ENERGY CONVERSION DEVICES, INC.
2005 ANNUAL REPORT
[COMPANY LOGO]
To Our Shareholders:
The year 2005 has been one of continuing success for our ECD Ovonics
commercial products: photovoltaics from our 100%-owned subsidiary, United Solar
Ovonic and NiMH Battery Systems from our 50-50 joint venture, Cobasys. There
also is increasing recognition of the commercial viability of the OUM
phase-change electronic memory from our joint venture, Ovonyx. ECD products in
the prototype development phase, such as Ovonic hydrogen storage systems and the
Ovonic fuel cell, also continued to make progress.
The reorganization and realignment of resources to support our growing
commercial business are in place. Several of our processes and practices had to
be changed to match the new organization. Additionally, the new requirements of
the Sarbanes-Oxley Act were complied with in a timely manner. Because of the
complexity of the new rules, we used consultants; but the majority of work was
done in-house by the ECD team in addition to their normal duties. We are very
proud of their positive results.
Most exciting this year was the performance of our new 25 MW thin-film
triple-junction solar manufacturing plant. The continuous web machine came
on-line and has reached design capacity. Planned improvements in efficiency and
machine speed will also increase capacity. Designed and built by our ECD
Production and Technology and Machine Division, with overall direction from Stan
Ovshinsky, the machine performs well with minimum unscheduled downtime and
virtually no scrap material. Running "24/7" except for material loading, most of
our visitors are amazed by its size and consistent production performance. As we
were when we bought out our former partner, we have confidence in the machine
and process; hence, our decision to go forward with another plant. The favorable
2005 financial results reflect improved factory utilization and significantly
reduced variable cost. Our United Solar Ovonic segment had a gross profit of
$4.4 million versus a gross loss in fiscal year 2004 of $6.3 million. On July
14, 2005, we broke ground for our second 25 MW facility in Auburn Hills, less
than a mile from the current facility. This will double our capacity with
production beginning in the fall of 2006. The U.S. Secretary of Energy, the
Honorable Samuel W. Bodman, attended the Groundbreaking Ceremony with other
state and local officials. The Secretary delivered the keynote address. His
comments included congratulations for adding jobs and providing consumers and
contractors with another option to reduce energy costs while decreasing the
nation's dependence on foreign sources of oil. Trained as a chemical engineer,
Secretary Bodman noted he had followed Stan's work in amorphous materials since
his days as a young professor at M.I.T.
With the superior performance of our triple-junction, thin-film products,
proven by testing around the world, demand continues to increase and we will
need additional plants going forward. Obviously, markets like Germany and Spain
with incentives need attention; but growth markets like China and India, without
adequate electric grid service, also need our product. We are examining all
these opportunities to decide our next steps. We expect that photovoltaic
opportunities will result in the continued expansion of the ECD Ovonics/United
Solar Ovonic business.
Now in a production mode, our 50-50 joint venture, Cobasys, has attracted
world-class customers from around the globe. This has resulted in several
purchase orders for Cobasys' NiMH battery pack systems from customers for their
upcoming hybrid electric vehicle programs. The battery pack systems are fully
integrated solutions, including battery management controls and appropriate
vehicle interface controls, currently being manufactured and assembled at
Cobasys' Springboro, Ohio plant. Cobasys has achieved ISO/TS 16949 Global
Automotive Supplier Certification, the new, more rigorous standard, replacing
prior quality certifications. The 16949 Standard focuses on continuous
improvement to reduce manufacturing costs while improving quality. Once
certified, a supplier company eliminates the need to register and be approved by
individual automakers. Cobasys is also developing solutions for the stationary
battery market, such as stand-by power and telecommunications. The NiMH battery
offers longer life, lower life cycle costs and is maintenance free. The Cobasys
engineering team has designed an interface control that adapts Cobasys NiMH
solution to existing, installed systems.
Some of the additional fields, now part of the Cobasys joint venture, are
as a result of the additional NiMH battery rights licensed to Cobasys by us in
2005. These rights were also the major contributor to the increased income and
revenue for 2005, non-cash revenue of $79.5 million. The license payment was in
the form of an option granted to us by Chevron to purchase approximately 4.4
million (4,376,633) shares of ECD common stock at $4.55/share. This license
agreement is consistent with our business strategy of monetizing our
intellectual property, historically carried at "zero" on our balance sheet; but
obviously considered to be valuable by a manufacturer desiring to expand its
business, in this case, Cobasys.
Ovonyx, our 41.7% joint venture with Tyler Lowrey, Intel and others made
significant progress with OUM, the Ovonic Universal Memory. Intel,
STMicroelectronics, Elpida and other worldwide chip makers are considering OUM
as a DRAM replacement. At several electronic conferences and symposiums this
year, OUM has emerged as the leading and preferred technology to replace DRAM.
Ovonyx reports good progress and heightened acceptance of OUM based on low cost,
low current requirements and its nonvolatile memory.
There have been several good reports in trade magazines and the motoring
media concerning our next-generation converted Toyota Prius running on hydrogen
fuel. The car was converted to showcase the Ovonic solid hydrogen storage system
installed under the rear seat area, outside the body structure with no loss of
luggage or passenger space. The hydride storage cylinders are refueled through
the vehicle's normal gasoline filling location, converted to accept hydrogen.
Using similar hydride materials, we have developed a refueling system and a bulk
storage system. Several automakers have examined the system and have expressed
interest for possible use in future fuel cell powered cars instead of the high
pressure gaseous hydrogen systems at 5,000-10,000 psi. The Ovonic hydrogen
system is refueled at 1,500 psi and when in-use the system operates at lower
pressure, approximately 200 psi. The hydrogen-powered vehicle and storage system
are currently being evaluated in California while our development activities in
Michigan continue. On a smaller scale, we are manufacturing small hydrogen
storage cylinders, about 200/month, for use with small fuel cell powered
applications such as professional video cameras and small stand-by power
applications.
Other development projects are continuing, but on a reduced scale since,
in addition to increasing revenues, we have cost and expense control programs in
place. We are encouraged by the progress in the fuel cell and cognitive computer
fields. We are working with several potential partners who have expressed
interest.
Our technology and commercial products are being accepted in the
marketplace. We are investing for growth and market leadership. At the same
time, we are making progress on our path to profitability. We appreciate the
support of you, our shareholders, and your continuing interest in ECD Ovonics.
/s/ R.C. Stempel
R. C. Stempel
Chairman and Chief Executive Officer
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, 2005
-----------------------------------------------------
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 Rule 12b-2 of the Act). Yes X No
--- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
The aggregate market value of the voting and nonvoting common equity held
by nonaffiliates (based upon the closing price of such voting and nonvoting
common equity on the NASDAQ National Market System on December 31, 2004, the
last business day of the registrant's most recently completed second fiscal
quarter) was approximately $489 million.
As of September 6, 2005, there were 219,913 shares of ECD's Class A Common
Stock, 430,000 shares of ECD's Class B Common Stock and 28,386,215 shares of
ECD's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
===============================================================================
TABLE OF CONTENTS
FORM 10-K
FOR FISCAL YEAR ENDED JUNE 30, 2005
PART I ..................................................................... 2
Item 1: Business .......................................................... 2
Item 2: Properties ....................................................... 21
Item 3: Legal Proceedings ................................................ 22
Item 4: Submission of Matters to a Vote of Security Holders .............. 22
PART II ................................................................... 23
Item 5: Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities .............. 23
Item 6: Selected Financial Data .......................................... 25
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 26
Item 7A: Quantitative and Qualitative Disclosures about Market Risk ....... 42
Item 8: Consolidated Financial Statements and Supplementary Data ......... 43
Item 9: Changes in and Disagreements on Accounting and Financial
Disclosure ..................................................... 92
Item 9A: Controls and Procedures .......................................... 93
Item 9B: Other Information ................................................ 94
PART III .................................................................. 95
Item 10: Directors and Executive Officers of the Registrant ............... 95
Item 11: Executive Compensation ........................................... 99
Item 12: Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters .................... 110
Item 13: Certain Relationships and Related Transactions .................. 115
Item 14: Principal Accountant Fees and Services .......................... 115
PART IV .................................................................. 117
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 117
SIGNATURES ............................................................... 121
CERTIFICATIONS............................................................ 122
1
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 business segments. 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 United
Solar Ovonic Corp., United Solar Ovonic LLC, Ovonic Cognitive Computer, Inc.,
Ovonic Hydrogen Systems LLC, Ovonic Fuel Cell Company LLC and Ovonic Battery
Company, Inc. which are included in our consolidated financial statements):
United Solar Ovonic Segment Ownership as of September 6, 2005
- --------------------------- ---------------------------------
United Solar Ovonic Corp. ECD - 100%
United Solar Ovonic LLC ECD - 60%
United Solar Ovonic Corp. - 40%
ECD Segment
- -----------
Ovonic Unified Memory(TM)
-------------------------
Ovonyx, Inc. ECD - 41.7%
Tyler Lowrey; Intel Capital; private investors - 58.3%
Ovonic Cognitive Computer(TM)
-----------------------------
Ovonic Cognitive Computer, Inc. ECD - 95%
Ovonyx - 5%
Hydrogen Technology
-------------------
Ovonic Hydrogen Systems LLC ECD - 100%
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) Chevron 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 High Tech
Battery Joint Venture Co. Ltd. Holding Co. Ltd. and other investors - 81%
Rare Earth Ovonic NiMH Battery
Electrode Joint Venture Co. Ltd.
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
commercial and residential 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 (BIPV) roofing products.
Cobasys, our integrated energy storage solutions joint venture with Chevron
Technology Ventures (Chevron), is bringing advanced NiMH batteries into
widespread commercial production for transportation, telecommunication,
uninterruptible power supply (UPS), military, homeland security, stationary
power and other prismatic battery applications. Cobasys offers complete advanced
NiMH battery pack system solutions for hybrid electric vehicles (HEVs),
heavy-duty vehicles (HDVs) and vehicles with 36/42-volt electrical systems. It
also is developing advanced stationary battery systems for telecommunications,
UPS and distributed generation applications.
Another joint venture, Ovonyx, 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
activity of Ovonic Battery Company, Inc. is production of nickel hydroxide
positive electrode materials for NiMH batteries.
4
Consolidated revenues for our last three fiscal years (excluding revenues
of licensees and joint ventures) in our three business segments were as follows:
Segments 2005 2004 2003
-------- ---------- ---------- ----------
(000's) (000's) (000's)
United Solar Ovonic $ 58,718 $ 36,959 $ 14,890
ECD 16,841 16,155 27,062
Ovonic Battery* 88,557** 15,230 28,671
Less Intersegment Revenues (7,546) (2,088) (5,599)
--------- -------- --------
Total Revenues $ 156,570 $ 66,256 $ 65,024
========= ======== ========
* Excludes discontinued operations
** Includes $79,532,000 one-time, noncash license fee
United Solar Ovonic Segment
- ---------------------------
Photovoltaics. Photovoltaic (PV) systems provide clean energy by converting
sunlight into electricity. With the increasing awareness for energy security and
concern about pollution caused by the burning of fossil fuels, the world market
for PV is growing rapidly at an annual rate of more than 30%.
Large-scale deployment of PV is dependent on its cost. We have pioneered
the low-cost roll-to-roll technology for manufacture of large-area thin-film
amorphous silicon PV and, together with our wholly owned subsidiaries United
Solar Ovonic Corporation and United Solar Ovonic LLC (collectively hereafter
referred to as "United Solar Ovonic") are leaders in the thin-film amorphous PV
technology. Compared to PV products that are produced using conventional
technology, Uni-Solar products are lightweight and rugged and require much less
energy to produce. The cell thickness is 100 times thinner than that of the
conventional crystalline silicon solar cells, and the material cost is,
therefore, low. Also, our thin-film PV technology is not affected by the
shortage of semiconductor grade silicon that is impeding the growth of companies
in the industry using conventional PV technology.
United Solar Ovonic technology involves the deposition of solar cells on
flexible rolls of stainless steel; the products are flexible and abuse tolerant.
The PV laminates can be provided with adhesive on the back of the laminate which
is exposed by removal of a protective paper covering. These self-adhesive PV
laminates can be easily and quickly bonded to the roof surface, reducing the
installation cost. Conventional products use glass and are heavy, fragile and
costly to install since they need support structures for mounting.
United Solar Ovonic has made alliances with several roofing material
manufacturers and roofing contractors to expand its market reach. In April 2004
United Solar Ovonic entered into an agreement with Solar Integrated Technologies
(SIT) of Los Angeles, California for integration of its products with single-ply
roofing materials. SIT has completed several major solar roofing projects for
schools and commercial buildings in California using Uni-Solar products. United
Solar Ovonic has also made major alliances in Europe with manufacturers of
different types of roofing materials. ThyssenKrupp Hoesch Bausysteme GmbH
(Thyssen), a leading German steel manufacturer, integrates Uni-Solar products
with its roofing material for the German market. Similar agreements have been
made with
5
Alwitra for single-ply membrane roofs and Kalzip for aluminum roofs. In November
2004, United Solar Ovonic signed a multi-year agreement with Biohaus PV Handels
GmbH to sell up to 9.6 megawatts of PV laminates that would be incorporated by
Biohaus into its proprietary panel design to address Germany's grid-connected
market.
In order to expand its market reach further in Europe, United Solar Ovonic
has also signed agreements with two leading distributors of PV products in
Germany: Sunset Energietechnik GmbH to address the German market; and Conergy AG
to address the emerging markets in France, Greece, Spain and Switzerland.
With the increased acceptance of its Uni-Solar products, United Solar
Ovonic is doubling its production capacity. In June 2005, it entered into a
long-term lease agreement for its next state-of-the-art thin-film solar panel
manufacturing facility to be located near the current manufacturing plant in
Auburn Hills, Michigan. Occupancy of the new facility is scheduled for May 2006,
and it is anticipated that the plant will begin manufacturing products in the
fall of 2006 following optimization of the manufacturing equipment.
United Solar Ovonic is also developing its PV technology for an
ultra-lightweight, low-cost alternative to conventional space PV modules made of
crystalline silicon or gallium arsenide. United Solar Ovonic's 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 are being developed that have a specific
power density greater than 1,000 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 and satellite applications, 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 makes it
an attractive material for space application.
United Solar Ovonic has been successfully developing its ultra-lightweight
solar cell technology to use in space and airship vehicles addressing defense
and homeland security applications under contracts from the U.S. Air Force
Research Laboratory, Kirtland AFB, New Mexico. The most recent contract,
announced in August 2005, provides for an 18-month, $6.7 million extension of
development work initially began in 2003. Another contract with the Air Force
Research Laboratory, awarded in May 2004, calls for United Solar Ovonic to
provide 3 kilowatts 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.
United Solar Ovonic has a long-term research and development strategy for
increasing the throughput of its solar cell manufacturing equipment and
increasing the conversion efficiency of its solar cells. It is expected that
future generations of our solar cell manufacturing equipment will be capable of
producing PV products with higher sunlight-to-electricity conversion efficiency
and in quantities which exceed our present generation of state-of-the-art
thin-film deposition manufacturing equipment.
United Solar Ovonic has a formidable patent portfolio in PV technology with
85 U.S. patents and 144 foreign counterparts covering the materials that are
used in the cells, cell
6
design, processes and equipment to manufacture the cells and product design.
Because many of its patents are broad and because its patent portfolio is
extensive, United Solar Ovonic does not believe that expiration of any of its
PV technology patents during the next five years will have a material adverse
effect on its business.
ECD Segment
- -----------
Ovonyx/Ovonic Unified Memory. Building on our earlier work, Ovonyx is
developing a proprietary family of high-performance nonvolatile semiconductor
memory and information processing devices called Ovonic Unified Memory.
In 1999, we and Tyler Lowrey, the former vice chairman and chief technology
officer of Micron Technology, Inc., formed Ovonyx, Inc. to further develop and
commercialize OUM for various semiconductor memory products. Our contribution to
Ovonyx, in return for our initial 50% ownership interest, consisted of licenses,
know-how and proprietary technology.
In February 2000, Ovonyx and Intel entered into a collaboration and
nonexclusive 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 without giving effect to the exercise of outstanding stock options
and warrants.
Ovonyx is commercializing its proprietary phase-change semiconductor memory
technology through a series of joint development programs with industrial
partners. OUM offers significantly faster write and erase speeds and higher
cycling endurances than conventional FLASH memory. OUM also has the advantage of
a simple fabrication process that permits the design of semiconductor chips with
embedded nonvolatile memory using only a few additional mask steps.
Ovonyx is focusing its efforts on the development and optimization of
manufacturing processes and OUM device structures that are compatible with
existing commercial memory products such as DRAM and FLASH. Because it has the
advantage of enormously improved cycle life, significantly reduced programming
time and simple manufacturing process, OUM can be a direct replacement for FLASH
memory. OUM can also provide a direct replacement for DRAM memory, universally
used as system memory in computers.
Ovonyx' strategy for OUM is to target the direct replacement of FLASH
memory in products such as cell phones, digital cameras and PDAs where a single
OUM device can replace what now requires a combination of DRAM and FLASH
devices. OUM is a high-speed, nonvolatile memory with cost advantages over DRAM
or FLASH such as a very small footprint, reduced cost per bit, low power and low
voltage, and a robust temperature range. It also is a random-access,
nondestructive 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.
In November 1999, Ovonyx and BAE Systems entered into a collaboration and
royalty-bearing exclusive agreement to commercialize OUM technology for
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.
7
Ovonyx and STMicroelectronics entered into a collaboration and a
nonexclusive royalty-bearing agreement in December 2000 whereby
STMicroelectronics was granted a license by Ovonyx to use its thin-film
nonvolatile semiconductor memory technology in 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.
In August 2004, Ovonyx and Nanochip, Inc. entered into a collaboration and
royalty-bearing nonexclusive license agreement pursuant to which Nanochip will
use Ovonyx nonvolatile semiconductor memory technology in its
Micro-Electro-Mechanical Systems (MEMS) based, ultra-high-density data storage
systems.
In February 2005, Ovonyx granted a nonexclusive technology license to
Elpida Memory, Inc. of Japan to use Ovonyx OUM technology. The principal owners
of Elpida are NEC Corporation and Hitachi, Ltd. The technology license agreement
also provided that Ovonyx actively support Elpida's program to commercialize OUM
phase-change memory products.
While OUM technology is gaining broader acceptance among semiconductor
manufacturers, 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 has been selected for use as the rewritable version of the CD, DVD,
Blu-ray and HD-DVD formats. The competing Blu-ray and HD-DVD formats both use
our phase-change technology for the next generation of high definition digital
video discs.
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 1.5% 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 product and processing 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.
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.
Ovonic Cognitive Computer 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
8
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 which is not possible to perform using
conventional computers together 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 used to make devices
which, when fully developed, will have the capability to execute ordinary
arithmetic and logic operations as well as advanced functions such as nonbinary
processing, higher mathematics, pattern recognition and encryption in a densely
interconnected and parallel fashion. The Ovonic cognitive computer technology
requires significant technical and product development and substantial
financial resources to reach commercial product status.
Ovonic Solid Hydrogen Storage Systems Technology. 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. One of the principal stumbling blocks 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 48 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 portable
electronic devices. For example, 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. During fiscal year
2005, Ovonic Hydrogen Systems began producing and selling limited quantities of
hydrogen storage canisters for portable applications.
In April 2004, the U.S. Department of Transportation approved the transport
of hydrogen in metal hydride storage systems developed by 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
Ovonic Hydrogen Systems, allowing hydrogen storage capacity up to 1300 standard
liters. The exemption also authorizes re-qualification by
9
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."
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, carbon
monoxide and hydrocarbon emissions at the tailpipe. Ovonic Hydrogen Systems
converted an original equipment 1.5-liter internal combustion engine (ICE) in a
2004 Toyota Prius to run on hydrogen using a low-pressure solid hydrogen storage
system. This modified Prius demonstrates our solid hydrogen storage technology
for vehicular propulsion using two 33-liter hydrogen storage vessels storing up
to 3.4 kilograms of hydrogen to provide nearly a 200-mile vehicle range.
Refueling at 1,500 psi to 90% capacity takes 10 minutes.
In February 2004, we were awarded a $500,000 cost-shared contract by the
U.S. Department of Energy and the Agency for International Development to
convert a three-wheeled internal-combustion-engine-powered vehicle, commonly
used as a taxi in India, to be fueled by hydrogen. The hydrogen fuel is supplied
by our on-board solid-state metal hydride storage tank. In April 2005, we
demonstrated a prototype hydrogen-ICE three wheeler at the annual meeting of the
U.S. National Hydrogen Association.
In October 2000, we and Chevron formed a joint venture to further develop
and advance the commercialization of the Ovonic solid hydrogen systems. In
December 2004, in consideration of relieving Chevron from any continuing funding
obligation, Chevron transferred to ECD its interest in the joint venture. Ovonic
Hydrogen Systems LLC is now owned 100% by ECD. As of June 30, 2005, Chevron
funded $62,398,000 for initial product and market development, the primary use
of which was to fund a contract from Ovonic Hydrogen Systems to ECD to further
develop the Ovonic solid hydrogen storage technology.
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.
Ovonic Metal Hydride 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 metal hydride fuel cell,
means for hydrogen storage, such as metal hydrides, are provided in the anode.
This fundamentally new approach of our technology, we believe, results in unique
and favorable features, such as the intrinsic ability to store energy in the
fuel cell stack, instant-start capability and excellent low-temperature
performance. Ovonic fuel cell technology presents a lower cost approach to the
noble metal catalysts typically used in proton exchange membrane fuel cells.
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.
10
Since 2002, we have been issued 13 U.S. patents and five foreign
counterparts 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 metal hydride fuel cell
technology. These patents have various dates of expiration through 2025. We do
not believe that the expiration of any patent applicable to Ovonic metal
hydride fuel cell technology during the next five years will have a material
adverse effect on our business.
Our Ovonic metal hydride 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 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 25 megawatt (MW) solar manufacturing machinery
and equipment. The Production Technology and Machine Building Division is
building the roll-to-roll solar-cell deposition equipment for United Solar
Ovonic's second state-of-the-art thin-film solar panel manufacturing facility.
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 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 is
being 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 the fabrication steps into one line.
Ovonic Battery Segment
- ----------------------
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.
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
11
environmentally hazardous substances. NiMH batteries are capable of being made
in awide range of sizes and have a wide range of applications, including
hand-held consumer products such as digital cameras; HEVs and EVs; 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 computer and cell phone markets. 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,
or the application requires high power levels, and are the batteries of choice
by the manufacturers of HEVs 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 125 issued U.S. patents and 350 foreign counterparts. While all
of the patents involving Ovonic NiMH battery technology are important to our
licensing activities and the business activities of Cobasys LLC, 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 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.
Cobasys. Cobasys is the joint venture restructured in July 2001 by Ovonic
Battery and Chevron. Cobasys was organized to bring advanced integrated energy
storage systems utilizing NiMH batteries into widespread commercial production
for transportation, telecommunication, UPS, distributed generation, military,
homeland security, stationary power and other prismatic battery applications.
Cobasys offers complete advanced NiMH battery pack system solutions in
transportation applications for HEVs, HDVs and vehicles with 36/42-volt
electrical systems.
In December 2004, as part of our focus on our core businesses, we entered
into a series of agreements with Chevron and Cobasys to expand the scope of
licenses granted to Cobasys at the time of the restructuring of the joint
venture in July 2001. The expanded licenses will provide an opportunity for
Cobasys to take advantage of the growing interest in NiMH battery systems and
will enable it to address a full range of energy storage opportunities.
In July 2004, we, Ovonic Battery, Cobasys, Matsushita Electric Industrial
Co., Ltd. (MEI), Panasonic EV Energy Co., Ltd. (PEVE) and Toyota Motor
Corporation entered into a settlement agreement with respect to patent
infringement disputes initiated by us and counterclaims involving NiMH batteries
pending before the International Chamber of Commerce, International Court of
Arbitration.
12
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 to MEI, PEVE and
Toyota did not include rights 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. PEVE was granted expanded rights in July 2005 to
solicit and sell NiMH batteries for certain North American transportation
applications and Cobasys will receive royalties on PEVE North American sales of
NiMH batteries through 2014.
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.
Through January 2005, Chevron contributed $160 million to Cobasys to
develop integrated energy storage systems, to increase manufacturing capacity
and for market and product development.
In December 2004, we and Chevron agreed to a number of amendments to the
terms of the Cobasys operating agreement, which include providing a mechanism
for additional funding from Chevron to continue Cobasys' activities. Chevron is
entitled to a priority right of repayment for providing this additional funding
in the form of a loan. We and Chevron will each continue to own a 50-percent
interest in Cobasys subject to adjustment under certain circumstances. Under the
amended agreement, Chevron has loaned $20.1 million to Cobasys through June 30,
2005. Ovonic Battery has contributed to the joint venture intellectual property,
licenses, production processes, know-how, personnel and engineering services
relating to NiMH battery technology.
A 170,000 square foot state-of-the-art integrated energy storage system
production facility with automated manufacturing equipment has been established
by Cobasys in Springboro, Ohio. The facility is ISO/TS 16949 certified and will
be capable of producing two million battery modules annually at full capacity
when fully equipped. Cobasys is currently pursuing ISO 17025 and TL 9000
certifications in order to meet additional industry quality requirements.
Cobasys is cooperating with Motorola, Inc. in the development and
manufacture of battery control system components for HEV battery systems such as
the hybrid battery pack controller which integrates Motorola-designed hardware
with Cobasys' patent-pending software. The control system will monitor, control
and perform diagnostics for Cobasys' NiMH battery systems.
We recorded revenues of approximately $2.0 million, $5.6 million and $12.4
million for work performed under an advanced product development contract with
Cobasys for the years ended June 30, 2005, 2004 and 2003, respectively. As
Cobasys becomes fully integrated to include research and development activities,
future development contracts with Ovonic Battery are not anticipated.
13
Ovonic Battery Company. Ovonic Battery licenses manufacturers of NiMH
batteries throughout the world for consumer, vehicle propulsion and other
battery applications.
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.
Most of Ovonic Battery's licensees have the right to make and sell cylindrical
NiMH batteries for consumer applications under royalty-bearing non-exclusive
licenses.
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.
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- to five-year periods. Based upon our NiMH
battery patent portfolio (provided a market for NiMH batteries remains for the
next nine years), we believe that patents applicable to NiMH batteries can
provide us with royalty revenues through 2014.
Ovonic Battery also produces high performance proprietary nickel hydroxide
materials for use in the positive electrodes of NiMH batteries and sell these
materials to some of its licensees. The Ovonic nickel hydroxide materials offer
NiMH battery manufacturers advantages with such features as higher capacity and
power, greater cycle life, high temperature performance, and lower costs. Ovonic
Battery manufactures its nickel hydroxide materials at an automated facility
capable of operating 24 hours a day, seven days a week.
Ovonic Battery has established three joint ventures in China with Rare
Earth High-Tech Co., Ltd., which are licensed to make and sell NiMH batteries
and battery materials for consumer applications and has entered into
royalty-bearing consumer battery license agreements with 13 other Chinese
companies.
Most of Ovonic Battery's licensees have the right to make and sell
cylindrical NiMH batteries for consumer applications under royalty-bearing
non-exclusive licenses.
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, 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. Saft
14
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.
For two- and three-wheeled vehicle applications, Ovonic Battery has entered
into royalty-bearing license agreements for the manufacture and sale of Ovonic
NiMH batteries with Sanyo, Walsin, Sanoh Industrial Co., Ltd., Nan Ya, GP
Batteries and our Rare Earth Ovonic joint ventures. Subject to these agreements
and subject to rights retained by Ovonic Battery in China and India with respect
to NiMH batteries for two- and three-wheeled vehicles, Cobasys has been granted
an exclusive royalty-free license for the manufacture and sale of batteries for
two- and three-wheeled vehicles.
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 wafer processing equipment in a clean room fabrication facility
which 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.
The amount of future revenues to be billed and recognized as revenue, as
earned, under current contracts with government agencies totaled approximately
$12,040,000, $468,000 of which has not yet been approved. 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, 2005. All of our research
15
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,
2005 2004 2003
------------ ------------ ------------
Sponsored by industrial
partners, government
agencies and licensees $ 15,500,378 $ 23,925,301 $ 28,139,630
Sponsored by us 16,457,311 14,196,280 12,539,628
------------ ------------ ------------
$ 31,957,689 $ 38,121,581 $ 40,679,258
============ ============ ============
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, cobalt and stainless steel; 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 a joint venture partner, consists of 294 U.S. patents and 493
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.
16
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, 2005, one
customer represented 11% of our total revenues (Solar Integrated Technologies).
See Note I of Notes to Consolidated Financial Statements. 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). As of December 2, 2004, ECD owns 100% of
Texaco Ovonic Hydrogen Systems, which was renamed Ovonic Hydrogen Systems.
BACKLOG
Our backlog of orders as of June 30, 2005 for photovoltaic products,
machine-building and equipment sales contracts and nickel hydroxide materials is
$52,059,000, of which $51,299,000 is for United Solar Ovonic. The comparable
backlog at June 30, 2004 was $10,978,000. In fiscal 2006, we expect to recognize
revenues of $49,870,000 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
17
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 6, 2005, we and our consolidated subsidiaries had a total
of 496 employees in the U.S. and 250 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 Commission (SEC). 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 have a history of losses, our future profitability is uncertain;
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 revenues are dependent upon licensing arrangements and our licensees
may be unwilling or unable to devote their financial resources and
manufacturing and marketing capabilities to commercialize products based
on our technologies;
o we receive a significant portion of our revenues from a small number of
customers;
18
o we may be unable to continue to protect and maintain the proprietary
nature of our technology, or to convince others of the necessity of
licensing our technology without litigation;
o other companies may be successful in asserting patent infringement or
other claims against us which prevent us from commercializing products
based on our technology or which force us to make royalty or other
payments to competitors;
o other companies may develop competing technologies which cause our
technology to become obsolete or noncompetitive;
o our ability to succeed will be dependent upon our ability to successfully
implement our business plan, as to which no assurance can be given;
o we may experience performance problems with key suppliers or
subcontractors;
o adverse changes may occur in general economic conditions or in political
or competitive forces affecting our business;
o competition may increase in our industry or markets;
o our government product development or research contracts may be
terminated by unilateral government action or we may be unsuccessful in
obtaining new government contracts to replace those which have been
terminated or completed;
o we may become subject to legal or regulatory proceedings which may reach
unfavorable resolutions;
o there may be adverse changes in the securities markets which affect the
price of our stock;
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 and our joint venture partners may not be able to manufacture our
developed products successfully on a commercial scale;
o it is uncertain that the market will accept our products once the
technology has been developed and commercial-scale manufacturing has
been achieved;
o we may not achieve the designed output capabilities of certain
manufacturing equipment designed and built by us;
o we may discover material weaknesses in our internal controls which, if
not remedied, could result in material misstatements in our financial
statements, cause investors to lose confidence in our reported financial
information, and have a negative effect on the trading price of our
stock;
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;
19
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, Ovonic Fuel Cell Company and
Ovonic Hydrogen Systems, follows. Excluded from the table is a leased facility
being constructed for United Solar Ovonic at 2705 Commerce Parkway in Auburn
Hills, Mich., which is scheduled for occupancy in May 2006.
Number of
Location Square Feet
-------- -------------
ECD:
2956 Waterview, Rochester Hills, MI 49,550
2983 Waterview, Rochester Hills, MI 77,372
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 31,067
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
-------
TOTAL 497,411
=======
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 manufacturing, product development, preproduction
activities, administrative and other operations.
21
Item 3: Legal Proceedings
- ------ -----------------
Neither we nor our subsidiaries are presently involved in any material
litigation, nor to our knowledge is any material litigation threatened against
us or our subsidiaries.
Item 4: Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Not applicable.
22
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 6, 2005, there were approximately 2,000 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 Class A and Class B Common Stock are
automatically convertible into Common Stock on a share-for-share basis on
September 30, 2005 and are convertible at the option of the holder any time
prior to that date.
The following table sets forth the range of high and low prices on the
NASDAQ National Market System for our Common Stock:
For the Fiscal Year Ended June 30
(In Dollars Per Share)
----------------------------------------------
2005 2004
--------------------- ----------------------
High Low High Low
-------- -------- -------- --------
First Quarter $ 14.89 $ 9.62 $ 19.24 $ 9.06
(July - September)
Second Quarter $ 23.45 $ 12.50 $ 13.50 $ 8.00
(October - December)
Third Quarter $ 23.42 $ 15.639 $ 10.00 $ 6.75
(January - March)
Fourth Quarter $ 26.20 $ 16.27 $ 13.35 $ 9.758
(April - June)
We have not paid any cash dividends in the past and do not expect to pay
any in the foreseeable future.
23
During the fiscal year ended June 30, 2005, 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
--------- --------------- -------------------- -----------------
Seven nonemployee members Common Stock 1,876 shares Services rendered valued at
of our Board of Directors approximately $35,000
Directors
The nonemployee directors of the Company are issued approximately $5,000
per year ($15,000 per year effective January 1, 2005) in ECD Common Stock based
on the closing price of the Common Stock on the first business day of each year.
The issuances are made each January with respect to services as directors during
the prior calendar year. See Part III, Item 10, Directors and Executive Officers
of the Registrant, for compensation of directors.
ISSUER PURCHASES OF EQUITY SECURITIES
Maximum Number (or
Total Number of Approximate Dollar
Total Number Shares (or Units) Value) of Shares (or
of Shares (or Average Price Purchased as Part Units) that May Yet Be
Units) Paid per Share of Publicly Announced Purchased Under the
Period Purchased (or Unit) Plans or Programs Plans or Programs
----------- --------------- -------------- ---------------------- -----------------------
May 17, 2005 4,376,633 $4.55 Not Applicable None
The 4,376,633 shares indicated in the table above were purchased from a
subsidiary of Chevron Corporation through the exercise of an option. The total
purchase price was $19,913,680. The shares acquired through the option exercise
have been cancelled and returned to authorized and unissued status.
24
Item 6: Selected Financial Data
- ------ -----------------------
Set forth below is certain financial information derived from the Company's
audited consolidated financial statements prior to the reclassification for 2002
and 2001 for discontinued operations discussed in Note A of Notes to
Consolidated Financial Statements (See Item 1: Description of Business).
June 30,
----------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Revenues:
Product sales $ 51,943,873 $ 33,808,209 $ 22,260,912 $ 36,307,715 $ 24,029,364
Royalties 5,332,003 2,521,779 1,843,647 2,000,914 2,898,956
Revenues from product
development agreements 17,652,510 29,220,752 37,335,248 52,685,717 37,582,138
Revenues from license
and other agreements 80,784,380 125,000 3,444,114 25,000 5,300,000
Other 857,286 580,195 140,061 364,487 1,383,429
------------ ------------ ------------ ------------ ------------
TOTAL REVENUES $156,570,052 $ 66,255,935 $ 65,023,982 $ 91,383,833 $ 71,193,887
============ ============ ============ ============ ============
Net income (loss) from continuing
operations before income taxes,
extraordinary item and cumulative effect
of change in accounting principle $ 50,287,216 $(49,191,286) $(35,772,568) $(17,460,015) $ (1,599,140)
Income taxes 825,414 - - - -
------------ ------------ ------------ ------------ ------------
Net income (loss) from continuing
operations before extraordinary item and
cumulative effect of change in accounting
principle 49,461,802 (49,191,286) (35,772,568) (17,460,015) (1,599,140)
Discontinued operations, net of tax
benefit (1,392,630) (2,230,388) (2,641,151) (3,428,019) (3,522,698)
Extraordinary item, net of tax 2,262,910 - - - -
Cumulative effect of change
in accounting principle - - 2,215,560 - -
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 50,332,082 $(51,421,674) $(36,198,159) $(20,888,034) $ (5,121,838)
============ ============ ============ ============ ============
Basic net income (loss) per share
Continuing operations $ 1.80 $ (2.06) $ (1.63) $ (.80) $ (.08)
Discontinued operations (.05) (.09) (.12) (.16) (.18)
Extraordinary item .08 - - - -
Cumulative effect of change in
accounting principle - - .10 - -
------------ ------------ ------------ ------------ ------------
Basic net income (loss) per share $ 1.83 $ (2.15) $ (1.65) $ (.96) $ (.26)
============ ============ ============ ============ ============
Diluted net income (loss) per share
Continuing operations $ 1.67 $ (2.06) $ (1.63) $ (.80) (.08)
Discontinued operations (.05) (.09) (.12) (.16) (.18)
Extraordinary item .08 - - - -
Cumulative effect of change in
accounting principle - - .10 - -
------------ ------------ ------------ ------------ ------------
Diluted net income (loss) per share $ 1.70 $ (2.15) $ (1.65) $ (.96) $ (.26)
============ ============ ============ ============ ============
At year end:
Cash and Cash Equivalents $ 84,295,571 $ 12,676,537 $ 6,567,261 $ 42,221,015 $ 33,055,399
Short-Term Investments $ 11,840,526 $ - $ 26,801,506 $ 71,997,154 $ 48,908,662
Total Assets $198,063,433 $113,311,775 $153,694,650 $192,118,594 $166,105,387
Long-Term Liabilities $ 10,203,772 $ 10,160,791 $ 10,187,127 $ 14,428,769 $ 18,154,121
Working Capital $111,934,992 $ 24,649,431 $ 37,794,730 $100,796,311 $ 92,577,489
Stockholders' Equity $155,720,361 $ 81,155,068 $ 99,832,172 $135,254,960 $110,740,711
25
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 (U.S. 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 Uncollectible Accounts
- ------------------------------------
The Company maintains an allowance for uncollectible 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 more 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.
Principles of Consolidation and Equity Accounting
- -------------------------------------------------
The Company's investments in Cobasys and Ovonyx 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
26
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 contributions, other than technology, it recognizes its
proportionate share of any losses until the investment reaches zero.
The Company has three joint ventures, Rare Earth Ovonic, with Rare Earth
High-Tech Co. Ltd. of Baotou Steel Company of Inner Mongolia, China, for the
manufacture of batteries 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 limited amounts for
certain of its joint ventures (see Note E 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. 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 delivered to the customer. Generally, this is upon shipment from the factory
as most products are shipped FOB shipping point. Some foreign customers are
shipped under DDP terms where the customer takes delivery at the point of
destination. All intersegment sales are eliminated in consolidation.
Royalties
- ---------
Most license agreements, other than the amended MEI battery agreement (see
Note E of Notes to Consolidated Financial Statements) and 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 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
- -------------------
Revenues are also 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
27
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. 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, 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, after its agreed-upon cost share, if any, 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.
Results of Operations
Overview
- --------
The Company had net income from continuing operations of $49,462,000 on
revenues of $156,570,000 in the year ended June 30, 2005, compared to a net loss
from continuing operations of $49,191,000 on revenues of $66,256,000 for the
year ended June 30, 2004. For the year ended June 30, 2005, the Company had an
extraordinary gain of $2,263,000 and a loss from discontinued operations of
$1,393,000, and for the year ended June 30, 2004, the loss from discontinued
operations was $2,230,000. The Company had a net loss from continuing operations
of $35,773,000 on revenues of $65,024,000 for the year ended June 30, 2003. For
the year ended June 30, 2003, the Company had a cumulative gain of $2,216,000
from a change in accounting principle, as well as a loss from discontinued
operations of
28
$2,641,000. Losses from discontinued operations decreased in each of the three
years ended June 30, 2005 due to the Company's cost-containment and
restructuring programs.
The table below summarizes each of the Company's business segment's
operating results (in thousands) for the last three fiscal years ended June 30:
Revenues Income (Loss) from Operations
---------------------------------------- ----------------------------------------
Segment 2005 2004 2003 2005 2004 2003
- --------------------------- ------------ ------------ ------------ ------------ ------------ ------------
United Solar Ovonic(1) $ 58,718 $ 36,959 $ 14,890 $ (3,240) $ (13,418) $ (6,355)
Energy Conversion Devices 16,841 16,155 27,062 (22,282) (22,877) (20,745)
Ovonic Battery(2) 88,557 15,230 28,671 68,358 (13,840) (7,356)
Consolidating Entries (7,546) (2,088) (5,599) 547 1,599 3,821
--------- --------- --------- --------- ---------- ---------
Consolidated $ 156,570 $ 66,256 $ 65,024 $ 43,383 $ (48,536) $ (30,635)
========= ========= ========= ========= ========== =========
- --------------------------
(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 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 the years ended June 30, 2004
and 2005.
(2) Excludes discontinued operations.
Year Ended June 30, 2005 Compared to Year Ended June 30, 2004
- -------------------------------------------------------------
United Solar Ovonic Segment
- ---------------------------
The United Solar Ovonic segment reduced its operating loss by 76% in 2005
versus 2004 primarily due to significantly higher product sales and the impact
of cost reductions in 2005.
United Solar Ovonic's 2005 revenues increased by $21,759,000 primarily due
to increased product sales. Photovoltaic product sales increased by 84% to
$50,777,000 for 2005 from $27,586,000 for 2004. This increase was principally
attributable to higher PV product sales ($25,172,000) and increased balance of
systems work ($607,000), partially offset by unfavorable product mix
($2,682,000) in 2005.
Gross profit on United Solar Ovonic's product sales was $4,350,000 in 2005
compared to a gross loss of $6,311,000 in 2004 because of higher sales, lower
material costs, and the absorption in 2005 of all of the fixed manufacturing
costs.
United Solar Ovonic's revenues from product development agreements in the
year ended June 30, 2005 were $7,768,000 compared to $9,373,000 in 2004. The
decrease in 2005 was principally due to lower revenues on the Air Force and
Lockheed Martin contracts.
Revenues from product development agreements for the United Solar Ovonic
segment in 2005 funded 91% of its cost of product development. Revenues from
product development
29
agreements decreased by $1,605,000 and spending decreased by $34,000, resulting
in an increase of $1,571,000 in net cost of product development.
Year Ended June 30,
--------------------------
2005 2004
----------- -----------
Cost of revenues from product development
agreements $ 5,935,000 $ 7,615,000
Product development and research 2,618,000 972,000
----------- -----------
Total cost of product development 8,553,000 8,587,000
Revenues from product development agreements 7,768,000 9,373,000
----------- -----------
Net cost (profit) of product development $ 785,000 $ (786,000)
=========== ===========
While revenues increased 59%, United Solar Ovonic's selling, general and
administrative expenses (net of allocations) decreased by $917,000 in 2005 as a
result of various cost-reduction measures in 2005, including a decrease in the
number of employees, in other employee-related costs and in warranty expense,
partially offset by reduced allocations ($175,000) to cost of product
development in 2005, which are based on the relationship of selling, general and
administrative expenses to product development wages.
The product development expenditures were used to fund the development of
new products for space and airship applications and to develop lower-cost and
higher-efficiency terrestrial products.
Energy Conversion Devices Segment
- ---------------------------------
The ECD segment had a reduced operating loss in 2005, versus 2004,
primarily due to approximately $4,000,000 in royalties in 2005 from Ovonic
Battery in connection with an intercompany license agreement, partially offset
by costs of $2,708,000 in 2005 related to compliance with Sarbanes-Oxley
requirements and a decrease in the segment's hydrogen development contract
revenues.
ECD's product sales, consisting of machine building, were $1,740,000 in
2005 compared to $184,000 in 2004 with the increase due to the commencement of
the new 25MW machine for United Solar Ovonic. These sales were made to a
consolidated subsidiary and are eliminated in consolidation.
ECD's revenues from product development agreements decreased in the year
ended June 30, 2005 to $9,480,000 from $14,713,000 in the year ended June 30,
2004 due to lower revenues from Ovonic Hydrogen Systems ($4,089,000 in 2005
versus $10,063,000 in 2004) and the ECD TACOM hydrogen contract (which was
completed in 2004), resulting in no revenues in 2005 versus revenues of $499,000
in 2004, partially offset by additional work in 2005 on contracts with National
Institute of Standards and Technology (NIST) ($2,200,000 in 2005 versus $799,000
in 2004) for work done in optical switching and organic electroluminescent
devices (OLED) technologies.
Revenues from product development agreements for the ECD segment for the
year ended June 30, 2005 funded 35% of this segment's cost of product
development. Revenues from product development agreements decreased by
$5,233,000 while spending decreased
30
by $3,304,000, principally in the hydrogen technology, resulting in an increase
of $1,929,000 in net cost of product development.
Year Ended June 30,
--------------------------
2005 2004
----------- -----------
Cost of revenues from product development
agreements $10,583,000 $15,562,000
Product development and research 16,228,000 14,553,000
----------- -----------
Total cost of product development 26,811,000 30,115,000
Revenues from product development agreements 9,480,000 14,713,000
----------- -----------
Net cost of product development $17,331,000 $15,402,000
=========== ===========
Product development programs include work on the Ovonic Cognitive Computer
technology, including a unique three-terminal device with high-speed
high-current capabilities based on ECD's Ovonic threshold/memory technology.
Additionally, since acquiring a 100% interest in Ovonic Hydrogen Systems and
Ovonic Fuel Cell Company, ECD has continued the development of solid hydrogen
storage systems and the Ovonic metal hydride fuel cell technologies. ECD is also
continuing development of its PV, optical switching, and OLED technologies.
ECD's royalties, consisting principally of optical memory royalties, were
$851,000 in 2005 compared to $619,000 in 2004. ECD recognized in 2005 royalties
of $686,000 versus $464,000 in 2004 related to nonrefundable advance royalty
payments received by ECD in prior years associated with license agreements under
which the licensees no longer have an obligation to make royalty payments. In
addition, there was approximately $4,000,000 in royalties in 2005 from Ovonic
Battery in connection with an intercompany license agreement.
Other revenues are primarily related to insurance proceeds, services,
facilities and miscellaneous administrative and laboratory services provided to
some of the Company's joint ventures. Other revenues were $814,000 in the year
ended June 30, 2005 up from $639,000 in the year ended June 30, 2004. The
increase in other revenues in 2005 was primarily due to increased services
provided to Ovonyx and insurance proceeds in 2005.
ECD's patent expenses, incurred to protect its proprietary technology, were
$1,324,000 in 2005 compared to $1,329,000 in 2004.
ECD's operating, general and administrative expenses (net of allocations)
were $7,932,000 in 2005 compared to $5,569,000 in 2004. The increase in the net
expense for 2005 was principally due to expenses related to compliance with
Sarbanes-Oxley requirements of $2,708,000 in 2005, an increase of $2,239,000
over 2004.
Ovonyx is included in the ECD segment. However, since this investment is
not consolidated, but is accounted for using the cost method of accounting, no
revenues or expenses of Ovonyx are included in ECD's results of operations for
2005, 2004 and 2003.
31
Ovonic Battery Segment
- ----------------------
The Ovonic Battery segment had operating income in 2005 versus an operating
loss in 2004 resulting from the recognition of a one-time, noncash license
revenue of $79,532,000 in 2005 (as described in Note E of Notes to Consolidated
Financial Statements) plus reductions of $6,594,000 in patent expenses in 2005,
partially offset by reduced equipment sales to Rare Earth Ovonic and a reduction
in revenues from product development agreements, principally related to
decreased activities under the advanced product development agreement from
Cobasys.
The operating income/(loss) for Ovonic Battery for 2005 and 2004 exclude
the aforementioned results from operations from discontinued operations.
Sales of nickel hydroxide were $1,762,000 in 2005 versus $1,724,000 in
2004. Equipment sales decreased to $1,167,000 in 2005 from $6,142,000 in 2004,
primarily due to the winding down of activities with Rare Earth Ovonic as the
project nears completion and the cumulative revenue adjustment at December 31,
2004 of $2,668,000 in connection with a review of its estimates to complete the
equipment on the Ovonic Battery contracts with Rare Earth Ovonic to provide
battery-manufacturing equipment and a reduction in the estimated margin from 12%
to 8%.
The loss on product sales was $3,262,000 in 2005 compared to a profit of
$700,000 in 2004 due to Ovonic Battery's reduction in revenues on the Rare Earth
Ovonic contract and the aforementioned margin adjustment.
Ovonic Battery's revenues from product development agreements in the year
ended June 30, 2005 decreased to $1,977,000 from $7,037,000 in the year ended
June 30, 2004, primarily due to reduced activities with Cobasys ($1,997,000 in
2005 compared to $5,610,000 in 2004) as Cobasys moves into its commercialization
phase and requires less support from Ovonic Battery and the completion of a
contract with TACOM to develop an advanced NiMH battery resulting in no revenues
in 2005 versus revenues of $1,158,000 in 2004.
Revenues from product development agreements for the Ovonic Battery segment
in the year ended June 30, 2005 funded 20% of Ovonic Battery's cost of product
development as Ovonic Battery significantly reduced its spending on product
development. Revenues from product development agreements decreased by
$5,060,000 and spending decreased by $4,810,000, resulting in an increase of
$250,000 in net cost of product development.
Year Ended June 30,
--------------------------
2005 2004
----------- -----------
Cost of revenues from product development
agreements $ 1,892,000 $ 7,603,000
Product development and research 7,892,000 6,991,000
----------- -----------
Total cost of product development 9,784,000 14,594,000
Revenues from product development agreements 1,977,000 7,037,000
----------- -----------
Net cost of product development $ 7,807,000 $ 7,557,000
=========== ===========
32
During 2005, Ovonic Battery continued its development work for its metal
hydride and nickel hydroxide technologies. This development work included
preparation and testing of advanced materials in NiMH batteries and the further
development of these materials. In addition, Ovonic Battery met with current and
potential nickel hydroxide customers to discuss their current and future needs
for this product.
Royalties increased 135% to $4,481,000 in the year ended June 30, 2005 from
$1,903,000 in the year ended June 30, 2004. Included in this increase is
$1,680,000 in 2005, compared to $393,000 in 2004, for royalties for
transportation applications, primarily for hybrid vehicles. The increase
included $1,125,000 related to an advance royalty payment received by Ovonic
Battery in prior years associated with license agreements under which the
licensee no longer had a contractual obligation to make payments.
Revenues from license and other agreements increased to $80,784,000 in the
year ended June 30, 2005 from $125,000 in the year ended June 30, 2004. The 2005
license fees result from the recognition of a one-time, noncash revenue of
$79,532,000 for additional technology that Ovonic Battery contributed to Cobasys
in exchange for an option to repurchase shares of the Company owned by Chevron
(see Note E of Notes to Consolidated Financial Statements) and the amortization
over 10.5 years of the $10,000,000 payment received in the settlement of the
patent infringement disputes and counterclaims in consideration of the licenses
granted and the agreement to cross license through December 31, 2014 (see Note E
of Notes to Consolidated Financial Statements). In addition, in 2005 there was
an expanded license agreement with BYD Company Limited ($250,000) and a new
license agreement with Guangzhou Wintonic Battery & Magnet Co. Ltd. ($50,000).
The 2004 license fees resulted from licenses to Mcnair-tech Co., Ltd., Linghao
Battery and Shenzhen High Power Tech., Co., Ltd., all of China. Revenues from
license and other agreements depend on a small number of new business
arrangements, are sporadic and vary dramatically from period to period.
Patent expenses were incurred in 2005 and 2004 in connection with the
protection of Ovonic Battery's United States and foreign patents covering its
proprietary technologies. Total patent expenses decreased to $1,259,000 in the
year ended June 30, 2005 from $7,853,000 in the year ended June 30, 2004,
principally due to much lower patent defense costs ($218,000 in 2005 versus
$7,135,000 in 2004) for the protection of the Company's NiMH battery patents and
technology.
On July 7, 2004, the Company announced that it and Cobasys LLC had entered
into a settlement agreement with Matsushita Electric Industrial Co., Ltd. (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.
Ovonic Battery's operating, general and administrative expenses (net of
allocations) increased in 2005 due to approximately $4,000,000 in royalties due
to ECD in connection with an intercompany license agreement partially offset by
cost reductions in 2005.
Cobasys is included in the Ovonic Battery segment. However, since this
investment is accounted for on the equity basis of accounting, no revenues or
expenses of Cobasys are included in Ovonic Battery's results of operations for
2005, 2004 and 2003.
33
Other Income/Expense, Extraordinary Item and Discontinued Operations
- --------------------------------------------------------------------
The $7,559,000 improvement in other income (net) ($6,904,000 income in 2005
compared to $655,000 expense in 2004) resulted primarily from the $8,000,000
distribution received from Cobasys as a distribution from the joint venture
associated with the settlement of the patent infringement disputes and
counterclaims (see Note E of Notes to Consolidated Financial Statements);
increased interest income ($1,400,000 in 2005 versus $714,000 in 2004) due to
increased funds available for investment; higher interest rates, partially
offset by interest income in 2004 on a note receivable from United Solar Ovonic
LLC; and reduced interest expense ($777,000 in 2005 versus $1,314,000 in 2004)
due to payoff of Canon Note in 2004; partially offset by the impairment loss
($1,710,000) in the Company's investment in Rare Earth Ovonic (see Note E of
Notes to Consolidated Financial Statements).
In June 2005, as part of its restructuring plan and focus on its core
business, the Company decided to sell the assets of Ovonic Battery's metal
hydride materials business and has recognized a loss from continuing operations
of $1,393,000 and $2,230,000 for the years ended June 30, 2005 and 2004,
respectively.
In 2005, ECD received $4,675,000 from Chevron for payment of restructuring
fees. The $4,675,000 received from Chevron was $2,263,000 (net of tax) in excess
of restructuring costs through December 31, 2004. The Company has recognized
this as an extraordinary item (gain) in the year ended June 30, 2005.
The Company does business in many different parts of the world and its
royalty and product revenues are affected by changes in foreign currencies and
their exchange rates relative to the U.S. dollar. However, the vast majority of
the Company's business agreements are denominated in U.S. dollars and, as such,
the Company has minimized its exposure to currency rate fluctuations.
Year Ended June 30, 2004 Compared to Year Ended June 30, 2003
- -------------------------------------------------------------
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.
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.
34
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 25MW 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 a contract with the Air Force 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 (profit) 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.
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
initial 25MW machine in 2003.
35
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 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 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,
including a unique 3-terminal device with high-speed, high-current capabilities
based on ECD's Ovonic threshold/memory technology. 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 Chevron, 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.
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.
36
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 $6,142,000 in 2004 from
$11,769,000 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). Nickel
hydroxide sales increased to $1,724,000 in 2004 compared to $818,000 in 2003. In
addition, the margin on sales at Ovonic Battery decreased to $700,000 in 2004
from $2,808,000 in 2003 due to product mix from profits from the equipment sales
contract with Rare Earth Ovonic.
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.
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
=========== ===========
37
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.
and Shenzhen High Power Tech. Co. Ltd., all of China. Revenues from license and
other agreements depend on a small number of new business arrangements, are
sporadic and vary dramatically from period to period.
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. Chevron has agreed to share with the Company 50% of the litigation
costs with MEI relating to batteries for nonconsumer applications beginning in
fiscal 2002. Chevron'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, PEVE, and 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 E 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 a reduced allocation in 2004 from ECD.
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.
38
Liquidity and Capital Resources
As of June 30, 2005, the Company had $96,136,000 consolidated cash, cash
equivalents and short-term investments consisting of money market funds, and
corporate notes, classified as available-for-sale, maturing from 14 days to two
months and had consolidated working capital of $111,935,000.
In 2005, the Company received proceeds from financing totaling $109,549,000
(net of expenses) from a private placement of its Common Stock and an exercise
of warrants. On May 17, 2005, the Company used $19,913,680 of the net proceeds
to exercise its option to purchase for $4.55 per share the 4,376,633 shares of
ECD's Common Stock held by Chevron. In addition, in 2005 the Company received
$12,612,000 in connection with stock options exercised. The Company plans to use
the balance of the net proceeds from these transactions to double the
manufacturing capacity of United Solar Ovonic's triple-junction, thin-film
amorphous silicon photovoltaic products and for general corporate purposes,
including research and development activities.
On July 7, 2004, ECD and Cobasys LLC entered into a settlement agreement
with MEI, PEVE, and 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. Also, Cobasys and PEVE
cross licensed each other for current and future patents to avoid possible
future litigation. Cobasys and PEVE 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 also established a joint
development program to collaborate on the development of next-generation high
performance NiMH batteries for HEVs. In July 2005, Cobasys and PEVE expanded
their license to permit PEVE to sell NiMH battery products for certain North
American transportation applications.
As part of the aforementioned 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 Chevron as
partial reimbursement of legal expenses.
During fiscal year 2005, the Company began to implement a restructuring
plan approved by the Board of Directors 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 HEVs. Our strategy is to transition 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. The
Company intends to continue its restructuring activities in fiscal 2006,
including securing revenues to finance its hydrogen, fuel cell and other
technologies, sale of the assets of the metal hydride materials business and
vacating three facilities, with the goal of moving the Company into a position
of having sustained profitability.
The restructuring is expected to increase other 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
39
portfolio of advanced product development activities and a leaner R&D team to
grow future businesses.
In addition, the Company has commenced construction of a new United Solar
Ovonic 25MW machine, which is anticipated to be completed by fall 2006 at a
total cost of $70,000,000.
The core commercial businesses on which the Company is focusing are our
wholly owned subsidiary, United Solar Ovonic, and our joint ventures, Cobasys
and Ovonyx.
The Company expects the amount of cash to be received under existing
product development agreements in the year ending June 30, 2006 to decrease to
approximately $9,295,000, compared to $21,015,000 received in the year ended
June 30, 2005, due to reduced funding to be received in the year ending June 30,
2006 from Chevron.
Certain of the Company's product development and product purchase
agreements contain provisions allowing for the termination of such agreements
for, among other things, failure of the Company to meet agreement milestones or
for breach of material contractual provisions. Generally, the termination
provisions allow for the Company to recover any costs incurred through the
termination date.
The 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
Capital Lease Obligations $ 15,062,000 $ 1,266,000 $ 2,659,000 $ 2,734,000 $ 8,403,000
Capital Lease Commitment 35,845,000 - 2,993,000 3,302,000 29,550,000
Operating Leases 6,812,000 1,952,000 2,385,000 2,012,000 463,000
Purchase Obligations 23,495,000 22,616,000 879,000 - -
------------ ------------ ------------ ------------ ------------
Total $ 81,214,000 $ 25,834,000 $ 8,916,000 $ 8,048,000 $ 38,416,000
============ ============ ============ ============ ============
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 venture
license and development agreements) with third parties who can provide financial
and other resources and expertise for the Company's technologies and products.
Management believes that funds generated from operations, new business
agreements, exercises of Common Stock purchase warrants and stock options,
cost-containment initiatives, and existing cash and cash equivalents will be
adequate to support and finance planned growth, capital expenditures and
company-sponsored product development programs over the coming year. The Company
is evaluating a number of alternatives to accelerate the growth of its
businesses by increasing its manufacturing capacity. In order to fund this
accelerated growth, the Company is exploring many alternatives including, but
not limited to, equity and debt financing and new business agreements. The
Company is also in
40
discussions with potential partners to fund its various activities. No
assurances can be given as to the time or success of the aforementioned plans,
negotiations, discussions and programs.
The December 2004 agreement with Chevron provides a mechanism for
additional funding from Chevron to continue the Cobasys expansion. Chevron will
be entitled to priority right of repayment for providing the additional funding.
ECD and Chevron will each continue to own a 50% interest in Cobasys subject to
adjustment under certain circumstances.
In a separate December 2004 agreement with Chevron, Chevron transferred its
interest in Ovonic Hydrogen Systems to ECD in consideration of relieving Chevron
of continuing funding obligations. ECD is currently funding 100% of Ovonic
Hydrogen Systems' requirements at a reduced level.
The commercialization of the Company's Ovonic Unified Memory through the
Ovonyx joint venture does not require financial support because Ovonyx has
generated sufficient funds for its operations through licensing activities.
Our current backlog of orders for machine-building and equipment sales
contracts and photovoltaic products is $52,059,000 compared to a backlog of
$10,978,000 as of June 30, 2004. The backlog includes $51,299,000 and $9,426,000
at United Solar Ovonic at June 30, 2005 and 2004, respectively. The increase in
2005 is due to an increase in the backlog for United Solar Ovonic. In fiscal
2006, we expect to recognize $49,870,000 of this backlog.
During the year ended June 30, 2005, $16,864,000 of cash was used in
operating activities. The $66,326,000 difference between the net income from
continuing operations of $49,462,000 and the net cash used in operating
activities was principally due to the recognition of a one-time, noncash revenue
of $79,532,000 as a license fee (see Note E of Notes to Consolidated Financial
Statements) and reductions in nonrefundable advance royalties ($1,841,000),
increases in both accounts receivable ($6,692,000) and inventories ($4,415,000)
due to a higher volume of product sales, partially offset by depreciation
($8,069,000), deferred nonrefundable patent license fee ($9,048,000), impairment
loss in Rare Earth Ovonic ($1,710,000), and decreases in related-party accounts
receivable ($1,760,000) due to reduced volume in related party revenues, stock
issued for service rendered ($1,020,000), increase in long-term retirement
($263,000) and a decrease in restricted cash ($1,150,000) (see Notes A, B and E
of Notes to Consolidated Financial Statements).
The Company spent $3,120,000 on property, plant and equipment that was
placed in service during the year ended June 30, 2005. In total, the Company
expects to spend $51,000,000 for capital expenditures in fiscal 2006, primarily
to double United Solar Ovonic's capacity to manufacture solar cells and for
leasehold improvements to the Company's facilities.
41
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 $95,805,000 and $13,074,000 of these investments (including cash
equivalents) on June 30, 2005 and June 30, 2004, respectively. On June 30, 2005,
the investments had an average maturity of less than 30 days, $12,000,000 of
which had maturities of 14 days to two months. On June 30, 2004, the investments
were all maturing on a daily basis. 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 (excluding cash equivalents) shall represent
more than 10% of the portfolio and at least 10% 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, 2005, the risk
associated with changes in interest rates is minimal due to the short average
maturity of the investments.
42
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 sheets of Energy
Conversion Devices, Inc. (a Delaware corporation) and subsidiaries as of June
30, 2005 and 2004, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years ended June 30,
2005. 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 audits. The financial statements of Energy Conversion
Devices, Inc. for the year ended June 30, 2003, prior to the reclassification
for discontinued operations discussed in Note A to the financial statements,
were audited by other auditors whose report dated October 21, 2003, on those
statements included explanatory paragraphs that described the uncertainty
surrounding the ability of Energy Conversion Devices, Inc. to continue as a
going concern and management's plans concerning these matters, and that
effective July 1, 2002 the Company changed its method of accounting for goodwill
and other intangible assets to conform to SFAS No. 142, "Goodwill and Other
Intangible Assets".
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, 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, 2005 and 2004, and the results of
its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
We also audited the adjustments described in Note A to the financial statements
that were applied to reclassify the 2003 financial statements to give effect to
the discontinued operations. In our opinion, such adjustments are appropriate
and have been properly applied.
Our audits were 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 financial
statements and, in our opinion, is fairly stated when considered in relation to
the basic consolidated financial statements taken as a whole.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of June 30, 2005, based on the
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated August 26, 2005 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over
financial reporting and an adverse opinion on the effectiveness of the
Company's internal control over financial reporting because of a material
weakness.
/s/ Grant Thornton LLP
Southfield, Michigan
August 26, 2005
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
Energy Conversion Devices, Inc.
We have audited management's assessment, included in the accompanying
"Management's Annual Report on Internal Control over Financial Reporting", that
Energy Conversion Devices, Inc. (a Delaware Corporation) and subsidiaries (the
Company) did not maintain effective internal control over financial reporting as
of June 30, 2005, because the Company did not maintain effective controls over
accounting for certain sale transactions in accordance with contract terms,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weakness has been
44
identified and included in management's assessment. With respect to certain
product sales to international customers with title transfer terms of Delivered
Duty Paid, the Company failed to ensure the correct application of SEC Staff
Accounting Bulletin No. 104 - Revenue Recognition. This material weakness was
considered in determining the nature, timing, and extent of audit tests applied
in our audit of the June 30, 2005 financial statements, and this report does
not affect our report dated August 26, 2005 on those financial statements.
In our opinion, management's assessment that Energy Conversion Devices,
Inc. did not maintain effective internal control over financial reporting as of
June 30, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion,
because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, Energy Conversion
Devices, Inc. has not maintained effective internal control over financial
reporting as of June 30, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We do not express an opinion or any other form of assurance on management's
statements referred to in "Remediation of Material Weakness in Internal
Control".
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements of Energy Conversion Devices, Inc. and subsidiaries and our report
dated August 26, 2005 expressed an unqualified opinion.
/s/ Grant Thornton LLP
Southfield, Michigan
August 26, 2005
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Energy Conversion Devices, Inc.
Rochester Hills, Michigan
We have audited the consolidated statements of operations, stockholders' equity,
and cash flows for the year ended June 30, 2003 (none of which are presented
herein) of Energy Conversion Devices, Inc. and subsidiaries (the "Company"). Our
audit also included the financial statement schedule for the year ended June 30,
2003 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 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, such consolidated financial statements present fairly, in all
material respects, the results of the Company's operations and their cash flows
for the year 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 for the year ended June 30, 2003, 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 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
46
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
June 30,
------------------------------
2005 2004
------------- -------------
CURRENT ASSETS
Cash, including cash equivalents of $83,964,000 at
June 30, 2005 and $11,924,000 at June 30, 2004 $ 84,295,571 $ 12,676,537
Short-term investments 11,840,526 -
Restricted Cash - 1,150,000
Accounts receivable (net of allowance for uncollectible
accounts of approximately $412,000 at June 30,
2005 and $274,000 at June 30, 2004) 19,112,613 12,730,100
Accounts receivable due from related parties 419,862 2,180,069
Inventories 18,066,876 13,651,715
Assets held for sale 131,797 -
Other 960,128 1,264,364
------------- -------------
TOTAL CURRENT ASSETS 134,827,373 43,652,785
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 267,000 267,000
Buildings and improvements 14,804,999 15,191,642
Machinery and other equipment 65,784,810 75,776,192
Capitalized lease equipment 10,000,000 10,000,000
------------- -------------
90,856,809 101,234,834
Less accumulated depreciation and amortization (29,920,832) (35,288,928)
------------- -------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 60,935,977 65,945,906
Investment in Rare Earth Ovonic-China - 1,710,000
INVESTMENT IN AND ADVANCES TO JOINT VENTURES
Ovonyx - -
Cobasys - -
OTHER ASSETS 2,300,083 2,003,084
------------- -------------
TOTAL ASSETS $ 198,063,433 $ 113,311,775
============= =============
See notes to consolidated financial statements.
47
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
------------------------------
2005 2004
------------- -------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 15,914,518 $ 12,937,175
Salaries, wages and amounts withheld from employees 4,368,205 4,766,215
Deferred revenues under business agreements 1,288,268 966,596
Current portion of deferred patent license fee 952,380 -
Current installments on long-term liabilities 369,010 333,368
------------- -------------
TOTAL CURRENT LIABILITIES 22,892,381 19,003,354
LONG-TERM LIABILITIES 10,203,772 10,160,791
LONG-TERM DEFERRED PATENT LICENSE FEE 8,095,240 -
NONREFUNDABLE ADVANCE ROYALTIES 1,151,679 2,992,562
------------- -------------
TOTAL LIABILITIES 42,343,072 32,156,707
COMMITMENTS (NOTE G)
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 - 28,232,970 shares at
June 30, 2005 and 24,523,001 shares at
June 30, 2004 282,330 245,230
Additional paid-in capital 440,577,239 417,313,665
Accumulated deficit (285,191,353) (335,813,785)
Accumulated other comprehensive income 211,586 250,399
Unearned compensation on Class B Convertible
Common Stock (165,940) (846,940)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 155,720,361 81,155,068
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 198,063,433 $ 113,311,775
============= =============
See notes to consolidated financial statements.
48
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year Ended June 30,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
REVENUES
Product sales $ 51,943,873 $ 33,805,787 $ 15,907,721
Product sales to related parties - 2,422 6,353,191
------------ ------------ ------------
Total product sales 51,943,873 33,808,209 22,260,912
Royalties 5,332,003 2,521,779 1,843,647
Revenues from product development agreements 11,566,334 13,547,648 6,382,432
Revenues from product development agreements
with related parties 6,086,176 15,673,104 30,952,816
------------ ------------ ------------
Total revenues from product development agreements 17,652,510 29,220,752 37,335,248
Revenues from license and other agreements 80,784,380 125,000 3,444,114
Other revenues 549,449 309,622 (79,312)
Other revenues from related parties 307,837 270,573 219,373
------------ ------------ ------------
Total other operating revenues 857,286 580,195 140,061
------------ ------------ ------------
TOTAL REVENUES 156,570,052 66,255,935 65,023,982
EXPENSES
Cost of product sales 51,426,076 39,703,247 23,142,896
Cost of revenues from product development agreements 16,839,605 28,878,722 37,001,106
Product development and research 26,738,343 22,516,247 19,798,126
Patent defense (net) 217,815 7,135,427 5,429,042
Patents 2,406,999 2,086,896 2,189,290
Operating, general and administrative (net) 15,558,248 14,471,210 8,098,941
------------ ------------ ------------
TOTAL EXPENSES 113,187,086 114,791,749 95,659,401
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 43,382,966 (48,535,814) (30,635,419)
OTHER INCOME (EXPENSE):
Interest income 1,400,461 714,049 3,561,326
Interest expense (776,725) (1,314,202) (881,284)
Equity in losses of joint ventures (100,000) (644,220) (11,794,552)
Impairment loss in Rare Earth Ovonic-China (1,710,000) - -
Minority interest share of losses - - 2,079,845
Distribution from joint venture 8,000,000 - -
Gains on sales of investments - 364,416 1,427,241
Other nonoperating income 90,514 224,485 470,275
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 6,904,250 (655,472) (5,137,149)
------------ ------------ ------------
Net Income (loss) from continuing operations before
income taxes, extraordinary item and cumulative
effect of change in accounting principle 50,287,216 (49,191,286) (35,772,568)
Income taxes 825,414 - -
------------ ------------ ------------
Net Income (loss) from continuing operations before
extraordinary item and cumulative effect of change
in accounting principle 49,461,802 (49,191,286) (35,772,568)
Discontinued operations, net of tax benefit of $23,642 in 2005 (1,392,630) (2,230,388) (2,641,151)
Extraordinary item, net of tax of $38,416 2,262,910 - -
Cumulative effect of change in accounting principle - - 2,215,560
------------ ------------ ------------
Net Income (Loss) $ 50,332,082 $(51,421,674) $(36,198,159)
============ ============ ============
Basic net income (loss) per share
Continuing operations $ 1.80 $ (2.06) $ (1.63)
Discontinued operations (.05) (.09) (.12)
Extraordinary item .08 - -
Cumulative effect of change in accounting principle - - .10
------------ ------------ ------------
Basic net income (loss) per share $ 1.83 $ (2.15) $ (1.65)
============ ============ ============
Diluted net income (loss) per share
Continuing operations $ 1.67 $ (2.06) $ (1.63)
Discontinued operations (.05) (.09) (.12)
Extraordinary item .08 - -
Cumulative effect of change in accounting principle - - .10
------------ ------------ ------------
Diluted net income (loss) per share $ 1.70 $ (2.15) $ (1.65)
============ ============ ============
See notes to consolidated financial statements.
49
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Three years ended June 30, 2005
Class A
and Class B
Convertible Unearned
Common Stock Common Stock Compen-
--------------- -------------------- Accumulated sation on
Number Number Additional Other Class B Total
of of Paid-In Accumulated Comprehen- Convertible Stockholders'
Shares Amount Shares Amount Capital Deficit sive Income Common Stock Equity
------- ------- ---------- --------- ------------- -------------- ----------- ------------ -------------
Balance at
July 1, 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, 2005
(CONTINUED)
Class A
and Class B
Convertible Unearned
Common Stock Common Stock Compen-
--------------- -------------------- Accumulated sation on
Number Number Additional Other Class B Total
of of Paid-In Accumulated Comprehen- Convertible Stockholders'
Shares Amount Shares Amount Capital Deficit sive Income Common 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, net 3,266,254 32,663 32,176,154 32,208,817
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.
(Continued on next page)
51
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Three years ended June 30, 2005
(CONTINUED)
Class A
and Class B
Convertible Unearned
Common Stock Common Stock Compen-
--------------- -------------------- Accumulated sation on
Number Number Additional Other Class B Total
of of Paid-In Accumulated Comprehen- Convertible Stockholders'
Shares Amount Shares Amount Capital Deficit sive Income Common Stock Equity
------- ------- ---------- --------- ------------- -------------- ----------- ------------ -------------
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
Net income for
year ended
June 30, 2005 50,332,082 50,332,082
Foreign currency
translation losses (38,813) (38,813)
------------
Comprehensive income 50,293,269
Earned compensation
on Class B stock 681,000 681,000
Sale of units to
institutional
investors, net 5,090,000 50,900 82,055,312 82,106,212
License exchange
for option to
purchase ECD stock (79,532,000) (79,532,000)
Exercise of option
to purchase and to
retire ECD stock (4,376,633) (43,766) (19,869,914) (19,913,680)
Issuance of stock
to directors 1,876 19 35,025 35,044
Common stock issued
in connection
with exercise of
stock options 1,028,883 10,289 12,601,463 12,611,752
Common stock issued
in connection with
exercise of warrants 1,965,843 19,658 27,423,510 27,443,168
Stock options issued
to non-employees 303,460 303,460
Tax credits relating
to stock options 132,886 132,886
Other 113,832 290,350 404,182
------- ------- ---------- --------- ------------- ------------- --------- ----------- ------------
Balance at
June 30, 2005 649,913 $ 6,499 28,232,970 $ 282,330 $ 440,577,239 $(285,191,353) $ 211,586 $ (165,940) $155,720,361
======= ======= ========== ========= ============= ============= ========= =========== ============
See notes to consolidated financial statements.
52
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended June 30,
-----------------------------------------------
2005 2004 2003
------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) from continuing operations before extraordinary
item and cumulative effect of change in accounting principle $ 49,461,802 $ (49,191,286) $ (35,772,568)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
License agreement (exchange for debt and related interest) - - (3,269,114)
Depreciation and amortization 7,991,995 7,858,641 3,513,933
Depreciation on discontinued operations 76,759 269,778 441,708
Bad debt expense 309,512 93,093 23,000
Amortization of deferred nonrefundable patent license fee (952,380) - -
Amortization of premium/discount on investments - 73,083 660,316
Equity in losses of joint ventures 100,000 644,220 11,794,552
Impairment loss in Rare Earth Ovonic 1,710,000 - -
Changes in nonrefundable advance royalties (1,840,883) (515,433) (119,936)
Stock and stock options issued for services rendered 1,019,503 807,549 716,675
Tax credit relating to stock options 132,886 - -
(Gain) loss on sales of investments - (364,416) (1,427,241)
(Gain) loss on sale of equipment (93,362) 10,368 40,257
Minority interest - - (2,079,845)
Retirement liability 263,638 307,032 285,827
Long-term operating lease 148,353 - -
Option received in exchange for license (79,532,000) - -
Discontinued operations (1,392,630) (2,230,388) (2,641,151)
Extraordinary item 2,262,910 - -
Changes in working capital:
Accounts receivable (6,692,025) (2,302,474) 1,721,131
Accounts and note receivable due from related parties 1,760,207 4,797,211 2,958,600
Inventories (4,415,161) (1,203,543) (1,207,889)
Other assets (84,062) 479,305 1,334,471
Current portion of deferred nonrefundable patent license fee 952,380 - -
Accounts payable and accrued expenses 2,579,333 (5,479,016) 2,450,159
Deferred revenues under business agreements 321,672 (4,159,973) (2,131,385)
Deferred nonrefundable patent license fee 9,047,620 - -
Deferred tax assets and other - - (173,012)
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (16,863,933) (50,106,249) (22,881,512)
------------- ------------- -------------
INVESTING ACTIVITIES:
Reduction (increase) in restricted cash 1,150,000 850,000 (2,000,000)
Purchases of property, plant and equipment (3,119,771) (3,546,922) (5,134,579)
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 Ovonyx (100,000) (50,000) (1,000,000)
Insurance proceeds 98,745 - -
Purchase of investments (19,768,819) (11,969,949) (30,907,063)
Proceeds from maturities of investments 7,928,293 11,969,949 3,000,000
Proceeds from sales of investments - 26,661,685 73,812,839
Proceeds from sale of property, plant and equipment 15,065 161,477 24,251
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (13,796,487) 24,076,240 29,037,713
------------- ------------- -------------
FINANCING ACTIVITIES:
Principal payments under short-term and long-term debt
obligations and capitalized lease obligations (333,368) (228,889) (41,764,836)
Proceeds from exercise of stock options and warrants 40,168,753 32,233,268 -
Exercise of option to purchase ECD stock (19,913,680) - -
Proceeds from sale of stock and warrants, net of expenses 82,106,212 - -
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 102,027,917 32,004,379 (41,764,836)
------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 251,537 134,906 (45,119)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 71,619,034 6,109,276 (35,653,754)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,676,537 6,567,261 42,221,015
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 84,295,571 $ 12,676,537 $ 6,567,261
============= ============= =============
See notes to consolidated financial statements.
53
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended June 30,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 776,725 $ 1,314,202 $ 881,284
Noncash transactions:
Short-term and long-term note receivable -
United Solar Ovonic LLC - (11,629,489) -
Short-term and long-term note payable -
Canon - 11,629,489 -
Debt principal and interest exchanged for
license - United Solar Ovonic/Canon - - 3,269,114
Cumulative effect of change in
accounting principle - - 2,215,560
Negative goodwill - - (2,215,560)
See notes to consolidated financial statements.
54
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 will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. In connection with the filing of our Annual Report on Form
10-K for the year ended June 30, 2003 and 2004, there existed substantial doubt
about the Company's ability to continue as a going concern in the absence of
sufficient additional funds. This was the result of the Company's history of
reporting losses from operations and the uncertainty as to the amounts and
timing of activities that would be necessary in order to generate sufficient
additional funding. Subsequently, the Company has raised substantial amounts of
working capital in order to fund its current operations and its growth (see Note
B) and has taken other steps to improve its financial condition. Based on the
current financial condition, we believe there is no longer substantial doubt
about the Company's ability to continue as a going concern.
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 and information technologies.
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. and
United Solar Ovonic LLC (jointly referred to as "United Solar Ovonic") 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 no additional
funding requirement by the minority shareholders. The Company has a number of
strategic alliances and, as of June 30, 2005, has two major investments
accounted for using the equity method: (i) Cobasys LLC, a joint venture between
Ovonic Battery and a subsidiary of Chevron Corporation, Chevron Technology
Ventures LLC, (Chevron), each having 50% interest in the joint venture and (ii)
Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler Lowrey, Intel Capital
and other investors. See Note E for discussions of all of the Company's major
joint 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
55
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- --------------------------------------------------
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 years ended June 30, 2005 and
2004.
At June 30, 2005 and at June 30, 2004, the Company's investments in Cobasys
and Ovonyx 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 contributions, other than technology, 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 provide limited funding to
certain of its joint ventures (see Note E).
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.
Discontinued Operations
- -----------------------
In June 2005, the Company, as part of its restructuring plan, decided to
sell the assets of Ovonic Battery's metal hydride materials business. The
Company is currently in negotiations with a third party to sell these assets.
At June 30, 2005, the Company has reclassified the current net book value
of these fixed assets ($132,000) (it does not anticipate any loss on this sale)
as assets held for sale and has ceased depreciating these assets.
56
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
For each of the three years ended June 30, the Company has recorded the
following results of its metal hydride materials business as a discontinued
operation in accordance with Statement of Financial Accounting Statement (SFAS)
No. 144:
2005 2004 2003
------------ ------------ ------------
Revenues $ 217,602 $ 48,634 $ 154,878
Costs and expenses 1,633,874 2,279,022 2,796,029
------------ ------------ ------------
Loss from discontinued
operations (1,416,272) (2,230,388) (2,641,151)
Income taxes - benefit 23,642 - -
------------ ------------ ------------
Net loss from discontinued
operations, net of tax $ (1,392,630) $ (2,230,388) $ (2,641,151)
============ ============ ============
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 2005
presentation.
Change in Accounting Principle
- ------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued 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.
57
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
The following is the effect on the year ended June 30, 2003 of this change
in accounting principle:
Net Loss $ (36,198,159)
Deduct:-
Cumulative effect of change in accounting principle (2,215,560)
-------------
Adjusted Net Loss before cumulative effect of change
in accounting principle $ (38,413,719)
=============
Basic Net Loss Per Share $ (1.65)
Deduct:-
Cumulative effect of change in accounting principle (.10)
-------------
Adjusted Basic Net Loss Per Share before cumulative
effect of change in accounting principle $ (1.75)
=============
Cash Equivalents
- ----------------
Cash equivalents consist of investments in short-term, highly liquid
securities maturing 90 days or less from the date of acquisition.
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 corporate notes which mature 91 days or more from date of
acquisition.
The following schedule summarizes the contractual maturities and unrealized
gains and losses on the Company's short-term investments (in thousands):
June 30, 2005
--------------------------------------------
Gross Unrealized
-------------------- Estimated
Cost Gains (Losses) Fair Value
--------------------------------------------
Due within one year or less
Corporate notes $ 11,841 $ - $ - $ 11,841
At June 30, 2004, the Company had no short-term investments.
58
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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 more 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 uncollectible 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.
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 20
----------------------------------
* Includes leasehold improvements which are
amortized over the shorter of the balance
of the lease term or the life of the
improvement, ranging from one to twenty
years.
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.
59
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Capitalized leases are amortized over the shorter of the term of the lease
or the life of the equipment or facility, usually three to 20 years. Accumulated
amortization on capitalized leases as of June 30, 2005 and June 30, 2004 was
$2,778,000 and $2,111,000, respectively.
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.
Warranty Reserve
- ----------------
A warranty reserve 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).
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. 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 delivered to the customer. Generally, this is upon shipment from the factory
as most products are shipped FOB shipping point. Some foreign customers are
shipped under DDP terms where the customer takes delivery at the point of
destination. All intersegment sales are eliminated in consolidation.
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
60
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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
for payments to the Company under the 1992 contract. The agreed reimbursement
includes a 15% share of royalty payments the Company receives through May 3,
2012 where Ovonic NiMH batteries serve as the primary source of power for
electric 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
- -------------------
Revenues are also 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. 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.
61
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements, 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, after its agreed-upon cost share, if any, 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, 2005, approximately
$759,000 in deferred revenues relates to the Rare Earth High-Tech of Inner
Mongolia, China (Rare Earth Ovonic) contracts with the joint ventures, which
represents the excess of payments made by Rare Earth Ovonic in excess of
revenues recognized on these contracts.
Overhead and Selling, General and Administrative Allocations
- ------------------------------------------------------------
The Company allocates overhead and general and administrative expenses to
product development and research expenses and to cost of revenues from product
development agreements based on a percentage of direct labor costs. For cost of
revenues from product development agreements, this allocation is limited to the
amount of revenues, after direct expenses, under the applicable agreements.
Overhead is allocated to cost of product sales through the application of
overhead to inventory costs.
The following is a summary of the gross selling, general and administrative
expenses and the aforementioned allocations:
Year Ended June 30,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Gross Expenses $ 28,161,000 $ 28,903,000 $ 24,219,000
Less - allocations to product
development and research (10,240,000) (8,315,000) (7,667,000)
- allocations to cost of revenues from
product development agreements (2,363,000) (6,117,000) (8,453,000)
------------ ------------ ------------
Remaining Expenses $ 15,558,000 $ 14,471,000 $ 8,099,000
============ ============ ============
62
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
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
- ------------------------
ECD applies APB 25 to its stock-based compensation awards to employees. Had
compensation costs for ECD'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 income (loss) and net
income (loss) per share for the years ended June 30, 2005, 2004 and 2003 would
have changed as follows:
Year Ended June 30,
-------------------------------------------
2005 2004 2003
------------ ------------ ------------
Net income (loss), as reported $ 50,332,082 $(51,421,674) $(36,198,159)
Total stock-based compensation expense
determined under fair value based
method, net of tax benefit in 2005 2,535,000 3,004,000 5,054,000
------------ ------------ ------------
Pro-forma net income (loss) $ 47,797,082 $(54,425,674) $(41,252,159)
============ ============ ============
Net income (loss) per share:
Basic - as reported $ 1.83 $ (2.15) $ (1.65)
============ ============ ============
Basic - pro forma $ 1.74 $ (2.28) $ (1.88)
============ ============ ============
Diluted - as reported $ 1.70 $ (2.15) $ (1.65)
============ ============ ============
Diluted - pro forma $ 1.61 $ (2.28) $ (1.88)
============ ============ ============
The fair value of the options granted during 2005, 2004 and 2003 is
estimated as $3,315,000, $276,000 and $3,926,000 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
2005 2004 2003
------------ ------------ ------------
Dividend Yield 0% 0% 0%
Volatility % 62.29% 64.83% 69.87%
Risk Free Interest Rate 3.55% 2.50% 2.20%
Expected Life 5.76 years 5.11 years 5.11 years
63
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Basic and Diluted Net Income (Loss) Per Share
- ---------------------------------------------
Basic net income (loss) per common share is computed by dividing the net
income (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 net income (loss) per share
for the years ended June 30 are computed as follows:
2005 2004 2003
------------ ------------ ------------
Weighted average number of shares outstanding:
- for basic net income (loss) per share 27,465,767 23,920,337 21,900,416
- for diluted net income (loss) per share 29,661,847 23,920,337 21,900,416
Net income (loss) from continuing operations
before income taxes, extraordinary item and cumulative
effect of change in accounting principle $ 50,287,216 $(49,191,286) $(35,772,568)
Income taxes 825,414 - -
------------ ------------ ------------
Net income (loss) from continuing operations
before extraordinary item and cumulative
effect of change in accounting principle 49,461,802 (49,191,286) (35,772,568)
Discontinued operations, net of tax benefit of
$23,642 in 2005 (1,392,630) (2,230,388) (2,641,151)
Extraordinary item, net of tax of $38,416 2,262,910 - -
Cumulative effect of change in accounting
principle - - 2,215,560
------------ ------------ ------------
Net income (loss) $ 50,332,082 $(51,421,674) $(36,198,159)
============ ============ ============
Basic net income (loss) per share
Continuing operations $ 1.80 $ (2.06) $ (1.63)
Discontinued operations (.05) (.09) (.12)
Extraordinary item .08 - -
Cumulative effect of change in accounting
principle - - .10
------------ ------------ ------------
Basic net income (loss) per share $ 1.83 $ (2.15) $ (1.65)
============ ============ ============
Diluted net income (loss) per share
Continuing operations $ 1.67 $ (2.06) $ (1.63)
Discontinued operations (.05) (.09) (.12)
Extraordinary item .08 - -
Cumulative effect of change in accounting
principle - - .10
------------ ------------ ------------
Diluted net income (loss) per share $ 1.70 $ (2.15) $ (1.65)
============ ============ ============
64
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies (Continued)
- ---------------------------------------------------
Due to the Company's net losses, the 2004 and 2003 weighted average shares
of potential dilutive securities of 80,713 and 8,406, 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. Because of
the relationship between the exercise prices and the average market price of
ECD's Common Stock, additional securities of 510,501, 4,069,454 and 2,700,473,
respectively, were excluded from the 2005, 2004 and 2003 calculations of
weighted average shares of potential dilutive securities as these securities
would have been antidilutive regardless of the Company's net income or loss.
Recent Pronouncements
- ---------------------
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
This statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award and is effective as of the beginning of the first annual
reporting period that begins after June 15, 2005. The Company is in the process
of reviewing this statement for the future effect on the Company's consolidated
financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." This
statement clarifies the accounting for abnormal amounts of idle facility
expenses, freight, handling costs and wasted material spoilage and is effective
for fiscal years beginning after June 15, 2005. It is anticipated that the
adoption of this standard will not have a material effect on the Company's
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.
65
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - Financings
- -------------------
Private Placement
- -----------------
In February 2005, ECD completed an $82,106,212 (net of $1,306,163 of
expenses) private placement of its Common Stock. ECD sold 5,090,000 shares of
Common Stock at a price of $17.25 per share to institutional investors. On May
16, 2005, ECD used $19,913,680 of the net proceeds to exercise its option to
purchase for $4.55 per share the 4,376,633 shares of ECD's Common Stock held by
Chevron.
Sale of Units
- -------------
In November 2003 and January 2004, ECD received $32,209,000 in connection
with the sale of 3,266,254 units of its securities to a group of three
institutional investors at an average price per unit of $10.27 based upon the
closing price of ECD Common Stock plus $.125. Each unit consisted 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.
In April and May, 2005, ECD received $27,168,000 from the exercise of
warrants. The warrants to purchase 1,946,162 shares of ECD Common Stock at an
exercise price of $13.96 per share were exercised by warrantholders who received
the warrants as a result of purchasing units consisting of one share of Common
Stock and one warrant to purchase a share of Common Stock in the private
placements of November 2003 and January 2004.
66
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - Accounts Receivable
- ----------------------------
June 30, June 30,
2005 2004
------------ ------------
Long-term contracts accounted for under
percentage-of-completion accounting
Amounts billed to customers
Commercial customers $ - $ 505,008
Long-term contracts not accounted for under
percentage-of-completion accounting
Amounts earned which are billed in
the subsequent month
U.S. Government 719,620 369,322
Commercial customers 21,985 102,638
------------ ------------
741,605 471,960
Amounts billed
U.S. Government 1,073,548 1,229,432
------------ ------------
Sub-total 1,815,153 1,701,392
Amounts unbilled for other than long-term contracts
Commercial customers 3,401,579 1,762,282
Amounts billed for other than long-term contracts
U.S. Government - 145,936
Commercial customers 14,307,881 8,889,482
------------ ------------
Sub-total 14,307,881 9,035,418
------------ ------------
Allowance for uncollectible accounts (412,000) (274,000)
------------ ------------
TOTAL $ 19,112,613 $ 12,730,100
============ ============
Accounts Receivable Due from Related Parties
- --------------------------------------------
June 30, June 30,
2005 2004
------------ ------------
Amounts earned which are billed in the subsequent
month on long-term contracts
Chevron $ - $ 38,875
Cobasys 62,460 623,551
Ovonic Hydrogen Systems - 1,329,194
------------ ------------
Sub-total 62,460 1,991,620
Amounts billed
Cobasys 296,085 7,393
Other unbilled
Ovonyx 30,469 17,237
Other billed
Chevron - 121,376
Ovonyx 21,008 16,850
Cobasys 9,840 -
Ovonic Hydrogen Systems - 25,593
------------ ------------
Sub-total 30,848 163,819
------------ ------------
TOTAL $ 419,862 $ 2,180,069
============ ============
67
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - Inventories
- --------------------
Inventories of raw materials, work in process and finished goods for the
manufacture of solar cells and nickel hydroxide 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.
Inventories (substantially all for United Solar Ovonic) are as follows:
June 30, June 30,
2005 2004
------------ ------------
Finished product $ 5,104,043 $ 3,511,730
Work in process 3,150,529 4,060,923
Raw materials 9,812,304 6,079,062
------------ ------------
$ 18,066,876 $ 13,651,715
============ ============
NOTE E - Joint Ventures and Investments
- ---------------------------------------
Joint Ventures
- --------------
United Solar Ovonic
Since May 2003, when ECD acquired Bekaert's interest in United Solar
Ovonic, ECD has been funding and continues to fund 100% of United Solar Ovonic's
cash requirements. Prior to May 2003, 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
for the period July 1, 2002 to May 14, 2003, 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
In July 2001, Ovonic Battery and ChevronTexaco (now Chevron) formed a
strategic alliance (Cobasys LLC). Chevron invested $160,000,000 to match the
Company's technological contribution in the venture. Cobasys is owned 50% by
Ovonic Battery and 50% by Chevron.
On December 2, 2004, as part of its focus on its core businesses, ECD
entered into a series of agreements with Chevron and Cobasys to expand the scope
of licenses granted to Cobasys at the time of the restructuring of the joint
venture in July 2001. In consideration of the expanded licenses, ECD received an
option to purchase the 4,376,633 shares exercisable at
68
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
$4.55 per share of ECD Common Stock then owned by Chevron. The transaction
increased ECD's revenue and decreased additional paid-in capital in the year
ended June 30, 2005 by $79,532,000 based upon the value of this option using the
Black Scholes valuation model.
In July 2004, ECD and Cobasys entered into a settlement agreement with MEI,
PEVE, and Toyota with respect to patent infringement disputes and counterclaims
involving 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 and PEVE. This fee was recorded as a deferred
patent license fee in July 2004 and is being amortized to income over 10.5
years. The Company recognized $952,000 as revenues from license and other
agreements in the year ended June 30, 2005 in connection with the amortization
of this fee. In addition, Cobasys received a $20 million license fee from MEI,
PEVE and Toyota, of which $4 million was placed in escrow for a next-generation
NiMH battery development project plan. Upon receipt of the license fee, Cobasys
made an $8 million distribution each to Ovonic Battery and Chevron representing
a partial reimbursement of legal expenses. The Company recorded this $8 million
as a distribution from joint venture in the year ended June 30, 2005.
The Company recorded revenues from Cobasys of $2,033,000, $5,696,000 and
$12,367,000 for the years ended June 30, 2005, 2004 and 2003, respectively, for
services performed on behalf of Cobasys (primarily for advanced product
development and market development work). The Company received $33,800, $3,050
and $207,000 for the years ended June 30, 2005, 2004 and 2003, respectively, for
products sold to Cobasys.
The Company also recorded revenues from Cobasys of $45,000 for the year
ended June 30, 2005 and $179,000 for each year ended June 30, 2004 and 2003, 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:
69
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
COBASYS LLC AND SUBSIDIARY
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
------------------------
July 17, 2001
Year Ended (date of inception)
June 30, 2005 to June 30, 2005
---------------- ------------------
Revenue
Product and prototype revenues $ 1,170,140 $ 3,916,392
Contract research revenue 770,941 5,714,464
Licensing revenue 1,904,762 1,904,762
Other revenues 34,706 34,706
------------ -------------
Total Revenue 3,880,549 11,570,324
Expenses
Cost of product and prototype revenues 9,006,484 25,000,284
Research and development costs 19,514,620 82,994,239
Sales and marketing costs 3,048,212 8,774,186
General and administrative costs 7,022,226 19,328,760
Depreciation and amortization 3,206,142 9,283,263
Loss on asset impairment and disposal 3,195,786 4,809,187
Loss on impairment of cost-basis
investment - 4,000,000
Interest expense 164,061 164,061
------------ -------------
Total Expenses 45,157,531 154,353,980
------------ -------------
Net Loss $(41,276,982)
============
Deficit accumulated during the development stage $(142,783,656)
=============
70
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
COBASYS LLC AND SUBSIDIARY
(A Development Stage Enterprise)
BALANCE SHEET
--------------
June 30, 2005
-------------
Assets
Current Assets:
Cash and cash equivalents ($1,050,604 of
which is restricted as of June 30, 2005) $ 2,375,677
Investment securities (restricted) 1,994,000
Accounts receivable (net of allowance
of $10,577 as of June 30, 2005) 1,516,034
Inventories, net 3,540,791
Prepaid expenses 249,729
------------
Total Current Assets 9,676,231
Net Property, Plant and Equipment 35,902,091
Assets held for sale 565,500
Cash surrender value of life insurance 567,511
------------
Total Assets $ 46,711,333
============
Liabilities and Members' Interest
Current Liabilities:
Accounts payable $ 2,379,324
Accounts payable, related party 301,713
Accrued expenses 3,161,399
Deferred revenues - current portion 2,150,000
Current installments of obligations
under capital lease 13,513
------------
Total Current Liabilities 8,005,949
Deferred revenue - noncurrent 16,295,219
Obligations under capital lease, net of
current installments 33,889
Redeemable preferred interest - related party 20,135,095
Other noncurrent liabilities 1,024,837
------------
Total Liabilities 45,494,989
Members' interest 1,216,344
------------
Total Liabilities and Members' Interest $ 46,711,333
============
71
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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 of the shares
outstanding without giving effect to the exercise of outstanding stock options
and warrants. 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 and a $100,000
payment in December 2004. ECD recorded its $1,150,000 investment in Ovonyx and
accounts for this investment on the equity method and is recognizing its
proportionate share of Ovonyx losses to the extent of its $1,150,000 investment.
In the years ended June 30, 2005, 2004 and 2003, ECD recorded an equity loss of
$100,000, $644,000 and $406,000, respectively, related to its investment in
Ovonyx.
ECD recorded revenues from Ovonyx of $272,000, $186,000 and $162,000,
respectively, for the years ended June 30, 2005, 2004 and 2003 representing
services provided to this joint venture. ECD has provided Ovonyx with free use
of its wafer lab facilities and has absorbed patent fees for the three years
ended June 30, 2005.
Ovonic Fuel Cell
In September 2000, ECD and ChevronTexaco (now Chevron) formed Texaco Ovonic
Fuel Cell. Chevron 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 metal hydride fuel cell
technology. The joint venture was owned 50% by Chevron and 50% by ECD. ECD
contributed intellectual property and licenses.
In June 2003, ECD acquired Chevron's interest in Texaco Ovonic Fuel Cell
Company LLC for $1, effective as of December 31, 2002. The company, 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, 2005 and 2004, the Company did not record
any revenues for services provided to this joint venture, while during the year
ended June 30, 2003, the Company recorded revenue of $4,022,000.
72
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
Ovonic Hydrogen Systems
In October 2000, ECD and ChevronTexaco (now Chevron) formed Texaco Ovonic
Hydrogen Systems. Chevron funded the initial product and market development for
this joint venture, 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. In December 2004, Chevron transferred to ECD its interest in
Texaco Ovonic Hydrogen Systems (renamed Ovonic Hydrogen Systems LLC by ECD). In
accordance with purchase accounting (SFAS 141), we wrote down the assets and
liabilities of Ovonic Hydrogen Systems to zero at December 2, 2004. ECD received
$4,675,000 from Chevron for payment of restructuring fees. The $4,675,000
received from Chevron was $2,263,000 (net of tax) in excess of restructuring
costs. The Company has recognized this as an extraordinary item (gain) in the
year ended June 30, 2005.
As of December 2, 2004, Ovonic Hydrogen Systems is wholly owned by ECD. It
is funded by ECD at a reduced level and is included in the Company's
consolidated financial statements. Ovonic Hydrogen Systems will focus on
continuing to commercialize compact portable hydrogen storage canisters that
have current and near-term market applications while continuing to develop and
commercialize ECD's proprietary reversible solid metal hydride-based
low-pressure hydrogen storage system for longer-term stationary, transportation
and infrastructure applications.
During the years ended June 30, 2005, 2004 and 2003, the Company recorded
revenues of $4,089,000, $10,063,000 and $13,651,000, respectively, for services
provided to this joint venture, primarily for market development and advanced
product development work.
Investments in Rare Earth Ovonic
During the year ended June 30, 2000, ECD and Ovonic Battery signed
agreements with Rare Earth High-Tech of Inner Mongolia, China. The agreements
called for the creation of three joint ventures for manufacturing and licensing
of advanced NiMH battery technology, alloy powders, and production equipment,
all for certain battery applications for NiMH batteries. 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.
At December 31, 2004, the Company reviewed its revenue and cost estimates
for its Rare Earth Ovonic joint ventures in connection with its investment
($1,710,000) in Rare Earth Ovonic. Based upon these estimates, the Company
recorded an impairment charge of $1,710,000 as of December 31, 2004.
73
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - Joint Ventures and Investments (Continued)
- ---------------------------------------------------
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, 2005, Ovonic Battery has received payments totaling $59,484,000 under
the three contracts. In December 2004, the Company reviewed its estimates to
complete the equipment under the Rare Earth Ovonic contracts. As a result of
this review and the changes in estimates, the Company reduced its estimated
margin from 12% to 8%. This resulted in a reduction in the cumulative revenue
for these contracts at June 30, 2005 of approximately $2,668,000.
The Company recorded revenues from Rare Earth Ovonic of $595,000
(negative), $4,410,000 and $10,726,000 for the years ended June 30, 2005, 2004
and 2003, respectively.
NOTE F - 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, 2005, 2004 and 2003:
Year Ended June 30,
--------------------------------------------
2005 2004 2003
----------- ----------- -----------
Liability beginning of the period $ 1,945,934 $ 2,990,661 $ 2,489,024
Amounts accrued for as warranty costs (105,737)** (721,312)* 1,212,949
Amounts acquired in connection with
United Solar Ovonic - - 728,503
Amounts reversed in connection with
acquiring United Solar Ovonic - - (1,439,815)
Warranty claims (204,665) (323,415) -
----------- ----------- -----------
Liability at end of period $ 1,635,532 $ 1,945,934 $ 2,990,661
=========== =========== ===========
- ------------------------------
* 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.
** During the year ended June 30, 2005, United Solar Ovonic LLC revised
its warranty liability, based upon its recent experience, and
recorded a reduction in this liability.
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 through June 30, 2003. 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
74
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Liabilities and Line of Credit (Continued)
- ---------------------------------------------------
development to its indirect cost pools. In addition, DCAA has stated that there
could be penalties imposed. The Company 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 $2,294,000
and $1,847,000 at June 30, 2005 and 2004, respectively, related to these issues.
Long-Term Liabilities
- ---------------------
A summary of the Company's long-term liabilities is as follows:
June 30,
-----------------------------
2005 2004
------------ ------------
Capital lease - 3800 Lapeer LLC $ 8,964,481 $ 9,297,849
Long-term retirement 1,384,948 1,121,310
Other 223,353 75,000
------------ ------------
Total 10,572,782 10,494,159
Less amounts included in current liabilities 369,010 333,368
------------ ------------
Total Long-Term Liabilities $ 10,203,772 $ 10,160,791
============ ============
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.
Other Long-Term Liabilities
- ---------------------------
The Company has retirement plans for certain executives that provide for
benefits after retirement. The Company recorded retirement expense of $264,000,
$307,000 and $286,000 in the years ended June 30, 2005, 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.
United Solar Ovonic matched 50% of the first 8% of the participant's
compensation. Amounts charged against income for the 401(k) plan, representing
the Company's matching contributions, were $1,031,000, $1,117,000 and $1,070,000
for the years ended June 30, 2005, 2004 and 2003, respectively.
75
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - Liabilities and Line of Credit (Continued)
- ---------------------------------------------------
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, 2005, 2004 and 2003 was approximately
$2,668,000, $2,843,000 and $2,738,000, 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, 2005 are as
follows:
Other Long-Term Capital Operating
Liabilities Leases Leases
--------------- ----------- ------------
2006 $ (2,757) $ 1,266,497 $ 1,951,881
2007 10,699 1,291,625 1,235,577
2008 31,737 1,367,012 1,149,800
2009 37,422 1,367,012 1,136,880
2010 43,215 1,367,012 874,647
Thereafter 1,487,985 8,403,104 463,203
----------- ----------- -----------
TOTAL 1,608,301 15,062,262 $ 6,811,988
===========
Less interest included above - 6,097,781
----------- -----------
Present value of minimum payments $ 1,608,301 $ 8,964,481
=========== ===========
Business-Loan Agreement
- -----------------------
As of June 30, 2005, 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. The business-loan agreement, which
had an expiration date of August 31, 2005, has been extended to expire on August
31, 2006. This agreement contains certain covenants, including a minimum $20
million liquidity covenant. At June 30, 2005, the Company had outstanding
letters of credit of $2,741,000 against the business loan agreement.
76
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - Commitments
- --------------------
The Company, in the ordinary course of business, enters into purchase
commitments for raw materials. The Company also enters into purchase
commitments for capital equipment, including subcontracts for the purchase of
components for the new 25MW solar manufacturing equipment being installed in
Auburn Hills, Michigan. The Company's total obligations under purchase
commitments at June 30, 2005, were $23,495,000 ($22,616,000 of which was within
one year and $879,000 thereafter).
In June 2005, United Solar Ovonic signed a lease for its new facility in
Auburn Hills. The terms of the lease are as follows:
o Term: Ten years, plus options for another ten years.
o Guaranty of lease: Lease guaranteed by ECD.
o Security deposit: ECD provided an irrevocable, clear, stand by
letter of credit in the amount of $2,161,000 as a security
deposit with the landlord. This security deposit will be
reduced over the term of the lease dependent on certain
conditions.
The future minimum payments, assuming a 20-year occupancy, for this lease
are as follows:
2006 $ 411,596
2007 1,347,333
2008 1,645,467
2009 1,651,200
2010 1,651,200
Thereafter 29,549,600
------------
Total 36,256,396
Less interest and operating
lease components included above 20,356,396
------------
Present value of minimum payments $ 15,900,000
============
Upon commencement of this lease in fiscal year 2006, United Solar Ovonic
will record this as a capital lease at an amount of $15,900,000.
77
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H - Nonrefundable Advance Royalties and Long-Term Deferred
- ---------------------------------------------------------------
Patent License Fee
- ------------------
At June 30, 2005 and 2004, the Company deferred recognition of revenue
relating to nonrefundable advance royalty payments, which consist of the
following:
June 30,
------------------------------
2005 2004
------------ ------------
Battery $ 435,902 $ 1,560,902
Optical memory 715,777 1,431,660
------------ ------------
$ 1,151,679 $ 2,992,562
============ ============
Creditable royalties earned and recognized as revenue were:
Year Ended June 30,
2005 2004 2003
------------ ---------- -----------
$ 1,840,883 $ 515,433 $ 119,936
Included in creditable royalties in 2005 and 2004 were $1,811,000 and
$447,500, respectively, 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.
As part of the settlement agreement with MEI, PEVE and Toyota, ECD and its
subsidiary, Ovonic Battery, received a $10 million license fee from MEI and
PEVE. This fee was recorded as a deferred patent license fee in July 2004 and is
being amortized to income over 10.5 years. The Company recognized $952,000 as
revenues from license and other agreements in the year ended June 30, 2005 in
connection with the amortization of this fee.
NOTE I - Product Sales, Royalties, Revenues from Product Development Agreements
- -------------------------------------------------------------------------------
and License and Other Agreements
- --------------------------------
The Company has product sales and business agreements with third parties
and with related parties for which royalties and revenues are included in the
consolidated statements of operations.
A summary of all of the Company's revenues follows:
78
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I - Product Sales, Royalties, Revenues from Product Development Agreements
- -------------------------------------------------------------------------------
and License and Other Agreements (Continued)
- --------------------------------------------
Year Ended June 30,
--------------------------------------------
2005 2004 2003*
------------ ------------ ------------
Product sales
Photovoltaics $ 50,777,272 $ 27,586,197 $ 4,001,937
Machine building and equipment sales (595,487) 4,489,728 10,949,828
Nickel hydroxide and battery packs 1,762,088 1,729,862 955,956
------------ ------------ ------------
51,943,873 33,805,787 15,907,721
Product sales - related parties
Photovoltaics - - 5,767,035
Machine building - - 499,793
Battery packs - - 86,363
Nickel hydroxide - 2,422 -
------------ ------------ ------------
- 2,422 6,353,191
------------ ------------ ------------
Total product sales $ 51,943,873 $ 33,808,209 $ 22,260,912
============ ============ ============
Royalties
Battery technology:
Transportation $ 1,679,585 $ 393,453 $ 216,852
Consumer 2,801,289 1,509,394 1,561,318
------------ ------------ ------------
4,480,874 1,902,847 1,778,170
Optical memory 837,112 616,824 32,592
Ovonic Unified Memory 14,017 2,108 32,885
------------ ------------ ------------
Total royalties $ 5,332,003 $ 2,521,779 $ 1,843,647
============ ============ ============
Revenues from product development agreements
Photovoltaics $ 8,716,805 $ 10,501,264 $ 3,615,674
Battery technology (20,602) 1,426,325 2,575,376
Optical memory 1,035,461 403,932 64,387
Solid hydrogen storage systems 428,398 737,538 -
Organic electroluminescent devices (OLEDs) 1,406,272 459,912 -
Other - 18,677 126,995
------------ ------------ ------------
11,566,334 13,547,648 6,382,432
Revenues from product development
agreements - related parties
Battery technology 1,997,252 5,610,242 12,366,964
Optical memory - - 615,330
Solid hydrogen storage systems 4,088,924 10,062,862 13,948,178
Fuel cell technology - - 4,022,344
------------ ------------ ------------
6,086,176 15,673,104 30,952,816
------------ ------------ ------------
Total revenues from product development
agreements $ 17,652,510 $ 29,220,752 $ 37,335,248
============ ============ ============
License and other agreements
Battery technology $ 80,784,380 $ 125,000 $ 175,000
Photovoltaic technology - - 3,269,114
------------ ------------ ------------
$ 80,784,380 $ 125,000 $ 3,444,114
============ ============ ============
- ------------------------------------------------
* United Solar Ovonic LLC is included in ECD's consolidated
financial statements effective May 15, 2003.
79
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I - 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,
----------------------------------------------
2005 2004 2003
------------- ------------ -------------
United States $ 123,002,029 $ 43,993,570 $ 38,552,709
Germany 18,370,383 8,551,530 50,191
China 1,966,506 6,540,300 11,948,288
Japan 5,727,884 2,083,261 4,703,822
Mexico 5,865 84,828 9,768,972
Other countries 7,597,385 5,002,446 -
------------ ------------ ------------
$ 156,670,052 $ 66,255,935 $ 65,023,982
============= ============ ============
The 2005 license fees result from the recognition of revenue of $79,532,000
as a one-time, noncash license fee and $952,000 resulted from the amortization
over 10.5 years of the $10,000,000 payment received in the MEI settlement (see
Note E). In addition, in 2005 there was an expanded license agreement with BYD
Company Limited ($250,000) and a new license agreement with Guangzhou Wintonic
Battery & Magnet Co. Ltd. ($50,000).
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.
($25,000).
The Company has historically entered into agreements with a relatively
small number of major customers throughout the world. In the year ended June 30,
2005, one customer (Solar Integrated Technology) represented 11% of the
Company's total revenues. In the year ended June 30, 2004, one customer (Ovonic
Hydrogen Systems) represented 15% of the Company's total revenues. In the year
ended June 30, 2003, three customers represented 58% of the Company's total
revenues (21% Ovonic Hydrogen Systems, 21% Cobasys and 16% Rare Earth Ovonic
joint ventures) (see Note E).
80
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE J - Capital Stock
- ----------------------
The voting rights of ECD's three classes of stock are as follows:
Class A Convertible Common Stock - 25 votes per share
Class B Convertible Common Stock - one vote per share
Common Stock - one vote per share
The Class A Common Stock and Class B Convertible Common Stock are
automatically convertible into Common Stock on a share-for-share basis on
September 30, 2005 and are convertible at the option of the holder any time
prior to that date.
As part of an Executive Employment Agreement between ECD and Mr. Robert C.
Stempel, chairman and CEO of ECD, dated January 15, 1999, ECD issued to Mr.
Stempel 430,000 shares of its Common Stock ($.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 ECD and
Mr. Stempel states that the stock fully vests to Mr. Stempel on September 30,
2005, 81 months after the date of the agreement. ECD is amortizing the total
value of the stock grant on a straight-line basis, and recorded compensation
expense of approximately $680,000 in each of the years ended June 30, 2005, 2004
and 2003 in connection with this transaction. Following stockholder approval in
March 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.
As part of an employment agreement among ECD, Ovonic Battery and Mr.
Stanford R. Ovshinsky, president and chief scientist and technologist 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. The agreements are automatically renewable
for successive one-year terms unless terminated by Mr. Ovshinsky or ECD or
Ovonic Battery by giving notice of termination 120 days in advance of renewal
date.
In February 2005, ECD completed an $82,106,212 (net of expenses) private
placement of its Common Stock. ECD sold 5,090,000 shares of Common Stock at a
price of $17.25 per share to institutional investors. On May 16, 2005, ECD used
$19,913,680 of the
81
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE J - Capital Stock (Continued)
- ----------------------------------
net proceeds to exercise its option to purchase for $4.55 per share the
4,376,633 shares of ECD's Common Stock held by Chevron. The Company plans to use
the balance of the net proceeds from this transaction to double the
manufacturing capacity of United Solar Ovonic's triple-junction, thin-film
amorphous silicon photovoltaic products and for general corporate purposes,
including research and development activities.
In April and May, 2005, ECD received $27,168,000 from the exercise of
warrants. The warrants to purchase 1,946,162 shares of ECD Common Stock at an
exercise price of $13.96 per share were exercised by warrantholders who received
the warrants as a result of purchasing units consisting of one share of Common
Stock and one warrant to purchase a share of Common Stock in the private
placements of November 2003 and January 2004.
During the years ended June 30, 2005, 2004 and 2003, ECD issued 1,876,
2,140 and 2,844 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, 2005, 2004
and 2003 of $35,000, $20,000 and $30,000, respectively, relating to these
restricted shares of Common Stock.
NOTE K - Stock Option Plans, Warrants and Other Rights to Purchase Stock
- ------------------------------------------------------------------------
ECD has Common Stock reserved for issuance as follows:
Number of Shares
----------------------------
June 30, 2005 June 30, 2004
------------- -------------
Conversion of Class A Convertible Common Stock 219,913 219,913
Conversion of Class B Convertible Common Stock 430,000 430,000
Stock options 4,410,476 5,377,479
Warrants 1,790,892 3,756,735
Convertible Investment Certificates 5,210 5,210
--------- ---------
TOTAL RESERVED SHARES 6,856,491 9,789,337
========= =========
Equity Compensation Plans Approved by Security Holders
- ------------------------------------------------------
The Company's 1995 Non-Qualified Stock Option Plan (1995 Stock Option
Plan), which expired on January 26, 2005, 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 Committee appointed by the Board of Directors (the "Compensation
Committee") shall determine. Both stock option plans are administered by the
Compensation Committee.
82
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K - Stock Option Plans, Warrants and Other Rights to Purchase
- ------------------------------------------------------------------
Stock (Continued)
- -----------------
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.
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, 2005, 2004
and 2003 with respect to ECD's Stock Option Plans follows:
2005 2004 2003
----------------------- ---------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- ---------- ---------- --------- ---------
Outstanding July 1 3,065,458 $ 16.84 3,167,123 $ 16.97 2,531,753 $ 18.67
Granted 292,500 $ 19.81 45,000 $ 10.95 653,825 $ 10.46
Exercised 1,028,883 $ 12.26 2,400 $ 10.19 - -
Cancelled 60,440 $ 19.23 144,265 $ 18.12 18,455 $ 19.01
--------- ------- --------- ------- --------- -------
Outstanding June 30 2,268,635 $ 19.23 3,065,458 $ 16.84 3,167,123 $ 16.97
========= ======= ========= ======= ========= =======
Exercisable June 30 1,720,345 $ 20.40 2,428,818 $ 17.35 2,002,253 $ 17.66
========= ======= ========= ======= ========= =======
Weighted average fair
value of options granted
during the year $11.73 $ 6.13 $ 6.00
====== ====== ======
The following table summarizes information about stock option plans
approved by the shareholders, outstanding at June 30, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ---------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices As of 6/30/05 Contractual Life Price As of 6/30/05 Price
- --------------------- ------------- ---------------- -------- ------------- ---------
$ 10.05 - $ 15.75 588,650 6.21 $ 11.32 336,660 $ 11.93
$ 16.75 - $ 22.43 402,500 7.75 $ 19.86 106,200 $ 19.91
$ 22.63 - $ 22.63 1,186,585 5.70 $ 22.63 1,186,585 $ 22.63
$ 23.00 - $ 24.38 90,900 4.59 $ 23.35 90,900 $ 23.35
--------- ---- ------- --------- -------
$ 10.05 - $ 24.38 2,268,635 6.16 $ 19.23 1,720,345 $ 20.40
========= ==== ======= ========= =======
83
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K - Stock Option Plans, Warrants and Other Rights to Purchase
- ------------------------------------------------------------------
Stock (Continued)
- -----------------
Equity Compensation Plans Not Approved by Security Holders
- ----------------------------------------------------------
In September 1993, ECD's Compensation Committee authorized the Company to
cancel stock options to purchase 94,367 and 49,630 shares of Common Stock held
by Stanford R. Ovshinsky and Dr. Iris M. Ovshinsky, respectively, which
previously had been granted under the Company's Amended and Restated Stock
Option Plan and to grant stock options to purchase 150,000 (adjusted to 528,088
as of June 30, 2005) and 100,000 (adjusted to 342,643 as of June 30, 2005)
shares of Common Stock to Mr. and Dr. Ovshinsky, respectively, which were
subsequently granted to them pursuant to Stock Option Agreements dated November
1993 (the "Agreements"). The stock options cancelled had an average exercise
price of approximately $18.00 per share. The weighted average exercise price of
the outstanding stock options is $14.99 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 Stock Option Agreements were
amended in November 1995 to provide that options could be exercised for a
limited number of shares of Class A Common Stock.
The number of stock options granted to Mr. and Dr. Ovshinsky was adjusted
pursuant to the antidilution protection adjustment provisions of the Agreements.
For the three years ended June 30, 2005, 2004 and 2003, Mr. Ovshinsky was
granted stock options to purchase 60,198, 66,391 and 0 shares of ECD Common
Stock, respectively. For the three years ended June 30, 2005, 2004 and 2003, Dr.
Ovshinsky was granted stock options to purchase 40,132, 44,261 and 0 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, 2005 and 2004
was $21.27 and $10.12 per share, respectively. The weighted average fair value
of options granted to Mr. and Dr. Ovshinsky during the years ended June 30, 2005
and 2004 was $10.57 and $3.38 per share, respectively.
In June 2005, the Agreements were amended by deleting the antidilution
protection adjustment provision. No further options will be granted to Mr. and
Dr. Ovshinsky under the Agreements. In consideration of the agreements by Mr.
and Dr. Ovshinsky to such amendment, ECD's Compensation Committee approved the
grant of options to Mr. Ovshinsky (100,000 shares) and Dr. Ovshinsky (65,000
shares) under the Company's 2000 Non-Qualified Stock Option Plan.
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.
84
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K - Stock Option Plans, Warrants and Other Rights to Purchase
- ------------------------------------------------------------------
Stock (Continued)
- -----------------
Warrants
- --------
As of June 30, 2005, ECD had outstanding warrants for the purchase of
400,000 shares of Common Stock granted pursuant to a Common Stock Warrant
Agreement 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 fiscal year 2004 (see Note B), ECD
issued warrants to purchase 3,266,254 shares of Common Stock to three
institutional investors and warrants to purchase 90,481 shares of Common Stock
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.
In April and May, 2005, ECD received $27,168,000 from the exercise of
warrants. Warrants to purchase 1,946,162 shares of ECD Common Stock at an
exercise price of $13.96 per share were exercised by warrantholders who received
the warrants as a result of purchasing units consisting of one share of Common
Stock and one warrant to purchase a share of Common Stock in the private
placements of November 2003 and January 2004.
Other Rights to Purchase Stock
- ------------------------------
Pursuant to the Stock Purchase Agreement between ECD and ChevronTexaco (now
Chevron) dated as of May 1, 2000, ChevronTexaco purchased a 20% equity stake in
ECD for $67.4 million. As part of this Stock Purchase Agreement, Chevron
received rights to purchase additional shares of ECD Common Stock or other ECD
securities (ECD Stock).
In consideration of an expanded license, revised joint venture agreements,
and the grant to Chevron of a security interest in our membership interest in
Cobasys, ECD, through its subsidiary Ovonic Battery, received an option to
purchase the 4,376,633 shares of ECD Common Stock owned by Chevron. The option,
approximately $20,000,000, exercisable at $4.55 per share, was exercised on May
16, 2005 and these shares were retired.
NOTE L - Federal Taxes on Income
- --------------------------------
Due to the transaction with Chevron (see Note E) and the recognition of
$79,532,000 in revenue from the license with Cobasys, it is estimated that the
Company will have an alternative minimum tax liability. The Company has used the
effective alternative minimum tax rate of 2% in computing the income tax expense
as of June 30, 2005.
85
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Federal Taxes on Income (Continued)
- --------------------------------------------
The income tax provision or benefit reflected in the consolidated statement
of operations consists of the following:
Year Ending June 30,
----------------------
2005 2004
------- -------
(000's)
Current:
Federal $ 840 $ -
State and local - -
Non-U.S. - -
Deferred:
Federal - -
State and local - -
Non-U.S. - -
----- -----
Total: $ 840 $ -
===== =====
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.
Temporary differences and carryforwards that give rise to deferred tax
assets and (liabilities) are as follows:
June 30,
---------------------------
2005 2004
------------ -----------
(000's)
Deferred tax asset:
Basis difference in intangibles $ 18,360 $ 18,360
Equity losses in subsidiaries 4,056 3,440
Purchase accounting adjustments 5,661 5,661
NOL carryforward 77,538 87,157
R&D credit carryforward 487 487
AMT credit carryforward 726 -
All other 2,712 2,463
---------- ---------
109,540 117,568
Deferred tax liability:
Basis and depreciation differences of property (10,776) (8,002)
All other (98) -
---------- ---------
Net deferred tax asset 98,666 109,566
Valuation allowance (98,666) (109,566)
---------- ---------
Net deferred tax asset $ - $ -
========== =========
86
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - Federal Taxes on Income (Continued)
- --------------------------------------------
The Company's valuation reserve decreased by $10,900,000 in 2005, and
increased by $20,634,000 in 2004 and $10,169,000 in 2003 for the impact of the
2005 taxable income and the 2004 and 2003 net operating losses, temporary
differences and the utilization and expiration of tax carryforwards. The
decrease in the valuation reserve in 2005 is mainly due to the utilization of
net operating losses. The increases in 2004 and 2003 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, 2005, 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
------------------- --------------
2007 $ - $ 276,000
2008 4,443,000 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 4,674,000 -
2022 22,599,000 -
2023 36,846,000 -
2024 67,627,000 -
------------- ---------
Total $ 228,054,000 $ 487,000
============= =========
Due to the history of losses and uncertainties, a valuation reserve has
been provided to fully offset deferred tax assets.
87
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE M - Related Party Transactions
- -----------------------------------
For the three years ended June 30, 2005, 2004 and 2003, ECD incurred
expenses of $199,000, $152,009 and $97,301, respectively, for services rendered
by its directors.
For related party transactions involving United Solar Ovonic LLC, Cobasys,
Ovonyx, Ovonic Fuel Cell and Ovonic Hydrogen Systems, see Note E.
NOTE N - Business Segments
- --------------------------
The Company has three business segments: United Solar Ovonic, Ovonic
Battery and the parent company, ECD. United Solar Ovonic is involved in
manufacturing and selling photovoltaic products. Ovonic Battery is involved in
developing and licensing Ovonic NiMH consumer battery technology. ECD is
involved in developing microelectronics, fuel cells, hydrogen storage,
catalysis, 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)
United Solar Ovonic Consolidating
Ovonic ECD Battery Entries Consolidated*
------------ ------------ ------------ ------------- -------------
Revenues*
Year ended June 30, 2005 $ 58,718 $ 16,841 $ 88,557 $ (7,546) $ 156,570
Year ended June 30, 2004 36,959 16,155 15,230 (2,088) 66,256
Year ended June 30, 2003 14,890 27,062 28,671 (5,599) 65,024
Operating Income (Loss)*
Year ended June 30, 2005 $ (3,240) $ (22,282) $ 68,358 $ 547 $ 43,383
Year ended June 30, 2004 (13,418) (22,877) (13,840) 1,599 (48,536)
Year ended June 30, 2003 (6,355) (20,745) (7,356) 3,821 (30,635)
Interest Income
Year ended June 30, 2005 $ 47 $ 4,180 $ - $ (2,827) $ 1,400
Year ended June 30, 2004 19 3,397 - (2,702) 714
Year ended June 30, 2003 67 3,518 - (24) 3,561
Interest Expense**
Year ended June 30, 2005 $ 3,765 $ - $ - $ (2,988) $ 777
Year ended June 30, 2004 3,481 373 - (2,540) 1,314
Year ended June 30, 2003 818 61 83 (81) 881
88
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE N - Business Segments (Continued)
- --------------------------------------
United Solar Ovonic Consolidating
Ovonic ECD Battery Entries Consolidated*
------------ ------------ ------------ ------------- -------------
Equity in Net Income (Loss) of
Investees Under Equity Method
Year ended June 30, 2005 $ - $ (100) $ - $ - $ (100)
Year ended June 30, 2004 - (644) - - (644)
Year ended June 30, 2003 (6,103) (5,692) - - (11,795)
Depreciation Expense
Year ended June 30, 2005 $ 6,042 $ 2,180 $ 487 $ (640) $ 8,069
Year ended June 30, 2004 6,815 2,228 634 (1,549) 8,128
Year ended June 30, 2003 2,577 1,784 1,136 (1,541) 3,956
Capital Expenditures
Year ended June 30, 2005 $ 2,671 $ 169 $ 280 $ - $ 3,120
Year ended June 30, 2004 868 1,745 934 - 3,547
Year ended June 30, 2003 132 4,220 783 - 5,135
Investments and Advances in
Equity Method Investees
Year ended June 30, 2005 $ - $ - $ - $ - $ -
Year ended June 30, 2004 - - - - -
Year ended June 30, 2003 - 594 - - 594
Identifiable Assets
Year ended June 30, 2005 $ 86,342 $ 223,792 $ 6,315 $(118,386) $ 198,063
Year ended June 30, 2004 82,366 132,097 6,378 (107,529) 113,312
Year ended June 30, 2003 142,036 141,199 10,916 (140,456) 153,695
- --------------------------------------
* Excludes discontinued operations (Ovonic Battery).
** Excludes intercompany interest between ECD and Ovonic Battery.
The composition of the Company's property, plant and equipment, net of
accumulated depreciation, between those in the United States and those in other
countries as of June 30, in thousands, is set forth below:
2005 2004 2003
-------- -------- --------
United States $ 60,328 $ 65,384 $ 70,128
Mexico 591 549 565
Germany 17 13 6
-------- -------- --------
Total property, plant and equipment, net $ 60,936 $ 65,946 $ 70,699
======== ======== ========
89
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE O - Quarterly Financial Data (Unaudited)
- ---------------------------------------------
(In thousands, except for per-share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- ----------- -----------
Year Ended June 30,2005
Revenues $ 22,092 $ 95,674 $ 17,896 $ 20,908 $ 156,570
Operating income (loss) $ (6,113) $ 68,016 $ (11,286) $ (7,234) $ 43,383
Net income(loss) from continuing
operations before extraordinary item $ 1,734 $ 65,309 $ (10,950) $ (6,631) $ 49,462
Loss from discontinued operations, net of tax (386) (438) (300) (269) (1,393)
Extraordinary item, net of tax - 2,266 - (3) 2,263
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 1,348 $ 67,137 $ (11,250) $ (6,903) $ 50,332
========== ========== ========== ========== ==========
Basic net income (loss) per share
From continuing operations $ 0.07 $ 2.56 $ (0.38) $ (0.22) $ 1.80
From discontinued operations (0.02) (0.02) (0.01) (0.01) (0.05)
From extraordinary item - 0.09 - - 0.08
---------- ---------- ---------- ---------- ----------
Basic net income (loss) per share $ 0.05 $ 2.63 $ (0.39) $ (0.23) $ 1.83
========== ========== ========== ========== ==========
Diluted net income (loss) per share
From continuing operations $ 0.07 $ 2.38 $ (0.38) $ (0.22) $ 1.67
From discontinued operations (0.02) (0.02) (0.01) (0.01) (0.05)
From extraordinary item - 0.08 - - 0.08
---------- ---------- ---------- ---------- ----------
Diluted net income (loss) per share $ 0.05 $ 2.44 $ (0.39) $ (0.23) $ 1.70
========== ========== ========== ========== ==========
Year Ended June 30,2004
Revenues $ 14,198 $ 15,662 $ 16,533 $ 19,863 $ 66,256
Operating income (loss) $ (13,803) $ (12,527) $ (11,558) $ (10,648) $ (48,536)
Net income (loss) from continuing
operations $ (13,672) $ (12,856) $ (11,744) $ (10,920) $ (49,192)
Loss from discontinued operations (610) (560) (522) (538) (2,230)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (14,282) $ (13,416) $ (12,266) $ (11,458) $ (51,422)
========== ========== ========== ========== ==========
Basic net income (loss) per share
From continuing operations $ (0.62) $ (0.55) $ (0.47) $ (0.42) $ (2.06)
From discontinued operations (0.03) (0.02) (0.02) (0.02) (0.09)
---------- ---------- ---------- ---------- ----------
Basic net income (loss) per share $ (0.65) $ (0.57) $ (0.49) $ (0.44) $ (2.15)
========== ========== ========== ========== ==========
Diluted net income (loss) per share
From continuing operations $ (0.62) $ (0.55) $ (0.47) $ (0.42) $ (2.06)
From discontinued operations (0.03) (0.02) (0.02) (0.02) (0.09)
---------- ---------- ---------- ---------- ----------
Diluted net income(loss) per share $ (0.65) $ (0.57) $ (0.49) $ (0.44) $ (2.15)
========== ========== ========== ========== ==========
90
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE P - Other Comprehensive Income (Loss)
- ------------------------------------------
The Company's total comprehensive loss was as follows:
Year Ended June 30,
-------------------------------------------
2005 2004 2003
------------ ------------ ------------
Net Income (Loss) $ 50,332,082 $(51,421,674) $(36,198,159)
OTHER COMPREHENSIVE INCOME
(LOSS) (net of taxes):
Net unrealized losses - (431,153) (56,797)
Foreign currency translation
adjustments (38,813) 134,906 115,493
------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 50,293,269 $(51,717,921) $(36,139,463)
============ ============ ============
There was an unrealized holding gain on investments arising during the year
ended June 30, 2003 of $219,147. There were reclassification adjustments of
$431,153 and $275,944 for gains realized in net income for the years ended June
30, 2004 and 2003, respectively. Realized gains on investments of zero, $364,416
and $1,427,241 were recorded in the years ended June 30, 2005, 2004 and 2003,
respectively. The accumulated income (expense) balances of currency translation
adjustments, net of taxes, were $211,586, $250,399 and $115,493 at June 30,
2005, 2004 and 2003, respectively. The effect from foreign currency transactions
were losses of $6,705 and $15,610 for 2005 and 2004, respectively, and a gain of
$40,736 for 2003.
91
Item 9: Changes in and Disagreements on Accounting and Financial Disclosure
- ------ -------------------------------------------------------------------
Changes in Independent Auditors
On October 29, 2003, the Audit Committee of ECD's Board of Directors 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 SFAS 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.
92
Item 9A: Controls and Procedures
- ------- -----------------------
A. Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Under the direction of our Chief Executive Officer and Chief Financial
Officer, we evaluated our disclosure controls and procedures. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, with the exception of the following, 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, 2005. We
identified the following material weakness in our internal control over
financial reporting with respect to accounting for sale transactions:
o a failure to ensure the correct application of SEC Staff
Accounting Bulletin No. 104 - Revenue Recognition when certain
sale transactions were entered into with our international
customers with shipping terms of Delivered Duty Paid.
Solely as a result of this material weakness, we concluded that our
disclosure controls and procedures were not effective as of June 30, 2005.
B. Remediation of Material Weakness in Internal Control
----------------------------------------------------
We are confident that, as of the date of this filing, we have fully
remediated the material weakness in our internal control over financial
reporting with respect to accounting for these sale transactions. The remedial
actions included:
o improving training, education and accounting reviews designed
to ensure that all relevant personnel involved in sale
transactions understand and apply proper revenue recognition
accounting in compliance with SEC Staff Accounting Bulletin
No. 104 - Revenue Recognition; and
o reviewing all shipping terms, other than FOB shipping point,
to ensure proper revenue recognition with current contracts; and
o adding controls around changes to shipping terms, other than FOB
shipping point, and monitoring shipping terms periodically; and
o reviewing all new contracts to ensure that proper revenue
recognition occurs.
Under the direction of our Chief Executive Officer and Chief Financial
Officer, we have evaluated our disclosure controls and procedures as currently
in effect, including the remedial actions discussed above, and we have concluded
that, as of this date, our disclosure controls and procedures are effective.
93
C. Management's Annual Report on Internal Control over Financial Reporting
-----------------------------------------------------------------------
The Company's management is responsible for establishing and maintaining an
adequate system of internal control over financial reporting, as defined in the
Exchange Act Rule 13a-15(f). The management conducted an assessment of the
Company's internal control over financial reporting based on the framework
established by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control - Integrated Framework. Based on the assessment,
the management concluded that, as of June 30, 2005, the Company's internal
control over financial reporting is not effective. Management's assessment of
the effectiveness of the Company's internal control over financial reporting as
of June 30, 2005, has been audited by Grant Thornton LLP, an independent
registered public accounting firm, as stated in their report which is included
herein.
Management identified the following material weakness in internal control
over financial reporting with respect to accounting for certain sale
transactions.
o a failure to ensure the correct application of SEC Staff
Accounting Bulletin No. 104 - Revenue Recognition when certain
sale transactions were entered into with our international
customers with shipping terms of Delivered Duty Paid.
Item 9B: Other Information
- ------- -----------------
Not applicable.
94
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 Principal Occupation and
Name Since Office Business Experience
------- -------- ------ ------------------------
Robert C. Stempel 1995 Chairman of Mr. Stempel, 72, is Chairman of the Board and
the Board, Chief Executive Officer of ECD. He is also the
Chief Executive vice chairman and director of Ovonyx, Inc. and a
Officer and member of the Management Committee of Cobasys
Director LLC. From 1990 until his retirement in 1992, he
was the chairman and chief executive officer of
General Motors Corporation.
Stanford R. Ovshinsky 1960 President, Mr. Ovshinsky, 82, the founder, President and
Chief Chief Scientist and Technologist of ECD, has been
Scientist and an executive officer and director of ECD since
Technologist its inception in 1960. Mr. Ovshinsky is the
and Director principal inventor of ECD's technologies. He is
also the chairman and director of Ovonyx and a
member of the Management Committee of Cobasys.
Mr. Ovshinsky is the husband of Dr. Iris M.
Ovshinsky.
Iris M. Ovshinsky 1960 Vice Dr. Ovshinsky, 78, co-founder and Vice President
President and of ECD, has been an executive officer and
Director director of ECD since its inception in 1960. Dr.
Ovshinsky is the wife of Stanford R. Ovshinsky.
95
Robert I. Frey 2004 Director Mr. Frey, 62, is an assistant professor of global
management and business ethics and serves as the
director of the Business Ethics Center at Seidman
School of Business, Grand Valley State University
in Grand Rapids, Michigan. He 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, South
America and Asian Operations. He also served as
Whirlpool's General Counsel from 1985-1989.
William J. Ketelhut 2004 Director Mr. Ketelhut, 52, was, from 2001-2002, president of
of Control Products at Honeywell International, 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.
Florence I. Metz 1995 Director Dr. Metz, 76, 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.
Stephen Rabinowitz 2004 Director Mr. Rabinowitz, 62, 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 previously held senior level
positions with General Electric Corporation
(1982-1992) and AlliedSignal Corporation (1992-1994).
He serves on the Board of Directors of JLG Industries,
Columbus McKinnon Corp. and The NanoSteel Company.
96
COMPENSATION OF DIRECTORS
Directors who are employees of ECD do not receive additional
compensation for their services as a director. Effective January 1, 2005, the
nonemployee directors of the Company are issued approximately $15,000 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 $1,500 for attendance at each Board
meeting. Members of the Audit Committee are paid $2,500 for attendance at each
Audit Committee meeting and the Audit Committee Chair receives an annual
retainer of $7,500. Members of the Finance Committee are paid $2,000 for
attendance at each Finance Committee meeting and the Finance Committee Chair
receives an annual retainer of $5,000. Members of the Corporate Governance and
Nominating Committee receive $1,500 for attendance at each Corporate Governance
and Nominating Committee meeting; the Committee Chair is paid an annual retainer
of $5,000. Members of the Compensation Committee receive $1,500 for attendance
at each Compensation Committee meeting; the Committee Chair is paid an annual
retainer of $5,000. Nonemployee directors are compensated for teleconference
meetings lasting beyond an hour. Directors who are not employed by the Company
are also reimbursed for all expenses incurred for the purpose of attending board
and committee meetings, including airfare, mileage, parking, transportation and
hotel. Nonemployee directors are eligible to receive stock options under the
Company's stock option plans.
The executive officers of ECD are as follows:
Served as an Executive
Name Age Office Officer or Director Since
----------- --- ------ ------------------------
Robert C. Stempel 72 Chairman of the Board, Chief 1995
Executive Officer and Director
Stanford R. Ovshinsky 82 President, Chief Scientist and 1960(1)
Technologist and Director
Iris M. Ovshinsky 78 Vice President and Director 1960(1)
James R. Metzger 58 Executive Vice President and 2000
Chief Operating Officer
Nancy M. Bacon 59 Senior Vice President 1976
Stephan W. Zumsteg 59 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 95 for information relating to Robert C. Stempel, Stanford R.
Ovshinsky and Iris M. Ovshinsky.
97
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 Texaco 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 November 1977 - February 2004.
Mr. Zumsteg joined ECD in March 1997. He was elected Treasurer in April
1997 and Vice President and Chief Financial Officer in February 2001.
Audit Committee. The Audit Committee consists of William Ketelhut (Chairman),
Florence Metz and Stephen Rabinowitz and met six times during fiscal year 2005.
The Audit Committee assists the Board of Directors in its oversight of the
quality and integrity of the accounting, auditing, and reporting practices of
the Company. The Audit Committee's role includes discussing with management the
Company's processes to manage business and financial risk, and for compliance
with significant applicable legal, ethical, and regulatory requirements. The
Audit Committee is responsible for the appointment, replacement, compensation,
and oversight of the independent registered public accounting firm engaged to
prepare or issue audit reports on the financial statements of ECD. The Audit
Committee relies on the expertise and knowledge of management and the
independent registered public accounting firm in carrying out its oversight
responsibilities. The specific responsibilities in carrying out the Audit
Committee's oversight role are delineated in the Audit Committee Charter, which
is available on our website at www.ovonic.com. The Board of Directors has
determined Mr. Ketelhut, Chairman of the Audit Committee, is an Audit Committee
financial expert and is independent of the Company as defined in the relevant
securities law. This determination is based on a qualitative assessment of Mr.
Ketelhut's level of knowledge based on a number of factors, including his formal
education and other relevant experience.
Corporate Governance. The Board of Directors has adopted Corporate Governance
Principles, a copy of which can be found in the Investor Relations and Corporate
Governance sections of the Company's website at www.ovonic.com. These principles
address, among other things, a director's responsibilities, qualifications,
including independence and access to management and advisors. The Corporate
Governance and Nominating Committee, composed of two independent directors, is
responsible for overseeing and reviewing these principles and recommending to
the Board any changes to the principles.
Executive Session. The independent directors meet regularly without the
presence of the CEO.
Code of Ethics. The Board has adopted a Code of Business Conduct and Ethics,
which sets out basic principles to guide the actions and decisions of all of the
Company's employees, officers and directors. The Code of Business Conduct and
Ethics, which is also available in the Investor Relations and Corporate
Governance sections of our website, covers topics such as honesty, integrity,
conflicts of interest, compliance with laws, corporate opportunities, and
98
confidentiality, as well as numerous other topics. Waivers of the Code of
Business Conduct and Ethics are discouraged, but any waiver that relates to the
Company's executive officers may only be made by the Board or a Board committee
and will be publicly disclosed.
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 ("SEC") 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, 2005, 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.
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, 2005, 2004 and 2003.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation
Compensation Awards
------------ --------------
Securities
Name and Principal Fiscal Underlying All Other
Position Year(1) Salary(2) Options(#) Compensation(3)
------------------ ------- --------- ---------- ---------------
Robert C. Stempel (4) 2005 $ 270,005 - $ 5,438
Chairman and Chief 2004 $ 275,776 - $ 5,778
Executive Officer 2003 $ 300,019 40,000 $ 4,191
Stanford R. Ovshinsky 2005 $ 331,219 160,198(5) $ 8,200
President and Chief 2004 $ 338,295 66,391(6) $ 8,000
Scientist and Technologist 2003 $ 367,668 40,000 $ 10,781
James R. Metzger 2005 $ 290,280(7) - $ 8,200
Executive Vice President and 2004 $ 279,347(8) 25,000 $ 6,069
Chief Operating Officer 2003 $ 141,571(9) 25,000 -
Iris M. Ovshinsky 2005 $ 283,504 105,132(5) $ 13,762
Vice President 2004 $ 289,564 44,261(6) $ 13,562
2003 $ 314,727 25,000 $ 13,562
Nancy M. Bacon 2005 $ 270,005 10,000 $ 10,522
Senior Vice President 2004 $ 275,776 - $ 10,322
2003 $ 289,441 30,000 $ 10,322
- ------------
99
(1) ECD's fiscal year is July 1 to June 30. ECD's 2005 fiscal year ended
June 30, 2005.
(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 with respect to each of the calendar years ended December 31, 2004,
2003 and 2002, respectively, as follows: Mr. Ovshinsky $8,200, $8,000 and
$8,000; Mr. Metzger $8,200, $6,069 and $0; Dr. Ovshinsky $8,200, $8,000
and $8,000; Mrs. Bacon $8,200, $8,000, $8,000; and (ii) the dollar value
of any life insurance premiums paid by ECD in the fiscal years ended June
30, 2005, 2004 and 2003 with respect to term-life insurance for the
benefit of each of the named executives as follows: Mr. Stempel $5,438,
$5,778 and $4,191; Mr. Ovshinsky $0, $0, $2,781; Dr. Ovshinsky $5,562
(all three years); Mrs. Bacon $2,322 (all three years). 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
contributions in the amount of 100% of the first 2% and 50% of the next
4% of each such participant's deferred compensation. These matching
contributions were limited to 4% of a participant's salary, up to
$205,000 for calendar year 2004 and up to $200,000 for calendar years
2003 and 2002. 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) Of the stock options issued to Mr. and Dr. Ovshinsky in the amount of
160,198 shares and 105,132 shares, respectively, 60,198 shares (Mr.
Ovshinsky) and 40,132 shares (Dr. Ovshinsky) were issued pursuant to
Stock Option Agreements (the "Agreements") dated November 1993, as
amended in November 1995, which provided for periodic antidilution
protection adjustments based on changes in the number of outstanding
shares of ECD Common Stock. In June 2005, the Agreements were further
amended by deleting the antidilution protection adjustment provision. No
further options will be granted to Mr. and Dr. Ovshinsky under the
Agreements. In consideration of the agreements by Mr. and Dr. Ovshinsky
to such amendment, the Company's Compensation Committee approved the
grant of options to Mr. Ovshinsky (100,000 shares) and Dr. Ovshinsky
(65,000 shares) under the Company's 2000 Non-Qualified Stock Option Plan.
(6) The stock options were issued to Mr. and Dr. Ovshinsky pursuant to the
Agreements referred to in footnote (5) above.
(7) Includes expenses of $46,121 for travel and lodging imputed as income to
Mr. Metzger.
(8) Includes expenses of $69,967 for travel and lodging imputed as income to
Mr. Metzger.
(9) 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 imputed as income to Mr. Metzger. Prior to joining ECD as an
employee in November 2002, Mr. Metzger served as a nonemployee board
member. Accordingly, the salary for 2003 also includes approximately
$5,000 in annual director fees for calendar year 2002.
100
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all options granted to the named
executive officers during the fiscal year ended June 30, 2005.
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term(1)
--------------------------------------------------------- ----------------------------
Percent of
Number of Total
Securities Options
Underlying Granted Exercise
Options to Employees of Base
Granted in Fiscal Price Expiration
Name (#) Year ($/Sh) Date 5% 10%
-------- ------- ------------ --------- ---------- ----------- -----------
Stanford R. Ovshinsky 160,198(2) 40.78% $ 21.84(3) (4) $ 2,200,308 $ 5,576,013
Iris M. Ovshinsky 105,132(5) 26.76% $ 21.84(3) (6) $ 1,443,624 $ 3,658,427
Nancy M. Bacon 10,000 2.55% $ 16.75 1/26/2015 $ 105,340 $ 266,952
- ---------
(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 SEC, 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) Of the 160,198 shares, 100,000 shares were issued pursuant to ECD's 2000
Non-Qualified Stock Option Plan and 60,198 shares were issued pursuant to
a Stock Option Agreement (the "Agreement") dated November 1993, and
amended in November 1995, which provided for periodic antidilution
protection adjustments based on changes in the number of outstanding
shares of ECD Common Stock. In June 2005, the Agreement was amended by
deleting the antidilution protection adjustment provision. No further
options will be granted to Mr. Ovshinsky under the Agreement.
(3) The exercise price is the weighted average exercise price of all stock
options granted to Mr. and Dr. Ovshinsky in fiscal year 2005.
(4) Of the 160,198 shares, 100,000 shares expire on June 24, 2015 and 60,198
shares expire 12 months after termination of employment other than
voluntary termination or 90 days after voluntary termination.
(5) Of the 105,132 shares, 65,000 shares were issued pursuant to ECD's 2000
Non-Qualified Stock Option Plan and 40,132 shares were issued pursuant to
a Stock Option Agreement (the "Agreement") dated November 1993, and
amended November 1995, which provided for periodic antidilution protection
adjustments based on changes in the number of outstanding shares of ECD
Common Stock. In June 2005, the Agreement was amended by deleting the
antidilution protection adjustment provision. No further options will be
granted to Dr. Ovshinsky under the Agreement.
(6) Of the 105,132 shares, 65,000 shares expire on June 24, 2015 and 40,132
shares expire 12 months after termination of employment other than
voluntary termination or 90 days after voluntary termination.
101
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The following table sets forth all stock options exercised by the named
executives during the fiscal year ended June 30, 2005, and the number and value
of unexercised options held by the named executive officers at June 30, 2005.
Number of Securities Value of Unexercised
Shares Underlying Unexercised in-the-Money Options
Acquired Value Options at June 30, 2005 at June 30, 2005
on Exercise Realized (#) ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
-------- ------------ -------- ------------------------- -------------------------
Robert C. Stempel(1) 129,000 $ 1,012,432(2) 599,000 / 16,000 $4,420,745 / $191,680
Stanford R. Ovshinsky(3) 194,957 $ 1,638,266(4) 652,088 / 116,000 $4,397,695 / $211,680
Iris M. Ovshinsky(5) 146,888 $ 1,251,812(6) 427,643 / 75,000 $2,774,989 / $132,800
James R. Metzger(7) _ _ 33,000 / 27,000 $ 323,710 / $308,240
Nancy M. Bacon(8) 125,200 $ 956,881(9) 115,000 / 22,000 $ 272,015 / $ 200,060
- --------------
(1) Mr. Stempel's exercisable and unexercisable options are exercisable at a
weighted average price of $15.11 and $10.40 per share, respectively.
(2) Of the $1,012,432 value realized, approximately $408,516 was used to cover
withholding taxes associated with the exercise. Mr. Stempel retained
20,000 of the 129,000 shares exercised.
(3) Mr. Ovshinsky's exercisable and unexercisable options are exercisable at a
weighted average price of $15.92 and $20.56 per share, respectively.
(4) Of the $1,638,266 value realized, $579,127 was used to cover withholding
taxes associated with the exercise.
(5) Dr. Ovshinsky's exercisable and unexercisable options are exercisable at a
weighted average price of $16.18 and $20.61 per share, respectively.
(6) Of the $1,251,812 value realized, $442,515 was used to cover withholding
taxes associated with the exercise.
(7) Mr. Metzger's exercisable and unexercisable options are exercisable at a
weighted average price of $12.57 and $10.96 per share, respectively.
(8) Mrs. Bacon's exercisable and unexercisable options are exercisable at a
weighted average price of $20.24 and $13.29 per share, respectively.
(9) Of the $956,881 value realized, approximately $290,414 was used to cover
withholding taxes associated with the exercise.
102
EMPLOYMENT AGREEMENTS
On January 15, 1999, we entered into an Executive Employment Agreement with
Robert C. Stempel and a Restricted Stock Agreement awarding Mr. Stempel 430,000
shares of Class B Common Stock. The Executive Employment Agreement, which
provided for Mr. Stempel to serve as our Executive Director for a term ending
September 30, 2005, was amended in October 2000 to extend the term of his
employment until September 30, 2010. The Executive Employment Agreement is
automatically renewable for successive one-year terms after the initial term,
unless terminated by either Mr. Stempel or ECD by giving written notice of
termination at least 120 days in advance of the renewal date. 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 by the Board of Directors from time to time. The
Executive Employment Agreement also provides for discretionary bonuses based on
Mr. Stempel's individual performance and our financial performance. Mr. Stempel
is also entitled to receive nonwage 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
noncompetition 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 cease effective upon the date of the termination of
his employment.
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. The agreements are automatically renewable
for successive one-year terms unless terminated by Mr. Ovshinsky or ECD or
Ovonic Battery by giving notice of termination 120 days in advance of the
renewal date.
In June 2005, Mr. Ovshinsky's Executive Employment Agreements with ECD and
Ovonic Battery were amended to provide for ECD and Ovonic Battery to have the
benefits of Mr. Ovshinsky's services as a consultant following the termination
of his active employment for consulting fees equal to 50% of the salary payable
to Mr. Ovshinsky at the date of the termination of his active employment and for
Mr. Ovshinsky to retire at any time during his services as a consultant and
receive retirement benefits equal to the consulting fees for the remainder of
his life.
103
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 pretax income (excluding Ovonic
Battery) and 1% of the operating income of Ovonic Battery. Accordingly, Mr.
Ovshinsky will receive $676,000 in bonus based upon Ovonic Battery's financial
results for fiscal year 2005, which will be paid to him no later than September
30, 2005.
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 to purchase 186 shares of Ovonic Battery's common stock,
exercisable at a price of $16,129 per share, representing approximately 6% of
Ovonic Battery's outstanding common stock.
In February 1998, the Compensation Committee recommended and our Board of
Directors approved an Employment Agreement between ECD and Iris M. Ovshinsky.
The purpose of the Employment Agreement is to clearly define Dr. Ovshinsky's
duties and compensation arrangements. The Employment Agreement also provides for
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.
104
Report of the Compensation Committee of the Board of Directors
The Compensation Committee is responsible for establishing compensation
policies which govern both the annual compensation of and grants of stock
options to the executive officers of the Company and its wholly and/or majority
owned subsidiaries and the Company's directors. No member of the Compensation
Committee is a current or former officer or employee of ECD or any of its
subsidiaries. The Committee meets several times during the year to review and
approve management's recommendation regarding stock options and compensation.
Compensation and stock option recommendations are based principally upon
performance and also take into consideration market-based comparisons to 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.
Compensation of Executive Officers
The Compensation Committee considers ECD's financial position and other
factors in determining the compensation of executive officers. These factors
include remaining competitive within the relevant hiring market - whether
scientific, managerial or otherwise - so as to enable ECD to attract and retain
high quality employees, and, where appropriate, linking a component of
compensation to the performance of the 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. ECD has 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. In light of cost-containment
initiatives, ECD instituted a salary freeze for all ECD and Ovonic Battery
employees in August 2003. Additionally, senior executives voluntarily reduced
their salaries by 10 percent effective September 1, 2003. We do not have a
formal bonus program for executives. Mr. Ovshinsky's Executive Employment
Agreement with Ovonic Battery entitles him to receive annual bonuses equal to 1%
of the operating income of Ovonic Battery. Accordingly, Mr. Ovshinsky will
receive $676,000 in bonus, based upon Ovonic Battery's financial results, for
fiscal year 2005, which will be paid to him no later than September 30, 2005.
Stock Options
- -------------
The Compensation Committee considers stock options to be an extremely
effective incentive for executive officers and other employees. Such options
also encourage executives to remain with ECD because they vest over a period of
years. In fiscal year 2005, stock options were granted to Mr. Ovshinsky, Dr.
Ovshinsky, Nancy M. Bacon and Stephan W. Zumsteg. See Item 11 - Option Grants in
Last Fiscal Year for the number of stock options granted to Mr. Ovshinsky, Dr.
Ovshinsky and Mrs. Bacon. On January 26, 2005, Mr. Zumsteg was granted an option
to purchase 10,000 shares of ECD Common Stock at $16.75 per share under the
terms of ECD's 1995 Non-Qualified Stock Option Plan.
105
The employees of our majority-owned subsidiaries also participate in the
broad-based stock option program.
Chief Executive Officer Compensation
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. The Executive Employment Agreement, which provides that Mr. Stempel
serve as an executive of ECD for a term ending until September 30, 2010. See
"Management -- Employment Agreements" which sets forth the terms and conditions
governing Mr. Stempel's employment. Mr. Stempel did not receive a salary
increase or a bonus in fiscal year 2005 and, along with other senior executives,
voluntarily reduced his salary by 10 percent in August 2003.
COMPENSATION AND NOMINATING COMMITTEE
Florence I. Metz, Chairwoman
Robert I. Frey
106
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
-------------------------------------------------------
6/00 6/01 6/02 6/03 6/04 6/05
ENERGY CONVERSION DEVICES, INC. 100.00 110.34 61.83 36.41 44.37 88.20
NASDAQ STOCK MARKET (U.S.) 100.00 55.50 37.13 31.63 43.05 43.54
RUSSELL 2000 100.00 100.66 91.93 90.42 120.59 131.98
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, 2000, 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 Committee on Executive Compensation and the
Performance Graph are not deemed to be filed with the SEC 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.
107
AUDIT COMMITTEE REPORT
The following report of the Audit Committee should not be deemed filed or
incorporated by reference into any other Company filing under the Securities Act
of 1933 or the Securities Exchange Act of 1934, except to the extent the Company
specifically incorporates this report by reference therein.
The Audit Committee is comprised of three directors, all of whom are
independent directors as defined under applicable rules of the SEC and NASDAQ.
The Audit Committee oversees the integrity of the Company's financial
statements on behalf of the Board of Directors; the adequacy of the Company's
systems of internal controls; the Company's compliance with legal and regulatory
requirements; the qualifications and independence of the Company's independent
registered public accounting firms; and the performance of the Company's
independent registered public accounting firms, and of the Company's internal
audit function. The public accounting firm of Crowe Chizek and Company LLC has
been retained to perform the Company's internal audit function.
In fulfilling its oversight responsibilities, the Audit Committee has
direct responsibility, among other things, for:
o confirming the independence of the Company's independent registered public
accounting firms;
o the appointment, compensation and retention of the Company's independent
registered public accounting firms;
o reviewing the scope of the audit services to be provided by the Company's
independent registered public accounting firms, including the adequacy of
staffing and compensation;
o approving nonaudit services;
o overseeing management's relationship with the Company's independent
registered public accounting firms;
o overseeing management's implementation and maintenance of effective
systems of internal and disclosure controls; and
o reviewing the Company's internal audit program.
The Audit Committee reviews the 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. The 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 the
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. During
fiscal year 2005, the Audit Committee met six times with management and the
independent registered public accounting firm and discussed the interim
financial information contained in each quarterly earnings report prior to
public release.
108
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
the Company 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 the
Company's internal controls and the requirements of the Sarbanes-Oxley Act of
2002. The Audit Committee discussed with management the process used to support
the certifications of the Chief Executive Officer and Chief Financial Officer
that are required in periodic reports filed by the Company with the SEC. The
Audit Committee reviewed with the independent registered public accounting firm
their audit plans, audit scope, and identification of audit risks. The Audit
Committee engaged the independent registered public accounting firm and approved
auditor services and fees, including audit, audit-related and nonaudit fees.
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 the audited financial statements as of and for the fiscal
year ended June 30, 2005. Management represented to the Audit Committee that the
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.
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 (and the Board agreed) that the audited
consolidated financial statements be included in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2005, for filing with the SEC.
AUDIT COMMITTEE
William J. Ketelhut, Chairman
Florence I. Metz
Stephen Rabinowitz
109
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 6, 2005.
Number of securities
Number of remaining available for
securities to be future issuance under
issued upon Weighted-average equity compensation
exercise of exercise price of plans (excluding securities
Plan category outstanding options outstanding options reflected in 1st column)
----------------- ------------------- ------------------- ----------------------------
Equity compensation plans
approved by security holders(1) 2,055,620 $19.11 971,910
Equity compensation plans not
approved by security holders 1,170,731(2)(3) $13.88 (2)(3)
---------
Total 3,226,351 $17.21 971,910
=========
- -----------------
(1) These plans consist of the 1995 Non-Qualified Stock Option Plan and 2000
Non-Qualified Stock Option Plan.
(2) Of the 1,170,731 shares issuable upon exercise, options to acquire 528,088
shares (adjusted as of June 30, 2005) and 342,643 shares (adjusted as of
June 30, 2005) were issued to Mr. and Dr. Ovshinsky, respectively, pursuant
to Stock Option Agreements (the "Agreements") dated November 1993, as
amended in November 1995, which provided for periodic antidilution
protection adjustments based on changes in the number of outstanding shares
of ECD Common Stock. In June 2005, the Agreements were further amended by
deleting the antidilution protection adjustment provisions. No further
options will be granted to Mr. and Dr. Ovshinsky under the Agreements.
(3) Of the 1,170,731 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.
110
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.
As of September 9, 2005, the Class A Common Stock together with the 19,749
shares of Common Stock which Mr. and Dr. Ovshinsky own, give Mr. and Dr.
Ovshinsky voting control over shares representing approximately 16.01% of the
combined voting power of our outstanding stock. Following the conversion of the
Class A Common Stock to Common Stock on September 30, 2005, Mr. and Dr.
Ovshinsky will own Common Stock representing .82% of the voting power of our
Common Stock.
The following table sets forth, as of September 9, 2005, information
concerning the beneficial ownership of Class A Common Stock by Mr. and Dr.
Ovshinsky. Under the rules of the SEC, Mr. and Dr. Ovshinsky may each be
considered to beneficially own the shares held by the other.
Class A
Common Stock
Name of Beneficially Total Number of Shares
Beneficial Owner Owned(1)(2) Beneficially Owned Percentage of Class
----------------- ------------- --------------------- -------------------
Stanford R. Ovshinsky 153,420 153,420 69.8%
Iris M. Ovshinsky 65,601 65,601 29.8%
All other executive - - -
officers and directors
as a group (8 persons) ------- ------- -----
Total 219,021 219,021 99.6%
======= ======= =====
- -----------
(1) The balance of the 219,913 shares of Class A Common Stock outstanding,
892 shares, or approximately 0.4%, are owned by other members of Mr. and
Dr. Ovshinsky's family. Neither Mr. nor Dr. Ovshinsky has voting or
investment power with respect to such shares.
(2) On November 10, 1995, the Compensation Committee recommended, and the
Board of Directors approved, an amendment to Mr. and Dr. Ovshinsky's
Stock Option Agreements dated November 18, 1993 (the "Agreements") to
permit Mr. and Dr. Ovshinsky to exercise a portion (126,082 and 84,055
shares, respectively) of their existing Common Stock option for Class A
Common Stock on the same terms and conditions as provided in the
Agreements. The shares of Class A Common Stock issuable upon exercise of
the options under the Agreements, as amended, are not included in the
number of shares indicated 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 112).
111
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 is convertible into Common Stock on a
share-for-share basis at any time at the option of the holder and will be deemed
to be converted into Common Stock on a share-for-share basis on September 30,
2005.
COMMON STOCK
Directors and Executive Officers. The following table sets forth, as of
September 9, 2005, 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 Percent
Name of Beneficial Owner Ownership(1) of Class(2)
------------------------ -------------------- -----------
Robert C. Stempel 1,110,404 (3) 3.77%
Stanford R. Ovshinsky 817,748 (4) 2.80%
Iris M. Ovshinsky 500,753 (5) 1.73%
Nancy M. Bacon 144,015 (6) *
James R. Metzger 47,974 (7) *
Stephan W. Zumsteg 39,000 (8) *
Florence I. Metz 13,405 (9) *
William J. Ketelhut 5,768 (10) *
Stephen Rabinowitz 4,268 (11) *
Robert I. Frey 3,268 (12) *
---------
All executive officers and directors
as a group (10 persons) 2,686,603 8.69%
=========
- -----------
* Less than 1%.
112
(1) Under the rules and regulations of the SEC, 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 SEC, 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 599,000 shares
represented by options exercisable within 60 days.
(4) Includes 652,088 shares represented by options exercisable within 60
days and 153,420 shares of Class A Common Stock which are convertible
into Common Stock. Under the rules and regulations of the SEC, 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 427,643 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 SEC, 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 119,000 shares represented by options exercisable within 60
days.
(7) Includes 43,000 shares represented by options exercisable within 60
days.
(8) Includes 37,000 shares represented by options exercisable within 60
days.
(9) Includes 5,000 shares represented by options exercisable within 60 days.
(10) Includes 2,000 shares represented by options exercisable within 60 days.
(11) Includes 2,000 shares represented by options exercisable within 60 days.
(12) Includes 2,000 shares represented by options exercisable within 60 days.
113
Principal Shareholders. The following table sets forth 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 Percent of
Beneficial Owner Beneficial Ownership Class(1)
- --------------------------- -------------------- ----------
FMR Corp. 2,682,932(2)(3) 9.45%(2)
82 Devonshire Street, E31C
Boston, Massachusetts 02109
- -------
(1) Under the rules and regulations of the SEC, 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) The Company has relied upon information contained in filings with the SEC.
(3) Based upon information contained in a Form 13F filed by FMR Corp. with the
SEC for the period ended June 30, 2005. Based upon a Schedule 13G filed by
FMR Corp. on February 14, 2005, FMR Corp. has sole power to dispose or to
direct the disposition of such shares. 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.
114
Item 13: Certain Relationships and Related Transactions
- ------- ----------------------------------------------
Chevron Corporation. In December 2004, in consideration of the expansion of
the scope of licenses to Cobasys, the 50-50 joint venture between Ovonic Battery
and Chevron, ECD received through its Ovonic Battery subsidiary an option to
purchase 4,376,633 shares of ECD Common Stock owned by a subsidiary of Chevron
at $4.55 per share. The option was exercised in May 2005 for a total purchase
price of $19,913,680 and the shares acquired were cancelled and returned to
authorized and unissued status. ECD received $4,675,000 restructuring payment
from Chevron in December 2004 in connection with the transfer to ECD of
Chevron's interest in Ovonic Hydrogen Systems.
Ovonic Hydrogen Systems (formerly known as Texaco Ovonic Hydrogen Systems).
In December 2004, a subsidiary of Chevron transferred its 50% interest in Ovonic
Hydrogen Systems to ECD in consideration of relieving Chevron of any continuing
funding obligation. Stanford R. Ovshinsky and Robert C. Stempel, directors of
ECD, are members of the Management Committee of Ovonic Hydrogen Systems. For the
year ended June 30, 2005, ECD recorded revenues of $4,089,000 from Ovonic
Hydrogen Systems during the period it was co-owned and funded by Chevron
primarily for 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. For the year
ended June 30, 2005, Ovonic Battery recorded revenue of $2,112,000 from Cobasys
primarily for advanced product development work.
Ovonyx. Stanford R. Ovshinsky and Robert C. Stempel, directors of ECD, are
directors of Ovonyx. ECD owns 41.7% of Ovonyx. ECD recorded revenues of $272,000
from Ovonyx for the year ended June 30, 2005 for services provided to Ovonyx.
ECD made a $100,000 payment to Ovonyx in fiscal year 2005 under a license from
Ovonyx.
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 $200,013 in
salary during the fiscal year ended June 30, 2005.
Benjamin Ovshinsky, Stanford R. Ovshinsky's son, is employed by ECD as its
business representative for the Western United States. He received compensation
of $85,010 during the fiscal year ended June 30, 2005.
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
115
year ended June 30, 2005 and 2004 and fees billed for other services rendered by
Grant Thornton during those periods.
2005 2004
---------- --------
Audit Fees(1) $1,449,000 $605,000
Audit-Related Fees(2) - 52,000
Tax Fees(3) - -
All Other Fees(4) 142,000 31,000
---------- --------
Total Fees $1,591,000 $688,000
========== ========
- --------
(1) Audit Fees -- These are fees for professional services performed by
Grant Thornton 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 that are reasonably related to
the performance of the audit or review of our financial statements.
(3) Tax Fees -- These are fees for professional services performed by
Grant Thornton with respect to tax compliance, tax advice and tax
planning.
(4) All Other Fees -- These are fees for permissible work performed by
Grant Thornton that does not meet the above categories.
During fiscal year 2005, the Audit Committee approved all audit and
nonaudit 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 nonaudit 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 nonaudit 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 nonaudit services to be
performed by the independent registered public accounting firm. The Audit
Committee has considered that the provision of nonaudit services rendered by
Grant Thornton was compatible with maintaining Grant Thornton's independence.
The Audit Committee pre-approves all audit and nonaudit 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.
116
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......................43-46
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts................................120
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 filed March 25 (b)
1999 extending voting rights of the Company's Class A Conmmon 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 filed March (c)
18, 2004, increasing the number of authorized shares from 30,000,000
to 50,000,000
3.4 Bylaws in effect as of August 25, 2005 122
4.1 Agreement among the Company, Stanford R. Ovshinsky and Iris M. (d)
Ovshinsky relating to the automatic conversion of Class A Common
Stock into the Company's Common Stock upon the occurrence of certain
events, dated September 15, 1964
10.1 Executive Employment Agreement dated as of September 2, 1993 between (e)
the Company, Ovonic Battery Company, Inc. and Stanford R. Ovshinsky
117
10.2 Executive Employment Agreement dated as of September 2, 1993 between (f)
the Company and Stanford R. Ovshinsky
10.3 Stock Option Agreementby and between Ovonic Battery Company, Inc. (g)
and Stanford R. Ovshinsky dated as of November 18, 1993
10.4 Stock Option Agreement by and between the Company and Stanford R. (h)
Ovshinsky dated as of November 18, 1993
10.5 Stock Option Agreement by and between the Company and Iris M. (i)
Ovshinsky dated as of November 18, 1993
10.6 Energy Conversion Devices, Inc. 1995 Non-Qualified Stock Option Plan (j)
10.7 Energy Conversion Devices, Inc. 2000 Non-Qualified Stock Option Plan (k)
10.8 Executive Employment Agreement dated as of February 19, 1998 between (l)
the Company and Iris M. Ovshinsky
10.9 Executive Employment Agreement, Restricted Stock Agreement and Stock (m)
Option Agreement dated as of January 15, 1999 between the Company and
Robert C. Stempel
10.10 Amendment No. 2 to Stock Option Agreement by and between the Company 137
and Stanford R. Ovshinsky dated as of June 27, 2005
10.11 Amendment No. 2 to Stock Option Agreement by and between the Company 139
and Iris M. Ovshinsky dated as of June 27, 2005
10.12 Amendment to Executive Employment Agreement dated as of June 27, 141
2005, 2005 between the Company and Stanford R. Ovshinsky
10.13 Amendment to Executive Employment Agreement dated as of June 27, 143
2005 between the Company, Ovonic Battery Company, Inc. and
Stanford R. Ovshinsky
10.14 Amended and Restated Operating Agreement of Cobasys LLC dated as of (n)
December 2, 2004 by and between ChevronTexaco Technology Ventures,
LLC and Ovonic Battery Company, Inc.
21.1 List of all direct and indirect subsidiaries of the Company 145
23.1 Consent of Independent Registered Public Accounting Firm, Grant 146
Thornton LLP
23.2 Consent of Independent Registered Public Accounting Firm, Deloitte & 147
Touche LLP
118
31.1 Certificate of Chief Executive Officer Pursuant to Section 302 of the 148
Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer Pursuant to Section 302 of the 149
Sarbanes-Oxley Act of 2002
32 Certifications of Chief Executive Officer and Chief Financial Officer 150
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 13-D to the Company's Registration Statement on Form
S-1 (Registration No. 2-26772) and incorporated herein by reference.
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
(j) 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.
(k) Filed as Exhibit A to the Company's Proxy Notice and Statement dated
January 19, 2001.
(l) 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.
(m) Filed as Exhibits B, C and D, respectively, to the Company's Proxy
Notice and Statement dated February 23, 1999.
(n) Filed as Exhibit 10.2 to the Company's Current Report on Form 8-K
filed dated December 7, 2004 and incorporated herein by reference.
119
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, 2005 $ 274,000 $ 309,512 $ $ (171,512) $ 412,000
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
Reserve for Losses on Government Contracts:
Year Ended June 30, 2005 $ 1,846,636 $ 447,462 $ $ $ 2,294,098
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
Reserve for Warranty:
Year Ended June 30, 2005 $ 1,945,934 $ $ $ (310,402) $ 1,635,532
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
- -----------------
* Represents amounts applicable to United Solar Ovonic at May 14, 2003
(the date at which United Solar Ovonic was consolidated).
** Represents write-off of uncollectible accounts.
120
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, 2005 By: /s/ Robert C. Stempel
------------------------------------------
Robert C. Stempel,
Chairman and Chief Executive Officer
/s/ Robert C. Stempel Chairman of the Board, Chief September 13, 2005
- ---------------------- Executive Officer and Director
Robert C. Stempel (Principal Executive Officer)
/s/ Stephan W. Zumsteg Vice President and Chief September 13, 2005
- ---------------------- Financial Officer (Principal
Stephan W. Zumsteg Financial and Accounting Officer)
/s/ Stanford R. Ovshinsky President, Chief Scientist and September 13, 2005
- ------------------------- Technologist and Director
Stanford R. Ovshinsky
/s/ Robert I. Frey Director September 13, 2005
- -------------------------
Robert I. Frey
/s/ William J. Ketelhut Director September 13, 2005
- -------------------------
William J. Ketelhut
/s/ Florence I. Metz Director September 13, 2005
- -------------------------
Florence I. Metz
/s/ Iris M. Ovshinsky Director September 13, 2005
- -------------------------
Iris M. Ovshinsky
/s/ Stephen Rabinowitz Director September 13, 2005
- -------------------------
Stephen Rabinowitz
121
Exhibit 31.1
CERTIFICATION OF CEO PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert C. Stempel, Chief Executive Officer of Energy Conversion Devices,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Energy Conversion
Devices, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
/S/ Robert C. Stempel
Date: September 13, 2005 -------------------------------
Robert C. Stempel
Chief Executive Officer
122
Exhibit 31.2
CERTIFICATION OF CFO PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephan W. Zumsteg, Chief Financial Officer of Energy Conversion Devices,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Energy Conversion
Devices, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: September 13, 2005 /S/ Stephan W. Zumsteg
---------------------------------
Stephan W. Zumsteg
Chief Financial Officer
123
Exhibit 32
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Energy Conversion Devices, Inc.
(the "Company") on Form 10-K for the fiscal year ended June 30, 2005, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Robert C. Stempel, Chief Executive Officer of the Company, and
Stephan W. Zumsteg, Chief Financial Officer of the Company, respectively,
do each hereby certify, pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. ss. 1350), that based on his knowledge:
1. The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/S/ Robert C. Stempel
------------------------------
Robert C. Stempel
Chief Executive Officer
September 13, 2005
/S/ Stephan W. Zumsteg
------------------------------
Stephan W. Zumsteg
Chief Financial Officer
September 13, 2005
124
LEADERSHIP INFORMATION SHAREHOLDER INFORMATION
- ------------------------------------------------------------------ --------------------------------------
Robert I. Frey Director and Chair of Corporate Governance Executive Offices
and Nominating Committee, ECD Ovonics; 2956 Waterview Drive
Assistant Professor of Global Management and Rochester Hills, MI 48309
Business Ethics Center, Seidman School of T 248 293 0440
Business, Grand Valley State University, F 248 844 1214
Grand Rapids, Michigan investor.relations@ovonic.com
www.ovonic.com
William J. Ketelhut Director and Chair of Audit Committee, ECD
Ovonics; Former President of Control Independent Auditors
Products, Honeywell International Grant Thornton LLP
Florence I. Metz Director and Chair of Compensation Stock Data
Committee, ECD Ovonics; Retired Project Trading - Energy Conversion
Manager for Business and Strategic Planning, Devices, Inc. is listed on the
Inland Steel, East Chicago, Indiana NASDAQ National Market under
the ticker symbol ENER
Iris M. Ovshinsky Vice President and Director, ECD Ovonics
Stock Transfer Office
Stanford R. Ovshinsky President, Chief Scientist and Technologist Computershare (formerly EquiServe)
and Director, ECD Ovonics is the transfer agent for our common
stock. For information about
Stephen Rabinowitz Director and Chair of Finance Committee, ECD accounts, changes of address, stock
Ovonics; Former Chairman and Chief Executive transfers, and similar matters, you
Officer, General Cable, Inc. can contact Computershare at the
following telephone numbers and
Robert C. Stempel Chairman of the Board and Chief Executive addresses:
Officer, ECD Ovonics o Inside the United States
call 1 877 282 1169
o Outside the United States
call 1 781 575 3400
o Internet address
James R. Metzger Executive Vice President and Chief Operating www.computershare.com
Officer
Address shareholder inquiries to:
Nancy M. Bacon Senior Vice President o First Class, Registered and Certified Mail:
Computershare Investor Relations
Stephan W. Zumsteg Vice President and Chief Financial Officer P.O. Box 43023
Providence, RI 02940
Marvin S. Siskind Vice President and Patent Counsel
o Overnight Courier:
Ghazaleh Koefod Secretary Computershare Investor Services
250 Royall Street
Roger John Lesinski General Counsel Canton, MA 02021
ECVCM-10-KW-05