Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies
Basis of Presentation
In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements for the interim periods have been included. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commissions rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys latest annual report on Form 10-K, which is available on the Companys website
www.ovonic.com
.
Nature of Business
Energy Conversion Devices, Inc. (ECD) commercializes materials, products and production processes for the alternative energy generation, energy storage and information technology markets.
Financial Statement Presentation, Principles of Consolidation and Equity Accounting
The consolidated financial statements include the accounts of ECD and its 100%-owned subsidiary United Solar Ovonic LLC (referred to as United Solar Ovonic) and its 91.4%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic Battery or OBC) (collectively the "Company"). No minority interest related to Ovonic Battery is recorded in the consolidated financial statements because there is no additional funding requirement by the minority shareholders. The Company has a number of strategic alliances and, as of December 31, 2007, has two major investments accounted for using the equity method: (i) Cobasys LLC, a joint venture between Ovonic Battery and a subsidiary of Chevron Corporation, Chevron Technology Ventures LLC, (CTV), each having 50% interest in the joint venture and (ii) Ovonyx, Inc., a 39.3%-owned (or 30.7% on a fully diluted
basis after giving effect to exercise of stock options and warrants) corporation with Mr. Tyler Lowrey, Intel Capital, and other investors. See Note D, Joint Ventures and Investments, of the Notes to our Consolidated Financial Statements for discussions of all of the Companys major joint ventures and investments.
At December 31 and June 30, 2007, the Companys investment in Cobasys is recorded at zero. The
Companys investment in Ovonyx is recorded at $200,000 at December 31 and June 30, 2007. The Company
will continue to carry its investments in these joint ventures at the current amounts until the ventures
become sustainably 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 ventures profits or losses on the equity method of
7
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
accounting. To the extent that the Company has made contributions other than technology, it recognizes its proportionate share of any losses until the investment reaches zero.
Intellectual property, including patents, resulting from the Companys investments in its technologies, is valued at zero in the balance sheet. Intellectual property provides the foundation for the creation of the important strategic alliances whereby the Company provides intellectual property and patents and joint venture partners provide cash.
Upon consolidation, all intercompany accounts and transactions are eliminated. Any profits on intercompany transactions are eliminated to the extent of the Companys ownership percentage.
Restructuring
In April 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs. The specific activities under the restructuring plan include consolidating the photovoltaic machine-building activities into the United Solar Ovonic business segment; substantially reducing activities in the previous Ovonic Battery and ECD segments, rebalancing these activities with external revenue sources and consolidating the remaining activities into the new Ovonic Materials segment; and reducing general and administrative personnel and other costs. The plan is expected to yield the following principal benefits: reduce annual research and development and general and administrative costs when fully implemented by the end of fiscal year 2008; strengthen our United Solar Ovonic segment by aligning all of the key components for photovoltaic operations
within a single, unified operating structure to lower capital and production costs and drive technology improvements; align our emerging technologies with our business goals in our new Ovonic Materials segment, while directing integrated research and development and administrative resources accordingly; and right-size and consolidate our general and administrative activities to realize organizational synergies. Additional charges are expected in fiscal year 2008 in connection with the second, and final, phase of the plan, which will be fully completed by the end of fiscal year 2008.
Cash Equivalents
Cash equivalents consist of investments in short-term, highly liquid securities maturing 90 days or less from the date of acquisition.
Short-Term Investments
The Company has evaluated its investment policies consistent with Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, and determined that all of its short-term investment securities are classified
8
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders Equity under the caption Accumulated Other Comprehensive
Income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretions are included in interest income. Realized
gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in other nonoperating income (expense). The cost of securities sold is based on
the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. Short-term investments consist of auction rate
certificates, corporate bonds and notes, and certificates of deposit which mature 91 days or more from date of acquisition.
The following schedule summarizes the unrealized gains and losses on the Companys shot-term investments (in thousands):
|
|
Amortized
|
|
Gross Unrealized
|
|
Estimated
|
|
|
|
Cost
|
|
Gains
|
|
(Losses)
|
|
Fair Value
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction Rate Certificates
|
|
$
|
40,450
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
40,450
|
|
|
Corporate Bonds
|
|
|
18,759
|
|
|
|
|
|
|
|
|
(167
|
)
|
|
|
|
18,592
|
|
|
|
|
$
|
59,209
|
|
|
$
|
|
|
|
|
$
|
(167
|
)
|
|
|
$
|
59,042
|
|
|
Restricted Investment
Money Market
|
|
$
|
5,614
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
5,614
|
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction Rate Certificates
|
|
$
|
36,100
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
36,100
|
|
|
Corporate Bonds
|
|
|
74,882
|
|
|
|
27
|
|
|
|
|
(6
|
)
|
|
|
|
74,903
|
|
|
Certificates of Deposit
|
|
|
14,001
|
|
|
|
1
|
|
|
|
|
(1
|
)
|
|
|
|
14,001
|
|
|
|
|
$
|
124,983
|
|
|
$
|
28
|
|
|
|
$
|
(7
|
)
|
|
|
$
|
125,004
|
|
|
The following schedule summarizes the contractual maturities of the Companys short-term investments (in thousands):
|
December 31, 2007
|
|
June 30, 2007
|
|
|
Amortized
Cost
|
|
Market
Value
|
|
Amortized
Cost
|
|
Market
Value
|
|
Due in less than one year
|
$
|
|
|
$
|
|
|
$
|
43,692
|
|
$
|
43,696
|
|
Due after one year through five years
|
|
18,759
|
|
|
18,592
|
|
|
45,191
|
|
|
45,208
|
|
Due after five years
|
|
40,450
|
|
|
40,450
|
|
|
36,100
|
|
|
36,100
|
|
|
$
|
59,209
|
|
$
|
59,042
|
|
$
|
124,983
|
|
$
|
125,004
|
|
9
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
Capitalized Interest
Interest on capitalized lease obligations is capitalized during active construction periods of equipment. The Company incurred, respectively, total interest costs of $589,000 and $601,000 during the three months ended December 31, 2007 and 2006, and $1,171,000 and $946,000
during the six months ended December 31, 2007 and 2006, all of which were capitalized as part of the new solar cell manufacturing equipment currently under construction.
Impairment
Upon the identification of an event indicating potential impairment, the Company compares the carrying value of its long-lived assets with the estimated undiscounted cash flows or fair value associated with these assets. If the carrying value of the long-lived assets is more than the estimated undiscounted cash flows or fair value, then an impairment loss is recorded.
Financial Instruments
Due to the short-term maturities of cash equivalents, short-term investments, accounts receivable and accounts payable, the Company believes that the carrying value of its financial instruments is a reasonable estimate of fair value.
Accounts Receivable
The Company maintains an allowance for uncollectible accounts considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customers current ability to pay its obligation, and the condition of the general economy and industry as a whole.
Property, Plant, and Equipment
All properties are recorded at cost. Plant and equipment are depreciated on the straight-line method over the estimated useful lives of the individual assets. The estimated lives of the principal classes of assets are as follows:
|
|
Years
|
|
Buildings and improvements*
|
|
1 to 33
|
|
|
Machinery and other equipment
|
|
3 to 12.5
|
|
|
Assets under capitalized leases
|
|
3 to 20
|
|
|
*
|
Includes leasehold improvements which are amortized over the shorter of the balance of the lease term or the life of the improvement, ranging from one to 20 years.
|
10
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
Costs of machinery and other equipment acquired or constructed for a particular product development project, which have no alternative future use (in other product development projects or otherwise), are charged to product development and research costs as incurred.
Assets under capitalized leases are amortized over the shorter of the term of the lease or the life of the equipment or facility, usually three to 20 years. Accumulated amortization on assets under capitalized leases as of December 31, 2007 and 2006 was $6,146,000 and $4,413,000, respectively.
Expenditures for maintenance and repairs are charged to operations. Expenditures for betterments or major renewals are capitalized and are depreciated over their estimated useful lives.
Litigation
The Company is involved in certain legal actions and claims arising in the ordinary course of business, including, without limitation, commercial disputes, intellectual property matters, personal injury claims, tax claims and employment matters. Although the outcome of any legal matter cannot be predicted with certainty, management does not believe that any of these legal proceedings or matters will have a material adverse effect on the consolidated financial position or results of operations. See Note K, Litigation, for additional information.
Warranty Reserve
A warranty reserve is recorded at the time that the product is sold (for sales of photovoltaic products) or at the time that revenue is recognized (for machine-building and equipment sales).
Product Development, Patents and Technology
Product development and research costs are expensed as they are incurred and, as such, the Companys investments in its technologies and patents are recorded at zero in its financial statements, regardless of their values. The technology investments are the bases by which the Company is able to enter into strategic alliances, joint ventures and license agreements.
Product Sales
Product sales include revenues related to photovoltaic products and nickel hydroxide. Generally, product sales are recognized under Ex-Works shipping terms (buyer is informed that goods are available for shipment). All intersegment sales are eliminated in consolidation.
11
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
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 nonrefundable advance royalty payments which are creditable against future royalties under the licenses. Advance royalty payments are deferred and recognized in revenues as the creditable sales occur, the underlying agreement expires, or when the Company has demonstrable evidence that no additional royalties will be creditable and, accordingly, the earnings process is completed.
Business Agreements
Revenues are also derived through business agreements for the development and/or commercialization of products based upon the Company's proprietary technologies. The Company has two major types of business agreements.
The first type of business agreement relates to licensing the Company's proprietary technology. Licensing activities are tailored to provide each licensee with the right to use the Company's technology, most of which is patented, for a specific product application or, in some instances, for further exploration of new product applications of such technologies. The terms of such licenses, accordingly, are tailored to address a number of circumstances relating to the use of such technology which have been negotiated between the Company and the licensee. Such terms generally address whether the license will be exclusive or nonexclusive, whether the licensee is limited to very narrowly defined applications or to broader-based product manufacture or sale of products using such technologies, whether the license will provide royalties for products sold which employ such licensed technology and
how such royalties will be measured, as well as other factors specific to each negotiated arrangement. In some cases, licenses relate directly to product development that the Company has undertaken pursuant to product development agreements; in other cases, they relate to product development and commercialization efforts of the licensee; and other agreements combine the efforts of the Company with those of the licensee.
License agreement fees are generally recognized as revenue at the time the agreements are consummated, which is the completion of the earnings process. Typically, such fees are nonrefundable, do not obligate the Company to incur any future costs or require future performance by the Company, and are not related to future production or earnings of the licensee. In some instances, a portion of such license fees is contingent upon the commencement of
production or other uncertainties. In these cases, license fee revenues are not recognized until commencement of production or the resolution of uncertainties. Generally, there are no current or future direct costs associated with license fees.
12
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
In the second type of agreement, product development agreements, the Company conducts specified product development projects related to one of its principal technology specializations for an agreed-upon fee. Some of these projects have stipulated performance criteria and deliverables whereas others require "best efforts" with no specified performance criteria. Revenues from product development agreements that contain specific performance criteria are recognized on a percentage-of-completion basis which matches the contract revenues to the costs incurred on a project based on the relationship of costs incurred to estimated total project costs. Revenues from product development agreements, where there are no specific performance terms, are recognized in amounts equal to the amounts expended on the programs. Generally, the agreed-upon fees for product development agreements contemplate
reimbursing the Company, after its agreed-upon cost share, if any, for costs considered associated with project activities including expenses for direct product development and research, patents, operating,
general and administrative expenses and depreciation. Accordingly, expenses related to product development agreements are recorded as cost of revenues from product development agreements.
Deferred Revenues
Deferred revenues represent amounts received under business agreements in excess of amounts recognized as revenues.
Other Operating Revenues
Other operating revenues consist principally of revenues related to services provided to certain related parties and third-party service revenue realized by certain of the Companys service departments. Revenues related to services are recognized upon completion of performance of the applicable service.
Other Nonoperating Income (Expense)
Other nonoperating income consists of amortization of deferred gains, rental income, and other miscellaneous income. Other nonoperating expense consists of losses on sales of investments and miscellaneous expenses.
13
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
Stock-Based Compensation
ECD has common stock reserved for issuance as follows:
|
Number of Shares
|
|
December 31, 2007
|
|
June 30, 2007
|
Stock options
|
|
2,058,690
|
|
|
|
2,568,747
|
|
Warrants
|
|
400,000
|
|
|
|
400,000
|
|
Convertible Investment Certificates
|
|
5,210
|
|
|
|
5,210
|
|
TOTAL RESERVED SHARES
|
|
2,463,900
|
|
|
|
2,973,957
|
|
ECD records the fair value of stock-based compensation grants as an expense. In order to determine the fair value of stock options on the date of grant, ECD applies the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a greater level of judgment.
ECD uses an expected stock-price volatility assumption that is based on historical implied volatilities of the underlying stock which is obtained from public data sources. With regard to the weighted-average option life assumption, ECD considers the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are determined on specific criteria of the aggregate pool of optionees. Forfeiture rates are based on the Companys historical data for stock option forfeitures.
The weighted average fair value of the options granted during the three months and six months ended December 31, 2007 and 2006 is estimated based on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
2007
|
|
2006
(1)
|
|
2007
|
|
2006
|
Dividend Yield
|
0%
|
|
|
|
0%
|
|
0%
|
Volatility %
|
60.40%
|
|
|
|
61.76%
|
|
67.89%
|
Risk-Free Interest Rate
|
3.913%
|
|
|
|
4.238%
|
|
4.623%
|
Expected Life
|
6.58 years
|
|
|
|
6.44 years
|
|
6.63 years
|
|
(1)
|
No options were granted in the three months ended December 31, 2006.
|
14
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
To determine expected volatility, ECD uses historical volatility based on daily closing prices of its common stock over periods that correlate with the expected terms of the options granted. The risk-free rate is based on the United States Treasury seven-year Constant Maturity Rate. The Company has not paid dividends in the past and does not plan to pay any dividends in the foreseeable future. The expected term of stock options is based on the vesting term of the options and expected exercise behavior.
ECD has three shareholder-approved plans: the 1995 Non-Qualified Stock Option Plan (the 1995 Plan) pursuant to which 2,000,000 shares were reserved for grants, the 2000 Non-Qualified Stock Option Plan (the 2000 Plan) pursuant to which 3,000,000 shares were reserved for grants, and the 2006 Stock Incentive Plan (the 2006 Plan) pursuant to which 1,000,000 shares are reserved for grants. ECD issues new shares to satisfy stock option exercises.
The 1995 and 2000 Plans authorized 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) determined. The exercise period for stock options generally may not exceed 10 years from the date of grant.
Under the terms of the 1995 Plan, 40% of the options became exercisable six months after the grant date, with an additional 30% becoming exercisable at the commencement of 18 and 30 months following the grant date. The 1995 Plan expired on January 26, 2005 and no additional grants will be made under this Plan.
Under the terms of the 2000 Plan, 40% of the options became exercisable one year after the grant date, with an additional 20% becoming exercisable after each of the second, third and fourth anniversaries of the grant date. Effective November 14, 2006, the date ECD stockholders approved the 2006 Stock Incentive Plan, ECD will not grant any additional options under the 2000 Plan.
The 2006 Plan authorizes the grant of stock options, including nonqualified and incentive options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units to officers, other employees, nonemployee directors, consultants, advisors, independent contractors and agents of ECD and its subsidiaries. The Committee will determine the period during which an option may be exercised and the terms relating to the exercise or cancellation of an option upon a termination of employment or service, but no option shall fully vest in less than four years, with no more than 40% vesting in the first year following the award, no more than a total of 60% of the option vesting by the end of the second year following the award and no more than a total of 80% of the option vesting by the end of the third year following the award. Each option will be
exercisable for no more than 10 years after its date of grant, except that an incentive option granted to a participant owning more than 10% of ECDs voting shares will be exercisable for no more than five years after its date of grant.
15
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
Total net stock-based compensation expense is attributable to the granting of and the remaining requisite service periods of stock options previously granted. Compensation expense attributable to net stock-based compensation in the three and six months ended December 31, 2007 was $463,000 and $989,000, respectively, and in the three and six months ended December 31, 2006 was $309,000 and $901,000, respectively, increasing both basic and diluted loss per share by $.01 and $.02 for the three months and six months ended December 31, 2007, respectively, and by $.01 and $.02 for the three months and six months ended December 31, 2006, respectively. As of December 31, 2007, the total unrecognized compensation cost related to nonvested stock options and grants was as follows:
|
|
|
|
Weighted average period to be recognized
|
Nonvested Stock Options
|
$
|
1,841,000
|
|
1.82 years
|
Nonvested Restricted Stock Grants
|
|
2,416,000
|
|
2.95 years
|
|
$
|
4,257,000
|
|
|
A summary of the transactions during the three months ended December 31, 2007, with respect to ECDs 1995, 2000 and 2006 Plans follows:
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value
(1)
|
|
Weighted-Average Contractual Life Remaining in Years
|
Outstanding at June 30, 2007
|
|
966,840
|
|
|
$
|
20.05
|
|
|
|
$
|
10,901,717
|
|
|
|
4.86
|
|
Granted
|
|
80,000
|
|
|
$
|
25.91
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(37,770
|
)
|
|
$
|
18.24
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007
|
|
1,009,010
|
|
|
$
|
20.58
|
|
|
|
$
|
3,272,314
|
|
|
|
5.10
|
|
Granted
|
|
30,000
|
|
|
$
|
33.15
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(65,507
|
)
|
|
$
|
21.16
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(1,200
|
)
|
|
$
|
50.16
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(300
|
)
|
|
$
|
10.40
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
972,003
|
|
|
$
|
20.90
|
|
|
|
$
|
12,781,228
|
|
|
|
5.21
|
|
Exercisable at December 31, 2007
|
|
837,788
|
|
|
$
|
19.51
|
|
|
|
$
|
12,024,608
|
|
|
|
4.53
|
|
Exercisable at June 30, 2007
|
|
858,542
|
|
|
$
|
19.48
|
|
|
|
$
|
9,923,559
|
|
|
|
4.46
|
|
(1)
|
The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option.
|
16
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
The weighted average fair value of stock options granted and the total intrinsic value of stock options exercised during the three months and six months ended December 31, 2007 and 2006 were as follows:
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Weighted average fair value of options granted
|
$
|
608,802
|
|
$
|
|
|
$
|
1,899,191
|
|
$
|
330,417
|
|
Total intrinsic value of stock options exercised
|
$
|
5,147,741
|
|
$
|
7,219,487
|
|
$
|
6,366,388
|
|
$
|
8,019,402
|
|
The following is a summary of the transactions during the six months ended December 31, 2007 with respect to Stock Option Agreements between ECD and Stanford R. Ovshinsky and Dr. Iris M. Ovshinsky dated November 18, 1993. Upon the death of Dr. Ovshinsky in August 2006, and pursuant to the terms of the Stock Option Agreements and our stock option plans, options owned by Dr. Ovshinsky were transferred to her estate, of which Mr. Ovshinsky is the executor.
|
Shares
|
|
Weighted-
Average Exercise
Price
|
|
Aggregate Intrinsic Value
(1)
|
|
Weighted-Average Contractual Life Remaining in Years
|
Outstanding and exercisable at
June 30, 2007
|
|
445,259
|
|
|
$
|
18.25
|
|
|
$
|
5,595,637
|
|
|
(2)
|
|
Exercised
|
|
(259,674
|
)
|
|
$
|
15.06
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2007
|
|
185,585
|
|
|
$
|
22.73
|
|
|
$
|
2,026,588
|
|
|
(2)
|
|
|
(1)
|
The intrinsic value of a stock option is the amount by which the market value as of the above dates for the underlying stock exceeds the exercise price of the option.
|
|
(2)
|
Mr. Ovshinsky retired as an active employee and a director of ECD effective August 31, 2007. The 171,713 shares owned by him are exercisable through August 31, 2008. The 13,872 shares owned by the estate of Dr. Ovshinsky expire on August 16, 2008.
|
17
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
The following is a summary of the transactions during the six months ended December 31, 2007 with respect to a Stock Option Agreement between Robert C. Stempel and ECD entered into in January 1999:
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Aggregate Intrinsic Value
(1)
|
|
Weighted-Average Contractual Life Remaining in Years
|
Outstanding and exercisable at June 30, 2007
|
|
180,000
|
|
|
$
|
10.688
|
|
|
$
|
3,623,760
|
|
|
1.55
|
|
Exercised
|
|
(60,000
|
)
|
|
$
|
10.688
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2007
|
|
120,000
|
|
|
$
|
10.688
|
|
|
$
|
2,755,440
|
|
|
1.04
|
|
(1)
|
The intrinsic value of a stock option is the amount by which the market value as of the above dates for the underlying stock exceeds the exercise price of the option.
|
As of December 31 and June 30, 2007, there were 292,000 and 338,000, respectively, nonvested shares of restricted stock pursuant to a Restricted Stock Agreement dated January 19, 1999, and amended as of September 22, 2005, between Mr. Stempel and ECD with a weighted average grant date fair value of approximately $3,120,896 and $3,612,544, respectively. The vesting schedule provides for quarterly vesting of 23,000 shares at the beginning of each quarter commencing July 1, 2006 through October 1, 2010 with 16,000 shares vesting on December 31, 2010.
As part of the executive changes in August 2007, the vesting of certain stock options owned by Mr. Ovshinsky and Mr. Stempel was accelerated. As a result of this acceleration of vesting, approximately $258,000 was recorded as a restructuring charge in the six months ended December 31, 2007.
In May 2007, the Company awarded 23,352 shares of restricted stock to certain officers and an employee pursuant to the 2006 Stock Incentive Plan. The value ($838,804) of these restricted shares is being amortized over their three-year vesting period.
In September 2007, ECD issued the following shares of restricted stock to Mark D. Morelli, its new President and Chief Executive Officer: 30,000 shares vesting on the third anniversary of the date of grant, and an additional 30,000 shares vesting on the earlier of the third anniversary of the grant date or the twentieth consecutive trading day on which the average closing price of ECDs common stock on Nasdaq exceeds $50.
18
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
In December 2007, ECD issued 10,000 shares of restricted stock to an employee pursuant to the 2006 Stock Incentive Plan. The value ($354,500) of these restricted shares is being amortized over their three-year vesting period.
In August 2007, the Compensation Committee of ECDs Board of Directors restructured nonemployee director compensation to closely align with the long-term interest of the Company and its stockholders. Effective December 11, 2007, the meeting fees were eliminated and the nonemployee directors were paid an annual retainer of $90,000 payable in restricted stock, with each director having the option to receive up to 40% of such amount in cash.
In December 2007, ECD issued 15,546 shares of restricted stock to its nonemployee directors pursuant to the 2006 Stock Incentive Plan. The value ($463,582) of these restricted shares is being amortized over a two- to nine-year vesting period.
Warrants
As of December 31, 2007, ECD had outstanding a warrant for the purchase of 400,000 shares of Common Stock granted pursuant to a Common Stock Warrant Agreement entered into in March 2000. This warrant is exercisable on or prior to March 10, 2010 at $22.93 per share.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding. ECD uses the treasury stock method to calculate diluted earnings per share. Potential dilution exists from stock options and warrants. Weighted average number of shares outstanding and basic and diluted net income (loss) per share for the three months and six months ended December 31, 2007 and 2006 are computed as follows:
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net loss
|
$
|
(5,425,651
|
)
|
$
|
(2,913,053
|
)
|
$
|
(12,992,774
|
)
|
$
|
(5,214,728
|
)
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
for basic net loss per share
|
|
40,035,323
|
|
|
39,302,286
|
|
|
39,950,001
|
|
|
39,186,173
|
|
for diluted net loss per share
|
|
40,035,323
|
|
|
39,302,286
|
|
|
39,950,001
|
|
|
39,186,173
|
|
Basic net loss per share
|
$
|
(.14
|
)
|
$
|
(.07
|
)
|
$
|
(.33
|
)
|
$
|
(.13
|
)
|
Diluted net loss per share
|
$
|
(.14
|
)
|
$
|
(.07
|
)
|
$
|
(.33
|
)
|
$
|
(.13
|
)
|
19
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
Due to the Companys net losses, the 2007 weighted average shares of potential dilutive securities of 632,222 and 659,501, respectively, for the three months and six months ended December 31, 2007, respectively, were excluded from the calculations of diluted loss per share, as inclusion of these securities would have been antidilutive to the net loss per share. Additionally, securities of 25,121 and 24,625 for the three and six months ended December 31,
2007, respectively, were excluded from the 2007 calculations, as these securities would have been antidilutive regardless of the Companys net income or loss.
Due to the Companys net loss, the 2006 weighted average shares of potential dilutive securities of 1,252,823 and 2,333,199 for the three months and six months ended December 31, 2006, respectively, were excluded from the calculations of diluted net loss per share, as inclusion of these securities would have been antidilutive to the net loss per share. Additional securities of 6,317 and 18,400 for the three and six months ended December 31, 2006, respectively, were excluded from the 2006 calculation of weighted average shares of potential dilutive securities. Since the exercise prices exceeded the average market price of ECDs Common Stock during these periods, these securities would have been antidilutive regardless of the Companys net income or loss.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates.
Preproduction Costs
The Company recognizes in its Consolidated Statements of Operations costs in preparation for its new manufacturing facilities and equipment as preproduction costs. These costs include training of new employees, supplies and other costs for the new manufacturing facilities in advance of the commencement of manufacturing.
Recent Pronouncements
On December 4, 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 141 (Revised 2007), Business Combinations. Statement 141R will significantly change the accounting for business combinations. Under Statement 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Statement 141R will change the accounting treatment for certain specific items. Statement 141R also includes a substantial number of new disclosure requirements. Statement 141 applies prospectively to business combinations for which
20
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited.
The Company is currently assessing the potential impact that the adoption of this Statement will have on its financial statements.
On December 4, 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements An Amendment of ARB No. 51. Statement 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parents equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. Statement 160 clarifies that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. Statement 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. Statement 160 is effective for fiscal years, and interim periods with those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
The Company is currently assessing the potential impact that the adoption of this Statement will have on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value and establishes a framework for measuring fair value. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the potential impact that the adoption of SFAS No. 157 will have on its financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective as of the beginning of an entitys first year that begins after November 15, 2007. The Company is currently assessing the potential impact that the adoption of SFAS No. 159 will have on its financial statements.
21
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
In June 2007, the FASB Emerging Issues Task Force (EITF) reached a consensus that EITF Issue No.
07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities is effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier application is not permitted. EITF Issue No. 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the goods are delivered or the related services are performed. This pronouncement is expected to have no impact on the Companys financial statements.
Restructuring Charges and Assets Held for Sale
The Company recorded restructuring charges, representing expenses incurred in connection with its restructuring and succession plan, totaling $2,555,000 and $5,070,000 for the three and six months ended December 31, 2007, respectively. The first phase of our restructuring plan, which resulted in a total restructuring expense of $5,385,000 in fiscal year 2007, was substantially complete as of June 30, 2007. The impact of the charges was $.06 and $.13 per share for the three and six months ended December 31, 2007, respectively.
As part of the restructuring plan, in the year ended June 30, 2007, approximately 100 positions were eliminated principally from the Ovonic Materials segment and Corporate Activities. The majority of the estimated savings impacted research and development expenses. In the three months ended December 31, 2007, an additional 50 positions were eliminated principally from the Ovonic Materials segment and Corporate Activities. All of the restructuring charges are included in Corporate Activities.
In addition, as part of the restructuring, the Company will no longer be using its Wafer Lab equipment. This equipment, with a net book value of approximately $1,539,000, is currently classified as
Assets Held for Sale
and the Company is in negotiations with interested parties for the sale of this equipment at a sale price of equal to, or more than, the net book value of this equipment.
We expect to incur additional restructuring costs of approximately $2,000,000 to $3,000,000 in fiscal year 2008 related to the Phase 2 of our restructuring plan, which is expected to be fully completed in fiscal year 2008. We are currently in the process of evaluating a more aggressive cost-reduction plan in Phase 2 which may result in additional restructuring costs.
22
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A Summary of Accounting Policies (Continued)
The following summarizes activity in the Companys restructuring reserve through December 31, 2007.
|
Employee-Related
Expenses
|
|
Other Expenses
|
|
Total
|
Balance July 1, 2007
|
|
$
|
2,883,734
|
|
|
$
|
746,900
|
|
|
|
|
$
|
3,630,634
|
|
Charges
|
|
|
1,365,715
|
|
|
|
3,704,768
|
|
|
|
|
|
5,070,483
|
|
Utilization or payment
|
|
|
(3,696,660
|
)
|
|
|
(2,401,705
|
)
|
|
|
|
|
(6,098,365
|
)
|
December 31, 2007
|
|
$
|
552,789
|
|
|
$
|
2,049,963
|
|
|
|
|
|
2,602,752
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,287,472
|
)
|
Long-term restructuring reserve
|
|
|
|
|
|
|
|
|
|
|
|
$
|
315,280
|
|
NOTE B Accounts Receivable
Accounts Receivable consist of the following:
|
December 31,
2007
|
|
June 30,
2007
|
|
Billed
|
|
|
|
|
|
|
Trade
|
$
|
27,177,197
|
|
$
|
27,827,263
|
|
Related parties
|
|
619,222
|
|
|
322,105
|
|
Other
|
|
1,530,750
|
|
|
2,248,228
|
|
Subtotal
|
|
29,327,169
|
|
|
30,397,596
|
|
Unbilled
|
|
|
|
|
|
|
Trade
|
|
754,621
|
|
|
1,544,162
|
|
Related parties
|
|
47,965
|
|
|
85,905
|
|
Other
|
|
5,568,009
|
|
|
5,007,912
|
|
Subtotal
|
|
6,370,595
|
|
|
6,637,979
|
|
Less allowance for uncollectible accounts
|
|
(1,095,000
|
)
|
|
(538,000
|
)
|
|
$
|
34,602,764
|
|
$
|
36,497,575
|
|
23
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C Inventories
Inventories of raw materials, work in process and finished goods for the manufacture of solar cells and nickel hydroxide are valued at the lower of cost (first in, first out) or market. Cost elements included in inventory are materials, direct labor and manufacturing overhead.
Inventories (substantially all for United Solar Ovonic) are as follows:
|
December 31,
2007
|
|
June 30,
2007
|
|
Finished products
|
$
|
2,926,205
|
|
$
|
16,399,784
|
|
Work in process
|
|
8,389,548
|
|
|
5,495,945
|
|
Raw materials
|
|
19,616,338
|
|
|
16,796,449
|
|
|
$
|
30,932,091
|
|
$
|
38,692,178
|
|
The above amounts include an allowance for slow-moving and obsolete inventory of $3,244,000 and $1,870,000 as of December 31, 2007 and June 30, 2007, respectively.
NOTE D Joint Ventures and Investments
Joint Ventures
Cobasys
The Company recognized $238,000 and $476,000 as revenues from license agreements in each of the three and six months ended December 31, 2007 and 2006, respectively, in connection with the amortization of a license fee received from Panasonic EV Energy Co., Ltd. as part of a settlement of a certain patent infringement dispute in a prior year.
The Company recorded revenues from Cobasys of $106,000 and $227,000 for the three and six months ended December 31, 2007, respectively, and $251,000 and $442,000 for the three and six months ended December 31, 2006, respectively, for services performed on behalf of Cobasys (primarily for advanced product development testing and other services).
Ovonyx
As of December 31, 2007, ECD owns 39.3% (or 30.7% on a fully diluted basis after giving effect to exercise of stock options and warrants) of Ovonyx, Mr. Tyler Lowrey and his colleague own 39.3%, and Intel Capital and other investors own the remainder of the shares outstanding. ECD receives 0.5% of Ovonyx annual gross revenues.
24
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D Joint Ventures and Investments (Continued)
ECD recorded non-royalty revenues from Ovonyx of $59,000 and $127,000, respectively, for the three and six months ended December 31, 2007, respectively, and $195,000 and $340,000 for the three and six months ended December 31, 2006, respectively, representing services provided to this joint venture.
NOTE E Liabilities
Warranty Liability
The Company estimates the liability for product warranty costs based upon its past experience and best estimate of future warranty claims. The following is a summary of the changes in the product warranty liability during the six months ended December 31, 2007 and 2006:
|
Six Months Ended
December 31,
|
|
2007
|
|
2006
|
|
Liability at beginning of the period
|
$
|
1,325,452
|
|
$
|
1,835,136
|
|
Amounts accrued for as warranty costs
|
|
431,303
|
|
|
(387,463
|
)
(1)
|
Warranty claims
|
|
(191,477
|
)
|
|
(142,749
|
)
|
Liability at end of period
|
$
|
1,565,278
|
|
$
|
1,304,924
|
|
|
(1)
|
During the six months ended December 31, 2006, the Company, based upon current information, revised its estimate of the warranty accrual in connection with its Rare Earth Ovonic joint venture and recorded a $750,000 reduction in this accrual.
|
Government Contracts, Reserves and Liabilities
The Companys contracts with the U.S. Government and its agencies are subject to audits by the Defense Contract Audit Agency (DCAA). DCAA has audited the Companys indirect rates, including its methodology of computing these rates, for the years through June 30, 2004. In its reports, DCAA questioned the allowability of and the allocability of certain costs as well as the Companys methodology for allocating independent research and development to its indirect cost pools. The Company has a reserve of $1,830,000 and $1,899,000 at December 31, 2007 and at June 30, 2007, respectively.
In connection with a 1992 battery development contract with the United States Advanced Battery Consortium (USABC), partially funded by the Department of Energy (DOE), the Company has agreed to reimburse USABC and DOE for payments to the Company under the
25
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E Liabilities (Continued)
1992 contract. The agreed reimbursement includes a 15% share of royalty payments the Company receives through May 3, 2012 where Ovonic NiMH batteries serve as the primary source of power for electric vehicles. The Company has accrued as an expense 15% of such royalty payments.
NOTE F Line of Credit
As of December 31, 2007, the Company had a line of credit with LaSalle Bank Midwest N.A. in the amount of $5,000,000. This line of credit provides a mechanism for obtaining letters of credit and entering into foreign exchange transactions. The line of credit, which expires on August 31, 2008, is secured by a security interest in certain of the Companys inventory and requires maintaining a $5,000,000 minimum investment balance. At December 31, 2007, the Company had outstanding letters of credit of $2,161,000 against the line of credit.
NOTE G Commitments
The Company, in the ordinary course of business, enters into purchase commitments for raw materials. The Company also enters into purchase commitments for capital equipment, including subcontracts for the purchase of components for the new solar manufacturing equipment being installed in Greenville, Michigan and Tijuana, Mexico. The Companys total obligations under purchase commitments at December 31, 2007 were $70,947,000 ($60,873,000 of which was due within one year and $10,074,000 thereafter).
Purchase Commitment
. In December 2007, the Company entered into a gas purchase agreement totaling $8,458,000 for certain of its facilities. The agreements are effective through December 2008. The agreements require the Company to purchase a committed amount of germane gas at a monthly fixed price, which the Company believes it will consume in its normal course of operations during the period January through October 2008.
NOTE H Royalties, Nonrefundable Advance Royalties and License Agreements
The Company has business agreements with third parties and with related parties for which royalties and revenues are included in its Consolidated Statements of Operations.
At December 31 and June 30, 2007, the Company deferred recognition of revenue in the amount of $245,660 related to nonrefundable advance royalty payments.
26
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I Business Segments
The following table summarizes the financial data (in thousands) of the Companys operations by business segments:
|
United Solar Ovonic
|
|
Ovonic Materials
|
|
Corporate Activities
|
|
Consolidating Entries
|
|
Consolidated
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
$
|
51,720
|
|
|
$
|
4,570
|
|
|
$
|
376
|
|
|
$
|
(217
|
)
|
|
$
|
56,449
|
|
|
December 31, 2006
|
|
19,194
|
|
|
|
3,580
|
|
|
|
356
|
|
|
|
(183
|
)
|
|
|
22,947
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
$
|
93,607
|
|
|
$
|
9,662
|
|
|
$
|
545
|
|
|
$
|
(323
|
)
|
|
$
|
103,491
|
|
|
December 31, 2006
|
|
43,054
|
|
|
|
6,821
|
|
|
|
599
|
|
|
|
(345
|
)
|
|
|
50,129
|
|
|
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
$
|
2,084
|
|
|
$
|
399
|
|
|
$
|
(9,974
|
)
|
|
$
|
34
|
|
|
$
|
(7,457
|
)
|
|
December 31, 2006
|
|
864
|
|
|
|
(2,864
|
)
|
|
|
(5,339
|
)
|
|
|
(537
|
)
|
|
|
(7,876
|
)
|
|
Six months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
$
|
1,616
|
|
|
$
|
(301
|
)
|
|
$
|
(18,807
|
)
|
|
$
|
82
|
|
|
$
|
(17,410
|
)
|
|
December 31, 2006
|
|
2,351
|
|
|
|
(6,772
|
)
|
|
|
(9,731
|
)
|
|
|
(1,067
|
)
|
|
|
(15,219
|
)
|
|
Depreciation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
$
|
8,095
|
|
|
$
|
236
|
|
|
$
|
377
|
|
|
$
|
(68
|
)
|
|
$
|
8,640
|
|
|
December 31, 2006
|
|
3,489
|
|
|
|
723
|
|
|
|
381
|
|
|
|
(10
|
)
|
|
|
4,583
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
$
|
62,630
|
|
|
$
|
56
|
|
|
$
|
340
|
|
|
$
|
(2
|
)
|
|
$
|
63,024
|
|
|
December 31, 2006
|
|
71,334
|
|
|
|
98
|
|
|
|
70
|
|
|
|
(1,102
|
)
|
|
|
70,400
|
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
$
|
471,933
|
|
|
$
|
7,319
|
|
|
$
|
142,719
|
|
|
$
|
(25,888
|
)
|
|
$
|
596,083
|
|
|
December 31, 2006
|
|
272,037
|
|
|
|
9,153
|
|
|
|
357,129
|
|
|
|
(22,603
|
)
|
|
|
615,716
|
|
|
27
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I Business Segments (Continued)
The following table presents revenues (in thousands) by country based on the location of the customer:
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
United States
|
$
|
29,249
|
|
$
|
11,661
|
|
$
|
48,622
|
|
$
|
25,383
|
|
Germany
|
|
5,129
|
|
|
4,857
|
|
|
17,244
|
|
|
13,037
|
|
China/Hong Kong/Taiwan
|
|
2,409
|
|
|
1,279
|
|
|
6,047
|
|
|
2,047
|
|
Japan
|
|
1,456
|
|
|
1,077
|
|
|
2,422
|
|
|
1,857
|
|
Italy
|
|
3,549
|
|
|
2,439
|
|
|
13,714
|
|
|
3,895
|
|
South Korea
|
|
5,617
|
|
|
|
|
|
6,290
|
|
|
|
|
France
|
|
5,793
|
|
|
186
|
|
|
5,793
|
|
|
373
|
|
Other Countries
|
|
3,247
|
|
|
1,448
|
|
|
3,359
|
|
|
3,537
|
|
|
$
|
56,449
|
|
$
|
22,947
|
|
$
|
103,491
|
|
$
|
50,129
|
|
As of December 31 and June 30, 2007, the composition of the Company's property, plant and equipment, net of accumulated depreciation, is principally in the United States.
NOTE J Income Taxes
In the first quarter of fiscal 2008, the Company adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty for Income Taxes an interpretation of FASB Statement No. 109. FIN 48 prescribes a recognition threshold and measurement methodology for recording within the financial statements uncertain tax positions taken, or expected to be taken, in tax returns. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure related to uncertain tax positions. The cumulative effect of implementing FIN 48 as of July 1, 2007 was zero. The Company has no unrecognized tax benefits at this time.
The Company files U.S. federal, state and foreign income tax returns. Due to its net operating loss carryforwards, federal income tax returns from fiscal 1993 forward are still subject to examination. In addition, open tax years related to various state and foreign jurisdictions remain subject to examination.
28
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K Litigation
As previously reported, on September 10, 2007, CTV issued a notice of dispute and filed claims in arbitration against ECD and OBC relating to our Cobasys joint venture. CTVs original arbitration claim seeks damages and injunctive and other relief and alleges
that ECD and OBC breached and anticipatorily repudiated obligations to provide certain funding to Cobasys under the Amended and Restated Operating Agreement dated as of December 2, 2004 among us, OBC and CTV (the "Operating Agreement"), which governs Cobasys.
CTV subsequently filed a supplemental notice of dispute amending its claims to assert that ECD and OBC had dishonored CTV's preferred interest in Cobasys and that OBC had breached its obligation to use diligent efforts to approve a 2008 annual budget for Cobasys.
We and OBC have denied CTVs allegations and filed a counterclaim, seeking damages and injunctive and other relief on the ground that CTV has been acting unilaterally and in violation of the Operating Agreement and applicable Michigan law in regard to the funding and
spending provisions of the Agreement. The arbitrator held a hearing in January 2008 on our and OBCs application for partial judgment on the pleadings seeking to dismiss CTVs initial and amended claims and CTVs request for declaratory relief, seeking an
order declaring that OBC and ECD must meet their alleged funding obligations and not block a sale of Cobasys by dishonoring CTV's preferred interest. The arbitrators ruling is expected in February.
We and OBC have had settlement discussions with CTV. At the same time, we and OBC
dispute and have been vigorously defending the claims asserted by CTV and pursuing our counterclaim. In our view, the Operating Agreement is clear that we and OBC have no present obligation
to provide funding to Cobasys; OBC is not in default of the Operating Agreement; any future funding obligation would arise only upon unanimous approval by Cobasys members, OBC and CTV, of (i) a 2008
budget and operating plan for Cobasys, and (ii) agreed capital contributions by the members; and CTV has no right unilaterally to provide funding or to authorize spending by Cobasys without an approved 2008
budget and operating plan, or otherwise as approved by OBC. In our view, the Operating Agreement is also clear that we and OBC have not dishonored CTVs preferred interests; OBC has an unqualified right
to refuse to sell its interests in Cobasys on terms that it does not consider appropriate; and OBC may determine in its discretion whether to approve any sale of Cobasys or sale of CTVs interests in Cobasys.
The members of Cobasys have not approved a 2008 business plan and budget, and CTV and OBC have not been able to agree on a solution to Cobasys business issues or whether Cobasys should continue as a
going concern if it cannot be sold in the near future. CTV has continued to fund Cobasys loss-generating operations, which, in OBCs view, violates the Operating Agreement and applicable
Michigan law. Cobasys had losses of approximately $76 million and obtained funding of approximately $84 million in 2007, and Cobasys management has recently forecast for 2008, which has not been approved by
the members, losses of approximately $82-86 million and funding requirements of approximately $92-94 million. Clarification of the
29
Table of Contents
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K Litigation (Continued)
parties respective rights and obligations through the pending ruling by the arbitrator should help to facilitate a resolution.
International Acquisitions Services, Inc. (IAS), Innovative Transportation Systems AG (ITS) and Neville Chamberlain filed suit against Energy Conversion Devices, Inc. (ECD) in Nassau County, New
York on October 11, 2007, claiming, among other things, that ECD made fraudulent statements relating to the supply of battery products to ITS, an entity created to manufacture and sell an electric delivery
vehicle known as the InnoVan. Chamberlain, a sophisticated investor, invested in ITS through IAS. ECD also invested in ITS. ECD disputes and is vigorously defending these claims.
NOTE L Subsequent Event
Effective February 2008, ECD, as Loan Guarantor, and United Solar Ovonic LLC and United Solar Ovonic Corporation (collectively, the Borrowers), entered into a new secured credit facility, with an
aggregate commitment of up to $55,000,000, pursuant to a Credit Agreement and a Fast Track Export Loan Agreement with JPMorgan Chase Bank, N.A. who will serve as Administrative Agent for the Credit
Agreement. The new credit facility is comprised of two separate lines of credit, a $30,000,000 line (the Asset Based Revolver) and a $25,000,000 line (the Ex-Im Revolver). Both lines are secured by
inventory and receivables of the Borrowers. The credit facility has, among others, a financial covenant which requires the company to maintain a minimum liquidity of $10 million at all times. Liquidity is
defined as the sum of (a) cash (b) the market value of cash equivalents, (c) liquid investment securities and (d) aggregate borrowing availability under the facility.
30
Table of Contents