UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended June 30, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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Commission File Number 1-8403
ENERGY CONVERSION DEVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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38-1749884
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2956 Waterview Drive, Rochester Hills, Michigan
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48309
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
(248) 293-0440
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of each Exchange on which registered
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Common Stock, $.01 par value per share
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NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
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As of December 31, 2008, the aggregate market value of the registrant’s Common Stock held by nonaffiliates of the registrant was approximately $1.1
billion based on the closing price as reported on the NASDAQ Global Select Market.
As of August 20, 2009, there were 45,744,167 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III incorporate information by reference from the registrant’s Proxy Statement to be filed within 120 days of
June 30, 2009 for the 2009 Annual Meeting of Stockholders.
TABLE OF CONTENTS
ENERGY CONVERSION DEVICES, INC. and SUBSIDARIES
FORM 10-K
FISCAL YEAR ENDED JUNE 30, 2009
1
PART I
Energy Conversion Devices, Inc. and Subsidiaries
Item 1
:
Business
In this Report, we use the terms “Company,” “ECD,” “we,” “us” and “our,” unless otherwise
indicated or the context otherwise requires, to refer to Energy Conversion Devices, Inc. and its
consolidated subsidiaries. Certain disclosures included in this Report constitute forward-looking
statements that are subject to risks and uncertainties. See Item 1A, “Risk Factors,” and Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Forward-Looking Statements.”
Overview
We design, manufacture and sell photovoltaic (“PV”) products, known as PV or solar laminates
that generate clean, renewable energy by converting sunlight into electricity. Our solar laminates
have unique characteristics that differentiate them from conventional crystalline solar modules,
including physical flexibility, light weight, high durability and ease of installation. These
characteristics make our products particularly suitable for rooftop and building integrated
photovoltaic (“BIPV”) applications, which are our target markets. We manufacture our solar
laminates using a proprietary process and technology that we developed through nearly 30 years of
research. Solar laminate sales represent more than 92% of our revenues. We also receive fees and
royalties from licensees of our nickel metal hydride (“NiMH”) battery technology and sell high
performance nickel hydroxide used in NiMH batteries.
Our Business Segments
We operate our business in two business segments: United Solar Ovonic and Ovonic Materials.
Financial information regarding each segment is available in Note 19, “Business Segments,” of the
Notes to our Consolidated Financial Statements.
United Solar Ovonic
Our United Solar Ovonic segment designs, manufactures and sells PV laminates that generate
clean, renewable energy by converting sunlight into electricity. This business, which we conduct
through our wholly owned subsidiary, United Solar Ovonic LLC (“USO”), is based principally on our
pioneering technologies for thin-film amorphous silicon PV laminates and roll-to-roll
manufacturing. In addition, subsequent to June 30, 2009, we completed the acquisition of Solar
Integrated Technologies, Inc. (“SIT”), which will expand our sales activities to include design,
development and installation of rooftop and BIPV systems and applications, as well as enhance our
field engineering and technical support activities.
Our PV laminates possess several unique attributes that make them ideal for both rooftop and
building integrated applications, including ability to be integrated with roofing materials;
ability to qualify for special BIPV incentives; light weight; superior resistance to wind uplift;
no roof penetration; high durability and impact resistance; and ease of installation. In addition,
our products generate more electricity in real world conditions than many competing products,
resulting in higher returns for our customers.
We sell our PV laminates principally for commercial and industrial roofing applications. We
believe we have a strategic competitive advantage because our PV laminates are readily adaptable
for integration
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into various roofing materials. We sell most of our laminates to commercial roofing materials
manufacturers, builders and building contractors, and solar power installers/integrators who
incorporate our PV laminates into their products for commercial sale and then handle all aspects of
the consumer relationship, including marketing, sales and service. We have developed similar
relationships with residential roofing material manufacturers, who are developing applications to
sell our laminates through their distributions and installation channels for the residential
market. The adaptability of our lightweight, flexible PV laminates also presents opportunities for
sales to developers of certain ground mount and other PV applications. In addition, as a
consequence of our SIT acquisition in August 2009, we now have the capacity to sell and service
complete rooftop and BIPV systems to end-user customers.
We presently have 150MW of nameplate manufacturing capacity. We have an additional 28MW of
nameplate manufacturing capacity attributable to our Auburn Hills 1 facility, which is offline as
we consolidate certain of the production operations from this facility into our newer Auburn Hills
2 facility. This consolidation, which will lower overall costs and improve manufacturing
efficiencies, is part of an overall program to reduce costs.
We manufacture our PV laminates using our proprietary vacuum deposition and large-scale,
roll-to-roll manufacturing processes to deposit amorphous silicon as a thin film on a large roll of
stainless steel. We have designed, developed and manufactured the automated production equipment
based on these proprietary process technologies. We believe our manufacturing process and product
design create significant barriers to entry for competitors who may seek to produce products
similar to our own. We also believe that consolidating our PV equipment design and manufacturing
activities with our PV laminate manufacturing activities allows us to more effectively improve our
manufacturing efficiency and reduce capital costs.
Our PV sales compete with companies that currently manufacture and distribute products based
on well-established technologies for electricity generation, as well as companies that currently
manufacture and distribute products based on alternative energy generation technologies, such as
solar and wind. Our principal competitors in the solar market include Sharp Corporation, Q-Cells
AG, Evergreen Solar, Inc., Kyocera Corporation, Sanyo Electric Co., Ltd. (“Sanyo”), SunPower Corp.,
Mitsubishi Electric Corporation, Yingli Solar, Trina Solar Limited, and Suntech Power Holdings Co.,
Ltd., all of which manufacture predominantly crystalline or polycrystalline silicon PV modules, and
First Solar, Inc., which manufactures thin film, cadmium telluride PV modules on glass substrates.
The competitiveness of alternative energy generation products in general, including solar power
products, is typically enhanced by governmental incentives designed to encourage the use of these
products as compared to conventional energy generation sources, which today are less expensive at
the customer level in most locations. However, our long-term goal is to compete directly, without
subsidies, in energy markets. SIT also competes with numerous developers, contractors and
installers of PV systems principally for rooftop applications.
We enter into long-term supply agreements, some of which are “take-or-pay” agreements (that
require the customer to purchase a specified minimum amount of our products) with our customers.
As of June 30, 2009, our backlog of anticipated product sales for fiscal years 2010 through 2016
was $1.6 billion (including sales to SIT, which we have since
acquired, of $506.7 million). As of
June 30, 2008, our backlog of anticipated product sales was approximately $1.5 billion. The
Company’s estimate of anticipated product sales may be impacted by various assumptions, including
anticipated price reductions, currency exchange rates, and overall customer demand. Anticipated
product sales include future firm commitments under take-or-pay agreements, confirmed orders from
customers as of June 30, 2009 and government contracts. For a discussion of the risks associated
with our backlog and customer demand more generally, see Item 1A — Risk Factors.
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Our strategic customers include EDF En Developpement, Solardis-Soprasolar, Alwitra Flachdach
Systeme GmbH, Advanced Green Technologies, Inc. (a unit of Advanced Roofing, Inc.), Marcegaglia
Taranto S.p.A., Derbigum Suisse Sarl, and Centrosolar AG. Sales to EDF En Developpement
represented 13% and 6%, respectively, of our product sales in this segment for fiscal years 2009
and 2008. Sales to Advanced Green Technologies represented 8% and 12%, respectively, of our
product sales in this segment for fiscal years 2009 and 2008. Sales to SIT, which we recently
acquired, represented 10% and 23%, respectively, of our product sales in this segment for fiscal
years 2009 and 2008. For information about our revenues by geographic region, see Note 19
“Business Segments,” to our Notes to the Consolidated Financial Statements. For additional
information concerning SIT, see Note 21 “Subsequent Events”, to our Notes to Consolidated Financial
Statements.
Our long-term research and development strategy involves reducing production costs, improving
light-to-electricity conversion efficiency and identifying new commercial applications for our
products. We seek to offset our research and development costs with third-party funding, including
product development agreements and government funding. For example, in July 2007, we entered into
a three-year cooperative agreement in which we will receive approximately $19 million from the
Department of Energy under an innovative program, the Solar America Initiative, to increase the
efficiency of our photovoltaic products, lower material costs and develop innovative installation
methods in order to reduce overall system costs.
The key raw materials used in our United Solar Ovonic segment business are: stainless steel,
high purity industrial gases, primarily argon, nitrogen, hydrogen, silane and germane, and polymer
materials. We believe that we have adequate sources for the supply of key raw materials and
components for our PV laminate manufacturing needs. We have, in certain instances, selected
single-source suppliers for certain key raw materials and components for efficiency, cost and
quality. We are actively managing our direct material costs through purchasing strategies, product
design and operating improvements.
Our United Solar Ovonic segment is headquartered in Auburn Hills, Michigan, and has
manufacturing facilities in Auburn Hills and Greenville, Michigan and Tijuana, Mexico. We maintain
sales offices in France, Germany, Italy, Spain, and the United States. Additionally, we have
established a joint venture, United Solar Ovonic Jinneng Limited, which is organized under the laws
of the People’s Republic of China, to manufacture solar products in China for sale in the Chinese
market using solar cells purchased from, and technology licensed by, USO. We presently own 25% of
the joint venture, with the option to increase our ownership to 51% in certain circumstances, and
Tianjin Jinneng Investment Co. owns the remainder of the joint venture. The joint venture is
expected to commence operations in the second quarter of fiscal year 2010.
Ovonic Materials
Our Ovonic Materials segment invents, designs and develops materials and products based on our
pioneering materials science technology. We seek to commercialize this technology internally and
through third-party relationships, such as licenses and joint ventures. We are presently
commercializing our NiMH materials and consumer battery technology through this segment. We are
also engaged in pre-commercialization activities for our emerging technologies, the funding of
which we seek to offset with royalties and licensing revenues and third-party funding, including
product development agreements and government funding.
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NiMH Batteries
NiMH batteries are rechargeable energy storage solutions offering high power and energy, long
cycle life and maintenance-free operation. They are adaptable to a broad range of consumer,
transportation and stationary applications. Products utilizing our NiMH battery technology compete
with lead-acid, nickel-cadmium and lithium battery technologies. NiMH batteries produce high
energy and power for their weight and volume, do not contain any environmentally hazardous
substances, have excellent durability and abuse tolerance, have a long cycle life, and provide
excellent cost benefits.
We commercialize our NiMH battery technology principally through third-party licensing
arrangements with NiMH battery manufacturers throughout the world. We also sell proprietary
high-performance positive electrode nickel hydroxide materials for use in NiMH batteries. We
conduct our NiMH battery technology licensing and materials manufacturing activities through our
consolidated subsidiary Ovonic Battery Company, Inc., in which we have a 91.4% equity interest and
the balance is owned by Honda Motor Company, Ltd. (3.2%), Sanoh Industrial Co., Ltd. (3.2%) and
Sanyo (2.2%). Subsequent to June 30, 2009, we completed the sale of our interest in Cobasys LLC,
our former joint venture through which we also commercialized our NiMH battery technology. See
Note 21 “Subsequent Events”, to our Notes to Consolidated Financial Statements.
Licensing
We have licensed our NiMH battery technology to NiMH battery manufacturers, principally for
consumer and transportation applications, on a royalty-bearing, nonexclusive basis. We are
presently receiving royalties from manufacturers who are currently producing NiMH batteries using
our technology.
Royalties from Sanyo for consumer and transportation applications represented 36% and 24%,
respectively, of our revenues in this segment for fiscal years 2009 and 2008.
Materials Manufacturing
We produce proprietary high-performance positive electrode nickel hydroxide materials for use
in NiMH batteries, which we sell to licensees of our NiMH battery technology. Our positive
electrode materials offer advantages such as higher capacity and power, greater cycle life,
high-temperature performance and lower costs. Sales to Gold Peak Industries (Holdings) Limited
represented 100% and 96%, respectively, of our NiMH materials product sales in this segment and 18%
and 34%, respectively, of our total revenues in this segment for fiscal years 2009 and 2008. We
conduct our manufacturing operations at an automated facility in Troy, Michigan.
The key raw materials used in our nickel hydroxide business are primarily nickel and cobalt.
All of the raw materials used are generally readily available from numerous sources, but
interruptions in production or delivery of key raw materials could have an adverse impact on our
manufacturing operations in this segment. Prices for these raw materials fluctuate in the normal
course of business due to supply and demand. Our product pricing formula to our customers is based
on the raw material price.
Emerging Technologies
Our research and development activities have generated new technologies, which we are seeking
to bring to full-scale commercialization. These technologies, some of which are discussed below,
are subject to further development and will require substantial additional funding to reach
commercial product status. We seek to offset our funding requirements by obtaining third-party
funding through strategic alliances and government contracts.
5
Ovonic Solid Hydrogen Storage Technologies
Hydrogen is a clean and efficient fuel source that yields more energy per unit of weight than
any other combustible fuel, and we are developing a practical approach to storing hydrogen in a
solid metal matrix at low pressures using a family of efficient metal hydrides. Our solid hydrogen
storage solutions have several advantages over conventional gaseous and liquid storage solutions,
including improved volumetric density and greater safety due to our technology’s low-pressure
refilling and storage capabilities. We are presently manufacturing and selling pre-production
volumes of portable hydrogen canisters in our Rochester Hills, Michigan facility.
Ovonic Metal Hydride Fuel Cell Technologies
Fuel cells are environmentally-clean power generators in which hydrogen and oxygen are
combined to produce electricity, with water and heat as the only byproducts. Our Ovonic metal
hydride fuel cell technology is a proprietary approach which provides a lower-cost solution in
comparison to conventional proton exchange membrane (“PEM”) fuel cells, which require expensive
platinum catalysts. As part of our development activities, we have demonstrated high power fuel
stacks utilizing our metal hydride fuel cell technology that meet the power ratings of certain
commercially-available fuel cells for the stationary market at a fraction of the cost.
Ovonic Biofuel Reformation Technologies
Hydrogen is a widely used industrial gas. Our Ovonic reformation technology produces
high-purity hydrogen in a safe process from multiple renewable biofuel and biomass sources at far
lower operating temperatures than commercial processes and without the generation of carbon dioxide
gas. Our proprietary process has the potential to dramatically reduce distributed hydrogen cost by
eliminating high transportation costs. We are presently seeking funding as we move from
laboratory-scale development to pilot scale production.
Ovonyx
Our Ovonyx joint venture is commercializing our proprietary Ovonic Universal Memory (“OUM”)
technology through licensing and product development arrangements. OUM is a basic, new type of
nonvolatile memory that can replace conventional nonvolatile or FLASH memory in applications
requiring retention of stored data when power is turned off, including cell phones, PDAs, digital
cameras and microelectronics. OUM, which is also known in the semiconductor industry as
phase-change random access memory (PRAM and PC-RAM), offers several advantages over conventional
nonvolatile memory, including significantly faster write time, greater scalability, lower power
utilization and longer life, and is compatible with existing complementary
metal-oxide-semiconductor (“CMOS”) manufacturing processes.
We own 39.3% (or 30.7% on a fully diluted basis after giving effect to the exercise of stock
options and warrants) of the common stock of Ovonyx. As part of this joint venture arrangement, we
have contributed intellectual property, licenses, production processes and know-how. In addition
to our equity interest in Ovonyx, we receive 0.5% of Ovonyx’s annual gross revenue as a royalty.
Ovonyx has entered into royalty-bearing, nonexclusive license agreements with Intel
Corporation, Samsung Electronics Co., Ltd., Elpida Memory, Inc., STMicroelectronics N.V., BAE
Systems, Hynix Semiconductor, Inc., and Numonyx B.V., to produce OUM products. Under most of these
agreements,
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Ovonyx is also participating in joint development programs to assist in the commercialization
of OUM phase-change memory products.
Our Technology and Intellectual Property
The principal markets in which we compete — the alternative energy generation, energy storage
and information technology markets — are characterized by rapid change and competition driven by
technological and product performance advantages, as well as cost. We have driven some of this
activity through our pioneering and proprietary materials, product and production process
technologies. At the same time, we are actively engaged in product design and development to
commercialize and improve our materials, products and production processes.
Research and Development Expenditures
Our research and development expenditures are reflected as cost of revenues from product
development agreements and product development and research expenses in our Consolidated Statements
of Operations. We seek to offset our research and development costs with third-party funding,
including joint ventures, product development agreements and government funding.
Patents and Intellectual Property
We maintain an extensive patent portfolio presently consisting of approximately 270 U.S.
patents and over 300 foreign counterparts to which we are regularly adding new patents based upon
our continuing research and development activities. Importantly, our portfolio includes numerous
basic and fundamental patents applicable to each of our business segments, covering not only
materials, but also the production technology and products we develop. Based on the breadth and
depth of our patent portfolio, we believe that our proprietary patent position is sustainable
notwithstanding the expiration of certain patents. We do not expect the expiration of any patents
to materially affect the business prospects of any of our business segments.
Competition
Since our businesses are based upon our pioneering technologies that offer fundamental
solutions in the alternative energy generation, energy storage and information technology markets,
we compete not only at the product level for market share but also at the technology level for
market acceptance. Our competition includes well-established conventional technologies, other
alternative technology solutions and other technologies within an alternative solution. For
example, our PV technology competes with conventional electricity generation technologies, such as
gas and coal; alternative electricity generation technologies, such as wind and nuclear; and other
solar technologies, such as crystalline products. Our business competitors include some of the
world’s largest industrial companies, many of which are pursuing new technology solutions in
addition to their well-established conventional technologies.
We believe that we have derived a key business and technological advantage through our
research and development activities by continuously inventing new technologies and improving our
existing materials, products and production processes. However, even as we successfully pursue
these research and development activities, some of our technologies, particularly in the
alternative energy generation and energy storage markets, presently face commercial barriers as
compared to well-established conventional technologies, including infrastructural barriers,
customer transition costs and higher manufacturing costs associated with present production
volumes. The competitiveness of products based on our technologies in these areas is typically
enhanced by external factors, including rising energy costs, concerns regarding
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energy security and governmental incentives at the consumer level. Our long-term goal is to
compete directly in energy markets without subsidies.
Our Employees
As of June 30, 2009, we employed approximately 1,800 people, approximately 1,100 of whom are
located in the United States.
Available Information
Our website address is www.ovonic.com. We make available on our website our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission (“SEC”). We also make available on our website, or in printed
form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct,
charters for the committees of our Board of Directors and other information related to the Company.
The information found on our website is not part of this or any other report we file with, or
furnish to, the SEC.
Item 1A: Risk Factors
The continuing global economic, capital markets and credit disruptions pose risks for our
business segments.
The continuing global economic, capital markets and credit disruptions pose risks for our
business segments. These risks include slower economic activity and investment in construction
projects that make use of our products and services. These economic developments, particularly
decreased credit availability, have reduced demand for solar products, including our solar
laminates and for the solar development and installation services of SIT. Further, these
conditions have caused some of our customers to be unable to fully comply with the terms of their
agreements to purchase our solar laminates.
Continued decreases in credit availability as well as continued economic instability may
adversely impact our existing or future business and require that we reallocate product shipments
from customers who are unable to satisfy their contractual obligations to other customers or pursue
other remedies, including contract renegotiation.
The decline in polysilicon prices, and the increase in the global capacity of PV products, is
causing downward pressure on the prices of our products, resulting in lower revenues and earnings.
Polysilicon, a key raw material for traditional glass panel PV products, is readily available
to solar cell and module manufacturers after several years of short supply and prices have been
falling rapidly. These price reductions are resulting in price reductions of solar cells and
modules that compete with our laminates. While we believe our laminates have unique characteristics
that make them attractive for a variety of applications, particularly BIPV installations, the
market price decline of competitive products is resulting in downward pressure on our pricing that
negatively impacts our revenues and earnings.
We have instituted demand creation initiatives that are extending our business model and subjecting
us to additional business and financial risks.
8
We have instituted demand creation initiatives in our United Solar Ovonic segment to stimulate
demand for our products. Certain of these initiatives, such as offering project financing and
acquiring SIT, extend our existing business model in this segment from principally manufacturing
and selling laminates through our channel partners to include development, design, installation,
maintenance, financing and ownership of PV projects. As a result, these initiatives will expose us
to additional business risks, such as credit risks (project financing) and project construction and
performance risks (SIT acquisition), which may be significant. Some of these initiatives, such as
project financing, are capital intensive, and there can be no assurances that our existing capital
resources will be sufficient to meaningfully stimulate demand. Additionally, certain of these
initiatives will require us to redeploy our capital resources from other initiatives, such as our
manufacturing capacity expansion, which may impair our ability to pursue these other initiatives
and realize their benefits. Further, there can be no assurance that these initiatives will
successfully stimulate demand for our products.
In response to market conditions, we have instituted capital expenditure and cost reduction
initiatives that are impacting our financial performance and our cash resources and will continue
to do so in the future.
We have instituted a number of cost reduction initiatives to improve our cost structure and
preserve capital in response to market conditions. We have incurred restructuring expenses as a
result of certain of these activities and may incur additional restructuring expenses as we pursue
further cost reduction activities in the future. In addition, in response to market conditions,
we temporarily suspended our manufacturing capacity expansion in our United Solar Ovonic segment
and reduced our production in this segment. We recognized under-absorption of overhead costs
resulting from our production adjustments and may recognize similar costs in the future if we do
not operate our facilities at production capacity. If our production levels and related cash flows
remain at reduced levels we may be required to record an impairment to our plant and equipment,
which could have a material adverse effect on our financial position and results of
operations. Furthermore, there can be no assurance that market demand will align with
our present manufacturing capacity and, as a result, our business could be materially adversely
affected.
Volatility in customer demand in the solar industry could affect future levels of sales and
profitability and limit our ability to predict such levels; if we are unable to balance our
production levels with customer demand, our business and financial results will be materially
adversely impacted.
In June 2008, in order to meet increasing demand for our products, we announced the active
expansion of our production capacity and the commencement of a plan to reach 1GW of annual
production capacity by 2012. In March of 2009, we announced that we were slowing the pace of our
“demand-driven” production and expansion plan to better reflect the present impact of credit
availability on project flow in the global pipeline for photovoltaics. In connection with this
announcement we have delayed expansion at our Greenville facility and Battle Creek facility, which
will reduce our capital expenditures and allow us to preserve and, in strategic situations,
redeploy our capital in other areas. When market conditions and visibility improves, we believe
that we can quickly re-initiate our manufacturing capacity expansion, as a result of the
operational improvements we have made with respect to the construction and ramp of new facilities.
In the meantime, however, we will have to ensure that we balance our production levels with demand
for our products.
Historically, we have maintained moderate lead times, which has enabled customers to place
orders close to their true needs for product. In defining our financial goals and projections, we
consider inventory on hand, backlog, production cycles and expected order patterns from customers.
If our estimates in these areas become inaccurate, we may not be able to meet our revenue goals and
9
projections. In addition, some customers require us to manufacture product and have it
available for shipment, even though the customer is unwilling to make a binding commitment to
purchase all, or even some, of the products. As a result, in any quarterly fiscal period we are
subject to the risk of cancellation of orders leading to a fall-off of sales and backlog. Further,
those orders may be for products that meet the customer’s unique requirements so that those
cancelled orders would, in addition, result in an inventory of unsaleable products, and thus
potential inventory write-offs. We routinely estimate inventory reserves required for such
products, but actual results may differ from these reserve estimates.
We have acquired SIT to extend our business model and enhance our competitiveness, but we face
integration and other related risks arising from this acquisition that could expose us to liability
or cause us not to achieve these benefits.
We have begun the process of integrating SIT into our business, which we expect will require
significant resources until completed in the second half of fiscal year 2010. However, we may not
be able to integrate SIT successfully into our existing business and could incur or assume unknown
or contingent liabilities as a result of this acquisition or fail to realize the expected
improvements in our engineering and technical capabilities or responsiveness to market
opportunities. We also may incur acquisition or disposition-related charges, amortization of
expenses related to intangibles and charges for impairment of long-term assets as a result of this
acquisition. We also may lose some laminate sales from customers who choose to withdraw business
from us because they perceive SIT to be a competitor. If any of these possibilities occur, our
business could be materially adversely affected.
We face intense competition from other companies producing solar energy and other renewable energy
products.
The solar energy market is intensely competitive and rapidly evolving. The number of solar
energy product manufacturers is rapidly increasing due to the growth of actual and forecast demand
for solar energy products and the relatively low barriers to entry. If we fail to attract and
retain customers in our target markets for our current and future core products, namely solar
laminates, we will be unable to increase our revenue and market share. Some of our competitors
have established more prominent market positions, and if we fail to attract and retain customers
and establish successful distribution networks in our target markets for our products, we will be
unable to increase our sales. In addition, many of our competitors manufacture predominantly
crystalline or polycrystalline silicon solar modules which are currently sold at lower cost than
our solar laminates.
We may also face competition from new entrants to the solar energy market, including those
that offer more advanced technological solutions or that have greater financial resources. A
significant number of our competitors are developing or currently producing products based on more
advanced solar energy technologies, including amorphous silicon, string ribbon, copper indium
gallium (di)selenide, and nano technologies, which may eventually offer cost and technology
advantages over the technologies currently used by us. A widespread adoption of any of these
technologies could result in a rapid decline in our position in the solar energy market and our
revenue if we fail to adopt such technologies or develop new technologies. Furthermore, the entire
solar energy industry also faces competition from conventional energy (for example a decline in
base grid electricity prices), and non-solar renewable energy providers. Due to the relatively
high manufacturing costs compared to most other energy sources, solar energy is generally not
competitive without government incentive programs.
Many of our existing and potential competitors have substantially greater financial,
technical, manufacturing and other resources than we do. Our competitors’ greater size in some
cases provides
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them with a competitive advantage with respect to manufacturing because of their economies of
scale and their ability to purchase raw materials at lower prices. As a result, those competitors
may have stronger bargaining power with their suppliers and may have an advantage over us in
negotiating favorable pricing, as well as securing supplies in times of shortages. Many of our
competitors also have greater brand name recognition, more established distribution networks,
balance of system capabilities, and larger customer bases. In addition, many of our competitors
have well-established relationships with our current and potential distributors and have extensive
knowledge of our target markets. As a result, they may be able to devote more resources to the
research, development, promotion and sale of their products or respond more quickly to evolving
industry standards and changes in market conditions than we can. Our failure to adapt to changing
market conditions and to compete successfully with existing or new competitors may materially and
adversely affect our financial condition and results of operations.
Our customers increasingly need financing to purchase our products, which exposes us to additional
business and credit risks.
Availability and cost of financing are significant factors that affect demand for our
products. Developers and owners of solar facilities typically require project financing before
initiating a solar installation. Roofing contractors and other solar integrators must obtain
working capital financing to carry inventory of our products and maintain their operations.
Historically most of our customers have arranged their own financing without assistance from us,
but with the illiquidity of current financing markets some of our customers have sought various
forms of credit support from us. From time to time we may provide credit support to certain
customers through open account sales or extended payment terms. Due to our size and capital
constraints, we are not able to satisfy all credit requests by our customers. These credit support
transactions expose us to credit risk, including the risk of default by customers. In addition, if
we are unable to provide credit to our customers, or otherwise induce third parties to satisfy
customer credit demands, we could lose sales and be unable to achieve our future business plan.
We have a history of losses and our future profitability is uncertain; the failure to maintain
sustainable profitability could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
Since our inception, we have incurred significant net losses. Principally as a result of
ongoing operating losses, we had an accumulated deficit of $312.7 million as of June 30, 2009.
However, we generated net income of $12.5 million for the year ended June 30, 2009, and our goal is
to operate our business in such a way that such profitability is sustainable over the long term.
Nonetheless, we may be unable to sustain or increase our profitability in the future, which in turn
could materially and adversely impact our ability to repay our debt and could materially decrease
the market value of our common stock (and as a result, the value of our convertible senior notes).
We expect to continue to make significant capital expenditures and anticipate that our expenses
will increase as we seek to:
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continuously improve our manufacturing operations, whether domestically or
internationally;
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service our debt obligations;
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develop our distribution network;
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continue to research and develop our products and manufacturing technologies;
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implement our demand creation initiatives, which may include project financing and
strategic acquisitions;
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implement internal systems and infrastructure to support our growth; and
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retain key members of management, retain other personnel and hire additional personnel.
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We do not know whether our revenue will grow at all or grow rapidly enough to absorb these
costs and our limited operating history under our current business strategy and new management team
makes it difficult to assess the extent of these expenses or their impact on our operating results.
If we fail to sustain profitability, our business, results of operations, financial condition and
cash flows could be materially adversely affected.
We have international operations, which we are expanding, that are vulnerable to risks associated
with doing business in foreign countries.
We have a PV laminate manufacturing facility in Tijuana, Mexico, and have established a joint
venture in Tianjin, China, to manufacture PV laminates. Also, a portion of our expenses are
denominated in currencies other than U.S. dollars. International operations and transactions are
subject to certain risks inherent in doing business abroad, including:
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the potential that we may be forced to forfeit, voluntarily or involuntarily, foreign
assets due to economic or political instability in the countries in which we choose to
locate our manufacturing facilities;
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difficult and expensive compliance with the commercial and legal requirements of
international markets;
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difficulty in interpreting and enforcing contracts governed by foreign law, which may
be subject to multiple, conflicting and changing laws, regulations and tax systems;
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inability to obtain, maintain or enforce intellectual property rights;
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encountering trade barriers such as export requirements, tariffs, currency exchange
controls, taxes and other restrictions and expenses, which could affect the competitive
pricing of our solar laminates and reduce our market share in some countries;
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being subjected to additional withholding taxes or other tax on our foreign income or
tariffs and other restrictions on foreign trade and investment, including currency
exchange controls;
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being subjected to fluctuations in exchange rates which may affect product demand and
our profitability in U.S. dollars to the extent the price of our solar laminates and cost
of raw materials, labor and equipment is denominated in a foreign currency;
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limitations on dividends or restrictions against repatriation of earnings;
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difficulty in recruiting and retaining individuals skilled in international business
operations; and
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increased costs associated with maintaining international marketing efforts.
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In addition, since expanding our business globally is an important element of our strategy,
our exposure to these risks will be greater in the future. The likelihood of such occurrences and
their potential effect on us vary from country to country and are unpredictable. However, any such
occurrences could be harmful to our business and our profitability.
Demand for our products is affected by existing regulations concerning the electrical utility
industry; changes to such regulations may present technical, regulatory and economic barriers to
the purchase and use of solar power products, which may significantly reduce demand for our
products.
The market for electricity generation products is influenced heavily by foreign, federal,
state and local government regulations and policies concerning the electric utility industry, as
well as internal policies and regulations promulgated by electric utilities. These regulations and
policies often relate to electricity pricing and technical interconnection of customer-owned
electricity generation. In the United States (at
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both the national level and the state and local
level) and in a number of other countries, these regulations and policies are being modified and
may continue to be modified.
Customer purchases of, or further investment in the research and development of, alternative
energy sources, including solar power technology, could be deterred by these regulations and
policies, which could result in a significant reduction in the potential demand for our solar power
products. For example, utility companies commonly charge fees to larger, industrial customers for
disconnecting from the electric grid or for having the capacity to use power from the electric grid
for back-up purposes. These fees could increase the cost to our customers of using our solar power
products and make them less desirable, thereby harming our business, prospects, results of
operations and financial condition.
We anticipate that our solar power products and their installation will be subject to
oversight and regulation in accordance with national, state and local laws and ordinances relating
to building codes, safety, and environmental protection, utility interconnection and metering and
related matters. There is also a burden in having to track the requirements of individual
countries and states and design equipment to comply with the varying standards. Any new government
regulations or utility policies pertaining to our solar power products may result in significant
additional expenses to us and our resellers and their customers and, as a result, could cause a
significant reduction in demand for our solar power products.
We receive a significant portion of our revenues from a small number of customers.
We historically have entered into agreements with a relatively small number of major customers
throughout the world. Our five largest customers represented approximately 46%, 50% and 40% of our
total revenue for the fiscal years ended June 30, 2009, 2008 and 2007, respectively. Any loss or
material reduction in sales to any of our top customers would be difficult to recoup from other
customers and could have an adverse effect on our sales, results of operations, financial condition
and cash flows.
The reduction or elimination of government incentives related to solar power could cause our
revenues to decline.
Today, the cost of solar power exceeds the cost of power furnished by the electric utility
grid in most locations. As a result, federal, state and local government bodies in many countries,
most notably Germany, Japan, Italy, Spain, France, Greece, China and the United States, have
provided incentives in
the form of rebates, tax credits and other incentives to end users, distributors, system
integrators and manufacturers of solar power products to promote the use of solar energy to reduce
dependency on other forms of energy. These government economic incentives could be reduced or
eliminated. Reductions in, or eliminations or expirations of, incentives related to solar power
could result in decreased demand for our solar laminates and lower our revenue.
We must continue to develop and market new and innovative products and there can be no assurance
that such efforts will be successful.
Our financial performance depends in part on our ability to enhance our existing solar
laminates, develop new and innovative products and product applications, reduce our costs of
producing solar laminates, and adopt or develop new technologies that continue to differentiate our
products from those of our competitors. The continued demand for our solar laminates is premised
in part on the features of our solar laminates that distinguish them from the solar laminates of
our competitors and the resulting unique product applications. These features include physical
flexibility, the ability of our laminates to be integrated with roofing materials, light weight,
superior resistance to wind lift, durability, no roof penetration and ease of installation. There
are companies using similar or competitive technologies that
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have introduced or announced plans to
introduce solar laminates incorporating some or all of these features. In addition, all solar
laminates compete based on efficiency and significant advances in the efficiency of the solar
laminates of our competitors also could provide them with a competitive advantage. If we fail to
enhance our existing solar laminates, develop new and innovative products and product applications,
or adopt or develop new technologies that continue to differentiate our products from those of our
competitors, our business, financial condition and results of operations could be adversely
affected.
The expansion of our business into new markets, such as residential, may increase our exposure to
certain risks, including class action claims.
We are developing new applications of our solar technology, including solar laminates to be
integrated into residential roofing materials. Our new solar technology applications may not gain
market acceptance and we may not otherwise be successful in entering new markets, including the
market for residential applications. Moreover, entry into new markets may increase our exposure to
certain risks that we currently face or expose us to new risks. For example, the residential
construction market for solar energy systems is exposed to different risks than the commercial
construction markets, including more acute seasonality, sensitivity to interest rates, and other
macroeconomic conditions, as well as aesthetics and enhanced legal exposure. In particular, new
home developments can result in class action litigation when one or more homes in a development
experience problems with roofing or power systems. If we enter the residential market and
experience product failures that create property damage or personal injury, we may be exposed to
greater liability of a different nature than with respect to product failures in commercial
building applications.
We have focused our business strategy on, and invested significant financial resources in, the BIPV
segment of the PV market and there is no guarantee that the demand for BIPV systems will develop as
we anticipate.
Our current business strategy rests on increasing demand for BIPV systems. We believe that
there has been an increase in demand for BIPV systems based in part on increasing interest and
customer support from the building industry, solar customers and governments. As a result, we have
invested, and will continue to invest, significant financial resources in the production and
commercialization of our solar laminates for BIPV systems. If the BIPV segment does not develop as
we anticipate, or takes longer
to develop than we anticipate, we may experience difficulties implementing our growth and
business targets. This in turn could adversely impact our business, financial condition and
results from operations.
We may be unable to obtain key raw materials that meet our quality, quantity and cost requirements.
The key raw materials used in our business are stainless steel, resin-based polymers, nickel
and high purity industrial gases, primarily argon, nitrogen, hydrogen, silane and germane. Most of
our key raw materials are readily available from numerous sources, however we have, in certain
instances, selected single-source suppliers for certain key raw materials and components for
efficiency, cost and quality. Our supply chain and operations could be adversely impacted by the
failure of the suppliers of the single-sourced materials to provide us with the raw materials that
meet our quality, quantity and cost requirements. In addition, significant shortages or price
increases in raw materials that are not single-sourced may adversely impact our business. Any
constraint on our production may cause us to be unable to meet our obligations under customer
purchase orders, and any increase in the price of raw materials could constrain our margins, either
of which would adversely impact our financial results.
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We actively manage our raw materials and other supply costs through purchasing strategies,
product design and operating improvements; however our management may not always be effective,
which could adversely impact our supply chain and financial condition. Some of our suppliers may
be unable to supply our demand for raw materials and components. In such event, we may be unable
to identify new suppliers or qualify their products for use in our production lines in a timely
manner and on commercially reasonable terms. Raw materials and components from new suppliers also
may be less suited for our technology and yield solar laminates with lower conversion efficiencies,
higher failure rates and higher rates of degradation than solar laminates manufactured with the raw
materials from our current suppliers. Our failure to obtain raw materials and components that meet
our quality, quantity and cost requirements in a timely manner could interrupt or impair our
ability to manufacture our solar laminates or increase our manufacturing cost.
Significant warranty and product liability claims could adversely affect our business and results
of operations.
We may be subject to warranty and product liability claims in the event that our solar
laminates or PV systems fail to perform as expected or if a failure of our solar laminates or PV
systems results, or is alleged to result, in bodily injury, property damage or other damages.
Since our solar laminates and PV systems are electricity producing devices, it is possible that our
products could result in injury, whether by product malfunctions, defects, improper installation or
other causes. In addition, because the products we are developing incorporate new technologies and
use new installation methods, we cannot predict whether or not product liability claims will be
brought against us in the future or the effect of any resulting negative publicity on our business.
As a result of our acquisition of SIT, we may be subject to warranty and product liability claims
associated with the manufacture, sale and installation of products by SIT before the acquisition.
Moreover, we may not have adequate resources in the event of a successful claim against us.
Our current standard product warranty for our solar laminates ranges from 20-25 years. We
believe our warranty periods are competitive with industry practice. Due to the long warranty
period and our proprietary technology, we bear the risk of extensive warranty claims long after we
have shipped product and recognized revenue. Although we test our solar power products for
reliability and durability, we cannot ensure that we effectively simulate the 20-25 year warranty
period. Any increase in the defect rate of our products would cause us to increase the amount of
warranty reserves and have a corresponding
negative impact on our financial results.
A successful warranty or product liability claim against us that is not covered by insurance
or is in excess of our available insurance limits could require us to make significant payments of
damages. In addition, quality issues can have various other ramifications, including delays in the
recognition of revenue, loss of revenue, loss of future sales opportunities, increased costs
associated with repairing or replacing products, and a negative impact on our goodwill and
reputation. The possibility of future product failures could cause us to incur substantial
expenses to repair or replace defective products. Furthermore, widespread product failures may
damage our market reputation and reduce our market share and cause sales to decline.
The conversion rate of our outstanding convertible debt is dependent upon the trading price of our
common stock and thus the dilutive impact of the future converted shares cannot be predicted.
Except in the instance of specific events involving the price of the Company’s common stock,
the price of the Notes, and certain corporate transactions, our outstanding convertible debt is not
convertible until March 15, 2013. The holders of the Notes may convert the principal amount of
their notes into cash
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and, if applicable, shares of the Company’s common stock initially at a
conversion rate of 10.8932 shares (equivalent to an initial conversion price of approximately
$91.80 per share) per $1,000 principal amount of the Notes. The holders of the Notes are only entitled
to amounts in excess of the principal amount if shares of the Company’s common stock exceed a
market price of $91.80 for a period of 20 consecutive trading days during the applicable cash
settlement averaging period. Since we cannot predict the future trading price of our common stock,
we cannot estimate the number of shares that will be issued at the time of conversion and the
effect of those shares on the trading price of the common stock or the effect on earnings per
share.
If we lose key personnel or are unable to attract and retain qualified personnel to maintain and
expand our business, financial condition, results of operations and prospects could be adversely
affected.
Our success is highly dependent on the continued services of the senior management team and of
a limited number of skilled managers, scientists and technicians. The loss of any of these
individuals could have a material adverse effect on us. In addition, our success will depend upon,
among other factors, the recruitment and retention of additional highly skilled and experienced
management and technical personnel. There can be no assurance that we will be able to retain
existing employees or to attract and retain additional personnel on acceptable terms given the
competition for such personnel in industrial, academic and nonprofit research sectors.
We may become subject to legal or regulatory proceedings which may reach unfavorable resolutions.
We are involved in legal proceedings arising in the normal course of business. Due to the
inherent uncertainties of legal proceedings, the outcome of any such proceeding could be
unfavorable, and we may choose to make payments or enter into other arrangements, to settle such
proceedings. Failure to settle such proceedings could require us to pay damages or other expenses,
which could have a material adverse effect on our financial condition or results of operations. We
have been subject to legal proceedings in the past involving the validity and enforceability of
certain of our patents. While such patent-related legal proceedings have been resolved, such
proceedings can require the expenditure of substantial management time and financial resources and
can adversely affect our financial performance. There can be no assurance that we will not be a
party to other legal proceedings in the future.
We are subject to a variety of federal, state and local laws, rules and regulations related to the
discharge or disposal of toxic, volatile or other hazardous chemicals that may expose us to
liability and other compliance risks.
Although we believe that we are in compliance with these laws, rules and regulations, the
failure to comply with present or future regulations could result in fines, suspension of
production or cessation of operations. Third parties may also have the right to sue to enforce
compliance. Moreover, it is possible that increasingly strict requirements imposed by
environmental laws and enforcement policies thereunder could require us to make significant capital
expenditures.
The operation of a manufacturing plant entails the inherent risk of environmental damage or
personal injury due to the handling of potentially harmful substances. There can be no assurance
that we will not incur material costs and liabilities in the future because of an accident or other
event resulting in personal injury or unauthorized release of such substances to the environment.
In addition, we generate hazardous materials and other wastes that are disposed of at licensed
disposal facilities. We may be liable,
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irrespective of fault, for material cleanup costs or other
liabilities incurred at these facilities in the event of a release of hazardous substances by such
facilities into the environment.
Our success depends in part upon our ability to protect our intellectual property and our
proprietary technology including our trade secrets and other confidential information.
Our success depends in part on our ability to obtain and maintain intellectual property
protection for products based on our technologies. Our policy is to seek to protect our products
and technologies by, among other methods, filing United States and foreign patent applications
related to our proprietary technology, inventions and improvements. The patent positions of
companies like ours are generally uncertain and involve complex legal and factual questions. Our
ability to maintain our proprietary position for our technology will depend on our success in
obtaining effective patent claims and enforcing those claims once granted. We do not know whether
any of our patent applications will result in the issuance of any patents. Our issued patents and
those that we may issue in the future may be challenged, invalidated, rendered unenforceable or
circumvented, which could limit our ability to stop competitors from marketing related products or
the length of term of patent protection that we may have for our products and technologies. In
addition, the rights granted under any issued patents may not provide us with competitive
advantages against competitors with similar products or technologies. Furthermore, our competitors
may independently develop similar technologies or duplicate technology developed by us in a manner
that does not infringe our patents or other intellectual property. Because of the extensive time
required for development and commercialization of products based on our technologies, it is
possible that,
before these products can be commercialized, any related patents may expire or remain in force
for only a short period following commercialization, thereby reducing any advantages of these
patents and making it unlikely that we will be able to recover investments we have made to develop
our technologies and products based on our technologies.
In addition to patent protection, we also rely on protection of trade secrets, know-how and
confidential and proprietary information. To maintain the confidentiality of trade secrets and
proprietary information, we have entered into confidentiality agreements with our employees, agents
and consultants upon the commencement of their relationships with us. These agreements require
that all confidential information developed by the individual or made known to the individual by us
during the course of the individual’s relationship with us be kept confidential and not disclosed
to third parties. Our agreements with employees also provide that inventions conceived by the
individual in the course of rendering services to us will be our exclusive property. Individuals
with whom we have these agreements may not comply with their terms. In the event of the
unauthorized use or disclosure of our trade secrets or proprietary information, these agreements,
even if obtained, may not provide meaningful protection for our trade secrets or other confidential
information. To the extent that our employees or consultants use technology or know-how owned by
others in their work for us, disputes may arise as to the rights in related inventions. Adequate
remedies may not exist in the event of unauthorized use or disclosure of our confidential
information. The disclosure of our trade secrets would impair our competitive position and could
have a material adverse effect on our operating results, financial condition and future growth
prospects.
We may be involved in lawsuits to protect or enforce our patents, which could be expensive and time
consuming.
Competitors may infringe our patents. To counter infringement or unauthorized use, we may be
required to file patent infringement claims, which can be expensive and time-consuming. In
addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or
is unenforceable, or may refuse to stop the other party from using the technology at issue on the
grounds that our patents do
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not cover its technology. An adverse determination of any litigation
or defense proceedings could put one or more of our patents at risk of being invalidated or
interpreted narrowly and could put our patent applications at risk of not issuing.
Interference proceedings brought by the United States Patent and Trademark Office may be
necessary to determine the priority of inventions with respect to our patent applications.
Litigation or interference proceedings may fail and, even if successful, may result in substantial
costs and be a distraction to our management. We may not be able to prevent misappropriation of
our proprietary rights, particularly in countries where the laws may not protect such rights as
fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure. In addition, during the course of this litigation, there could be
public announcements of the results of hearings, motions or other interim proceedings or
developments. If securities analysts or investors perceive these results to be negative, it could
have a substantial adverse effect on the price of our common stock.
We may not prevail in any litigation or interference proceeding in which we are involved.
Even if we do prevail, these proceedings can be expensive and distract our management.
Third parties may own or control patents or patent applications that are infringed by our products
or technologies.
Our success depends in part on avoiding the infringement of other parties’ patents and
proprietary rights. In the United States and most other countries, patent applications are
published 18 months after filing. As a result, there may be patents of which we are unaware, and
avoiding patent infringement may be difficult. We may inadvertently infringe third-party patents
or patent applications. These third parties could bring claims against us that, even if resolved
in our favor, could cause us to incur substantial expenses and, if resolved against us, could
additionally cause us to pay substantial damages. Further, if a patent infringement suit were
brought against us, we and our joint venture partners and licensees could be forced to stop or
delay research, development, manufacturing or sales of products based on our technologies in the
country or countries covered by the patent we infringe, unless we can obtain a license from the
patent holder. Such a license may not be available on acceptable terms, or at all, particularly if
the third party is developing or marketing a product competitive with products based on our
technologies. Even if we were able to obtain a license, the rights may be nonexclusive, which
would give our competitors access to the same intellectual property.
We also may be required to pay substantial damages to the patent holder in the event of an
infringement. Under some circumstances in the United States, these damages could be triple the
actual damages the patent holder incurs. If we have supplied infringing products to third parties
for marketing or licensed third parties to manufacture, use or market infringing products, we may
be obligated to indemnify these third parties for any damages they may be required to pay to the
patent holder and for any losses the third parties may sustain themselves as the result of lost
sales or damages paid to the patent holder.
Any successful infringement action brought against us may also adversely affect marketing of
products based on our technologies in other markets not covered by the infringement action.
Furthermore, we may suffer adverse consequences from a successful infringement action against us
even if the action is subsequently reversed on appeal, nullified through another action or resolved
by settlement with the patent holder. The damages or other remedies awarded, if any, may be
significant. As a result,
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any infringement action against us would likely harm our competitive
position, be costly and require significant time and attention of our key management and technical
personnel.
Compliance with environmental regulations can be expensive, and noncompliance with these
regulations may require us to pay substantial fines, suspend production or cease operations.
The operation of our manufacturing facilities entails the use and handling of potentially
harmful substances, including toxic and explosive gases that pose inherent risks of environmental
damage or personal injury. Although we believe that we are in material compliance with
environmental regulations, rules and regulations, there can be no assurance that we will not incur
material costs and liabilities in the future because of an accident or other event resulting in
personal injury or unauthorized release of such substances into the environment. We may be liable,
irrespective of fault, for material cleanup costs or other liabilities incurred at these facilities
in the event of a release of hazardous substances into the environment by our operations.
For example, our manufacturing process involves the controlled storage and use of silane and
germane gases, both of which are toxic and combustible. Although we have rigorous safety
procedures for handling these materials, the risk of accidental injury from such hazardous
materials cannot be completely eliminated. If we have an accident at one of our facilities
involving a release of these
substances, we may be subject to civil and/or criminal penalties, including financial
penalties and damages, and possibly injunctions preventing us from continuing our operations.
In addition, it is possible that increasingly strict requirements imposed by environmental
laws and enforcement policies could require us to make significant capital expenditures. To date
such laws and regulations have not had a significant impact on our operations, and we believe that
we have all necessary permits to conduct operations as they are presently conducted. If more
stringent laws and regulations are adopted in the future, the costs of compliance with these new
laws and regulations could be substantial. The failure to comply with present or future
regulations could result in fines, third party lawsuits, suspension of production or cessation of
operations.
We have entered into joint ventures and licensing agreements to develop and commercialize products
based on our technologies and we must manage such joint ventures and licensing agreements
successfully.
We have entered into licensing and joint venture agreements in order to develop and
commercialize certain products based on our technologies. Any revenue or profits that may be
derived by us from these agreements will be substantially dependent upon our ability to agree with
our joint venture partners and licensees about the management and operation of the joint ventures
and license agreements. In addition, any revenue or profits from such agreements will be
substantially dependent on the willingness and ability of our joint venture partners and licensees
to devote their financial resources and manufacturing and marketing capabilities to commercialize
products based on our technologies. There can be no assurance that we will agree regarding the
operation of such joint ventures and licensing agreements, that required financial resources will
be available on mutually agreeable terms or that commercialization efforts will be successful. If
we and our joint venture partners and licensees are unable to agree with respect to the operation
of our joint ventures and licensing agreements, are unwilling or unable to devote financial
resources or are unable to commercialize products based on our technologies, we may not be able to
realize revenue and profits based on our technologies and our business could be materially
adversely affected.
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Our government product development and research contracts may be terminated by unilateral
government action, or we may be unsuccessful in obtaining new government contracts to replace those
that have been terminated or completed.
We have several government product development and research contracts. Any revenue or profits
that may be derived by us from these contracts will be substantially dependent upon the government
agencies’ willingness to continue to devote their financial resources to our research and
development efforts. There can be no assurance that such financial resources will be available or
that such research and development efforts will be successful. Our government contracts may be
terminated for the convenience of the government at any time, even if we have fully performed our
obligations under the contracts. Upon a termination for convenience, we would generally only be
entitled to recover certain eligible costs and expenses we had incurred prior to termination and
would not be entitled to any other payments or damages. Therefore, if government product
development and research contracts are terminated or completed and we are unsuccessful in obtaining
replacement government contracts, our revenue and profits may decline and our business may be
adversely affected.
The credit facility entered into by our subsidiaries, United Solar Ovonic Corporation and United
Solar Ovonic LLC, contains covenant restrictions that may limit our ability to operate our
business.
We conduct substantially all of our United Solar Ovonic segment operations through our
subsidiaries
United Solar Ovonic Corporation and United Solar Ovonic LLC. For example, our cash flows from
that segment are dependent on the distributions to us by United Solar Ovonic Corporation and United
Solar Ovonic LLC. In February 2008, United Solar Ovonic Corporation and United Solar Ovonic LLC
entered into a secured credit facility with an aggregate commitment of up to $55.0 million, of
which we are a guarantor. The credit facility contains, and any other future debt agreements may
contain, covenant restrictions that may effectively limit our ability to operate our business, due
to restrictions on our or our subsidiaries’ ability to, among other things:
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•
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incur additional debt or issue guarantees;
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•
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create liens;
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•
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make certain investments;
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•
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enter into transactions with our affiliates;
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•
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sell certain assets;
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•
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make certain restricted payments; declare or pay dividends or make other distributions
to stockholders; and
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•
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merge or consolidate with any person.
|
As a result of these covenants, our ability to respond to changes in business and economic
conditions and to obtain additional financing, if needed, may be significantly restricted, and we
may be prevented from engaging in transactions that might otherwise be beneficial to us due to the
restrictions imposed by the credit facility. In addition, the failure to comply with these
covenants could result in a default, which could permit the lenders and debt holders to accelerate
such debt.
Our ability to utilize our net operating loss carryforwards could be substantially limited if we
experience an ownership change under the Internal Revenue Code, which may adversely affect our
results of operations and financial condition.
As a result of our past financial performance, we have significant operating loss and research
and development credit carryforwards which expire from 2010 to 2027. Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”), contains rules that limit the ability of a company
that undergoes
20
an ownership change to utilize its net operating loss carryforwards in years after
the ownership change. An “ownership change” for purposes of Section 382 of the Code generally
refers to any change in ownership of more than 50% of the company’s stock over a three-year period.
These rules generally operate by focusing on ownership changes among stockholders owning, directly
or indirectly, 5% or more of the stock of a company or any change in ownership arising from a new
issuance of the company’s stock.
If we undergo an ownership change for purposes of Section 382 as a result of future
transactions involving our common stock, including purchases or sales of stock between our greater
than 5% stockholders, our ability to use our net operating loss carryforwards would be subject to
the limitations of Section 382. Depending on the resulting limitations, a significant portion of
our net operating loss carryforwards could expire before we would be able to use them. Our
inability to utilize our net operating loss carryforwards may adversely affect our results of
operations and financial condition.
We have a significant amount of debt outstanding. Our indebtedness, along with our other
contractual commitments, could adversely affect our business, financial condition and results of
operations, as well as our ability to meet any of our payment obligations.
Together with our subsidiaries, we have a significant amount of debt and debt service
requirements. As of June 30, 2009, we have approximately $316.3 million of outstanding debt. This
level of debt and related debt service could have significant consequences on our future
operations, including:
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•
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making it more difficult for us to meet our payment and other obligations;
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•
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resulting in an event of default if we and our subsidiaries fail to comply with
covenants contained in our debt agreements, which could result in such debt becoming
immediately due and payable;
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•
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reducing the availability of our cash flow to fund working capital, capital
expenditures, acquisitions and other general corporate purposes, and limiting our ability
to obtain additional financing for these purposes;
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•
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subjecting us to the risk of increased sensitivity to interest rate increases on our
indebtedness with variable interest rates, including borrowings under our new credit
facility;
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•
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limiting our flexibility in planning for, or reacting to, and increasing our
vulnerability to, changes in our business, the industry in which we operate and the
general economy; and
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•
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placing us at a competitive disadvantage compared to our competitors that have less
debt or are less leveraged.
|
Any of the above-listed factors could have an adverse effect on our business, financial
condition and results of operations, liquidity and our ability to meet our payment obligations.
Our ability to meet our payment and other obligations under our debt instruments depends on our
ability to generate significant cash flow in the future. This, to some extent, is subject to
general economic, financial, competitive, legislative and regulatory factors as well as other
factors that are beyond our control. We cannot assure you that our business will generate cash
flow from operations, or that future borrowings will be available to us under existing or any
future credit facilities or otherwise, in an amount sufficient to enable us to meet our payment
obligations and to fund other liquidity needs. If we are not able to generate sufficient cash flow
to service our debt obligations, we may need to refinance or restructure our debt, sell assets,
reduce or delay capital investments, or seek to raise additional capital. If we are unable to
implement one or more of these alternatives, we may not be able to meet our payment obligations
under our debt and other obligations.
21
Item 1B
:
Unresolved Staff Comments
None.
Item 2
:
Properties
Our corporate headquarters is located in Rochester Hills, Michigan. We currently lease our
headquarters, together with adjacent facilities in Rochester Hills, which we use principally for
our Ovonic Materials segment and for our corporate activities. These facilities, including our
headquarters, provide an aggregate of approximately 160,000 square feet for technical and
administrative uses, and are supplemented by an aggregate of approximately 10,000 square feet of
additional leased facilities in Troy, Michigan, for research and development and manufacturing
purposes.
Our United Solar Ovonic segment’s headquarters is located in Auburn Hills, Michigan; we lease
sales offices in San Diego, California; Villafranca, Italy; Paris, France; Madrid, Spain; and
Frankfurt/Main, Germany. We lease two manufacturing facilities in Auburn Hills for this segment:
one of these facilities (approximately 167,000 square feet) also contains the segment’s
headquarters; the other facility (approximately 172,000 square feet) became operational in December
2006. We also lease an approximately 42,000 square feet facility in Troy, which houses our
research and development and a 320,000 square feet facility in Tijuana, Mexico, which principally
assembles PV laminates for PV cells produced at our Greenville, Michigan, plant.
We own two manufacturing facilities in Greenville, Michigan. Each is approximately 280,000
square feet. We own approximately 25 acres of land in Battle Creek, Michigan upon which we have
started the construction of a building for our manufacturing expansion, which we have paused in the
third quarter of fiscal year 2009 until market conditions improve.
SIT, which we recently acquired, has its global headquarters in Los Angeles, California; its
European headquarters in Mainz, Germany; a manufacturing facility in Los Angeles, California; and a
roofing operation facility in Los Angeles, California. All of these facilities are leased.
Item 3
:
Legal Proceedings
We are 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, we do not believe that any of these other legal
proceedings or matters in which we are currently involved, either individually or in the aggregate,
will have a material adverse effect on our business, liquidity, consolidated financial position or
results of operations.
On September 10, 2007, Chevron Technologies Ventures LLC (“CTV”) issued a notice of dispute
and filed claims in arbitration (the “CTV Arbitration”) seeking damages and injunctive and other
relief and alleging that Energy Conversion Devices, Inc. (“ECD”) and Ovonic Battery Company, Inc.
(“OBC”) had breached and anticipatorily repudiated obligations under the Amended and Restated
Operating Agreement dated as of December 2, 2004 among ECD, OBC and CTV (the “Operating Agreement”)
to provide certain funding to Cobasys LLC (“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. ECD and OBC denied CTV’s allegations and filed a counterclaim,
seeking damages and injunctive and other relief on the ground that CTV had acted unilaterally and
in violation of the Operating
22
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
OBC’s application for partial judgment on the pleadings seeking to dismiss CTV’s initial and
amended claims and CTV’s 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.
On July 30, 2008 Mercedes-Benz U.S. International, Inc. (“MBUSI”) filed a complaint and motion
for preliminary injunction (the “MBUSI Lawsuit”) against Cobasys, CTV and OBC in the Federal
District Court for the Northern District of Alabama alleging that Cobasys breached a contract for
production of nickel metal hydride battery packs and that CTV and OBC intentionally interfered with
MBUSI’s business relations through actions in their capacities as owners of Cobasys. MBUSI
subsequently amended its complaint to add a claim of conspiracy against Cobasys, CTV and OBC
arising from the
same conduct alleged in the initial complaint.
On June 26, 2009, in connection with an agreement for OBC and CTV to sell their interests in
Cobasys to a third party, (1) ECD, OBC, and CTV entered into a Second Interim Settlement Agreement
temporarily suspending the CTV Arbitration and providing for the dismissal of the CTV Arbitration,
and the execution of a settlement agreement and release among the parties, upon the consummation of
such sale, and (2) Cobasys, ECD, OBC, CTV and MBUSI entered into a Settlement Agreement and Mutual
Release temporarily suspending the lawsuit and providing for the dismissal of the lawsuit upon the
consummation of such sale. The sale was consummated on July 13, 2009, and the CTV Arbitration and
MBUSI Lawsuit were each dismissed, with prejudice, on July 13, 2009. ECD, OBC, and CTV also
entered into a Settlement Agreement and Release as of July 13, 2009.
Item 4
:
Submission of Matters to a Vote of Security Holders
Not applicable
23
PART II
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Item 5
:
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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Our common stock is listed on the NASDAQ Global Select Market under the symbol “ENER.” As of
August 20, 2009, there were 1,556 holders of record of our common stock.
The following table sets forth the range of high and low closing prices for our common stock
as reported by The Nasdaq Global Select Market, Inc. for each period indicated:
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For the year ended June 30,
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2009
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2008
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High
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Low
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High
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Low
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(in dollars per share)
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First Quarter (July — September)
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$
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79.38
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$
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53.05
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$
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36.00
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$
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22.26
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Second Quarter (October — December)
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61.77
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18.50
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36.45
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22.90
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Third Quarter (January — March)
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29.38
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13.23
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34.28
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20.47
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Fourth Quarter (April — June)
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20.51
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13.37
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83.33
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29.55
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Dividends
We have not paid any cash dividends in the past and do not expect to pay any in the
foreseeable future.
Stock Repurchases
During the year ended June 30, 2008, the Company repurchased 11,245 shares of common stock
from the Company’s Chief Executive Officer for payment of tax withholdings upon the vesting of
restricted stock awards.
Stock Price Performance Graph
The following graph compares the cumulative 5-year total return provided shareholders on
Energy Conversion Devices, Inc.’s common stock relative to the cumulative total returns of the
NASDAQ Composite index and the NASDAQ Clean Edge Green Energy index. The Company’s previous
industry comparison, the NASDAQ Clean Edge Index (CLEN) no longer exists therefore we have
transitioned to the NASDAQ Clean Edge Green Energy Index (CELS). Data for the NASDAQ Composite and
the NASDAQ Clean Edge Green Energy Index assume market cap weighting and reinvestment of dividends
over a five-year period. An investment of $100 (with reinvestment of all dividends) is assumed to
have been made in our common stock and in each of the indexes on June 30, 2004 and its relative
performance is tracked through June 30, 2009.
24
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Energy Conversion Devices, Inc., The NASDAQ Composite Index
And The NASDAQ Clean Edge Green Energy Index
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6/30/2004
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6/30/2005
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6/30/2006
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6/30/2007
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6/30/2008
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6/30/2009
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Energy Conversion Devices, Inc.
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100.00
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198.76
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323.53
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273.71
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654.00
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125.67
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NASDAQ Composite
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100.00
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101.09
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109.49
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132.47
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117.33
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92.91
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NASDAQ Clean Edge Green Energy
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100.00
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102.23
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119.43
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160.46
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190.56
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103.36
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The stock price performance included in this graph is not necessarily indicative of
future stock price performance.
25
Item 6
:
Selected Financial Data
Set forth below is certain financial information derived from the Company’s audited
consolidated financial statements.
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Year Ended June 30,
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2009
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2008
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2007
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2006
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2005
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(in thousands, except per share data)
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Consolidated Statements of
Operations
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Total Revenues
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$
|
316,293
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|
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$
|
255,861
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|
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$
|
113,567
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|
|
$
|
102,419
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|
|
$
|
156,570
|
|
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|
|
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Net income (loss) from
continuing operations before
discontinued operations and
extraordinary item
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12,456
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(1)
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3,853
|
(1)
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|
|
(25,231
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)
(1)
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(18,910
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)
|
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49,462
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Discontinued operations, net of
tax benefit
|
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—
|
|
|
|
—
|
|
|
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—
|
|
|
|
314
|
|
|
|
(1,393
|
)
|
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Extraordinary item, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,263
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
12,456
|
(1)
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|
$
|
3,853
|
(1)
|
|
$
|
(25,231
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)
(1)
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$
|
(18,596
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)
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$
|
50,332
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
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|
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|
|
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|
|
|
|
|
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Continuing operations
|
|
$
|
0.29
|
|
|
$
|
0.10
|
|
|
$
|
(0.64
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
1.80
|
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
(0.05
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)
|
|
Extraordinary item
|
|
|
—
|
|
|
|
—
|
|
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|
—
|
|
|
|
—
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
$
|
0.29
|
|
|
$
|
0.10
|
|
|
$
|
(0.64
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
1.83
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
(0.64
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
1.67
|
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
(0.05
|
)
|
|
Extraordinary item
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
(0.64
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
1.70
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
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|
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|
|
|
|
|
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|
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|
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|
Total Assets
|
|
$
|
1,069,178
|
|
|
$
|
1,041,967
|
|
|
$
|
600,679
|
|
|
$
|
596,342
|
|
|
$
|
198,063
|
|
|
Long-Term Obligations
|
|
|
337,662
|
|
|
|
342,055
|
|
|
|
25,796
|
|
|
|
25,594
|
|
|
|
10,204
|
|
|
|
|
|
|
(1)
|
|
Includes restructuring charges of $2.2 million, $9.4 million and $5.4 million in 2009, 2008
and 2007, respectively.
|
26
|
|
|
|
|
Item 7
:
|
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
This section summarizes significant factors affecting the Company’s consolidated operating
results, financial condition and liquidity for the three-year period ended June 30, 2009. This
section should be read in conjunction with the Company’s Consolidated Financial Statements and
related Notes appearing elsewhere in this report.
Overview
We design, manufacture and sell photovoltaic (“PV”) products, known as PV or solar laminates,
that generate clean, renewable energy by converting sunlight into electricity. Solar laminate
sales represent more than 92% of our revenues. We also receive fees and royalties from licensees of
our nickel metal hydride (“NiMH”) battery technology, sell high performance nickel hydroxide used
in NiMH batteries, and receive funds for product development agreements under government sponsored
programs.
The following key factors should be considered when reviewing our results for the periods
discussed:
|
|
•
|
|
Our consolidated financial results are driven primarily by the performance of our
United Solar Ovonic segment
. Our United Solar Ovonic segment accounted for 96% and 94% of
our total revenue in the fiscal years ended June 30, 2009 and 2008, respectively. Our
United Solar Ovonic segment generated operating income of $44.5 million and $31.6 million
in the fiscal years ended June 30, 2009 and 2008, respectively. Given the expected growth
of this segment (as discussed below) relative to our other business activities, our
overall success in the foreseeable future will be aligned primarily with the performance
of our United Solar Ovonic segment and subject to the risks of that business.
|
|
|
|
|
•
|
|
Global economic, capital markets and credit disruptions have significantly impacted
current market conditions in the solar market and created uncertainty, but we believe that
growth opportunities will resume in calendar year 2010.
We believe that there remains
strong interest in alternative energy in general and solar in particular, but existing
global financial constraints are impacting the funding of solar projects that otherwise
have strong strategic rationale and/or financial returns. These macroeconomic conditions
are adversely impacting our customers, including some customers (who are unable to fully
comply) with take-or-pay agreements, and, as a result, our revenues and net income are
likewise adversely impacted. We are working with our customers to preserve relationships
and maximize long-term value by, among other things, reallocating product shipments to
other customers and pursuing other remedies (including contract renegotiations), as
appropriate on a case-by-case basis. We also continue to be encouraged by the
opportunities for large scale restructuring of the energy infrastructure to increase
emphasis on renewable energy, such as our solar laminates. Recent government support in
this direction includes renewable energy spending and incentive programs included in the
American Recovery and Reinvestment Act, and the solar investment tax credit initiatives
enacted as part of the U.S. Emergency Economic Stabilization Act of 2008, including an
8-year extension of the 30%, uncapped investment tax credit for commercial and residential
solar installations, and permitting utilities to benefit from these tax credits. Pending
energy legislation would also adopt a national renewable portfolio standard. We believe
that these programs will provide meaningful stimulus for U.S. growth in calendar year
2010.
|
27
|
|
•
|
|
We are adjusting our production in our United Solar Ovonic segment and reducing costs
to respond to near-term market conditions and improve our overall competitiveness.
In
June 2008, in order to meet increasing demand for our products, we announced the active
expansion of our production capacity and the commencement of a plan to reach 1GW of annual
production capacity by 2012. In March of 2009, we announced that we were slowing the pace
of our “demand-driven” production and expansion plan to better reflect the present impact
of credit availability on project flow in the global pipeline for photovoltaics. In
connection with this announcement, we have implemented actions, including temporary
production hiatuses and a consolidation of certain production operations from our Auburn
Hills 1 facility into our newer Auburn Hills 2 facility. This consolidation, which will
lower overall costs and improve manufacturing efficiencies, is part of an overall program
to reduce costs. Other activities focus on improvement in our operations to generate
higher throughput and yield, reductions in administrative costs, and raw material cost
reductions. We have incurred restructuring expenses as a result of certain of these
activities and may incur additional restructuring expenses as we pursue further cost
reduction activities in the future. We have also recognized under-absorption of fixed
overhead costs, and associated period costs, resulting from our production adjustments and
may recognize similar costs and/or asset impairments in the future if we do not operate
our facilities at productive capacity. At the same time, we intend to continue to invest
strategically in our business, for example to bolster our sales and marketing functions
and to add technical competencies related to application engineering and structured
finance. Additionally, in July 2009, we approved a project to upgrade our deposition
process, materials and equipment in our Auburn Hills 1 facility. The project will utilize
existing equipment in Auburn Hills as well as equipment from our other facilities and will
require an additional investment. This action temporarily reduces our production capacity
in this facility until the project is completed. We expect that these activities will
improve our competitiveness and margins, both in the near-and long-term.
|
|
|
|
|
•
|
|
We are enhancing our revenues in our United Solar Ovonic segment through a demand
creation strategy, which includes focusing on customers and markets where our solar
laminates have a competitive advantage, particularly the rooftop market.
As indicated
above, there have been disruptions in the solar markets caused by global macro economic
conditions. At the same time, competition within the solar market is increasing primarily
as a result of sharp declines in the pricing of polysilicon, a key raw material in
traditional, rigid PV modules. We are continuing to concentrate on the rooftop market,
particularly the BIPV market, which we believe represents the most attractive opportunity
for our solar laminates. The physical flexibility, durability and lightweight nature of
our solar laminates makes them an attractive value proposition for the BIPV market,
particularly commercial rooftop applications, where our solar laminates can be integrated
with roofing materials and other building products. Our strategy is to increase our sales
in the rooftop market, which includes developing new channels for rooftop applications,
such as the utilities channel, and designing new rooftop applications, such as residential
applications. We are also developing new applications that leverage the unique
characteristics of our laminates, such as landfill covers.
|
|
|
|
|
•
|
|
We are strategically deploying our capital resources to implement our demand creation
strategy in our United Solar Ovonic segment and enhance our business model.
As described
below, we have paused our manufacturing capacity expansion, upon which we had previously
principally focused our capital resources, in response to weakened market conditions. We
are now utilizing our capital resources to, among other things, offer financing to
encourage and support the installation of systems utilizing our laminates, and make
strategic acquisitions, like the recent
|
28
|
|
|
|
acquisition of SIT (as described below). We expect to strategically deploy our capital
resources to improve our capabilities, enhance our competitiveness, and opportunistically
develop demand under current market conditions. These activities may impact the adequacy of
our existing capital resources in re-starting our manufacturing capacity expansion when
market conditions improve.
|
|
|
|
|
•
|
|
Subsequent to June 30, 2009, we have acquired and are integrating Solar Integrated
Technologies, Inc. to extend our value proposition and improve our overall competitiveness
as part of our demand creation and operational excellence initiatives.
SIT is a global
leader in designing, developing, bonding, installing and servicing rooftop PV systems, and
has significant field experience with our laminates. SIT’s core competencies in rooftop
solar are expected to improve our engineering and technical capabilities to better support
our channel partners in Europe and the U.S. and to provide a platform for directly
participating in the growing U.S. market. SIT’s expertise is also expected to enhance our
applications activities to improve our responsiveness to market opportunities and reduce
overall systems costs for rooftop installations of our laminates. We have begun the
process of integrating SIT into our business, which we expect will require significant
resources until completed in the second half of fiscal year 2010.
|
|
|
|
|
•
|
|
We are pausing our manufacturing capacity expansion in our United Solar Ovonic segment
to respond to existing uncertainties in the market consistent with our demand driven
expansion strategy.
We presently have 150MW of nameplate capacity and are delaying
further manufacturing capacity expansion until market demand and visibility improves. We
have delayed expansion at our Greenville facility and planned Battle Creek facility, which
will reduce or defer our capital expenditures and allow us to preserve and, in strategic
situations, redeploy our capital in other areas (as described above). When market
conditions and visibility improves, we believe that we have the operational capabilities
to quickly re-initiate our manufacturing capacity expansion, as a result of the
improvements we have made with respect to the construction and ramp of new facilities. We
do not presently believe that we will expand to 300MW of nameplate capacity by 2010 or 1GW
by 2012
.
|
|
|
|
|
•
|
|
We are profitably operating our Ovonic Materials segment and are continuing to realize
value from our technology portfolio.
We have developed proprietary technologies in our
Ovonic Materials segment that we believe have value, including technologies for NiMH
batteries, solid hydrogen storage, metal hydride fuel cells, and biofuel reformation. The
development activities for these technologies have been substantially balanced with
external sources of revenues, such as royalties and development agreements (principally
government contracts), to align our development commercialization efforts at sustainable
levels. We are continually evaluating commercialization opportunities and strategic
alternatives to maximize value for these technologies, which may include licenses, joint
ventures, and sales. We completed the disposition of our Cobasys joint venture interest,
but retained certain technology and royalty rights.
|
Key Indicators of Financial Condition and Operating Performance
In evaluating our business, we use product sales, gross profit, pre-tax income, earnings per
share, net income, cash flow from operations and other key performance metrics. We also use
production, measured in megawatts (“MW”) per annum, and gross margins on product sales as key
performance metrics for our United Solar Ovonic segment, particularly in connection with the
manufacturing operations in this segment.
29
In March 2009, we implemented an organizational restructuring to consolidate certain
production operations from our Auburn Hills 1 facility into our newer Auburn Hills 2 facility which
reduced the combined production capacity from these facilities. This consolidation, which lowered
overall costs and improved manufacturing efficiencies, is part of an overall program to reduce
costs. Additionally, we have realigned our workforce based on our demand creation strategy and
will recognize improved efficiencies as a result. We have incurred total restructuring costs of
$1.7 million through June 30, 2009 as a result of certain of these activities and may incur
additional restructuring expenses as we pursue further cost reduction activities in the future. We
are continuing to evaluate our facilities infrastructure and personnel requirements based on our
consolidated and realigned business activities to identify additional cost savings opportunities
and may undertake additional restructuring activities, and record additional restructuring charges,
as a result.
Results of Operations
The following table summarizes each of our business segment’s operating results for the last
three fiscal years ended June 30, together with the revenue and expenses related to Corporate and
Other that are not allocated to the business segments during these periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
United Solar Ovonic
|
|
$
|
302,758
|
|
|
$
|
239,398
|
|
|
$
|
98,363
|
|
|
$
|
44,537
|
|
|
$
|
31,644
|
|
|
$
|
1,962
|
|
|
Ovonic Materials
|
|
|
13,317
|
|
|
|
16,066
|
|
|
|
14,635
|
|
|
|
3,912
|
|
|
|
899
|
|
|
|
(13,706
|
)
|
|
Corporate and Other
(1)
|
|
|
218
|
|
|
|
397
|
|
|
|
569
|
|
|
|
(27,763
|
)
|
|
|
(36,604
|
)
|
|
|
(30,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
316,293
|
|
|
$
|
255,861
|
|
|
$
|
113,567
|
|
|
$
|
20,686
|
|
|
$
|
(4,061
|
)
|
|
$
|
(42,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Revenues consist primarily of services, facilities and miscellaneous administrative and
laboratory and machine shop services provided to certain non-consolidated affiliates; expenses
primarily include corporate operations, including facilities, human resources, legal,
governance, finance, information technology, business development, purchasing and
restructuring. The operating income (loss) for 2009, 2008 and 2007 includes restructuring
costs associated with the Company’s restructuring plan.
|
30
Year Ended June 30, 2009 Compared to Year Ended June 30, 2008
United Solar Ovonic Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
292,402
|
|
|
$
|
231,519
|
|
|
Revenues from product development agreements
|
|
|
10,356
|
|
|
|
7,879
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUES
|
|
|
302,758
|
|
|
|
239,398
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
205,957
|
|
|
|
169,015
|
|
|
Cost of revenues from product development agreements
|
|
|
7,414
|
|
|
|
4,938
|
|
|
Product development and research
|
|
|
5,412
|
|
|
|
3,650
|
|
|
Preproduction costs
|
|
|
5,409
|
|
|
|
6,920
|
|
|
Selling, general and administrative
|
|
|
31,397
|
|
|
|
21,935
|
|
|
Loss on disposal of property, plant and equipment
|
|
|
979
|
|
|
|
1,296
|
|
|
Restructuring charges
|
|
|
1,653
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
|
|
258,221
|
|
|
|
207,754
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
$
|
44,537
|
|
|
$
|
31,644
|
|
|
|
|
|
|
|
|
|
Our United Solar Ovonic segment’s revenues increased $63.4 million due to growth in
international sales of $101.4 million, primarily the western European country markets, reduced by
declines in the U.S. market of $38.0 million. Operating income also increased $12.9 million in
2009 as compared to 2008, principally as a result of expanding our manufacturing capacity from
118MW at the end of 2008 to 150MW at the end of 2009 and increasing our product sales by 32% in the
first half of fiscal year 2009 versus the second half of 2008. These increases were offset in part
by production furloughs, under-absorption of factory overhead costs, and product sales decreases of
43% in the second half of fiscal year 2009 compared to the first half of the fiscal year.
The increase in total revenues in 2009 was primarily attributable to an increase in PV product
sales of $67.2 million, the impact of which was partially offset by a price declines and product
mix of $6.3 million. The cost of product sales increased $36.9 million reflecting higher product
sales volume, and the operating costs associated with the expansion of our production capacity in
our Greenville, Michigan facility in the first half of fiscal year 2009.
The
cost of product sales increased in 2009 primarily due to the
previously mentioned sales volume increase, which resulted in $46.0
million of additional cost, as well as increased inventory reserves
of $5.0 million, higher warranty costs of $5.3 million and associated
period costs of $8.2 million, caused by the under-absorption of fixed
overhead costs resulting from our declines of sales and production in
the second half of fiscal 2009. These additional costs were offset in
part by lower raw material costs and improved efficiencies in our
manufacturing processes, which in total amounted to $27.6 million
resulting in increased margins on product sales from 27.0% in 2008 to
29.6% in 2009.
31
Combined cost of revenues from product development agreements and product development and
research expenses increased by $4.2 million in 2009. This additional cost was partially offset by
increased revenues from product development agreements of $2.5 million. Our combined product
development and research expenses are principally funded by government programs under contracts
from the U.S. Air Force and the Department of Energy’s Solar America Initiative. The revenue
remaining on each contract at the end of fiscal year 2009 was $8.5 million and $10.3 million,
respectively. We continue to invest in product development and research to improve the throughput
of our PV cell manufacturing equipment, reduce the cost of production and increase the
sunlight-to-electricity conversion efficiency of our PV laminates.
Although we expanded our nameplate capacity in the first half of fiscal 2009 from 118MW to
150MW with the addition of 60MW of nameplate capacity in our Greenville, Michigan facility,
preproduction costs (consisting of new employee training, facilities preparation, set-up materials
and supplies) decreased $1.5 million as, in the second half of fiscal 2009, we paused the continued
expansion of our Michigan and Tijuana, Mexico facilities.
Our selling, general and administrative expenses increased due to increased support services
of $4.8 million, sales and marketing of $1.9 million and an increase in the allowance for doubtful
accounts receivable of $2.8 million. We expect selling, general and administrative expenses to
increase as we continue to enhance our demand creation activities and develop the strategic
infrastructure to achieve and support those activities.
The loss on disposal of property, plant and equipment represents the write-off of obsolete
equipment that is no longer used in the production process.
The restructuring costs in fiscal year 2009 reflect severance and equipment relocation costs
associated with the consolidation of certain production operations from Auburn Hills 1 facility to
the newer Auburn Hills 2 facility. The restructuring was completed in fiscal year 2009.
32
Ovonic Materials Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
2,590
|
|
|
$
|
5,690
|
|
|
Royalties
|
|
|
6,355
|
|
|
|
5,306
|
|
|
Revenues from product development agreements
|
|
|
3,053
|
|
|
|
3,560
|
|
|
License and other revenues
|
|
|
1,319
|
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUES
|
|
|
13,317
|
|
|
|
16,066
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
2,581
|
|
|
|
5,374
|
|
|
Cost of revenues from product development agreements
|
|
|
2,093
|
|
|
|
2,318
|
|
|
Product development and research
|
|
|
3,574
|
|
|
|
6,256
|
|
|
Selling, general and administrative expenses
|
|
|
1,157
|
|
|
|
1,219
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
|
|
9,405
|
|
|
|
15,167
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
$
|
3,912
|
|
|
$
|
899
|
|
|
|
|
|
|
|
|
|
Our Ovonic Materials segment’s operating income increased in fiscal year 2009 as compared to
fiscal year 2008, primarily as a result of increased transportation royalties, savings associated
with our previous restructuring which was recorded in Corporate and Other, and additional
cost-reduction activities, which have reduced our product development and research expenses.
Product sales, representing sales of our high performance nickel hydroxide materials,
decreased in 2009 as compared to 2008 due to reduced nickel prices and decreased volume from our
principal customer.
Royalties increased in 2009 compared to 2008, as indicated below, resulting primarily from
increased royalties for our NiMH battery technology for transportation applications.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Royalties
|
|
|
|
|
|
|
|
|
|
Transportation — NiMH
Battery
|
|
$
|
3,304
|
|
|
$
|
2,086
|
|
|
Consumer — NiMH Battery
|
|
|
2,779
|
|
|
|
2,985
|
|
|
Ovonyx
|
|
|
40
|
|
|
|
64
|
|
|
Other
|
|
|
232
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
Total Royalties
|
|
$
|
6,355
|
|
|
$
|
5,306
|
|
|
|
|
|
|
|
|
|
Revenues from license agreements, included in “License and other revenues” above, consist
primarily of $1.0 million recognized annually from a $10.0 million payment received in a July 2004
settlement of
certain patent infringement disputes (see Note 8 “Investment in Affiliates,” of the Notes to
our Consolidated Financial Statements).
33
Combined cost of revenues from product development agreements and product development and
research expenses decreased to $5.7 million in 2009 from $8.6 million in 2008, reflecting the
savings associated with restructuring and additional cost-reduction activities. Revenues from
product development agreements decreased as we completed certain contracts in fiscal year 2009.
Corporate and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
TOTAL REVENUES
|
|
$
|
218
|
|
|
$
|
397
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
26,096
|
|
|
|
27,605
|
|
|
Net loss on disposal of property, plant and equipment
|
|
|
1,307
|
|
|
|
—
|
|
|
Restructuring charges
|
|
|
578
|
|
|
|
9,396
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
|
|
27,981
|
|
|
|
37,001
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
$
|
(27,763
|
)
|
|
$
|
(36,604
|
)
|
|
|
|
|
|
|
|
|
Revenues in Corporate and Other consist primarily of facilities and miscellaneous
administrative and laboratory services provided to certain non-consolidated affiliates.
Selling, general and administrative expenses consist primarily of corporate operations,
including human resources, legal, finance, strategy, information technology, business development,
and corporate governance. The reduction in selling, general and administrative expenses in fiscal
2009 was primarily due to lower salaries, wages and related expenses, lower supplies and
professional fees, offset by stock and option award amortization.
Net loss on disposal of property, plant and equipment increased in fiscal year 2009 to $1.3
million. We were unable to sell certain assets previously classified as assets held for sale and
determined these assets no longer met the criteria for classification as assets held for sale. As
a result, we reclassified these assets as held and used and recognized a loss of $1.3 million.
The decline in restructuring charges in fiscal year 2009 as compared to fiscal year 2008 is
primarily due to lower severance and facility related costs associated with our earlier business
realignment activities. Most of the restructuring (which began in fiscal 2007) was completed
during fiscal 2008. As a result, restructuring charges decreased by $8.8 million during the year
ended June 20, 2009.
Other Income (Expense)
Other income (expense) was $(6.8) million in fiscal 2009 compared to $8.1 million in fiscal
year 2008. The change was principally due to increased interest expense reflecting a full year’s
interest on our convertible senior notes of $10.7 million, a reduction in the level of investments
and lower interest rates in fiscal 2009 (which reduced interest income by $1.8 million), foreign
currency losses of $0.5 million, investment losses of $1.1 million reduced by insurance proceeds of
$0.8 million in fiscal 2009.
In May 2008, the FASB issued FSP APB 14-1 “Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” (“FSP APB 14-1”),
which
34
clarifies the accounting for convertible debt instruments that may be settled in cash upon
conversion. FSP APB 14-1 significantly impacts the accounting for our convertible debt by
requiring us to separately account for the liability and equity components of the convertible debt
in a manner that reflects interest expense equal to our non-convertible debt borrowing rate. FSP
APB 14-1 will result in significantly higher non-cash interest expense on our convertible debt.
FSP APB 14-1 is effective for fiscal years and interim periods beginning after December 15,
2008 (effective July 1, 2009 for the Company), and retrospective application will be
required for all periods presented.
Income Taxes
Income tax expense was $1.5 million for fiscal year 2009 compared to $0.2 million in fiscal
year 2008. The increase in tax expense is primarily related to taxes incurred for alternative
minimum tax in the U.S. of $0.9 million, state taxes in the U.S. of $0.3 million and an increase in
foreign income taxes in Germany and Mexico.
Year Ended June 30, 2008 Compared to Year Ended June 30, 2007
United Solar Ovonic Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
231,519
|
|
|
$
|
91,182
|
|
|
Revenues from product development agreements
|
|
|
7,879
|
|
|
|
7,174
|
|
|
License and other operating revenues
|
|
|
—
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUES
|
|
|
239,398
|
|
|
|
98,363
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
169,015
|
|
|
|
75,096
|
|
|
Cost of revenues from product development agreements
|
|
|
4,938
|
|
|
|
2,922
|
|
|
Product development and research
|
|
|
3,650
|
|
|
|
3,737
|
|
|
Preproduction costs
|
|
|
6,920
|
|
|
|
3,614
|
|
|
Selling, general and administrative
|
|
|
21,935
|
|
|
|
10,713
|
|
|
Loss on disposal of property, plant and equipment
|
|
|
1,296
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
|
|
207,754
|
|
|
|
96,401
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
$
|
31,644
|
|
|
$
|
1,962
|
|
|
|
|
|
|
|
|
|
Our United Solar Ovonic segment’s revenues increased $141.0 million and operating income
increased $29.7 million in 2008 as compared to 2007 as we continued to rapidly expand our
manufacturing capacity and product sales.
The increase in revenues in 2008 was primarily attributable to a significant increase in PV
product sales of $140.3 million, partially offset by product and price mix of $7.5 million. The
cost of product sales increased by $93.9 million, reflecting this higher product sales volume,
including the operating costs for our expanded production capacity.
35
Margins on product sales increased from 17.6% in 2007 to 27.0% in 2008 due to lower labor
costs, and raw material costs and improved efficiencies in our manufacturing processes, offset in
part by product and price mix as described above. Margins at our Greenville and Tijuana
manufacturing facilities were positively impacted by the faster ramp of our operations at these two
facilities. As we expand our manufacturing capacity, our gross profit margins will be impacted by
higher costs associated with production volumes as we ramp production to full capacity at our new
manufacturing facilities.
Combined product development and research expenses increased by $1.9 million in 2008,
partially offset by $0.7 million of increased revenues from product development agreements.
Substantially all of our combined product development and research expenses are funded by
government programs under contracts from the U.S. Air Force and the Department of Energy’s Solar
America Initiative. We continue to invest in product development and research to improve the
throughput of our PV cell manufacturing equipment, reduce the cost of production and increase the
sunlight-to-electricity conversion efficiency of our PV laminates.
Preproduction costs (consisting of new employee training, facilities preparation, set-up
materials and supplies) increased as we continued to expand our Michigan facilities by $1.0 million
and Tijuana, Mexico facilities by $2.3 million. We will incur preproduction costs with each new
manufacturing facility until we commence production.
Consistent with our sales growth, our selling, general and administrative expenses increased
due to increased Michigan wages and related costs of $3.3 million, increased costs in Europe of
$2.2 million, increased depreciation expense of $0.8 million and incentive costs of $4.6 million.
As our sales continue to grow, operating, selling, general and administrative expenses,
particularly sales and marketing, are expected to increase as we develop the infrastructure to
achieve and support those sales.
The loss on disposal of property, plant and equipment represents the recognition of impairment
charges in 2008 and 2007 for equipment that is no longer used in the production process.
36
Ovonic Materials Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
5,690
|
|
|
$
|
4,832
|
|
|
Royalties
|
|
|
5,306
|
|
|
|
3,323
|
|
|
Revenues from product development agreements
|
|
|
3,560
|
|
|
|
4,780
|
|
|
License and other revenues
|
|
|
1,510
|
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUES
|
|
|
16,066
|
|
|
|
14,635
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
5,374
|
|
|
|
4,666
|
|
|
Cost of revenues from product development agreements
|
|
|
2,318
|
|
|
|
4,782
|
|
|
Product development and research
|
|
|
6,256
|
|
|
|
16,008
|
|
|
Selling, general and administrative
|
|
|
1,219
|
|
|
|
2,885
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
|
|
15,167
|
|
|
|
28,341
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
$
|
899
|
|
|
$
|
(13,706
|
)
|
|
|
|
|
|
|
|
|
Our Ovonic Materials segment had income from operations in 2008, primarily as a result of
increased royalties (both transportation and consumer) and the savings from our restructuring
activities, which have substantially reduced our product development and research and selling,
general and administrative expenses.
Product sales, reflecting sales of our positive electrode nickel hydroxide materials,
increased in 2008 due primarily to an increased demand from our principal customer. The increased
cost of product sales is a direct reflection of the higher sales volume.
Royalties increased in 2008 compared to 2007, as indicated below, resulting from increased
market for our NiMH battery technology for both consumer and transportation applications.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
Royalties
|
|
|
|
|
|
|
|
|
|
Transportation — NiMH Battery
|
|
$
|
2,086
|
|
|
$
|
1,515
|
|
|
Consumer — NiMH Battery
|
|
|
2,985
|
|
|
|
1,688
|
|
|
Ovonyx
|
|
|
64
|
|
|
|
51
|
|
|
Other
|
|
|
171
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Total Royalties
|
|
$
|
5,306
|
|
|
$
|
3,323
|
|
|
|
|
|
|
|
|
|
Revenues from license agreements, included in “License and other revenues” above, consist
primarily of $1.0 million recognized annually from a $10.0 million payment received in a July 2004
settlement of
certain patent infringement disputes (see Note 8 “Investments in Affiliates,” of the Notes to
our Consolidated Financial Statements).
37
Combined product development and research expenses decreased substantially to $8.6 million in
2008 from $20.8 million in 2007, reflecting primarily the savings associated with the restructuring
plan initiated in late fiscal 2007. Revenues from product development agreements decreased as we
completed certain contracts in fiscal 2008.
Selling, general and administrative expenses decreased in 2008 primarily due to the savings in
patent costs of $1.5 million associated with the restructuring plan initiated in late fiscal 2007.
Corporate and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
TOTAL REVENUES
|
|
$
|
397
|
|
|
$
|
569
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
27,605
|
|
|
|
25,942
|
|
|
Restructuring costs
|
|
|
9,396
|
|
|
|
5,385
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
|
|
37,001
|
|
|
|
31,327
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
$
|
(36,604
|
)
|
|
$
|
(30,758
|
)
|
|
|
|
|
|
|
|
|
Revenues provided to certain affiliates consist primarily of facilities and miscellaneous
administrative and laboratory and machine shop services.
Selling, general and administrative expenses, which consist of corporate operations, including
human resources, legal, finance, information technology, business development, purchasing and
corporate governance, increased in 2008 due to higher legal fees of $2.9 million and incentive
costs of $2.2 million, partially offset by reduced labor and related costs of $1.8 million due to
the restructuring plan initiated in late fiscal 2007.
In 2007, the Company recorded a $0.8 million reduction in product warranty accrued expenses in
connection with the Rare Earth Ovonic joint venture.
Restructuring costs increased in 2008, due principally to severance costs of $4.9 million
incurred in connection with the aforementioned restructuring plan.
Other Income (Expense)
Other income (expense) decreased to $8.1 million in 2008 from $17.3 million in 2007, due to
lower interest rates on our investments and an overall lower level of investments in 2008, offset
in part by insurance proceeds of $1.7 million for business interruptions at one of our facilities.
Income Taxes
Income tax expense for 2008 represents taxes paid by the Company in Mexico and Germany.
38
Liquidity and Capital Resources
Our principal sources of liquidity are cash, cash equivalents and short-term investments
(which principally represent the proceeds from our June 2008 offering of convertible debt and
common stock), cash flows from operations, and borrowing available under our credit facility. We
believe that cash, cash equivalents and investments and cash flows from operations and borrowing
under our credit facility will be sufficient to meet our liquidity needs for our current
operations. At June 30, 2009, we had consolidated working capital of $390.4 million.
As of June 30, 2009, we had $301.6 million in cash, cash equivalents, and short-term
investments consisting of Floating Rate Corporate Notes (“FRNs”), corporate notes, U.S. Government
agency notes, auction rate certificates (“ARCs”), and auction rate securities rights. The
investments have maturities up to 12 months, except for the ARCs which have maturities from 24 to
36 years. Presently, there is an absence of auctions for ARCs. As a result, these investments are
not currently liquid. In October 2008, we agreed to an offer from UBS AG (“UBS”) to sell at par
value, at anytime from June 30, 2010 through July 2, 2012, the ARCs purchased from UBS (which
represent the entire portfolio of our ARCs). These auction rate securities rights (“ARSRs”), which
are akin to a freestanding put option, are non-transferable and are not traded on any exchange. At
June 30, 2009, we classified the ARCs as short-term investments based upon management’s intention
to exercise its right to sell the ARCs to UBS.
Our valuations of ARCs and ARSRs are based on unobservable inputs for which there is little or
no market data and therefore require us to develop our own assumptions. For additional information
about our judgments and assumption underlying our fair value measurements and details about the
methodology and inputs used see Note 17 “Fair Value Measurements” to our Notes to the Consolidated
Financial Statements and information about the sensitivity of our measurements in Item 7A
“Quantitative and Qualitative Disclosures About Market Risk.”
Cash Flows
Year Ended June 30, 2009 Compared to Year Ended June 30, 2008
Net cash provided by our operating activities was $11.1 million in 2009 compared to $28.5
million in 2008. The operating cash flows in our United Solar Ovonic segment are being negatively
impacted by the change in working capital as we expand sales activities, extend payment terms to
certain customers, develop project financing capabilities for new projects and fund our inventory
and accounts receivable growth. We anticipate that future accounts receivable and saleable
inventory balances will fluctuate as we continue to balance our manufacturing and sales activities
until market conditions improve. We expect project inventory and related investment to increase as
we close project financing deals.
Net cash used in investing activities was $440.5 million in 2009 as compared to $41.7 million
in the corresponding period in 2008. This increase was principally due to increased purchases of
investments and increased capital spending principally associated with expenditures for the
expansion of our United Solar Ovonic segment’s manufacturing capacity during the first half of
fiscal 2009. Because of adverse market conditions, we significantly curtailed our production
capacity and expansion plans in the third quarter of fiscal year
2009. Until market conditions improve, we will continue to curb capital expenditures for expansion.
However, we will continue to invest in capital equipment provided the investment results in
reducing our cost structure.
39
Net cash provided by our financing activities was $0.9 million in 2009 compared to $417.2
million in 2008, primarily as a result of proceeds from the June 2008 convertible debt and equity
offerings.
Year Ended June 30, 2008 Compared to Year Ended June 30, 2007
Net cash provided by our operating activities was $28.5 million in 2008 compared to net cash
used in operating activities of $21.8 million in 2007. The operating cash flows in our United
Solar Ovonic segment are being negatively impacted by the change in working capital as we expand
sales and production.
Net cash used in investing activities was $41.7 million in 2008 as compared to $73.2 million
in the corresponding period in 2007. This decrease was principally due to reduced purchases of
investments in 2008. There was a decrease in capital spending ($117.3 million in 2008 compared to
$187.0 million in 2007), principally associated with the timing of the expenditures for the
expansion of our United Solar Ovonic segment’s manufacturing capacity.
Net cash provided by our financing activities was $417.2 million in 2008 compared to $11.0
million in 2007, primarily as a result of proceeds from the June 2008 convertible debt and equity
offerings.
Short-term Borrowings
On February 4, 2008, our subsidiaries United Solar Ovonic LLC and United Solar Ovonic
Corporation entered into Secured Credit Facility Agreements consisting of a $30.0 million revolving
line of credit to finance domestic activities and a separate $25.0 million revolving line of credit
provided under the United States Export-Import Bank’s fast track working capital guarantee program
to finance foreign activities. Availability of financing under the lines of credit will be
determined by reference to a borrowing base comprised of domestic and foreign inventory and
receivables, respectively. At June 30, 2009, there were no outstanding borrowings on the line of
credit. The credit facilities also contain an aggregate $10.0 million sub-limit for standby letters
of credit and there were approximately $1.7 million of standby letters of credit outstanding at
June 30, 2009.
Convertible Senior Notes
On June 24, 2008, we completed an offering of $316.3 million of Convertible Senior Notes
(“Notes”). The Notes bear interest at a rate of 3.0% per year, payable on June 15 and December 15
of each year, commencing on December 15, 2008. If the Notes are not converted, they will mature on
June 15, 2013. The Notes are only convertible prior to March 13, 2013 under specific circumstances
involving the price of the Company’s common stock, the price of the Notes and certain corporate
transactions including, but not limited to, an offering of common stock at a price less than
market, a distribution of cash or other assets to stockholders, a merger, consolidation or other
share exchange, or a change in control. The holders of the Notes may convert the principal amount
of their notes into cash and, if applicable, shares of the Company’s common stock initially at a
conversion rate of 10.8932 shares (equivalent to an initial conversion price of approximately
$91.80 per share) per $1,000 principal amount of the Notes. The holders of the Notes are only entitled
to amounts in excess of the principal amount if shares of the Company’s common stock exceed a
market price of $91.80 for a period of 20 consecutive trading days during the applicable cash
settlement averaging period. The applicable conversion rate will be subject to adjustments in
certain circumstances. The notes are senior unsecured obligations of ECD and rank equal in right
of payment with any future senior unsecured debt of ECD, and senior in right of payment to all of
ECD’s existing and future debt, if any, that is subordinated to the notes.
40
Off Balance Sheet Arrangements
Our off balance sheet financing consists primarily of operating leases for equipment and
property. These leases have terms ranging from a month-to-month basis to 9 years. We incurred
lease expense of $4.7 million, $5.0 million and $3.1 million for the years ended June 30, 2009,
2008 and 2007, respectively.
Contractual Obligations
The Company previously announced expansion plans to expand its manufacturing capacity. As of
June 30, 2009, the Company had purchase commitments of approximately $59.0 million for its
announced expansion (of which advance payments of $19.8 million have been made), and the Company
intends to fund this additional expansion through existing funds and cash generated from
operations. The Company has significantly curtailed its expansion plans until market conditions
improve. Discussion with vendors on the purchase commitments continue; to date, the Company has
not incurred any significant cost from these purchase commitments.
The Company, in the ordinary course of business, enters into purchase commitments for
certain 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.
Our contractual obligations include the following maturities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Convertible senior notes, including interest
|
|
$
|
358,944
|
|
|
$
|
9,488
|
|
|
$
|
18,975
|
|
|
$
|
330,481
|
|
|
$
|
—
|
|
|
Capital lease obligations, including interest
|
|
|
41,072
|
|
|
|
3,106
|
|
|
|
6,251
|
|
|
|
6,382
|
|
|
|
25,333
|
|
|
Operating leases
|
|
|
27,063
|
|
|
|
4,418
|
|
|
|
6,318
|
|
|
|
5,780
|
|
|
|
10,547
|
|
|
Purchase obligations
|
|
|
82,889
|
|
|
|
81,647
|
|
|
|
1,242
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
509,968
|
|
|
$
|
98,659
|
|
|
$
|
32,786
|
|
|
$
|
342,643
|
|
|
$
|
35,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We anticipate capital expenditures to be approximately $60.9 million during fiscal year
2010.
Significant Accounting Policies and Critical Accounting Estimates
Our significant accounting policies are more fully described in Note 1 “Nature of Operations,
Basis of Presentation and Summary of Significant Accounting Policies,” of the Notes to our
Consolidated Financial Statements. Certain of our accounting policies require management to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date
of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. These estimates and assumptions are based on our historical experience, the
terms of existing contracts, our evaluation of trends in the industry, information provided by our
customers and suppliers and information available from other outside sources, as appropriate.
However, they are subject to an inherent degree of uncertainty. As a result, actual results in
these areas may differ significantly from our
estimates.
41
We consider an accounting estimate to be significant if it requires us to make assumptions
about matters that were uncertain at the time the estimate was made and changes in the estimate
would have had a significant impact on our consolidated financial position or results of
operations.
Inventory Reserves
We evaluate the recoverability of our inventory based upon assumptions about anticipated
customer demand and future market conditions. The key factors we consider when estimating our
inventory reserve include historical sales, anticipated demand, expected sales price, market
trends, product obsolescence, the effect new products might have on the sale of existing products
and other factors. If actual market conditions are less favorable than those projected by
management, additional inventory reserves may be required. Inventory
reserves were $12.9 million and
$4.8 million at June 30, 2009 and 2008, respectively.
Warranty Reserve
We generally provide a 20-25 year product warranty on power output on all solar product sales.
We estimate our warranty liability based on past experience of claims and claims paid as well as
our engineering and laboratory tests of our product under different conditions and then apply that
knowledge to the installed base of solar product sales. At June 30, 2009 and 2008, the Company had
recorded a liability for future warranty claims of approximately $5.9 million and $1.5 million,
respectively.
Allowance for Uncollectible Accounts
The Company maintains an allowance for uncollectible accounts and considers a number of
factors, when estimating the allowance including the length of time trade accounts receivable are
past due, existing collateral or other security that can be obtained, trade credit insurance
coverage, previous payment and loss history, the customer’s current ability to pay its obligation,
and its knowledge of the customer and the customer’s business. The allowance for doubtful accounts
was $4.5 million and $0.8 million at June 30, 2009 and 2008, respectively.
Government Contracts, Reserves and Liabilities
The Company had a reserve for losses on government contracts of $1.8 million and $1.9 million
at June 30, 2009 and 2008, respectively. Our reserves and liabilities for government contracts
reflect estimated obligations as a result of audits of certain government contracts by the Defense
Contract Audit Agency. See Note 9 “Liabilities,” of the Notes to our Consolidated Financial
Statements.
Federal Taxes on Income
The Company accounts for income taxes using the asset and liability approach. Deferred income
taxes are provided for the differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements. This method also requires the recognition of future
tax benefits, such as net operating loss carryforwards, to the extent that the realization of such
benefits is more likely than not.
At June 30, 2009, the Company had net operating loss carryforwards of $281.0 million expiring
in 2012 through 2027 and an alternative minimum tax credit carryforward of $2.2 million, which does
not
42
expire. Additionally, the Company had R&D credit carryforwards of $0.8 million expiring in
2010 through 2028.
At June 30, 2009 and 2008, a full valuation allowance has been recorded for all of the above
tax benefits. The Company has historically reserved its net deferred tax assets (“DTA”), which are
mainly comprised of net operating losses (“NOL”) that resulted in prior years, basis differences in
intangible assets, and other temporary differences. In assessing whether or not the deferred tax
assets are realizable in accordance with Statement of Financial Accounting Standards (“SFAS”) No.
109 “
Accounting for Income Taxes
” (“SFAS 109”), significant weight is given to evidence, both
positive and negative, that can be objectively verified. Currently, a three-year historical
cumulative pre-tax accounting income test is widely used to assess the probability of a future DTA
recognition including the ability to demonstrate recent cumulative profitability over the past
several years. The Company has had a long history of numerous consecutive losses, and as of June
30, 2009, the Company has a three-year cumulative pre-tax loss. In addition, other factors that
the Company considered in its analysis include:
|
|
•
|
|
The continuing global economic, capital markets and credit disruptions resulting in
reduced industry demand for solar products,
|
|
|
|
|
•
|
|
Continued uncertainty in the overall economy,
|
|
|
|
|
•
|
|
Changes within the sales pipeline
|
After consideration of both the positive and negative evidence, the Company has retained a
full valuation allowance on its DTA in accordance with SFAS 109.
Share-Based Compensation
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 Company’s
historical data for stock option forfeitures.
Impact of Recent Accounting Pronouncements
See Note 1, “Nature of Operations, Basis of Presentation and Summary of Significant Accounting
Policies,” of the Notes to our Consolidated Financial Statements for a description of recent
accounting pronouncements and the impact on the Company’s financial statements.
43
Forward-Looking Statements
This Annual Report on Form 10-K includes “forward-looking statements” that involve risks and
uncertainties. These forward-looking statements are made pursuant to safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include
statements concerning our plans, objectives, goals, strategies, future events, future sales or
performance, capital expenditures, financing needs, plans or intentions relating to acquisitions,
business trends and other information that is not historical information. When used in this report,
the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,”
“forecasts,” “foresees,” “likely,” “may,” “should,” “goal,” “target” and variations of such words
or similar expressions are intended to identify forward-looking statements. All forward-looking
statements are based upon information available to us on the date of this report.
These forward-looking statements are subject to risks, uncertainties and other factors, many
of which are outside of our control, that could cause actual results to differ materially from the
results discussed in the forward-looking statements, including, among other things, the matters
discussed in this Item 1A “Risk Factors.” Factors you should consider that could cause these
differences are:
|
|
•
|
|
the worldwide credit markets including sufficiency and availability of credit financing
for solar projects and for our customers;
|
|
|
|
|
•
|
|
the impact of the current lack of credit financing capacity on our customer’s ability
to meet their obligations to ECD and its subsidiaries;
|
|
|
|
|
•
|
|
the worldwide demand for electricity and the market for renewable energy, including
solar energy;
|
|
|
|
|
•
|
|
the ability or inability of conventional fossil fuel-based generation technologies to
meet the worldwide demand for electricity;
|
|
|
|
|
•
|
|
government subsidies and policies supporting renewable energy, including solar energy;
our expenses, sources of sales and international sales and operations;
|
|
|
|
|
•
|
|
future pricing of, and demand for, our solar laminates;
|
|
|
|
|
•
|
|
the performance, features, costs, and benefits of our solar laminates and plans for the
enhancement of solar laminates;
|
|
|
|
|
•
|
|
our ability to maintain high standards of quality in our product;
|
|
|
|
|
•
|
|
the supply and price of components and raw materials;
|
|
|
|
|
•
|
|
our ability to expand our manufacturing capacity in a timely and cost-effective manner;
|
|
|
|
|
•
|
|
our ability to retain our current key executives, integrate new key executives and
attract and retain other skilled managerial, engineering and sales marketing personnel;
|
|
|
|
|
•
|
|
the viability of our intellectual property and our continued investment in research and
development;
|
|
|
|
|
•
|
|
payments and other obligations resulting from the unfavorable resolution of legal
proceedings;
|
|
|
|
|
•
|
|
changes in, or the failure to comply with, government regulations and environmental,
health and safety requirements;
|
|
|
|
|
•
|
|
interest rate fluctuations and both our and our end-users’ ability to secure financing
on commercially reasonable terms or at all; and
|
|
|
|
|
•
|
|
general economic and business conditions, including those influenced by international
and geopolitical events.
|
There may be other factors that could cause our actual results to differ materially from the
results referred to in the forward-looking statements. We undertake no obligation to publicly
update or revise forward-looking statements to reflect events or circumstances after the date made
or to reflect the occurrence of unanticipated events, except as required by law.
44
Item 7A
:
Quantitative and Qualitative Disclosures about Market Risk
The following discussion about our exposure to market risk of financial instruments contains
forward-looking statements. Actual results may differ materially from those described.
Interest Rate Risk
Our investments in financial instruments are comprised of debt securities. All such
instruments are classified as securities available-for-sale. We do not invest in portfolio equity
securities, or commodities, or use financial derivatives for trading purposes. Our debt security
portfolio represents funds held temporarily, pending use in our business and operations. The
Company had $290.6 million of these investments as of June 30, 2009. It is the Company’s policy
that investments (including cash equivalents) shall be rated “A” or higher by Moody’s or Standard
and Poor’s, no single investment (excluding cash equivalents) shall represent more than 10% of the
portfolio and at least 10% of the total portfolio shall have maturities of 90 days or less. Our
market risk primarily relates to the risks of changes in the credit quality of issuers. An
interest rate increase (decrease) of 1% would increase (decrease) the value of our portfolio by
approximately $0.4 million and $(1.0) million, as of June 30, 2009, respectively.
The Company invests in ARCs. Our ARCs are Student Loan Asset-Backed Securities guaranteed by
the Federal Family Education Loan Program (FFELP). The payments of principal and interest on these
student loans are guaranteed by the state or not-for-profit-guaranty agency and the U.S. Department
of Education. At the time of our initial investment and through the date of this filing, all of
our ARCs are rated as AAA. The ARCs mature at various dates between December 2033 and December
2045. The ARCs bear interest at rates determined every 28 or 35 days through an auction process.
Presently, there is an absence of auctions for ARCs. As a result, these investments are not
currently liquid. These funds will not be accessible until a successful auction occurs, the issuer
redeems the ARC, a buyer is found outside the auction process or the securities mature. In October
2008, the Company agreed to an offer from UBS AG (“UBS”) to sell at par value, at anytime from June
30, 2010 through July 2, 2012, the ARCs purchased from UBS (which represent the entire portfolio of
our ARCs). These ARSRs, which are akin to a freestanding put option, are non-transferable and are
not traded on any exchange. At June 30, 2009 the Company classified the ARCs as short-term
investments based upon management’s intention to exercise its right to sell the ARCs to UBS.
Our investments in ARCs are not valued using a market model due to the recent absence of
auctions. The valuation analyses utilized discount rates based on the reported rates for comparable
securities (i.e., similar student loan portfolios and holding periods) in active markets, plus a
factor for the present market illiquidity associated with the ARCs. The reported rate for a
comparable security was the sum of (1) the base rate that is used in the reporting of that
security, in this case three month LIBOR, and (2) the interest rate spread above the base rate, as
reported from the active markets for that security. The illiquidity factor was established based
on the credit quality of the ARC determined by the percentage of the underlying loans guaranteed by
FFELP. The resulting discount rates used in the valuation analyses ranged from 3.1% to 6.4% based
on the ARC. At June 30, 2009, we held $30.2 million of ARCs and have included them in short term
investments on our Consolidated Balance Sheets.
Our Notes are subject to interest rate and market price risk due to the convertible feature of
the Notes. Since the Notes are convertible to common stock, as the fair market value of our common
stock increases, so will the fair market value of the Notes. Conversely, as the fair market value
of our common stock decreases, the fair market value of the Notes will decrease as well. As
interest rates rise, the fair market
45
value of the Notes will decrease and as interest rates fall, the fair market value of the
Notes will increase. At June 30, 2009, the estimated fair market value of our Notes was
approximately $195.1 million. An increase or decrease in market interest rates of 1% would
increase or decrease the fair value of our Notes by approximately $2.0 million.
Foreign Exchange Risk
A portion of the equipment acquisitions necessary for our planned expansion are denominated in
Yen. We have entered into contracts for equipment purchases of approximately 160 million Yen ($1.7
million USD). For the year ended June 30, 2009, an increase or a decrease in exchange rates of 1%
would increase or decrease our capital equipment purchases by an insignificant amount.
Also, we conduct our business in U.S. Dollars which may impact our foreign customers and
suppliers as a result in changes in currency exchange rates. These factors may adversely impact our
existing or future sales agreements and require we reallocate product shipments or pursue other
remedies.
46
Item 8
:
Consolidated Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Energy Conversion Devices, Inc.
We have audited the accompanying consolidated balance sheets of Energy Conversion Devices, Inc. (a
Delaware Corporation) and subsidiaries as of June 30, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity and comprehensive
income (loss), and cash flows for each of the three years in the
period ended June 30, 2009. Our audits of the basic consolidated financial statements included the
financial statement schedule listed in the table of contents under Item 15(a)2. These financial
statements and financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Energy Conversion Devices, Inc. and subsidiaries as of
June 30, 2009 and 2008, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 2009 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
We also
have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Energy Conversion Devices, Inc. and subsidiaries’ internal control over
financial reporting as of June 30, 2009, based on criteria established in
Internal
Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated August 26, 2009 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Southfield, Michigan
August 26, 2009
47
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
294,992
|
|
|
$
|
237,191
|
|
|
$
|
96,014
|
|
|
Royalties
|
|
|
6,355
|
|
|
|
5,306
|
|
|
|
3,323
|
|
|
Revenues from product development agreements
|
|
|
13,409
|
|
|
|
11,440
|
|
|
|
11,934
|
|
|
License and other revenues
|
|
|
1,537
|
|
|
|
1,924
|
|
|
|
2,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUES
|
|
|
316,293
|
|
|
|
255,861
|
|
|
|
113,567
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
208,285
|
|
|
|
174,075
|
|
|
|
81,241
|
|
|
Cost of revenues from product development agreements
|
|
|
9,507
|
|
|
|
7,257
|
|
|
|
7,684
|
|
|
Product development and research
|
|
|
8,986
|
|
|
|
9,906
|
|
|
|
19,745
|
|
|
Preproduction costs
|
|
|
5,409
|
|
|
|
6,920
|
|
|
|
3,614
|
|
|
Selling, general and administrative
|
|
|
58,902
|
|
|
|
51,252
|
|
|
|
38,082
|
|
|
Net loss on disposal of property, plant and equipment
|
|
|
2,287
|
|
|
|
1,116
|
|
|
|
318
|
|
|
Restructuring charges
|
|
|
2,231
|
|
|
|
9,396
|
|
|
|
5,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
|
|
295,607
|
|
|
|
259,922
|
|
|
|
156,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
20,686
|
|
|
|
(4,061
|
)
|
|
|
(42,502
|
)
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,226
|
|
|
|
7,019
|
|
|
|
17,542
|
|
|
Interest expense
|
|
|
(10,863
|
)
|
|
|
(165
|
)
|
|
|
(2
|
)
|
|
Other nonoperating income (expense), net
|
|
|
(1,118
|
)
|
|
|
1,216
|
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER INCOME (EXPENSE)
|
|
|
(6,755
|
)
|
|
|
8,070
|
|
|
|
17,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) before Income Taxes
|
|
|
13,931
|
|
|
|
4,009
|
|
|
|
(25,231
|
)
|
|
Income Taxes
|
|
|
1,475
|
|
|
|
156
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
12,456
|
|
|
$
|
3,853
|
|
|
$
|
(25,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share
|
|
$
|
0.29
|
|
|
$
|
0.10
|
|
|
$
|
(0.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
(0.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
48
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
56,379
|
|
|
$
|
484,492
|
|
|
Short-term investments
|
|
|
245,182
|
|
|
|
14,989
|
|
|
Accounts receivable, net
|
|
|
69,382
|
|
|
|
53,525
|
|
|
Inventories, net
|
|
|
74,266
|
|
|
|
31,337
|
|
|
Assets held for sale
|
|
|
—
|
|
|
|
1,539
|
|
|
Other current assets
|
|
|
4,897
|
|
|
|
4,130
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
450,106
|
|
|
|
590,012
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net
|
|
|
605,742
|
|
|
|
404,119
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Investments
|
|
|
—
|
|
|
|
32,277
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
13,330
|
|
|
|
15,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,069,178
|
|
|
$
|
1,041,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
52,244
|
|
|
$
|
39,017
|
|
|
Salaries, wages and amounts withheld from employees
|
|
|
3,243
|
|
|
|
3,160
|
|
|
Amounts due under incentive plans
|
|
|
694
|
|
|
|
6,747
|
|
|
Current maturities of capital leases
|
|
|
1,013
|
|
|
|
1,087
|
|
|
Other
|
|
|
2,493
|
|
|
|
2,092
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
59,687
|
|
|
|
52,103
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
|
Convertible senior notes
|
|
|
316,250
|
|
|
|
316,250
|
|
|
Capital lease obligations
|
|
|
21,412
|
|
|
|
22,468
|
|
|
Other liabilities
|
|
|
9,701
|
|
|
|
9,234
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Liabilities
|
|
|
347,363
|
|
|
|
347,952
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100 million shares authorized,
45,754,652 and 45,575,554 issued in 2009 and 2008, respectively
|
|
|
458
|
|
|
|
456
|
|
|
Additional paid-in capital
|
|
|
976,575
|
|
|
|
969,421
|
|
|
Treasury stock
|
|
|
(700
|
)
|
|
|
(700
|
)
|
|
Accumulated deficit
|
|
|
(312,709
|
)
|
|
|
(325,165
|
)
|
|
Accumulated other comprehensive loss, net
|
|
|
(1,496
|
)
|
|
|
(2,100
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
662,128
|
|
|
|
641,912
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
1,069,178
|
|
|
$
|
1,041,967
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
49
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
12,456
|
|
|
$
|
3,853
|
|
|
$
|
(25,231
|
)
|
|
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
33,515
|
|
|
|
21,917
|
|
|
|
12,170
|
|
|
Provision for slow-moving and obsolete inventory
|
|
|
8,111
|
|
|
|
2,920
|
|
|
|
1,348
|
|
|
Allowance for doubtful accounts
|
|
|
3,692
|
|
|
|
868
|
|
|
|
10
|
|
|
Share-based compensation
|
|
|
5,273
|
|
|
|
2,010
|
|
|
|
1,763
|
|
|
Warranty expense
|
|
|
5,680
|
|
|
|
391
|
|
|
|
(292
|
)
|
|
Other-than-temporary impairment of investment
|
|
|
1,002
|
|
|
|
—
|
|
|
|
—
|
|
|
Loss (gain) on sale of property, plant and equipment
|
|
|
2,287
|
|
|
|
1,116
|
|
|
|
504
|
|
|
Other
|
|
|
(597
|
)
|
|
|
1,649
|
|
|
|
(700
|
)
|
|
Changes in operating assets and liabilities, net of foreign exchange:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21,068
|
)
|
|
|
(17,815
|
)
|
|
|
(8,590
|
)
|
|
Inventories
|
|
|
(51,165
|
)
|
|
|
4,662
|
|
|
|
(17,165
|
)
|
|
Other assets
|
|
|
3,799
|
|
|
|
(1,168
|
)
|
|
|
(2,371
|
)
|
|
Accounts payable and accrued expenses
|
|
|
14,661
|
|
|
|
4,004
|
|
|
|
12,914
|
|
|
Accrued incentive plan
|
|
|
(6,053
|
)
|
|
|
6,204
|
|
|
|
543
|
|
|
Restructuring reserve
|
|
|
(574
|
)
|
|
|
(2,301
|
)
|
|
|
3,523
|
|
|
Other liabilities
|
|
|
70
|
|
|
|
200
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
11,089
|
|
|
|
28,510
|
|
|
|
(21,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(242,257
|
)
|
|
|
(117,335
|
)
|
|
|
(186,989
|
)
|
|
Investment in joint ventures
|
|
|
(1,000
|
)
|
|
|
—
|
|
|
|
(200
|
)
|
|
Purchases of investments
|
|
|
(203,355
|
)
|
|
|
(62,250
|
)
|
|
|
(423,033
|
)
|
|
Proceeds from maturities of investments
|
|
|
3,400
|
|
|
|
22,591
|
|
|
|
248,180
|
|
|
Proceeds from sale of investments
|
|
|
2,750
|
|
|
|
115,038
|
|
|
|
288,828
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
—
|
|
|
|
288
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(440,462
|
)
|
|
|
(41,668
|
)
|
|
|
(73,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible senior notes
|
|
|
—
|
|
|
|
306,762
|
|
|
|
—
|
|
|
Payments for deferred financing costs
|
|
|
—
|
|
|
|
(1,258
|
)
|
|
|
—
|
|
|
Proceeds from common stock issuance
|
|
|
—
|
|
|
|
98,998
|
|
|
|
—
|
|
|
Principal payments under capitalized lease obligations
|
|
|
(1,054
|
)
|
|
|
(1,144
|
)
|
|
|
(850
|
)
|
|
Increase in long-term customer deposits
|
|
|
—
|
|
|
|
680
|
|
|
|
—
|
|
|
Decrease in restricted investments
|
|
|
—
|
|
|
|
(273
|
)
|
|
|
—
|
|
|
Proceeds from sale of stock and share-based compensation, net of
expenses
|
|
|
1,966
|
|
|
|
13,482
|
|
|
|
11,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
912
|
|
|
|
417,247
|
|
|
|
11,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
348
|
|
|
|
(367
|
)
|
|
|
(181
|
)
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(428,113
|
)
|
|
|
403,722
|
|
|
|
(84,192
|
)
|
|
Cash and cash equivalents at beginning of period
|
|
|
484,492
|
|
|
|
80,770
|
|
|
|
164,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
56,379
|
|
|
$
|
484,492
|
|
|
$
|
80,770
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
50
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Additional
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
of
|
|
|
|
|
|
|
Paid In
|
|
|
of
|
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
|
|
|
Balance at June 30, 2006
|
|
|
39,059
|
|
|
$
|
391
|
|
|
$
|
840,539
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
(303,787
|
)
|
|
$
|
(121
|
)
|
|
$
|
537,022
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,231
|
)
|
|
|
—
|
|
|
|
(25,231
|
)
|
|
Unrealized gain on
investments, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57
|
|
|
|
57
|
|
|
Foreign currency
translation gains, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,143
|
)
|
|
Share-based
compensation expense,
net of shares issued
|
|
|
738
|
|
|
|
7
|
|
|
|
13,628
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,635
|
|
|
Stock expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
|
|
|
Balance at June 30, 2007
|
|
|
39,797
|
|
|
|
398
|
|
|
|
854,161
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(329,018
|
)
|
|
|
(33
|
)
|
|
|
525,508
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,853
|
|
|
|
—
|
|
|
|
3,853
|
|
|
Unrealized losses on
investments, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,210
|
)
|
|
|
(2,210
|
)
|
|
Foreign currency
translation gains, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
77
|
|
|
|
77
|
|
|
Unrealized gains on
derivative instruments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,786
|
|
|
Share-based
compensation expense,
net of shares issued
|
|
|
873
|
|
|
|
9
|
|
|
|
16,311
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,320
|
|
|
Stock repurchases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
(700
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(700
|
)
|
|
Equity offering (net of
expenses $6.2 million)
|
|
|
4,905
|
|
|
|
49
|
|
|
|
98,949
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
98,998
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
45,575
|
|
|
|
456
|
|
|
|
969,421
|
|
|
|
(11
|
)
|
|
|
(700
|
)
|
|
|
(325,165
|
)
|
|
|
(2,100
|
)
|
|
|
641,912
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,456
|
|
|
|
—
|
|
|
|
12,456
|
|
|
Unrealized gain on
investments, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,292
|
|
|
|
2,292
|
|
|
Foreign currency
translation losses, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,622
|
)
|
|
|
(1,622
|
)
|
|
Unrealized losses on
derivative instruments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(66
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,060
|
|
|
Share-based
compensation expense,
net of shares issued
|
|
|
180
|
|
|
|
2
|
|
|
|
7,168
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,170
|
|
|
Equity offering expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(14
|
)
|
|
|
|
|
|
Balance at June 30, 2009
|
|
|
45,755
|
|
|
$
|
458
|
|
|
$
|
976,575
|
|
|
|
(11
|
)
|
|
$
|
(700
|
)
|
|
$
|
(312,709
|
)
|
|
$
|
(1,496
|
)
|
|
$
|
662,128
|
|
|
|
|
|
See notes to consolidated financial statements.
51
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
Energy Conversion Devices, Inc. (the “Company” or “ECD”), through its subsidiaries,
commercializes materials, products and production processes for the alternative energy generation
(primarily solar energy), energy storage and information technology markets.
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The consolidated financial statements include the Company and the accounts of the Company’s
subsidiaries in which it holds a controlling financial or management interest.
The consolidated financial statements include the accounts of ECD and its 100%-owned
subsidiaries United Solar Ovonic LLC and United Solar Ovonic Corporation (collectively referred to
as “United Solar”), 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 due to accumulated losses in excess of the minority
investment and the lack of additional funding requirement by the minority stockholders. All
significant intercompany balances and transactions have been eliminated in consolidation.
The Company has ownership interests in three joint ventures as discussed in Note 8 —
Investment in Affiliates. One of the joint ventures was sold subsequent to June 30, 2009; see Note
21 — Subsequent Events. The Company applies the equity method of accounting for investments in
voting stock which give it the ability to exercise significant influence over operating and
financial policies of the investee. Significant influence is generally defined as 20% to 50%
ownership in the voting stock of an investee. However, each investment in voting stock is analyzed
to determine if other factors are present, such as representation on the investee’s board of
directors, participation in policy making processes, material intercompany transactions,
interchange of managerial personnel, or technological dependency, which may indicate the Company’s
ability to exercise significant influence absent a voting stock ownership greater than 20%.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with 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 could differ
from those estimates.
52
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation
Assets and liabilities of the Company’s foreign operations for which the local currency is the
functional currency are translated into U.S. dollars at period-end exchange rates, while income and
expenses are translated at the average exchange rates during the period. Translation gains or
losses are
included in Accumulated Other Comprehensive Loss in the Stockholders’ Equity section of the
Consolidated Balance Sheets and separately as a component of Accumulated Other Comprehensive Loss
in the Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss). Gains and
losses resulting from foreign currency transactions, which are transactions denominated in a
currency other than the functional currency, are included as a component of Other nonoperating
income (expense), net in the Consolidated Statements of Operations. The Company recognized a net
foreign exchange transaction loss of $0.6 million for the year ended June 30, 2009, and
insignificant losses for the years ended June 30, 2008 and 2007, respectively.
Product Sales
The Company recognizes revenue from product sales when evidence of an arrangement exists,
delivery has occurred, the selling price is fixed and determinable, and collectability is
reasonably assured.
The Company requires a written agreement to establish evidence of an arrangement. The written
agreement defines the selling price and other material terms, including those that may have an
impact on revenue, for example rebates and discounts (if applicable). The agreements generally
take the form of a take-or-pay or supply agreement, or a purchase order.
The Company determines product delivery based on the stated shipping terms in the agreement
and on the International Chamber of Commerce Official Rules for the Interpretation of Trade Terms
(Incoterms 2000). The Company primarily sells solar products under Incoterms 2000 ex-works terms,
meaning the right of possession and risk of loss are transferred to the buyer when the Company
places the products at the disposal of the buyer. For these sales, the Company affirmatively
notifies the buyer that the goods are available for the buyer’s disposal at the named place of
delivery, at which point the Company recognizes the sale. The remainder of the Company’s products
are sold under free on board (“FOB”) shipping point terms, meaning ownership and risk of loss are
transferred to the buyer when the products are placed with the buyer’s carrier, at which point
title transfers to the buyer and the Company recognizes the sale.
The Company regularly reviews its customers’ financial positions to ensure that collectability
is reasonably assured. Customer acceptance, return policies, post shipment obligations,
warranties, credits and discounts, rebates, price protection and similar privileges have not
resulted in uncertainty that impacts revenue recognition. Sales agreements include ordinary course
of business commercial terms for return of non-conforming goods (which have not historically been
significant). Certain agreements include credits, discounts, rebates or price protection that have
not historically been significant and have not required establishment of an accrual. The agreements
do not include significant post shipping obligations. The product sales agreements include a
standard warranty, and the Company records a warranty reserve based upon the Company’s past
experience and estimate of future warranty claims.
53
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
54
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Other Operating Revenues
Other operating revenues consist principally of revenues related to services provided to
certain related parties and third-party service revenue realized by certain of the Company’s
service departments. Revenues related to services are recognized upon completion of performance of
the applicable service.
Deferred Revenues
Deferred revenues represent amounts received under business agreements in excess of amounts
recognized as revenues.
Product Development, Patents and Technology
Product development and research costs are expensed as they are incurred and, as such, the
Company’s investments in its technologies and patents are recorded at zero in its financial
statements, regardless of their values. The technology investments are the bases by which the
Company is able to enter into strategic alliances, joint ventures and license agreements.
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.
Other Nonoperating Income (Expense)
Other nonoperating income (expense) consists of amortization of deferred gains, rental income,
net losses on sales and valuations of investments, insurance settlements, and other miscellaneous
income and expenses.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments in short-term, highly liquid securities
maturing 90 days or less from the date of acquisition. The Company had cash equivalents of $45.4
million and $468.4 million at June 30, 2009 and 2008, respectively. During fiscal year 2009,
certain cash amounts were used to purchase short term investments. See Note 4 — Investments for
further information.
Investments
Investments with a maturity of greater than three months to one year from date of acquisition
are classified as short-term investments. Investments with maturities beyond one year may be
classified as
55
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
short-term if the Company reasonably expects the investment to be realized in cash,
sold or consumed during one year. Available-for-sale securities are carried at fair value, with
unrealized holding gains and losses reported as other comprehensive income as a separate component
of shareholders’ equity. Trading securities are carried at fair value, with unrealized holding
gains and losses included in “Other nonoperating income (expense), net” in the Company’s
Consolidated Statement of Operations.
Accounts Receivable
Trade accounts receivable are stated net of allowance for uncollectible accounts. When
determining the allowance for uncollectible accounts, the Company evaluates the overall composition
of the accounts receivable by considering a number of factors, including the length of time trade
accounts receivable are past due, existing collateral or other security that can be obtained, trade
credit insurance coverage,
previous payment and loss history, the customer’s current ability to pay its obligation, and
our knowledge of the customer and the customer’s business.
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 or market. The Company’s cost is
primarily determined on a first-in, first-out basis. Cost elements included in inventory are
materials, direct labor and manufacturing overhead. If the Company determines that its inventories
have become obsolete or are otherwise not saleable, the Company will record a reserve for such
loss. Unabsorbed fixed costs are calculated based on a formula of factory nameplate capacity and
are expensed as component of cost of sales in the period incurred.
Property, Plant, and Equipment
All property, plant and equipment are recorded at cost. Plant and equipment are depreciated
on the straight-line method over the estimated useful lives of the individual assets 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.
|
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 term of the lease, usually three to 20
years.
56
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expenditures for maintenance and repairs are expensed as incurred. Expenditures for
enhancements or major renewals are capitalized and are depreciated over their estimated useful
lives. When assets are sold or otherwise retired, the cost and accumulated depreciation are
removed from the ledgers and the resulting gain or loss is separately disclosed and is included in
operating income (loss).
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “
Accounting
for the Impairment or Disposal of Long-Lived Assets,”
the Company periodically evaluates the
carrying value of the long-lived assets held for use whenever events or changes in circumstances
indicate that the carrying value of those assets may not be recoverable. 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. The impairment review is generally
triggered when events such as a significant industry downturn, product discontinuance, facility
closures, product dispositions, or technological obsolescence occur.
Capitalized Interest
The Company capitalizes interest costs consistent with SFAS No. 34, “
Capitalization of
Interest Costs.
” Interest is capitalized during active construction periods of equipment. During
the years ended June 30, 2009, 2008 and 2007, the Company incurred total interest costs of $14.4
million, $2.9 million and $2.1 million, respectively, of which $3.5 million, $2.7 million and $2.1
million, respectively, were capitalized as part of the new solar cell manufacturing equipment
currently under construction.
Warranty Reserve
The Company generally provides a 20-25 year product warranty on power output on all solar
product sales. When the Company recognizes revenue for product sales, it accrues a liability for
the estimated costs of meeting its warranty obligations for those products. The Company estimates
its warranty liability based on past experience of specific individual claims and claims paid as
well as the Company’s engineering and laboratory tests of its product under different conditions.
The Company then applies that knowledge to calculate a probable experience factor which is then
applied to the installed base of solar product sales.
Income Taxes
The Company accounts for income taxes under the asset and liability method which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements. Under this method, deferred tax assets
and liabilities are determined based on the temporary difference between the tax bases of assets
and liabilities and their reported amounts in the financial statements, using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.
The Company records net deferred tax assets to the extent it believes that the realization of
such assets is more likely than not to occur. In making such determination, the Company considers
all
57
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
available evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax planning strategies and recent financial operations. In the
event the Company were to determine that it would be able to realize its deferred income tax assets
in the future in excess of the net recorded amount, it would make an adjustment to the valuation
allowance which would reduce the provision for income taxes or goodwill to the extent that the
valuation allowance was established in purchase accounting.
Derivative Instruments
The Company primarily enters into derivative financial instruments to manage its foreign
currency risks. The Company accounts for these instruments in accordance with SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” (SFAS 133) which requires companies
to recognize derivatives as either assets or liabilities in the balance sheet at fair value. For
derivative instruments that qualify as a hedge, the effective portion of changes in the fair value
is recorded in accumulated other comprehensive income (loss). Any ineffective portion of the
change in fair value is recognized in current earnings.
Recent Accounting Pronouncements Not Yet Adopted
In June 2009, the FASB issued SFAS No. 168, “
The FASB Accounting Standards
Codification
TM
and the Hierarchy of Generally Accepted Accounting Principles”
(“SFAS
168”)
.
SFAS 168 establishes the
FASB Accounting Standards Codification
TM
(“Codification” or “ASC”) as the sole source of authoritative GAAP recognized by the FASB for
nongovernmental entities. Rules and interpretive releases issued by the SEC under federal
securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective
for financial statements issued for interim and annual periods ending after September 15, 2009
(effective September 30, 2009 for the Company). The Company does not believe that the adoption of
SFAS 168 will have a material effect on its consolidated financial statements.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 167,
“
Amendments to FASB Interpretation No. 46(R),
and (“SFAS 167”). SFAS 167 amends FIN 46(R) and
changes the consolidation guidance applicable to a variable interest entity (“VIE”). It also
amends the guidance governing the determination of whether an enterprise is the primary beneficiary
of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis
rather than a quantitative analysis. The qualitative analysis will include, among other things,
consideration of which enterprise has the power to direct the activities of the entity that most
significantly impact the entity’s economic performance and which enterprise has the obligation to
absorb losses or the right to receive benefits of the VIE that could potentially be significant to
the VIE. This standard also requires continuous reassessments of whether an enterprise is the
primary beneficiary of a VIE. Previously, FIN 46(R) required reconsideration of whether an
enterprise was the primary beneficiary of a VIE only when specific events had occurred. Qualifying
special purpose entities (“QSPEs”), which were previously exempt from the application of this
standard, will be subject to the provisions of this standard when it becomes effective. SFAS 167
also requires enhanced disclosures about an enterprise’s involvement with a VIE. SFAS 167 is
effective as of the beginning of the Company’s first annual reporting period that begins after
November 15, 2009 (effective July 1, 2010 for the Company). The Company is currently evaluating
the requirements of SFAS 167 and has not yet determined the impact on its consolidated financial
statements.
58
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2009, the FASB approved EITF No. 09-1,
“Accounting for Own-Share Lending Arrangements
in Contemplation of Convertible Debt Issuance”
(“EITF 09-1”), which clarifies that share lending
arrangements that are executed in connection with convertible debt offerings or other financings
should be considered debt issuance costs and amortized using the effective interest method over the
life of the financing arrangement as interest cost. In addition, EITF 09-1 states that the loaned
shares should be excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs, at which time the loaned shares would be included in the common
and diluted earnings per share calculation. EITF 09-1 is effective for fiscal years beginning after
December 15, 2009, (effective July 1, 2010 for the Company) and retrospective application is
required for all periods presented. The Company is currently evaluating the requirements of EITF
09-1 and has not yet determined the impact on its consolidated financial statements.
In November 2008, the FASB approved EITF 08-6, “
Equity Method Investment Accounting
Considerations
.” EITF 08-6 clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. EITF 08-6 is effective for fiscal years
beginning after December 15, 2008, with early adoption prohibited (effective July 1, 2009 for the
Company). The Company does not believe that EITF 08-6 will have a material effect on its
consolidated financial statements.
In June 2008, the FASB approved EITF Issue No. 07-5, “Determining Whether an Instrument (or an
Embedded Feature) is Indexed to an Entity’s Own Stock.” EITF 07-5 provides guidance for determining
whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own
stock and thus meets one of the scope exceptions for derivative accounting under SFAS 133. The
determination
is a two step process which requires the evaluation of the instrument’s contingent exercise
provisions and the instrument’s settlement provisions. EITF 07-5 is effective for fiscal years
beginning after December 15, 2008 (effective July 1, 2009 for the Company). The Company does not
believe that EITF 07-5 will have a material effect on its consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1 “
Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities”
(“FSP EITF 03-6-1”), which clarified
that all outstanding unvested share-based payment awards that contain rights to nonforteitable
dividends participate in undistributed earnings with common shareholders. Awards of this nature
are considered participating securities and the two-class method of computing basic and diluted
earnings per share must be applied. FSP EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008 (effective July 1, 2009 for the Company). The Company is currently evaluating
the requirements of FSP EITF 03-6-1 and has not yet determined the impact on its consolidated
financial statements.
In May 2008, the FASB issued FSP No. APB 14-1, “
Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion
.” The FSP applies to convertible debt
instruments that give the issuer the choice of settling the instrument on conversion either (a)
entirely in cash or other assets or (b) partially in shares and partially in cash or other assets.
The FSP requires issuers to account separately for the liability and equity components of
convertible debt instruments that have stated terms permitting settlement on conversion in cash or
other assets, with one exception-the accounting does not apply if the embedded conversion option
must be accounted for separately as a derivative under SFAS 133. Convertible preferred shares
accounted for in equity or temporary equity would also not be subject to the FSP. The FSP is
effective for financial statements issued for fiscal years beginning after
59
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 15, 2008 and interim periods within those fiscal years (effective July 1, 2009 for
the Company). When effective, FSP APB 14-1 will be applied retrospectively to all periods
presented in the financial statements. The cumulative effect of the accounting change on periods
before those presented would be recognized as of the beginning of the first period presented, with
an offsetting adjustment to the opening balance of retained earnings for that period, which would
be presented separately. Assuming a market interest rate of 9.9% at issuance on the Company’s
Convertible Senior Notes, the implementation of FSP APB 14-1 would result in a reduction of the
Company’s Convertible Senior Notes of approximately $69.5 million, an increase in additional
paid-in capital of approximately $83.1 million, an increase in deferred tax liabilities and
corresponding decrease in the valuation allowance of $29.9 million and an increase in gross
interest expense of approximately $14.4 million for the year
ended June 30, 2010.
In December 2007, the FASB issued SFAS No. 141(R), “
Business Combinations
,” (“SFAS 141(R)”)
which retains the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. SFAS 141(R) requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling
interests in the acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. SFAS 141(R) retains the guidance in Statement 141 for identifying and
recognizing intangible assets separately from goodwill and applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008 (effective July 1, 2009 for the Company).
An entity may not apply SFAS 141(R) before that date. The impact of this Statement will be
determined if and when an acquisition occurs.
In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “
Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51
.” SFAS 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 parent’s 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. SFAS 160
clarifies that changes in a parent’s 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. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its noncontrolling interest.
SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008 (effective July 1, 2009 for the Company). Earlier adoption is
prohibited. The Company does not believe that the adoption of SFAS 160 will have a material effect
on its consolidated financial statements.
In December 2007, the FASB ratified a consensus opinion reached by the EITF Issue No. 07-1,
“
Accounting for Collaborative Arrangements
,” (“EITF Issue 07-1”) which defines a collaborative
arrangement as a contractual arrangement in which the parties are active participants in the
arrangement and are exposed to significant risks and rewards that are dependent on the ultimate
commercial success of the endeavor. Whether an arrangement is a collaborative arrangement would be
determined at the inception of the arrangement and would be reconsidered when facts and
circumstances indicate a change
60
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in either a participant’s role in the arrangement or its exposure to significant risks and rewards.
Participants in a collaborative arrangement would be required to make certain disclosures in their
annual financial statements about the nature and purpose of the arrangement and amounts reported in
the income statement. The consensus in EITF Issue 07-1 is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2008 (effective July 1, 2009 for
the Company). The Company does not believe that the adoption of EITF Issue 07-1 will have a
material effect on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In June 2009, the Company adopted SFAS No. 165, “
Subsequent Events
,” (“SFAS 165”) to
incorporate the accounting and disclosure requirements for subsequent events into U.S. generally
accepted accounting principles. Prior to the issuance of the Statement, these requirements were
included in the auditing standards in AICPA AU section 560, “
Subsequent Events
.” SFAS 165
introduces new terminology, defines a date through which management must evaluate subsequent
events, and lists the circumstances under which an entity must recognize and disclose events or
transactions occurring after the balance-sheet date. It is effective prospectively for interim or
annual reporting periods ending after June 15, 2009.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “
Recognition and Presentation of
Other-Than-Temporary Impairments
,” (“FSP FAS 115-2 and FAS 124-2”) to make the guidance on
other-than-temporary impairments of debt securities more operational and improve the financial
statement disclosures related to other-than-temporary impairments for debt and equity securities.
If the fair value of a debt security is below its amortized cost and the entity intends to sell the
security or it is more likely than not that the entity will sell the security before recovery of
the cost basis, an other-than-temporary impairment exists. The entire impairment is recognized in
earnings. If it is more likely than not that the entity will not sell the security before recovery
of the cost basis but it is probable the entity will be unable to collect all amounts due under the
contractual terms of the security, an other-than-temporary impairment exists. The amount of the
impairment related to credit losses is recognized in earnings with the amount of the impairment due
to other factors recognized in other comprehensive income. FSP FAS 115-2 and FAS 124-2 are
effective for annual and interim periods ending after June 15, 2009. The Company adopted the
provisions of FSP FAS 115-2 and FAS 124-2 in June 2009 and it did not have a material effect on its
consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS 107-1 and Accounting Principles
Board Opinions (“APB”) 28-1, “
Interim Disclosures about Fair Value of Financial Instruments
” (“FSP
FAS 107-1 and APB 28-1”), to require disclosures about fair value of financial instruments for
interim reporting periods of public entities. An entity is required to disclose the methods and
assumptions used in estimating fair value. FSP FAS 107-1 and APB 28-1 are effective for interim
and annual periods ending after June 15, 2009. The Company adopted the provisions of FSP FAS 107-1
and APB 28-1 in June 2009 and it did not have a material effect on its consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161, “
Disclosures About Derivative Instruments and
Hedging Activities — An Amendment of FASB Statement No. 133
” (“SFAS 161”), which requires enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133, “
Accounting for
Derivative Instruments
61
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and Hedging Activities”
, as amended and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position, financial performance,
and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. The Company adopted
the provisions of SFAS 161 during the third quarter of the current fiscal year and it did not have
a material effect on its consolidated financial statements.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8,
“Disclosures by Public
Entities (Enterprises) About Transfers of Financial Assets and Interest in Variable Interest
Entities”
(“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 require enhanced
disclosures regarding the transfer of financial assets and variable interest entities. The
adoption of FSP 140-4 and FIN 46(R)-8 did not have a material effect on the Company’s consolidated
financial statements.
In July 2008, the Company adopted SFAS No. 159, “
The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115”
(“SFAS 159”). SFAS 159
permits entities to choose to measure many financial instruments and certain other items at fair
value. The objective of SFAS 159 is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently. The adoption of SFAS 159 did not have a material effect on the Company’s
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “
Fair Value Measurements,”
(“SFAS 157”) which
defines fair value and establishes a framework for measuring fair value. SFAS 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. In February 2008, the FASB
issued FSP FAS 157-1, “
Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification
or Measurement under Statement 13
,” (“FSP FAS 157-1”) which amends SFAS 157 to exclude SFAS No. 13
“
Accounting for Leases”
(“SFAS 13”), and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under SFAS 13. In February 2008,
the FASB issued FSP 157-2,
“Effective Date of FASB Statement No. 157”
which defers the effective
date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that
are recognized at fair value in the financial statements on a recurring basis (at least annually).
In October, 2008 the FASB issued FSP FAS 157-3, “
Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active,
” (“FSP FAS 157-3”) which applies to financial assets
subject to the fair value accounting requirements of SFAS 157 and clarifies the application of SFAS
157’s valuation requirements to a financial asset in a market that is not active. FSP FAS 157-3
was effective upon issuance, including for prior periods if financial statements had not yet been
issued. In April 2009, the FASB issued FSP FAS 157-4, “
Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly,”
(“FSP FAS 157-4”) to provide additional guidance on estimating
fair value when the volume and level of activity for an asset or liability have significantly
decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a
transaction is not orderly. FSP FAS 157-4 emphasizes that, regardless of whether the volume and
level of activity for an asset or liability have decreased significantly and regardless of which
valuation technique was used, the objective of a fair value measurement under FASB Statement 157,
Fair Value Measurements
, remains the same—to estimate the price that would be received to sell an
asset or transfer a liability in an orderly transaction between market participants at the
62
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
measurement date under current market conditions. If it is determined that the activity for an
asset or liability has significantly decreased, the quoted market price may not be fair value and
the entity must perform additional analysis to determine fair value. This analysis may include the
use of valuation techniques other than quoted market prices. If it is determined that a
transaction for an asset or liability was not orderly, an entity should place little weight on that
transaction when determining fair value. FSP FAS 157-4 is effective for annual and interim periods
ending after June 15, 2009 and must be applied prospectively. On July 1, 2008 the Company adopted
the provisions of SFAS 157 and related FSP’s as it applies to financial assets and liabilities, and
it did not have a material effect on its consolidated financial statements.
Note 2 — Earnings (Loss) Per Share
Basic earnings (loss) per common share are computed by dividing the net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted earnings (loss) per
share reflect the potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock or resulted in the issuance of common
stock that then shared in the net income (loss) of the Company. The following table reconciles the
numerator and denominator to calculate basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
Earnings
|
|
|
|
(Loss)
|
|
Shares
|
|
(Loss) Per
|
|
|
|
(Numerator)
|
|
(Denominator)
|
|
Share
|
|
|
|
(in thousands, except per share amounts)
|
|
Year Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
12,456
|
|
|
|
42,277
|
|
|
$
|
0.29
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
warrants
|
|
|
—
|
|
|
|
133
|
|
|
|
—
|
|
|
Stock options
|
|
|
—
|
|
|
|
301
|
|
|
|
—
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
12,456
|
|
|
|
42,711
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
3,853
|
|
|
|
40,231
|
|
|
$
|
0.10
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
warrants
|
|
|
—
|
|
|
|
127
|
|
|
|
—
|
|
|
Stock options
|
|
|
—
|
|
|
|
780
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
3,853
|
|
|
|
41,138
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(25,231
|
)
|
|
|
39,389
|
|
|
$
|
(0.64
|
)
|
|
|
|
|
As part of the agreement for the Convertible Senior Notes (“Notes”) issued in June 2008, the
Company also issued 3,444,975 shares as part of a “share-lending” arrangement with the underwriter.
63
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purpose of the share-lending agreement is to facilitate transactions which allow the
investors in the Notes to hedge their investments in the Notes.
The underwriter received all proceeds from any sale of shares pursuant to the share lending
agreement. The underwriter provided the Company collateral equal to the par value of the common
stock. The shares must be returned to the Company no later than the maturity date of the Notes.
These shares are considered issued and outstanding and have all the rights of any holder of the
Company’s common stock. However, because the shares must be returned to the Company, the shares
are not considered outstanding for purposes of calculating earnings per share.
The Notes are only convertible prior to March 15, 2013 under specific circumstances involving
the price of the Company’s common stock, the price of the Notes, and certain corporate transactions
including, but not limited to, an offering of common stock at a price less than market, a
distribution of cash or other assets to stockholders, a merger, consolidation or other share
exchange, or a change in control. The holders of the Notes may convert the principal amount of
their notes into cash and, with respect to any amounts in excess of the principal amount, if
applicable, shares of the Company’s common stock initially at a conversion rate of 10.8932 shares
(equivalent to an initial conversion price of approximately $91.80 per share) per $1,000 principal
amount of the Notes. The holders of the Notes are only entitled to amounts in excess of the
principal amount if shares of the Company’s common stock exceed a market price of $91.80 for a
period of 20 consecutive trading days during the applicable cash settlement averaging period. (See
Note 12 — Long-Term Debt for additional information.) During the years ended June 30, 2009 and
2008, the Company’s common stock price did not exceed the conversion price. Therefore, there are
no contingently issuable shares to include in the diluted earnings per share calculation.
The following securities would have had an anti-dilutive effect on earnings per share and are
therefore excluded from the computations above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Share-based payment arrangements
|
|
|
160
|
|
|
|
—
|
|
|
|
1,140
|
|
64
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Supplemental Cash Flow Information
Supplemental disclosures of cash flow information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, including capitalized interest
|
|
$
|
11,605
|
|
|
$
|
2,842
|
|
|
$
|
2,125
|
|
|
Cash paid for income taxes
|
|
|
809
|
|
|
|
65
|
|
|
|
—
|
|
|
Decrease in accounts payable for capital expenditures
|
|
|
4,439
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities rights
|
|
|
3,938
|
|
|
|
—
|
|
|
|
—
|
|
|
Capital lease obligations incurred to finance capital
equipment
|
|
|
—
|
|
|
|
362
|
|
|
|
245
|
|
|
Depreciation allocated to construction in progress
|
|
|
—
|
|
|
|
—
|
|
|
|
326
|
|
Note 4 — Investments
Short-Term Investments
The following schedule summarizes the unrealized gains and losses on the Company’s short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
(in thousands)
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
23,047
|
|
|
$
|
—
|
|
|
$
|
(1,037
|
)
|
|
$
|
22,010
|
|
|
U.S. Government securities
|
|
|
188,902
|
|
|
|
148
|
|
|
|
(10
|
)
|
|
|
189,040
|
|
|
Auction rate certificates
|
|
|
34,250
|
|
|
|
—
|
|
|
|
(4,056
|
)
|
|
|
30,194
|
|
|
Auction rate securities rights
|
|
|
—
|
|
|
|
3,938
|
|
|
|
—
|
|
|
|
3,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
246,199
|
|
|
$
|
4,086
|
|
|
$
|
(5,103
|
)
|
|
$
|
245,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
15,156
|
|
|
$
|
—
|
|
|
$
|
(167
|
)
|
|
$
|
14,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following schedule summarizes the contractual maturities of the Company’s short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Amortized
|
|
|
Market
|
|
|
Amortized
|
|
|
Market
|
|
|
|
|
Cost
|
|
|
value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
(in thousands)
|
|
|
Due in less than one year
|
|
$
|
211,949
|
|
|
$
|
211,050
|
|
|
$
|
3,401
|
|
|
$
|
3,396
|
|
|
Due after one year
through five years
|
|
|
34,250
|
|
|
|
34,132
|
|
|
|
11,755
|
|
|
|
11,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
246,199
|
|
|
$
|
245,182
|
|
|
$
|
15,156
|
|
|
$
|
14,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The corporate bonds and U.S. government securities are classified as “available-for-sale” in
accordance with SFAS No. 115, “
Accounting for Certain Investments in Debt and Equity Securities.
”
At June 30, 2009, the Company held a corporate bond issued by Lehman Brothers with a cost of $1.1
million and an estimated fair value of $0.2 million. Because of the bankruptcy proceedings of
Lehman Brothers and the decline in the market for their bonds, the Company has recorded this
decline in fair value as an other-than-temporary impairment, included in “Other nonoperating income
(expense), net” in the Company’s Consolidated Statement of Operations.
Auction Rate Certificates (“ARCs”) represent securities with fixed maturity dates the interest
rates of which reset monthly. The Company’s ARCs are Student Loan Asset-Backed Securities
guaranteed by the Federal Family Education Loan Program. The payments of principal and interest on
these student loans are guaranteed by the state or not-for-profit-guaranty agency and the U.S.
Department of Education. At the time of the Company’s initial investment and through the date of
this filing, all of the Company’s ARCs are rated as AAA.
The default interest rate on the ARCs, which applies in the absence of an active market for
the ARCs, is the lesser of (1) the trailing twelve-month average of the 91 day U.S. Treasury bill
rate plus 120 basis points, or (2) the trailing twelve-month average interest rate of the ARCs.
The weighted average interest rate on the ARCs was 0.5% at June 30, 2009.
The ARCs mature at various dates between December 2033 and December 2045. The ARCs bear
interest at rates determined every 28 or 35 days through an auction process, in which the
applicable rate is set at the lowest rate submitted in the auction, or, in the absence of an active
market for the ARCs, the default rate discussed above. Interest rates on the ARCs are capped
between 12% and 18%.
At June 30, 2009, the Company has valued these securities using a pricing model which is not a
market model, but which does reflect some discount due to the current lack of liquidity of the
investments as a result of recently failed auctions (see Note 17 — Fair Value Measurements for a
description of the model). This valuation resulted in an unrealized loss of $4.1 million and $2.0
million as of June 30, 2009 and 2008, respectively.
In October 2008, the Company agreed to an offer from UBS AG (“UBS”) to sell at par value, at
anytime from June 30, 2010 through July 2, 2012, the ARCs purchased from UBS (which represents the
66
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company’s entire portfolio of ARCs). These Auction Rate Securities Rights (“ARSRs”), which are
akin to a freestanding put option, are non-transferable and are not traded on any exchange. The
Company has valued the ARSRs using a present value model (see Note 17 — Fair Value Measurements
for a description of the model). Using this model, the Company has determined the fair value of the
ARSRs to be $3.9 million at June 30, 2009.
The ARSRs also grants UBS the right to purchase the Company’s ARCs at par value at anytime
without notice. As a result, the Company has reclassified the entire portfolio of ARCs as “trading
securities.” During the quarter ended December 31, 2008, the previously unrealized loss of $5.6
million related to the ARCs has been reclassified from other comprehensive income to “Other
nonoperating income (expense), net” in the Company’s Consolidated Statement of Operations due to
the reclassification of the ARCs as trading securities. At June 30, 2009 the Company classified
the ARCs as short-term investments based upon management’s intention to exercise its right to sell
the ARCs to UBS.
Long-Term Investments
The following schedule summarizes the unrealized gains and losses on the Company’s long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate certificates
|
|
$
|
34,300
|
|
|
$
|
—
|
|
|
$
|
(2,023
|
)
|
|
$
|
32,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Accounts Receivable
Accounts Receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Billed
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
65,313
|
|
|
$
|
44,970
|
|
|
Related parties
|
|
|
271
|
|
|
|
345
|
|
|
Other
|
|
|
160
|
|
|
|
3,305
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
65,744
|
|
|
|
48,620
|
|
|
Unbilled
|
|
|
|
|
|
|
|
|
|
Royalties under license agreements
|
|
|
4,372
|
|
|
|
3,044
|
|
|
Government contracts
|
|
|
2,174
|
|
|
|
1,604
|
|
|
Government grants
|
|
|
593
|
|
|
|
439
|
|
|
Related parties
|
|
|
37
|
|
|
|
77
|
|
|
Other
|
|
|
943
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
8,119
|
|
|
|
5,730
|
|
|
Less allowance for uncollectible accounts
|
|
|
(4,481
|
)
|
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,382
|
|
|
$
|
53,525
|
|
|
|
|
|
|
|
|
|
Unbilled receivables represent amounts for goods sold or services performed for the end
customer that have not been invoiced as of the balance sheet date. Royalties under license
agreements represent current estimated royalties earned but not yet received under long-term
license agreements (up to 20 years). Amounts due under government contracts represent current
estimated earnings not yet received under long-term government contracts (3-5 years). Amounts due
under government grants represent current estimated earnings not yet received under long-term
government grants which span several years. Other unbilled receivables represent interest and
insurance claim receivables. All unbilled receivables are billed and received within twelve months
of the balance sheet date.
68
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Finished products
|
|
$
|
41,167
|
|
|
$
|
3,893
|
|
|
Work in process
|
|
|
19,247
|
|
|
|
15,414
|
|
|
Raw materials
|
|
|
13,852
|
|
|
|
12,030
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,266
|
|
|
$
|
31,337
|
|
|
|
|
|
|
|
|
|
Substantially all of the Company’s inventories are included in its United Solar Ovonic
Segment. The above amounts are net of an allowance for slow moving and obsolescence of $12.9
million and $4.8 million as of June 30, 2009 and 2008, respectively.
Note 7 — Property, Plant and Equipment, Net
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Machinery and equipment
|
|
$
|
345,330
|
|
|
$
|
253,424
|
|
|
Machinery and equipment — under capital leases
|
|
|
339
|
|
|
|
922
|
|
|
Buildings and improvements
|
|
|
85,015
|
|
|
|
58,914
|
|
|
Buildings and improvements — under capital leases
|
|
|
25,900
|
|
|
|
25,900
|
|
|
Land
|
|
|
1,526
|
|
|
|
1,157
|
|
|
Construction in progress
|
|
|
245,271
|
|
|
|
124,679
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
703,381
|
|
|
|
464,996
|
|
|
Less accumulated depreciation and amortization
|
|
|
(97,639
|
)
|
|
|
(60,877
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
605,742
|
|
|
$
|
404,119
|
|
|
|
|
|
|
|
|
|
Accumulated amortization on assets under capital leases as of June 30, 2009 and 2008 was $8.2
million and $7.0 million respectively.
At June 30, 2009, the Company had $245.3 million in construction in progress, of which
approximately $242.6 million was for its expansion projects in Greenville and Battle Creek,
Michigan, and the facility expansion in Tijuana, Mexico. In May 2009, the Company suspended a
significant portion of its expansion plans and, as a result, suspended capitalizing interest on
these projects. The Company anticipates resuming the expansion of these facilities in future
years. At June 30, 2009, the Company performed an analysis and determined that the assets were not
impaired. The remaining balance of the construction in progress, of approximately $2.7 million, is
for active projects within the Company’s on-going operations (non-expansion).
69
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Investments in Affiliates
Ovonyx, Inc.
Ovonyx, Inc. (“Ovonyx”) was formed in 1999 as a joint venture between the Company, Mr. Tyler
Lowrey, Intel Capital, and other investors giving the Company 39.3% ownership (or 30.7% on a fully
diluted basis after giving effect for exercise of stock options and warrants). Ovonyx was formed
to commercialize the Company’s Ovonic Universal Memory (“OUM”) technology through licensing and
product development arrangements. OUM is a basic, new type of nonvolatile memory that can replace
conventional nonvolatile or FLASH memory in applications requiring retention of stored data when
power is turned off. As part of this joint venture arrangement, the Company has licensed all OUM
technology to Ovonyx on an exclusive, worldwide basis and contributed intellectual property,
licenses, production processes and know-how. The Company has made cash investments of $1.5 million
for the ownership interest. The Company initially applied the equity method of accounting for its
investment in Ovonyx. The Company discontinued applying the equity method of accounting as the
Company had written down its investment to zero as its respective share of the losses of this joint
venture exceeded its investment and the Company has not guaranteed any obligations or committed to
provide financial support to Ovonyx.
In addition to its equity interest, the Company also receives 0.5% of the Ovonyx annual gross
revenues which it recognizes as royalty revenue. Royalty revenue was insignificant for the years
ended June 30, 2009, 2008 and 2007, respectively.
The Company recorded non-royalty revenue from Ovonyx of $0.2 million, $0.3 million and $0.7
million, respectively, for the years ended June 30, 2009, 2008 and 2007 representing services
provided to this joint venture.
United Solar Ovonic Jinneng Limited
United Solar Ovonic Jinneng Limited (“USO Jinneng” or the “entity”) was formed in September
2008 as a joint venture between United Solar Ovonic LLC (“USO”) and Tianjin Jinneng Investment Co.
(“TJIC”) and gave the Company a 25% equity interest. The entity was organized under the laws of
the People’s Republic of China (“PRC”) to manufacture solar products in China for sale in the
Chinese market using solar cells purchased from, and technology licensed by, USO. TJIC owns the
other 75% equity interest and has the right to appoint a majority of the entity’s board of
directors. Profits and losses of the joint venture will be allocated based on the parties’
respective ownership percentages. The Company’s equity interest can be increased up to 51% if
sales of 10MW of PV modules in the PRC for a full fiscal year are achieved. Such an increase would
also require additional capital contributions and loan guarantees. The Company has not decided if
they will increase their ownership percentage. Currently the Company has no additional funding
requirements under the agreement. During the year ended June 30, 2009, the Company made initial
cash investments totaling $1.0 million to the joint venture and provided $1.5 million in value in
the form of royalty-free license technology for which no investment was recorded. The joint
venture is in start-up mode and production is expected to commence the second quarter of fiscal
year 2010. The company applies the equity method of accounting for this investment and recognized
an insignificant equity loss during the year ended June 30, 2009.
70
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cobasys, LLC
Cobasys LLC (“Cobasys”) was formed in 2001 as a 50/50 joint venture between Ovonic Battery and
a subsidiary of Chevron Corporation, Chevron Technology Ventures LLC (“CTV”). See Note 21 -
Subsequent Events for further information concerning the sale of Cobasys. Cobasys was formed to
design, develop, manufacture and sell advanced nickel metal hydride (“NiMH”) battery system
solutions for transportation markets, including hybrid electric vehicles (“HEVs”), in addition to
stationary back-up power supply systems for uninterruptible power supply, telecommunication and
distributed generation requirements. The Company contributed technology and intellectual property
for its ownership interest in Cobasys. The Company initially applied the equity method of
accounting for its investment in Cobasys. The Company has discontinued applying the equity method
of accounting as the Company has written down its investment to zero as its respective share of the
losses of this joint venture exceeded its investment and the Company has not guaranteed any
obligations or committed to provide financial support to Cobasys.
In addition, in accordance with FASB Interpretation (“FIN”) No. 46(R), “
Consolidation of
Variable Interest Entities — An Interpretation of ARB No. 51
” (“FIN 46”), the Company has
determined that its investment in Cobasys meets the definition of a variable interest entity. The
Company has further determined it is not the primary beneficiary or obligor of Cobasys, since it
does not absorb a majority of the joint ventures’ losses or receive a majority of the expected
residual returns; and as a result Cobasys should not be consolidated.
The Company recognized $1.0 million as revenue from license agreements in each of the years
ended June 30, 2009, 2008 and 2007 in connection with the amortization of a license fee received in
July 2004 from Panasonic EV Energy Co., Ltd. as part of a settlement of a patent infringement
dispute.
The Company recorded revenue from Cobasys of $0.3 million, $0.5 million and $0.8 million for
the years ended June 30, 2009, 2008 and 2007, respectively, for services performed on behalf of
Cobasys (primarily for advanced product development testing and other services).
Note 9 — Liabilities
Warranty Liability
The following is a summary of the changes in the product warranty liability during the years
ended June 30, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Liability at beginning of the period
|
|
$
|
1,499
|
|
|
$
|
1,325
|
|
|
Amounts accrued for as warranty costs
|
|
|
5,680
|
|
|
|
391
|
|
|
Warranty claims
|
|
|
(1,262
|
)
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
Liability at end of the period
|
|
$
|
5,917
|
|
|
$
|
1,499
|
|
|
|
|
|
|
|
|
|
71
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The warranty liability is included in “Accounts payable and accrued expenses” in the Company’s
Consolidated Balance Sheets.
Government Contracts, Reserves and Liabilities
The Company’s contracts with the U.S. Government and its agencies are subject to audits by the
Defense Contract Audit Agency (“DCAA”). DCAA has audited the Company’s contracts, specifically its
indirect rates, including its methodology of computing these rates, for the years through June 30,
2004. In its reports, DCAA challenged the allowability and the allocability of certain costs as
well as the Company’s methodology for allocating independent research and development to its
indirect cost pools. In May 2009, the Company received a preliminary determination letter from
Department of Energy (“DOE”) on certain of these matters. Based on this determination, and an
unrelated contract close-out, in June 2009, the Company reduced its reserve by $0.1 million. The
Company has a reserve of $1.8 million and $1.9 million at June 30, 2009 and 2008, respectively for
its estimated obligation as a result of this audit and is included in “Accounts payable and accrued
expenses” in the Company’s Consolidated Balance Sheets.
Other Long-Term Liabilities
A summary of the Company’s other long-term liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Long-term retirement
|
|
$
|
1,894
|
|
|
$
|
1,976
|
|
|
Customer deposits
|
|
|
1,940
|
|
|
|
680
|
|
|
Deferred patent license fees
|
|
|
4,286
|
|
|
|
5,238
|
|
|
Deferred revenue and royalties
|
|
|
321
|
|
|
|
321
|
|
|
Rent payable
|
|
|
884
|
|
|
|
533
|
|
|
Other
|
|
|
376
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,701
|
|
|
$
|
9,234
|
|
|
|
|
|
|
|
|
|
Long-Term Retirement
Pursuant to agreements between the Company and two former employees, the Company is obligated
to pay the former employees periodic payments for the remainder of their lives. The total amount
of payments due is based on the periodic payments and their life expectancy applying mortality
tables in effect at the time of their retirement. The liability is then discounted to a present
value using an AA-rated bond that most closely represents the remaining life expectancy of the
former employees.
Note 10 — Employee Benefit Plans
The Company has a qualified 401(k) Plan for substantially all U.S. employees of the Company.
The Company contributions are voluntary and established as a percentage of each participant’s
salary up to a certain amount per employee. The Company matches participants’ contributions at a
rate of 100% of
72
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the first 3% of the participant’s compensation and 50% of the next 2% of the participant’s
compensation. The Company’s matching contributions to the 401(k) Plan were $1.6 million, $1.2
million and $1.3 million for the years ended June 30, 2009, 2008 and 2007, respectively.
Note 11 — Derivative and Hedging Activities
The Company’s primary exposure to foreign currency risk is forecasted transactions denominated
in Yen. The Company periodically enters into forward contracts to mitigate the risks associated
with changes in exchange rates between the dollar and Yen. The Company’s sole exposure to foreign
currency changes is for commitments to purchase equipment from a supplier located in Japan. The
Company uses forward contracts exclusively to hedge forecasted transactions. The Company does not
use forward contracts for speculative purposes.
The Company accounts for derivative financial instruments in accordance SFAS 133. Under SFAS
133, the Company is required to recognize all derivative instruments as either assets or
liabilities at fair value in the Consolidated Balance Sheets.
In June 2008, the Company entered into several forward contracts to mitigate the risks
associated with changes in exchange rates between the dollar and the Yen. During fiscal year 2009
the Company settled all of its forward contracts and has no forward contracts as of June 30, 2009.
In addition, during the fiscal year 2009 the Company reclassified approximately $0.6 million from
accumulated other comprehensive income into earnings representing the ineffectiveness.
The fair value of the derivative instruments recorded in the Company’s Consolidated Balance
Sheet in other current assets as of June 30, 2008 was not significant. The amount of hedge
ineffectiveness for June 30, 2008 as recorded in the Company’s Consolidated Statement of Operations
as a component of other nonoperating income (expense) was not significant.
Note 12 — Long-Term Debt
Lines of Credit
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 $55.0 million, pursuant to a Credit Agreement and a Fast
Track Export Loan Agreement with JPMorgan Chase Bank, N.A. The new credit facility is comprised of
two separate lines of credit, a $30.0 million line (the “Asset Based Revolver”) and a $25.0 million
line (the “Ex-Im Revolver”). Both lines are secured by inventory and receivables of the Borrowers.
The Company has two borrowing options — Alternate Base Rate borrowings and Eurodollar Rate
borrowings. Interest on Alternate Base Rate advances is incurred at the prime rate less 1.00% and
is payable monthly. Eurodollar advances are charged interest at LIBOR plus 1.25%. Eurodollar
Rate advances pay interest upon repayment of the related borrowing. The interest rate on both
Alternate Base Rate and Eurodollar borrowings automatically resets upon changes in the Company’s
liquidity.
The credit facility has, among others, a financial covenant which requires the company to
maintain a minimum liquidity of $10.0 million at all times. Liquidity is defined as the sum of (a)
cash (b) the market
73
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value of cash equivalents, (c) liquid investment securities and (d) aggregate borrowing
availability under the facilit
y
. The Company was in compliance with this and all other covenants
at June 30, 2009.
At June 30, 2009, there were no amounts outstanding on this credit facility. Letters of
credit totaling $1.7 million had been issued against the facility as of June 30, 2009. Any amounts
advanced under this credit facility are payable upon the expiration of the agreement in February
2013.
Convertible Senior Notes
In June 2008, the Company completed an offering of $316.3 million of Convertible Senior Notes.
The Notes bear interest at a rate of 3.0% per year, payable semi-annually on June 15 and December
15 of each year, commencing on December 15, 2008. If the Notes are not converted, they will mature
on June 15, 2013. Proceeds to the Company were $306.8 million, net of debt issuance costs of $9.5
million. An additional $1.3 million of issuance costs were also incurred and paid directly by the
Company. All debt issuance costs are being amortized over the life of the Notes using the interest
method. Amortization expense for the year ended June 30, 2009 was $2.1 million and not significant
for the year ended June 30, 2008.
The Notes are only convertible prior to March 15, 2013 under specific circumstances involving
the price of the Company’s common stock, the price of the Notes and certain corporate transactions
including, but not limited to, an offering of common stock at a price less than market, a
distribution of cash or other assets to stockholders, a merger, consolidation or other share
exchange, or a change in control. The holders of the Notes may convert the principal amount of
their notes into cash and, if applicable, shares of the Company’s common stock initially at a
conversion rate of 10.8932 shares (equivalent to an initial conversion price of approximately
$91.80 per share) per $1,000 principal amount of the Notes. The holders of the Notes are only entitled
to amounts in excess of the principal amount if shares of the Company’s common stock exceed a
market price of $91.80 for a period of 20 consecutive trading days during the applicable cash
settlement averaging period.
As part of the agreement for the Notes issued in June 2008, the Company also issued 3,444,975
shares as part of a “share-lending” arrangement with the underwriter. The purpose of the
share-lending agreement is to facilitate transactions which allow the investors in the Notes to
hedge their investments in the Notes. The underwriter received all proceeds from any sale of
shares pursuant to the share lending agreement. The underwriter provided ECD collateral equal to
the par value of the common stock. The shares must be returned to ECD no later than the maturity
date of the Convertible Senior Notes. These shares are considered issued and outstanding and have
all the rights of any holder of the Company’s common stock.
74
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate maturities of long-term debt and capital lease obligations by year as of
June 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
|
|
Capital Lease
|
|
|
|
Year
|
|
Debt
|
|
Obligations
|
|
Total
|
|
|
|
(in thousands)
|
|
2010
|
|
$
|
—
|
|
|
$
|
1,013
|
|
|
$
|
1,013
|
|
|
2011
|
|
|
—
|
|
|
|
1,116
|
|
|
|
1,116
|
|
|
2012
|
|
|
—
|
|
|
|
1,278
|
|
|
|
1,278
|
|
|
2013
|
|
|
316,250
|
|
|
|
1,411
|
|
|
|
317,661
|
|
|
2014
|
|
|
—
|
|
|
|
1,647
|
|
|
|
1,647
|
|
|
Thereafter
|
|
|
—
|
|
|
|
15,960
|
|
|
|
15,960
|
|
|
|
|
|
|
Total
|
|
$
|
316,250
|
|
|
$
|
22,425
|
|
|
$
|
338,675
|
|
|
|
|
|
Note 13 — Commitments and Contingencies
Operating Leases
The Company has operating lease agreements, principally for office and research facilities and
equipment. These leases have terms ranging from a month-to-month basis to 9 years and, in some
instances, include renewal provisions at the option of the Company. Rent expense under such lease
agreements for the years ended June 30, 2009, 2008 and 2007 was approximately $4.7 million, $5.0
million and $3.1 million, respectively.
Future minimum payments on obligations under noncancellable operating leases expiring in each
of the five years subsequent to June 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
2010
|
|
$
|
4,418
|
|
|
2011
|
|
|
3,475
|
|
|
2012
|
|
|
2,843
|
|
|
2013
|
|
|
2,885
|
|
|
2014
|
|
|
2,895
|
|
|
Thereafter
|
|
|
10,547
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,063
|
|
|
|
|
|
|
The Company also enters into purchase commitments for capital equipment. As of June 30, 2009,
the Company had purchase commitments of approximately $59.0 million related to its previously
announced goal of expanding United Solar’s manufacturing capacity. The Company has significantly
curtailed its future expansion plans until the market recovers and demand for its product returns.
The Company intends to fund this additional expansion through existing funds and cash from
operations.
75
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — 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 the Consolidated Statements of Operations.
The Company deferred recognition of revenue in the amount of $0.2 million relating to
nonrefundable advance royalty payments for both fiscal years ended June 30, 2009 and 2008.
Fiscal years 2009, 2008 and 2007 included license fees of approximately $1.0 million resulting
from the amortization over 10.5 years of the $10.0 million payment received in July 2004 in
connection with a settlement of a patent infringement dispute with Panasonic EV Energy Co., Ltd.
There were also new license agreements in 2009 and 2008, principally with new licensees in China.
Note 15 — Restructuring Charges
In fiscal year 2007, management decided to consolidate the photovoltaic and machine-building
activities into United Solar Ovonic and reduce costs in both the Ovonic Materials segment and
Corporate and Other. Charges for this consolidation were primarily for severance and costs
associated with the closing of facilities. All charges are included in “Restructuring charges” in
the Company’s Consolidated Statements of Operations.
In March 2009, the Company implemented an organizational restructuring to consolidate certain
production operations from its Auburn Hills 1 facility into its newer Auburn Hills 2 facility which
reduced the combined production capacity from these facilities. This consolidation, which lowered
overall costs and improved manufacturing efficiencies, is part of an overall program to reduce
costs. Additionally, the Company has realigned its workforce and will recognize improved
efficiencies as a result. Charges for this consolidation were for severance and relocation of
equipment. All charges are included in “Restructuring charges” in the Company’s Consolidated
Statements of Operations. The Company has incurred total restructuring costs of $1.7 million
through June 30, 2009 as a result of certain of these activities and may incur additional
restructuring expenses as the Company pursues further cost reduction activities in the future.
The project was substantially completed during fiscal year 2009.
76
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes activity in the Company’s restructuring reserve through June 30, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
Other Expenses
|
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
Balance July 1, 2007
|
|
$
|
2,884
|
|
|
$
|
747
|
|
|
$
|
3,631
|
|
|
Charges
|
|
|
4,179
|
|
|
|
5,217
|
|
|
|
9,396
|
|
|
Utilization or payment
|
|
|
(5,977
|
)
|
|
|
(5,805
|
)
|
|
|
(11,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2008
|
|
$
|
1,086
|
|
|
$
|
159
|
|
|
$
|
1,245
|
|
|
Charges
|
|
|
986
|
|
|
|
1,245
|
|
|
|
2,231
|
|
|
Utilization or payment
|
|
|
(1,232
|
)
|
|
|
(1,404
|
)
|
|
|
(2,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2009
|
|
$
|
840
|
|
|
$
|
—
|
|
|
$
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, during the fiscal year ended June 30, 2009, the Company was unable to sell
certain assets previously classified as assets held for sale and determined these assets no longer
met the criteria for classification as an asset held for sale. As a result, the Company
reclassified these assets as held and used and recognized a loss of $1.3 million, which was
recorded in “Net loss on disposal of property, plant and equipment” in the Company’s Consolidated
Statements of Operations.
Note 16 — Share-Based Compensation
The Company records the fair value of stock-based compensation grants as an expense. Total
share-based compensation expense for the years ended June 30, 2009, 2008, and 2007 was $5.3
million, $2.0 million, and $1.8 million, respectively.
In November 2006, shareholders approved the 2006 Stock Incentive Plan (the “2006 Plan”)
pursuant to which 1.0 million shares are reserved for grants. The Company issues authorized but
previously unissued shares upon the exercise of stock options, the granting of restricted stock
(RSAs) and the redemption of restricted stock units (RSUs). The 2006 Plan authorizes the grant of
stock options, including nonqualified and incentive options, stock appreciation rights, restricted
stock awards, restricted stock units, performance shares and performance units to officers, other
employees, nonemployee directors, consultants, advisors, independent contractors and agents of the
Company and its subsidiaries. The Compensation Committee of the Board of Directors 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 the Company’s voting
shares will be exercisable for no more than five years after its date of grant.
The Company has Common Stock authorized for future issuance as follows:
77
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
June 30, 2009
|
|
June 30, 2008
|
|
Stock options
|
|
|
1,508,204
|
|
|
|
1,692,968
|
|
|
Warrants
|
|
|
400,000
|
|
|
|
400,000
|
|
|
Convertible Investment Certificates
|
|
|
5,210
|
|
|
|
5,210
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
authorized shares
|
|
|
1,913,414
|
|
|
|
2,098,178
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
In order to determine the fair value of stock options on the date of grant, the Company
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.
The Company 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. The
risk-free interest rate is based on the yield of U.S. Treasury securities with a term equal to that
of the option. With regard to the weighted-average option life assumption, the Company 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 Company’s historical data for stock option forfeitures.
The weighted-average fair value of the options granted during the years ended June 30, 2009,
2008 and 2007 are estimated based on the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Estimated fair value
|
|
$
|
35.43
|
|
|
$
|
19.19
|
|
|
$
|
22.03
|
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Volatility %
|
|
|
65.04
|
%
|
|
|
61.40
|
%
|
|
|
67.89
|
%
|
|
Risk-Free Interest Rate
|
|
|
2.95
|
%
|
|
|
4.02
|
%
|
|
|
4.62
|
%
|
|
Expected Life
|
|
7.03 years
|
|
6.47 years
|
|
6.63 years
|
78
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the transactions during the fiscal years 2009, 2008 and 2007 with respect to the
Company’s stock options, including the Stock Option Agreement between Robert C. Stempel and the
Company is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Intrinsic
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Value
(1)
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in thousands)
|
|
|
Outstanding at June 30, 2006
|
|
|
1,649,263
|
|
|
$
|
18.00
|
|
|
$
|
30,658
|
|
|
Granted
|
|
|
15,000
|
|
|
|
32.90
|
|
|
|
|
|
|
Exercised
|
|
|
(501,623
|
)
|
|
|
16.91
|
|
|
|
13,730
|
|
|
Expired
|
|
|
(1,500
|
)
|
|
|
11.98
|
|
|
|
|
|
|
Forfeited
|
|
|
(14,300
|
)
|
|
|
26.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007
|
|
|
1,146,840
|
|
|
|
18.58
|
|
|
|
14,525
|
|
|
Granted
|
|
|
149,000
|
|
|
|
31.19
|
|
|
|
|
|
|
Exercised
|
|
|
(328,644
|
)
|
|
|
16.30
|
|
|
|
13,844
|
|
|
Expired
|
|
|
(1,410
|
)
|
|
|
35.13
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,200
|
)
|
|
|
50.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
|
964,586
|
|
|
|
21.24
|
|
|
|
50,541
|
|
|
Granted
|
|
|
94,870
|
|
|
|
56.00
|
|
|
|
|
|
|
Exercised
|
|
|
(158,166
|
)
|
|
|
12.52
|
|
|
|
6,817
|
|
|
Expired
|
|
|
(3,190
|
)
|
|
|
23.63
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,596
|
)
|
|
|
54.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009
|
|
|
894,504
|
|
|
|
26.33
|
|
|
$
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
79
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below sets forth stock options exercisable during the three years ended June
30, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Contractual Life
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Remaining
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value
(1)
|
|
|
in Years
|
|
|
|
|
(in thousands)
|
|
Exercisable at June
30, 2007
|
|
|
1,039
|
|
|
$
|
17.96
|
|
|
$
|
13,547
|
|
|
|
3.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June
30, 2008
|
|
|
801
|
|
|
|
19.02
|
|
|
|
43,751
|
|
|
|
3.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June
30, 2009
|
|
|
709
|
|
|
|
21.85
|
|
|
|
376
|
|
|
|
3.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
As of June 30, 2009, there was $2.8 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the Plan. The cost is
expected to be recognized over a weighted-average period of 1.25 years.
Restricted Stock Awards
Restricted stock awards (“RSAs”) consist of shares of common stock the Company issued at a
price of $0. Upon issuance, RSAs become outstanding and have voting rights. The shares issued to
employees are subject to forfeiture and to restrictions which limit the sale or transfer during the
restriction period. The fair value of the RSAs is determined on the date of grant based on the
market price of the Company’s common stock and is recognized as compensation expense. The value of
RSAs granted to employees is amortized over their three-year vesting period, while the value of
RSAs granted to nonemployee directors is amortized over a two- to nine-year vesting period. In
June 2008, 30,000 shares of restricted stock awards issued to the Company’s CEO became fully vested
in accordance with the terms and conditions of this award. This accelerated vesting resulted in an
additional expense of $0.6 million.
80
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information concerning RSAs awarded under the 2006 Stock Incentive Plan during the year ended
June 30, 2009, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted Average
|
|
|
|
Shares
|
|
Grant Date Fair Value
|
|
Nonvested at June 30, 2006
|
|
|
—
|
|
|
$
|
—
|
|
|
Awarded
|
|
|
23,352
|
|
|
|
35.92
|
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2007
|
|
|
23,352
|
|
|
|
35.92
|
|
|
Awarded
|
|
|
99,266
|
|
|
|
28.88
|
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
Released from restriction
|
|
|
(32,784
|
)
|
|
|
26.76
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2008
|
|
|
89,834
|
|
|
|
31.49
|
|
|
Awarded
|
|
|
26,500
|
|
|
|
43.03
|
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
(5,568
|
)
|
|
|
35.92
|
|
|
Released from restriction
|
|
|
(13,348
|
)
|
|
|
33.46
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2009
|
|
|
97,418
|
|
|
|
34.10
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, there was $3.8 million of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Plan. The cost is expected to be
recognized over a weighted-average period of 2.03 years.
Restricted Stock Units “RSUs”
RSUs settle on a one-for-one basis in shares of the Company’s common stock and vest in
accordance with the terms of the 2006 Stock Incentive Plan or the Executive Severance Plan, as
applicable. The fair value of the RSUs is determined on the date of grant based on the market
price of the Company’s common stock and is recognized as compensation expense. Information
concerning RSUs awarded during the year ended June 30, 2009, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
Grant Date
|
|
|
|
Shares
|
|
Fair Value
|
|
Nonvested at June 30, 2007
|
|
|
—
|
|
|
|
|
|
|
Awarded
|
|
|
2,500
|
|
|
$
|
73.64
|
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2008
|
|
|
2,500
|
|
|
|
73.64
|
|
|
Awarded
|
|
|
208,428
|
|
|
|
52.70
|
|
|
Vested
|
|
|
(760
|
)
|
|
|
76.74
|
|
|
Forfeited
|
|
|
(5,700
|
)
|
|
|
60.49
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2009
|
|
|
204,468
|
|
|
|
52.63
|
|
|
|
|
|
|
|
|
|
|
|
81
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2009, there was $0.4 million of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Plan. The cost is expected to be
recognized over a weighted-average period of 1.39 years. The total fair value of shares vested
during the years ended June 30, 2009 was insignificant.
Warrants
As of June 30, 2009 and 2008, the Company had outstanding warrants for the purchase of 400,000
shares of Common Stock granted pursuant to a Common Stock Warrant Agreement entered into in March
2000. These warrants are exercisable on or prior to March 10, 2010 at $22.93 per share.
Note 17 — Fair Value Measurements
Effective July 1, 2008, the Company adopted SFAS No. 157, “
Fair Value Measurements
,”
(“SFAS 157”) which establishes a framework for fair value and expands disclosures about financial
instruments measured at fair value. Financial instruments held by the Company include, corporate
bonds, U.S. government securities, and money market funds.
SFAS 157 requires the use of valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs. Observable inputs consist of market data obtained from
independent sources while unobservable inputs reflect the Company’s own market assumptions. These
inputs create the following fair value hierarchy:
|
|
•
|
|
Level 1 — Quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
•
|
|
Level 2 — Valuations based on quoted prices in markets that are not active,
quoted prices for similar assets or liabilities or all other inputs that are
observable
|
|
|
|
|
•
|
|
Level 3 — Unobservable inputs for which there is little or no market data which
require the Company to develop its own assumptions
|
If the inputs used to measure the fair value of a financial instrument fall within different
levels of the hierarchy, the financial instrument is categorized based upon the lowest level input
that is significant to the fair value measurement.
Whenever possible, the Company uses quoted market prices to determine fair value. In the
absence of quoted market prices, the Company uses independent sources and data to determine fair
value. At June 30, 2009, the fair value of the Company’s investments in corporate bonds, U.S.
government securities, and money market funds was determined using quoted prices in active markets.
The carrying values of the Company’s cash, cash equivalents, short-term investments, long-term
investments, accounts receivable and accounts payable approximate their fair values. The fair
value of the Company’s convertible senior notes was estimated at $195.1 million as of June 30, 2009
using level 1 inputs.
As described in Note 4 “Investments”, the Company’s investments in auction rate certificates
(“ARCs”) are not valued using a market model due to the recent absence of auctions. Each ARC was
valued using a discounted cash flow analysis because there is presently no active market for the
ARCs from which to determine value. The valuation analyses utilized discount rates based on the
reported rates
82
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for comparable securities (i.e., similar student loan portfolios and holding periods) in active
markets, plus a factor for the present market illiquidity associated with the ARCs. The reported
rate for a comparable security was the sum of (1) the base rate that is used in the reporting of
that security, in this case three month LIBOR, and (2) the interest rate spread above the base
rate, as reported from the active markets for that security. The illiquidity factor was
established based on the credit quality of the ARC determined by the percentage of the underlying
loans guaranteed by the Federal Family Education Loan Program (FFELP). The resulting discount
rates used in the valuation analyses ranged from 3.1% to 6.4% based on the ARCs.
Since the Auction Rate Securities Rights (“ARSRs”) are non-transferable and not traded on any
exchange, the Company has elected to measure them using the fair value option permitted by SFAS No.
159, “
The Fair Value Option for Financial Assets and Liabilities
.” The ARSRs represents a guarantee
of the par value of the ARCs, and the Company has valued the ARSRs using a present value model as
permitted by SFAS 157. In valuing the ARSRs, the Company calculated the present value of the
difference between the par value of the ARCs and the current fair value of the ARCs. The present
value model utilized a discount rate of 2.96%, which is a combination of the credit default swap
rate risk of UBS at 1.84% and the rate on a U.S. Treasury interest rate swap of 0.85%. The sum of
those rates was increased by an additional 10% to account for any potential liquidity risk should
UBS not be able to fulfill its obligation under the ARSR agreement. The ARSRs are included in
“Long-Term Investments” in the Company’s Consolidated Balance Sheets. (See Note 4 — “Investments”
for additional information).
At June 30, 2009, information regarding the Company’s assets and liabilities measured at fair
value is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(in thousands)
|
|
Auction rate certificates
|
|
|
|
|
|
|
|
|
|
$
|
30,194
|
|
|
$
|
30,194
|
|
|
Auction rate securities rights
|
|
|
|
|
|
|
|
|
|
|
3,938
|
|
|
|
3,938
|
|
|
Investments in corporate bonds
|
|
$
|
22,010
|
|
|
|
|
|
|
|
|
|
|
|
22,010
|
|
|
Investments in U.S.
government securities
|
|
|
189,040
|
|
|
|
|
|
|
|
|
|
|
|
189,040
|
|
|
Investments in money market
funds
|
|
|
45,411
|
|
|
|
|
|
|
|
|
|
|
|
45,411
|
|
The following table presents the changes in Level 3 assets for the year ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction Rate
|
|
|
Auction Rate
|
|
|
|
|
Certificates
|
|
|
Securities Rights
|
|
|
|
|
(in thousands)
|
|
|
Balance at July 1, 2008
|
|
$
|
32,277
|
|
|
$
|
—
|
|
|
Redeemed by UBS
|
|
|
(50
|
)
|
|
|
—
|
|
|
Net (loss) gain included in investment
|
|
|
(2,033
|
)
|
|
|
3,938
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
30,194
|
|
|
$
|
3,938
|
|
|
|
|
|
|
|
|
|
83
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Income Taxes
On July 1, 2008, the Company adopted FASB Interpretation No. 48, “
Accounting for Uncertainty
for Income Taxes — an interpretation of FASB Statement No. 109.”
(“FIN 48”) 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. As of June 30, 2009, the Company has no unrecognized tax benefits as
defined in FIN 48.
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 1994 forward are still subject
to examination. In addition, open tax years related to various state and foreign jurisdictions
remain subject to examination.
The Company’s income taxes for the year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
|
(in thousands)
|
|
|
Federal Income Tax
|
|
$
|
858
|
|
|
$
|
—
|
|
|
State Income Tax
|
|
|
266
|
|
|
|
—
|
|
|
Foreign Income Tax
|
|
|
351
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
Total Income Taxes
|
|
$
|
1,475
|
|
|
$
|
156
|
|
Tax expense relates to U.S. operations and its subsidiaries located in Mexico and Germany. Due
to the availability of net operating losses in the U.S., no income tax expense is recorded for U.S.
operations, except for alternative minimum tax (“AMT”) and state income taxes. The AMT is
creditable against future regular taxable income and the related deferred tax benefit for this
asset is fully reserved for and included in the Company’s valuation allowance.
84
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporary differences and carryforwards that give rise to deferred tax assets and
(liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
|
Basis difference in intangibles
|
|
$
|
10,464
|
|
|
$
|
11,510
|
|
|
NOL carryforwards
|
|
|
95,539
|
|
|
|
112,592
|
|
|
R&D credit carryforwards
|
|
|
812
|
|
|
|
170
|
|
|
AMT credit carryforwards
|
|
|
2,222
|
|
|
|
1,363
|
|
|
All other
|
|
|
24,654
|
|
|
|
8,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,691
|
|
|
|
134,505
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
|
Basis and depreciation differences of property
|
|
|
(2,424
|
)
|
|
|
(5,462
|
)
|
|
All other
|
|
|
(732
|
)
|
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
130,535
|
|
|
|
128,757
|
|
|
Valuation allowance
|
|
|
(130,535
|
)
|
|
|
(128,757
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
The Company’s valuation allowance increased by $1.8 million and decreased $0.8 million in
fiscal year 2009 and 2008, respectively. The changes in the valuation allowance are mainly due to
the addition of AMT and R&D tax credits, as well as certain state deferred taxes. In addition, R&D
expenditures were capitalized for income tax purposes in order to utilize net operating losses
prior to their expiration.
Included in the net operating loss deferred tax asset above is approximately $24.0 million of
deferred tax asset attributable to excess stock option deductions. Due to a provision within SFAS
No. 123(R) “
Share-Based Payment”
concerning when tax benefits related to excess stock option
deductions can be credited to paid in capital, the related valuation allowance cannot be reversed,
even if the facts and circumstances indicate that it is more likely than not that the deferred tax
asset can be realized. The valuation allowance will only be reversed as the related deferred tax
asset is applied to reduce current taxes payable.
85
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2009, the Company’s remaining net tax operating loss carryforwards and tax credit
carryforwards expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Tax Operating
|
|
|
R&D Credit
|
|
|
|
|
Loss Carryforward
|
|
|
Carryforward
|
|
|
|
|
(in thousands)
|
|
|
2010
|
|
|
—
|
|
|
|
15
|
|
|
2011
|
|
|
—
|
|
|
|
40
|
|
|
2012
|
|
|
16,742
|
|
|
|
14
|
|
|
2013
|
|
|
19,272
|
|
|
|
29
|
|
|
2014
|
|
|
—
|
|
|
|
42
|
|
|
2015
|
|
|
—
|
|
|
|
—
|
|
|
2016
|
|
|
—
|
|
|
|
—
|
|
|
2017
|
|
|
—
|
|
|
|
—
|
|
|
2018
|
|
|
—
|
|
|
|
—
|
|
|
2019
|
|
|
8,212
|
|
|
|
—
|
|
|
2020
|
|
|
10,170
|
|
|
|
—
|
|
|
2021
|
|
|
4,674
|
|
|
|
—
|
|
|
2022
|
|
|
22,599
|
|
|
|
—
|
|
|
2023
|
|
|
36,846
|
|
|
|
—
|
|
|
2024
|
|
|
67,627
|
|
|
|
—
|
|
|
2025
|
|
|
—
|
|
|
|
—
|
|
|
2026
|
|
|
46,979
|
|
|
|
—
|
|
|
2027
|
|
|
47,877
|
|
|
|
—
|
|
|
2028
|
|
|
—
|
|
|
|
672
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
280,998
|
|
|
$
|
812
|
|
|
|
|
|
|
|
|
|
In addition, the Company has $2.2 million in Alternative Minimum Tax Credit carryforwards that
do not expire.
As of the end of fiscal 2009, a full valuation allowance has been recorded against the
Company’s net deferred tax assets of $130.5 million (consisting primarily of U.S. net operating
loss carryforwards which expire in various amounts between 2012 and 2027, and basis differences in
intangible assets recognized for tax purposes and not book purposes). Based upon the Company’s
operating results for the preceding years and most recent quarter, the Company determined that it
was more likely than not that the deferred tax assets would not be realized.
In assessing whether or not the deferred tax assets are realizable in accordance with SFAS 109
"
Accounting for Income Taxes"
, the Company considers both positive and negative evidence using a
more likely than not standard when measuring the need for a valuation allowance. In making such
judgments, significant weight is given to evidence that can be objectively verified, including the
ability to demonstrate recent cumulative profitability over the past several years. Future
realization of the deferred tax asset is dependent on generating sufficient taxable income prior to
the expected reversal of the
deferred tax assets, including loss carryforwards. In addition, the expiration dates of tax
attribute carryforwards need to be evaluated.
86
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although a full valuation allowance is recorded against the Company’s deferred tax assets, the
amount of the deferred tax asset considered realizable could be significantly increased in the near
term if the Company continues to generate positive pretax income. The Company will forecast its
ability to generate sufficient positive pre-tax income based on the most objective information
available, including current market conditions for the Company’s product and the Company’s sales
backlog, in order to assess whether it is more likely than not that the deferred tax assets will be
realizable in the future.
Note 19 — Business Segments
Effective April 1, 2007, the Company organized its business into two operating business
segments, United Solar Ovonic
and Ovonic Materials, the basis for each are based on differences in
products and services.
|
|
•
|
|
United Solar Ovonic — designs, manufactures and sells photovoltaic (“PV”) laminates
that generate clean, renewable energy by converting sunlight into electricity.
|
|
|
|
|
•
|
|
Ovonic Materials — invents, designs, develops and licenses materials and products
based on the Company’s pioneering materials science technology. This segment also
commercializes the Company’s NiMH materials and consumer battery technology.
|
87
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table lists the Company’s segment information and reconciliation to the
Company’s consolidated financial statement amounts. The grouping “Corporate and Other” below does
not meet the definition of an operation segment as it contains the Company’s headquarter costs,
consolidating entries, and the Company’s investments in two joint ventures, Cobasys LLC and Ovonyx,
Inc., which are not allocated to the above segments; however, it is included below for
reconciliation purposes only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
Solar
|
|
Ovonic
|
|
Corporate
|
|
|
|
|
|
Ovonic
|
|
Materials
|
|
and Other
|
|
Total
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Year Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
302,758
|
|
|
$
|
13,317
|
|
|
$
|
218
|
|
|
$
|
316,293
|
|
|
Depreciation and
amortization
|
|
|
32,467
|
|
|
|
296
|
|
|
|
752
|
|
|
|
33,515
|
|
|
Operating income (loss)
|
|
|
44,537
|
|
|
|
3,912
|
|
|
|
(27,763
|
)
|
|
|
20,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
239,398
|
|
|
|
16,066
|
|
|
|
397
|
|
|
|
255,861
|
|
|
Depreciation and
amortization
|
|
|
20,862
|
|
|
|
330
|
|
|
|
725
|
|
|
|
21,917
|
|
|
Operating income (loss)
|
|
|
31,644
|
|
|
|
899
|
|
|
|
(36,604
|
)
|
|
|
(4,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
98,363
|
|
|
|
14,635
|
|
|
|
569
|
|
|
|
113,567
|
|
|
Depreciation and
amortization
|
|
|
10,007
|
|
|
|
1,478
|
|
|
|
685
|
|
|
|
12,170
|
|
|
Operating income (loss)
|
|
|
1,962
|
|
|
|
(13,706
|
)
|
|
|
(30,758
|
)
|
|
|
(42,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
242,094
|
|
|
|
—
|
|
|
|
163
|
|
|
|
242,257
|
|
|
Total assets
|
|
|
784,755
|
|
|
|
6,329
|
|
|
|
278,094
|
|
|
|
1,069,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
116,743
|
|
|
|
—
|
|
|
|
592
|
|
|
|
117,335
|
|
|
Total assets
|
|
|
552,618
|
|
|
|
8,469
|
|
|
|
480,880
|
|
|
|
1,041,967
|
|
88
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenues by country based on the invoicing location of the
customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
United States
|
|
$
|
82,564
|
|
|
$
|
119,424
|
|
|
$
|
52,531
|
|
|
France
|
|
|
69,282
|
|
|
|
32,661
|
|
|
|
381
|
|
|
Italy
|
|
|
66,859
|
|
|
|
25,758
|
|
|
|
12,893
|
|
|
Germany
|
|
|
60,254
|
|
|
|
39,012
|
|
|
|
32,407
|
|
|
Switzerland
|
|
|
16,704
|
|
|
|
—
|
|
|
|
—
|
|
|
South Korea
|
|
|
6,410
|
|
|
|
17,646
|
|
|
|
103
|
|
|
Japan
|
|
|
6,244
|
|
|
|
5,396
|
|
|
|
3,824
|
|
|
Hong Kong
|
|
|
3,364
|
|
|
|
6,087
|
|
|
|
3,663
|
|
|
China
|
|
|
406
|
|
|
|
1,693
|
|
|
|
1,889
|
|
|
Other Countries
|
|
|
4,206
|
|
|
|
8,184
|
|
|
|
5,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
316,293
|
|
|
$
|
255,861
|
|
|
$
|
113,567
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s property, plant and equipment, net of accumulated depreciation, is located
principally in the United States as of June 30, 2009, 2008 and 2007.
The following table presents major customers as a percentage of total Company revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Significant Customer
|
|
Business Segment
|
|
2009
|
|
2008
|
|
2007
|
|
EDF En Developpement
|
|
United Solar Ovonic
|
|
|
12
|
%
|
|
|
*
|
|
|
|
—
|
%
|
|
Solar Integrated Technologies**
|
|
United Solar Ovonic
|
|
|
*
|
|
|
|
21
|
%
|
|
|
*
|
|
|
Advanced Green Technologies
|
|
United Solar Ovonic
|
|
|
*
|
|
|
|
11
|
%
|
|
|
—
|
%
|
|
|
|
|
|
*
|
|
denotes less than 10% during the period
|
|
|
|
**
|
|
acquired by the Company subsequent to June 30, 2009
|
Note 20 — Litigation
Cobasys
On September 10, 2007, Chevron Technologies Ventures, LLC (“CTV”) issued a notice of dispute
and filed claims in arbitration (the “CTV Arbitration”) seeking damages and injunctive and other
relief and alleging that Energy Conversion Devices, Inc. (“ECD”) and Ovonic Battery Company, Inc.
(“OBC”) had breached and anticipatorily repudiated obligations under the Amended and Restated
Operating Agreement dated as of December 2, 2004 among ECD, OBC and CTV (the “Operating Agreement”)
to provide certain funding to Cobasys LLC (“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. ECD and OBC denied CTV’s allegations and filed a counterclaim, seeking damages
and
89
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
injunctive and other relief on the ground that CTV had acted 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 OBC’s
application for partial judgment on the pleadings seeking to dismiss CTV’s initial and amended
claims and CTV’s 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.
On July 30, 2008 Mercedes-Benz U.S. International, Inc. (“MBUSI”) filed a complaint and motion
for preliminary injunction (the “MBUSI Lawsuit”) against Cobasys, CTV and OBC in the Federal
District Court for the Northern District of Alabama alleging that Cobasys breached a contract for
production of nickel metal hydride battery packs and that CTV and OBC intentionally interfered with
MBUSI’s business relations through actions in their capacities as owners of Cobasys. MBUSI
subsequently amended its complaint to add a claim of conspiracy against Cobasys, CTV and OBC
arising from the same conduct alleged in the initial complaint.
On June 26, 2009, in connection with an agreement for OBC and CTV to sell their interests in
Cobasys to a third party, (1) ECD, OBC, and CTV entered into a Second Interim Settlement Agreement
temporarily suspending the CTV Arbitration and providing for the dismissal of the CTV Arbitration,
and the execution of a settlement agreement and release among the parties, upon the consummation of
such sale, and (2) Cobasys, ECD, OBC, CTV and MBUSI entered into a Settlement Agreement and Mutual
Release temporarily suspending the lawsuit and providing for the dismissal of the lawsuit upon the
consummation of such sale. The sale was consummated on July 13, 2009, and the CTV Arbitration and
MBUSI Lawsuit were each dismissed, with prejudice, on July 13, 2009. ECD, OBC, and CTV also
entered into a Settlement Agreement and Release as of July 13, 2009.
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. The IAS matter was resolved in June 2008
with a payment of $0.9 million made to IAS. This payment was funded equally by ECD, Chevron and
General Motors.
Other than the information provided above, 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, results of operations, or liquidity of the Company.
Note 21 — Subsequent Events
The Company has performed an evaluation of subsequent events through August 27, 2009, which is
the date the Company’s financial statements were issued. No material subsequent events, other than
the items disclosed below, have occurred since June 30, 2009 that required recognition or
disclosure in these
financial statements.
90
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition of Solar Integrated Technologies
On July 21, 2009, the Company and Solar Integrated Technologies, Inc. (“SIT”), a significant
customer to the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”),
effective August 19, 2009, under which SIT was merged with and into a subsidiary of the Company,
resulting in SIT as the surviving entity and wholly owned subsidiary of the Company, all subject to
the terms and conditions set forth in the Merger Agreement (the “Merger”). Under the terms of the
Merger, the Company acquired all of SIT’s outstanding shares by paying 6.75 pence in cash (or
approximately $0.11) for each share of SIT for an aggregate of $11.2 million and assuming the cash
and third party debt of SIT which net to approximately $5.1 million.
SIT designs, manufactures and installs building-integrated photovoltaic roofing systems for
non-residential customers. The Merger is an important element of the Company’s future growth plan
as it transitions from manufacturing and selling a product to a company that provides complete
solar solutions and value-added services. The Merger also strengthens and diversifies the
Company’s business.
The initial accounting for the business combination is not yet completed because the closing of the transaction was affective August 19, 2009. Therefore, the acquisition date fair values of the assets acquired and
liabilities assumed have not yet been determined.
Cobasys
On July 13, 2009, OBC and CTV completed a sale of 100% of the membership interests in Cobasys
to SB LiMotive Co. Ltd. for $1. In connection with the sale of Cobasys, the Amended and Restated
Operating Agreement dated July 2, 2004 was terminated effective as of the transaction date.
Termination of the Operating Agreement was effectuated by a Termination Agreement dated as of the
transaction date. This transaction coincides with settlement of a pending lawsuit against Cobasys
filed in August 2008 by MBUSI. In connection with settling the lawsuit, OBC paid MBUSI $1.1
million from the $1.3 million in royalties distributed to it by Cobasys and entered into a mutual
release with MBUSI of all Cobasys-related claims. In addition, Cobasys restructured its
intellectual property licenses with the Company and OBC so that OBC has royalty-free, exclusive
rights to the technology for defined non-transportation uses and Cobasys has royalty-free exclusive
rights for defined transportation uses.
In connection with these transactions, OBC, CTV and the Company settled and jointly dismissed
their pending arbitration without any finding of financial liability. These parties entered into
mutual releases and agreed to the terms of the Cobasys sale transaction. In July 2009, the Company
recorded the $1.3 million received in connection with this settlement as a Distribution from a
Joint Venture and the $1.1 million paid to MBUSI as Selling, General and Administrative Expenses.
91
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22 — Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
|
|
|
|
|
|
|
(in thousands, except for per-share amounts)
|
|
|
|
|
|
Year ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
95,765
|
|
|
$
|
103,107
|
|
|
$
|
66,006
|
|
|
$
|
51,415
|
|
|
$
|
316,293
|
|
|
Operating
income (loss)
|
|
|
13,772
|
|
|
|
15,926
|
|
|
|
3,983
|
|
|
|
(12,995
|
)
|
|
|
20,686
|
|
|
Net income (loss)
|
|
|
12,661
|
|
|
|
14,240
|
|
|
|
1,326
|
|
|
|
(15,771
|
)
|
|
|
12,456
|
|
|
Basic net income (loss) per share
|
|
|
0.30
|
|
|
|
0.34
|
|
|
|
0.03
|
|
|
|
(0.37
|
)
|
|
|
0.29
|
|
|
Diluted net income (loss) per share
|
|
|
0.29
|
|
|
|
0.33
|
|
|
|
0.03
|
|
|
|
(0.37
|
)
|
|
|
0.29
|
|
|
Year ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
47,042
|
|
|
|
56,449
|
|
|
|
69,982
|
|
|
|
82,388
|
|
|
|
255,861
|
|
|
Operating (loss) income
|
|
|
(9,953
|
)
|
|
|
(7,457
|
)
|
|
|
5,572
|
|
|
|
7,777
|
|
|
|
(4,061
|
)
|
|
Net income (loss)
|
|
|
(7,567
|
)
|
|
|
(5,426
|
)
|
|
|
6,974
|
|
|
|
9,872
|
|
|
|
3,853
|
|
|
Basic net income (loss) per share
|
|
|
(0.19
|
)
|
|
|
(0.14
|
)
|
|
|
0.17
|
|
|
|
0.24
|
|
|
|
0.10
|
|
|
Diluted net income (loss) per
share
|
|
|
(0.19
|
)
|
|
|
(0.14
|
)
|
|
|
0.17
|
|
|
|
0.24
|
|
|
|
0.09
|
|
92
|
|
|
|
|
Item 9
:
|
|
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
|
|
|
Item 9A
:
|
|
Controls and Procedures
|
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures were effective.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934. The Company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States. Internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of the assets, (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and
directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our assets that could have a material
effect on our financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and
internal auditing practices and actions taken to correct deficiencies as identified. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial
reporting as of June 30, 2009. Management based this assessment on criteria for effective internal
control over financial reporting described in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included
an evaluation of the design of the Company’s internal control over financial reporting and testing
of the operational effectiveness of its internal control over financial reporting. Management
reviewed the results of its assessment with the Audit Committee of the Company’s Board of
Directors. Based on this assessment, management determined that, as of June 30, 2009, the Company
maintained effective internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of June 30, 2009 has
been audited by Grant Thornton LLP, our independent public accounting firm, as stated in their
report which appears herein.
93
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred
during the Company’s most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Energy Conversion Devices, Inc.
We have audited Energy Conversion Devices, Inc. (a Delaware Corporation) and subsidiaries’ (the
Company) internal control over financial reporting as of June 30, 2009, based on criteria
established in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Energy
Conversion Devices, Inc. and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of June 30, 2009, based on criteria established in
Internal
Control—Integrated Framework
issued by COSO.
94
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Energy Conversion Devices, Inc. and
subsidiaries as of June 30, 2009 and 2008, and the related consolidated statements of operations,
stockholders’ equity and comprehensive income (loss), cash flows and financial statement schedule for each of the three years in
the period ended June 30, 2009 and our report dated August 26, 2009 expressed an unqualified
opinion.
/s/ GRANT THORNTON LLP
Southfield, Michigan
August 26, 2009
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Item 9B
:
|
|
Other Information
|
Not applicable.
95
PART III
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III is omitted from this Report on Form 10-K and is
hereby incorporated by reference from the Registrant’s definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on November 17, 2009 (the “2009 Proxy Statement”) pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, which will be filed not later
than 120 days after the end of the fiscal year covered by this Report.
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Item 10
:
|
|
Directors, Executive Officers and Corporate Governance
|
The information contained in the sections entitled “Election of Directors” and “Section 16(a)
Beneficial Ownership Reporting Compliance” included in our 2009 Proxy Statement is incorporated
herein by reference.
The information regarding our Audit Committee, including the members of our Audit Committee
and audit committee financial experts, set forth in the section entitled “Corporate Governance and
Board Matters” contained in our 2009 Proxy Statement is incorporated herein by reference.
The charters of our Audit Committee, Compensation Committee, Corporate Governance and
Nominating Committee, and Finance Committee are available in the “Investor Relations — Corporate
Governance” section of our website at
www.ovonic.com
and are available to any stockholder upon
request to the Corporate Secretary. The information on our website is not incorporated by
reference in this Annual Report on Form 10-K.
We have adopted a Code of Business Conduct that applies to all employees, including our chief
executive officer and chief financial officer, and directors. A copy of the Code of Business
Conduct is available in the “Investor Relations — Corporate Governance” section of our website at
www.ovonic.com
.
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|
Item 11
:
|
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Executive Compensation
|
The information required to be furnished pursuant to this Item will be included under
“Compensation of Directors,” “Director Compensation Table,” “Compensation Discussion and Analysis,”
“Compensation Committee Interlocks and Insider Participation,” and “Executive Compensation Tables,”
in the 2009 Proxy Statement and is incorporated herein by reference.
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|
Item 12
:
|
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The information required by this Item concerning equity compensation plan information will be
included under “Equity Compensation Plan Information” in the 2009 Proxy Statement and is
incorporated herein by reference.
The information required by this Item regarding security ownership of certain beneficial
owners, directors and executive officers will be included under “Security Ownership of Management
and Certain Beneficial Owners” in the 2009 Proxy Statement and is incorporated herein by reference.
96
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Item 13
:
|
|
Certain Relationships and Related Transactions, and Director Independence
|
The information concerning certain relationships and related transactions will be included
under “Transactions with Related Persons” and “Corporate Governance and Board Matters —
Determination of Independence of Board Members” in the 2009 Proxy Statement and is incorporated
herein by reference.
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|
Item 14
:
|
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Principal Accountant Fees and Services
|
The information required by this Item will be included under “Independent Registered Public
Accounting Firm Fees” in the 2009 Proxy Statement and is incorporated herein by reference.
97
PART IV
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Item 15
:
|
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Exhibits and Financial Statement Schedules
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Page
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|
(a) 1. Financial Statements
|
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47
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48
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49
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50
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51
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2. Financial Statement Schedules:
|
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|
Schedule II — Valuation and Qualifying Accounts
|
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103
|
|
Other financial statements and financial statement schedules are omitted (1) because of the absence
of the conditions under which they are required or (2) because the information called for is shown
in the financial statements and notes thereto.
|
|
3.
|
|
Exhibits (including those incorporated by reference):
|
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Reference
|
|
3.1
|
|
Restated Certificate of Incorporation filed September 29, 1967
|
|
(a)
|
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3.2
|
|
Certificate of Amendment to Certificate of Incorporation filed March
25, 1999 extending voting rights of the Company’s Class A Common
Stock, increasing the authorized capital stock of the Company’s Common
Stock to 20,930,000 shares, and authorizing 430,000 shares of Class B
Common Stock
|
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(b)
|
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|
|
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|
3.3
|
|
Certificate of Amendment to Certificate of Incorporation filed March
18, 2004, increasing the number of authorized shares from 30,000,000
to 50,000,000
|
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(c)
|
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|
3.4
|
|
Certificate of Amendment to Certificate of Incorporation filed
December 8, 2006, increasing the number of authorized shares from
50,000,000 to 100,000,000
|
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(d)
|
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3.5
|
|
Amended and Restated Certificate of Incorporation filed January 8, 2008
|
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(e)
|
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3.6
|
|
Bylaws in effect as of October 11, 2007
|
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(f)
|
|
|
|
|
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4.1
|
|
Form of Indenture, dated June 24, 2008, between Energy Conversion
Devices, Inc. and The Bank of New York Trust Company, N.A. as Trustee
|
|
(g)
|
98
|
|
|
|
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|
|
|
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|
|
Reference
|
|
4.2
|
|
Form of First Supplemental Indenture dated June 24, 2008, between
Energy Conversion Devices, Inc. and The Bank of New York Trust
Company, N.A., as Trustee
|
|
(g)
|
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|
|
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|
4.3
|
|
Indenture, dated June 24, 2008, between Energy Conversion Devices,
Inc. and The Bank of New York Trust Company, N.A. as Trustee
|
|
(h)
|
|
|
|
|
|
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|
4.4
|
|
First Supplemental Indenture dated June 24, 2008, between Energy
Conversion Devices, Inc. and The Bank of New York Trust Company,
N.A., as Trustee
|
|
(h)
|
|
|
|
|
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|
|
10.1
|
|
Energy Conversion Devices, Inc. 1995 Non-Qualified Stock Option Plan
|
|
(i)
|
|
|
|
|
|
|
|
10.2
|
|
Energy Conversion Devices, Inc. 2000 Non-Qualified Stock Option Plan
|
|
(j)
|
|
|
|
|
|
|
|
10.3
|
|
Restricted Stock Agreement and Stock Option Agreement dated as of
January 15, 1999 between the Company and Robert C. Stempel
|
|
(k)
|
|
|
|
|
|
|
|
10.4
|
|
Amended and Restated Operating Agreement of Cobasys LLC dated as of
December 2, 2004 by and between ChevronTexaco Technology Ventures
LLC and Ovonic Battery Company, Inc.
|
|
(l)
|
|
|
|
|
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|
10.5
|
|
Energy Conversion Devices, Inc. 2006 Stock Incentive Plan
|
|
(m)
|
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|
|
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|
10.6
|
|
Energy Conversion Devices, Inc. Executive Severance Plan effective
July 24, 2007
|
|
(n)
|
|
|
|
|
|
|
|
10.7
|
|
Form of Severance Plan Participation Agreement
|
|
(o)
|
|
|
|
|
|
|
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10.8
|
|
Energy Conversion Devices, Inc. Annual Incentive Plan
|
|
(p)
|
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|
|
|
|
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|
10.9
|
|
Form of Stock Option Agreement
|
|
(q)
|
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|
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|
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|
10.10
|
|
Form of Restricted Stock Agreement
|
|
(r)
|
|
|
|
|
|
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|
10.11
|
|
Offer Letter dated July 25, 2007 between Energy Conversion Devices,
Inc. and Mark D. Morelli
|
|
(s)
|
|
|
|
|
|
|
|
10.12
|
|
Letter Agreement dated August 23, 2007 among Stanford R. Ovshinsky,
Energy Conversion Devices, Inc. and Ovonic Battery Company
|
|
(t)
|
|
|
|
|
|
|
|
10.13
|
|
Letter Agreement dated August 31, 2007 between Robert C. Stempel
and Energy Conversion Devices, Inc.
|
|
(u)
|
|
|
|
|
|
|
|
10.14
|
|
Revised Separation Agreement with executive officer effective
December 31, 2007
|
|
(v)
|
99
|
|
|
|
|
|
|
|
|
|
|
Reference
|
|
10.15
|
|
Revised Separation Agreement with executive officer
effective March 31, 2008
|
|
(w)
|
|
|
|
|
|
|
|
10.16
|
|
Share Lending Agreement dated as of June 18, 2008 among
Energy Conversion Devices, Inc. and Credit Suisse
International and Credit Suisse Securities (USA) LLC
|
|
(g)
|
|
|
|
|
|
|
|
10.17
|
|
Form of Restricted Stock Unit
|
|
(x)
|
|
|
|
|
|
|
|
10.18
|
|
Offer Letter dated July 16, 2008 between Energy Conversion
Devices, Inc. and Harry W. Zike
|
|
(y)
|
|
|
|
|
|
|
|
10.19
|
|
Revised Separation Agreement with Executive Officer
effective August 31, 2008 (portions of the agreement have
been omitted pursuant to a request for confidential
treatment under Rule 24b-2)
|
|
(z)
|
|
|
|
|
|
|
|
10.20
|
|
Amendment No. 1 to 2006 Stock Incentive Plan
|
|
(aa)
|
|
|
|
|
|
|
|
10.21
|
|
Form of Performance Share Award Agreement pursuant to the
Energy Conversion Devices, Inc. 2006 Stock Incentive Plan,
as amended
|
|
(bb)
|
|
|
|
|
|
|
|
10.22
|
|
Amended Executive Severance Plan
|
|
(cc)
|
|
|
|
|
|
|
|
10.23
|
|
Form of Restricted Stock Unit Award Agreement
|
|
(dd)
|
|
|
|
|
|
|
|
10.24
|
|
Termination Agreement dated as of July 13, 2009 by and
among Ovonic Battery Company, Inc., Energy Conversion
Devices, Inc. and Chevron Technology Ventures LLC
|
|
(ee)
|
|
|
|
|
|
|
|
10.25
|
|
Agreement and Plan of Merger entered into by Energy
Conversion Devices, Inc. and Solar Integrated Technologies
dated July 21, 2009
|
|
|
|
|
|
|
|
|
|
21.1
|
|
List of all direct and indirect subsidiaries of the Company
|
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm,
Grant Thornton LLP
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certificate of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certificate of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
32
|
|
Certifications of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
Notes to Exhibit List
|
|
|
|
|
|
(a)
|
|
Filed as Exhibit 2-A to the Company’s Form 8-A and incorporated herein by reference.
|
|
|
|
(b)
|
|
Filed as Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 1999 and incorporated herein by reference.
|
100
|
|
|
|
|
(c)
|
|
Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004 and incorporated herein by reference.
|
|
|
|
(d)
|
|
Filed with the Company’s Proxy Statement dated October 12, 2006 and incorporated herein by
reference.
|
|
|
|
(e)
|
|
Filed with the Company’s Proxy Statement dated October 29, 2007 and incorporated herein by
reference.
|
|
|
|
(f)
|
|
Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated October 17, 2007 and
incorporated herein by reference.
|
|
|
|
(g)
|
|
Filed as Exhibits 4.1, 4.2 and 10.18 to the Company’s Current Report on Form 8-K dated June
19, 2008 and incorporated herein by reference.
|
|
|
|
(h)
|
|
Filed as Exhibits 4.3 and 4.4 to the Company’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2008
|
|
|
|
(i)
|
|
Filed as Exhibit 10.77 to the Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 1995 and incorporated herein by reference.
|
|
|
|
(j)
|
|
Filed as Exhibit A to the Company’s Proxy Notice and Statement dated January 19, 2001 and
incorporated herein by reference.
|
|
|
|
(k)
|
|
Filed as Exhibits B, C and D, respectively, to the Company’s Proxy Notice and Statement dated
February 23, 1999 and incorporated herein by reference.
|
|
|
|
(l)
|
|
Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated December 7, 2004 and
incorporated herein by reference.
|
|
|
|
(m)
|
|
Filed as Exhibit A to the Company’s Proxy Statement dated October 12, 2006 and incorporated
herein by reference.
|
|
|
|
(n)
|
|
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 30, 2007 and
incorporated herein by reference.
|
|
|
|
(o)
|
|
Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated July 30, 2007 and
incorporated herein by reference.
|
|
|
|
(p)
|
|
Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated July 30, 2007 and
incorporated herein by reference.
|
|
|
|
(q)
|
|
Filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated July 30, 2007 and
incorporated herein by reference.
|
|
|
|
(r)
|
|
Filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K dated July 30, 2007 and
incorporated herein by reference.
|
|
|
|
(s)
|
|
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 3, 2007 and
incorporated herein by reference.
|
|
|
|
(t)
|
|
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 27, 2007 and
incorporated herein by reference.
|
|
|
|
(u)
|
|
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 31, 2007 and
incorporated herein by reference.
|
101
|
|
|
|
|
(v)
|
|
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008 and incorporated herein by reference.
|
|
|
|
(w)
|
|
Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008 and incorporated herein by reference.
|
|
|
|
(x)
|
|
Filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2008.
|
|
|
|
(y)
|
|
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 2, 2008 and
incorporated herein by reference.
|
|
|
|
(z)
|
|
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 and incorporated herein by reference
|
|
|
|
(aa)
|
|
Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 and incorporated herein by reference.
|
|
|
|
(bb)
|
|
Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 and incorporated herein by reference.
|
|
|
|
(cc)
|
|
Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 and incorporated herein by reference.
|
|
|
|
(dd)
|
|
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
December 31, 2008 and incorporated herein by reference
|
|
|
|
(ee)
|
|
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 14, 2009 and
incorporated herein by reference.
|
102
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Schedule II — Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
Costs and
|
|
Other
|
|
|
|
|
|
End of
|
|
|
|
of Period
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
Period
|
|
|
|
(in thousands)
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts
|
|
|
825
|
|
|
|
3,692
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
4,481
|
|
|
Reserve for losses on government
contracts
|
|
|
1,851
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(90
|
)
|
|
|
1,761
|
|
|
Reserve for inventory obsolescence
|
|
|
4,790
|
|
|
|
8,111
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,901
|
|
|
Reserve for warranty
|
|
|
1,499
|
|
|
|
5,680
|
|
|
|
—
|
|
|
|
(1,262
|
)
|
|
|
5,917
|
|
|
Valuation allowance for deferred taxes
|
|
|
128,757
|
|
|
|
4,934
|
|
|
|
—
|
|
|
|
(3,156
|
)
|
|
|
130,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts
|
|
|
538
|
|
|
|
868
|
|
|
|
6
|
|
|
|
(587
|
)
|
|
|
825
|
|
|
Reserve for losses on government
contracts
|
|
|
1,899
|
|
|
|
158
|
|
|
|
—
|
|
|
|
(206
|
)
|
|
|
1,851
|
|
|
Reserve for inventory obsolescence
|
|
|
1,870
|
|
|
|
3,059
|
|
|
|
—
|
|
|
|
(139
|
)
|
|
|
4,790
|
|
|
Reserve for warranty
|
|
|
1,325
|
|
|
|
391
|
|
|
|
—
|
|
|
|
(217
|
)
|
|
|
1,499
|
|
|
Valuation allowance for deferred taxes
|
|
|
129,571
|
|
|
|
4,934
|
|
|
|
—
|
|
|
|
(5,748
|
)
|
|
|
128,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts
|
|
|
691
|
|
|
|
10
|
|
|
|
57
|
|
|
|
(220
|
)
|
|
|
538
|
|
|
Reserve for losses on government
contracts
|
|
|
2,343
|
|
|
|
134
|
|
|
|
—
|
|
|
|
(578
|
)
|
|
|
1,899
|
|
|
Reserve for inventory obsolescence
|
|
|
1,164
|
|
|
|
1,348
|
|
|
|
—
|
|
|
|
(642
|
)
|
|
|
1,870
|
|
|
Reserve for warranty
|
|
|
1,835
|
|
|
|
(292
|
)
|
|
|
—
|
|
|
|
(218
|
)
|
|
|
1,325
|
|
|
Valuation allowance for deferred taxes
|
|
|
112,674
|
|
|
|
22,398
|
|
|
|
—
|
|
|
|
(5,501
|
)
|
|
|
129,571
|
|
103
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.
|
|
|
August 27, 2009
|
By:
|
/S/ Mark D. Morelli
|
|
|
|
|
Mark D. Morelli
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
/s/ Mark D. Morelli
Mark D. Morelli
|
|
President, Chief
Executive Officer
and
Director
(Principal Executive
Officer)
|
|
August 27, 2009
|
|
|
|
|
|
|
/s/ Harry W. Zike
Harry W. Zike
|
|
Vice President and
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
|
|
August 27, 2009
|
|
|
|
|
|
|
/s/ Joseph A. Avila
Joseph A. Avila
|
|
Director
|
|
August 27, 2009
|
|
|
|
|
|
|
/s/ Alan E. Barton
Alan E. Barton
|
|
Director
|
|
August 27, 2009
|
|
|
|
|
|
|
/s/ Christopher P. Belden
Christopher P. Belden
|
|
Director
|
|
August 27, 2009
|
|
|
|
|
|
|
/s/ Robert I. Frey
Robert I. Frey
|
|
Director
|
|
August 27, 2009
|
|
|
|
|
|
|
/s/ William J. Ketelhut
William J. Ketelhut
|
|
Director
|
|
August 27, 2009
|
|
|
|
|
|
|
/s/ Stephen Rabinowitz
Stephen Rabinowitz
|
|
Director
|
|
August 27, 2009
|
|
|
|
|
|
|
/s/ George A. Schreiber, Jr.
George A. Schreiber, Jr.
|
|
Director
|
|
August 27, 2009
|
104
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