electronic devices and have a stronger market share than NiMH in
certain laptop computers and cell phones. NiMH technology has numerous
advantages over Li-Ion technology such as lower cost, higher power, safety and
abuse tolerance. NiMH batteries are most favored by manufacturers of mass-market
consumer products incorporating rechargeable batteries where cost is a factor,
and are the batteries of choice by the manufacturers of hybrid electric vehicles
where safety considerations in large, high-energy battery systems are extremely
important.
Our inventions have resulted in basic patents covering all commercial NiMH
batteries, with 85 issued U.S. patents and 249 foreign counterparts. While all
of the patents involving Ovonic NiMH battery technology are important to our
licensing activities, there are approximately 13 patents which we believe to be
particularly important. These patents have various dates of expiration through
2014. Additional U.S. and foreign patent applications are in various stages of
preparation, prosecution and allowance. In view of the overall strength of our
patent position relating to NiMH batteries, and with the realization that the
validity of newer patents has not been tested in court, we do not believe that
the expiration of any of our NiMH battery patents during the next five years
will have a material adverse effect on our business.
Ovonic NiMH batteries are manufactured and sold throughout the world by
such major companies as Sanyo Electric Co. Ltd. under a licensing arrangement
and by Cobasys. In addition to our three Rare Earth Ovonic joint ventures in
China with Rare Earth High-Tech Co., Ltd., which are licensed for materials and
consumer battery applications, we have entered into royalty-bearing consumer
battery license agreements with eight other Chinese companies. We are also in
discussions with other Chinese companies for additional license agreements.
Ovonic Battery also produces nickel hydroxide positive electrode materials for
sale to some of our licensees. Limited quantities of metal hydride materials for
use in Ovonic solid hydrogen storage systems have also been manufactured and
sold by Ovonic Battery to Texaco Ovonic Hydrogen Systems.
Our royalty-bearing NiMH battery licenses provide for upfront
nonrefundable license fees and, depending on factors such as geographical scope
and fields of application, require licensees to pay us a royalty of 0.5% (for
consumer applications) or 3.0% (for transportation applications) of the selling
price of NiMH batteries. Certain licensees, particularly our Chinese licensees,
have paid modest upfront, nonrefundable license fees, but are required to pay
royalty rates considerably higher than 0.5% and to pay additional license fees
as their sales of NiMH batteries increase, or have been granted substantially
narrower rights to geographical areas in which licensed products can be made or
sold. Our joint ventures established to manufacture NiMH batteries are licensees
of Ovonic Battery. Typically, we acquired our ownership interest in the NiMH
battery joint ventures by the contribution of licensed patents or technology, or
both. These licenses to our NiMH battery joint ventures generally do not require
the payment of royalties.
12
Generally, the term of the license agreements extends for so long as the
patents being licensed are in force. Some licenses have fixed terms but provide
for extensions of additional one-year periods. Based upon our NiMH battery
patent portfolio (and should a market for NiMH batteries remain for the next 10
years), we believe that patents applicable to NiMH batteries can provide us with
royalty revenues through 2014.
Four-Wheel Vehicle Battery Business Arrangements. In addition to its
Cobasys joint venture, Ovonic Battery has entered into royalty-bearing,
nonexclusive license agreements granting limited rights for the manufacture of
Ovonic NiMH four-wheeled vehicle propulsion batteries and related products
outside of the United States with Sanyo, Toshiba, Hyundai Motor Company, Varta,
Nan Ya and GP Batteries. Sanyo, Toshiba and Hyundai have restricted rights to
sell batteries in vehicles imported into North America. GP Batteries and the
Rare Earth Ovonic joint ventures have limited rights to sell vehicle propulsion
batteries in North America by and through Ovonic Battery. Varta's license
includes the right to manufacture vehicle propulsion batteries subject to
certain limitations on access to technology and restrictions on manufacturing in
North America. Saft Group and the United States Advanced Battery Consortium are
licensed under a royalty-bearing, nonexclusive license agreement for the
manufacture and sale of vehicle propulsion batteries in the United States. Among
our licensees of Ovonic NiMH batteries for four-wheel vehicle propulsion
applications, Sanyo and GP Batteries are engaged in manufacturing batteries for
such applications.
Two- and Three-Wheeled Vehicles. We have installed Ovonic NiMH batteries
in scooters converted to electric power and successfully demonstrated the
application of our battery for two- and three-wheeled electric vehicles
including power-assisted electric bicycles. We consider two- and three-wheeled
electric vehicles and power-assisted bicycles a potentially large-volume market
since these types of vehicles are the primary mode of transportation in many
European and developing countries throughout the world, such as India, China and
Taiwan. Electric two- and three-wheeled vehicles using Ovonic NiMH batteries
should improve the acute air pollution problems in these regions caused by
conventional internal-combustion-engine-powered two- and three-wheeled vehicles.
Ovonic Battery has entered into royalty-bearing license agreements for the
manufacture and sale of Ovonic NiMH batteries for two- and three-wheeled
vehicles with Sanyo, Walsin, Sanoh Industrial Co., Ltd., Nan Ya, GP Batteries
and our Rare Earth Ovonic joint ventures. Subject to these agreements, Cobasys
has been granted an exclusive royalty-free license for the manufacture and sale
of batteries for two- and three-wheeled vehicles. We believe that Sanyo and
Sanoh are engaged in the manufacture of Ovonic NiMH batteries for two- and
three-wheeled vehicle applications.
United Solar Ovonic Segment
---------------------------
Photovoltaics. Photovoltaic (PV) systems provide a clean and simple
solid-state method for direct conversion of sunlight into electrical energy. We
originated and have patented our proprietary continuous web, multilayer,
large-area thin-film amorphous silicon technology, and, together with our wholly
owned subsidiaries United Solar Ovonic Corp. and United Solar Ovonic LLC
(together hereafter referred to as "United Solar Ovonic"), are leaders in
thin-film amorphous photovoltaic technology.
13
Compared to PV products that are produced using other PV technologies, our
PV products are substantially lighter, more rugged, require much less energy to
produce and can be manufactured in high volume at significantly lower cost. Our
proprietary position in photovoltaic technology ranges from the invention of
materials and the development of products to the design and manufacture of
production equipment. We have 130 U.S. patents and 215 foreign counterparts in
photovoltaic technology. Because many of our patents are broad and because our
patent portfolio is extensive, we do not believe that the expiration of any of
our PV technology patents occurring in the next five years will have a material
adverse effect on our business.
Using our proprietary thin-film, vapor-deposited amorphous silicon alloy
materials, we have developed proprietary technology to reduce the materials cost
in a solar cell. Because amorphous silicon absorbs light more efficiently than
its crystalline counterpart, the amorphous silicon solar cell thickness can be
100 times less than that of crystalline technology, thereby significantly
reducing materials cost. By utilizing a flexible, stainless steel substrate and
polymer-based encapsulants, United Solar Ovonic's PV products can be very
lightweight, flexible and abuse-tolerant. They do not break during shipping, are
particularly easy to transport to remote rural areas, thus saving shipping
costs, and can be installed without breakage.
To further reduce the manufacturing cost of photovoltaic modules, we have
pioneered the development of and have the fundamental patents on a unique
approach utilizing proprietary continuous roll-to-roll solar cell deposition
process. Using a roll of flexible stainless steel that is a mile and one-half
long and 14 inches wide, nine thin-film layers of amorphous silicon alloy with
different light absorption properties are deposited sequentially, one on top of
another, in a high yield, automated machine to make a continuous, stacked
three-cell structure to capture the broad solar spectrum more effectively,
increase energy conversion efficiency and improve performance stability. The
roll of solar cell material then is processed further for use in a variety of
photovoltaic products. United Solar Ovonic's solar-cell manufacturing equipment,
located at our manufacturing plant in Auburn Hills, Michigan, is being optimized
to its designed manufacturing capability of producing on an annual basis solar
products generating 30 megawatt (MW) of electrical power through a program of
maintenance time-reduction and improved operational efficiency.
United Solar Ovonic is producing a variety of PV products for
building-integrated photovoltaic systems, ground-mounted power systems, remote
power applications, telecommunications and PV-powered lighting systems, and
selling PV modules and systems throughout the world. Its unique products for the
building and construction industries such as PV laminate products, PV shingles
and metal roofing products, which are easy to install and emulate conventional
roofing materials, are receiving enthusiastic market response.
In April 2004, United Solar Ovonic entered into an agreement with Solar
Integrated Technologies (SIT) of Los Angeles expanding on a strategic alliance
formed in 2003. Under the agreement, SIT is expected to purchase more than 5MW
of United Solar Ovonic flexible solar laminates in calendar year 2004. The
agreement provides SIT with certain exclusive rights to utilize United Solar
Ovonic's flexible solar electric laminates for integration with single-ply
roofing membranes for commercial, institutional and industrial buildings in
North
14
America. SIT has completed major solar roofing projects for large manufacturing
and warehouse-type facilities in California.
United Solar Ovonic's flexible solar roofing laminates also have
significant appeal outside North America. ThyssenKrupp Hoesch Bausysteme GmbH
(Thyssen), a German steel manufacturer, purchased 1MW of photovoltaic panels in
fiscal year 2004. The United Solar Ovonic products are integrated with metal
roofing products offered by Thyssen in the German market. Another customer in
Germany, Sunset Energietechnik GmbH, placed an order for 1.25MW of photovoltaic
panels to be delivered in calendar year 2004 for electric grid-connected systems
installed on large roofs. In August 2004, United Solar Ovonic received an
additional order of 750 kilowatt (kW) of photovoltaic products to address the
large grid-connected PV market from Alwitra GmbH & Co. (Alwitra) of Germany,
which increased to 1.5MW the 2004 calendar year sales to Alwitra.
United Solar Ovonic technology is also being developed for an
ultra-lightweight, low-cost alternative to conventional space PV modules made of
crystalline silicon or gallium arsenide. The United Solar Ovonic triple-junction
modules, originally developed for terrestrial applications, are made of
amorphous silicon based thin-film alloys, which are deposited on a 5-mil
flexible stainless steel substrate. By utilizing a polymeric or a thinner
stainless substrate, new space cells will be developed that have a specific
power density greater than 1000 watts per kilogram (W/kg) using a polymeric
substrate and 500W/kg using a thin stainless steel substrate. A high specific
power density is required for airship application and, considering the high cost
of launching satellites, lightweight cells also are economically attractive for
space application. Additionally, the radiation hardness and superior
high-temperature performance of amorphous silicon make it an attractive material
for space application.
In June 2004, the U.S. Air Force Research Laboratory, Kirtland AFB, New
Mexico, awarded United Solar Ovonic a $4.02 million, 18-month contract to
develop new solar cell technology to be used in space and airship vehicles
addressing defense and homeland security applications. This contract builds upon
the success of an $11.5 million contract awarded in May 2003 by the Air Force.
Another contract with the Air Force Research Laboratory, awarded in May
2004, calls for United Solar Ovonic to provide 3kW of lightweight solar cells
deposited on thin stainless steel to supply power to an experimental satellite.
Included in the contract is an option for the Air Force to acquire an additional
300 watts of ultra-lightweight solar cells deposited on polymer.
15
RESEARCH AND PRODUCT DEVELOPMENT
The nature of our business has required, and will continue to require,
expenditures for research and product development to achieve our objective of
product commercialization. Agencies of the U.S. government and our licensees and
industrial partners have partially funded our research and product development
activities. We believe the materials, production technologies and products being
developed and produced by us and our joint venture partners are technologically
sophisticated and are designed for markets characterized by rapid technological
change and competition based, in large part, upon technological and product
performance advantages.
We have completed the installation of a new Clean Room fabrication
facility that allows us state-of-the-art functionality. This facility will allow
us to extend the application of Ovonic materials and fabricate amorphous
semiconductor devices, including devices that will be used in the development of
the Ovonic Cognitive Computer technology.
The sophisticated capability of this fabrication facility and electronic
test equipment enables us to conduct work not only for ourselves in advanced
materials, optical and memory activities, but for our Ovonyx joint venture, as
well as others who could utilize our advanced capabilities.
As of June 30, 2004, the amount of future revenues to be billed and
recognized as revenue, as earned, under contracts with government agencies
totaled approximately $10,920,000, $4,312,000 of which has not yet been approved
by the government as of June 30, 2004. These contracts are cancelable at any
time with provisions to reimburse us for any costs through the termination date.
Our government contracts, which have partially funded development of specific
segments of our technologies, provide the government with "march-in rights" to
use, or have others use, technologies developed under the applicable contract on
a royalty-free basis under certain conditions. We retain the technology rights
for any inventions or other discoveries under these contracts. The U.S.
government has not exercised its "march-in rights" with respect to any
technologies developed by us under such product development contracts.
The following is a summary of our consolidated direct expenditures,
excluding the allocation of patents, depreciation and general and administrative
expenses, for product research and development for the three years ended June
30, 2004. All of our research and development costs are expensed as incurred and
are included in our Consolidated Statement of Operations as cost of revenues
from product development agreements and product development and research.
Direct Research and Development Expenditures
--------------------------------------------
Year Ended June 30,
--------------------------------------------
2004 2003 2002
----------- ----------- -----------
Sponsored by industrial
partners, government
agencies and licensees $23,925,301 $28,139,630 $40,358,618
Sponsored by us 14,196,280 12,539,628 7,467,157
----------- ----------- -----------
$38,121,581 $40,679,258 $47,825,775
=========== =========== ===========
16
SOURCES AND AVAILABILITY OF RAW MATERIALS
Materials, parts, supplies and services used in our business are generally
available from a variety of sources. However, interruptions in production or
delivery of these goods and services could have an adverse impact on our
manufacturing operations. The key raw materials used in our business are metals,
primarily nickel, titanium, manganese, cobalt and stainless steel, as well as
various rare-earth elements; high purity industrial gases, primarily argon,
nitrogen, hydrogen, silane, disilane and germane; and polymer materials.
PATENTS AND PROPRIETARY RIGHTS
Since our founding in 1960, we have focused our research and product
development efforts on amorphous, disordered and related materials, a previously
unrecognized field of physics and materials science that has since attracted
widespread attention. We have established a multi-disciplinary business,
scientific and technical organization ranging from research and development to
product development and manufacturing and selling products, as well as designing
and building production machinery. We recognize that all of our activities need
to be carefully protected. Our extensive patent portfolio, including patents
assigned to our joint ventures, consists of 374 U.S. patents and 737 foreign
counterparts, and includes numerous basic and fundamental patents applicable to
each of our lines of business. We invent not only materials, but also develop
low-cost production technologies and high-performance products. Our patents,
therefore, cover not only materials, but also the production technology and
products we develop.
Because we generate patents which basically and broadly cover our
business, we believe that our proprietary patent position will be sustained
notwithstanding the expiration of certain patents and do not expect the
expiration of the patents to adversely affect our business prospects.
We believe that worldwide patent protection is important for us to compete
effectively in the marketplace. Certain of our patents have been the subject of
legal actions, all of which, to date, have been resolved in our favor prior to
trial. See Item 3: Legal Proceedings on page 22 for pending and recently
resolved legal proceedings.
CONCENTRATION OF REVENUES
We have historically entered into agreements with a relatively small
number of major customers throughout the world. In the year ended June 30, 2004,
one customer (Texaco Ovonic Hydrogen Systems) represented 15% of our total
revenues. In the year ended June 30, 2003, three customers represented 58% of
our total revenues (21% Texaco Ovonic Hydrogen Systems, 21% Cobasys and 16% Rare
Earth Ovonic joint ventures). In the year ended June 30, 2002, three customers
represented 67% of our total revenues (28% Rare Earth Ovonic joint ventures, 20%
Texaco Ovonic Hydrogen Systems and 19% Cobasys). See Note J of Notes to
Consolidated Financial Statements.
BACKLOG
Our backlog of orders as of June 30, 2004 for machine-building and
equipment sales contracts, photovoltaic products and metal hydride materials is
$10,978,000. The
17
comparable backlog at June 30, 2003 was $8,531,000. In fiscal 2005, we expect
to recognize revenues of $10,939,000 from our backlog.
COMPETITION
Because each of our technologies has the potential to replace certain
existing energy storage, energy generation and information technology products,
competition for products based on our technologies comes from new technologies,
improvements to current technologies and improved products from current
technologies.
We also compete with companies that currently manufacture and distribute
products based on well-established technologies in the fields of energy
generation and storage and information technology. Some of the firms with which
we compete are among the largest industrial companies in the world. Many of our
competitors have established product lines, extensive financial, manufacturing
and marketing resources, and large research and development staffs and
facilities.
We believe our success depends primarily on our ability to apply our
technologies to the development and production of proprietary products and
production technologies that offer significant advantages in performance,
efficiency, cost and environmental friendliness over competing products and
technologies, as well as to package our technologies and products with those of
others into fully integrated systems. We expect to maintain our competitive
position by diligently prosecuting patents, designing and obtaining patents for
innovative applications for our technologies, removing costs from our technology
applications, developing volume manufacturing processes, and continuing to form
strategic relationships with leading companies.
Many of our technologies, such as those in the field of energy generation
and storage, compete with well-established existing conventional technologies.
There are likely to be transition costs incurred in switching from existing
technologies to new technologies in these fields. Until we are able to achieve
cost reductions through increased production volumes, the costs to produce
products based on our technologies may also be higher than the cost of products
based on existing technologies. These factors may combine to provide companies
offering products based on existing technologies with a competitive advantage.
EMPLOYEES
As of September 3, 2004, we and our consolidated subsidiaries had a total
of 522 employees in the U.S. and 199 employees outside of the U.S. The above
numbers do not include employees of our joint ventures or licensees.
AVAILABLE INFORMATION
Our Internet address is www.ovonic.com. We make available, free of charge,
on our Internet website our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange
18
Commission. Our SEC reports can be accessed through the investor relations
section of our website. The information found on our website is not part of this
or any other report we file with or furnish to the SEC.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking statements 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
Annual 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;
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;
19
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 Annual
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.
20
Item 2: Properties
------ ----------
A summary of our principal facilities and those of our consolidated
subsidiaries, Ovonic Battery, United Solar Ovonic and Ovonic Fuel Cell Company,
follows:
Number of
Location Square Feet
-------- -----------
ECD:
2956 Waterview, Rochester Hills, MI 49,550
1050 East Square Lake Road, Bloomfield Hills, MI 11,000
1621 Northwood, Troy, MI 24,900
Ovonic Battery:
1864 Northwood, Troy, MI 12,480
1826 Northwood, Troy, MI 12,480
2968 Waterview, Rochester Hills, MI 33,804
1414 Combermere, Troy, MI 9,870
United Solar Ovonic:
1100 West Maple Road, Troy, MI 47,775
3800 Lapeer Road, Auburn Hills, MI 167,526
Av. La Paz. No. 10009, Parque Industrial
Pacifico, Tijuana, B.C., Mex. C.P. 22670 67,362
Ovonic Fuel Cell Company:
2983 Waterview, Rochester Hills, MI 27,080
-------
TOTAL 463,827
=======
Except for the property located at 1050 East Square Lake Road, Bloomfield
Hills, MI, which is owned by us, the foregoing properties, which are generally
of brick and block construction, are leased by us. The foregoing properties are
devoted primarily to the product development, production and pre-production
activities and administrative and other operations of ECD, Ovonic Battery and
United Solar Ovonic. Management believes that the above facilities are adequate
for present operations.
21
A summary of the facilities of our North American joint ventures follows:
Number of
Location Square Feet
-------- -----------
Texaco Ovonic Hydrogen Systems:
2983 Waterview, Rochester Hills, MI 50,292
Cobasys:
1334 Maplelawn, Troy, MI 28,122
1250 Maplelawn, Troy, MI 21,000
1104 West Maple Road, Troy, MI 15,000
50 Ovonic Way, Springboro, OH 170,000
-------
TOTAL 284,414
=======
Item 3: Legal Proceedings
------ -----------------
In March 2001, ECD and its subsidiary Ovonic Battery Company, Inc. (Ovonic
Battery) initiated litigation in Federal District Court for the Eastern District
of Michigan against Matsushita Electric Industrial Co., Ltd. (MEI) and related
companies, Panasonic EV Energy Co., Ltd. (PEVE), and Toyota Motor Corporation
(Toyota) and related companies for infringement of certain of Ovonic Battery's
NiMH patents in connection with hybrid electric vehicle battery and consumer
battery sales in the United States. In October 2001, Cobasys LLC (f/k/a Texaco
Ovonic Battery Systems LLC) (Cobasys), the 50/50 battery manufacturing joint
venture between ECD's Ovonic Battery and ChevronTexaco Technology Ventures LLC
(ChevronTexaco), joined the litigation as a co-plaintiff.
In December 2001, ECD, Ovonic Battery and Cobasys filed an arbitration
demand with the International Chamber of Commerce on the claims held to be
arbitrable by the Federal District Court as well as additional patent
infringement claims. Also in December 2001, the parties initiated settlement
discussion and, in January 2002, the Federal District Court granted a joint
motion to stay further proceedings in the litigation pending the outcome of
settlement discussions. The International Chamber of Commerce also agreed to
hold its proceedings in abeyance pending settlement discussions.
In December 2002, ECD, Ovonic Battery and Cobasys entered into an
arbitration agreement with MEI, PEVE and Toyota, which established the basic
terms, conditions and procedures to resume arbitration of the dispute before the
International Chamber of Commerce. Pursuant to the arbitration agreement, the
parties agreed to dismiss the patent infringement litigation in the Federal
District Court. The arbitration proceeding was held in New York City and began
in November 2003 and concluded in January 2004. Since the conclusion of the
arbitration proceedings, the parties were engaged in discussions aimed at
settlement of the disputes.
22
In July 2004, we announced the settlement of the patent infringement
disputes. Under the terms of the settlement, we, Cobasys and MEI, PEVE, Toyota
have entered into an agreement pursuant to which the parties have cross-licensed
current and future patents related to NiMH batteries filed through December 31,
2014, effective upon the date of settlement. The licenses granted by us and
Cobasys do not grant rights to MEI, PEVE or Toyota to use the licensed patents
to (i) offer for sale certain NiMH batteries for certain transportation
applications in North America until after June 30, 2007 or (ii) sell commercial
quantities of certain transportation and certain stationary power NiMH batteries
in North America until after June 30, 2010.
Further, under the terms of the settlement, Cobasys and PEVE have agreed
to a technical cooperation arrangement, including access to suppliers, to
advance the state-of-the-art of NiMH batteries, which are widely used in hybrid
electric vehicles (HEVs). Cobasys and PEVE have also agreed to collaborate on
the development of next-generation high-performance NiMH batteries for HEVs. In
addition to manufacturing their own line of NiMH batteries, Cobasys will be the
distributor of PEVE's NiMH batteries to certain markets in North America through
June 30, 2010.
ECD and Ovonic Battery received a nonrefundable patent license fee of $10
million in consideration of the licenses granted to MEI/PEVE with respect to
NiMH batteries for consumer applications. Cobasys received a nonrefundable
patent license fee of $20 million in consideration of the licenses granted to
MEI/PEVE and Toyota, of which $4 million was placed in escrow to be used to pay
PEVE upon reaching certain milestones under the next-generation
high-performance NiMH battery module development project plan. Cobasys
distributed $8 million to Ovonic Battery and $8 million to ChevronTexaco as
partial reimbursement of legal expenses. Cobasys will also receive royalties
through December 31, 2013, on certain NiMH batteries sold by MEI/PEVE in North
America.
Item 4: Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
Not applicable.
23
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters
------ ------------------------------------------------------------------
and Issuer Purchases of Equity Securities
-----------------------------------------
Shares of our Common Stock, par value $.01 per share, trade on the NASDAQ
National Market System under the symbol "ENER." Shares of our Class A Common
Stock, par value $.01 per share, and Class B Common Stock, par value $.01 per
share, are not publicly traded.
As of September 3, 2004, there were approximately 2,075 holders of record
of Common Stock, four holders of record of Class A Common Stock and one holder
of record of Class B Common Stock.
The following table sets forth the range of high and low closing prices on
the NASDAQ National Market System for our Common Stock:
For the Fiscal Year Ended June 30
(In Dollars Per Share)
--------------------------------------
2004 2003
--------------- --------------
High Low High Low
---- --- ---- ---
First Quarter $19.24 $9.06 $15.90 $9.47
(July - September)
Second Quarter $13.50 $8.00 $12.88 $7.21
(October - December)
Third Quarter $10.00 $6.75 $11.85 $7.95
(January - March)
Fourth Quarter $13.35 $9.758 $11.32 $8.002
(April - June)
We have not paid any cash dividends in the past and do not expect to pay
any in the foreseeable future.
24
During the fiscal year ended June 30, 2004, we issued the following
securities to the following persons for the consideration noted. In each case,
the issuances were to persons who had complete access to all material
information relating to the Company. Accordingly, we claim exemption from the
registration requirements of Section 5 of the Securities Act of 1933 pursuant to
Section 4(2) of that Act, no public offering having been involved.
Party/ies Security Issued Number of Securities Consideration
--------- --------------- -------------------- -------------
4 members of our Common Stock 2,140 shares Services rendered valued at
Board of Directors approximately $20,000
The independent outside directors of the Company are issued approximately
$5,000 per year in ECD Common Stock based on the closing price of the Common
Stock on the first business day of each year. See Part III, Item 10, Directors
and Executive Officers of the Registrant, for compensation of directors.
25
Item 6: Selected Financial Data
------ -----------------------
Set forth below is certain financial information derived from the
Company's audited consolidated financial statements (See Item 1: Description of
Business).
June 30,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Revenues:
Product sales $ 33,856,843 $ 22,415,790 $ 36,634,167 $ 24,239,970 $ 6,892,355
Royalties 2,521,779 1,843,647 2,000,914 2,898,956 3,440,164
Revenues from product
development agreements 29,220,752 37,335,248 52,685,717 37,582,138 10,418,985
Revenues from license
and other agreements 125,000 3,444,114 25,000 5,300,000 3,138,000
Other 580,195 140,061 364,487 1,383,429 6,089,581
------------ ------------ ------------ ------------ ------------
TOTAL REVENUES $ 66,304,569 $ 65,178,860 $ 91,710,285 $ 71,404,493 $ 29,979,085
============ ============ ============ ============ ============
NET LOSS BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $(51,421,674) $(38,413,719) $(20,888,034) $ (5,121,838) $(16,656,128)
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (NOTE A) - 2,215,560 - - -
------------ ------------ ------------ ------------ ------------
Net Loss $(51,421,674) $(36,198,159) $(20,888,034) $ (5,121,838) $(16,656,128)
============ ============ ============ ============ ============
BASIC AND DILUTED NET
LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (NOTE A) $ (2.15) $ (1.75) $ (.96) $ (.26) $ (1.16)
BASIC AND DILUTED NET
INCOME PER SHARE FOR
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (NOTE A) - .10 - - -
------------ ------------ ------------ ------------ ------------
Basic and Diluted Net Loss
per Common Share $ (2.15) $ (1.65) $ (.96) $ (.26) $ (1.16)
At year end:
Cash and Cash Equivalents $ 13,826,537 $ 8,567,261 $ 42,221,015 $ 33,055,399 $ 44,592,017
Short-Term Investments $ - $ 26,801,506 $ 71,997,154 $ 48,908,662 $ 44,723,500
Total Assets $113,311,775 $153,694,650 $192,118,594 $166,105,387 $148,905,642
Long-Term Liabilities $ 10,160,791 $ 10,187,127 $ 14,428,769 $ 18,154,121 $ 20,059,353
Working Capital $ 24,649,431 $ 37,794,730 $100,796,311 $ 92,577,489 $ 89,789,457
Stockholders' Equity $ 81,155,068 $ 99,832,172 $135,254,960 $110,740,711 $ 98,776,560
26
Item 7: Management's Discussion and Analysis of Financial Condition and
------ Results of Operations
---------------------------------------------------------------
Critical Accounting Policies
----------------------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP), management is
required to make estimates and assumptions that affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reported period. Actual results could differ from those estimates. The Company
is impacted by factors such as the continued receipt of contracts from the U.S.
government and industrial partners, its ability to protect and maintain the
proprietary nature of its technology, its continued product and technological
advances and the strength and ability of the Company's licensees and joint
venture partners to commercialize the Company's products and technologies.
Warranty Liability
------------------
The Company estimates the liability for product warranty costs based upon
its past experience and best estimate of future warranty claims. Warranty
liability is recorded at the time that the product is sold (for sales of
photovoltaic products) or at the time that revenue is recognized (for machine-
building and equipment sales).
Allowance for Doubtful Accounts
-------------------------------
The Company maintains an allowance for doubtful accounts considering a
number of factors, including the length of time trade accounts receivable are
past due, previous loss history, the customer's current ability to pay its
obligation, and the condition of the general economy and industry as a whole.
Impairment of Long-Lived Assets
-------------------------------
The Company compares the carrying value of its long-lived assets with the
estimated undiscounted cash flows or fair value associated with these assets.
If the carrying value of the long-lived assets is less than the estimated
undiscounted cash flows or fair value, then an impairment loss is recorded.
Government Contract Liability
-----------------------------
The Company's contracts with the U.S. Government and its agencies are
subject to audits by the Defense Contract Audit Agency (DCAA). The Company,
based on its review of DCAA audit reports, records an estimated reserve for
items questioned by DCAA.
We have identified the following as critical accounting policies to our
company: principles of consolidation, equity accounting and revenue recognition
for product sales, royalties, and business agreements.
27
Principles of Consolidation and Equity Accounting
-------------------------------------------------
The Company's investments in Cobasys, Texaco Ovonic Hydrogen Systems and
Ovonic Media are recorded at zero. The Company will continue to carry its
investment in each of these joint ventures at zero until the venture becomes
profitable (based upon the venture's history of sustainable profits), at which
time the Company will start to recognize over a period of years its share, if
any, of the then equity of each of the ventures, and will recognize its share of
each venture's profits or losses on the equity method of accounting. To the
extent that the Company has made cash or other contributions, it recognizes its
proportionate share of any losses until the investment reaches zero.
The Company accounts for its investment in Ovonyx on the equity method and
has recognized its proportionate share of Ovonyx losses to the extent of its
investment.
The Company has three joint ventures, Rare Earth Ovonic, with Rare Earth
High-Tech Co. Ltd. (Rare Earth High-Tech) of Baotou Steel Company of Inner
Mongolia, China, for the manufacture of its battery and other related products
and components. The Company accounts for its 19% interest in each of these
joint ventures using the cost method of accounting.
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 G of Notes to Consolidated Financial Statements).
Product Sales
-------------
Product sales include revenues related to photovoltaic products,
machine-building and equipment sales contracts and nickel hydroxide and metal
hydride materials. Revenues related to most machine-building and equipment sales
contracts and sales related to other long-term contracts are recognized on the
percentage-of-completion method of accounting using the costs incurred to date
as a percentage of the total estimated costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point.
Percentage of Completion - Revenues from product development agreements
that contain specific performance criteria are recognized on a percentage-of-
completion basis which matches the contract revenues to the costs incurred on a
project, based on the relationship of costs incurred to estimated total project
costs. Revenues from product development agreements, where there are no
specific performance terms, are recognized in amounts equal to the amounts
expended on the programs.
Royalties
---------
Most license agreements, other than those granted to certain joint
ventures, provide for the Company to receive royalties from the sale of products
which utilize the licensed technology. Typically, the royalties are incremental
to and distinct from the license fee and are recognized as revenue upon the sale
of the respective licensed product. In several instances, the Company has
received cash payments for nonrefundable advance royalty payments which
28
are creditable against future royalties under the licenses. Advance royalty
payments are deferred and recognized in revenues as the creditable sales occur,
the underlying agreement expires, or when the Company has demonstrable evidence
that no additional royalties will be creditable and, accordingly, the earnings
process is completed.
Business Agreements
-------------------
A substantial portion of revenues is derived through business agreements
for the development and/or commercialization of products based upon the
Company's proprietary technologies. The Company has two major types of business
agreements.
The first type of business agreement relates to licensing the Company's
proprietary technology. Licensing activities are tailored to provide each
licensee with the right to use the Company's technology, most of which is
patented, for a specific product application or, in some instances, for further
exploration of new product applications of such technologies. The terms of such
licenses, accordingly, are tailored to address a number of circumstances
relating to the use of such technology which have been negotiated between the
Company and the licensee. Such terms generally address whether the license will
be exclusive or nonexclusive, whether the licensee is limited to very narrowly
defined applications or to broader-based product manufacture or sale of products
using such technologies, whether the license will provide royalties for products
sold which employ such licensed technology and how such royalties will be
measured, as well as other factors specific to each negotiated arrangement. In
some cases, licenses relate directly to product development that the Company has
undertaken pursuant to product development agreements; in other cases, they
relate to product development and commercialization efforts of the licensee; and
other agreements combine the efforts of the Company with those of the licensee.
License agreement fees are generally recognized as revenue at the time the
agreements are consummated, which is the completion of the earnings process.
Typically, such fees are nonrefundable, do not obligate the Company to incur any
future costs or require future performance by the Company, and are not related
to future production or earnings of the licensee. License fees payable in
installments are recorded at the present value of the amounts to be received,
taking into account the collectibility of the license fee. In some instances,
a portion of such license fees is contingent upon the commencement of production
or other uncertainties. In these cases, license fee revenues are not recognized
until commencement of production or the resolution of uncertainties. Generally,
there are no current or future direct costs associated with license fees.
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project, based on the relationship of costs
incurred to estimated total project costs. Revenues from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the agreed-
upon fees for product development agreements contemplate reimbursing the Company
for costs considered associated with project activities
29
including expenses for direct product development and research, patents,
operating, general and administrative expenses and depreciation. Accordingly,
expenses related to product development agreements are recorded as cost of
revenues from product development agreements.
Results of Operations
Overview
--------
The Company had a net loss of $51,422,000 on revenues of $66,305,000 in
the year ended June 30, 2004 compared to a net loss of $36,198,000 on revenues
of $65,179,000 for the year ended June 30, 2003. We had a net loss of
$20,888,000 on revenues of $91,710,000 for the year ended June 30, 2002.
The table below summarizes the Company's operating results (in thousands):
Revenues Operating Profit/(Loss)
------------------------------ ------------------------------
Segment 2004 2003 2002 2004 2003 2002
--------------------------- -------- -------- -------- -------- -------- --------
Energy Conversion Devices $ 16,155 $ 27,062 $ 61,636 $(22,877) $(20,745) $(17,560)
Ovonic Battery 15,279 28,826 48,529 (16,070) (9,998) (6,460)
United Solar Ovonic (1) 36,959 14,890 7,157 (13,418) (6,355) (4,539)
Consolidating Entries (2,088) (5,599) (25,612) 1,599 3,821 6,326
-------- -------- -------- -------- -------- --------
Consolidated $ 66,305 $ 65,179 $ 91,710 $(50,766) $(33,277) $(22,233)
======== ======== ======== ======== ======== ========
---------------
(1) For the period July 1, 2002 through May 14, 2003, the Company owned 81%
of United Solar Ovonic Corp. (formerly United Solar Systems Corp.) and
consolidated that entity with a 19% minority interest recognized, and
accounted for United Solar Ovonic Corp.'s 40% interest in United Solar
Ovonic LLC (formerly Bekaert ECD Solar Systems LLC) on the equity basis.
Therefore, the operating results reflected above do not include the
results of United Solar Ovonic LLC prior to May 14, 2003. With the
purchase by the Company from Bekaert Corporation of the remaining
interests in United Solar Ovonic Corp. and United Solar Ovonic LLC,
the Company owns 100% of each of the entities and has consolidated the
entities in their entirety for the period from May 15, 2003 through
June 30, 2003 and for all of the year ended June 30, 2004.
Year Ended June 30, 2004 Compared to Year Ended June 30, 2003
-------------------------------------------------------------
Energy Conversion Devices Segment
---------------------------------
The ECD segment had an increased operating loss in 2004 versus 2003,
primarily due to higher investment in product development as the Company
received reduced funding from third parties in 2004. The ECD segment's revenues
decreased in 2004 from 2003, primarily due to a decrease from product
development agreements and a decrease in product sales.
ECD's product sales, consisting of machine building, were $184,000 in 2004
compared to $6,115,000 in 2003 with the decrease due to completion of the 30MW
machine in 2003.
30
ECD's revenues from product development agreements decreased in the year
ended June 30, 2004 to $14,713,000 from $20,249,000 in the year ended June 30,
2003 due to lower revenues from Texaco Ovonic Hydrogen Systems ($10,063,000 in
2004 and $13,651,000 in 2003), the suspension of funding to Ovonic Media (zero
in 2004 versus $615,000 in 2003) and Ovonic Fuel Cell (zero for 2004 - Ovonic
Fuel Cell is now 100% owned and included in our consolidated financial results -
compared to $4,022,000 for 2003). These decreases were partially offset by new
contracts with the National Institute of Standards and Technology (NIST)
($799,000 in 2004 versus zero in 2003) and the Department of Defense (DOD)
($736,000 in 2004 versus zero in 2003).
Revenues from product development agreements for the segment for the year
ended June 30, 2004 funded 49% of the ECD segment's cost of product development
as ECD continues to develop its core technologies. Revenues from product
development agreements decreased by $5,536,000, and spending decreased by
$5,164,000, resulting in an increase of $372,000 in net cost of product
development.
Year Ended June 30,
-----------------------------
2004 2003
------------ ------------
Cost of revenues from product
development agreements $ 15,562,000 $ 20,250,000
Product development and research 14,553,000 15,029,000
------------ ------------
Total cost of product development 30,115,000 35,279,000
Revenues from product development agreements 14,713,000 20,249,000
------------ ------------
Net cost of product development $ 15,402,000 $ 15,030,000
============ ============
The expenditures continued the development of ECD'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. ECD 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 ($1,029,000) related to the new state-of-
the-art clean room and the related equipment. ECD, 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.
ECD's royalties, consisting of optical memory royalties, were $619,000 in
2004 compared to $65,000 in 2003. Higher royalties reflect 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 $464,000 related to nonrefundable advance royalty payments
received by the Company in prior years associated with license agreements under
which the licensees no longer have an obligation to make royalty payments.
31
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 were $639,000 in the year ended
June 30, 2004 from $633,000 in the year ended June 30, 2003.
ECD's patent expenses were $1,329,000 in 2004 compared to $1,319,000 in
2003.
ECD's operating, general and administrative expenses (net of allocations)
were $5,569,000 in 2004 compared to $3,305,000 in 2003. The increase in the net
expense for 2004 was due to reduced allocation of these expenses to product
development and cost of revenues from product development agreements.
Ovonic Battery Segment
----------------------
The Ovonic Battery segment had an increased operating loss in 2004 versus
2003, primarily resulting from lower revenues for the profitable equipment
contract with Rare Earth Ovonic in 2004 compared to 2003, lower revenues from
product development agreements and higher costs for patent defense, partially
offset by higher royalties and higher sales of nickel hydroxide in 2004.
The decrease in Ovonic Battery's revenues was primarily due to a decrease
in equipment sales to Rare Earth Ovonic as phase one of this program moves into
final machine acceptance, and a reduction in revenues from product development
agreements principally related to decreased activities under the advanced
product development agreement from Cobasys.
Equipment sales revenues decreased 48% to $6,191,000 in 2004 from
$11,924,000 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, ($4,410,000 in 2004 compared to $10,726,000 in 2003). Other
product sales increased to $1,773,000 ($1,724,000 of nickel hydroxide sales and
$49,000 of metal hydride sales) in 2004 compared to $973,000 ($818,000 of nickel
hydroxide sales and $155,000 of metal hydride sales) in 2003. (See Note J of
Notes to Consolidated Financial Statements.) In addition, the margin on sales
at Ovonic Battery decreased to negative $1,530,000 in 2004 from positive
$167,000 in 2003 due to product mix as the profits from the equipment sales
contract with Rare Earth Ovonic were more than offset by losses on sales of
hydride materials resulting from low sales volume and high fixed costs.
Ovonic Battery's revenues from product development agreements in the year
ended June 30, 2004 decreased to $7,037,000 from $14,942,000 in the year ended
June 30, 2003 primarily due to reduced battery activities with Cobasys
($5,610,000 in 2004 compared to $12,367,000 in 2003).
Revenues from product development agreements for the Ovonic Battery
segment in the year ended June 30, 2004 funded 48% of Ovonic Battery's cost of
product development as the Company continues to develop its core technologies.
Revenues from product development agreements decreased by $7,905,000, and
spending decreased by $3,341,000, resulting in an increase of $4,564,000 in net
cost of product development.
32
Year Ended June 30,
-----------------------------
2004 2003
------------ ------------
Cost of revenues from product
development agreements $ 7,603,000 $ 15,197,000
Product development and research 6,991,000 2,738,000
------------ ------------
Total cost of product development 14,594,000 17,935,000
Revenues from product development agreements 7,037,000 14,942,000
------------ ------------
Net cost of product development $ 7,557,000 $ 2,993,000
============ ============
Royalties increased 7% to $1,903,000 in the year ended June 30, 2004 from
$1,778,000 in the year ended June 30, 2003.
Revenues from license and other agreements decreased to $125,000 in the
year ended June 30, 2004 from $175,000 in the year ended June 30, 2003. The
2004 license fees resulted from licenses to Linghao Battery, Mcnair-tech Co.,
Ltd. of China and Shenzhen High Power Tech. Co. Ltd. Revenues from license and
other agreements depend on a small number of new business arrangements, are
sporadic and vary dramatically from period to period.
Patent expenses were incurred in 2004 and 2003 in connection with the
protection of Ovonic Battery's United States and foreign patents covering its
proprietary technologies. Total patent expenses increased to $7,853,000 in the
year ended June 30, 2004 from $6,241,000 in the year ended June 30, 2003,
principally due to higher patent defense costs ($7,135,000 in 2004 versus
$5,429,000 in 2003) for the protection of the Company's NiMH battery patents
and technology. ChevronTexaco has agreed to share with the Company 50% of the
litigation costs with Matsushita Electric Industrial Co., Ltd. (MEI) relating
to batteries for non-consumer applications beginning in fiscal 2002.
ChevronTexaco's share of the patent defense costs were $6,272,000 and
$5,174,000 for the year ended June 30, 2004 and 2003, respectively.
On July 7, 2004, the Company announced that it and Cobasys LLC had entered
into a settlement agreement with MEI, Panasonic EV Energy Co., Ltd. (PEVE), and
Toyota Motor Corporation (Toyota) with respect to patent infringement disputes
and counterclaims involving nickel metal hydride (NiMH) batteries before the
International Chamber of Commerce, International Court of Arbitration. Under the
terms of the settlement, no party admitted any liability. (See Note R of Notes
to Consolidated Financial Statements.)
Ovonic Battery's operating, general and administrative expenses (net of
allocations) were $1,178,000 in 2004 compared to $1,410,000 in 2003. The
decrease was primarily due to reduced allocation in 2004 from ECD.
United Solar Ovonic Segment
---------------------------
The United Solar Ovonic segment had an increased operating loss in 2004
versus 2003 primarily due to the impact of 100% ownership of United Solar Ovonic
in 2004 for the entire year, a license fee in 2003, start-up and other costs,
including depreciation expense associated with increasing production capacity,
partially offset by improvement in United Solar Ovonic's loss from operations
due to higher revenues and cost reductions in 2004.
33
United Solar Ovonic's 2004 revenues increased by $22,069,000. $9,991,000
of the increase resulted from consolidating United Solar Ovonic LLC after the
May 14, 2003 acquisition. The remainder of the increase resulted from increased
product sales and higher revenues from product development agreements. In
addition, the 2003 revenues included a license fee.
Photovoltaic sales were $27,586,000 for 2004, which were sales to third
parties, and $9,769,000 for 2003, which were sales to an affiliate. Product
sales to third parties increased by $8,443,000 (44%) in 2004 versus 2003.
United Solar Ovonic's loss on product sales to third parties improved by
$1,341,000 in 2004 compared to 2003 because of higher sales and lower material
costs, partially offset by higher depreciation associated with the 30MW machine
and product mix.
United Solar Ovonic's revenues from product development agreements in the
year ended June 30, 2004 increased to $9,373,000 compared to $2,352,000 in 2003
due to the new Air Force Contract to develop new solar technology to be used in
space and airship vehicles ($7,256,000 in 2004).
Revenues from product development agreements for the segment in 2004
funded more than United Solar Ovonic's cost of product development as United
Solar Ovonic continues to develop its core technologies. Revenues from product
development agreements increased by $7,021,000, and spending increased by
$4,839,000, resulting in an improvement of $2,182,000 in net cost of product
development.
Year Ended June 30,
-----------------------------
2004 2003
------------ ------------
Cost of revenues from product
development agreements $ 7,615,000 $ 1,717,000
Product development and research 972,000 2,031,000
------------ ------------
Total cost of product development 8,587,000 3,748,000
Revenues from product development agreements 9,373,000 2,352,000
------------ ------------
Net cost of product development $ (786,000) $ 1,396,000
============ ============
The license revenue ($3,269,000) 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 year ended June 30, 2003.
United Solar Ovonic's operating, general and administrative expenses (net
of allocations) increased by $4,445,000 in 2004 as a result of the consolidation
of United Solar Ovonic LLC following the May 14, 2003 acquisition.
34
Other Income/Expense and Change in Accounting Principle
-------------------------------------------------------
The $4,482,000 improvement in other income (net) ($655,000 expense in 2004
compared to $5,137,000 expense in 2003) resulted primarily from lower equity
losses attributed to losses at ITS (zero in 2004 compared to $5,286,000 in
2003), at United Solar Ovonic LLC (zero in 2004 because it is now fully
consolidated and no longer on the equity basis - compared to $6,103,000 in 2003)
and higher equity losses at Ovonyx ($644,000 in 2004 versus $406,000 in 2003),
partially offset by lower short-term investments and lower interest rates
causing lower interest income ($714,000 in 2004 compared to $3,561,000 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.
Year Ended June 30, 2003 Compared to Year Ended June 30, 2002
-------------------------------------------------------------
Energy Conversion Devices Segment
---------------------------------
The ECD segment had an increased operating loss in 2003 versus 2002
primarily due to higher investment in product development as ECD received lower
third-party funding to offset its spending on its core technologies. The ECD
segment's revenues decreased in 2003 from 2002 primarily due to a decrease in
revenues from product development agreements.
ECD's product sales, consisting of machine building, were $6,115,000 in
2003 compared to $29,508,000 in 2002, resulting from the completion of the
contract to design and manufacture equipment for United Solar Ovonic which, when
optimized, will be capable of producing on an annual basis solar products
generating 30MW of electrical power.
ECD's revenues from product development agreements decreased in the year
ended June 30, 2003 to $20,249,000 from $31,684,000 in the year ended June 30,
2002 due to reduced funding from ChevronTexaco for agreements with Texaco Ovonic
Hydrogen Systems ($13,651,000 for 2003 compared to $18,581,000 for 2002), Ovonic
Fuel Cell ($4,022,000 for 2003 compared to $8,887,000 for 2002), lower revenues
from a service agreement with Ovonic Media ($615,000 in 2003 versus $1,923,000
in 2002) and the completion of programs with National Institute of Standards and
Technology (NIST) and U.S. Department of Energy (DOE), which advanced ECD's
hydrogen storage and optical memory technologies (zero in 2003 versus $521,000
in 2002).
Revenues from product development agreements for the segment funded 57%
(compared to 79% in 2002) of ECD's cost of product development. While ECD
continued to spend aggressively on its core technologies, the total cost of
product development decreased by $4,971,000 for the year ended June 30, 2003.
However, third-party funding decreased by $11,435,000, resulting in an increase
of $6,464,000 in net cost of product development.
35
Year Ended June 30,
-----------------------------
2003 2002
------------ ------------
Cost of revenues from product
development agreements $ 20,250,000 $ 31,310,000
Product development and research 15,029,000 8,940,000
------------ ------------
Total cost of product development 35,279,000 40,250,000
Revenues from product development agreements 20,249,000 31,684,000
------------ ------------
Net cost of product development $ 15,030,000 $ 8,566,000
============ ============
The expenditures continued the development of ECD's core technologies in
energy storage, energy generation and information technology. Also, product
development programs include work on the Ovonic Cognitive Computer technology -
a unique multifunctional approach to computing basically different than today's
computers - which has the potential to accomplish many tasks in a simple manner
impossible to perform on conventional computers. It is based on the learning
capability that mimics the functionality of the human brain by combining memory
and processing in single sub-micron device. Included in the development costs
for the Ovonic(TM) Cognitive Computer technology is depreciation ($886,000)
related to the new state-of-the-art clean room and the related equipment.
Another project, in collaboration with ChevronTexaco, was the conversion of a
2-liter internal combustion engine (ICE) to run on hydrogen. This converted
engine is being used to power a hybrid electric vehicle (a 2002 Toyota Prius)
using our Ovonic(TM) low-pressure solid hydrogen storage system. This solid
storage system can potentially be applied to hydrogen-powered fuel cell vehicles
and demonstrates the principles of utilizing hydrides to address the hydrogen
infrastructure.
ECD's royalties, consisting of optical memory royalties, were $65,000 in
2003 compared to $87,000 in 2002.
Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of ECD's
joint ventures. Other revenues increased to $633,000 in the year ended June 30,
2003 from $357,000 in the year ended June 30, 2002. This increase was primarily
due to certain adjustments which increased revenues to reflect a change in
estimate based on information received by the Company pertaining to certain
customers and contracts and increases in revenues for services provided by ECD's
Central Analytical Lab and Production Technology and Machine Building Division
to affiliates and others.
ECD's patent expenses were $1,319,000 in 2003 compared to $1,165,000 in
2002.
ECD's operating, general and administrative expenses were $3,305,000 in
2003 compared to $1,925,000 in 2002. The increase was due to decreased
allocation in 2004 to cost of revenues from business agreements.
Ovonic Battery Segment
----------------------
The Ovonic Battery segment had an increased operating loss in 2003
compared to 2002 primarily resulting from higher costs for patent defense and
lower revenues from product development agreements.
36
The decrease in Ovonic Battery's revenues was primarily due to lower
equipment sales to Rare Earth Ovonic, decreased revenues from product
development agreements and decreased royalties, partially offset by increased
revenues from license and other agreements.
Equipment sales decreased 55% to $11,924,000 in 2003 from $26,504,000 in
2002, primarily due to the near completion of the first phase of Ovonic
Battery's contracts with Rare Earth Ovonic to provide battery-making equipment
($10,726,000 in 2003 compared to $25,287,000 in 2002). Sales of nickel
hydroxide and metal hydride materials were $973,000 in 2003 compared to $940,000
in 2002. Ovonic Battery had improved profitability on the contract to provide
battery manufacturing equipment to Rare Earth Ovonic and a smaller loss on the
sales of metal hydride materials.
Ovonic Battery's revenues from product development agreements decreased in
the year ended June 30, 2003 to $14,942,000 from $20,078,000 in the year ended
June 30, 2002 primarily as a result of reduced funding from ChevronTexaco for
an agreement with Cobasys ($12,367,000 for 2003 compared to $16,315,000 for
2002).
Revenues from product development agreements for the segment funded 83%
(compared to 94% in 2002) of the Ovonic Battery's cost of product development.
While Ovonic Battery continued to spend aggressively on its core technologies,
the total cost of product development decreased by $3,476,000 for the year ended
June 30, 2003. However, third-party funding decreased by $5,136,000, resulting
in an increase of $1,660,000 in net cost of product development.
Year Ended June 30,
-----------------------------
2003 2002
------------ ------------
Cost of revenues from product
development agreements $ 15,197,000 $ 19,469,000
Product development and research 2,738,000 1,942,000
------------ ------------
Total cost of product development 17,935,000 21,411,000
Revenues from product development agreements 14,942,000 20,078,000
------------ ------------
Net cost of product development $ 2,993,000 $ 1,333,000
============ ============
Royalties decreased 7% to $1,778,000 in the year ended June 30, 2003 from
$1,914,000 in the year ended June 30, 2002. Lower royalties reflect lower sales
of small consumer batteries and increased production efficiencies of the Ovonic
Battery's licensees, which have resulted in lower prices.
Ovonic Battery entered into license agreements in 2003 with four Chinese
companies for a total of $175,000, compared to $25,000 in 2002.
Expenses were incurred in 2003 and 2002 in connection with the protection
of the Company's U.S. and foreign patents covering its proprietary technologies.
Total patent expenses increased to $6,241,000 in the year ended June 30, 2003
from $3,695,000 in the year ended June 30, 2002, principally due to litigation
costs ($5,429,000 in 2003 versus $2,749,000 in 2002) for the protection of
Ovonic Battery's NiMH battery patents and technology. ChevronTexaco has agreed
to share 50% of the battery litigation expenses, other
37
than those related to consumer batteries, beginning in fiscal 2002. (See Note R
of Notes to Consolidated Financial Statements for resolution of this matter.)
Ovonic Battery's operating, general and administrative expenses were
$1,410,000 in 2003 compared to $4,257,000 in 2002. The decrease in 2003 was due
to increased allocations to product development agreements and research expense.
United Solar Ovonic Segment
---------------------------
The United Solar Ovonic segment had an increased operating loss of
$1,816,000 (operating loss of $6,355,000 in 2003 versus operating loss of
$4,539,000 in 2002) primarily due to costs associated with increasing production
capacity with the February 2003 start-up of new manufacturing equipment which,
when fully optimized, is capable of producing 30MW of photovoltaic products
annually and due to, after May 14, 2003, recognition of 100% of United Solar
Ovonic's operating results.
United Solar Ovonic's 2003 consolidated revenues increased to $14,890,000
in 2003 versus $7,157,000 in 2002 due to: (i) increased product sales as it
continues to expand its manufacturing capacity from the previous 5MW
manufacturing equipment to the current equipment which, when fully optimized,
will be capable of producing 30MW of photovoltaic products annually, (ii) the
acquisition of 100% of United Solar Ovonic LLC on May 14, 2003 and the resultant
consolidation of their revenues from third parties after that date, and (iii)
higher revenues from product development agreements.
Photovoltaic sales (sales of semi-finished products to an affiliate,
United Solar Ovonic LLC, prior to May 14, 2003, and are sales of finished
products to third parties after that date) which were $9,769,000 for 2003 and
$5,883,000 for 2002 (see Note D of Notes to Consolidated Financial Statements).
The increased loss on product sales primarily relates to sales of photovoltaic
products as the new manufacturing equipment for photovoltaic products was
brought on line.
United Solar Ovonic's revenues from product development agreements were
$2,352,000 in 2003 compared to $1,274,000 in 2002.
Revenues from product development agreements for the segment funded 63%
(compared to 38% last year) of United Solar Ovonic's cost of product
development. While United Solar continued to spend aggressively on its core
technologies, the total cost of product development increased by $418,000 for
the year ended June 30, 2003. However, third-party funding increased by
$1,078,000, resulting in a decrease of $660,000 in net cost of product
development.
Year Ended June 30,
-----------------------------
2003 2002
------------ ------------
Cost of revenues from product
development agreements $ 1,717,000 $ 1,274,000
Product development and research 2,031,000 2,056,000
------------ ------------
Total cost of product development 3,748,000 3,330,000
Revenues from product development agreements 2,352,000 1,274,000
------------ ------------
Net cost of product development $ 1,396,000 $ 2,056,000
============ ============
38
Revenues from license and other agreements increased to $3,269,000 in the
year ended June 30, 2003 from zero in the year ended June 30, 2002. The
increase primarily resulted from United Solar Ovonic Corp. issuing to Canon Inc.
a notice whereby United Solar Ovonic Corp. granted Canon rights to manufacture
photovoltaic products in two countries of its choice in Southeast Asia,
excluding India and the People's Republic of China. These rights were granted
in satisfaction of the outstanding obligation ($2,500,000 plus accrued interest)
due Canon in connection with a previous loan made to United Solar Ovonic Corp.
by Canon. United Solar Ovonic Corp. recorded the satisfaction of the loan and
accrued interest from Canon ($3,269,000) as revenue from license agreements in
its statement of operations for the year ended June 30, 2003.
United Solar Ovonic's patent expenses were $58,000 in 2003 compared to
$72,000 in 2002.
United Solar Ovonic's operating, general and administrative expenses were
$3,622,000 in 2003 compared to $1,652,000 in 2002. The increase in 2003 was a
result of the consolidation of United Solar Ovonic LLC following the May 14,
2003 acquisition.
General
-------
The $6,482,000 decrease in other income (expense) ($5,137,000 expense in
2003 compared to $1,345,000 income in 2002) resulted primarily from increased
equity losses attributed to losses at United Solar Ovonic LLC ($6,103,000 in
2003 compared to $2,944,000 in 2002), equity losses and the write-down of the
Company's investment in ITS Innovative Transportation Systems ($5,286,000 loss
in 2003) and from lower interest income on the Company's investments as a result
of lower interest rates and a lower level of investments ($3,561,000 in 2003
compared to $4,727,000 in 2002), partially offset by increased realized gains
on the sale of investments ($1,427,000 in 2003 versus $304,000 in 2002) and
because 2002 had a $1,000,000 write-off of the Company's investment in EV
Global.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. This is a favorable
adjustment to the Company and is the cumulative effect of a change in accounting
principle in the Company's statements of operations on July 1, 2002. The
Company had an amortization of negative goodwill of $466,000 in 2002 and zero in
2003.
The Company does business in many different parts of the world and its
royalty revenues are affected by changes in foreign currencies and their
exchange rates relative to the U.S. dollar. However, the vast majority of the
Company's business agreements are denominated in U.S. dollars and, as such, the
Company has minimized its exposure to currency rate fluctuations.
39
Liquidity and Capital Resources
As of June 30, 2004, the Company had consolidated cash, cash equivalents,
and accounts receivable (including $2,180,000 of amounts due from related
parties) of $28,737,000 (see Note H of Notes to Consolidated Financial
Statements for restrictions) and had consolidated working capital of
$24,649,000.
On July 7, 2004, ECD and Cobasys LLC entered into a settlement agreement
with Matsushita Electric Industrial Co., Ltd. (MEI), Panasonic EV Energy Co.,
Ltd. (PEVE), and Toyota Motor Corporation with respect to patent infringement
disputes and counterclaims involving nickel metal hydride (NiMH) batteries
before the International Chamber of Commerce, International Court of
Arbitration. Under the terms of the settlement, no party admitted any liability.
Also, Cobasys and PEVE will cross license each other for current and future
patents to avoid possible future litigation. Cobasys and PEVE have agreed to a
technical cooperation agreement to advance the state-of-the-art of NiMH
batteries which are widely used in hybrid electric vehicles (HEVs). Cobasys and
PEVE have also established a joint development program to collaborate on the
development of next-generation high performance NiMH batteries for HEVs.
As part of the settlement, ECD and Ovonic Battery received a $10 million
license fee from MEI, PEVE and Toyota. In addition, Cobasys received a $20
million patent license fee according to documents filed on July 7, 2004 with
the U.S. Securities and Exchange Commission. Upon receipt of the funds, Cobasys
made $8 million distributions to each of Ovonic Battery and ChevronTexaco as
partial reimbursement of legal expenses.
On August 12, 2004, the Board of Directors unanimously approved
Management's business restructuring plan to take full advantage of the favorable
battery settlement agreement announced on July 7, 2004 and the increasing market
interest in solar energy systems and hybrid electric vehicles. Our strategy is
to move ECD from a highly successful research-oriented company to the next phase
of development, which is to commercialize the products we have developed and
concentrate on growing sales revenues and equity value in our core commercial
businesses with the goal to move the Company into a position of having sustained
profitability by July 2006.
The restructuring will increase product revenues while enabling us to
carry out major cost-reduction measures, including significant reductions in the
workforce to right size activities to support our core commercial businesses.
We will manage a reduced portfolio of advanced product development activities
and a leaner R&D team to grow future businesses.
Since the purchase of our partner's interest in United Solar Ovonic on
May 14, 2003, ECD has funded the operating losses and capital needs of United
Solar Ovonic. With the growth of United Solar Ovonic's business, it is expected
that United Solar Ovonic will be able to fund its own operations and capital
needs in the coming year.
The core commercial businesses on which the Company is focusing are United
Solar Ovonic, Cobasys, Ovonyx and Texaco Ovonic Hydrogen Systems.
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
40
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. Each unit included a warrant to purchase a share of
ECD Common Stock. Warrants to purchase 3,356,735 shares of ECD Common Stock are
outstanding and may be exercised for $13.96 on or prior to May 2, 2005 and for
$16.03 at any time thereafter but prior to October 31, 2006.
The Company expects the amount of cash to be received under existing
product development agreements in the year ending June 30, 2005 to decrease to
approximately $13,044,000, compared to $36,678,000 received in the year ended
June 30, 2004, substantially due to reduced funding to be received in the year
ending June 30, 2005 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.
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
June 30, 2004, Ovonic Battery has received payments totaling $59,484,000 under
the three contracts. Ovonic Battery has recorded revenues of $58,500,000 for
the contracts, $984,000 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 June 30, 2004, the Company had $13,827,000 consolidated cash and
cash equivalents ($1,150,000 of which was restricted) consisting of money market
funds. 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.
During the year ended June 30, 2004, $50,106,000 of cash was used in
operations. The difference between the net loss of $51,422,000 and the net
cash used in operations was principally due to noncash costs (principally
depreciation ($8,128,000) and equity in losses of joint ventures ($644,000))
partially offset by a $7,775,000 increase in working capital (other than cash).
The Company spent $3,547,000 on property, plant and equipment that was
placed in service during the year ended June 30, 2004. A balance of $91,000
was in other assets at June 30, 2004 which represents deposits and progress
payments for property, plant and equipment, all of which is expected to be
placed in service during fiscal 2005. In total, the Company expects to spend
$2,000,000 for capital expenditures in fiscal 2005, primarily for manufacturing
equipment at United Solar Ovonic and for leasehold improvements to the Company's
facilities.
41
The following table delineates the Company's contractual obligations:
Payments Due by Period
--------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
Long-term Debt $ - $ - $ - $ - $ -
Capital Lease Obligations 16,329,000 1,267,000 2,558,000 2,734,000 9,770,000
Operating Leases 9,471,000 2,709,000 3,167,000 2,257,000 1,338,000
Purchase Obligations 13,483,000 13,193,000 287,000 3,000 -
----------- ----------- ----------- ----------- -----------
Total $39,283,000 $17,169,000 $ 6,012,000 $ 4,994,000 $11,108,000
=========== =========== =========== =========== ===========
As part of its long-standing strategy, the Company has made investments in
its technologies, which have resulted in enabling intellectual property and
products. The technology emerging from these investments has enabled the
Company to finance its operations and growth through strategic alliances (joint
ventures and license agreements) with third parties who can provide financial
resources and marketing expertise for the Company's technologies and products.
The resultant strategic alliances and joint ventures form the basis for
advancement of the commercialization of the Company's technologies and products:
o Cobasys LLC - ChevronTexaco is funding an initial amount up to
$178,000,000 ($134,000,000 of which has been funded as of June 30, 2004)
to increase the manufacturing capacity at Cobasys' facilities in Michigan
and Ohio, and for market development and advanced product development.
Funding may be cancelled if mutually agreed-upon business objectives and
milestones are not satisfied. Objectives and milestones were developed
four years ago and are no longer relevant. A new business plan is under
review by the Management Committee and, upon its approval, the Committee
will establish new business objectives and milestones. A portion of
Cobasys' funding is committed to an advanced product development contract
with Ovonic Battery. The Company recorded revenues of $5,610,000 for work
performed under the contract in the year ended June 30, 2004 and expects
to record revenues of approximately $1,500,000 in fiscal 2005.
o Texaco Ovonic Hydrogen Systems LLC - Through June 30, 2004, ChevronTexaco
has funded $59,948,000, including product and market development.
Funding may be cancelled if mutually agreed-upon milestones are not
satisfied. A significant portion of the funding has been used for a
product development contract from Texaco Ovonic Hydrogen Systems to ECD.
The Company had revenues for work performed under the contract of
$10,063,000 for the year ended June 30, 2004. At its meeting on
June 30, 2004, the Management Committee of Texaco Ovonic Hydrogen
Systems did not approve the accomplishment of three of the joint
venture's milestones. The Management Committee will review and
determine the satisfaction of these milestones at a future meeting.
42
The resultant strategic alliances and agreements with major companies have
accelerated the commercialization and development of the Company's products and
technologies. While the Company's business partners have funded most of its
product development and commercialization 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.
Management believes that funds generated from operations, new business
agreements, equity, including the exercise of Common Stock purchase warrants,
debt financings, new government contracts and the cost-containment initiatives,
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 report of the independent registered public accounting firm
states that "the Company's recurring losses from operations and need for
additional working capital raise substantial doubt about its ability to continue
as a going concern." The Company has recurring losses from operations and is
actively engaged in discussions to obtain the needed additional working capital.
Item 7A: 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 $13,074,000 and $32,995,000 of these investments (including cash
equivalents) on June 30, 2004 and June 30, 2003, respectively. On June 30,
2004, the investments were all maturing on a daily basis. On June 30, 2003, the
investments had an average maturity of 292 days, $26,802,000 of which had
maturities of 91 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. Our market risk
primarily relates to the risks of changes in the credit quality of issuers. As
of June 30, 2004, the risk associated with changes in interest rates is minimal
due to the short average maturity of the investments.
43
Item 8: Consolidated Financial Statements and Supplementary Data
------ --------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Energy Conversion Devices, Inc.
We have audited the accompanying consolidated balance sheet of Energy Conversion
Devices, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2004, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Energy Conversion
Devices, Inc. and subsidiaries as of June 30, 2004, and the results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, is fairly stated when
considered in relation to the basic consolidated financial statements taken as
a whole.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to
the Company's consolidated financial statements, the Company's recurring losses
from operations and need for additional working capital raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are described in Note B. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Grant Thornton LLP
Southfield, Michigan
September 3, 2004
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Energy Conversion Devices, Inc.
Rochester Hills, Michigan
We have audited the accompanying consolidated balance sheet of Energy Conversion
Devices, Inc. and subsidiaries (the "Company") as of June 30, 2003 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended June 30, 2003. Our audits
also included the financial statement schedule listed in the Index at Item 15.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 2003 and
the results of their operations and their cash flows for each of the two years
in the period ended June 30, 2003 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, effective July
1, 2002, the Company changed its method of accounting for goodwill and other
intangible assets to conform to Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company's working capital and recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note B. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Detroit, Michigan
October 21, 2003
45
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
June 30,
---------------------------
2004 2003
------------ ------------
CURRENT ASSETS
Cash, including cash equivalents of
$13,074,000 at June 30, 2004 (of which
$1,150,000 is restricted) and $6,193,000 at
June 30, 2003 (of which $2,000,000 is
restricted) $ 13,826,537 $ 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
$274,000 at June 30, 2004 and $265,000 at
June 30, 2003) 12,730,100 10,520,719
Accounts receivable due from related parties 2,180,069 6,977,280
Note receivable - 11,629,489
Inventories 13,651,715 12,448,172
Other 1,264,364 1,017,659
------------ ------------
TOTAL CURRENT ASSETS 43,652,785 77,962,086
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 15,191,642 13,982,830
Machinery and other equipment (including
construction in progress of approximately
$2,000 at June 30, 2004 and $163,000 at
June 30, 2003) 75,776,192 75,587,068
Capitalized lease equipment 10,000,000 10,000,000
------------ ------------
101,234,834 99,836,898
Less accumulated depreciation and amortization (35,288,928) (29,137,648)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 65,945,906 70,699,250
Investment in Rare Earth Ovonic-China 1,710,000 1,710,000
INVESTMENT IN AND ADVANCES TO JOINT VENTURES
Ovonyx - 594,220
Cobasys - -
Texaco Ovonic Hydrogen Systems - -
Ovonic Media - -
OTHER ASSETS 2,003,084 2,729,094
------------ ------------
TOTAL ASSETS $113,311,775 $153,694,650
============ ============
See notes to consolidated financial statements.
46
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
---------------------------
2004 2003
------------ ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 12,937,175 $ 18,608,052
Salaries, wages and amounts withheld from
employees 4,766,215 4,574,357
Deferred revenues under business agreements 966,596 5,126,569
Current installments on long-term liabilities 333,368 11,858,378
------------ ------------
TOTAL CURRENT LIABILITIES 19,003,354 40,167,356
LONG-TERM LIABILITIES 10,160,791 10,187,127
NONREFUNDABLE ADVANCE ROYALTIES 2,992,562 3,507,995
------------ ------------
TOTAL LIABILITIES 32,156,707 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 and outstanding - 24,523,001 shares at
June 30, 2004 and 21,252,207 shares at
June 30, 2003 245,230 212,522
Additional paid-in capital 417,313,665 384,987,156
Accumulated deficit (335,813,785) (284,392,111)
Accumulated other comprehensive income 250,399 546,646
Unearned compensation on Class B Convertible
Common Stock (846,940) (1,528,540)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 81,155,068 99,832,172
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $113,311,775 $153,694,650
============ ============
See notes to consolidated financial statements.
47
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year Ended June 30,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
REVENUES
Product sales $ 33,853,793 $ 15,942,438 $ 26,252,235
Product sales to related parties 3,050 6,473,352 10,381,932
------------ ------------ ------------
Total product sales 33,856,843 22,415,790 36,634,167
Royalties 2,519,671 1,810,762 1,980,746
Royalties - related party 2,108 32,885 20,168
------------ ------------ ------------
Total royalties 2,521,779 1,843,647 2,000,914
Revenues from product development agreements 13,547,648 6,382,432 6,776,976
Revenues from product development
agreements with related parties 15,673,104 30,952,816 45,908,741
------------ ------------ ------------
Total revenues from product development
agreements 29,220,752 37,335,248 52,685,717
Revenues from license and other agreements 125,000 3,444,114 25,000
Other operating revenues 309,622 (79,312) 136,577
Other operating revenues from related parties 270,573 219,373 227,910
------------ ------------ ------------
Total other operating revenues 580,195 140,061 364,487
------------ ------------ ------------
TOTAL REVENUES 66,304,569 65,178,860 91,710,285
EXPENSES
Cost of product sales 41,982,269 25,938,925 37,165,211
Cost of revenues from product development
agreements 28,878,722 37,001,106 51,703,118
Product development and research 22,516,247 19,798,126 12,775,128
Patent defense (net) 7,135,427 5,429,042 2,749,176
Patents 2,086,896 2,189,290 2,183,166
Operating, general and administrative (net) 14,471,210 8,098,941 7,367,813
------------ ------------ ------------
TOTAL EXPENSES 117,070,771 98,455,430 113,943,612
------------ ------------ ------------
LOSS FROM OPERATIONS (50,766,202) (33,276,570) (22,233,327)
OTHER INCOME (EXPENSE):
Interest income 714,049 3,561,326 4,727,246
Interest expense (1,314,202) (881,284) (910,134)
Equity in losses and write-down of joint
ventures (644,220) (11,794,552) (3,658,480)
Minority interest share of losses - 2,079,845 1,536,236
Loss on write-off of investment in EV Global - - (1,000,000)
Gains on sales of investments 364,416 1,427,241 303,572
Other nonoperating income 224,485 470,275 346,853
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (655,472) (5,137,149) 1,345,293
------------ ------------ ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (51,421,674) (38,413,719) (20,888,034)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - 2,215,560 -
------------ ------------ ------------
NET LOSS $(51,421,674) $(36,198,159) $(20,888,034)
============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ (2.15) $ (1.75) $ (.96)
BASIC AND DILUTED NET INCOME PER SHARE
FOR CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - .10 -
------------ ------------ ------------
BASIC AND DILUTED NET LOSS PER SHARE $ (2.15) $ (1.65) $ (.96)
============ ============ ============
See notes to consolidated financial statements.
48
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Three years ended June 30, 2004
Class A and
Class B Unearned
Convertible Compen-
Common Stock Common Stock sation on
--------------- ------------------- Accumulated Class B
Number Number Additional Other Convertible Total
of of Paid-In Accumulated Comprehen- Common Stockholders'
Shares Amount Shares Amount Capital Deficit sive Income Stock Equity
------- ------- ---------- -------- ------------ ------------- ----------- ----------- -------------
Balance at July 1, 2001 649,913 $ 6,499 19,053,026 $190,530 $339,858,798 $(227,305,918) $ 881,342 $(2,890,540) $110,740,711
Net loss for year ended
June 30, 2002 (20,888,034) (20,888,034)
Unrealized loss on
investments (net of
reclassification
adjustment) (393,392) (393,392)
------------
Comprehensive loss (21,281,426)
Earned compensation on
Class B stock 680,400 680,400
Issuance of stock to
directors and consultants 1,310 13 25,034 25,047
Common stock issued in
connection with
exercise of stock
options and warrants 1,746,279 17,463 35,727,718 35,745,181
Expense options granted
below market 197,838 197,838
Stock options issued
to non-employees 253,579 253,579
Common stock sold to
ChevronTexaco 448,358 4,484 8,889,146 8,893,630
------- ------- ---------- -------- ------------ ------------- --------- ----------- ------------
Balance at June 30, 2002 649,913 $ 6,499 21,248,973 $212,490 $384,952,113 $(248,193,952) $ 487,950 $(2,210,140) $135,254,960
======= ======= ========== ======== ============ ============= ========= =========== ============
See notes to consolidated financial statements.
(Continued on next page)
49
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Three years ended June 30, 2004
(CONTINUED)
Class A and
Class B Unearned
Convertible Compen-
Common Stock Common Stock sation on
--------------- ------------------- Accumulated Class B
Number Number Additional Other Convertible Total
of of Paid-In Accumulated Comprehen- Common Stockholders'
Shares Amount Shares Amount Capital Deficit sive Income Stock Equity
------- ------- ---------- -------- ------------ ------------- ----------- ----------- ------------
Balance at June 30, 2002 649,913 $ 6,499 21,248,973 $212,490 $384,952,113 $(248,193,952) $ 487,950 $(2,210,140) $135,254,960
Net loss for year ended
June 30, 2003 (36,198,159) (36,198,159)
Unrealized loss on
investments (net of
reclassification
adjustment) (56,797) (56,797)
Foreign currency
translation gains 115,493 115,493
------------
Comprehensive loss (36,139,463)
Earned compensation on
Class B stock 681,600 681,600
Issuance of stock to
directors and consultants 2,844 28 29,976 30,004
Common stock issued in
connection with
convertible investment
certificates 390 4 (4) -
Stock options issued
to non-employees 5,071 5,071
------- ------- ---------- -------- ------------ ------------- --------- ----------- ------------
Balance at June 30, 2003 649,913 $ 6,499 21,252,207 $212,522 $384,987,156 $(284,392,111) $ 546,646 $(1,528,540) $ 99,832,172
======= ======= ========== ======== ============ ============= ========= =========== ============
See notes to consolidated financial statements.
(Continued on next page)
50
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Three years ended June 30, 2004
(CONTINUED)
Class A and
Class B Unearned
Convertible Compen-
Common Stock Common Stock sation on
--------------- ------------------- Accumulated Class B
Number Number Additional Other Convertible Total
of of Paid-In Accumulated Comprehen- Common Stockholders'
Shares Amount Shares Amount Capital Deficit sive Income Stock Equity
------- ------- ---------- -------- ------------ ------------- ----------- ----------- -------------
Balance at June 30, 2003 649,913 $ 6,499 21,252,207 $212,522 $384,987,156 $(284,392,111) $ 546,646 $(1,528,540) $ 99,832,172
Net loss for year ended
June 30, 2004 (51,421,674) (51,421,674)
Unrealized loss on
investments (net of
reclassification
adjustment) (431,153) (431,153)
Foreign currency
translation gains 134,906 134,906
-------------
Comprehensive loss (51,717,921)
Sale of units to
institutional investors 3,266,254 32,663 33,794,801 33,827,464
Expenses related to
sale of units (1,618,647) (1,618,647)
Earned compensation on
Class B stock 681,600 681,600
Issuance of stock to
directors and consultants 2,140 21 19,988 20,009
Common stock issued in
connection with exercise
of stock options
and warrants 2,400 24 24,427 24,451
Stock options issued
to non-employees 105,940 105,940
------- ------- ---------- -------- ------------ ------------- --------- ----------- ------------
Balance at June 30, 2004 649,913 $ 6,499 24,523,001 $245,230 $417,313,665 $(335,813,785) $ 250,399 $ (846,940) $ 81,155,068
======= ======= ========== ======== ============ ============= ========= =========== ============
See notes to consolidated financial statements.
51
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
OPERATING ACTIVITIES:
Net loss $ (51,421,674) $ (36,198,159) $ (20,888,034)
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 8,128,419 3,955,641 2,273,010
Amortization of premium/discount on investments 73,083 660,316 362,172
Equity in losses and write-down of joint ventures 644,220 11,794,552 3,658,480
Profit deferred on sales to United Solar Ovonic LLC - - (1,774,172)
Changes in nonrefundable advance royalties (515,433) (119,936) (213,057)
Stock and stock options issued for services rendered 807,549 716,675 1,156,864
Loss/(gain) on sales of investments (364,416) (1,427,241) (335,757)
(Gain)/loss on sale of equipment 10,368 40,257 (16,245)
Amortization of deferred gain - - (139,164)
Amortization of negative goodwill - - (466,433)
Minority interest - (2,079,845) (1,536,236)
Cumulative effect of change in accounting principle - (2,215,560) -
Loss on write-off of investment in EV Global - - 1,000,000
Retirement liability 307,032 285,827 264,964
Changes in working capital:
Accounts receivable (2,209,381) 1,744,131 11,540,647
Accounts and note receivable due from related parties 4,797,211 2,958,600 (516,672)
Inventories (1,203,543) (1,207,889) 170,269
Other assets 479,305 1,334,471 (1,528,048)
Accounts payable and accrued expenses (5,479,016) 2,450,159 733,313
Deferred revenues under business agreements (4,159,973) (2,131,385) 4,609,917
Deferred tax assets and other - (173,012) 864,999
-------------- -------------- --------------
NET CASH USED IN OPERATIONS (50,106,249) (22,881,512) (779,183)
-------------- -------------- --------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,546,922) (5,134,579) (7,666,791)
Acquisition of United Solar Ovonic (net of
cash acquired) - (3,773,365) -
Investment in and advances to United Solar Ovonic LLC - (2,984,370) -
Investment in and advances to ITS - (2,000,000) -
Investment in Rare Earth Ovonic - - (1,710,000)
Investment in Ovonyx (50,000) (1,000,000) -
Purchase of investments (11,969,949) (30,907,063) (79,490,214)
Sales of investments 38,631,634 76,812,839 55,981,916
Proceeds from sale of property, plant and equipment 161,477 24,251 35,876
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 23,226,240 31,037,713 (32,849,213)
-------------- -------------- --------------
FINANCING ACTIVITIES:
Principal payments under short-term and long-term
debt obligations and capitalized lease obligations (228,889) (41,764,836) (1,844,799)
Proceeds from sale of stock 32,233,268 - 44,638,811
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 32,004,379 (41,764,836) 42,794,012
-------------- -------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 134,906 (45,119) -
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,259,276 (33,653,754) 9,165,616
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,567,261 42,221,015 33,055,399
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,826,537 $ 8,567,261 $ 42,221,015
============= ============= =============
See notes to consolidated financial statements.
52
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 1,314,202 $ 881,284 $ 910,134
Non-cash transactions:
Short-term and long-term note
receivable - United Solar Ovonic LLC (11,629,489) - 665,122
Short-term and long-term note
payable - Canon 11,629,489 - (665,122)
Debt principal and interest exchanged for
license - United Solar Ovonic/Canon - 3,269,114 -
Transfer investment in United Solar
Ovonic LLC to note receivable - - (4,523,841)
Record note receivable - Bekaert ECD
Solar Systems - - 4,523,841
53
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 below) 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. On August 12, 2004, the Board of
Directors unanimously approved Management's business restructuring plan to take
full advantage of the favorable battery settlement agreement announced on
July 7, 2004 and the increasing market interest in solar energy systems and
hybrid electric vehicles. Management believes that funds generated from
operations, equity and debt financing, new government contracts and the
restructuring initiatives (see Note B of Notes to Consolidated Financial
Statements), 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.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern in the absence of sufficient additional
funds and the achievement of profitable operations. 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 of Notes to Consolidated
Financial Statements).
Nature of Business
------------------
Energy Conversion Devices, Inc. (ECD) is a technology, product development
and manufacturing company engaged in the invention, engineering, development and
commercialization of new materials, products and production technology in the
fields of alternative energy technology and information technology.
Financial Statement Presentation, Principles of Consolidation and Equity
Accounting
------------------------------------------------------------------------
The consolidated financial statements include the accounts of ECD and its
100%-owned 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 G of Notes to Consolidated
Financial Statements) and its approximately 91%-owned subsidiary Ovonic Battery
Company, Inc. (Ovonic Battery) (collectively the "Company"). No minority
interest related to Ovonic Battery is recorded in the consolidated financial
statements because there is
54
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
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; (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; (iii)
Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler Lowrey, Intel Capital
and other investors; and (iv) Ovonic Media, LLC, a joint venture owned 51% by
General Electric through its GE Plastics business unit and 49% by ECD. See
Note G of Notes to Consolidated Financial Statements for discussions of all of
the Company's ventures.
For the period July 1, 2002 through May 14, 2003, ECD owned 81% of United
Solar Ovonic Corp. (formerly United Solar Systems Corp.) and consolidated that
entity with a 19% minority interest recognized, and accounted for United Solar
Ovonic Corp.'s 40% interest in United Solar Ovonic LLC on the equity basis.
Effective May 15, 2003, with the purchase by the Company from Bekaert
Corporation of the remaining interests in United Solar Ovonic Corp. and United
Solar Ovonic LLC, the Company owns 100% of each of the entities and has
consolidated the entities in their entirety for the period from May 15, 2003
through June 30, 2003 and for all of the year ended June 30, 2004. (See Note D
of Notes to Consolidated Financial Statements.)
At June 30, 2004, the Company's investments in Cobasys, Ovonyx, Texaco
Ovonic Hydrogen Systems and Ovonic Media are recorded at zero. The Company will
continue to carry its investment in each of these joint ventures at zero until
the venture becomes profitable (based upon the venture's history of sustainable
profits), at which time the Company will start to recognize over a period of
years its share, if any, of the then equity of each of the ventures, and will
recognize its share of each venture's profits or losses on the equity method of
accounting. To the extent that the Company has made cash or other
contributions, it recognizes its proportionate share of any losses until the
investment reaches zero.
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 G of Notes to Consolidated Financial Statements).
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.
55
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
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 2004
presentation.
Change in Accounting Principle
------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The
Company adopted these statements on July 1, 2002 and recognized the unamortized
negative goodwill of approximately $2,216,000. This is a favorable adjustment
to the Company and is the cumulative effect of a change in accounting principle
in the Company's statements of operations.
The following is the effect on the years ended June 30, 2003 and 2002 of
this change in accounting principle:
Year Ended June 30,
----------------------------
2003 2002
------------ ------------
Net Loss $(36,198,159) $(20,888,034)
Deduct:-
Amortization of negative goodwill - (466,433)
Cumulative effect of change in
accounting principle (2,215,560) -
------------ ------------
Adjusted Net Loss before cumulative
effect of change in accounting principle $(38,413,719) $(21,354,467)
============ ============
Basic Net Loss Per Share $ (1.65) $ (.96)
Deduct:-
Amortization of negative goodwill - (.02)
Cumulative effect of change in
accounting principle (.10) -
------------ ------------
Adjusted Basic Net Loss Per Share before
cumulative effect of change in
accounting principle $ (1.75) $ (.98)
============ ============
Cash Equivalents
----------------
Cash equivalents consist of investments in short-term, highly liquid
securities having a maturity of 90 days or less from the date of acquisition.
56
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
Short-Term Investments
----------------------
The Company has evaluated its investment policies consistent with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
determined that all of its investment securities are classified as available-
for-sale. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses reported in Stockholders' Equity under the caption
"Accumulated Other Comprehensive Income." The amortized cost of debt securities
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretions are included in interest income. Realized
gains and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other nonoperating income
(expense). The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
Short-term investments consist of mortgage and asset-backed securities and
corporate notes which mature 91 days or more from date of acquisition.
Investment in Rare Earth Ovonic-China
-------------------------------------
The Company has three joint ventures, collectively Rare Earth Ovonic, with
Rare Earth High-Tech Co. Ltd. (Rare Earth High-Tech) of Baotou Steel Company of
Inner Mongolia, China, for the manufacturing of its battery and other related
technologies. The Company accounts for its 19% interest in each of these joint
ventures using the cost method of accounting.
Impairment
----------
The Company compares the carrying value of its long-lived assets with the
estimated undiscounted cash flows or fair value associated with these assets.
If the carrying value of the long-lived assets is less than the estimated
undiscounted cash flows or fair value, then an impairment loss is recorded.
Financial Instruments
---------------------
Due to the short-term maturities of cash, cash equivalents, short-term
investments, accounts receivable and accounts payable, the Company believes that
the carrying value of its financial instruments is a reasonable estimate of fair
value.
Accounts Receivable
-------------------
The Company maintains an allowance for doubtful accounts considering a
number of factors, including the length of time trade accounts receivable are
past due, previous loss history, the customer's current ability to pay its
obligation, and the condition of the general economy and industry as a whole.
57
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
Foreign Currency Transaction Gains and Losses
---------------------------------------------
Since most of the Company's contracts and transactions are denominated and
settled in U.S. dollars, there are no significant foreign currency gains or
losses.
Property, Plant and Equipment
-----------------------------
All properties are recorded at cost. Plant and equipment are depreciated
on the straight-line method over the estimated useful lives of the individual
assets. The estimated lives of the principal classes of assets are as follows:
Years
-------------
Buildings and improvements 5 to 20
Machinery and other equipment 3 to 12.5
Capitalized leases 3 to 15
Costs of machinery and other equipment acquired or constructed for a
particular product development project, which have no alternative future use
(in other product development projects or otherwise), are charged to product
development and research costs as incurred.
Expenditures for maintenance and repairs are charged to operations.
Expenditures for betterments or major renewals are capitalized and are
depreciated over their estimated useful lives.
Product Development, Patents and Technology
-------------------------------------------
Product development and research costs are expensed as they are incurred
and, as such, the Company's investments in its technologies and patents are
recorded at zero in its financial statements, regardless of their values. The
technology investments are the bases by which the Company is able to enter into
strategic alliances, joint ventures and license agreements.
Product Sales
-------------
Product sales include revenues related to photovoltaic products,
machine-building and equipment sales contracts and nickel hydroxide and metal
hydride materials. Revenues related to most machine-building and equipment sales
contracts and sales related to other long-term contracts are recognized on the
percentage-of-completion method of accounting using the costs incurred to date
as a percentage of the total estimated costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point.
Percentage of Completion - Revenues from product development agreements
that contain specific performance criteria are recognized on a percentage-of-
completion basis which matches the contract revenues to the costs incurred on a
project, based on the relationship of
58
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
costs incurred to estimated total project costs. Revenues from product
development agreements, where there are no specific performance terms, are
recognized in amounts equal to the amounts expended on the programs.
Royalties
---------
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the sale of the respective licensed product. In
several instances, the Company has received cash payments for nonrefundable
advance royalty payments which are creditable against future royalties under the
licenses. Advance royalty payments are deferred and recognized in revenues as
the creditable sales occur, the underlying agreement expires, or when the
Company has demonstrable evidence that no additional royalties will be
creditable and, accordingly, the earnings process is completed.
In connection with a 1992 battery development contract with the United
States Advanced Battery Consortium (USABC), partially funded by the U.S.
Department of Energy (DOE), the Company has agreed to reimburse USABC and DOE,
as their recoupment for payments to the Company under the 1992 Contract, a 15%
share of royalty payments the Company receives through May 3, 2012 where
Ovonic(R) NiMH batteries serve as the primary source of power for battery-
propelled vehicles. The Company has accrued as an expense 15% of such royalty
payments.
ECD has a royalty trust arrangement whereby ECD is obligated to pay a
trust 25% of optical memory royalties received.
Business Agreements
-------------------
A substantial portion of revenues is derived through business agreements
for the development and/or commercialization of products based upon the
Company's proprietary technologies. The Company has two major types of business
agreements.
The first type of business agreement relates to licensing the Company's
proprietary technology. Licensing activities are tailored to provide each
licensee with the right to use the Company's technology, most of which is
patented, for a specific product application or, in some instances, for further
exploration of new product applications of such technologies. The terms of such
licenses, accordingly, are tailored to address a number of circumstances
relating to the use of such technology which have been negotiated between the
Company and the licensee. Such terms generally address whether the license will
be exclusive or nonexclusive, whether the licensee is limited to very narrowly
defined applications or to broader-based product manufacture or sale of products
using such technologies, whether the license will provide royalties for products
sold which employ such licensed technology and how such royalties will be
measured, as well as other factors specific to each negotiated arrangement. In
some cases,
59
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
licenses relate directly to product development that the Company has
undertaken pursuant to product development agreements; in other cases, they
relate to product development and commercialization efforts of the licensee;
and other agreements combine the efforts of the Company with those of the
licensee.
License agreement fees are generally recognized as revenue at the time the
agreements are consummated, which is the completion of the earnings process.
Typically, such fees are nonrefundable, do not obligate the Company to incur any
future costs or require future performance by the Company, and are not related
to future production or earnings of the licensee. License fees payable in
installments are recorded at the present value of the amounts to be received,
taking into account the collectibility of the license fee. In some instances,
a portion of such license fees is contingent upon the commencement of production
or other uncertainties. In these cases, license fee revenues are not recognized
until commencement of production or the resolution of uncertainties. Generally,
there are no current or future direct costs associated with license fees.
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project, based on the relationship of costs
incurred to estimated total project costs. Revenues from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the agreed-
upon fees for product development agreements contemplate reimbursing the Company
for costs considered associated with project activities including expenses for
direct product development and research, patents, operating, general and
administrative expenses and depreciation. Accordingly, expenses related to
product development agreements are recorded as cost of revenues from product
development agreements.
Deferred Revenues
-----------------
Deferred revenues represent amounts received under business agreements in
excess of amounts recognized as revenues. At June 30, 2004, approximately
$665,000 in deferred revenues relates to the Rare Earth Ovonic contracts with
the joint ventures. (See Note G of Notes to Consolidated Financial Statements.)
Overhead and General and Administrative Allocations
---------------------------------------------------
The Company allocates overhead and general and administrative expenses to
product development research expenses and to cost of revenues from research and
development agreements based on a percentage of direct labor costs. For cost of
revenues from product
60
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
development agreements, this allocation is limited to the amount of revenues,
after direct expenses, under the applicable agreements. Overhead is allocated to
cost of product sales through the application of overhead to inventory costs.
The following is a summary of the gross selling, general and
administrative expenses and the aforementioned allocations:
Year Ended June 30,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
Gross Expenses $28,903,000 $24,219,000 $24,487,000
Less - allocations to product
development and research (8,315,000) (7,667,000) (5,255,000)
- allocations to cost of revenues from
product development agreements (6,117,000) (8,453,000) (11,398,000)
- amortization of negative goodwill - - (466,000)
----------- ----------- -----------
Remaining Expenses $14,471,000 $ 8,099,000 $ 7,368,000
=========== =========== ===========
Other Operating Revenues
------------------------
Other operating revenues consist principally of revenues related to
services provided to certain related parties and third-party service revenue
realized by certain of the Company's service departments, including the
Production Technology and Machine Building Division and Central Analytical
Laboratory. Revenues related to services are recognized upon completion of
performance of the applicable service.
Other Nonoperating Income
-------------------------
Other nonoperating income consists of gains and losses on sales of
property, plant and equipment, amortization of deferred gains, rental income,
and other miscellaneous income.
Stock-Based Compensation
------------------------
The Company applies APB 25 to its stock-based compensation awards to
employees. 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 years ended June 30, 2004, 2003 and 2002
would have increased as follows:
61
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
Year Ended June 30,
-------------------------------------------
2004 2003 2002
------------- ------------- ------------
Net Loss, as reported $(51,421,674) $(36,198,159) $(20,888,034)
Add:
Total stock-based compensation
expense determined under fair
value based method, net of tax 3,004,000 5,054,000 10,880,000
------------- ------------- ------------
Pro-forma net loss $(54,425,674) $(41,252,159) $(31,768,034)
============= ============= ============
Loss per share:
Basic and Diluted - as reported $ (2.15) $ (1.65) $ (.96)
============= ============= ============
Basic and Diluted - pro forma $ (2.28) $ (1.88) $ (1.47)
============= ============= ============
The fair value of the options granted during 2004, 2003 and 2002 is
estimated as $276,000, $3,926,000 and $2,253,000 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
2004 2003 2002
---------- ---------- ----------
Dividend Yield 0% 0% 0%
Volatility % 64.83% 69.87% 76.53%
Risk Free Interest Rate 2.50% 2.20% 3.71%
Expected Life 5.11 years 5.11 years 5.11 years
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 years ended June 30 are
computed as follows:
2004 2003 2002
------------ ------------ ------------
Weighted average number of shares outstanding 23,920,337 21,900,416 21,659,933
Net loss before cumulative effect of change
in accounting principle $(51,421,674) $(38,413,719) $(20,888,034)
Cumulative effect of change in accounting
principle - 2,215,560 -
------------ ------------ ------------
Net loss $(51,421,674) $(36,198,159) $(20,888,034)
============ ============ ============
BASIC AND DILUTED NET LOSS PER
SHARE BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ (2.15) $ (1.75) $ (.96)
BASIC AND DILUTED NET LOSS PER SHARE $ (2.15) $ (1.65) $ (.96)
62
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------
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 year ended June 30, 2003.
Due to the Company's net losses, the 2004, 2003 and 2002 weighted average
shares of potential dilutive securities of 80,713, 8,406 and 532,151,
respectively, were excluded from the calculations of diluted loss per share, as
inclusion of these securities would have been antidilutive to the net loss per
share. Additional securities of 4,069,454, 2,700,473 and 62,799, respectively,
were excluded from the 2004, 2003 and 2002 calculations of weighted average
shares of potential dilutive securities. Because of the relationship between
the exercise prices and the average market price of ECD's Common Stock during
these periods, these securities would have been antidilutive regardless of the
Company's net loss.
Recent Pronouncements
---------------------
In December 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," which is effective for financial
statements of public entities that have interests in variable interest entities
or potential variable interest entities commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public
entities (other than small business issuers) for all other types of entities is
required in financial statements for periods ending after March 15, 2004. The
Company implemented this Interpretation on March 31, 2004. The adoption of this
Interpretation did not have a material effect on the Company's consolidated
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement requires that
discontinued operations are measured at the lower of carrying value or fair
value less cost to sell and that future operating losses of discontinued
operations are not recognized until they occur. The Company implemented this
statement on July 1, 2002. On July 1, 2002, in accordance with the provisions
of SFAS 144, the Company assessed for impairment an intangible asset it had on
its balance sheet since 1995. This intangible asset, which was the result of a
license agreement entered into in 1995, was originally valued at $330,000 and
was being amortized over 40 years. After a review of this intangible asset,
including the associated cash flows represented by recent royalties from one
licensee, the Company determined that this intangible asset was impaired. The
Company wrote off the balance ($272,250) of this intangible asset as of July 1,
2002 and recorded this amount in operating, general and administrative expense
in its consolidated statements of operations for the year ended June 30, 2003.
63
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings and Liquidity
---------------------------------
Restructuring
-------------
On August 12, 2004, the Board of Directors unanimously approved
Management's business restructuring plan to take full advantage of the
favorable battery settlement agreement announced on July 7, 2004 (see Note R of
Notes to Consolidated Financial Statements) and the increasing market interest
in solar energy systems and hybrid electric vehicles. Our strategy is to move
ECD from a research-oriented company to the next phase of development, which is
to commercialize the products we have developed and concentrate on growing sales
revenues and equity value in our core commercial businesses with the goal to
move the Company into a position of having sustained profitability by July 2006.
The restructuring will increase product revenues while enabling us to
carry out major cost-reduction measures, including significant reductions in the
workforce to right size activities to support our core commercial businesses.
We will manage a reduced portfolio of advanced product development activities
and a leaner R&D team to grow future businesses.
The core commercial businesses on which the Company is focusing are United
Solar Ovonic, Cobasys, Ovonyx and Texaco Ovonic Hydrogen Systems.
Settlement Agreement
--------------------
On July 7, 2004, ECD announced that it and Cobasys LLC, its 50-50
manufacturing joint venture with ChevronTexaco Technology Ventures LLC, have
entered into a settlement agreement with Matsushita Electric Industrial Co.,
Ltd. (MEI), Panasonic EV Energy Co., Ltd. (PEVE), and Toyota Motor Corporation
with respect to patent infringement disputes and counterclaims involving nickel
metal hydride (NiMH) batteries before the International Chamber of Commerce,
International Court of Arbitration. Under the terms of the settlement, no party
admitted any liability.
As part of the settlement, ECD and its subsidiary, Ovonic Battery,
received a $10 million license fee from MEI, PEVE and Toyota. This fee was
recorded as an advance royalty in July 2004 and will be amortized to income over
10.5 years. In addition, Cobasys received a $20 million license fee according
to documents filed on July 7, 2004 with the U.S. Securities and Exchange
Commission. Upon receipt of the money, Cobasys made an $8 million distribution
each to Ovonic Battery and ChevronTexaco, which were applied as partial
reimbursements of legal expenses.
64
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings and Liquidity (Continued)
---------------------------------------------
Sale of Units
-------------
In November 2003, the Company received $27,940,000 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.
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.
65
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable
----------------------------
June 30, June 30,
2004 2003
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Amounts billed to customers
Commercial customers $ 505,008 $ 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 369,322 698,634
Commercial customers 102,638 9,060
----------- -----------
471,960 707,694
Amounts billed
U.S. Government 1,229,432 1,773,824
----------- -----------
Sub-total 1,701,392 2,481,518
Amounts unbilled for other than long-term
contracts
Commercial customers 1,762,282 1,892,532
Amounts billed for other than long-term contracts
U.S. Government 145,936 -
Commercial customers 8,889,482 5,847,071
----------- -----------
Sub-total 9,035,418 5,847,071
Allowance for uncollectible accounts (274,000) (265,000)
----------- -----------
TOTAL $12,730,100 $10,520,719
=========== ===========
Certain contracts with the U.S. government require a retention that is
paid upon completion of audit of the Company's indirect rates. Certain
contracts have been completed for more than 10 years and have not been audited.
U.S. Government retentions totaling $103,447 are included in long-term other
assets at June 30, 2004 and $103,947 at June 30, 2003. Most U.S. government
contracts remain subject to audit.
66
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable (Continued)
----------------------------------------
Accounts Receivable Due from Related Parties
--------------------------------------------
June 30, June 30,
2004 2003
------------ ------------
Amounts earned which are billed in the
subsequent month on long-term contracts
ChevronTexaco Technology Ventures $ 38,875 $ -
Cobasys 623,551 2,072,138
Texaco Ovonic Hydrogen Systems 1,329,194 1,603,147
---------- ----------
Sub-total 1,991,620 3,675,285
Amounts billed
Cobasys 7,393 3,221,059
Other unbilled
Ovonyx 17,237 412
Other billed
ChevronTexaco Technology Ventures 121,376 5,721
Ovonyx 16,850 48,053
Cobasys - 18,386
Texaco Ovonic Hydrogen Systems 25,593 8,364
---------- ----------
Sub-total 163,819 80,524
---------- ----------
TOTAL $2,180,069 $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 LLC and 19%
interest in United Solar Ovonic Corp. (see Note D of Notes to Consolidated
Financial Statements). 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.
67
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Acquisitions
---------------------
As a result of Bekaert's decision to focus on its core business, on
May 14, 2003, ECD purchased Bekaert's 19% interest in United Solar Ovonic Corp.
and 60% interest in United Solar Ovonic LLC for $6 million ($4 million paid at
closing and $2 million to be paid no later than December 22, 2003) thereby
increasing the Company's ownership in both entities to 100%. ECD had previously
acquired its 81% interest in United Solar Ovonic Corp. and its 40% interest in
United Solar Ovonic LLC in April 2000. In accordance with the purchase and sale
agreement, Bekaert assigned to ECD its $12.2 million note receivable of its
bridge loans to United Solar Ovonic LLC and ECD provided $36 million to United
Solar Ovonic LLC to terminate its master sale-and-leaseback agreement with
LaSalle National Leasing ("LaSalle") pursuant to which United Solar Ovonic LLC's
machinery and equipment were sold to LaSalle and leased back for a period of
seven years. This transaction was accounted for as a step acquisition using
the purchase method of accounting.
$2 million was paid to Bekaert on December 22, 2003. ECD also provided
backup guarantees, secured with standby letters of credit, to Bekaert relating
to guarantees that Bekaert had provided for United Solar Ovonic relating to a
sale/leaseback with Fuji Bank (which was extinguished in July 2003) and the
lease of the Auburn Hills facility. ECD's standby letter of credit is secured
by restricting the use of $1,150,000 of ECD's short-term investments at June 30,
2004.
The purchase price was allocated to identifiable assets acquired and
liabilities assumed based on their fair values. United Solar Ovonic Corp. and
United Solar Ovonic LLC did not have any intangible assets subject to
revaluation. Based on the valuation of machinery and equipment, there is an
excess of the aggregate fair value of the identifiable net assets acquired over
the purchase price, which resulted in negative goodwill. In accordance with the
provisions of SFAS No. 141 "Business Combinations," the negative goodwill is
allocated to reduce the carrying value of the fixed assets of United Solar
Ovonic Corp. and United Solar Ovonic LLC.
The following is a summary of the fair value of the assets acquired and
liabilities assumed (representing 60% of United Solar Ovonic LLC and 19% of
United Solar Ovonic Corp.) as of the date of the acquisition. The fair value of
property, plant and equipment shown below is net of the allocated negative
goodwill:
68
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Acquisitions (Continued)
---------------------------------
ASSETS
Current Assets
Accounts receivable $ 5,600,657
Accounts receivable - Bekaert 11,536,530
Inventory 6,625,688
Prepaids and other assets 704,419
------------
Total current assets 24,467,294
PROPERTY, PLANT AND EQUIPMENT 26,671,416
OTHER ASSETS 6,699,314
------------
TOTAL ASSETS $ 57,838,024
============
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 6,447,455
Notes payable - affiliates 5,395,573
Current portion of long-term debt 3,252,867
Other current liabilities 9,053
------------
Total current liabilities 15,104,948
LONG-TERM DEBT 36,716,661
------------
TOTAL LIABILITIES 51,821,609
------------
PURCHASE PRICE, NET OF CASH ACQUIRED $ 6,016,415
============
With this transaction, ECD increased its ownership of United Solar Ovonic
LLC from 32.4% to 100%, necessitating a change from the equity method of
accounting to consolidation effective May 15, 2003. As ECD's ownership interest
in United Solar Ovonic Corp. increased from 81% to 100%, United Solar Ovonic
Corp. will continue to be accounted for as a consolidated entity; however,
minority interest will cease to be recognized.
NOTE E - Inventories
--------------------
Inventories of raw materials, work in process and finished goods for the
manufacture of solar cells, metal hydride materials and battery packs are valued
at the lower of cost (first in, first out) or market. Cost elements included in
inventory are materials, direct labor and manufacturing overhead.
69
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Inventories (Continued)
--------------------------------
Inventories for United Solar Ovonic Corp., United Solar Ovonic LLC and
Ovonic Battery are as follows:
June 30, June 30,
2004 2003
----------- -----------
Finished products $ 3,511,730 $ 5,282,156
Work in process 4,060,923 1,825,839
Raw materials 6,079,062 5,340,177
----------- -----------
$13,651,715 $12,448,172
=========== ===========
NOTE F - Property, Plant and Equipment
--------------------------------------
Capitalized leases are amortized over the shorter of the term of the lease
or the life of the equipment, usually three to 15 years. Accumulated
amortization on capitalized leases as of June 30, 2004 and June 30, 2003 was
$2,111,000 and $1,444,000, respectively.
NOTE G - Joint Ventures and Investments
---------------------------------------
Joint Ventures
--------------
United Solar Ovonic
Since May 14, 2003, when ECD acquired Bekaert's interest in United Solar
Ovonic (see Note D of Notes to Consolidated Financial Statements), 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.
The Company recorded revenues from United Solar Ovonic LLC of $6,267,000
and $10,121,000 for the period July 1, 2002 to May 14, 2003 and for the year
ended June 30, 2002, respectively, representing revenues realized on ECD's
machine-building contract with United Solar Ovonic LLC and United Solar Ovonic
Corp.'s sales of product to United Solar Ovonic LLC.
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 ($134,000,000 of which has been
received as of June 30, 2004) in the venture. Cobasys is owned 50% by Ovonic
Battery and 50% by a unit of ChevronTexaco.
70
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Joint Ventures and Investments (Continued)
---------------------------------------------------
The Company recorded revenues from Cobasys of $5,610,000, $12,367,000
and $16,315,000 for the years ended June 30, 2004, 2003 and 2002, respectively,
for services performed on behalf of Cobasys (primarily for advanced product
development and market development work). The Company recorded revenues of
$207,000 and $261,000 for the years ended June 30, 2003 and 2002, respectively,
for products sold to Cobasys.
The Company also recorded revenues from Cobasys of $179,000, $179,000 and
$116,000 for the years ended June 30, 2004, 2003 and 2002, 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:
COBASYS LLC AND SUBSIDIARY
STATEMENTS OF OPERATIONS
------------------------
Year Ended June 30,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
Revenue
Product and prototype revenues $ 1,668,722 $ 653,802 $ 423,728
Contract research revenue 2,166,571 2,776,952 -
------------ ------------ ------------
Total Revenue 3,835,293 3,430,754 423,728
Expenses
Cost of product and prototype revenues 5,736,206 5,861,176 5,115,798
Research and development costs 17,706,311 24,560,781 23,837,938
Sales and marketing costs 2,623,229 3,243,541 275,687
General and administrative costs 4,162,702 4,596,838 3,997,460
Loss on impairment of investment - 4,000,000 -
Depreciation and amortization 2,730,782 1,918,836 1,392,273
------------ ------------ ------------
Total Expenses 32,959,230 44,181,172 34,619,156
------------ ------------ ------------
Net Loss $(29,123,937) $(40,750,418) $(34,195,428)
============ ============ ============
71
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Joint Ventures and Investments (Continued)
---------------------------------------------------
COBASYS LLC AND SUBSIDIARY
BALANCE SHEETS
--------------
June 30, 2004 June 30, 2003
-------------- --------------
Assets
Current Assets:
Cash and cash equivalents $ 1,305,873 $ 6,849,235
Accounts receivable 769,444 145,972
Inventories 3,825,704 2,503,650
Prepaid expenses 50,740 2,045
------------- -------------
Total Current Assets 5,951,761 9,500,902
Net Property and Equipment 28,091,071 27,185,775
Other Assets:
Cash surrender value of life insurance 316,302 83,135
------------- -------------
Total Assets $ 34,359,134 $ 36,769,812
============= =============
Liabilities and Members' Capital
Current Liabilities:
Accounts payable $ 1,424,092 $ 4,912,724
Accounts payable, related party 1,300,175 3,474,873
Accrued expenses 1,453,034 1,161,597
Deferred revenues 166,145 -
------------- -------------
Total Current Liabilities 4,343,446 9,549,194
Members' Capital:
Members' interest 134,085,471 102,166,464
Loss accumulated during the
development stage (104,069,783) (74,945,846)
------------- -------------
Total Members' Capital 30,015,688 27,220,618
------------- -------------
Total Liabilities and Members' Capital $ 34,359,134 $ 36,769,812
============= =============
Ovonyx
ECD owns 41.7% of Ovonyx, Mr. Tyler Lowrey and his colleague own 41.7% of
Ovonyx, and Intel and other investors own the remainder. On a fully diluted
basis after giving effect to the exercise of stock options and warrants, our
ownership of Ovonyx would be 31.4%. ECD has contributed intellectual property
and licenses for its interest in 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
72
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Joint Ventures and Investments (Continued)
---------------------------------------------------
the equity method and is recognizing its proportionate share of Ovonyx losses to
the extent of its $1,050,000 investment. In the years ended June 30, 2004 and
2003, ECD recorded an equity loss of $644,000 and $406,000, respectively.
ECD recorded revenues from Ovonyx of $150,000, $162,000 and $215,000,
respectively, for the years ended June 30, 2004, 2003 and 2002 representing
services provided to this joint venture.
Ovonic Fuel Cell
In September 2000, ECD and ChevronTexaco formed Texaco Ovonic Fuel Cell.
ChevronTexaco was funding (through December 31, 2002) initial product and market
development, the primary use of which was to fund a contract from Texaco Ovonic
Fuel Cell to ECD to further develop Ovonic regenerative fuel cell technology.
The joint venture was owned 50% by ChevronTexaco and 50% by ECD. ECD
contributed intellectual property and licenses.
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 years ended June 30, 2004, 2003 and 2002, the Company recorded
revenues of zero, $4,022,000 and $8,887,000, respectively, for services provided
to this joint venture.
Texaco Ovonic Hydrogen Systems
In October 2000, ECD and ChevronTexaco formed Texaco Ovonic Hydrogen
Systems. ChevronTexaco is funding initial product and market development, the
primary use of which has been to fund a contract from Texaco Ovonic Hydrogen
Systems to ECD to further develop the Ovonic hydrogen storage technology. As
of June 30, 2004, ChevronTexaco has funded $59,948,000 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. Funding may be cancelled if mutually agreed-upon milestones
are not satisfied. At its meeting on June 30, 2004, the Management Committee of
Texaco Ovonic Hydrogen Systems did not approve the accomplishment of three of
the joint venture's milestones. The Management Committee will review and
determine the satisfaction of these milestones at a future meeting. 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.
73
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Joint Ventures and Investments (Continued)
---------------------------------------------------
TEXACO OVONIC HYDROGEN SYSTEMS LLC
STATEMENTS OF OPERATIONS
------------------------
Year Ended June 30,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
(Unaudited)
Revenues
Other Income $ 25,085 $ 17,480 $ 26,581
Prototype Sales 151,225 - 21,793
------------ ------------ ------------
Total Revenues 176,310 17,480 48,374
Expenses
Product Development - Paid or
Payable to ECD 9,848,771 12,656,468 11,979,981
Product Development - Paid or
Payable to ChevronTexaco 1,153,504 2,659,819 1,691,406
Depreciation Expense 2,486,284 1,890,384 596,193
Loss on Disposal of Assets - - 50,912
------------ ------------ ------------
Total Expenses 13,488,559 17,206,671 14,318,492
------------ ------------ ------------
Net Loss $(13,312,249) $(17,189,191) $(14,270,118)
============ ============ ============
TEXACO OVONIC HYDROGEN SYSTEMS LLC
BALANCE SHEETS
--------------
June 30, June 30,
2004 2003
------------ ------------
(Unaudited)
Current Assets:
Cash and Equivalents $ 1,222,639 $ 1,742,437
Accounts Receivable 33,639 10,746
----------- -----------
Total Current Assets 1,256,278 1,753,183
Property, Plant and Equipment 9,879,612 9,501,712
Less Accumulated Depreciation (5,042,712) (2,556,428)
----------- -----------
Net Property, Plant and Equipment 4,836,900 6,945,284
----------- -----------
Total Assets $ 6,093,178 $ 8,698,467
=========== ===========
Current Liabilities:
Amount Due to Related Parties, Net $ 1,278,475 $ 2,130,446
Accounts Payable 31,109 -
Deferred Revenue 15,257 15,257
----------- -----------
Total Current Liabilities 1,324,841 2,145,703
Noncurrent Liabilities
Deferred Revenue 112,000 112,000
Members' Equity 4,656,337 6,440,764
----------- -----------
Total Liabilities and Members' Equity $ 6,093,178 $ 8,698,467
=========== ===========
74
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Joint Ventures and Investments (Continued)
---------------------------------------------------
During the years ended June 30, 2004, 2003 and 2002, the Company recorded
revenues of $10,063,000, $13,651,000 and $18,581,000, respectively, for services
provided to this joint venture, primarily for market development and advanced
product development work.
Ovonic Media
In 2000, we and General Electric, through its GE Plastics business unit,
formed a joint venture, Ovonic Media, LLC, to design, develop, demonstrate and
commercialize our proprietary continuous web roll-to-roll technology for the
ultra-high-speed manufacture of optical media products, primarily rewritable
DVDs. GE owns 51% of Ovonic Media and we own 49%. We have contributed
intellectual property, know-how, licenses and equipment to the joint venture.
GE has made cash and other contributions to the joint venture. Since its
inception, Ovonic Media has paid us $5.6 million through the end of fiscal year
2003 for services to the joint venture.
For the years ended June 30, 2004, 2003 and 2002, the Company recorded
revenues of zero, $615,000 and $1,923,000, respectively, from Ovonic Media 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 seeking to secure a partner that is a leader in the
storage media industry to facilitate the commercialization and funding of our
technology. In the interim, ECD is directly funding continued product
development activities for this technology at a reduced level.
Investments in Rare Earth Ovonic
During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech of Inner Mongolia, China. The agreement
called for the creation of joint ventures for manufacturing and licensing of
advanced NiMH battery technology, alloy powders, advanced Ovonic nickel
hydroxide materials and production equipment, all for certain battery
applications for NiMH batteries. As of June 30, 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 June 30, 2004, Ovonic Battery has
received payments totaling $59,484,000 under the three contracts.
75
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Joint Ventures and Investments (Continued)
---------------------------------------------------
The Company recorded revenues from Rare Earth Ovonic of $4,410,000,
$10,726,000 and $25,287,000 for the years ended June 30, 2004, 2003 and 2002,
respectively.
NOTE H - Liabilities and Line of Credit
---------------------------------------
Warranty Liability
------------------
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 years
ended June 30, 2004, 2003 and 2002:
Year Ended June 30,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
Liability beginning of the period $ 2,990,661 $ 2,489,024 $ 978,895
Amounts accrued for as warranty costs* (721,312) 1,212,949 1,510,129
Amounts acquired in connection with
United Solar Ovonic - 728,503 -
Amounts reversed in connection with
acquiring United Solar Ovonic - (1,439,815) -
Warranty claims (323,415) - -
----------- ----------- -----------
Liability at June 30 $ 1,945,934 $ 2,990,661 $ 2,489,024
=========== =========== ===========
* During the year ended June 30, 2004, the Company, based
on its recent experience, revised its estimated warranty
liability (primarily on its Rare Earth Ovonic contract)
and recorded a reduction in this liability.
Warranty liability is recorded at the time that the product is sold (for
sales of photovoltaic products) or 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 $1,847,000 at June 30, 2004 and $1,682,000
at June 30, 2003 related to these issues.
76
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Liabilities and Line of Credit (Continued)
---------------------------------------------------
Long-Term Liabilities
---------------------
A summary of the Company's long-term liabilities is as follows:
June 30,
----------------------------
2004 2003
------------ ------------
Capital lease - 3800 Lapeer LLC $ 9,297,849 $ 9,526,739
Note Payable - Canon (discount rate of 6.3%) - 11,629,489
Long-term retirement 1,121,310 814,277
Other 75,000 75,000
------------ ------------
Total 10,494,159 22,045,505
Less amounts included in current liabilities 333,368 11,858,378
------------ ------------
Total Long-Term Liabilities $ 10,160,791 $ 10,187,127
============ ============
Capitalized Leases
------------------
In April 2001, the Company entered a 15-year lease for a 167,526 square
foot corporate facility in Auburn Hills, Michigan. The terms of the lease with
3800 Lapeer LLC allow for two renewal terms of five years each subject to
certain provisions. The Company has accounted for this transaction as a capital
lease, and has recorded a fixed asset and a related capital lease obligation of
$10,000,000 equal to the present value of the minimum lease payments.
In April 1998, the Company entered into a capital lease transaction with
Finova Capital Corporation. The lease transaction matured on June 30, 2003 and
as was required by the lease terms, on June 30, 2003, the Company purchased the
equipment under the lease for a total cost of $310,000.
The Company was obligated under a capital lease with Fuji Bank for certain
machinery and equipment. In the years ended June 30, 2003 and 2002, United
Solar Ovonic made regular lease payments of $2,097,000 and $2,097,000,
respectively. On June 23, 2003, United Solar Ovonic Corp. paid $3,282,919,
including $129,100 in a breakage fee, to terminate this lease and repurchase
these assets. The lease had been guaranteed by Canon and Bekaert and, as a
result, Canon had a lien on United Solar Ovonic Corp.'s assets.
Notes Payable and Other Long-Term Liabilities
---------------------------------------------
In connection with the 2000 acquisition of Canon's interest in United
Solar Ovonic Corp., ECD issued a noninterest-bearing note payable to Canon for
$12,000,000 due no later than January 1, 2004. This note payable was recorded
in April 2000, by ECD at a value of $9,500,000 (at a discount rate of 6.3%).
In connection with the Company's purchase of Bekaert's 60% interest in United
Solar Ovonic LLC and 19% interest in United Solar Ovonic Corp., and while
ECD continues to be contractually obligated to pay Canon, Bekaert assumed
77
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Liabilities and Line of Credit (Continued)
---------------------------------------------------
ECD's obligation to pay this $12,000,000 to Canon. (See Note C of Notes to
Consolidated Financial Statements.) On January 2, 2004, Bekaert paid the
$12,000,000 directly to Canon.
In January 1998, United Solar Ovonic Corp. entered into a term loan with
Canon in the amount of $2,500,000. Interest accrued at a rate of 6.21% per
annum and the loan was payable in full on January 17, 2003. At the Company's
option, certain additional rights could be given to Canon under a license
currently in effect in lieu of a cash payment. In December 2002, United Solar
Ovonic Corp. granted Canon rights to manufacture photovoltaic products in two
countries of its choice in Southeast Asia, excluding India and the People's
Republic of China. These rights were granted in satisfaction of the outstanding
obligation ($2,500,000 plus accrued interest) due Canon in connection with this
previous loan made to United Solar Ovonic Corp. by Canon. United Solar Ovonic
Corp. recorded the satisfaction of the loan and accrued interest from Canon
($3,269,000) as revenue from license agreements in its statement of operations
for the year.
The Company has retirement plans for certain executives that provide for
benefits after retirement. The Company recorded retirement expense of $307,000,
$286,000 and $265,000 in the years ended June 30, 2004, 2003 and 2002,
respectively. The balance recorded in long-term liabilities was $1,121,000 and
$814,000 at June 30, 2004 and 2003, respectively.
ECD and its subsidiaries are participating in qualified 401 (k) plans that
are available to all employees. ECD and Ovonic Battery matched participants'
contributions at a rate of 100% of the first 2% of the participant's
compensation plus 50% of the next 4% of compensation for the parent company.
Through December 31, 2001, our United Solar Ovonic subsidiary matched 50% of a
participating employee's pre-tax contribution up to a maximum of 6% of the
participant's compensation. Effective January 1, 2002, our United Solar Ovonic
subsidiary matched 50% of the first 8% of the participant's compensation.
Amounts charged to income for the 401 (k) plan, representing the Company's
matching contributions, were $1,117,000, $1,070,000 and $954,000 for the years
ended June 30, 2004, 2003 and 2002, respectively.
Other
-----
The Company has operating lease agreements, principally for office and
research facilities and equipment. These leases, in some instances, include
renewal provisions at the option of the Company. Rent expense under such lease
agreements for the years ended June 30, 2004, 2003 and 2002 was approximately
$2,843,000, $2,738,000 and $2,443,000, respectively.
Future Minimum Payments
-----------------------
Future minimum payments on long-term notes payable and other long-term
liabilities, obligations under capital leases and noncancellable operating
leases expiring in each of the five years subsequent to June 30, 2004 are as
follows:
78
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Liabilities and Line of Credit (Continued)
---------------------------------------------------
Long-Term Note
Payable and
Other Long-Term Operating
Liabilities Capital Leases Leases
--------------- -------------- ---------
2005 $ - $1,266,497 $2,709,166
2006 - 1,266,497 1,932,276
2007 - 1,291,625 1,234,654
2008 - 1,367,012 1,136,109
2009 - 1,367,012 1,121,274
Thereafter 1,196,310 9,770,116 1,337,850
---------- ---------- ----------
TOTAL 1,196,310 16,328,759 $9,471,329
Less interest included above - 7,030,910 ==========
---------- ----------
Present value of minimum payments $1,196,310 $9,297,849
========== ==========
Business-Loan Agreement
-----------------------
As of June 30, 2004, the Company had a business-loan agreement with
Standard Federal Bank in the amount of $3,000,000. This business-loan agreement
is used to provide a mechanism for the issuances of letters of credit and
entering into foreign exchange transactions and requires cash to be deposited
into a restricted collateral account equal to value of the underlying
transactions. As of June 30, 2004, $1,150,000 was deposited in the collateral
account. The business-loan agreement, which had an expiration date of August
31, 2004, has been extended to expire on August 31, 2005.
As of June 30, 2003, the Company had a business-loan agreement with
Standard Federal Bank in the amount of $8,000,000. This business-loan
agreement was used to provide a mechanism for the issuances of letters of credit
and entering into foreign exchange transactions and was secured by a first
interest in the Company's accounts receivable and inventories. Also, ECD had
granted Standard Federal Bank a security interest in a $5,000,000 short-term
investment.
79
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I - Nonrefundable Advance Royalties
----------------------------------------
At June 30, 2004 and 2003, the Company deferred recognition of revenue
relating to nonrefundable advance royalty payments. Nonrefundable advance
royalties consist of the following:
June 30,
------------------------
2004 2003
---------- ----------
Battery $1,560,902 $1,560,902
Optical memory 1,431,660 1,947,093
---------- ----------
$2,992,562 $3,507,995
========== ==========
Creditable royalties earned and recognized as revenue were:
Year Ended June 30,
2004 2003 2002
--------- --------- ---------
$ 515,433 $ 119,936 $ 213,057
Included in creditable royalties in 2004 were $447,500 related to advance
royalty payments received by the Company in prior years associated with license
agreements under which the licensees no longer have 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 J - 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 estimated 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.
A summary of all of the Company's revenues follows:
80
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE J - Product Sales, Royalties, Revenues from Product Development Agreements
-------------------------------------------------------------------------------
and License and Other Agreements (Continued)
--------------------------------------------
Year Ended June 30,
------------------------------------------
2004 2003* 2002
------------ ------------ ------------
Product sales
Photovoltaics $27,586,197 $ 4,001,937 $ -
Machine building and equipment sales 4,489,728 10,949,828 25,295,959
Battery packs 8,000 138,179 257,637
Nickel hydroxide and metal hydride materials 1,769,868 852,494 698,639
----------- ----------- -----------
33,853,793 15,942,438 26,252,235
Product sales-related parties
Photovoltaics - 5,767,035 5,883,442
Machine building - 499,793 4,237,201
Battery packs - 86,363 19,998
Metal hydride materials 3,050 120,161 241,291
----------- ----------- -----------
3,050 6,473,352 10,381,932
----------- ----------- -----------
Total product sales $33,856,843 $22,415,790 $36,634,167
=========== =========== ===========
Royalties
Battery technology $ 1,902,847 $ 1,778,170 $ 1,913,914
Optical memory 616,824 32,592 66,832
----------- ----------- -----------
2,519,671 1,810,762 1,980,746
Royalties-related party
Microelectronics 2,108 32,885 20,168
----------- ----------- -----------
Total royalties $ 2,521,779 $ 1,843,647 $ 2,000,914
=========== =========== ===========
Revenues from product development agreements
Photovoltaics $10,961,176 $ 3,615,674 $ 2,419,332
Battery technology 1,426,325 2,575,376 3,762,186
Optical memory 403,932 64,387 172,695
Solid hydrogen storage systems 737,538 - 348,435
Other 18,677 126,995 74,328
----------- ---------- ----------
13,547,648 6,382,432 6,776,976
Revenues from product development
agreements - related parties
Battery technology 5,610,242 12,366,964 16,315,424
Optical memory - 615,330 1,923,273
Solid hydrogen storage systems 10,062,862 13,948,178 18,783,190
Fuel cell technology - 4,022,344 8,886,854
----------- ----------- -----------
15,673,104 30,952,816 45,908,741
----------- ----------- -----------
Total revenues from product development
agreements $29,220,752 $37,335,248 $52,685,717
=========== =========== ===========
License and other agreements
Battery technology $ 125,000 $ 175,000 $ 25,000
Photovoltaic technology - 3,269,114 -
----------- ----------- -----------
$ 125,000 $ 3,444,114 $ 25,000
=========== =========== ===========
-------------------------------------
* United Solar Ovonic LLC is included in ECD's consolidated financial
statements effective May 15, 2003.
81
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE J - 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:
Year Ended June 30,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
United States $44,042,204 $38,707,587 $57,804,373
Germany 8,551,530 50,191 150,300
China 4,515,722 10,846,690 25,344,459
Mexico 84,828 9,768,972 5,883,442
Other countries 9,110,285 5,805,420 2,527,711
----------- ----------- -----------
$66,304,569 $65,178,860 $91,710,285
=========== =========== ===========
In the year ended June 30, 2004, the Company entered into license
agreements with Mcnair-tech Co., Ltd. of China ($50,000), Shenzhen High Power
Tech. Co. Ltd. of China ($50,000) and received an additional license fee from
Linghao Battery Co. Ltd. ($25,000).
In the year ended June 30, 2003, the Company recognized $3,269,000 in
revenues from license and other agreements as a result of United Solar Ovonic
Corp. granting Canon rights to manufacture photovoltaic products in two
countries of its choice in Southeast Asia, excluding India and the People's
Republic of China. These rights were granted in satisfaction of the outstanding
obligation ($2,500,000 plus accrued interest) due Canon in connection with a
previous loan made to United Solar Corp. by Canon. Additionally, the Company
entered into license agreements with four Chinese battery companies, Henan
Huanyu Power Source Co., Ltd. ($50,000), Ghandong Shida Battery Co. Ltd.
($50,000), TWD Battery Co., Ltd. ($50,000) and Linghao Battery Co., Ltd.
($25,000).
In the year ended June 30, 2002, the Company entered into a license
agreement with Lexel Battery Co., Ltd. of China ($25,000).
The Company has historically entered into agreements with a relatively
small number of major customers throughout the world. In the year ended June 30,
2004, one customer (Texaco Ovonic Hydrogen Systems) represented 15% of the
Company's total revenues. In the year ended June 30, 2003, three customers
represented 58% of the Company's total revenues (21% Texaco Ovonic Hydrogen
Systems, 21% Cobasys and 16% Rare Earth Ovonic joint ventures). In the year
ended June 30, 2002, three customers represented 67% of the Company's total
revenues (28% Rare Earth Ovonic joint ventures, 20% Texaco Ovonic Hydrogen
Systems and 19% Cobasys). Cobasys, Texaco Ovonic Hydrogen Systems and Rare Earth
Ovonic are joint ventures of the Company (see Note G of Notes to Consolidated
Financial Statements).
82
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K - Capital Stock
----------------------
The voting rights of ECD's three classes of stock are as follows:
Class A Convertible Common Stock - 25 votes per share
Class B Convertible Common Stock - one vote per share
Common Stock - one vote per share
The Class A Convertible Common Stock is automatically convertible into
Common Stock on a share-for-share basis on September 30, 2005 and is convertible
at the option of the holder any time prior to that date.
As part of an employment agreement among ECD, Ovonic Battery and Mr.
Stanford R. Ovshinsky, president and CTO of ECD, ECD granted Mr. Ovshinsky the
right to vote the shares of Ovonic Battery held by ECD following a change in
control of ECD. For purposes of this agreement, change in control means (i) any
sale, lease, exchange or other transfer of all or substantially all of ECD's
assets, (ii) the approval by ECD stockholders of any plan or proposal of
liquidation or dissolution of ECD, (iii) the consummation of any consolidation
or merger of ECD in which ECD is not the surviving or continuing corporation,
(iv) the acquisition by any person of 30% or more of the combined voting power
of the then-outstanding securities having the right to vote for the election of
directors, (v) changes in the constitution of the majority of the Board of
Directors, (vi) the holders of the Class A Common Stock ceasing to be entitled
to exercise their preferential voting rights other than as provided in ECD's
charter and (vii) bankruptcy. In the event of mental or physical disability or
death of Mr. Ovshinsky, the foregoing power of attorney and proxy shall be
exercised by Mr. Ovshinsky's wife, Dr. Iris Ovshinsky, a vice president of ECD.
In February 1999, the Board of Directors of the Company renewed each of Mr.
Ovshinsky's employment agreements for an additional term ending September 30,
2005.
As part of an Executive Employment Agreement between ECD and Mr. Robert C.
Stempel, chairman and CEO of ECD, dated January 15, 1999, ECD issued to Mr.
Stempel 430,000 shares of its Common Stock ($.01 par value), having a total
value of $4,595,840 based upon the closing price of ECD Common Stock on January
15, 1999, for $4,300, representing an amount equal to the aggregate par value of
the Common Stock. The Restricted Stock Agreement entered into between the
Company and Mr. Stempel states that the stock fully vests to Mr. Stempel on
September 30, 2005, 81 months after the date of the agreement. The Company is
amortizing the total value of the stock grant on a straight-line basis, and
recorded compensation expense of $682,000, $682,000 and $680,400 in each of the
years ended June 30, 2004, 2003 and 2002, respectively, in connection with this
transaction. Following stockholder approval on March 25, 1999 authorizing
430,000 shares of a new Class B Common Stock, par value $.01, Mr. Stempel
surrendered to ECD the shares of Common Stock issued for an equal number of
shares of Class B Common Stock. After the conversion of the Class A Common Stock
into Common Stock, the Class B Common Stock will be entitled to 25 votes per
share.
83
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K - Capital Stock (Continued)
----------------------------------
The Class B Common Stock is automatically convertible into Common Stock on
a share-for-share basis on September 30, 2005.
During the years ended June 30, 2004, 2003 and 2002, ECD issued 2,140,
2,844 and 1,310 shares of restricted Common Stock, respectively, as compensation
to directors. ECD recorded compensation expense, based upon fair market value of
these shares at the date of issuance, for the years ended June 30, 2004, 2003
and 2002 of $20,000, $30,000 and $25,000, respectively, relating to these
restricted shares of Common Stock.
NOTE L - Stock Option Plans, Warrants and Other Rights to Purchase Stock
------------------------------------------------------------------------
ECD has Common Stock reserved for issuance as follows:
Number of Shares
-----------------------------
June 30, 2004 June 30, 2003
------------- -------------
Conversion of Class A Convertible Common Stock 219,913 219,913
Conversion of Class B Convertible Common Stock 430,000 430,000
Stock options 5,377,479 5,273,477
Warrants 3,756,735 400,000
Convertible Investment Certificates 5,210 5,210
--------- ---------
TOTAL RESERVED SHARES 9,789,337 6,328,600
========= =========
Equity Compensation Plans Approved by Security Holders
------------------------------------------------------
The Company's 1995 Non-Qualified Stock Option Plan (1995 Stock Option
Plan) and the 2000 Non-Qualified Stock Option Plan (2000 Stock Option Plan)
authorize the granting of stock options at such exercise prices and to such
employees, consultants and other persons as the Compensation and Nominating
Committee appointed by the Board of Directors (the "Compensation and Nominating
Committee") shall determine. Both stock option plans are administered by the
Compensation and Nominating Committee.
Options under the 1995 and the 2000 Stock Option Plans expire no later
than 10 years from the date of grant. The vesting period of stock options under
the 1995 Stock Option Plan is as follows: 40% of the shares vest six months
after the date of grant, 30% after 18 months and 30% after 30 months. The
vesting period of stock options under the 2000 Stock Option Plan is as follows:
40% of the shares vest one year after the date of grant and 20% after each of
the second, third and fourth years of grant. The exercise price of all options
granted has been equal to the fair market value of the Common Stock at the time
of grant.
84
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Stock Option Plans, Warrants and Other Rights to Purchase Stock
(Continued)
------------------------------------------------------------------------
The purchase price and number of shares covered by the options are subject
to adjustment under certain circumstances to protect the optionholders against
dilution.
A summary of the transactions during the years ended June 30, 2004, 2003
and 2002 with respect to ECD's Stock Option Plans follows:
2004 2003 2002
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------- -------------------- --------------------
Outstanding July 1 3,167,123 $ 16.97 2,531,753 $ 18.67 2,444,545 $ 18.50
Granted 45,000 $ 10.95 653,825 $ 10.46 120,000 $ 21.88
Exercised 2,400 $ 10.19 - - 14,412 $ 11.98
Cancelled 144,265 $ 18.12 18,455 $ 19.01 18,380 $ 22.57
--------- ------- --------- ------- --------- -------
Outstanding June 30 3,065,458 $ 16.84 3,167,123 $ 16.97 2,531,753 $ 18.67
========= ======= ========= ======= ========= =======
Exercisable June 30 2,428,818 $ 17.35 2,002,253 $ 17.66 1,730,668 $ 16.90
========= ======= ========= ======= ========= =======
Weighted average fair
value of options $ 6.13 $ 6.00 $ 18.78
granted during the year ====== ====== =======
The following table summarizes information about stock options outstanding
at June 30, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices As of 6/30/04 Life Price As of 6/30/04 Price
----------------- ------------- ----------- -------- ------------- --------
$ 10.05 - $ 11.88 1,344,563 4.49 $ 11.09 966,013 $ 11.35
$ 12.07 - $ 22.43 398,915 2.72 $ 16.83 359,115 $ 17.02
$ 22.63 - $ 22.63 1,221,580 6.70 $ 22.63 1,003,790 $ 22.63
$ 23.00 - $ 27.04 100,400 5.73 $ 23.44 99,900 $ 23.42
--------- ----- ------- --------- -------
$ 10.05 - $ 27.04 3,065,458 5.18 $ 16.84 2,428,818 $ 17.35
========= ===== ======= ========= =======
Equity Compensation Plans Not Approved by Security Holders
----------------------------------------------------------
In November 1993, stock options to purchase 94,367 shares of Common Stock
held by Stanford R. Ovshinsky, and stock options to purchase 49,630 shares of
Common Stock held by Dr. Iris M. Ovshinsky, issued under the Company's Amended
and Restated Stock Option Plan, were cancelled and new stock options, covering
150,000 (adjusted to 467,890 as of June 30, 2004) shares of Common Stock in the
case of Mr. Ovshinsky and 100,000 shares (adjusted to 302,511 as of June 30,
2004) of Common Stock in the case of Dr. Ovshinsky, were granted by
85
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Stock Option Plans, Warrants and Other Rights to Purchase Stock
(Continued)
------------------------------------------------------------------------
ECD. The stock options cancelled had an average exercise price of approximately
$18.00 per share. The weighted average exercise price of these outstanding
stock options is $14.17 per share. The weighted average price was arrived at
based upon (i) the option price of $7.00 per share for the original number of
shares and any additional shares resulting from adjustments for the antidilution
provisions during the 18-month period following the original grant; and (ii)
thereafter the option exercise price will be the lower of the sales price of the
additional securities or the fair market value of the Common Stock as of the
date of such issuance. The Company recorded $198,000 compensation expense in
the year ended June 30, 2002 related to options granted at a price lower than
market.
The number of stock options granted to Mr. and Dr. Ovshinsky is adjusted
pursuant to the antidilution provisions of the stock option agreements. There
were no grants in fiscal year 2003. For the three years ended June 30, 2004,
2003 and 2002, Mr. Ovshinsky was granted stock options to purchase 66,391, 0,
and 44,530 shares of ECD Common Stock, respectively. For the three years ended
June 30, 2004, 2003 and 2002, Dr. Ovshinsky was granted stock options to
purchase 44,261, 0, and 29,687 shares of ECD Common Stock, respectively. The
weighted average exercise price of options granted to Mr. and Dr. Ovshinsky
during the years ended June 30, 2004 and 2002 was $10.12 and $20.38 per share,
respectively. The weighted average fair value of options granted to Mr. and Dr.
Ovshinsky during the years ended June 30, 2004 and 2002 was $3.38 and $10.52 per
share, respectively.
On January 15, 1999, ECD entered into a Stock Option Agreement with Robert
C. Stempel that granted Mr. Stempel an option to purchase up to 300,000 shares
of Common Stock at an exercise price of $10.688 per share, the fair market value
of the Common Stock as of the date of the Stock Option Agreement. The option,
which is not subject to vesting requirements, may be exercised from time to
time, in whole or in part, commencing as of the date of the Stock Option
Agreement and ending on the tenth anniversary of such date.
Warrants
--------
As of June 30, 2004, ECD had outstanding warrants for the purchase of
400,000 shares of Common Stock granted to General Electric pursuant to a Common
Stock Warrant Agreement between General Electric and ECD entered into in March
2000. These warrants are exercisable on or prior to March 10, 2010 at $22.93
per share.
In connection with the sale of units in 2004 (see Note B of Notes to
Consolidated Financial Statements), ECD issued 3,266,254 warrants to three
institutional investors and 90,481 warrants to the placement agent. Each
warrant gives the holder the right to purchase a 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.
86
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Stock Option Plans, Warrants and Other Rights to Purchase Stock
(Continued)
------------------------------------------------------------------------
Other Rights to Purchase Stock
------------------------------
Pursuant to the Stock Purchase Agreement between ECD and Texaco Inc. dated
as of May 1, 2000, Texaco purchased a 20% equity stake in ECD for $67.4 million.
As part of this Stock Purchase Agreement, Texaco received rights to purchase
additional shares of ECD Common Stock or other ECD securities (ECD Stock). On
October 9, 2001, the shareholders of Texaco and Chevron Corp. voted on the
merger of Texaco and Chevron. The combined companies have been renamed
ChevronTexaco Corporation, which holds its equity stake in ECD in TRMI Holdings,
a wholly owned subsidiary of ChevronTexaco.
So long as ChevronTexaco owns more than 5% of ECD Stock and in the event
ECD issues additional ECD Stock other than to ChevronTexaco, ChevronTexaco has
the right to purchase additional ECD Stock in order for ChevronTexaco to
maintain its same proportionate interest in ECD Stock as ChevronTexaco held
prior to the issuance of the additional ECD Stock. If ChevronTexaco elects to
purchase ECD Common Stock, the purchase price will be the average of the closing
price on NASDAQ of the ECD Common Stock as reported in The Wall Street Journal
for the five trading days prior to the closing date of the sale multiplied by
the number of shares of the ECD Common Stock which ChevronTexaco is entitled to
purchase.
If ChevronTexaco does not exercise its right to purchase additional ECD
Stock within 15 days after delivery of a Rights Notice from ECD, ChevronTexaco's
right to purchase such additional ECD Stock which are the subject of the Rights
Notice will terminate.
NOTE M - Federal Taxes on Income
--------------------------------
The Company accounts for income taxes using the asset and liability
approach. Deferred income taxes are provided for the differences between the
tax bases of assets or liabilities and their reported amounts in the financial
statements. This method also requires the recognition of future tax benefits,
such as net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not.
June 30, 2004 June 30, 2003
------------- -------------
Deferred tax assets
Net operating losses $ 87,157,000 $ 63,908,000
Tax credit carryforwards 487,000 487,000
Basis difference in investments
in joint ventures 21,922,000 24,537,000
------------- ------------
109,566,000 88,932,000
------------- ------------
Valuation allowance for deferred assets (109,566,000) (88,932,000)
------------- ------------
Net deferred tax assets $ - $ -
============= ============
87
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE M - Federal Taxes on Income (Continued)
------------------------------------------------
The Company's valuation reserve was increased by $20,634,000 in 2004,
$10,169,000 in 2003 and $6,528,000 in 2002 for the impact of the 2004, 2003 and
2002 net operating losses, temporary differences and the expiration of tax
carryforwards. The increases in 2004, 2003 and 2002 are mainly the result of
the Company's net operating losses and primarily comprise the difference between
statutory and effective tax rates. The Company's utilization of United Solar
Ovonic's net operating losses is limited to approximately $10,000,000 per year
under the Internal Revenue code.
At June 30, 2004, the Company's remaining net tax operating loss
carryforwards and tax credit carryforwards expire as follows:
Net Tax Operating R&D Credit
Loss Carryforward Carryforward
----------------- -----------------
2005 $ 5,307,000
2006 14,651,000
2007 10,548,000 $ 276,000
2008 9,302,000 41,000
2009 11,923,000 30,000
2010 9,313,000 15,000
2011 6,854,000 40,000
2012 26,121,000 14,000
2013 12,447,000 29,000
2014 7,219,000 42,000
2015 - -
2016 - -
2017 - -
2018 6,825,000 -
2019 993,000 -
2020 10,170,000 -
2021 - -
2022 23,002,000 -
2023 36,086,000 -
2024 65,585,000
------------ -----------
Total $256,346,000 $ 487,000
============ ===========
NOTE N - Related Party Transactions
-----------------------------------
For the three years ended June 30, 2004, 2003 and 2002, ECD incurred
expenses of $152,009, $97,301 and $72,038, respectively, for services rendered
by its directors.
For related party transactions involving United Solar Ovonic LLC, Ovonic
Media, Ovonyx, Texaco Ovonic Fuel Cell, Texaco Ovonic Hydrogen Systems and
Cobasys, see Note G of Notes to Consolidated Financial Statements.
88
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE O - 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 segments were as follows:
Financial Data by Business Segment
----------------------------------
(in thousands)
Ovonic United Solar Consolidat-
ECD Battery Ovonic ing Entries Consolidated
--------- --------- ------------ ----------- ------------
Revenues
Year ended June 30, 2004 $ 16,155 $ 15,279 $ 36,959 $ (2,088) $ 66,305
Year ended June 30, 2003 27,062 28,826 14,890 (5,599) 65,179
Year ended June 30, 2002 61,636 48,529 7,157 (25,612) 91,710
Interest Income
Year ended June 30, 2004 $ 3,397 $ - $ 19 $ (2,702) $ 714
Year ended June 30, 2003 3,518 - 67 (24) 3,561
Year ended June 30, 2002 4,439 - 288 - 4,727
Interest Expense*
Year ended June 30, 2004 $ 373 $ - $ 3,481 $ (2,540) $ 1,314
Year ended June 30, 2003 61 83 818 (81) 881
Year ended June 30, 2002 51 375 484 - 910
Operating Income (Loss)
Year ended June 30, 2004 $(22,877) $(16,070) $(13,418) $ 1,599 $(50,766)
Year ended June 30, 2003 (20,745) (9,998) (6,355) 3,821 (33,277)
Year ended June 30, 2002 (17,560) (6,460) (4,539) 6,326 (22,233)
Equity in Net Income (Loss) of
Investees Under Equity Method
Year ended June 30, 2004 $ (644) $ - $ - $ - $ (644)
Year ended June 30, 2003 (5,692) - (6,103) - (11,795)
Year ended June 30, 2002 (714) - (3,472) 528 (3,658)
Depreciation Expense
Year ended June 30, 2004 $ 2,228 $ 634 $ 6,815 $ (1,549) $ 8,128
Year ended June 30, 2003 1,784 1,136 2,577 (1,541) 3,956
Year ended June 30, 2002 1,008 1,146 1,750 (1,631) 2,273
89
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE O - Business Segments (Continued)
--------------------------------------
Ovonic United Solar Consolidat-
ECD Battery Ovonic ing Entries Consolidated
--------- --------- ------------ ----------- ------------
Capital Expenditures
Year ended June 30, 2004 $ 1,745 $ 934 $ 868 $ - $ 3,547
Year ended June 30, 2003 4,220 783 132 - 5,135
Year ended June 30, 2002 7,340 172 155 - 7,667
Investments and Advances in
Equity Method Investees
Year ended June 30, 2004 $ - $ - $ - $ - $ -
Year ended June 30, 2003 594 - - - 594
Year ended June 30, 2002 3,286 - 27,270 - 30,556
Identifiable Assets
Year ended June 30, 2004 $132,097 $ 6,378 $ 82,366 $(107,529) $113,312
Year ended June 30, 2003 141,199 10,916 142,036 (140,456) 153,695
Year ended June 30, 2002 171,018 13,588 25,819 (18,306) 192,119
----------------------------
* Excludes intercompany interest between ECD and Ovonic Battery.
NOTE P - Quarterly Financial Data (Unaudited)
---------------------------------------------
(In thousands, except for per-share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- ---------
Year Ended June 30, 2004
Revenues $ 14,205 $ 15,674 $ 16,545 $ 19,881 $ 66,305
Operating loss (14,413) (13,087) (12,080) (11,186) (50,766)
Net loss (14,282) (13,416) (12,266) (11,458) (51,422)
Basic and diluted net loss per share $ (.65) $ (.57) $ (.49) $ (.44) $ (2.15)
Year Ended June 30, 2003
Revenues $ 15,855 $ 18,478 $ 13,595 $ 17,251 $ 65,179
Operating loss (6,388) (4,036) (9,347) (13,506) (33,277)
Net loss before cumulative effect of
change in accounting principle (5,652) (5,779) (9,076) (17,907) (38,414)
Cumulative effect of change in
accounting principle 2,216 - - - 2,216
-------- -------- -------- -------- --------
Net loss $ (3,436) $ (5,779) $ (9,076) $(17,907) $(36,198)
-------- -------- -------- -------- --------
Basic and diluted net loss per share
before cumulative effect of change
in accounting principle $ (.26) $ (.26) $ (.41) $ (.82) $ (1.75)
======== ======== ======== ======== ========
Basic and diluted net income per
share for cumulative effect of
change in accounting principle .10 - - - .10
-------- -------- -------- -------- --------
Basic and diluted net loss per share $ (.16) $ (.26) $ (.41) $ (.82) $ (1.65)
======== ======== ======== ======== ========
90
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE Q - Other Comprehensive Income (Loss)
-----------------------------------------
The Company's total comprehensive loss was as follows:
Year Ended June 30,
---------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net Loss $(51,421,674) $(36,198,159) $(20,888,034)
OTHER COMPREHENSIVE INCOME
(LOSS) (net of taxes):
Unrealized holding gains arising
during period - 219,147 476,980
Less: reclassification adjustments
for gains realized in net income 431,153 275,944 870,372
------------ ------------ ------------
Net unrealized gains (losses) (431,153) (56,797) (393,392)
Foreign currency translation adjustments 134,906 115,493 -
------------ ------------ ------------
COMPREHENSIVE LOSS $(51,717,921) $(36,139,463) $(21,281,426)
============ ============ ============
The accumulated income (expense) balances of currency translation
adjustments, net of taxes, were $250,399, $115,493 and zero at June 30, 2004,
2003 and 2002, respectively. The effect from foreign currency transactions was
a loss of $15,610 for 2004, and gains of $40,736 and $1,425 for 2003 and 2002,
respectively.
NOTE R - Subsequent Event
-------------------------
On July 7, 2004, ECD announced that it and Cobasys LLC have entered into a
settlement agreement with Matsushita Electric Industrial Co., Ltd. (MEI),
Panasonic EV Energy Co., Ltd. (PEVE), and Toyota Motor Corporation with respect
to patent infringement disputes and counterclaims involving nickel metal hydride
(NiMH) batteries before the International Chamber of Commerce, International
Court of Arbitration. Under the terms of the settlement, no party admitted any
liability.
Under the terms of the settlement, Cobasys and PEVE will cross license
each other for current and future patents to avoid possible future litigation.
Cobasys and PEVE have agreed to a technical cooperation agreement to advance the
state-of-the-art of NiMH batteries which are widely used in hybrid electric
vehicles (HEVs). Cobasys and PEVE have also established a joint development
program to collaborate on the development of next-generation high performance
NiMH batteries for HEVs.
The parties reached an amicable settlement on mutually satisfactory terms
that will help them to meet the requirements of expanding the HEV market.
Details of the settlement are confidential.
91
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE R - Subsequent Event (Continued)
------------------------------------
Under the deal, ECD and Ovonic Battery received a $10 million fee from
MEI, PEVE and Toyota. This fee was recorded as an advance royalty in July 2004
and will be amortized to income over 10.5 years. In addition, Cobasys received
$20 million. Upon receipt of the money, Cobasys made an $8 million distribution
to each of Ovonic Battery and ChevronTexaco, which was applied as a partial
reimbursement of legal expenses.
On August 12, 2004, the Board of Directors unanimously approved
Management's business restructuring plan to take full advantage of the favorable
battery settlement agreement announced on July 7, 2004, and the increasing
market interest in solar energy systems and hybrid electric vehicles. Our
strategy is to move ECD from a highly successful research-oriented company to
the next phase of development, which is to commercialize the products we have
developed and concentrate on growing sales revenues and equity value in our core
commercial businesses with the goal to move the company into a position of
having sustained profitability by July 2006.
The restructuring will increase product revenues while enabling us to
carry out major cost-reduction measures, including significant reductions in the
workforce to right size activities to support our core commercial businesses. We
will manage a reduced portfolio of advanced product development activities and a
leaner R&D team to grow future businesses.
The core commercial businesses on which the Company is focusing are United
Solar Ovonic, Cobasys, Ovonyx and Texaco Ovonic Hydrogen Systems.
92
Item 9: Changes in and Disagreements on Accounting and Financial Disclosure
------ -------------------------------------------------------------------
Changes in Independent Auditors
On October 29, 2003, the Audit Committee was advised by Deloitte & Touche
LLP ("Deloitte") that it declined to stand for reelection as the Company's
independent auditors, and on October 30, 2003 we received a letter from Deloitte
confirming "that the client-auditor relationship between Energy Conversion
Devices, Inc. (Commission File No. 1-8403) and Deloitte & Touche LLP has
ceased."
The audit report of Deloitte on our consolidated financial statements as
of, and for the year ended June 30, 2002, dated September 27, 2002 ("2002 Audit
Report") did not contain any adverse opinion or disclaimer of opinion, nor was
it qualified or modified as to uncertainty, audit scope or accounting
principles.
The audit report of Deloitte on our consolidated financial statements as
of, and for the year ended June 30, 2003, dated October 21, 2003 ("2003 Audit
Report") did not contain any adverse opinion or disclaimer of opinion, nor was
it qualified or modified as to uncertainty, audit scope or accounting principles
except that the 2003 Audit Report expressed an unqualified opinion and included
explanatory paragraphs concerning (i) substantial doubt about the Company's
ability to continue as a going concern and (ii) effective July 1, 2002, we
changed our method of accounting for goodwill and other intangible assets to
conform to Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets.
The cessation of the client-auditor relationship between us and Deloitte
was not recommended or approved by our Board of Directors or the Audit
Committee.
In connection with the audits of our fiscal years ended June 30, 2003 and
2002 and for the period July 1, 2003 through October 30, 2003, we had no
disagreements with Deloitte on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Deloitte, would have
caused them to make reference to the subject matter of the disagreements in
connection with their reports on our consolidated financial statements.
On November 14, 2003, the Audit Committee of the Board of Directors
engaged the public accounting firm of Grant Thornton LLP as the Company's
independent auditors.
Item 9A: Controls and Procedures
------- -----------------------
As of June 30, 2004, an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) was carried
out under the supervision, and with the participation, of the Company's
management, including our Chief Executive Officer and Chief Financial Officer.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, with the exception of the items listed below, 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 Annual Report on Form 10-K for the
year ended June 30, 2004.
93
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 pursuant to the standards established by the American
Institute of Certified Public Accountants:
1. Policies and procedures regarding employee conduct and acceptable
business practices, including expense reporting and personal use of
the 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 the June 30,
2003 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 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. He has developed a project plan
and retained outside professional advisors to assist in the
evaluation of existing internal controls and procedures and provide
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 the 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.
In September 2004, Grant Thornton (GT) reported to the Company's Audit
Committee and management that it had identified during the course of its audit
for the year ended June 30, 2004 the following four significant deficiencies
pursuant to standards established by the Public Company Accounting
Oversight Board:
94
1. The Company has insufficient documentation of its policies and procedures
around internal controls to ensure that the execution of activities and
controls are consistent with management objectives.
2. The Company does not currently have monitoring controls in place to
determine whether controls that have been implemented by management
specifically in the financial reporting function are actually operating
consistently with management's objectives.
3. The Company has areas where employees are performing processes or
controls that are incompatible with their function. Segregation of duties
issues were identified in the Accounts Receivable, Accounts Payable,
Financial Reporting, Payroll, and Treasury functions.
4. The Company has certain weaknesses in the security of data within the
Company's information systems. These include issues regarding security
event logs and activity reports, assignment of administrator rights,
segregation of duties, and access to data and applications.
GT has indicated that each of the above significant deficiencies
constitutes a material weakness in our internal controls pursuant to standards
established by the Public Company Accounting Oversight Board. As part of the
Company's effort to ensure compliance with provisions of Sarbanes-Oxley Section
404, the Company will create a plan and dedicate the required resources to
address and remediate these material weaknesses prior to our attestation of
control effectiveness as of June 30, 2005.
Since the date of the evaluation, there have been no significant changes
to the Company's disclosure controls and procedures or significant changes in
other factors that could affect the Company's disclosure controls and
procedures. However, as noted above, the Company has taken, and is continuing to
take, certain actions designed to enhance its disclosure controls and
procedures.
Item 9B: Other Information
------- -----------------
Not applicable.
95
PART III
Item 10: Directors and Executive Officers of the Registrant
------- --------------------------------------------------
The ECD directors are elected by the stockholders to serve until the next
annual meeting of stockholders and until their successors are duly elected and
qualified. The composition of the Board of Directors of ECD is as follows:
Director of
the Company Principal Occupation and
Name Since Office Business Experience
---------------------- ---------- --------------- ---------------------------------------------------------------------------
Robert C. Stempel 1995 Chairman of Mr. Stempel, 71, is Chairman of the Board and Chief Executive Officer of
the Board, ECD. Prior to his election as a director in December 1995, Mr. Stempel
Chief served as senior business and technical advisor to Mr. Ovshinsky. He is
Executive also the chairman of Ovonic Battery Company, Inc.; a director of United
Officer and Solar Ovonic Corp. and United Solar Ovonic LLC; vice chairman and director
Director of Ovonyx, Inc.; a member of the Management Committee of Texaco Ovonic
Hydrogen Systems LLC and COBASYS LLC and a member of the Alliance Board
of Ovonic Media, LLC. From 1990 until his retirement in 1992, he was the
chairman and chief executive officer of General Motors Corporation. He was
a director of Southwall Technologies, Inc. until September 2004 and
served as chairman of its Audit Committee.
Stanford R. Ovshinsky 1960 President, Mr. Ovshinsky, 81, the founder, President and Chief Technology Officer
Chief of ECD, has been an executive officer and director of ECD since its
Technology inception in 1960. Mr. Ovshinsky is the principal inventor of ECD's
Officer and technologies. He also serves as the chief executive officer and a
Director director of Ovonic Battery; chief executive officer and chairman of United
Solar Ovonic Corp. and United Solar Ovonic LLC; president of Ovonic Fuel
Cell Company LLC; president and member of the Management Committee of
Texaco Ovonic Hydrogen Systems; a member of the Management Committee of
COBASYS; chairman and director of Ovonyx; and a member of the Alliance
Board of Ovonic Media. Mr. Ovshinsky is the husband of Dr. Iris M.
Ovshinsky.
Iris M. Ovshinsky 1960 Vice President Dr. Ovshinsky, 77, co-founder and Vice President of ECD, has been an
and Director executive officer and director of ECD since its inception in 1960. Dr.
Ovshinsky also serves as a director of Ovonic Battery. Dr. Ovshinsky is
the wife of Stanford R. Ovshinsky.
96
Umberto Colombo 1995 Director Professor Colombo, 76, is Chairman of the Scientific Councils of the ENI
Enrico Mattei Foundation and of the Instituto Per l'Ambiente in Italy. He
was chairman of the Italian National Agency for New Technology, Energy and
the Environment until 1993 and then served as Minister of Universities and
Scientific and Technological Research in the Italian Government until 1994.
Professor Colombo is a member of the board of directors of several
Italian-based public companies. He is also active as a consultant in
international science and technology policy institutions related to
economic growth.
Robert I. Frey 2004 Director Mr. Frey, 61, a visiting professor of global management and marketing and
business ethics at Seidman School of Business, Grand Valley State
University, joined Herman Miller, Inc. in 1996, where he was an executive
vice president and member of the executive committee and president of
Herman Miller International accountable for international strategic
planning, manufacturing, sales and marketing until his retirement in 2002.
Prior to 1996, he was chairman of the board and chief executive officer at
Whirlpool Corporation, Asian operations. He also served as Whirlpool's
General Counsel from 1985-1989.
William J. Ketelhut 2004 Director Mr. Ketelhut, 51, was, from 2001-2002, president of Control Products at
Honeywell, a global company with 15 major lines of businesses including
semiconductors, consumer products and sensors products. From 1994-2001, he
served as president of several business units of Invensys plc, a global
automation, controls and process solutions group. He was president and
chief executive officer at GE/Micro Switch Control Inc. (a joint venture
between GE and Honeywell Microswitch Division) from 1992-1994, responsible
for the development of the strategy and organization of a new joint venture
between GE and Honeywell.
Walter J. McCarthy, Jr. 1995 Director Mr. McCarthy, 79, until his retirement in 1990, was the chairman and chief
executive officer of Detroit Edison Company. Prior to his election to the
ECD Board, he served as a consultant to ECD. Mr. McCarthy also served as a
director and a member of the Audit Committee of Comerica Bank,
Federal-Mogul Corporation and Perry Drug Company. He is a member of the
National Academy of Engineering. Mr. McCarthy serves as chairman of the
Compensation and Nominating Committee and is on the Audit Committee of the
ECD Board.
97
Florence I. Metz 1995 Director Dr. Metz, 75, until her retirement in 1996, held various executive
positions with Inland Steel: General Manager, New Ventures, Inland Steel
Company (1989-1991); General Manager, New Ventures, Inland Steel Industries
(1991-1992) and Advanced Graphite Technologies (1992-1993); Program
Manager for Business and Strategic Planning at Inland Steel (1993-1996).
Dr. Metz also serves on the Board of Directors of Ovonic Battery and is on
the Audit Committee and the Compensation and Nominating Committee of the
ECD Board.
Stephen Rabinowitz 2004 Director Mr. Rabinowitz, 61, was chairman and chief executive officer of General
Cable, Inc., a leader in the development, design, manufacture, marketing
and distribution of copper, aluminum and fiber optic wire and cable
products for the communications, energy and specialty markets, from
1994-2001. He brings over 30 years of senior level business and general
management experience, including 10 years with General Electric Corporation
(1982-1992) and two years with AlliedSignal Corporation (1992-1994). He
serves on the Board of Directors of JLG Industries.
Stanley K. Stynes 1977 Director Dr. Stynes, 72, was Dean, College of Engineering at Wayne State University
from 1970 to August 1985, and a professor of engineering at Wayne State
University from 1985 until his retirement in 1992. He has been involved
in various administrative, teaching, research and related activities. Dr.
Stynes serves as chairman of the Audit Committee.
COMPENSATION OF DIRECTORS
Directors who are employees of ECD do not receive additional compensation
for their services as a director. The non-employee directors of the Company are
issued approximately $5,000 per year in ECD Common Stock based on the closing
price of the Common Stock on the first business day of each year and are paid
$1,000 for attendance at each Board meeting and each Compensation and
Nominating Committee meeting (whether in person or by phone). Directors serving
on the Audit Committee are paid $2,000 for attendance (whether in person or by
phone) at each meeting. Directors who are not employed by the Company are also
reimbursed for all expenses incurred for the purpose of attending board of
directors and committee meetings, including airfare, mileage, parking,
transportation and hotel. Non-employee directors are eligible to receive stock
options under the Company's stock option plans. On April 19, 2004, Messrs.
Frey, Ketelhut and Rabinowitz each received options to purchase 5,000 shares of
ECD Common Stock at $12.07 per share under the terms of ECD's 2000
Non-Qualified Stock Option Plan.
98
The executive officers of ECD are as follows:
Served as an
Executive Officer or
Name Age Office Director Since
-------------------- ----- ---------------------- --------------------
Robert C. Stempel 71 Chairman of the Board, 1995
Chief Executive Officer
and Director
Stanford R. Ovshinsky 81 President, Chief Technology 1960(1)
Officer and Director
Iris M. Ovshinsky 77 Vice President and Director 1960(1)
James R. Metzger 57 Executive Vice President 2000
and Chief Operating Officer
Nancy M. Bacon 58 Senior Vice President 1976
Hellmut Fritzsche 77 Vice President 1969
Stephan W. Zumsteg 58 Vice President and Chief 1997
Financial Officer
-------------
(1) The predecessor of ECD was originally founded in 1960. The present
corporation was incorporated in 1964 and is the successor by merger
of the predecessor corporation.
See page 96 for information relating to Robert C. Stempel, Stanford R.
Ovshinsky and Iris M. Ovshinsky.
Mr. Metzger joined ECD as Vice Chairman in November 2002. He was named
ECD's Chief Operating Officer in February 2003 and Executive Vice President in
February 2004 with responsibility for the day-to-day operations of ECD. He
served on ECD's Board of Directors from July 2000 - February 2004. Prior to his
retirement from ChevronTexaco on March 1, 2002 following the merger of Chevron
and Texaco on October 9, 2001, he was Vice President and Chief Technology
Officer at Texaco Inc.
Mrs. Bacon joined ECD in 1976 as Vice President of Finance and Treasurer
and was named Senior Vice President in 1993. She served on ECD's Board of
Directors from 1977 - February 2004. Mrs. Bacon serves as a director of United
Solar Ovonic Corp. and United Solar Ovonic LLC.
Dr. Fritzsche was a professor of physics at the University of Chicago from
1957 until his retirement in 1996. He was chairman of the Department of Physics
at the University of Chicago until 1986. Dr. Fritzsche has been an ECD vice
president since 1965, acting on a part-time basis chiefly in its research and
product development activities, and served on ECD's Board of Directors from
1969-2003. He serves on the board of directors of United Solar Ovonic Corp.
99
Mr. Zumsteg joined ECD in March 1997. He was elected Treasurer in April
1997 and Vice President and Chief Financial Officer in February 2001. Mr.
Zumsteg also serves as Treasurer of Ovonic Battery, Ovonic Fuel Cell and Texaco
Ovonic Hydrogen Systems.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and officers and persons who own 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with respect to our securities and those of our affiliates with the
Securities and Exchange Commission and to furnish copies of these reports to us.
Based on a review of these reports and written representations from our
directors and officers regarding the necessity of filing a report, we believe
that during the fiscal year ended June 30, 2004, all Section 16(a) filing
requirements applicable to the Company's directors, officers and greater than
10% beneficial owners were met on a timely basis.
100
Item 11: Executive Compensation
------- ----------------------
The following table sets forth the compensation paid to ECD's Chief
Executive Officer and the next four most highly compensated executive officers
for the fiscal years ended June 30, 2004, 2003 and 2002.
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
-------------------------------------- ---------------------------------------
Restricted Options All Other
Name and Principal Fiscal Stock (Number Compen-
Position Year(1) Salary(2) Bonus Award of Shares) sation(3)
------------------------ -------- -------------- ---------- ---------- ---------- --------------
Robert C. Stempel (4) 2004 $ 275,776 - $ 5,778
Chairman and Chief 2003 $ 300,019 40,000 $ 4,191
Executive Officer 2002 $ 294,247 25,000 $ 4,191
Stanford R. Ovshinsky 2004 $ 338,295 66,391(5) $ 8,000
President and Chief 2003 $ 367,668 40,000 $ 10,781
Technology Officer 2002 $ 349,713 $ 24,076 44,530(5) $ 12,362
Iris M. Ovshinsky 2004 $ 289,564 44,261(5) $ 13,562
Vice President 2003 $ 314,727 25,000 $ 13,562
2002 $ 299,730 29,687(5) $ 12,362
James R. Metzger(6) 2004 $ 279,347(7) 25,000 $ 6,069
Executive Vice 2003 $ 141,571(8) 25,000 -
President and Chief
Operating Officer
Nancy M. Bacon 2004 $ 275,776 - $ 10,322
Senior Vice President 2003 $ 289,441 30,000 $ 10,322
2002 $ 275,017 12,000 $ 8,942
----------------
(1) ECD's fiscal year is July 1 to June 30. ECD's 2004 fiscal year ended
June 30, 2004.
(2) Amounts shown include compensation deferred under ECD's 401(k) Plan.
(3) "All Other Compensation" is comprised of (i) contributions made by ECD to
the accounts of each of the named executive officers under ECD's 401(k)
Plan as follows: Mr. Ovshinsky, Dr. Ovshinsky, and Mrs. Bacon in the
amount of $8,000 with respect to each of the calendar years ended December
31, 2003 and 2002 and $6,800 with respect to calendar year ended December
31, 2001, and Mr. Metzger in the amount of $6,069 with respect to calendar
year ended December 31, 2003; and (ii) the dollar value of any life
insurance premiums paid by ECD in the fiscal years ended June 30, 2004,
2003 and 2002 with respect to term-life insurance for the benefit of each
of the named executives as follows: Mr. Stempel $5,778 and $4,191 (each
of 2003 and 2002); Mr. Ovshinsky $0, $2,781 and $5,562; Dr. Ovshinsky
$5,562 (all three years); Mrs. Bacon $2,322 (each of 2004 and
101
2003) and $2,142. Under the 401(k) Plan, which is a qualified defined-
contribution plan, ECD makes matching contributions periodically on behalf
of the participants. Effective October 2000, the Board of Directors
approved employer matching contribution in the amount of 100% of the first
2% and 50% of the next 4% of each such participant's compensation. These
matching contributions were limited to 4% of a participant's salary, up to
$200,000, for calendar years 2003 and 2002 and 4% of salary, up to
$170,000, for calendar year 2001. Mr. Stempel does not participate in the
Company's 401(k) Plan.
(4) See Item 12, Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters for a description of Class B Common Stock
awarded to Mr. Stempel under a Restricted Stock Agreement dated January 15,
1999. All shares of Restricted Stock will be deemed to vest if Mr. Stempel
is serving as a director and officer of ECD on September 30, 2005 or upon
the occurrence of a change in control of ECD.
(5) The stock options were issued to Mr. and Dr. Ovshinsky pursuant to Stock
Option Agreements dated November 1993 which are subject to periodic
antidilution protection adjustments based on changes in the number of
outstanding shares of ECD Common Stock. Under those Stock Option
Agreements, if ECD issues any equity securities, other than pursuant to
the exercise of options by Mr. and Dr. Ovshinsky under their respective
Stock Option Agreements, ECD is obligated to grant to Mr. and Dr. Ovshinsky
additional options covering sufficient additional shares of ECD Common
Stock so that their respective proportionate equity interest is maintained
on a fully-diluted basis. Such adjustments are calculated quarterly as of
the last day of each of our fiscal quarters and coincident with significant
issuances of ECD Common Stock. (See Note K of the Notes to Consolidated
Financial Statements.)
(6) Mr. Metzger joined ECD as vice chairman in November 2002.
(7) Includes expenses of $69,967 for travel and lodging.
(8) The salary reported for fiscal year 2003 is for the eight-month period
November 2002 - June 2003 and includes expenses of $6,460 for travel and
lodging. Prior to joining ECD as an employee, Mr. Metzger served as a
non-employee board member. Accordingly, the salary for 2003 also includes
approximately $5,000 in annual director fee for calendar year 2002.
102
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all options granted to the named executive
officers during the fiscal year ended June 30, 2004.
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term(1)
------------------------------------- --------------------------------------
Number of Percent of
Securities Total Options Exercise
Underlying Granted to of Base
Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% 10%
--------------------- ----------- ------------- --------- ---------- ----------- -------------
Stanford R. Ovshinsky 66,391(2) 42.65% $10.12(3) (4) $ 422,540 $1,070,801
Iris M. Ovshinsky 44,261(2) 28.44% $10.12(3) (4) $ 281,695 $ 713,872
James R. Metzger 25,000 16.06% $10.06 11/03/13 $ 158,167 $ 400,826
------------------
(1) The potential realizable value amounts shown illustrate the values
that might be realized upon exercise immediately prior to the
expiration of their term using 5% and 10% appreciation rates as
required to be used in this table by the Securities and Exchange
Commission, compounded annually, and are not intended to forecast
possible future appreciation, if any, of ECD's stock price.
Additionally, these values do not take into consideration the
provisions of the options providing for nontransferability or
termination of the options following termination of employment.
(2) The stock options were issued to Mr. and Dr. Ovshinsky pursuant to
Stock Option Agreements dated November 1993 which are subject to
periodic antidilution protection adjustments based on changes in
the number of outstanding shares of ECD Common Stock.
(3) The exercise price is the weighted average exercise price of the
stock options granted in fiscal year 2004.
(4) Twelve months after termination of employment other than voluntary
termination.
103
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
None of the named executives exercised any stock options during the fiscal
year ended June 30, 2004. The following table sets forth the number and value of
unexercised options held by the named executive officers at fiscal year end.
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised in-the-Money Options
on Exercise Realized Options at Fiscal Year End at Fiscal Year End
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------------------ ----------- --------- -------------------------- -------------------------
Robert C. Stempel(1) _ _ 700,000/44,000 $185,360/$20,640
Stanford R. Ovshinsky(2) _ _ 758,847/44,000 $732,313/$20,640
Iris M. Ovshinsky(3) _ _ 515,399/29,000 $447,516/$12,900
James R. Metzger(4) _ _ 16,000/44,000 $ 6,100/$39,150
Nancy M. Bacon(5) _ _ 222,200/30,000 $ 10,320/$15,480
--------------------
(1) Mr. Stempel's exercisable and unexercisable options are exercisable at
a weighted average price of $14.35 and $15.96 per share, respectively.
(2) Mr. Ovshinsky's exercisable and unexercisable options are exercisable at
a weighted average price of $14.34 and $15.96 per share, respectively.
(3) Dr. Ovshinsky's exercisable and unexercisable options are exercisable at
a weighted average price of $13.57 and $16.30 per share, respectively.
(4) Mr. Metzger's exercisable and unexercisable options are exercisable at
a weighted average price of $13.90 and $11.10 per share, respectively.
(5) Mrs. Bacon's exercisable and unexercisable options are exercisable at
a weighted average price of $15.67 and $15.29 per share, respectively.
104
EMPLOYMENT AGREEMENTS
On September 2, 1993, Mr. Ovshinsky entered into separate employment
agreements with each of ECD and Ovonic Battery in order to clearly define his
duties and compensation arrangements and to provide to each company the benefits
of his management efforts and future inventions. The initial term of each
employment agreement was six years. In February 1999, the Boards of Directors of
ECD and Ovonic Battery renewed each of Mr. Ovshinsky's employment agreements for
an additional term ending September 30, 2005. Mr. Ovshinsky's employment
agreement with ECD provides for an annual salary of not less than $100,000,
while his agreement with Ovonic Battery provides for an annual salary of not
less than $150,000. Both agreements provide for annual increases to reflect
increases in the cost of living, discretionary annual increases and an annual
bonus equal to 1% of our pre-tax income (excluding Ovonic Battery) and 1% of the
operating income of Ovonic Battery. Mr. Ovshinsky's annual salary increases are
determined based upon increases in the cost of living as determined by the
Compensation and Nominating Committee using as a guide the percentage increase
in the Consumer Price Index for the Detroit-metropolitan area published by the
Bureau of Labor Statistics. In light of ECD's cost-containment measures, Mr.
Ovshinsky recommended, and the Compensation and Nominating Committee accepted,
that he not receive a salary increase for fiscal year 2004. Additionally, Mr.
Ovshinsky and other senior executives of the Company voluntarily reduced their
salaries by 10 percent effective September 1, 2003. In recognition and
acknowledgement of Mr. Ovshinsky's invaluable contributions, the Compensation
and Nominating Committee determined that Mr. Ovshinsky's salary increase in
fiscal years 2003 and 2002 should be above the nominal cost-of-living increase.
Mr. Ovshinsky's employment agreement with Ovonic Battery additionally
contains a power of attorney and proxy from ECD providing Mr. Ovshinsky with the
right to vote the shares of Ovonic Battery held by ECD following a change in
control of ECD. For purposes of the agreement, change in control means (i) any
sale, lease, exchange or other transfer of all or substantially all of our
assets; (ii) the approval by our stockholders of any plan or proposal of our
liquidation or dissolution; (iii) the consummation of any consolidation or
merger of ECD in which we are not the surviving or continuing corporation; (iv)
the acquisition by any person of 30% or more of the combined voting power of our
then outstanding securities having the right to vote for the election of
directors; (v) changes in the constitution of the majority of our Board of
Directors; (vi) the holders of our Class A Common Stock ceasing to be entitled
to exercise their preferential voting rights other than as provided in our
charter and (vii) bankruptcy. In the event of mental or physical disability or
death of Mr. Ovshinsky, the foregoing power of attorney and proxy will be
exercised by Dr. Ovshinsky.
Pursuant to his employment agreement with Ovonic Battery, Mr. Ovshinsky
was granted stock options, exercisable at a price of $16,129 per share, to
purchase 186 shares (adjusted from a price of $50,000 per share to purchase 60
shares pursuant to the anti-dilution provisions of the option agreement) of
Ovonic Battery's common stock, representing approximately 6% of Ovonic Battery's
outstanding common stock. The Ovonic Battery stock options vested on a quarterly
basis over six years commencing with the quarter beginning October 1, 1993, and
are now fully vested.
105
In February 1998, our Compensation and Nominating Committee recommended
and our Board of Directors approved an Employment Agreement between ECD and Dr.
Ovshinsky. The purpose of the Employment Agreement is to clearly define Dr.
Ovshinsky's duties and compensation arrangements. The Employment Agreement also
provides for ECD to have the benefits of Dr. Ovshinsky's services as a
consultant to us following the termination of her active employment for
consulting fees equal to 50% of the salary payable to Dr. Ovshinsky at the date
of the termination of her active employment. Dr. Ovshinsky has the right to
retire at any time during her services as a consultant and receive retirement
benefits equal to the consulting fees for the remainder of Dr. Ovshinsky's life.
The initial term of Dr. Ovshinsky's employment period was until September
2, 1999 and is automatically renewed for successive one-year periods unless
terminated by Dr. Ovshinsky or ECD upon 120 days' notice in advance of the
renewal date. Dr. Ovshinsky's employment agreement provides for an annual salary
of not less than $250,000, annual increases to reflect increases in the cost of
living and discretionary annual increases.
On January 15, 1999, we entered into an Executive Employment Agreement
with Mr. Stempel and a Restricted Stock Agreement awarding Mr. Stempel 430,000
shares of Class B Common Stock. The Executive Employment Agreement provides that
Mr. Stempel will serve as our Executive Director for a term ending September 30,
2005. Mr. Stempel was named Chief Executive Officer in February 2004. During the
term of his employment, Mr. Stempel will be entitled to receive an annual salary
as determined from time to time. The Executive Employment Agreement also
provides for discretionary bonuses based on Mr. Stempel's individual performance
and our financial performance. The Executive Employment Agreement also requires
us to provide Mr. Stempel with non-wage benefits of the type provided generally
by us to our senior executive officers.
The Executive Employment Agreement permits Mr. Stempel to retire as one of
our officers and employees and will permit him to resign his employment at any
time in the event he becomes subject to any mental or physical disability which,
in the good faith determination of Mr. Stempel, materially impairs his ability
to perform his regular duties as our officer. The Executive Employment Agreement
permits us to terminate Mr. Stempel's employment upon the occurrence of certain
defined events, including the material breach by Mr. Stempel of certain
non-competition and confidentiality covenants contained in the Executive
Employment Agreement, his conviction of certain criminal acts or his gross
dereliction or malfeasance of his duties as one of our officers and employees
(other than as a result of his death or mental or physical disability).
Mr. Stempel's entitlement to compensation and benefits under the Executive
Employment Agreement will generally cease effective upon the date of the
termination of his employment, except that we will be required to continue to
provide Mr. Stempel and his spouse with medical, disability and life insurance
coverage for the remainder of their lives or until the date they secure
comparable coverage provided by another employer.
Compensation and Nominating Committee Report on Compensation Matters
Effective July 17, 2003, our management recommended and the Board of
Directors approved the restructuring of the Compensation Committee to include
the functions of a nominating committee and renaming it the Compensation and
Nominating Committee. The
106
Compensation and Nominating Committee is composed of Mr. McCarthy (Chairman)
and Dr. Metz.
The Compensation and Nominating Committee is responsible for administering
the policies which govern both annual compensation of executive officers and our
stock option plans. The Compensation and Nominating Committee meets several
times during the year to review recommendations from management regarding stock
options and compensation. Compensation and stock option recommendations are
based upon performance, current compensation, stock option ownership, and years
of service to us. We do not have a formal bonus program for executives, although
we have awarded bonuses to our executives from time to time.
The Compensation and Nominating Committee also assists in identifying and
recommending qualified individuals to serve on our Board of Directors and
proposes a slate of nominees for election at the annual meeting of stockholders.
Compensation of Executive Officers
The Compensation and Nominating Committee considers our financial position
and other factors in determining the compensation of our executive officers.
These factors include remaining competitive within the relevant hiring market -
whether scientific, managerial or otherwise - so as to enable us to attract and
retain high quality employees, and, where appropriate, linking a component of
compensation to the performance of our Common Stock, such as by a granting of
stock option or similar equity-based compensation, to instill ownership thinking
and align the employees' and stockholders' objectives. We have been successful
at recruiting and retaining and motivating executives who are highly talented,
performance-focused and entrepreneurial.
Salary and Bonus
----------------
Salary is paid for ongoing performance. During our fiscal year 2004, in
light of ECD's cost-containment measures, none of our senior executives received
a salary increase. We do not have a formal bonus program for executives. There
were no bonuses awarded to our executives for the fiscal year ended June 30,
2004.
In light of our cost-containment initiatives, the salaries of senior
executives were reduced by 10 percent effective September 1, 2003.
Stock Options
-------------
The Compensation and Nominating Committee considers stock options to be
an extremely effective incentive for executive officers and other employees.
Such options also encourage executives to remain with us because they vest over
a period of years. Other than grants to Mr. Ovshinsky, Dr. Ovshinsky and Mr.
Metzger pursuant to contractual obligations, there were no stock option grants
to our senior executives. The number of stock options granted to Mr. Ovshinsky,
Dr. Ovshinsky and Mr. Metzger is described in "Management -- Executive
Compensation."
107
Our employees and our majority-owned subsidiaries also participate in the
broad-based stock option program.
Chief Executive Officer Compensation
In September 1993, Mr. Ovshinsky entered into separate employment
agreements with each of ECD and Ovonic Battery. The purpose of these agreements,
which provide for the payment to Mr. Ovshinsky of an annual salary of not less
than $250,000 by us and by Ovonic Battery, was to clearly define Mr. Ovshinsky's
duties and compensation arrangements and to provide to each company the benefits
of his management efforts and future inventions. See "Management -- Employment
Agreements." Mr. Ovshinsky did not receive a salary increase or a bonus in
fiscal year 2004 (as part of its cost-containment initiatives, the Company
implemented a salary freeze for all ECD and Ovonic Battery employees), and,
along with other senior executives, voluntarily reduced his salary by 10
percent.
Mr. Stempel was named Chief Executive Officer in February 2004 by the
Board of Directors. In January 1999, he entered into an Executive Employment
Agreement with ECD, which provides that Mr. Stempel serve as Executive Director
for a term ending September 30, 2005. See "Management -- Employment Agreements."
Mr. Stempel did not receive a salary increase or a bonus in fiscal year 2004 (as
part of its cost-containment initiatives, the Company implemented a salary
freeze for all ECD and Ovonic Battery employees), and, along with other senior
executives, voluntarily reduced his salary by 10 percent.
COMPENSATION AND NOMINATING COMMITTEE
Walter J. McCarthy, Jr.
Florence I. Metz
108
PERFORMANCE GRAPH
The line graph below compares the cumulative total stockholder return on
ECD's Common Stock over a five-year period with the return on the NASDAQ Stock
Market - U.S. Index and the Russell 2000 Index.
Cumulative Total Return
---------------------------------------------------------------------
6/99 6/00 6/01 6/02 6/03 6/04
---- ---- ---- ---- ---- ----
ENERGY CONVERSION DEVICES, INC. 100.00 255.35 281.76 157.89 92.98 113.31
NASDAQ STOCK MARKET (U.S.) 100.00 192.65 68.58 58.24 56.04 76.42
RUSSELL 2000 100.00 114.32 115.07 105.09 103.37 137.86
The total return with respect to NASDAQ Stock Market - U.S. Index and the
Russell 2000 Index assumes that $100 was invested on June 30, 1999, including
reinvestment of dividends.
We have not paid any cash dividends in the past and do not expect to pay
any in the foreseeable future.
The Report of the Compensation and Nominating Committee on Executive
Compensation and the Performance Graph are not deemed to be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
or Securities Exchange Act of 1934, as amended, or incorporated by reference in
any documents so filed.
109
AUDIT COMMITTEE REPORT
The Audit Committee is comprised of three directors, all of whom are
independent directors as defined under applicable rules of the Nasdaq Stock
Market, Inc.
In accordance with its written charter adopted by the Board of Directors,
the Audit Committee assists the Board of Directors in fulfilling its
responsibility for oversight of the quality and integrity of our accounting,
auditing, and financial reporting practices. The Audit Committee reviews our
financial reporting process on behalf of the Board. Management has the primary
responsibility for the financial statements and the reporting process, including
the systems of internal controls. Our independent registered public accounting
firm is responsible for performing an audit in accordance with standards of the
United States Public Company Accounting Oversight Board to obtain reasonable
assurance that our consolidated financial statements are free from material
misstatement and expressing an opinion on the conformity of the financial
statements with accounting principles generally accepted in the United States of
America. The recently appointed Director of Risk Management and Internal Audit
is responsible to the Audit Committee and the Board for testing the integrity of
the financial accounting and reporting control systems and such other matters as
the Audit Committee and the Board determine. During fiscal year 2004, the Audit
Committee met 11 times with management and our independent registered public
accounting firm and discussed the interim financial information contained in
each quarterly earnings report prior to public release.
In discharging its oversight responsibility as to the audit process, the
Audit Committee obtained from the independent registered public accounting firm
a formal written statement describing all relationships between the auditors and
us that might bear on the auditors' independence consistent with Independence
Standards Board Standard No. 1, "Independence Discussions with Audit
Committees," discussed with the auditors any relationships that may impact their
objectivity and independence and satisfied itself as to the auditors'
independence. The Audit Committee also discussed with management and the
independent registered public accounting firm the quality and adequacy of our
internal controls. The Audit Committee reviewed with our independent registered
public accounting firm their audit plans, audit scope, and identification of
audit risks.
The Audit Committee discussed and reviewed with the independent registered
public accounting firm all communications required by generally accepted
auditing standards, including those described in Statement on Auditing Standards
No. 61, as amended, "Communication with Audit Committees," and, with and without
management present, discussed and reviewed the results of the independent
registered public accounting firm's examination of the consolidated financial
statements.
The Audit Committee reviewed with management and the independent
registered public accounting firm our audited financial statements as of and for
the fiscal year ended June 30, 2004. Management represented to the Audit
Committee that our consolidated financial statements were prepared in accordance
with generally accepted accounting principles in the United States of America,
and the Audit Committee has reviewed and discussed the consolidated financial
statements with management, the internal auditor and the independent registered
public accounting firm.
110
Based on the above-mentioned reviews and discussions with management and
the independent registered public accounting firm, the Audit Committee
recommended to the Board of Directors that the audited consolidated financial
statements be included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2004, for filing with the Securities and Exchange Commission.
AUDIT COMMITTEE
Stanley K. Stynes, Chairman
Walter J. McCarthy Jr.
Florence I. Metz
111
Item 12: Security Ownership of Certain Beneficial Owners and Management
------- and Related Stockholder Matters
--------------------------------------------------------------
Equity Compensation Plan Information
The following table sets forth aggregate information regarding grants
under all equity compensation plans of ECD as of September 3, 2004.
Number of securities
Number of remaining available for
securities to future issuance under
be issued upon Weighted-average equity compensation plans
exercise of exercise price of (excluding securities
Plan category outstanding options outstanding options reflected in 1st column)
------------------------------ ------------------- ------------------- -------------------------
Equity compensation plans
approved by security holders(1) 3,062,343 $16.84 1,244,735
Equity compensation plans
not approved by security holders 1,070,401(2)(3) $13.19 (2)(3)
---------
Total 4,132,744 $15.89 1,244,735
=========
--------------------
(1) These plans consist of the 1995 Non-Qualified Stock Option Plan and 2000
Non-Qualified Stock Option Plan.
(2) Of the 1,070,401 shares issuable upon exercise, options to acquire 467,890
shares (adjusted as of June 30, 2004) and 302,511 shares (adjusted as of
June 30, 2004) were issued to Mr. and Dr. Ovshinsky, respectively, pursuant
to Stock Option Agreements dated November 1993 which are subject to
periodic antidilution protection adjustments based on changes in the number
of outstanding shares of ECD Common Stock. Under those Stock Option
Agreements, if ECD issues any equity securities, other than pursuant to the
exercise of options by Mr. and Dr. Ovshinsky under their respective Stock
Option Agreements, ECD is obligated to grant to Mr. and Dr. Ovshinsky
additional options covering sufficient additional shares of ECD Common
Stock so that their respective proportionate equity interest in ECD as of
November 1993 is maintained on a fully-diluted basis. Such adjustments are
calculated quarterly as of the last day of each of ECD's fiscal quarters
and coincident with significant issuances of ECD Common Stock.
(3) Of the 1,070,401 shares issuable upon exercise, options to acquire 300,000
shares were issued to Mr. Robert Stempel pursuant to a Stock Option
Agreement dated January 15, 1999. There are no securities available for
future issuance under this Stock Option Agreement.
112
Security Ownership of Certain Beneficial Owners and Management
CLASS A COMMON STOCK
Mr. Stanford R. Ovshinsky and his wife, Dr. Iris M. Ovshinsky (executive
officers, directors and founders of ECD), own of record 153,420 shares and
65,601 shares, respectively (or approximately 69.8% and 29.8%, respectively), of
the outstanding shares of Class A Common Stock. Such shares are owned directly
or indirectly through certain trusts of which Mr. and Dr. Ovshinsky are
co-trustees. Common Stock is entitled to one vote per share and each share of
Class A Common Stock is entitled to 25 votes per share. Class A Common Stock is
convertible into Common Stock on a share-for-share basis at any time and from
time to time at the option of the holders, and will be deemed to be converted
into Common Stock on a share-for-share basis on September 30, 2005. Under
applicable Delaware law, the September 30, 2005 mandatory conversion date may be
extended in the future from time to time with approval of ECD's stockholders
voting together as a single class.
As of September 3, 2004, Mr. Ovshinsky also had the right to vote 126,500
shares of Common Stock owned by Sanoh Industrial Co., Ltd. under the terms of an
agreement dated as of November 3, 1992 between ECD and Sanoh which, together
with the Class A Common Stock and 19,749 shares of Common Stock Mr. and Dr.
Ovshinsky own, give Mr. and Dr. Ovshinsky voting control over shares
representing approximately 18.46% of the combined voting power of our
outstanding stock.
ChevronTexaco has agreed that (i) so long as it beneficially owns an
aggregate of 5% of our Common Stock and (ii) so long as Mr. and Dr. Ovshinsky
are the beneficial owners of Class A Common Stock, or Mr. Stempel is the
beneficial owner of Class B Common Stock, ChevronTexaco will vote its shares of
our Common Stock in accordance with the votes cast by the holders of Class A
Common Stock (prior to its conversion) or Class B Common Stock (after conversion
of the Class A Common Stock).
The following table sets forth, as of September 3, 2004, information
concerning the beneficial ownership of Class A Common Stock by each director and
all executive officers and directors of ECD as a group. All shares are owned
directly except as otherwise indicated. Under the rules of the Securities and
Exchange Commission, Stanford R. Ovshinsky and Iris M. Ovshinsky may each be
considered to beneficially own the shares held by the other.
Total Number Percentage
Name of Class A Common Stock of Shares of
Beneficial Owner Beneficially Owned(1)(2) Beneficially Owned Class
--------------------- ------------------------ ------------------ ----------
Stanford R. Ovshinsky 153,420 153,420 69.8%
Iris M. Ovshinsky 65,601 65,601 29.8%
All other executive
officers and
directors as a group - - -
(12 persons) ------- ------- ------
Total 219,021 219,021 99.6%
======= ======= =====
---------
113
(1) The balance of the 219,913 shares of Class A Common Stock
outstanding, 892 shares, or approximately 0.4%, are owned by other
members of Mr. and Dr. Ovshinsky's family. Neither Mr. nor Dr.
Ovshinsky has voting or investment power with respect to such shares.
(2) On November 10, 1995, the Compensation Committee recommended, and
the Board of Directors approved, an amendment to Mr. and Dr.
Ovshinsky's Stock Option Agreements dated November 18, 1993 (the
"Agreements") to permit Mr. and Dr. Ovshinsky to exercise a portion
(126,082 and 84,055 shares, respectively) of their existing Common
Stock option for Class A Common Stock on the same terms and
conditions as provided in the Agreements. The shares of Class A Common
Stock issuable upon exercise of the options under the Agreements,
as amended, are not included in the number of shares indicated in the
above table, but are included in the shares of Common Stock
beneficially owned by Mr. and Dr. Ovshinsky (see table of beneficial
ownership of Common Stock on page 115).
CLASS B COMMON STOCK
At ECD's Annual Meeting held on March 25, 1999, ECD's stockholders
approved a proposal to increase ECD's authorized capital stock and to authorize
430,000 shares of a new Class B Common Stock. All of the authorized shares of
Class B Common Stock were awarded to Mr. Robert C. Stempel pursuant to the terms
of a Restricted Stock Agreement dated as of January 15, 1999 between ECD and Mr.
Stempel.
The terms of the Class B Common Stock are substantially similar to those
of ECD's Class A Common Stock. The principal difference between the Class A
Common Stock and the Class B Common Stock is with respect to voting rights. Each
share of Class B Common Stock will initially entitle the holder to one vote on
all matters to be voted upon by ECD's stockholders. However, each share of Class
B Common Stock will become entitled to 25 votes as of the first date upon which
all of the outstanding shares of Class A Common Stock have been converted into
Common Stock and no shares of Class A Common Stock are outstanding. The
preferential voting rights of the Class B Common Stock, if triggered, will
expire on September 30, 2005.
The Class B Common Stock are convertible into Common Stock on a
share-for-share basis at any time at the option of the holder. In addition, the
Class B Common Stock will be deemed to be converted into Common Stock on
September 30, 2005. Under applicable Delaware law, the September 30, 2005
mandatory conversion date may be extended in the future from time to time with
the approval of ECD stockholders voting together as a single class.
ChevronTexaco has agreed that (i) so long as it beneficially owns an
aggregate of 5% of our Common Stock and (ii) so long as Mr. and Dr. Ovshinsky
are the beneficial owners of Class A Common Stock, or Mr. Stempel is the
beneficial owner of Class B Common Stock, ChevronTexaco will vote its shares of
our Common Stock in accordance with the votes cast by the holders of Class A
Common Stock (prior to its conversion) or Class B Common Stock (after conversion
of the Class A Common Stock).
114
COMMON STOCK
Directors and Executive Officers. The following table sets forth, as of
September 3, 2004, information concerning the beneficial ownership of Common
Stock by each director and executive officer and for all directors and executive
officers of ECD as a group. All shares are owned directly except as otherwise
indicated.
Amount and Nature
of Beneficial Percentage
Name of Beneficial Owner Ownership(1) of Class(2)
-------------------------------- ----------------- -----------
Robert C. Stempel 1,191,404 (3) 4.64%
Stanford R. Ovshinsky 1,051,007 (4) 4.13%
Iris M. Ovshinsky 588,509 (5) 2.34%
Nancy M. Bacon 247,215 (6) 1.00%
Hellmut Fritzsche 30,250 (7) *
Stephan W. Zumsteg 30,000 (8) *
Walter J. McCarthy, Jr. 20,708 (9) *
James R. Metzger 19,974 (10) *
Stanley K. Stynes 19,589 (11) *
Florence I. Metz 17,405 (12) *
Umberto Colombo 15,672 (13) *
Robert I. Frey 1,000 *
William J. Ketelhut -
Stephen Rabinowitz -
---------
All executive officers and 3,232,733 11.77%
directors as a group (14 =========
persons)
---------
* Less than 1%.
(1) Under the rules and regulations of the Securities and Exchange
Commission, a person is deemed to be the beneficial owner of a security
if that person has the right to acquire beneficial ownership of such
security within sixty days, whether through the exercise of options or
warrants or through the conversion of another security.
(2) Under the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock issuable upon exercise of options and
warrants or upon conversion of securities which are deemed to be
beneficially owned by the holder thereof (see Note (1) above) are deemed
to be outstanding for the purpose of computing the percentage of
outstanding securities of the class owned by such person, but are not
deemed to be outstanding for the purpose of computing the percentage of
the class owned by any other person.
(3) Includes 430,000 shares of Class B Common Stock and 700,000 shares
represented by options exercisable within 60 days.
115
(4) Includes 758,847 (adjusted as of June 30, 2004) shares represented by
options exercisable within 60 days, the 126,500 shares of Common Stock
owned by Sanoh Industrial Co., Ltd. over which Mr. Ovshinsky has voting
power and 153,420 shares of Class A Common Stock which are convertible
into Common Stock. Under the rules and regulations of the Securities and
Exchange Commission, Mr. Ovshinsky may be deemed a beneficial owner of
the shares of Common Stock and Class A Common Stock owned by his wife,
Dr. Ovshinsky. Such shares are not reflected in Mr. Ovshinsky's share
ownership in this table.
(5) Includes 515,399 (adjusted as of June 30, 2004) shares represented by
options exercisable within 60 days and 65,601 shares of Class A Common
Stock which are convertible into Common Stock. Under the rules and
regulations of the Securities and Exchange Commission, Dr. Ovshinsky may
be deemed a beneficial owner of the shares of Common Stock and Class A
Common Stock owned by her husband, Mr. Ovshinsky. Such shares are not
reflected in Dr. Ovshinsky's share ownership in this table.
(6) Includes 222,200 shares represented by options exercisable within 60
days.
(7) Includes 20,388 shares represented by options exercisable within 60 days.
(8) Includes 28,000 shares represented by options exercisable within 60 days.
(9) Includes 6,000 shares represented by options exercisable within 60 days.
(10) Includes 16,000 shares represented by options exercisable within 60 days.
(11) Includes 6,000 shares represented by options exercisable within 60 days.
(12) Includes 9,000 shares represented by options exercisable within 60 days.
(13) Includes 11,000 shares represented by options exercisable within 60 days.
116
Principal Shareholders. The following table sets forth, as of September 3,
2004, to our knowledge, the beneficial holders of more than 5% of our Common
Stock (see footnotes for calculation used to determine "percentage of class"
category):
Name and Address of Amount and Nature of Percentage of
Beneficial Holder Beneficial Ownership Class(1)
------------------------------- -------------------- -------------
TRMI Holdings Inc. 4,376,633 (2) 17.39%
(a unit of ChevronTexaco)
6001 Bollinger Canyon Road
San Ramon, California 94583
FMR Corp. 2,719,132 (3) 10.55%
82 Devonshire Street, E31C
Boston, Massachusetts 02109
CCM Master Qualified Fund, Ltd.
c/o Coghill Capital Management, L.L.C. 1,971,195 (4) 7.82%
One North Wacker Drive - Suite 4350
Chicago, Illinois 60606
Stanford R. and Iris M. Ovshinsky 1,639,516 (5) 6.48% (6)
Energy Conversion Devices, Inc.
2956 Waterview Drive
Rochester Hills, MI 48309
Heimdall Investments Ltd. 1,337,792 (7) 5.17%
c/o HBK Investments L.P.
300 Crescent Court - Suite 700
Dallas, Texas 75201
-------------------
(1) Under the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock issuable upon exercise of options
and warrants or upon conversion of securities which are deemed to be
beneficially owned by the holder thereof are deemed to be outstanding
for the purpose of computing the percentage of outstanding securities
of the class owned by such person, but are not deemed to be outstanding
for the purpose of computing the percentage of the class owned by any
other person.
(2) Pursuant to the Stock Purchase Agreement dated as of May 1, 2000, TRMI
Holdings Inc., a unit of ChevronTexaco, has agreed that (i) so long as
it beneficially owns an aggregate of 5% of our Common Stock and (ii) so
long as Mr. and Dr. Ovshinsky are the beneficial owners of Class A
Common Stock, or Mr. Stempel is the beneficial owner of Class B Common
Stock, ChevronTexaco will vote its shares of our Common Stock in
accordance with the votes cast by the holders of Class A Common Stock
(prior to its conversion) or Class B Common Stock (after conversion of
the Class A Common Stock). ChevronTexaco's percentage of class is
computed based on 24,523,001 shares of Common Stock outstanding,
219,913 shares of Class A Common Stock outstanding and 430,000 shares
of Class B Common Stock outstanding.
(3) Consists of 1,259,566 outstanding shares of Common Stock and 1,259,566
shares of Common Stock issuable upon exercise of currently exercisable
warrants. As of April 12,
117
2004, based upon information contained in a Schedule 13G with the
Commission, FMR Corp., on behalf of funds managed or advised by
subsidiaries of FMR Corp. and affiliates of FMR Corp. have sole power
to dispose or to direct the disposition of 2,719,132 shares of our
Common Stock. Sole power to vote the shares of Common Stock
beneficially owned by FMR Corp. resides in the respective boards of
trustees of the funds that have invested in the shares. The interest
of Fidelity Capital Appreciation Fund, an investment company registered
under the Investment Company Act of 1940, amounted to 2,519,132 shares
or 9.771% of our Common Stock.
(4) Consists of 1,302,299 outstanding shares of Common Stock and 668,896
shares of Common Stock issuable upon exercise of currently exercisable
warrants. Coghill Capital Management, L.L.C. and Clint D. Coghill,
through their control of CCM Master Qualified Fund, Ltd., have shared
voting and dispositive power over these shares.
(5) Includes 219,021 shares of Class A Common Stock owned by Mr. and Dr.
Ovshinsky (which shares are convertible at any time into Common Stock
and will be deemed to be converted into Common Stock on September 30,
2005), 19,749 shares of Common Stock owned by Mr. and Dr. Ovshinsky,
126,500 shares of Common Stock owned by Sanoh over which Mr. Ovshinsky
has voting rights, and 1,274,246 (adjusted as of June 30, 2004) shares
represented by options exercisable within 60 days.
(6) Represents the sum of Mr. and Dr. Ovshinsky's respective ownership
interests calculated separately.
(7) Consists of 1,337,792 shares of Common Stock issuable upon exercise of
currently exercisable warrants. HBK Investments L.P. may be deemed to
have sole voting power and sole dispositive power over the shares held
by Heimdall Investments Ltd. pursuant to an Investment Management
Agreement between HBK Investments L.P. and Heimdall Investments Ltd.
118
Item 13: Certain Relationships and Related Transactions
------- ----------------------------------------------
TRMI (ChevronTexaco). Pursuant to the Stock Purchase Agreement between ECD
and TRMI dated as of May 1, 2000, ChevronTexaco, through its TRMI unit,
purchased a 20% equity stake in ECD for $67.4 million. As part of this Stock
Purchase Agreement, ChevronTexaco received rights to purchase additional shares
of ECD Common Stock or other ECD securities (ECD Stock). (See Item 12 -
Principal Shareholders - for information on TRMI's ECD stock ownership.)
So long as ChevronTexaco owns more than 5% of ECD Stock and in the event
ECD issues additional ECD Stock other than to ChevronTexaco, ChevronTexaco has
the right to purchase additional ECD Stock in order for ChevronTexaco to
maintain its same proportionate interest in ECD Stock as ChevronTexaco held
prior to the issuance of the additional ECD Stock. If ChevronTexaco elects to
purchase ECD Common Stock, the purchase price will be the average of the closing
price on NASDAQ of the ECD Common Stock as reported in The Wall Street Journal
for the five trading days prior to the closing date of the sale multiplied by
the number of shares of the ECD Common Stock which ChevronTexaco is entitled to
purchase. If ChevronTexaco does not exercise its right to purchase additional
ECD Stock within 15 days after delivery of a Rights Notice from ECD,
ChevronTexaco's right to purchase such additional ECD Stock which are the
subject of the Rights Notice will terminate.
Donald L. Paul, Vice President and Chief Technology Officer of
ChevronTexaco, and Greg M. Vesey, President of ChevronTexaco Technology
Ventures, served as directors of ECD from 2001 through September 2003.
ChevronTexaco is entitled to designate one nominee to ECD's Board of Directors
for so long as it owns more than 5% of ECD Stock and is entitled to designate
two nominees or one-fifth of the number of directors on ECD's Board then serving
for so long as ChevronTexaco owns 10% of ECD Stock. There presently are no
ChevronTexaco designated nominees serving on ECD's Board of Directors.
Ovonic Fuel Cell. Effective as of December 31, 2002, ECD purchased the 50%
interest of ChevronTexaco Technology Ventures in Texaco Ovonic Fuel Cell
Company. The company is now owned 100% by ECD and has been renamed Ovonic Fuel
Cell Company. Stanford R. Ovshinsky, a director of ECD, serves as president of
Ovonic Fuel Cell Company and, until December 31, 2002, served as a member of the
Management Committee of Texaco Ovonic Fuel Cell Company.
Until December 31, 2002, Robert C. Stempel, a director of ECD, served on
the Management Committee of Texaco Ovonic Fuel Cell Company. Greg M. Vesey, a
former director of ECD, served on the Management Committee of Texaco Ovonic Fuel
Cell Company until December 31, 2002.
For the years ended June 30, 2003 and 2002, ECD recorded revenues of
$4,022,000 and $8,887,000, respectively, from Texaco Ovonic Fuel Cell for
product development services. For the period subsequent to December 31, 2002,
ECD has not recorded revenues from Ovonic Fuel Cell Company.
119
Texaco Ovonic Hydrogen Systems. Stanford R. Ovshinsky and Robert C.
Stempel, directors of ECD, are members of the Management Committee of Texaco
Ovonic Hydrogen Systems. Stanford R. Ovshinsky serves as president of Texaco
Ovonic Hydrogen Systems. Greg M. Vesey, a former director of ECD, is a member
of the Management Committee of Texaco Ovonic Hydrogen Systems. ECD owns 50%
of Texaco Ovonic Hydrogen Systems.
For the years ended June 30, 2004, 2003 and 2002, ECD recorded revenues
of $10,063,000, $13,651,000 and $18,581,000, respectively, from Texaco Ovonic
Hydrogen Systems, primarily for market development and advanced product
development work.
Cobasys. Stanford R. Ovshinsky and Robert C. Stempel, directors of ECD and
Ovonic Battery, are members of the Management Committee of Cobasys. Greg M.
Vesey, a former director of ECD, is a member of the Management Committee of
Cobasys. Ovonic Battery owns 50% of Cobasys.
For the year ended June 30, 2004, 2003 and 2002, Ovonic Battery recorded
revenues of $5,613,000, $12,487,000 and $16,577,000 from Cobasys primarily for
advanced product development and market development work.
Ovonyx. Stanford R. Ovshinsky, a director of ECD, is chairman and a
director of Ovonyx. Robert C. Stempel, a director of ECD, is vice chairman and
a director of Ovonyx. ECD currently owns 41.7% of Ovonyx.
ECD recorded revenues from Ovonyx of $150,000, $162,000 and $215,000 for
the years ended June 30, 2004, 2003 and 2002, respectively, representing
services performed for its operations which commenced on January 15, 1999.
ECD made a capital contribution of $1,000,000 to Ovonyx in the year ended
June 30, 2003 in exchange for technology previously contributed by ECD to Ovonyx
and an exclusive royalty-bearing license. ECD also made a $50,000 minimum
royalty payment in November 2003.
Ovonic Media. Stanford R. Ovshinsky and Robert C. Stempel, directors of
ECD, are members of the Alliance Board of Ovonic Media. ECD has a 49% interest
in this joint venture.
For the years ended June 30, 2003 and 2002, the Company had revenues of
$615,000 and $1,923,000, respectively, from Ovonic Media for providing product
development services. GE informed ECD that it was suspending additional funding
after January 3, 2003.
United Solar Ovonic LLC. This entity was formed on April 11, 2000 as
Bekaert ECD Solar Systems LLC. 60% of the membership interest was owned by
Bekaert Corporation and the remaining 40% was and continues to be owned by
United Solar Ovonic Corp. (formerly known as United Solar Systems Corp.). From
April 11, 2000 to May 14, 2003, when ECD acquired Bekaert's 60% interest, the
financial statements of United Solar Ovonic LLC were not included in the
consolidated financial statements of ECD. Beginning
120
May 15, 2003, ECD consolidated the financial statements of United Solar Ovonic
LLC within its own financial statements.
For the years ended June 30, 2003 and 2002, the Company recorded revenues
from United Solar Ovonic LLC of $6,267,000 and $10,121,000, respectively, for
product sales.
Southwall. Robert C. Stempel, a director of ECD, was a member of the Board
of Directors of Southwall until September 2004.
For the years ended June 30, 2003 and 2002, the Company had revenues of
$223,000 and $9,000, respectively, from Southwall under a contract to build
large-area deposition equipment. The completed equipment was shipped to
Southwall in July 2000.
Herbert Ovshinsky, Stanford R. Ovshinsky's brother, is employed by ECD as
Director of the Production Technology and Machine Building Division working
principally in the design of manufacturing equipment. He received $200,012 in
salary during the year ended June 30, 2004.
Benjamin Ovshinsky, Stanford R. Ovshinsky's son, is employed by ECD as its
business representative for Western United States. He received compensation of
$85,009 during the year ended June 30, 2004.
HKO Media, Inc., owned by Harvey Ovshinsky, Stanford R. Ovshinsky's son,
performed video production services on behalf of ECD. HKO Media, Inc. was paid
$79,536 by ECD for its services during the fiscal year ended June 30, 2004.
Item 14: Principal Accountant Fees and Services
------- --------------------------------------
The following table presents aggregate fees for professional audit
services rendered by Grant Thornton LLP, our Independent Registered Public
Accounting Firm, for the fiscal year ended June 30, 2004 and Deloitte & Touche
LLP ("Deloitte"), our former Independent Registered Public Accounting Firm, for
the fiscal year ended June 30, 2003, and fees billed for other services rendered
by Grant Thornton and Deloitte during those periods.
2004 2003
----------- -----------
Audit Fees(1) $ 677,000 $ 953,000
Audit-Related Fees(2) 52,000 67,000
Tax Fees(3) - 45,000
All Other Fees(4) 31,000 26,000
--------- ----------
Total Fees $ 760,000 $1,091,000
========= ==========
----------------------
(1) Audit Fees -- These are fees for professional services performed
by Grant Thornton and Deloitte for the audit of our annual
financial statements and review of financial statements included
in our 10-Q filings, and services that are normally provided in
connection with statutory and regulatory filings or engagements.
(2) Audit-Related Fees -- These are fees for the assurance and related
services performed by Grant Thornton and Deloitte that are
reasonably related to the performance of the audit or review of
our financial statements.
121
(3) Tax Fees -- These are fees for professional services performed by
Grant Thornton and Deloitte with respect to tax compliance, tax
advice and tax planning.
(4) All Other Fees -- These are fees for permissible work performed
by Grant Thornton and Deloitte that does not meet the above
categories. For 2003, this consists of consulting services for
improving efficiency of our procurement process by Deloitte. For
2004, this consists of consulting services for improving controls
by Grant Thornton.
During fiscal year 2004, the Audit Committee approved all audit and
non-audit services provided to us by Grant Thornton prior to management engaging
Grant Thornton for that purpose. The Committee's current practice is to consider
for pre-approval annually all audit and non-audit services proposed to be
provided by our independent registered public accounting firm for the fiscal
year. In accordance with the Committee's current policy, additional fees related
to audit services proposed to be provided within the scope of the approved
engagement may be approved by management, so long as the fees for such
additional services are consistent with historical experience, and are reported
to the Audit Committee at the next regularly scheduled Committee meeting.
Additional fees for other proposed audit related or non-audit services (not
within the scope of the approved engagement) may be considered and, if
appropriate, approved by the Chairman of the Audit Committee if such additional
fees constitute five percent or less of the approved budget, otherwise the Audit
Committee must approve all additional audit related and non-audit services to be
performed by the independent auditor. The Audit Committee has considered that
the provision of non-audit services rendered by Grant Thornton and Deloitte was
compatible with maintaining Grant Thornton's and Deloitte's independence.
The Audit Committee pre-approves all audit and non-audit services
provided by the independent registered public accounting firm prior to the
engagement of the independent registered public accounting firm with respect to
such services. The Chairman of the Audit Committee has been delegated the
authority by the Committee to pre-approve the engagement of the independent
registered public accounting firm when the entire Committee is unable to do so.
The Chairman must report all such pre-approvals to the entire Audit Committee at
the next Committee meeting.
122
PART IV
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K
------- ---------------------------------------------------------------
(a) 1. Financial Statements:
Page
------
The following is included in Part II, Item 8:
Reports of Independent Registered Public Accounting Firms....44-45
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts.............127
Other financial statements and financial statement schedules are
omitted (1) because of the absence of the conditions under which
they are required or (2) because the information called for is
shown in the financial statements and notes thereto.
3. Exhibits (including those incorporated by reference)
Page or
Reference
---------
3.1 Restated Certificate of Incorporation filed September 29,
1967 (a)
3.2 Certificate of Amendment to Certificate of Incorporation (b)
filed March 25, 1999 extending voting rights of the
Company's Class A Common Stock, increasing the authorized
capital stock of the Company's Common Stock to 20,930,000
shares, and authorizing 430,000 shares of Class B Common
Stock
3.3 Certificate of Amendment to Certificate of Incorporation (c)
filed March 18, 2004, increasing the number of authorized
shares from 30,000,000 to 50,000,000
3.4 Bylaws in effect as of July 17, 1997 (d)
3.5 Amendment to Article II of the Bylaws effective as of (e)
January 29, 2004
3.6 Amendment to Article VIII of the Bylaws effective as of (f)
April 20, 2004
3.7 Amendment to Article XV of the Bylaws effective as of (g)
April 20, 2004
4.1 Agreement among the Company, Stanford R. Ovshinsky and (h)
Iris M. Ovshinsky relating to the automatic conversion of
Class A Common Stock into the Company's Common Stock upon the
occurrence of certain events, dated September 15, 1964
123
10.1 Executive Employment Agreement dated as of September 2, (i)
1993 between the Company, Ovonic Battery Company, Inc. and
Stanford R. Ovshinsky
10.2 Executive Employment Agreement dated as of September 2, (j)
1993 between the Company and Stanford R. Ovshinsky
10.3 Stock Option Agreement by and between Ovonic Battery (k)
Company, Inc. and Stanford R. Ovshinsky dated as of
November 18, 1993
10.4 Stock Option Agreement by and between the Company and (l)
Stanford R. Ovshinsky dated as of November 18, 1993
10.5 Stock Option Agreement by and between the Company and Iris (m)
M. Ovshinsky dated as of November 18, 1993
10.6 Energy Conversion Devices, Inc. 1995 Non-Qualified Stock (n)
Option Plan
10.7 Energy Conversion Devices, Inc. 2000 Non-Qualified Stock (o)
Option Plan
10.8 Executive Employment Agreement dated as of February 19, (p)
1998 between the Company and Iris M. Ovshinsky
10.9 Executive Employment Agreement, Restricted Stock Agreement (q)
and Stock Option Agreement dated as of January 15, 1999
between the Company and Robert C. Stempel
10.10 Limited Liability Agreement of Texaco Ovonic Hydrogen (r)
Systems LLC dated as of October 31, 2000 by and between
Texaco Energy Systems Inc. and Energy Conversion Devices,
Inc.
10.11 Amended and Restated Operating Agreement of Cobasys LLC (s)
(f/k/a Texaco Ovonic Battery Systems LLC) dated as of July
17, 2001 by and between Texaco Energy Systems Inc. and
Ovonic Battery Company, Inc.
10.12 Purchase, Sale and Termination Agreement by and between (t)
Bekaert Corporation, N.V. Bekaert S.A., and Energy
Conversion Devices, Inc. dated May 14, 2003
21.1 List of all direct and indirect subsidiaries of the Company 130
23.1 Consent of Independent Registered Public Accounting Firm, 131
Grant Thornton LLP
23.2 Consent of Independent Registered Public Accounting Firm, 132
Deloitte & Touche LLP
124
31.1 Certificate of Chief Executive Officer Pursuant to Section 133
302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer Pursuant to Section 134
302 of the Sarbanes-Oxley Act of 2002
32 Certifications of Chief Executive Officer and Chief 135
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
Notes to Exhibit List
---------------------
(a) Filed as Exhibit 2-A to the Company's Form 8-A and incorporated herein by
reference.
(b) Filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999 and incorporated herein by reference.
(c) Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004 and incorporated herein by reference.
(d) Filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004 and incorporated herein by reference.
(e) Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 2003 and incorporated herein by reference.
(f) Filed as Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004 and incorporated herein by reference.
(g) Filed as Exhibit 3.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997, as amended, and incorporated herein by
reference.
(h) Filed as Exhibit 13-D to the Company's Registration Statement on Form S-1
(Registration No. 2-26772) and incorporated herein by reference.
(i) Filed as Exhibit 10.100 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 and incorporated herein by reference.
(j) Filed as Exhibit 10.101 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 and incorporated herein by reference.
(k) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 and incorporated herein by
reference.
(l) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 and incorporated herein by
reference.
125
(m) Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 and incorporated herein by
reference.
(n) Filed as Exhibit 10.77 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1995 and incorporated herein by reference.
(o) Filed as Exhibit A to the Company's Proxy Notice and Statement dated
January 19, 2001.
(p) Filed as Exhibit 10.63 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 and incorporated herein by reference.
(q) Filed as Exhibits B, C and D, respectively, to the Company's Proxy Notice
and Statement dated February 23, 1999.
(r) Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2001.
(s) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001.
(t) Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed
on May 29, 2003.
(b) Reports on Form 8-K
On May 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 March 31, 2004.
126
Schedule II - Valuation and Qualifying Accounts
Additions
--------------------------
Balance at Charged to Charged to
Beginning of Costs and Other Balance at End
Description Period Expenses Accounts Deductions of Period
======================================== ============== ========================== ============ ===============
Allowance for Uncollectible Accounts:
Year Ended June 30, 2004 $ 265,000 $ 93,093 $ $ (84,093)*** $ 274,000
Year Ended June 30, 2003 563,000 23,000 127,000* (448,000)*** 265,000
Year Ended June 30, 2002 583,000 28,000 (48,000)*** 563,000
Reserve for Losses on Government
Contracts:
Year Ended June 30, 2004 $1,681,636 $ 165,000 $ $ 1,846,636
Year Ended June 30, 2003 1,400,000 281,636 1,681,636
Year Ended June 30, 2002 1,650,000 (250,000)** 1,400,000
Reserve for Warranty:
Year Ended June 30, 2004 $2,990,661 $ $ $(1,044,727) $ 1,945,934
Year Ended June 30, 2003 2,489,024 1,212,949 728,503* (1,439,815) 2,990,661
Year Ended June 30, 2002 978,895 1,510,129 2,489,024
-------------------------------------
* Represents amounts applicable to United Solar Ovonic at May 14, 2003 (the
date at which United Solar Ovonic was consolidated).
** Represents change in estimated reserve.
*** Represents write-off of uncollectible accounts.
127
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENERGY CONVERSION DEVICES, INC.
September 13, 2004 By: /s/ Robert C. Stempel
------------------------------------------
Robert C. Stempel,
Chairman and Chief Executive Officer
/s/ Robert C. Stempel Chairman of the Board, Chief September 13, 2004
---------------------- Executive Officer and Director
Robert C. Stempel (Principal Executive Officer)
/s/ Stephan W. Zumsteg Vice President and Chief September 13, 2004
---------------------- Financial Officer (Principal
Stephan W. Zumsteg Financial and Accounting Officer)
/s/ Stanford R. Ovshinsky President, Chief Technology September 13, 2004
------------------------- Officer and Director
Stanford R. Ovshinsky
/s/ Umberto Colombo Director September 13, 2004
-------------------------
Umberto Colombo
/s/ Robert I. Frey Director September 13, 2004
-------------------------
Robert I. Frey
/s/ William J. Ketelhut Director September 13, 2004
-------------------------
William J. Ketelhut
/s/ Walter J. McCarthy, Jr. Director September 13, 2004
------------------------
Walter J. McCarthy, Jr.
128
/s/ Florence I. Metz Director September 13, 2004
-------------------------
Florence I. Metz
/s/ Iris M. Ovshinsky Director September 13, 2004
-------------------------
Iris M. Ovshinsky
/s/ Stephen Rabinowitz Director September 13, 2004
-------------------------
Stephen Rabinowitz
/s/ Stanley K. Stynes Director September 13, 2004
-------------------------
Stanley K. Stynes
129