ITEM 1: BUSINESS OVERVIEW
Energy Conversion Devices, Inc. (the "Company") is a leader in the synthesis of new materials and the development of advanced production technology and innovative products. The Company was founded in 1960 by Stanford R. Ovshinsky and Iris M. Ovshinsky. Under the direction of Stanford R. Ovshinsky, principal inventor, the Company has pioneered the development of products and production technology based on amorphous and related materials, with an emphasis on alternative energy and advanced information technologies. Unlike the simple, ordered, three-dimensional arrays found in most crystalline materials, the Company's proprietary synthetic materials--Ovonic materials--are designed to exploit unique properties that result from engineered chemical and structural disorder. The complex chemical and structural composition of Ovonic materials makes possible the development and commercialization of new products with unique chemical, electrical, mechanical and optical properties and superior performance characteristics.
The Company has used an integrated approach to product development since its inception that seeks to minimize the customary barriers between research and development, production design and product planning. The Company's strategy has been to develop products that have technological advantages over available alternatives and that are capable of being produced commercially on an economically competitive basis. The Company is currently engaged in manufacturing and selling its proprietary products through joint ventures and licensing arrangements as well as through its own internal production operations. The Company is also continuing its development efforts, funded in part through contracts with U.S. Government agencies and the United States Advanced Battery Consortium ("USABC"), to broaden and build upon its product and technological base.
The Company has established a multi-disciplinary business, scientific and technical organization to commercialize products based on its technologies. Its activities range from research and development to manufacturing and selling products as well as designing and building production machinery. The Company has recognized the need to protect its technology and maintains an extensive patent portfolio consisting currently of 349 issued United States patents and 811 foreign counterparts. The patent portfolio includes numerous basic and fundamental patents covering amorphous and related materials as well as patents covering products and production technologies.
The Company conducts its battery business through its 93.5%-owned subsidiary, Ovonic Battery Company, Inc. ("Ovonic Battery"). Sanoh Industrial Co., Ltd. ("Sanoh") and Honda Motor Company, Ltd. ("Honda") own approximately 6.5% of the outstanding stock
of Ovonic Battery. Sanoh has been a shareholder in Ovonic Battery since 1993 and Honda acquired its interest in 1996.
The Company has also formed three joint ventures in the field of alternative energy, GM Ovonic L.L.C. ("GM Ovonic"), United Solar Systems Corp. ("United Solar") and Sovlux Co., Ltd. ("Sovlux"). GM Ovonic was established to manufacture and commercialize Ovonic nickel metal-hydride ("NiMH") batteries for electric vehicle ("EV") applications. The Company's Ovonic Battery subsidiary owns a 40% equity interest in GM Ovonic and General Motors Corporation ("General Motors") owns a 60% equity interest. The Company and Canon Inc. of Japan ("Canon") each own a 49.98% equity interest in United Solar, a joint venture formed for the continued development, manufacture and sale of photovoltaic ("solar energy") products under license from the Company. Mrs. Haru Reischauer, a director of both the Company and United Solar, owns the balance of the outstanding shares of United Solar. The Company also owns a 50% equity interest in Sovlux, a joint venture with State Research and Production Enterprise Kvant ("Kvant"), a leading energy company in Russia. Sovlux was established to manufacture licensed photovoltaic products and batteries in Russia for worldwide sales. In July 1996, the Russian Ministry of Atomic Energy and its various enterprises ("MINATOM") agreed to become an equity partner in Sovlux.
In the field of information processing technology, the Company's Ovonic phase-change erasable optical memory technology is rapidly becoming the international choice of major optical disk manufacturers. The Company's licensees in this area include Matsushita Electric Industrial Co., Ltd. ("Matsushita"), Toshiba Corporation ("Toshiba"), Asahi Chemical Industry Co., Ltd. ("Asahi"), Hitachi, Ltd. ("Hitachi"), Plasmon Limited ("Plasmon"), Sony Corporation ("Sony"), International Business Machines Corporation ("IBM") and Toray Industries, Inc. ("Toray").
The Company is also developing thin-film semiconductor memory technology which has a wide variety of computer applications and is intended to replace conventional DRAM, SRAM and flash EEPROM memory devices.
The Company has entered into a variety of other strategic alliances and license agreements for the commercialization of its technologies.
Certain technical terms used herein are defined in the section captioned "Glossary of Technical Terms" appearing at the end of this Item 1.
MAJOR BUSINESSES
The Company has invented and developed Ovonic materials, products and production technology for use in the fields of energy, information and synthetic materials. The Company's goals have been to develop unique, proprietary and cost-effective products to address important environmental, energy and new materials needs.
ENERGY GENERATION AND STORAGE.
Energy activities, specifically in the areas of rechargeable batteries and photovoltaic systems, represent a major element of the Company's business strategy. Environmentally-safe methods of generating and storing energy have become critical in today's world. The Company's battery and photovoltaic technologies are gaining worldwide recognition, particularly in light of recent concerns about air pollution, global climate change, ozone layer depletion, dependence on imported oil and related concerns involving military action and international stability, balance of payments and economic development.
RECHARGEABLE BATTERIES. The Company's Ovonic Battery subsidiary has developed a proprietary NiMH battery technology using Ovonic materials which has achieved recognition by major battery manufacturers throughout the world. The Company believes that all NiMH batteries are covered by the Company's basic patents. Ovonic Battery currently has over a dozen consumer battery licensees and has established a dominant patent position in the field of Ovonic NiMH batteries, with 41 issued United States patents and 198 foreign counterparts. Additional United States and foreign patent applications are in various stages of preparation and prosecution.
The Ovonic NiMH batteries are being manufactured and sold throughout the world under licensing and joint venture arrangements. Ovonic Battery is also in volume production of the NiMH battery negative electrodes for sale to its licensees and its GM Ovonic joint venture.
Ovonic NiMH batteries store over twice as much energy as standard nickel cadmium ("Ni-Cd") or lead acid batteries of equivalent weight. In addition, Ovonic NiMH batteries have high power, long cycle life, no memory effect and are maintenance free. Moreover, Ovonic NiMH batteries do not contain cadmium or lead, both environmentally hazardous substances. Ovonic NiMH batteries can be made in a wide range of sizes and have a wide range of applications, including hand-held consumer electronics, power tools, utility applications, electric vehicles, including electric two- and three-wheeled vehicles, and industrial batteries.
During the fiscal year ended June 30, 1996, Ovonic Battery produced negative electrodes for sale to certain licensees for assembly into complete batteries for consumer and EV applications and has expanded its production capacity of negative electrodes from approximately 200,000 linear feet per month to approximately 400,000 linear feet per month. Further expansion is expected to double negative electrode production capacity during fiscal year 1997. Additionally, Ovonic Battery is producing batteries for EV
applications engineered and designed for volume production. The Ovonic NiMH battery, by virtue of its engineered materials, possesses superior performance characteristics without the limitations of conventional batteries. Ovonic Battery continues to further improve the performance characteristics of its Ovonic NiMH batteries.
Ovonic Battery is currently focusing on three principal battery markets: rechargeable batteries for portable electronics and consumer applications, electric vehicle batteries and batteries for the propulsion of two- and three-wheeled vehicles. These batteries can also serve industrial applications such as energy storage for remote power generation and battery-operated industrial equipment.
RECHARGEABLE PORTABLE ELECTRONICS AND CONSUMER BATTERIES. The need for high energy density storage batteries has continued to grow in recent years. The push toward portable electronic products--such as cellular telephones, portable computers and cordless tools--has created a large market for rechargeable batteries and has fueled research to investigate new, higher energy density battery systems. Although conventional storage batteries, such as Ni-Cd, have been further improved in design and packaging in recent years, the demand for higher performance batteries continues to increase. At present, conventional Ni-Cd batteries have an energy density of 30-35 watt- hours/kilogram. Ovonic NiMH batteries have an energy density of 80 watt-hours/kilogram. Technology improvements have demonstrated an energy density of over 95 watt-hours/kilogram in prototype batteries with larger energy densities possible.
Ovonic NiMH batteries offer a convenient "drop in" replacement for Ni-Cd batteries in portable electronic and household appliances. Consumer and governmental awareness that cadmium from Ni-Cd batteries represents a serious health problem, if improperly disposed of, has begun to move the industry away from Ni-Cd batteries. The desire of the battery industry to be cadmium-free is also a major factor in the growing interest in Ovonic NiMH batteries.
Ovonic Battery has licensing arrangements with many of the world's largest battery manufacturing companies. Ovonic Battery's proprietary battery technology has been licensed for consumer battery applications to GP Batteries International Limited ("GP Batteries") (formerly Sylva Industries, Ltd.) in Hong Kong, one of the world's largest manufacturers of 9-volt batteries and button cells; Varta Batterie AG ("Varta"), Europe's largest battery company; Sovlux, the Company's joint venture in Russia; Harding Energy Inc. ("Harding"); Eveready Battery Company, Inc. ("Eveready") (formerly Gates Energy Products, Inc.), the largest United States rechargeable consumer battery company; Walsin Technology Corporation ("Walsin") and Asia Pacific Investment Co. ("APIC"), both leading Taiwanese companies; Samsung Electronics Co., Ltd. ("Samsung"), a large electronic equipment manufacturer in Korea; Canon, Hitachi Maxell, Ltd. ("Hitachi Maxell"), Furukawa Battery Co., Ltd. ("Furukawa") and Matsushita Battery Industrial Co., Ltd. ("MBI"), all leading Japanese companies. In addition, the Ovonic battery technology is being used in consumer battery applications by three consumer battery manufacturers based in Japan. A group of battery manufacturers have also recently become Ovonic
Battery licensees. Ovonic consumer batteries are in volume production by most of these companies.
ELECTRIC VEHICLE BATTERIES. The strategic importance of EVs both in the United States and worldwide has increased greatly in recent years. This heightened interest is due to many concerns such as air pollution, global climate change, ozone layer depletion and dependence on imported oil.
Several major automobile manufacturers have active programs underway to develop and commercially market EVs. Since Ovonic NiMH battery technology provides two to two-and-a-half times the range as the same mass of lead acid batteries, several major automobile manufacturers are evaluating Ovonic NiMH battery technology as they prepare to commercialize and market EVs.
General Motors will introduce EV1, the first modern limited-production car designed from the ground up to be an electric vehicle, in the Fall of 1996 at Saturn dealerships in the Los Angeles and San Diego, California, and Phoenix and Tucson, Arizona, areas. Ovonic NiMH batteries manufactured by GM Ovonic will become available in limited quantities in the EV1 later in calendar 1997.
Honda, in addition to its investment in Ovonic Battery, has committed to use Ovonic NiMH batteries in a test fleet of EVs scheduled for introduction in calendar 1997.
Hyundai Motor Co. Ltd. of Korea ("Hyundai") is also introducing a vehicle in calendar 1997 to be powered by Ovonic NiMH batteries.
GM OVONIC. In June 1994, Ovonic Battery and General Motors formed a joint venture, GM Ovonic, to manufacture and sell Ovonic Battery's proprietary NiMH batteries for EV applications to all EV manufacturers on a worldwide basis. GM Ovonic is owned 40% by Ovonic Battery and 60% by General Motors. Ovonic Battery has contributed intellectual property, licenses, production processes, know-how, personnel and engineering services pertaining to Ovonic NiMH battery technology to the joint venture. General Motors' contribution consists of operating capital, plant, equipment and management personnel necessary for the production of batteries.
GM Ovonic is currently manufacturing production-intent batteries and is conducting production scale-up engineering activities at a manufacturing facility in Troy, Michigan.
OTHER EV BUSINESS AGREEMENTS. In addition to its GM Ovonic joint venture, Ovonic Battery has entered into royalty-bearing license agreements for the manufacture of EV batteries and related products outside of the United States with Hyundai, Varta, Sovlux, APIC and GP Batteries. Hyundai, GP Batteries and Sovlux have restricted rights to sell EV batteries in North America. Varta's license includes the right to manufacture EV batteries subject to certain limitations and restrictions on manufacturing in North America.
USABC, a partnership among Ford Motor Company, General Motors and Chrysler Corporation, with funding participation from the United States Department of Energy ("DOE") and the Electric Power Research Institute, was formed in 1991 to develop promising battery technologies for EVs. In 1992, Ovonic Battery was awarded a cost-sharing contract by USABC for development of a "mid-term" NiMH battery for EVs. This contract has, since 1992, been amended and extended several times to enable Ovonic Battery to continue its development efforts by working on advanced materials and battery design for further improving battery performance characteristics and reducing battery cost.
Ovonic Battery believes it has the only battery technology with the capability to meet or exceed USABC's "mid-term" goals for EV battery performance. Ovonic Battery has been designing and building cells and modules for independent evaluation by USABC as well as testing advanced prototype batteries with favorable results.
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(1) Indicates independently verified performance with the exception of life, which is projected based on cycle life results and history of small portable batteries using the same materials and manufacturing process. Based on this battery performance, purpose-built EVs have already achieved:
- More than 370 miles on a single charge - 0 to 60 mph acceleration in 8 seconds - Battery lifetime projected to be equal to the life of the vehicle - Battery quick charge to 60% of its capacity in 15 minutes
Moreover, the Ovonic NiMH battery is robust, maintenance free and free of lead, cadmium and other environmentally hazardous substances.
(2) Indicates performance already achieved on a prototype level at Ovonic Battery. For example, Ovonic Battery licensees in small portable batteries have achieved an energy density as high as 95 watt-hours/kilogram. Prototype batteries of advanced design have demonstrated performance characteristics that satisfy or exceed individual USABC mid-term goals. Optimization of all performance characteristics within a particular cell design is an ongoing activity.
(3) With respect to energy density, Ovonic Battery believes that significant potential for even higher performance exists. Based upon laboratory measurements of advanced materials, optimized construction and designs, Ovonic Battery projects that energy density can be improved to as high as 120-150 watt-hours/kilogram.
During the May 1996 American Tour de Sol race, the Solectria Sunrise electric sedan, powered by Ovonic NiMH batteries, again set a new electric vehicle range record--373 miles on a single charge. Another Solectria vehicle powered by Ovonic NiMH batteries, the Solectria Force, achieved a record 244 miles on a single charge. The Force competed in the production vehicle category and outdistanced all other production competitors.
TWO- AND THREE-WHEELED VEHICLES. Ovonic Battery has installed Ovonic NiMH batteries in scooters converted to electric power and successfully demonstrated the application of its battery for two-wheeled electric vehicles. Ovonic Battery considers two- and three-wheeled electric vehicles a potential large-volume market since these types of vehicles are the primary mode of transportation in many European and developing countries throughout the world, such as India, China and Taiwan. Electric two- and three- wheeled vehicles using Ovonic NiMH batteries should improve the acute air pollution problems in these regions caused by conventional two- and three-wheeled vehicles.
The Company has entered into royalty-bearing license agreements for the manufacture and sale of Ovonic NiMH batteries for two- and three-wheeled vehicles with Walsin, Sanoh and APIC, an affiliate of Taiwan's largest industrial conglomerate, the Formosa Plastics Group.
In June 1996, the Company entered into an agreement with Piaggio Veicoli Europei, S.P.A. ("Piaggio") to design, build and field test electric scooters in Europe. The Company has started to manufacture the Ovonic NiMH batteries for the fleet of scooters. The agreement also calls for technical cooperation and Piaggio's participation in a future joint venture to produce Ovonic NiMH scooter batteries in Europe. Piaggio is the developer of the world-famous Vespa scooter and ranks third among the world's scooter manufacturers.
In July 1996, the Company entered into an agreement with MINATOM for the expansion of its Sovlux joint venture to manufacture Ovonic NiMH batteries for two- and three-wheeled vehicles and address markets in Asia and Europe. Subject to further definitive agreements, MINATOM has agreed to purchase for Sovlux an initial $7 million of new battery production equipment from the Company.
OTHER LARGE BATTERY APPLICATIONS. Several licensees of Ovonic NiMH battery technology, such as Canon and Sovlux, have been granted rights to manufacture and sell large batteries for energy storage applications for electricity generated by photovoltaics, remote power generation, utility applications and battery-operated industrial equipment.
PHOTOVOLTAICS. Photovoltaic (PV) systems provide a clean and simple solid-state method for direct conversion of sunlight into electrical energy. The major barrier to the widespread use of direct solar-to-electrical energy conversion has been the lack of an inexpensive solar cell technology. The Company and its American joint venture, United
Solar, are leaders in thin-film amorphous photovoltaic technology and have pioneered a unique approach to the manufacture of photovoltaic products. Compared to PV products produced by other PV technologies, the ECD/United Solar PV products are substantially lighter, more rugged, require much less energy to produce and can be produced in high volume at significantly lower cost. The Company's proprietary position in photovoltaics ranges from the invention of materials and the development of products to the design and manufacture of production equipment. The Company and United Solar have more than 160 U.S. patents and numerous foreign counterpart patents.
Crystalline silicon was the original materials technology used by the photovoltaic industry. First widely used in space satellites, conventional crystalline silicon solar cells are fabricated in a step-and-repeat, batch process from small wafers of single crystal or polycrystalline silicon semiconductor materials. Notwithstanding the substantial advances that have been made in the development of this technology, the cost of crystalline photovoltaic modules still is high because of high materials costs and because many processing steps are needed to manufacture the modules. Crystalline silicon solar cell modules also are bulky and break easily.
The Company has developed technology to reduce the materials cost in a solar cell using the Company's proprietary thin film, vapor-deposited amorphous silicon (a-Si) alloy materials. Because a-Si absorbs light more efficiently than its crystalline counterpart, the a-Si solar cell thickness can be 50 to 100 times less, thereby significantly reducing material cost. Amorphous cells with different light absorption properties also can be deposited one on top of another to capture the broad solar spectrum more effectively, which increases the energy-conversion efficiency of the multi-cell device and improves performance stability.
The Company and its United Solar joint venture hold current world records for both large- and small-area conversion efficiency for amorphous silicon solar cells, as measured by the DOE's National Renewable Energy Laboratory ("NREL"). Conversion efficiency is the percentage of sunlight that is converted into electricity. In 1994, the DOE and United Solar announced that United Solar had set a world record of 10.2% stabilized energy conversion efficiency for large area (one-square foot) amorphous silicon alloy photovoltaic modules, which the DOE characterizes as a major breakthrough.
To further reduce the manufacturing cost of photovoltaic modules, the Company has pioneered the development of a fundamentally unique approach utilizing proprietary continuous roll-to-roll solar cell deposition process. Using a roll of flexible stainless steel that is typically a half-mile long and 14 inches wide, nine thin-film layers of a-Si alloy are deposited sequentially in a high yield, automated machine to make a continuous, stacked three-cell structure. The roll of solar cell material then is processed further for use in a variety of photovoltaic products. This basic approach that the Company has pioneered is unique in the industry and has significant manufacturing cost advantages.
The Company believes that in high-volume production its photovoltaic modules will be significantly less expensive than conventional crystalline silicon and other thin-film solar
modules produced on glass and can be cost competitive with fossil fuels. The Company and United Solar have also developed unique products for the building industry such as PV shingles and metal roofing products to emulate conventional roofing materials in form, construction, function and installation.
The Company has formed two joint ventures to manufacture photovoltaic modules and systems and to sell them throughout the world.
In 1990, the Company and Canon formed United Solar for the continued development, manufacture and sale of Ovonic solar cells under license from the Company. United Solar is owned 49.98% by the Company and 49.98% by Canon. Canon has invested $50,000,000 in United Solar.
In 1992, a memorandum of understanding was signed by Canon and the Company stating that should United Solar require additional funding beyond what Canon has already agreed to invest, Canon would assist United Solar in finding means of raising funds to continue the expansion of United Solar's operations to profitability which would not result in the dilution of the Company's interest in United Solar.
The Company and United Solar have been producing a variety of PV products and selling PV modules and systems throughout the world. United Solar presently has a 1.5 megawatt ("MW") facility in Troy, Michigan, where it manufactures products for remote power applications, PV powered lighting systems, building-integrated photovoltaic systems, marine applications and grid-integrated systems.
In 1996, United Solar upgraded its manufacturing facility and is more than tripling its production capacity. New machinery and equipment which was designed and built by the Company under an $8 million order from United Solar is planned to be operational late in calendar year 1996. This new machinery and equipment incorporates the world record stabilized conversion efficiency technology and will have annual production capacity of photovoltaic modules capable of producing electricity at the rate of 5MW.
In 1990, the Company also formed Sovlux, a joint venture with Kvant, to manufacture the Company's photovoltaic products in the countries of the former Soviet Union. Sovlux is owned 50% by the Company. In 1990, Kvant entered into machine-building contracts with the Company for the construction of 2MW-capacity photovoltaic manufacturing equipment. The equipment has been installed in Sovlux's plant in Moscow. Kvant contributed this equipment to the joint venture in exchange for its ownership interest in Sovlux. In July 1996, MINATOM agreed to become an equity partner in Sovlux. Under this agreement, and subject to further definitive agreements, MINATOM has agreed to provide operating capital to enable Sovlux to commence production of photovoltaic products as well as provide an initial $6 million for new production equipment to be built by the Company's Production Technology and Machine Building Division. The Company's contribution to the venture consists solely of the technology necessary to support Sovlux's operations. To date, Sovlux has conducted pre-production activities consisting of further manufacturing plant preparation and machinery optimization.
For more than 10 years, the Company has been engaged in research contracts awarded by the DOE and NREL aimed at further development of high-efficiency amorphous silicon-based alloy thin-film solar cells, improvement of photovoltaic manufacturing technologies, and the development and demonstration of photovoltaic systems to be used in roof-top construction in lieu of shingles and other roofing materials. The building industry offers a large opportunity for PV applications. The Company believes that the PV roofing products represent an important opportunity for large-volume production and sale to the building industry, both domestically and abroad.
OTHER ENERGY TECHNOLOGIES. The Company is conducting various research programs sponsored by U.S. Government agencies in the scale-up of the Company's previously developed thin-film alloys for thermally activated hydrogen storage and the use of thin-film microwave deposition techniques to develop new alloys to be used in high-efficiency thermoelectric devices.
INFORMATION TECHNOLOGIES.
The Company has developed a number of key technologies in the fields of information processing, storage and displays. In the past, products have been developed by the Company for data input (image scanners); data output (copier and laser printer drums); data display (active matrix flat panel displays); and data storage (optical and semiconductor memory devices).
OPTICAL MEMORY. The Company is the originator of phase-change erasable (PCE) optical memory disk technology. The Company's Ovonic PCE optical memory stores many times the amount of data as a conventional, removable rigid magnetic disk of the same size, in a convenient, removable disk format. The Company has licensed its optical memory technology to Matsushita, Toshiba, Plasmon, Asahi, Hitachi, Sony, Toray and IBM.
The Company's lead licensee in optical memories, Matsushita, is working to make the Ovonic PCE optical memory technology the international standard. Under its Panasonic brand name, Matsushita introduced a phase change dual ("PD") function disk drive in mid 1995, which uses rewriteable optical disk media that employ the Ovonic optical phase change technology. The Matsushita drive can read conventional CD-ROM disks now widely used for software distribution and multimedia applications as well as read and write to 650 megabyte capacity phase change optical memory disks. Many of the Company's optical memory technology licensees have announced they will also be making PD drives and storage media, and several have begun commercial sales. The products being sold by the Company's licensees have been met with enthusiastic industry and consumer acceptance.
An even higher capacity data storage removable optical memory product, the rewriteable DVD disk, is expected to be commercially introduced in the next several years. The Company's optical memory licensees now producing PD media are expected to
become manufacturers of DVD products. Due to its high data storage capacity, DVD disks will be used for a wide range of applications, including digital television recording.
The Company is working toward commercialization of its technology for high storage capacity rewriteable optical memory material produced by low-cost continuous web-embossing processes. In a related activity, the Company, along with several industry partners, is participating in a U.S. Department of Commerce, National Institute of Standards and Technology, multi-year, multi-million dollar cost-sharing program for the development of tape-based rapid access affordable mass storage products. The Company's optical memory materials technology is being utilized in this program due to its high storage capacity and low-cost manufacturability.
NON-VOLATILE SEMICONDUCTOR MEMORY. The Company, on the basis of its pioneering technology, developed the first non-volatile semiconductor memory, the Ovonic EEPROM, for computer data storage in the 1960s. The Company has advanced and extended that early work and is now developing a proprietary family of high-performance non-volatile semiconductor memory and information processing devices. This technology is designed to provide non-volatile computer data storage with the speed of current, volatile DRAM semiconductor system memory as well as to decrease the cost of production. The technology also offers an opportunity to develop new, fast computer architectures that eliminate the data transfer bottlenecks caused by the current computer memory hierarchy. The Company believes its Ovonic memory can, in a single layer, replace the multiple memory layers which are used in today's personal computers. Another application of the technology is intended for use in the rapidly growing flash EEPROM market. Flash EEPROMs are used in portable electronic devices such as laptop computers, pagers, and cellular telephones as all-solid-state, low-power replacements for magnetic hard disk storage. Still another application of the Company's non-volatile semiconductor memory technology can provide a basis for practical, highly complex, three- dimensional neural network systems for use in advanced artificial intelligence and speech- and image-pattern recognition.
The Company's non-volatile semiconductor memory technology had been developed since September 1994 in conjunction with Micron Semiconductor, Inc. ("Micron") and under a cost-sharing subcontract agreement under Micron's Advanced Research Projects Agency Prime Contract to perform research into advanced SRAM technology. The foregoing arrangements were concluded early in fiscal year 1997 and during fiscal year 1996, respectively.
While the Company licensed its previous flat panel display and image processing technology to its former subsidiary, OIS Optical Imaging Systems, Inc., the Company intends to continue its activities in this field employing new technology.
SYNTHETIC MATERIALS.
The Company has developed a new low-cost, transparent vapor barrier coating for flexible plastic beverage containers and packaging films. The Company has also
developed and demonstrated manufacturing technology and processes for depositing these coatings with cost-effective, roll-to-roll continuous production. The Company's vapor barrier coating technology is environmentally friendly and can be used to extend the shelf life of food, beverages, pharmaceutical and other types of sensitive commercial products. The vapor barrier coating production process deposits an amorphous film that significantly improves the barrier properties of commodity polymer films.
The Company also acquired a nonexclusive, royalty-free license from its former subsidiary, Ovonic Synthetic Materials Company, Inc. ("OSMC"), to make, use and sell products using clear coating and superconductivity technologies previously licensed to OSMC.
PRODUCTION TECHNOLOGY AND MACHINE BUILDING DIVISION AND CENTRAL ANALYTICAL LABORATORY
The Production Technology and Machine Building Division operates as a profit center for the Company's machine-building and engineering activities. It has extensive experience in designing and building proprietary automated production equipment. The Production Technology and Machine Building Division has designed and built for the Company and its licensees five generations of photovoltaic production lines, including United Solar's 5MW PV machinery and equipment, as well as research, development and manufacturing equipment for batteries, vapor barrier coating and other materials technology.
The Company's Central Analytical Laboratory conducts analysis of materials produced by the Company and its joint venture partners and licensees as well as materials produced by other companies. The Company also maintains an advanced materials technology group that supports the efforts of each of the Company's business areas.
RESEARCH AND DEVELOPMENT
The nature of the Company's business has required, and will continue to require, expenditures for research and development to support the commercial activities of the Company. Increasingly, such funds have been forthcoming from United States government agencies, the USABC and the Company's licensees. The materials, production technologies and products being developed and produced by the Company, Ovonic Battery and the Company's 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.
The following is a summary of the Company's consolidated direct expenditures, excluding the allocation of patents, depreciation and general and administrative expenses, for product research and development for the five years ended June 30, 1996. Information for OSMC is included through June 30, 1992. All of the Company's research and development costs are expensed as incurred.
Direct Research and Development Expenditures
SOURCES AND AVAILABILITY OF RAW MATERIALS
Materials, parts, supplies and services used in the Company's 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 the Company's manufacturing operations.
PATENTS AND PROPRIETARY RIGHTS
Since its founding in 1960, the Company's research and development efforts have focused on amorphous, disordered and related materials. The Company has established a multi-disciplinary business, scientific and technical organization ranging from research and development to manufacturing and selling products as well as designing and building production machinery. The Company has recognized the need to protect carefully those activities. The Company's extensive patent portfolio consists of 349 United States patents and 811 foreign counterparts. The Company's patent portfolio includes numerous basic and fundamental patents applicable to the field of amorphous and related materials. The Company invents not only materials but also develops low-cost production technologies and high-performance products. The Company's patents, therefore, cover not only materials but also the production technology and products developed by the Company.
The Company believes that worldwide patent protection is important for it to compete effectively in the marketplace. Certain of the Company's patents have been the subject of legal actions, two of which have been resolved favorably to the Company prior to trial. Other patents of the Company have not been challenged as to validity. See "Item 3: Legal Proceedings" on pages 19-20 of this Report. No assurance can accordingly be given as to either the validity or scope of the patent protection.
CONCENTRATION OF REVENUES
See Note B of the Notes to Consolidated Financial Statements on page 44 of this Report.
BACKLOG
The Company has a $13.7 million backlog of orders as of August 31, 1996 in battery packs and electrodes and machine-building contracts. The backlog at August 31, 1995 was $6.3 million. The Company expects to fill all of its current backlog within the current fiscal year.
COMPETITION
The principal competitive advantages of the Company include its products, production technology, extensive patent portfolio, inventions and research and development activities. In the areas of consumer rechargeable batteries, EV batteries, photovoltaics and information technologies, the Company has entered into joint venture or licensing agreements with established industrial companies that the Company believes possess the financial resources and manufacturing and marketing capabilities to commercialize products based on the Company's technologies.
The Company competes with firms, both domestic and foreign, that manufacture and sell products, as well as firms that perform research and development. Some of these firms are among the largest industrial companies in the world and have well-established product lines, extensive resources and large research and development staffs and facilities.
The Company is currently engaged in manufacturing and selling its proprietary products through joint ventures and licensing arrangements, as well as through its own divisions and internal production operations. The ability of the Company to maintain its competitive leadership in the future will depend not only on continuing product and technological advances but also on the strength and ability of the Company's licensees and joint venture partners.
EMPLOYEES
As of August 31, 1996, the Company had a total of 329 employees, including 171 full-time Ovonic Battery employees. The aforementioned numbers do not include employees of the Company's joint ventures or licensees. The Company considers its relations with its employees to be excellent.
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 within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, the Company's expectations, plans and strategies for the development and commercialization of products based on its technologies. These forward-looking statements are generally identified by the use of such terms as "intends," "expects," "plans," "projects," "estimates," "anticipates," "should" and "believes."
All of such forward-looking statements are based on assumptions which the Company, as of the date of this Annual Report, believes to be reasonable and appropriate. The Company cautions, however, that the actual facts and conditions that may exist in the future could vary materially from the assumed facts and conditions upon which such forward-looking statements are based.
The Company's future business prospects are substantially dependent upon the ability of the Company, its joint venture partners and licensees to develop, manufacture and sell products based on the Company's technologies. Additional development efforts will be required before certain products based on the Company's technologies can be manufactured and sold commercially. There can be no assurance that certain products based on the Company's technologies can be manufactured cost effectively on a commercial scale, that such products will gain market acceptance or that competing products and technologies will not render products based on the Company's technologies obsolete or noncompetitive.
In certain fields, the Company has entered into licensing or joint venture agreements with established companies. Any revenues or profits which may be derived by the Company from these arrangements will be substantially dependent upon the willingness and ability of the Company's licensees and joint venture partners to devote their financial resources and manufacturing and marketing capabilities to commercialize products based on the Company's technologies.
The Company's ability to compete effectively with other companies will depend, in part, on its ability to protect and maintain the proprietary nature of its technology. There can be no assurance that the Company's patents or other proprietary rights will be determined to be valid or enforceable if challenged in court or administrative proceedings or that the Company patents or other proprietary rights, even if determined to be valid, will be broad enough in scope to enable the Company to prevent third parties from producing products using similar technologies or processes. See "Item 3: Legal Proceedings." There can also be no assurance that the Company will not become involved in disputes with respect to the patents or proprietary rights of third parties.
The foregoing factors, as well as other factors discussed in this Annual Report and in other documents and reports filed by the Company with the Securities and Exchange Commission pursuant to the requirements of the federal securities laws, could cause the
actual facts and conditions that may exist in the future to vary materially from the assumed facts and conditions upon which the forward-looking statements contained herein are based.
GLOSSARY OF TECHNICAL TERMS
Certain technical terms used herein have the following meanings:
Amorphous - having an atomic structure that is not periodic.
Battery Memory Effect - an undesirable phenomenon in Ni-Cd batteries where repeated shallow discharge cycles adversely affect battery performance.
Crystalline - having a repeating atomic structure in all three dimensions.
Cycle Life - the number of times a rechargeable battery can be charged and discharged.
Disordered - lacking order. Order is defined over some scale of length such as short range, intermediate range or long-range and may refer to atomic position (structural order), type of atom (compositional order), or other physical properties such as magnetic and electric polarization and others.
DRAM (Dynamic Random Access Memory) - a type of semiconductor memory device used for the main system memory in most computers.
Electrode (battery) - the chemically active portions of a battery.
Energy Density - the amount of energy stored in a specific volume or weight.
Flash EEPROM (Electrically Erasable Programmable Read-Only Memory) - a type of semiconductor memory device that retains stored data even with the power off and which is electrically reprogrammable.
Hydrides - solid materials that store hydrogen.
Non-Volatile - a property of some types of computer memory which retain stored data even when power is removed.
Optical Memory - a computer memory technology that uses lasers to record and play back data stored on a rotating disc.
Ovonic - the term used to describe the Company's proprietary materials, products and technologies.
PCE (Phase Change Erasable) - an optical memory technology in which data is stored or erased on memory media by means of a laser beam that switches the structural phase of a thin-film material, for example, changes between a crystalline and an amorphous state.
Photovoltaic (PV) - direct conversion of light into electrical energy.
Power Density - the amount of power a battery can deliver per unit volume or weight.
Roll-to-Roll Process - a process where a roll of substrate is continuously converted into a roll of product.
Semiconductor - a class of materials with special electrical properties used to fabricate solar cells, transistors, integrated circuits and other electronic devices.
SRAM (Static Random Access Memory) - a type of very fast semiconductor memory device.
Stabilized Energy Conversion Efficiency - the long-term ratio of electrical output to light input. .
Thin Film - a very thin layer of material formed on a substrate.
Vapor Permeation Barrier Coating - a coating that prevents the passage of oxygen and water vapor.
ITEM 2:
ITEM 2: PROPERTIES
A summary of the principal facilities of the Company and Ovonic Battery follows:
The foregoing properties, which are generally of brick and block construction, are devoted primarily to the product development, pre-production and production activities and administrative and other operations of the Company and Ovonic Battery. The Company's Bloomfield Township facility is currently leased to a third party on a month-to-month basis as an educational facility with the Company retaining rights to use this facility. Management believes that the above facilities are generally adequate for present operations.
The Company and Ovonic Battery utilize their substantial amount of testing, analytical, research and development and production equipment in their operations. During the fiscal year ended June 30, 1996, the Company and Ovonic Battery purchased approximately $1.9 million of equipment, excluding additional equipment which was leased from Financing for Science International during the year ended June 30, 1996. The testing, analytical and research and development equipment used in the Company's and Ovonic Battery's development programs are being fully utilized.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
On August 8, 1994, Ovonic Battery filed an action with the United States International Trade Commission ("ITC") seeking an order halting the importation into the
United States of NiMH batteries made by three consumer battery manufacturers based upon Ovonic Battery's United States Patent #4,623,597 covering Ovonic Battery's proprietary technology for NiMH batteries (the "597 Patent"). In December 1994 and January 1995, the three consumer battery manufacturers entered into agreements with the Company and Ovonic Battery amicably settling the differences which led to the ITC action and paving the road for future cooperation in the further development of NiMH batteries.
In June 1996, the Company and Ovonic Battery and SAFT America, Inc. ("SAFT") settled litigation between the parties regarding Ovonic Battery's '597 Patent. SAFT and certain related companies or entities entered into a settlement agreement with the Company and Ovonic Battery and the parties have agreed to dismissal of all claims and counterclaims in the litigation.
The Company is involved in litigation with MBI concerning Ovonic Battery's U.S. Patent No. 5,348,822 ("'822 Patent") covering advanced electrodes for NiMH batteries. Prior to the litigation, the Company had been in discussions with MBI regarding electric vehicle batteries and had informed MBI that the Company intended to enforce its patents. The litigation also involves Toyota Motor Sales U.S.A., Inc. and Toyota Motor Corporation (collectively "Toyota") in view of the use of MBI batteries in Toyota electric vehicles which have been imported into California for fleet testing.
The Company is charging MBI and Toyota with infringement of the '822 Patent and is seeking injunctive relief and damages. MBI and Toyota are challenging the validity and enforceability of the '822 patents. Management of the Company believes that the allegations of MBI are without merit. The Company and Ovonic Battery intend to vigorously defend against the allegations of MBI and intend to press for the relief sought in the counterclaims asserted against MBI and Toyota.
There are no other legal proceedings to which the Company is a party which management believes to be material.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of the Company's Common Stock, par value $.01 per share ("Common Stock"), trade on the NASDAQ National Market System under the symbol "ENER." Shares of the Company's Class A Common Stock, par value $.01 per share ("Class A Common Stock"), are not publicly traded. As of September 13, 1996, there were approximately 2,950 holders of record of Common Stock and four holders of record of Class A Common Stock.
The following table sets forth the reported high and low bid quotations for the Company's Common Stock for the following quarters:
For the Fiscal Year Ended June 30 (in Dollars Per Share)
The above-listed quotations may include inter-dealer prices which may not necessarily represent actual transactions. The Company has paid no cash dividends in the past and no cash dividends are expected to be paid in the near future.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
Set forth below is certain financial information taken from the Company's audited consolidated financial statements (See Item 1: Description of Business).
* Restated. ** Includes $10,500,000 from settlement of International Trade Commission (ITC) action.
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
During the year ended June 30, 1996, the Company had total revenues of $37,312,000. The Company's business strategy to develop and license new products and production technology with third parties generated royalties of $1,321,000 and revenues from R&D agreements of $7,349,000 and revenues from license and other agreements of $12,524,000. Additionally, product sales were $14,828,000 and other revenue was $1,290,000.
The Company had net income for the year ended June 30, 1996 of $1,054,000, primarily due to battery agreements and related revenues thereunder with APIC for $6,024,000, Sanoh for $3,000,000, a group of battery manufacturers for $1,500,000, as well as royalties of $1,321,000 and a gain on the sale of Ovonic Battery common stock of $4,500,000.
As of June 30, 1996, the Company had unrestricted consolidated cash and cash equivalents and investments, consisting of commercial paper maturing in four to six months, of $34,101,000, an increase of $27,842,000 from June 30, 1995. As of June 30, 1996, the Company had consolidated working capital of $43,525,000, compared with a consolidated working capital of $9,311,000 as of June 30, 1995.
The increases in consolidated cash and cash equivalents, investments and consolidated working capital as of June 30, 1996 were primarily due to the receipt by the Company of the net proceeds of $27,781,000 from a registered public offering of 1,650,000 shares of its Common Stock completed in January 1996. The offering was made to a limited number of major institutional investors. During the year ended June 30, 1996, the Company also received $6,940,000 in connection with the exercise of stock options and warrants for the purchase of its Common Stock.
During the year ended June 30, 1996, $7,708,000 cash was used in operations. The difference between the net income of $1,054,000 and the net cash used in operations was principally due to the gain on the sale of Ovonic Battery common stock, depreciation expense, an increase in inventories and the timing of collection of certain revenues included in accounts receivable in the year ended June 30, 1996 from APIC and under other agreements, which payments will be received at a later date, partially offset by the receipt of $3,500,000 from Walsin (which license fee was recorded at June 30, 1995). In addition, during this period $1,887,000 of machinery and equipment was purchased or constructed for the Company's operations.
During the next 12 months, Ovonic Battery is considering the purchase of up to $6,000,000 of machinery and equipment. The machinery and equipment would be utilized
principally for the expansion of Ovonic Battery's manufacturing capacity and would be financed with a portion of the proceeds from the registered public offering.
Some business agreements related to research and development agreements have been entered into by the Company with U.S. government agencies and with industry to develop the Company's products and production technology. The technology developed, together with the applicable patents, are generally owned by the Company. Generally, the agreed-upon fees for these research and development contracts reimburse the Company for its direct costs associated with these projects, together with a portion of indirect costs (patents, operating, general and administrative expenses and depreciation).
The Company has entered into a third-party leasing arrangement with Financing for Science International ("FSI") which provides lease financing for certain equipment used by the Company. As of June 30, 1996, the Company had financed equipment having an acquisition cost of $8,600,000 under this arrangement. The Company's leases with FSI provide for a term of five years. The required lease payments over this period equal the acquisition cost of the leased equipment plus an interest factor. The Company has agreed to purchase certain equipment leased from FSI upon the expiration of the applicable leases for 10% of its acquisition cost. For other equipment, the Company has an option to purchase the equipment for its then market value (but no less than 10% nor more than 20% of its acquisition cost). The Company has an option to purchase certain other leased equipment upon the expiration of the applicable leases for its then fair market value.
While certain programs have a limited terms, the equipment being utilized for these programs has alternative future uses for other programs if, in fact, the programs are not continued beyond their respective terms.
Management believes that funds generated from operations and existing cash and investment balances will be adequate to support and finance planned growth, capital expenditures and company-sponsored research and development programs.
Results of Operations
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
The Company had net income in the year ended June 30, 1996 of $1,054,000 compared to net income of $5,606,000 for the year ended June 30, 1995. Net income for the year ended June 30, 1996 was primarily due to battery agreements and related payments thereunder from APIC for $6,024,000, Sanoh for $3,000,000, a group of battery manufacturers for $1,500,000 and Furukawa for $500,000, as well as royalties of $1,321,000 and a gain on the sale of Ovonic Battery common stock of $4,500,000. Net income for the year ended June 30, 1995 was due principally to $10,500,000 of non-recurring payments received by the Company under three consumer battery agreements
entered into in 1995 in settlement of the ITC action initiated by the Company, as well as agreements with other major companies.
Product sales increased 44% from $10,298,000 in the year ended June 30, 1995 to $14,828,000 in the year ended June 30, 1996 due to increased machine-building revenues for both the Company and Ovonic Battery and increased sales by Ovonic Battery of negative electrodes and battery packs to GM Ovonic.
Royalties increased from $1,205,000 (which included $390,000 of royalties reported by a licensee in 1995 relating to prior periods) in the year ended June 30, 1995 to $1,321,000 in the year ended June 30, 1996, primarily due to royalties earned for use of the Company's phase change optical memory technology. The Company has audit rights to verify the amounts of royalties being reported and paid by its licensees. The Company, based on information received, plans to enforce these audit rights.
Revenues from R&D agreements decreased 35% to $7,349,000 in the year ended June 30, 1996 from $11,366,000 in the year ended June 30, 1995 due to reductions in 1996 revenues recognized under agreements with USABC, NREL and DOE, partially offset by increased revenues recognized under an agreement with Micron. (See NOTE B - Notes to Consolidated Financial Statements.) The reduction in 1996 in revenues under government contracts is due to the completion of R&D agreements and the U.S. Government's deficit reduction program.
Revenues from license and other agreements decreased 30% to $12,524,000 in the year ended June 30, 1996 from $17,932,000 in the year ended June 30, 1995 due to non-recurring revenues of $10,500,000 related to agreements with three consumer battery manufacturers in settlement of the ITC action, and agreements with Walsin, GP Batteries and Eveready in 1995, partially offset by license and other agreements in 1996 with APIC, Sanoh, Furukawa and a group of battery manufacturers. (See NOTE B - Notes to Consolidated Financial Statements.)
The increase in other revenues was due to increased billings in 1996 for services performed by the Company's Production Technology and Machine Building Division, as well as miscellaneous work performed for Ovonic Battery licensees.
The increase in the cost of product sales from $10,391,000 in the year ended June 30, 1995 to $15,504,000 in the year ended June 30, 1996 was principally due to the increased machine-building activities for the Company and increased sales of Ovonic negative electrodes.
The decrease in cost of revenues from R&D agreements in the year ended June 30, 1996 compared to the year ended June 30, 1995 was principally due to decreases in activities in 1996 under the agreements with USABC, NREL and DOE.
The increase in product development and research expenses from $4,636,000 in the year ended June 30, 1995 to $9,151,000 in the year ended June 30, 1996 was due to the aforementioned reduced funding under the agreements with USABC and related increased Ovonic Battery product development and research expenses.
Patent defense costs of $2,625,000 in the year ended June 30, 1995 and $2,467,000 in the year ended June 30, 1996 was due to payment in 1995 of the contingent fees paid to the law firm representing the Company in the ITC action, which led to the three consumer battery agreements in 1995, and expenses incurred in 1996 in connection with the defense and prosecution of litigation involving SAFT and certain related companies or entities and MBI with respect to certain of Ovonic Battery's United States patents covering its proprietary technology for NiMH batteries. The litigation involving SAFT was settled in June 1996.
The change from other income (expense) of $190,000 other expense-net in the year ended June 30, 1995 compared to $5,233,000 of other income-net in the year ended June 30, 1996 was due principally to the $4,500,000 gain on the sale of Ovonic Battery common stock in 1996.
Year Ended June 30, 1995 Compared to Year Ended June 30, 1994
Certain adjustments for 1995 were recorded consisting of a non-cash charge to operations related to the extension of certain stock options. The results for 1995 have been restated to reflect those adjustments. (See Note A - - Notes to Consolidated Financial Statements.) All period-to-period comparisons contained herein refer to restated 1995 results.
The Company had net income in the year ended June 30, 1995 of $5,606,000 compared to a net loss of $3,893,000 for the year ended June 30, 1994. Net income for the year was due principally to the payments received by the Company during the period under three consumer battery agreements entered into in the year ended June 30, 1995, as well as agreements with Walsin, Eveready and Micron, and amended agreements with Hitachi Maxell, Varta and GP Batteries.
Product sales increased 40% from $7,367,000 in the year ended June 30, 1994 to $10,298,000 in the year ended June 30, 1995 due to increased machine-building revenues for both the Company and Ovonic Battery and increased sales by Ovonic Battery of battery packs to GM Ovonic.
Royalties increased 426% from $229,000 in the year ended June 30, 1994 to $1,205,000 in the year ended June 30, 1995, primarily due to royalties received from the three consumer battery manufacturers and from Varta (which included $390,000 of royalties reported by a licensee in 1995 relating to prior periods).
Revenues from R&D agreements increased 18% from $9,608,000 in the year ended June 30, 1994 to $11,366,000 in the year ended June 30, 1995 due to increased revenues
recognized under agreements with DOE and USABC. (See NOTE B - Notes to Consolidated Financial Statements.)
Revenues from license and other agreements increased from $1,925,000 in the year ended June 30, 1994 to $17,932,000 in the year ended June 30, 1995 due to the agreements with Micron, Walsin, Hitachi Maxell, Eveready and three consumer battery manufacturers. (See NOTE B - Notes to Consolidated Financial Statements.)
The increase in other revenues was due to increased billings in 1995 for services performed by the Company's Production Technology and Machine Building Division, as well as miscellaneous work performed for Ovonic Battery licensees.
The increase in cost of product sales from $6,621,000 in the year ended June 30, 1994 to $10,391,000 in the year ended June 30, 1995 was principally due to increased machine-building activities for both the Company and Ovonic Battery and increased cost of sales by Ovonic Battery of battery packs to GM Ovonic.
The increase in cost of revenues from R&D agreements in the year ended June 30, 1995 compared to the year ended June 30, 1994 was principally due to increased activities in 1995 under the aforementioned agreements with DOE and USABC.
The increase in product development and research expenses from $2,671,000 in the year ended June 30, 1994 to $4,636,000 in the year ended June 30, 1995 was due to an increase in work performed in the Company's microelectronics research program and an allocated $500,000 non-cash charge related to the extension of stock options previously issued to employees.
Patent defense costs of $2,625,000 in the year ended June 30, 1995 were due to the payment of the contingent fee made to the law firm representing the Company in the ITC action.
Patent expenses increased from $173,000 in the year ended June 30, 1994 to $408,000 in the year ended June 30, 1995 as a result of increased patent and maintenance costs in 1995.
The increase in operating, general and administrative expenses from $5,250,000 in the year ended June 30, 1994 to $6,474,000 in the year ended June 30, 1995 was caused by a non-cash charge in 1995 related to the extension of stock options previously issued to employees of $1,100,000, increased legal expenses in 1995 (some of which were associated with the ITC action), an accrual in 1995 for the value of non-cash compensation in connection with Ovonic Battery's option agreement with its Chief Executive Officer, together with costs associated with the transfer of technology and other work for GM Ovonic, partially offset by reductions in other operating, general and administrative expenses.
ITEM 8:
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors Energy Conversion Devices, Inc. Troy, Michigan
We have audited the accompanying consolidated balance sheets of Energy Conversion Devices, Inc. and subsidiary (the "Company") as of June 30, 1996 and June 30, 1995, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended June 30, 1996. These consolidated 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.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Energy Conversion Devices, Inc. and subsidiary as of June 30, 1996 and June 30, 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP Detroit, Michigan September 28, 1996
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
See notes to consolidated financial statements.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
* Restated - See Note A.
See notes to consolidated financial statements.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
* Restated - See Note A.
See notes to consolidated financial statements.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (NOTES F and G)
* Restated - See Note A.
See notes to consolidated financial statements.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
* Restated - See Note A.
See notes to consolidated financial statements.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies
Nature of Business
Energy Conversion Devices, Inc. ("ECD") is engaged in the synthesis of new materials and the development of advanced production technology and innovative products with an emphasis on alternative energy and advanced information processing technologies.
Financial Statement Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of ECD and its 93.5%-owned subsidiary (97% as of June 30, 1995) Ovonic Battery Company, Inc. ("Ovonic Battery"), a company formed to develop and commercialize ECD's Ovonic NiMH battery technology (collectively, the "Company"). In the year ended June 30, 1996, ECD sold approximately 3.3% of its interest in Ovonic Battery to another entity and realized a gain on this sale. Due to cumulative losses incurred by Ovonic Battery, no minority interest is recorded in the consolidated financial statements.
ECD also has three investments accounted for by the equity method: (i) United Solar Systems Corp. ("United Solar") (49.98%), ECD's photovoltaic (solar energy) joint venture with Canon Inc. of Japan ("Canon"); (ii) Sovlux Co. Ltd. ("Sovlux") (50%), ECD's Russian joint venture with State Research and Production Enterprise Kvant ("Kvant"); and (iii) GM Ovonic L.L.C. ("GM Ovonic") (40%), Ovonic Battery's joint venture with General Motors Corporation ("General Motors") to manufacture and sell the Company's proprietary NiMH batteries for electric vehicle applications worldwide. See Note D for a discussion of these ventures.
Upon consolidation, all intercompany accounts and transactions are eliminated.
Certain items for the years ended June 30, 1995 and 1994 have been reclassified to be consistent with the classification of items in the year ended June 30, 1996.
In preparing financial statements in conformity with Generally Accepted Accounting Principles, 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. In addition, the Company has certain concentrations of revenues as described in Note B. The Company is impacted by other factors such as the continued receipt of contracts from the U.S. government, its ability to protect and maintain the proprietary nature of its technology, its
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
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.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets," which requires adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995. The new standard requires the impairment of property and intangibles to be considered whenever evidence suggests a lack of comparability.
The Company has not yet adopted the new standard and has not determined what impact, if any, it will have on net income and earnings per share when it does adopt this new standard. Adoption of the new standard will have no effect on the Company's cash flows.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than fiscal years beginning December 15, 1995 and adoption of the recognition and measurement provisions for nonemployee transactions no later than after December 15, 1995. The new standard defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" but would be required to disclose in a note to the financial statements pro forma net income and, if presented, earnings per share as if the Company had applied the new method of accounting.
The accounting requirements of the new method are effective for all employee awards granted after the beginning of the fiscal year of adoption. The Company has not yet determined if it will elect to change to the fair value method, nor has it determined the effect the new standard will have on net income and earnings per share should it elect
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
to make such a change. Adoption of the new standard will have no effect on the Company's cash flows.
Cash Equivalents
Cash equivalents consist of investments in short-term, highly liquid securities having a maturity of three months or less from the date of acquisition.
Investments
Investments consist of commercial paper, classified as available for sale, maturing in four to six months from date of acquisition and are stated at cost, which approximates fair market value.
Financial Instruments
The Company considers the carrying value of its financial instruments to be a reasonable estimate of fair value.
Translation Gains and Losses
Since all of the Company's contracts and transactions are denominated and settled in U.S. dollars, there are no foreign currency gains or losses.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
Accounts Receivable
The following tabulation shows the component elements of accounts receivable from long-term contracts and other programs:
* Includes related-party (United Solar and GM Ovonic) amounts of $1,041,445 and $93,614, respectively. ** Includes related-party (United Solar and GM Ovonic) amounts of $1,860,064 and $634,760, respectively.
Unbilled receivables from commercial customers represent revenues recognized for the present value of license payments to be received in future periods. They also include revenues recognized on the percentage-of-completion method of accounting related to machine-building contracts and amounts earned under certain contracts, which amounts were billed in subsequent months.
Certain contracts with the U.S. government require a retention that is paid upon completion of audit of the Company's indirect rates. There are no material retentions at June 30, 1996 and 1995. Certain U.S. government contracts remain subject to audit. Management does not believe that adjustments which may result from an audit would be material to the financial position or results of operations of the Company.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
Inventories
Inventories of raw materials, work in process and finished goods for the manufacture of negative electrodes, hydride materials, battery packs and other products, together with supplies, are valued at the lower of cost (moving average) or market. Cost elements included in inventory are materials, direct labor and manufacturing overhead. Cost of sales are removed from inventory based on actual costs of items shipped to customers.
Inventories (principally those of Ovonic Battery) are as follows:
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:
Capitalized lease equipment and leasehold improvements are amortized over the shorter of the term of the lease or the life of the equipment or improvement, usually three to five years. Accumulated amortization on capitalized lease equipment as of June 30, 1996 and June 30, 1995 was $2,064,000 and $1,461,000, respectively.
Costs of machinery and other equipment acquired or constructed for a particular research and development project, which have no alternative future use (in other research
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
and development projects or otherwise), are charged to product development and research costs as incurred.
Expenditures for maintenance and repairs are charged to operations. Expenditures for betterments or major renewals are capitalized and are depreciated over their estimated useful lives.
Product Development and Research
Total direct product development and research costs, the majority of which are included in cost of revenues from research and development agreements ("R&D agreements"), were $12,947,000, $11,962,000 and $8,285,000 for the three years ended June 30, 1996, 1995 and 1994, respectively.
Patents
Patent expenditures are charged directly to expense. Total patent expenditures, most of which are allocated for financial statement purposes to cost of revenues from R&D agreements and product development and research, were $945,000, $933,000 and $1,010,000 for the three years ended June 30, 1996, 1995 and 1994, respectively. Patent defense expenditures, which are incurred by the Company to protect its patents and to pursue other companies who may be infringing on the Company's patents, are charged directly to expense and were $2,467,000 and $2,625,000 for the two years ended June 30, 1996 and 1995, respectively. There were no patent defense expenditures in fiscal year 1994.
Product Sales
Product sales include battery-related materials (hydride materials and Ovonic electrodes), contract revenues related to building of battery packs, and revenues related to machine-building contracts. Revenues related to machine-building contracts are recognized on the percentage-of-completion method of accounting using the costs incurred to date as a percentage of the total expected costs. All other product sales are recognized when the product is shipped.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
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 non-refundable 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
A substantial portion of revenues are derived through business agreements seeking to develop and/or commercialize products based upon the Company's proprietary technologies. Such agreements are of two types.
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 research and development that the Company has undertaken pursuant to R&D 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 non-refundable, do not obligate the Company to incur any future
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
costs or require future performance by the Company and are not related to future production or earnings of the licensee. License fees payable in installments are recorded at the present value of the amounts to be received taking into account the collectibility of the license fee. In some instances, a portion of such license fees is contingent upon the commencement of production or other uncertainties. In these cases, license fee revenues are not recognized until commencement of production or the resolution of uncertainties.
In the second type of business agreement, the Company conducts specified research and development projects related to one of its principal technology specializations for an agreed-upon fee ("R&D agreements"). Some of these projects have stipulated performance criteria and deliverables whereas others require "best efforts" with no specified performance criteria. Revenues from R&D agreements that contain specific performance criteria are recognized on a percentage-of-completion basis which matches the contract revenues to the costs incurred on a project based on the relationship of costs incurred to estimated total project costs. Revenue from R&D 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 R&D agreements contemplate reimbursing the Company for costs considered associated with project activities including expenses for direct product development and research, patents, operating, general and administrative expenses and depreciation. Accordingly, expenses related to R&D agreements are recorded as cost of revenues from R&D agreements.
Other Operating Revenues
Other operating revenues consist principally of 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.
Other Non-operating Income
Other non-operating income-net consists of rental income and gains and losses on sale of fixed assets.
Restatement
As disclosed in the Form 10-K/A (Amendment No. 1) to the Form 10-K for the year ended June 30, 1995, certain adjustments for 1995 were recorded consisting of a non-cash charge to operations related to the extension of certain stock options. The results for 1995 have been restated to reflect those adjustments.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE B - Royalties, Revenues from R&D Agreements and License and Other Agreements
The Company has business agreements with third parties for which royalties and revenues are included in the consolidated statements of operations. A summary of the royalties and revenue from such agreements follows:
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE B - Royalties, Revenues from R&D Agreements and License and Other Agreements - (Continued)
The Company historically has entered into agreements with a relatively small number of major customers throughout the world. Revenues from unaffiliated foreign customers represent approximately 41%, 53% and 45% for the years ended June 30, 1996, 1995 and 1994, respectively. There are two major consumer battery manufacturers which represent 12% each, GP Batteries which represents 11% and USABC which represents 15% of total revenue for the year ended June 30, 1995. There are two major customers which represent a total of 27% (11% for GM Ovonic and 16% for APIC) of total revenue for the year ended June 30, 1996.
NOTE C - Non-Refundable Advance Royalties
At June 30, 1996 and 1995, the Company deferred recognition of revenues relating to non-refundable advance royalty payments. Non-refundable advance royalties consist of the following:
During the years ended June 30, 1996 and 1995, $144,148 and $392,430, respectively, of creditable royalties earned were recognized as revenue. There are no obligations in connection with any of the advance royalty agreements which require the Company to incur any additional costs.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures
The Company's investments in its joint ventures, United Solar, Sovlux and GM Ovonic, 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, 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.
Based upon the opinion of legal counsel, the Company believes that it has no obligation to fund any losses that its joint ventures incur beyond the Company's original investment. Additionally, the Company has no financial or other guarantees with respect to liabilities incurred by its joint ventures.
United Solar
In 1990, ECD and Canon entered into a joint venture agreement for the formation of United Solar. The agreement provided that United Solar would be owned 49.98% by ECD, 49.98% by Canon, with the balance held by Mrs. Haru Reischauer, a member of the Board of Directors of ECD. ECD has contributed to United Solar a license in the field of photovoltaics, certain solar cell manufacturing and photovoltaic research and development equipment, leasehold improvements, furniture and fixtures, inventory and supplies. In return for the contribution of these assets, ECD received 49.98% equity interest in United Solar. In return for its 49.98% equity interest in United Solar, Canon has invested $50,000,000.
In 1992, a memorandum of understanding was signed by Canon and ECD stating that should United Solar require additional funding beyond what Canon has already agreed to invest, Canon would assist United Solar in finding means of raising funds to continue the expansion of United Solar's operations to profitability which would not result in the dilution of ECD's interest in United Solar.
ECD performed laboratory, shop, patent and research services for the benefit of United Solar for which ECD received approximately $128,000, $68,000 and $39,000 in the years ended 1996, 1995 and 1994, respectively. ECD also performed administrative services for the benefit of United Solar for which ECD received approximately $23,000 and $44,000 in the years ended 1995 and 1994, respectively. These amounts are included in other revenues. In addition, in the years ended June 30, 1996 and 1995, United Solar billed ECD for approximately $289,000 and $404,000, respectively, for work performed in accordance with the DOE PV Bonus contract.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures - (Continued)
In 1995, ECD received a $7,565,000 order (subsequently amended to $7,996,000) from United Solar for solar cell manufacturing equipment to provide production capacity of solar cells capable of producing 5 Megawatts of electricity on an annual basis. Through June 30, 1996, ECD received payments of $6,694,500 relative to this order. Through June 30, 1996, the Company recognized revenue of $7,548,000 and, at June 30, 1996, had a receivable of $853,500.
The following sets forth certain financial data regarding United Solar that are derived from United Solar's financial statements.
UNITED SOLAR STATEMENTS OF OPERATIONS
UNITED SOLAR BALANCE SHEETS
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures - (Continued)
Sovlux
In 1990, ECD established Sovlux, a joint venture with State Research and Production Enterprise ("Kvant") in Russia, to manufacture photovoltaic and battery products and systems in the countries comprising the former U.S.S.R. and sell them worldwide (except for Japan and India). Sovlux is owned 50% by ECD and 50% by Kvant. In 1990, Kvant entered into machine-building contracts with ECD for the construction of photovoltaic manufacturing equipment and battery equipment. Kvant paid ECD a total of $10,450,000 for these machine-building contracts. At June 30, 1993, ECD had completed these machines and shipped them to Kvant.
The joint venture arrangements provide that Kvant contribute such equipment in an installed and operational condition to the joint venture in exchange for its 50% interest. ECD's contribution to the venture consists solely of the technology necessary to support Sovlux's operations. No tangible assets have been contributed to Sovlux by ECD. Through June 30, 1996, the activities related to Sovlux have been limited to facility preparation at certain Kvant facilities from which Sovlux will operate.
There are no financial statements available for Sovlux since the December 31, 1993 financial statements.
GM Ovonic
In June 1994, Ovonic Battery and General Motors formed a joint venture for the manufacture and commercialization of Ovonic NiMH batteries for electric vehicles. General Motors has a 60% interest and Ovonic Battery has a 40% interest in this joint venture. Ovonic Battery has contributed intellectual property, licenses, production processes, know-how, personnel and engineering services pertaining to Ovonic NiMH battery technology to the joint venture. General Motors' contribution consists of operating capital, plant, equipment and management personnel necessary for the volume production of batteries.
GM Ovonic is currently manufacturing production-intent batteries and is conducting production scale-up engineering activities at a manufacturing plant in Troy, Michigan.
In October 1995, the Company received a $3,700,000 order, as amended, from GM Ovonic for battery manufacturing equipment. As of June 30, 1996, the Company
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures - (Continued)
received payments of $1,786,000 under this order and recognized revenue of $2,129,000. A receivable in the amount of $343,000 remains to be paid.
During the years ended June 30, 1996 and 1995, the Company had revenues, including the aforementioned machine-building revenues, of $4,118,000 and $2,372,000, respectively, related to sales of products to GM Ovonic, General Motors and related companies and for reimbursement of services performed for General Motors and related companies.
The following sets forth certain financial data regarding GM Ovonic derived from GM Ovonic's unaudited financial statements:
GM OVONIC STATEMENTS OF OPERATIONS (000's)
GM OVONIC BALANCE SHEETS (000's)
The Company has recorded its investment in GM Ovonic at zero, which represents the net book value of the Company's assets transferred to GM Ovonic. Additionally, the
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures - (Continued)
Company has made no financial or other guarantees with respect to liabilities incurred by GM Ovonic. The Company will continue to carry its investment at zero and will recognize over a period of years its share, if any, of the then equity of GM Ovonic and will recognize its share of the venture's profits or losses on the equity method of accounting.
NOTE E- Capitalized Lease Obligations
A summary of the Company's short-term borrowings, long-term debt and capitalized lease agreements is as follows:
Financing Lease
In 1990, the Company entered into a 10-year financing lease transaction relating to certain buildings and land. The terms of the transaction included an option for the Company to purchase the buildings and land in the sixth year of the lease for $2,150,000, increasing 5% each year thereafter. The Company has not exercised the option.
Capitalized Leases
In 1992, the Company entered into a third-party leasing arrangement with Financing for Science International ("FSI") for the financing of certain equipment. Ovonic Battery has financed equipment purchases for a total of $8,600,000 through June 30, 1996. The terms of the agreement require repayment over five years at an interest rate ranging between 5% and 13%.
The 1992 FSI agreement is secured by a security interest in the Company's USABC contract and by Ovonic Battery's plant and equipment. In addition, ECD has guaranteed Ovonic Battery's obligations under this agreement and has provided a first security interest
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE E - Capitalized Lease Obligations - (Continued)
to FSI in the Company's unencumbered plant and equipment. In connection with this agreement, Ovonic Battery has assigned all receivables from GP Batteries' purchase orders as additional collateral.
In 1994, the Company entered into a $1,250,000 sale and lease-back transaction with FSI for a vapor barrier coating machine, with a net book value of zero, at an interest rate of approximately 13%. The Company recorded a deferred gain of $1,250,000 in the year ended June 30, 1995 and is amortizing this deferred gain over the term of the lease. During the years ended June 30, 1996 and 1995, the Company amortized approximately $417,000 and $208,000, respectively, of this deferred gain.
The Company has agreed to purchase certain equipment leased from FSI upon expiration of the lease for 10% of its acquisition cost. For other equipment, the Company has an option to purchase the equipment for its then fair market value (but no less than 10% nor more than 20% of its acquisition cost), plus any applicable sales, excise or other taxes imposed as a result of such sale.
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, 1996, 1995 and 1994 was approximately $1,623,000, $941,000 and $431,000, respectively.
Future minimum payments on obligations under capital leases, other long-term debt and noncancellable operating leases expiring in each of the five years subsequent to June 30, 1996 are as follows:
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE F - Capital Stock
The voting rights of ECD's two classes of stock are as follows:
Class A Convertible Common Stock - 25 votes per share
Common Stock - one vote per share
The Class A Convertible Common Stock is automatically convertible into Common Stock on a share-for-share basis on September 14, 1999 and is convertible at the option of the holder any time prior to that date.
As part of an employment agreement among ECD, Ovonic Battery and Mr. Ovshinsky, 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 (1) any sale, lease, exchange or other transfer of all or substantially all of ECD's assets; (2) the approval by ECD stockholders of any plan or proposal of liquidation or dissolution of ECD; (3) the consummation of any consolidation or merger of ECD in which ECD is not the surviving or continuing corporation; (4) 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; (5) changes in the constitution of the majority of the Board of Directors; (6) the holders of the Class A Convertible Common Stock ceasing to be entitled to exercise their preferential voting rights other than as provided in ECD's charter and (7) 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 initial term of the employment agreement is six years and shall be automatically renewed every year thereafter unless terminated by the Company.
During the years ended June 30, 1996, 1995 and 1994, ECD issued restricted shares of 6,899, 3,733 and 31,148 (of which 28,518 shares were issued for future services), respectively, as compensation to employees, consultants, contractors and directors. ECD recorded compensation expense for the years ended June 30, 1996, 1995 and 1994 of $59,000, $48,000 and $48,000, respectively, relating to these restricted shares of Common Stock.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - Warrants and Options to Purchase Stock
The Company has Common Stock reserved for issuance as follows:
Stock Option Plans
The Company's 1976 Amended and Restated Stock Option Plan (the "Amended Plan"), 1987 Stock Option and Incentive Plan ("1987 Stock Option Plan") and the 1995 Non-Qualified Stock Option Plan ("1995 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. All three stock option plans are administered by the Compensation Committee.
Options under the Amended Plan and the 1987 Stock Option Plan expire six years from the date of grant (five years in the case of Incentive Stock Options as defined under Section 422A of the Internal Revenue Code granted to persons owning stock possessing more than 10% of the total combined voting power of all classes of stock of the Company). Options under the 1995 Stock Option Plan expire no later than 10 years from the date of grant. Stock options under all three plans may not be exercised during the first six months of the grant. Thereafter, options may be exercised cumulatively each year, starting at the end of six months after grant of the option, at a predetermined rate of the number of shares of the Common Stock subject to the option. 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 option holders against dilution.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - Warrants and Options to Purchase Stock - (Continued)
A summary of the transactions during the years ended June 30, 1996, 1995 and 1994 with respect to the Company's Amended Plan, 1987 Stock Option Plan and 1995 Stock Option Plan follows:
In November 1993, stock options to purchase 94,367 shares of Common Stock held by Stanford R. Ovshinsky, and stock options to purchase 49,630 shares of Common Stock held by Dr. Iris M. Ovshinsky, issued under the aforementioned Amended Plan, were canceled and new stock options, covering 150,000 (adjusted to 211,287 as of June 30, 1996) shares of Common Stock in the case of Mr. Ovshinsky and 100,000 shares (adjusted to 140,519 as of June 30, 1996) of Common Stock in the case of Dr. Ovshinsky, were granted by ECD. The stock options canceled had an average exercise price of approximately $18.00 per share. The weighted average exercise price of the outstanding stock options is $10.14 per share. The number of stock options are adjusted pursuant to the antidilution provisions of the stock option grants. 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 as adjusted for the antidilution provisions during the 18-month period following the grant; and (ii) thereafter, the fair market value of any additional shares as adjusted for the antidilution provisions, determined quarterly.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - Warrants and Options to Purchase Stock - (Continued)
In February 1995, the Compensation Committee of the Board of Directors extended the exercise period of certain stock options granted in March 1989. These options were extended on the same terms and conditions, including continuation of the exercise price at fair market value. The Committee extended the options in order to afford the holders of said options the six-year exercise period which had previously been interrupted for a period of time due to the Company's inability to issue registered shares upon exercise of options.
Subsequent to the issuance of the Company's 1995 financial statements, it was determined that, in accordance with generally accepted accounting principles, the difference between the aggregate exercise price and the fair market value of the Company's stock at February 1995, totaling $1,600,000, should be recorded as a non-cash charge to operations.
Warrants
ECD has outstanding warrants to purchase 174,966 shares of Common Stock in connection with private placements of Common Stock as well as warrants to purchase 239,000 shares of Common Stock in connection with services rendered. The warrants are currently exercisable at a weighted average price of $10.45 per share. The exercise price of certain of the warrants may be reduced in the future pursuant to certain antidilution provisions.
The Company recognized expenses and additional paid-in capital of $318,350 for the year ended June 30, 1994, based on an independent appraisal of ECD warrants and Ovonic Battery stock options.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE H - Net Income (Loss) Per Share
The Company uses the treasury stock method to calculate primary and fully-diluted earnings per share. Common stock equivalents consist of stock options and warrants. Weighted average number of shares outstanding and primary earnings per share for the three years ended June 30 are computed as follows:
* Restated
The primary and fully-diluted earnings per share for fiscal year 1996 are the same since the ending market value of ECD Common Stock at June 30, 1996 bof $22.75 per share approximates the average market value per share of ECD Common Stock of $20.23 during fiscal year 1996. The use of the ending market value of $22.75 per share results in a slightly higher pro forma weighted average number of shares for common stock equivalents for purposes of fully-diluted earnings per share; however, it does not result in a different earnings per share compared to primary earnings per share.
The difference between the primary earnings per share and the fully-diluted earnings per share for fiscal 1995 is the result of using the ending market value of $16.375 per share versus the average market value of $13.56. This results in pro forma weighted average shares for common stock equivalents of 1,938,977 and a fully-diluted earnings per share of $.56.
NOTE I - Federal Taxes on Income
At June 30, 1996 and 1995, the Company has approximately $35,639,000 and $34,821,000, respectively, of net deferred tax assets, consisting primarily of $33,782,000 and $32,772,000, respectively, due to net operating loss carryforwards, $1,857,000 and $2,049,000, respectively, due to tax credit carryforwards. However, a valuation reserve
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE I - Federal Taxes on Income - (Continued)
of the same amount is required due to the Company's operating history and uncertainty regarding the future realizability of the net operating loss carryforwards.
The Company's valuation reserve was increased by $818,000 in 1996 and decreased by $505,000 in 1995 for the impact of the 1996 and 1995 net operating income (losses), temporary differences and the expiration of tax.
At June 30, 1996, the Company's remaining net tax operating loss carryforwards and tax credit carryforwards expire as follows:
NOTE J - Related Party Transactions
For the three years ended June 30, 1996, 1995 and 1994, ECD incurred expenses of $90,514, $36,440 and $135,865, respectively, for services rendered by its directors (and/or their related companies).
For related party transactions involving United Solar and GM Ovonic see Note D.
NOTE K - Business Segments
The Company has two business segments, its subsidiary, Ovonic Battery, and the parent company, ECD. Ovonic Battery is primarily involved in developing and commercializing battery technology. ECD is primarily involved in photovoltaics,
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE K - Business Segments - (Continued)
microelectronics and machine building. General corporate expenses, interest expense and interest income are classified in the ECD business segment.
The Company's operations by business segment were as follows:
Financial Data by Business Segment (in thousands)
* Includes intercompany interest of $432 (for the period from April 1, 1996 to June 30, 1996) charged by ECD to Ovonic Battery in accordance with the agreements between the parties. ** Restated.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The composition of the Board of Directors of the Company is as follows:
***
Mr. Ralph F. Leach served as Chairman of the Board of Directors from 1977 to 1995 and was appointed Chairman Emeritus in December 1995. Until his retirement in December 1977, Mr. Leach was for more than five years Chairman of the Executive Committee of J.P. Morgan & Co. and Morgan Guaranty Trust Company of New York, institutional bankers, and is presently a member of that company's Directors' Advisory Council.
Dr. Robert R. Wilson, served as a director to the Company from 1978 to 1993 and was appointed Director Emeritus in January 1994. Until his retirement in 1978 Wilson was the founder and the director for more than ten years of the Fermi National Accelerator Laboratory. He was formerly President of the American Physical Society. Since retirement, Dr. Wilson has been a Professor Emeritus of physics at Cornell University, Columbia University and the University of Chicago.
The executive officers of the Company are as follows:
--------------- (1) The predecessor of the Company was originally founded in 1960. The present corporation was incorporated in 1964 and is the successor by merger of the predecessor corporation.
See above for information relating to Stanford R. Ovshinsky, Iris M. Ovshinsky, Robert C. Stempel, Nancy M. Bacon and Hellmut Fritzsche.
Subhash K. Dhar joined the Company in 1981 and has held various positions with Ovonic Battery since its inception in October 1982. Mr. Dhar has served as Chief Operating Officer of Ovonic Battery since 1986 and President since 1987.
Kenneth A. Pullis joined the Company in 1982 as Controller. Mr. Pullis was elected Acting Chief Financial Officer and Treasurer of the Company in August 1993.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The following tables set forth the compensation paid by the Company during its last three fiscal years to its Chief Executive Officer and each of its other four most highly compensated executive officers for the fiscal year ended June 30, 1996.
SUMMARY COMPENSATION TABLE
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(1) The Company's fiscal year is July 1 to June 30. The Company's 1996 fiscal year ended June 30, 1996. (2) Amounts shown include compensation deferred under the Company's 401 (k) Plan. Does not include taxable income resulting from exercise of stock options. (3) "All Other Compensation" is comprised of (i) contributions made by the Company to the accounts of each of the named executive officers under the Company's 401(k) Plan with respect to each of the fiscal years ended June 30, 1996, 1995 and 1994, respectively, as follows: Dr. Ovshinsky $2,500, $1,500 and $231; Mrs. Bacon $4,500, $4,096 and $2,965; Mr. Dhar $4,500 (1996) and $3,808 (1995); (ii) the dollar value of any life insurance premiums paid by the Company in the fiscal years ended June 30, 1996, 1995 and 1994, respectively, with respect to term-life insurance for the benefit of each of the named executives as follows: Mr. Ovshinsky $10,017, $8,798 and $8,122; Dr. Ovshinsky $3,226 for each of the three fiscal years; Mr. Stempel $3,159 (1996); Mrs. Bacon $1,294 for 1996 and $783 for each of 1995 and 1994; and Mr. Dhar $783, $459 and $420. Under the 401 (k) Plan, which is a qualified defined-contribution plan, the Company makes matching contributions periodically on behalf of the participants in the amount of 50% of each such participant's contributions. These
matching contributions are limited to 3% of a participant's salary, up to $150,000 for 1996. Prior to October 1994, the matching contributions were limited to 2% of a participant's salary. (4) In September 1993, Mr. Ovshinsky entered into separate employment agreements with the Company and Ovonic Battery. See "Employment Agreements." The amounts indicated include compensation received by Mr. Ovshinsky pursuant to the Employment Agreements with the Company and Ovonic Battery. (5) Does not include option to purchase shares of Ovonic Battery. See "Employment Agreements." (6) Mr. Stempel joined the Company in December 1995. The salary reported is for the six month period January 1996 - June 1996. Options indicated for 1994 and 1995 were granted to Mr. Stempel prior to his becoming an executive officer of the Company.
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, 1996.
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(1) The potential realizable value amounts shown illustrate the values that might be realized upon exercise immediately prior to the expiration of their term using 5% and 10% appreciation rates as required to be used in this table by the Securities and Exchange Commission, compounded annually, and are not intended to forecast possible future appreciation, if any, of the Company'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.
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, 1996 and the number and value of unexercised options held by the named executive officers at fiscal year end.
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(1) Mr. Ovshinsky's exercisable and unexercisable options are exercisable at a weighted average price of $10.83 per share and $11.85 per share, respectively.
(2) Dr. Ovshinsky's exercisable and unexercisable options are exercisable at a weighted average price of $10.75 per share and $11.86 per share, respectively.
(3) Mr. Stempel's exercisable and unexercisable options are exercisable at a weighted average price of $12.13 and $15.54 per share, respectively.
(4) Mrs. Bacon's exercisable and unexercisable options are exercisable at a weighted average price of $9.82 per share and $13.73 per share, respectively.
(5) Mr. Dhar's exercisable and unexercisable options are exercisable at a weighted average price of $15.57 per share and $16.75 per share, respectively.
EMPLOYMENT AGREEMENTS
On September 2, 1993, Stanford R. Ovshinsky entered into separate employment agreements with each of the Company and Ovonic Battery in order to define clearly 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 is six years. Mr. Ovshinsky's employment agreement with the Company 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 as determined by the Board of Directors of the Company and an annual bonus equal to 1% of the net income from operations of the Company (excluding Ovonic Battery) or Ovonic Battery.
Mr. Ovshinsky's employment agreement with Ovonic Battery additionally provides for a right to vote the shares of Ovonic Battery held by the Company following a change in control of the Company. For purposes of the agreement, change in control means (i) any sale, lease, exchange or other transfer of all or substantially all of the Company's assets; (ii) the approval by the Company's stockholders of any plan or proposal of liquidation or dissolution of the Company; (iii) the consummation of any consolidation or merger of the Company in which the Company is not the surviving or continuing corporation; (iv) the acquisition by any person of 30 percent 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 the Company'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 will be exercised by Dr. Iris M. Ovshinsky.
Pursuant to his employment agreement with Ovonic Battery, Mr. Ovshinsky was granted stock options, exercisable at a price of $16,216 per share to purchase 185 shares (adjusted from a price of $50,000 per share to purchase 60 shares pursuant to the anti-dilution provisions of the option agreement) of Ovonic Battery's common stock, representing approximately 6% of Ovonic Battery's outstanding common stock. The Ovonic Battery stock options will vest on a quarterly basis over six years commencing with the quarter beginning October 1, 1993, subject to Mr. Ovshinsky's continued performance of his obligations to Ovonic Battery under his employment agreement. Vesting of the stock options will accelerate in the event of Mr. Ovshinsky's death, mental or physical disability or termination of employment without cause and in the event of a change in control of the Company.
COMPENSATION OF DIRECTORS
Directors who are neither employees of the Company nor otherwise compensated by the Company are issued approximately $5,000 per year in the Company's Common Stock based on the closing bid price of Common Stock on the first business day of each year. Furthermore, as of April 18, 1996, directors who are not employees of the Company receive $500 for each Board meeting attended (in person or via telephone conference call) as well as $500 for each committee meeting if not coincident with a Board meeting. Directors are also reimbursed for all expenses incurred for the purpose of attending board of directors and committee meetings, including airfare, mileage, parking, transportation and hotel.
COMPENSATION COMMITTEE REPORT
ORGANIZATION AND COMPENSATION COMMITTEE.
During the fiscal year ended June 30, 1996, the Compensation Committee was composed of Mr. Conway, Mr. McCarthy and Dr. Metz. None of the Compensation Committee members are or were during the last fiscal year an officer or employee of the Company or any of its subsidiaries, or had any business relationship with the Company or any of its subsidiaries.
The Compensation Committee is responsible for administering the policies which govern both annual compensation of executive officers and the Company's stock option plans. The Compensation Committee meets several times during the year to review recommendations from management regarding stock options and compensation. Compensation and stock option recommendations are based upon performance, current compensation, stock option ownership, and years of service to the Company. The Company does not have a formal bonus program for executives, although it has awarded bonuses to its executives from time to time.
BASE SALARY.
The Compensation Committee considers the Company's financial position and other factors in determining the compensation of its executive officers. These factors include remaining competitive within the relevant hiring market--whether scientific, managerial or otherwise--so as to enable the Company to attract and retain high quality employees, and, where appropriate, linking a component of compensation to the performance of the Company's 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.
STOCK OPTIONS.
Stock option grants to Mr. Stempel, Mrs. Bacon and Mr. Dhar were made by the Compensation Committee in accordance with the Compensation Committee's evaluation of their contributions to the Company and years of service. See "Option Grants in Last Fiscal Year." While Mr. Ovshinsky and Mr. Stempel participate in formulating the recommendation of management regarding the grant of stock options, neither one participates in the deliberations of the Compensation Committee.
CHIEF EXECUTIVE OFFICER COMPENSATION.
During the Company's fiscal year ended June 30, 1994, several changes were made in the compensation arrangements between the Company and its Chief Executive Officer, Stanford R. Ovshinsky. The principal purpose of these changes was to recognize
Mr. Ovshinsky's significant past and current contributions to the Company. The Compensation Committee believes these changes were appropriate in light of Mr. Ovshinsky's primary role in implementing the Company's strategic plan and the absence of any material increases in Mr. Ovshinsky's cash or other compensation during the Company's preceding six fiscal years.
In September 1993, Mr. Ovshinsky entered into separate employment agreements with each of the Company and Ovonic Battery. The purpose of these agreements, which provide for the payment to Mr. Ovshinsky of an annual salary of not less than $100,000 by the Company and not less than $150,000 by Ovonic Battery, was to define clearly Mr. Ovshinsky's duties and compensation arrangements and to provide to each company the benefits of his management efforts and future inventions. The bonus award to Mr. Ovshinsky for the fiscal year ended June 30, 1996 was made in accordance with the formula set forth in the Employment Agreements. See "Employment Agreements."
COMPENSATION COMMITTEE
Jack T. Conway Walter J. McCarthy, Jr. Florence I. Metz
PERFORMANCE GRAPH
The line graph below compares the cumulative total stockholder return on the Company's Common Stock over a five-year period with the return (i) on the NASDAQ Stock Market - US Index, (ii) the Hambrecht & Quist Technology Index ("Technology Index") and (iii) the NASDAQ Electronic Components Index ("Electronic Components Index"). The Company believes that the companies included in the Electronic Components Index contained in the Form 10-K for the year ended June 30, 1995 ("1995 10-K") did not represent the diverse business activities and technologies of the Company. The Company has determined that it is appropriate to substitute the Technology Index for the Electronic Components Index because the companies which make up the Technology Index are broadly defined technology companies. In order to provide the stockholders with a basis against which to evaluate the Company's results consistent with that contained in the 1995 10-K, the graph below contains a comparison of the Company's stockholders' return with, among other indices, that of the Electronic Components Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG ENERGY CONVERSION DEVICES, INC., THE NASDAQ STOCK MARKET-US INDEX, THE NASDAQ ELECTRONIC COMPONENTS INDEX AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX
* $100 INVESTED ON 06/30/91 IN STOCK OR INDEX- INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING JUNE 30.
The total return with respect to NASDAQ Stock Market - US Index, the Technology Index and NASDAQ Electronic Components Index assumes that $100 was invested on June 30, 1991, including reinvestment of dividends.
ECD has paid no cash dividends in the past and no cash dividends are expected to be paid in the near future.
The Report of the Compensation Committee on Executive Compensation and the Performance Graph are not deemed to be filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or Securities Exchange Act of 1934, as amended, or incorporated by reference in any documents so filed.
ITEM 12:
ITEM 12: 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 the Company), 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. 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 14, 1999. As of September 13, 1996, Mr. Ovshinsky also had the right to vote 126,500 shares of Common Stock (the "Sanoh Shares") owned by Sanoh Industrial Co., Ltd. ("Sanoh") under the terms of an agreement dated as of November 3, 1992 between the Company and Sanoh which, together with the Class A Common Stock and 9,554 shares of Common Stock Mr. and Dr. Ovshinsky own, give Mr. and Dr. Ovshinsky voting control over shares representing approximately 35.20% of the combined voting power of the Company.
The following table sets forth, as of June 30, 1996, information concerning the beneficial ownership of Class A Common Stock by each Director and all executive officers and Directors of the Company as a group. All shares are owned directly except as otherwise indicated. Under the rules of the Securities and Exchange Commission, Stanford R. Ovshinsky and Iris M. Ovshinsky may each be considered to beneficially own the shares held by the other.
- ---------------- (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.
COMMON STOCK
DIRECTORS AND EXECUTIVE OFFICERS. The following table sets forth, as of September 13, 1996, information concerning the beneficial ownership of Common Stock by each director and executive officer and for all directors and executive officers of the Company as a group. All shares are owned directly except as otherwise indicated.
- --------------- * Less than 1%.
(1) Under the rules and regulations of the Securities and Exchange Commission, a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within sixty days, whether through the exercise of options or warrants or through the conversion of another security.
(2) Under the rules and regulations of the Securities and Exchange Commission, shares of Common Stock issuable upon exercise of options and warrants or upon conversion of securities which are deemed to be beneficially owned by the holder thereof (see Note (1) above) are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person but are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person.
(3) Includes 189,940 shares represented by options exercisable within 60 days and 6,000 shares represented by warrants exercisable within 60 days.
(4) Includes 4,000 shares represented by options exercisable within 60 days.
(5) Includes 7,000 shares represented by options exercisable within 60 days and 4,000 shares represented by warrants exercisable within 60 days.
(6) Includes 30,510 shares represented by options exercisable within 60 days.
(7) Includes 15,286 shares represented by options exercisable within 60 days and 1,980 shares represented by warrants exercisable within 60 days.
(8) Includes 5,000 shares represented by options exercisable within 60 days.
(9) Includes 12,000 shares represented by options exercisable within 60 days.
(10) Includes 2,000 shares represented by options exercisable within 60 days.
(11) Includes 263,341 shares (adjusted as of June 30, 1996) represented by options exercisable within 60 days, 65,601 shares of Class A Common Stock which are convertible into Common Stock and 750 shares represented by warrants exercisable within 60 days. Under the rules and regulations of the Securities and Exchange Commission, Dr. Ovshinsky may be deemed a beneficial owner of the shares of Common Stock and Class A Common Stock owned by her husband, Stanford R. Ovshinsky. Such shares are not reflected in Dr. Ovshinsky's share ownership in this table.
(12) Includes 417,757 shares (adjusted as of June 30, 1996) represented by options exercisable within 60 days, the 126,500 Sanoh Shares over which Mr. Ovshinsky has voting power, 153,420 shares of Class A Common Stock which are convertible into Common Stock, and 750 shares represented by warrants exercisable within 60 days . Under the rules and regulations of the Securities and Exchange Commission, Mr. Ovshinsky may be deemed a beneficial owner of the shares of Common Stock and Class A Common Stock owned by his wife, Iris M. Ovshinsky. Such shares are not reflected in Mr. Ovshinsky's share ownership in this table.
(13) Includes 1,200 shares represented by options exercisable within 60 days.
(14) Includes 27,000 shares represented by options exercisable within 60 days, and 15,885 shares of Common Stock held in a trust of which Mrs. Reischauer is trustee.
(15) Includes 12,000 shares represented by options exercisable within 60 days.
(16) Includes 166,300 shares represented by options exercisable within 60 days and 14,000 shares represented by warrants exercisable within 60 days.
(17) Includes 3,000 shares represented by options exercisable within 60 days.
PRINCIPAL SHAREHOLDERS. The following table sets forth, as of September 13, 1996, to the knowledge of the Company, the beneficial holders of more than 5% of the Company's Common Stock (see footnotes for calculation used to determine "percentage of class" category):
- --------------------
(1) Under the rules and regulations of the Securities and Exchange Commission, shares of Common Stock issuable upon exercise of options and warrants or upon conversion of securities which are deemed to be beneficially owned by the holder thereof are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person but are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person.
(2) Includes 219,021 shares of Class A Common Stock owned by Mr. and Dr. Ovshinsky (which shares are convertible at any time into Common Stock and will be deemed to be converted into Common Stock on September 14, 1999), 9,554 shares of Common Stock owned by Mr. and Dr. Ovshinsky, 126,500 shares of Sanoh Shares over which Mr. Ovshinsky has voting rights, 681,098 shares represented by options exercisable within 60 days and 1,500 shares represented by warrants exercisable within 60 days held by Mr. and Dr. Ovshinsky.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CANON/UNITED SOLAR. In June, 1990, the Company formed United Solar, a joint venture with Canon, in which Canon and the Company each own 49.98% of the outstanding shares, with the balance held by Mrs. Haru Reischauer, a member of the Company's Board of Directors. Mrs. Reischauer is also a director of United Solar. In 1995, United Solar placed an approximately $8,000,000 order with the Company for new machinery and equipment to upgrade and expand its photovoltaic production capacity. In the year ended June 30, 1996, the Company performed various laboratory, shop, patent and research services for United Solar for which United Solar was charged approximately $128,000. In the year ended June 30, 1996, United Solar billed ECD for approximately $289,000 for work performed in accordance with the DOE PV Bonus contract.
GM OVONIC. In October 1995, the Company received a $3,700,000 order, as amended, from GM Ovonic for battery manufacturing equipment. In the year ended June 30, 1996, the Company recorded revenues of $4,118,000, including the aforementioned machine-building revenue, from GM Ovonic representing sales of battery packs and machines and other services performed for GM Ovonic.
MISCELLANEOUS. Herbert Ovshinsky, Stanford R. Ovshinsky's brother, is employed by the Company as Director of Technology Production and Machine Building Division working principally in the design of manufacturing equipment. He received $115,000 in salary during the year ended June 30, 1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Under Section 16(a) of the Securities Exchange Act of 1934, the Company's directors and executive officers are required to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to disclose any failure to file by these dates during the fiscal year ended June 30, 1996. During the 1996 fiscal year, all the filing requirements were satisfied except that Jack T. Conway and Nancy M. Bacon each filed one late report reporting changes in the ownership of the Company's Common Stock. In making this disclosure, the Company has relied on the representation of its directors and executive officers and copies of the reports that they have filed with the Securities and Exchange Commission.
PART IV
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
Individual financial statements and schedules of the Company have been omitted as permitted by the instructions.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period covered by this Report.
(c) Exhibits
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.
By: /s/ Stanford R. Ovshinsky ------------------------------ Stanford R. Ovshinsky, President and Chief Executive Officer (Principal Executive Officer)
Dated: October 3, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ Nancy M. Bacon - --------------------------- Nancy M. Bacon Director October 3, 1996 ---------------
/s/ Umberto Colombo - --------------------------- Umberto Colombo Director October 3, 1996 ---------------
/s/ Jack T. Conway - --------------------------- Jack T. Conway Director October 3, 1996 ---------------
/s/ Hellmut Fritzsche - --------------------------- Hellmut Fritzsche Director October 3, 1996 ---------------
/s/ Joichi Ito - --------------------------- Joichi Ito Director October 3, 1996 ---------
/s/ Walter J. McCarthy, Jr. - --------------------------- Walter J. McCarthy, Jr. Director October 3, 1996 ---------------
/s/ Florence I. Metz - --------------------------- Florence I. Metz Director October 3, 1996 ---------------
/s/ Iris M. Ovshinsky - --------------------------- Iris M. Ovshinsky Director October 3, 1996 ---------------
/s/ Stanford R. Ovshinsky - --------------------------- Stanford R. Ovshinsky President, Chief Executive October 3, 1996 Officer and Director --------------- (Principal Executive Officer)
/s/ Kenneth A. Pullis - --------------------------- Kenneth A. Pullis Acting Chief Financial October 3, 1996 Officer (Principal Financial --------------- Officer)
/s/ Haru Reischauer - --------------------------- Haru Reischauer Director October 3, 1996 ---------------
/s/ Nathan J. Robfogel - --------------------------- Nathan J. Robfogel Director October 3, 1996 ---------------
/s/ Robert C. Stempel - --------------------- Robert C. Stempel Director October 3, 1996 ---------------
/s/ Stanley K. Stynes - --------------------- Stanley K. Stynes Director October 3, 1996 ---------------
EXHIBIT INDEX