Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 14, 2011)
  • 10-Q (May 10, 2011)
  • 10-Q (Feb 9, 2011)
  • 10-Q (Nov 9, 2010)
  • 10-Q (May 10, 2010)
  • 10-Q (Feb 9, 2010)

 
8-K

 
Other

Energy Conversion Devices 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                      
Commission File Number: 1-8403
ENERGY CONVERSION DEVICES, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   38-1749884
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    
     
2956 Waterview Drive, Rochester Hills, Michigan   48309
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (248) 293-0440
 
Former name, former address and former fiscal year, if changed since last report
 
    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No  o
    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).  Yes  o  No  o
    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.  Yes  o  No  o
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  þ
    As of November 4, 2010, there were 49,835,935 shares of the registrant’s Common Stock outstanding.
 
 

 


 

TABLE OF CONTENTS
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2010
         
       
 
       
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    33  
 EX-31.1
 EX-31.2
 EX-32

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Table of Contents

PART I — FINANCIAL INFORMATION
Item 1: Financial Statements
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
                 
    Three Months Ended  
    September 30,  
    2010     2009 (1)  
Revenues
               
Product sales
  $ 53,397     $ 34,143  
System sales
    11,650       2,567  
Royalties
    2,115       1,959  
Revenues from product development agreements
    827       3,991  
License and other revenues
    408       284  
 
           
Total Revenues
    68,397       42,944  
Expenses
               
Cost of product sales
    45,016       24,107  
Cost of system sales
    10,555       3,726  
Cost of revenues from product development agreements
    329       3,281  
Product development and research
    2,399       2,245  
Preproduction costs
    64       10  
Selling, general and administrative
    17,644       16,202  
Net (gain) loss on disposal of property, plant and equipment
    (76 )     974  
Restructuring charges
    491       677  
 
           
Total Expenses
    76,422       51,222  
 
           
Operating Loss
    (8,025 )     (8,278 )
Other Income (Expense)
               
Interest income
    344       292  
Interest expense
    (6,986 )     (7,170 )
Gain on debt extinguishment
    1,189        
Distribution from joint venture
          1,309  
Other nonoperating income, net
    132       885  
 
           
Total Other Income (Expense)
    (5,321 )     (4,684 )
 
           
Loss before Income Taxes and Equity Loss
    (13,346 )     (12,962 )
Income tax expense (benefit)
    155       (915 )
 
           
Loss before Equity Loss
    (13,501 )     (12,047 )
Equity loss
    (34 )      
 
           
Net Loss
    (13,535 )     (12,047 )
Net Loss Attributable to Noncontrolling Interest
    (79 )     (74 )
 
           
Net Loss Attributable to ECD Stockholders’
  $ (13,456 )   $ (11,973 )
 
           
 
               
Loss Per Share, Attributable to ECD Stockholders’
  $ (0.29 )   $ (0.28 )
 
           
 
               
Diluted Loss Per Share, Attributable to ECD Stockholders’
  $ (0.29 )   $ (0.28 )
 
           
 
    (1) As adjusted due to the implementation of FASB ASC 470-20 (See Note 1).
See notes to consolidated financial statements.

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Table of Contents

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
                 
    September 30,     June 30,  
    2010     2010 (1)  
    (Unaudited)        
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 68,963     $ 79,158  
Short-term investments
    125,369       113,771  
Accounts receivable, net
    58,366       72,021  
Inventories, net
    63,596       61,495  
Other current assets
    33,321       27,237  
 
           
Total Current Assets
    349,615       353,682  
 
               
Property, Plant and Equipment, net
    303,296       301,056  
 
               
Other Assets:
               
Restricted cash
    12,157       11,749  
Lease receivable, net
    10,592       10,854  
Other assets
    13,727       14,606  
 
           
Total Other Assets
    36,476       37,209  
 
           
 
               
Total Assets
  $ 689,387     $ 691,947  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable and accrued expenses
  $ 60,383     $ 56,035  
Current portion of warranty liability
    11,166       12,125  
Other current liabilities
    10,523       9,130  
 
           
Total Current Liabilities
    82,072       77,290  
 
               
Long-Term Liabilities:
               
Convertible senior notes
    239,645       243,654  
Capital lease obligations
    19,988       20,296  
Warranty liability
    30,952       29,210  
Other liabilities
    19,268       19,872  
 
           
Total Long-Term Liabilities
    309,853       313,032  
 
               
Commitments and Contingencies (Note 10)
               
 
               
Stockholders’ Equity
               
Common stock, $0.01 par value, 100 million shares authorized, 49,863,710 and 48,554,812 issued at September 30, 2010 and June 30, 2010, respectively
    499       486  
Additional paid-in capital
    1,087,005       1,079,910  
Treasury stock
    (700 )     (700 )
Accumulated deficit
    (787,844 )     (774,388 )
Accumulated other comprehensive loss, net
    (1,306 )     (3,570 )
 
           
Total ECD stockholders’ equity
    297,654       301,738  
Accumulated deficit — noncontrolling interest
    (192 )     (113 )
 
           
Total Stockholders’ Equity
    297,462       301,625  
 
           
Total Liabilities and Stockholders’ Equity
  $ 689,387     $ 691,947  
 
           
 
    (1) As adjusted due to the implementation of FASB ASC 470-20 (See Note 1).
See notes to consolidated financial statements.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
                 
    Three Months Ended  
    September 30,  
    2010     2009 (1)  
Cash flows from operating activities:
               
Net loss
  $ (13,535 )   $ (12,047 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    5,409       8,892  
Amortization of debt discount and deferred financing fees
    4,242       4,115  
Share-based compensation
    881       1,051  
Gain on debt extinguishment
    (1,189 )      
Net (gain) loss on disposal of property, plant and equipment
    (76 )     974  
Equity loss
    34        
Changes in operating assets and liabilities, net of foreign exchange:
               
Accounts receivable
    14,350       8,924  
Inventories
    (868 )     (29,880 )
Other assets
    (229 )     446  
Accounts payable and accrued expenses
    9,410       (7,442 )
Other liabilities
    769       (954 )
 
           
Net cash provided by (used in) operating activities
    19,198       (25,921 )
 
               
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (12,068 )     (12,157 )
Acquisition of business, net of cash acquired
          (2,088 )
Purchases of investments
    (45,478 )      
Proceeds from maturities of investments
    14,200       34,069  
Proceeds from sale of investments
    19,259       9,771  
Proceeds from sale of property, plant and equipment
    126        
Development loans
    (3,275 )      
Increase in restricted cash
    (408 )      
 
           
Net cash (used in) provided by investing activities
    (27,644 )     29,595  
 
               
Cash flows from financing activities:
               
Principal payments under capitalized lease obligations and other debt
    (426 )     (174 )
Repayment of revolving credit facility
          (5,705 )
 
           
Net cash used in financing activities
    (426 )     (5,879 )
 
               
Effect of exchange rate changes on cash and cash equivalents
    (1,323 )     233  
Net decrease in cash and cash equivalents
    (10,195 )     (1,972 )
Cash and cash equivalents at beginning of period
    79,158       56,379  
 
           
Cash and cash equivalents at end of period
  $ 68,963     $ 54,407  
 
           
 
(1)   As adjusted due to the implementation of FASB ASC 470-20 (See Note 1).
See notes to consolidated financial statements.

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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.
     On August 19, 2009, the Company acquired 100% of the outstanding common shares of Solar Integrated Technologies, Inc. (“SIT”), a Los Angeles-based company that manufactures, designs and installs building integrated photovoltaic roofing systems for commercial rooftops. The results of SIT’s operations have been included in the Company’s Consolidated Financial Statements beginning August 19, 2009.
Basis of Presentation
     The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting, and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements for interim reporting do not include all of the information and notes or disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. Results for interim periods should not be considered indicative of results for a full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the period ended June 30, 2010, as filed with the Securities and Exchange Commission (“SEC”).
     The consolidated financial statements include the accounts of the Company and the accounts of the Company’s subsidiaries in which it holds a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s share of earnings or losses of nonconsolidated affiliates are included in our consolidated operating results using the equity method of accounting when the Company is able to exercise significant influence over the operating and financial decisions of the affiliate.
     The Company has performed an evaluation of subsequent events through the date the Company’s financial statements were issued. No material subsequent events have occurred that required recognition or disclosure in these financial statements.
Summary of Significant Accounting Policies
Use of Estimates
     The preparation of financial statements in conformity with 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.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized Interest
     Interest is capitalized during periods of active equipment construction. During the three months ended September 30, 2010 and 2009, the Company incurred total interest costs of $7.3 million and $7.1 million, respectively, of which $0.3 million and $0.1 million, respectively, were capitalized.
General
     The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010 and have not materially changed as of the date of this Report with the exception of the following:
Restricted Cash
     In September 2010, the Company entered into a letter of credit facility, which requires cash collateral equal to 102% of any exposure under letters of credit issued under the facility. Such collateral is recorded as restricted cash on the Company’s Consolidated Balance Sheets.
Revenues from Product Development Agreements
     In July 2010, the Company began recording research and development cost sharing arrangements as research and development expense as incurred. The amounts funded by the customer will be recognized as an offset to the aggregate research and development expense rather than as contract revenues.
Recently Adopted Accounting Pronouncements
     On July 1, 2010, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), which amends Topic 810 “Consolidations” (“ASC 810”) to change 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 the VIE), 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, reconsideration of whether an enterprise was the primary beneficiary of a VIE only was required when specific events had occurred. Qualifying special purpose entities, which were previously exempt from the application of this standard, will be subject to the provisions of this standard when it becomes effective. ASC 810 also requires enhanced disclosures about an enterprise’s involvement with a VIE. ASC 810 is effective as of the beginning of the Company’s first annual reporting period that begins after November 15, 2009. The adoption of ASC 810 did not have any impact on the Company’s consolidated financial statements.
     On July 1, 2010, the Company adopted FASB Accounting Standards Update (“ASU”) 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a Consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”), which amends ASC Subtopic 605-25 for separate consideration in multiple-deliverable arrangements. ASU 2009-13 eliminates the use of the residual

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
method for allocating consideration, as well as the criteria that requires objective and reliable evidence of fair value of undelivered elements in order to separate the elements in a multiple-element arrangement. Upon adoption of the guidance the delivered element(s) will be considered a separate unit of accounting only if both of the following criteria are met: (i) the delivered item(s) has stand-alone value to the customer and (ii) if a general right of return exists relative to the delivered item(s), delivery or performance of the undelivered item(s) is substantially in the control of the vendor and is considered probable. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The adoption of ASU 2009-13 did not have any impact on the Company’s consolidated financial statements.
     On July 1, 2010, the Company adopted the FASB ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” (“ASU 2009-15”), which amends ASC 470-20 clarifies that share lending arrangements that are executed in connection with convertible debt offerings or other financings should be measured at fair value and recognized as a debt issuance cost which is amortized using the effective interest method over the life of the financing arrangement as interest cost. In addition, ASU 2009-15 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. The amended provisions of ASC 470-20 is effective for all arrangements outstanding as of the fiscal year beginning on or after December 15, 2009, and retrospective application is required for all periods presented. In addition, ASC 470-20 is effective for arrangements entered into on or after the beginning of the first reporting period that begins on or after June 15, 2009.
     The following table summarizes the effect of adopting ASC 470-20:
                         
    Consolidated Statement of Operations for the  
    Three Months Ended September 30, 2009  
    As Previously              
    Reported     ASC 470-20     As Reported  
    (in thousands, except per share amounts)  
Interest expense
  $ (6,963 )   $ (207 )   $ (7,170 )
Total Other Income (Expense)
    (4,477 )     (207 )     (4,684 )
Net Loss before Income Taxes
    (12,755 )     (207 )     (12,962 )
Net Loss
    (11,840 )     (207 )     (12,047 )
Net loss attributable to ECD Stockholders’
    (11,766 )     (207 )     (11,973 )
Loss per share
    (0.28 )           (0.28 )
Diluted loss per share
    (0.28 )           (0.28 )

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         
    Consolidated Balance Sheets as of June 30, 2010  
    As Previously              
    Reported     ASC 470-20     As Reported  
    (in thousands)  
Other assets
  $ 10,980     $ 3,626     $ 14,606  
Total assets
    688,321       3,626       691,947  
Additional paid-in capital
    1,074,410       5,500       1,079,910  
Accumulated deficit
    (772,514 )     (1,874 )     (774,388 )
Total ECD stockholders’ equity
    298,112       3,626       301,738  
Total stockholders’ equity
    297,999       3,626       301,625  
Total liabilities and stockholders’ equity
    688,321       3,626       691,947  
                         
    Consolidated Statement of Cash Flows for the  
    Three Months Ended September 30, 2009  
    As Previously              
    Reported     ASC 470-20     As Reported  
    (in thousands)  
Net loss
  $ (11,840 )   $ (207 )   $ (12,047 )
Amortization of debt discount and deferred financing fees
    3,908       207       4,115  
Note 2 — Loss Per Share
     Basic loss per common share attributable to ECD stockholders’ is computed by dividing the net loss attributable to ECD stockholders’ by the weighted average number of common shares outstanding for the period. Diluted loss per share attributable to ECD stockholders’ 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 loss attributable to ECD stockholders’. The following table reconciles the numerator and denominator to calculate basic and diluted loss per share attributable to ECD stockholders’:
                         
    Net Loss              
    Attributable              
    to ECD              
    Stockholders’     Shares     Per Share  
    (Numerator)     (Denominator)     Amounts  
    (in thousands, except per share amounts)  
Three Months Ended September 30, 2010
                       
Basic and diluted loss per share
  $ (13,456 )     46,128     $ (0.29 )
 
                 
 
                       
Three Months Ended September 30, 2009
                       
Basic and diluted loss per share
  $ (11,973 )     42,299     $ (0.28 )
 
                 

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     The following securities would have had an anti-dilutive effect on earnings per share and are therefore excluded from the computations above.
                 
    Three Months Ended  
    September 30,  
    2010     2009  
    (in thousands)  
Share-based payment arrangements
    1,428       1,311  
     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. 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 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. During the three months ended September 30, 2010 and 2009, 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.
Note 3 — Supplemental Cash Flow Information
     Supplemental disclosures of cash flow information are as follows:
                 
    Three Months Ended  
    September 30,  
    2010     2009  
    (in thousands)  
Supplemental disclosures:
               
Cash paid for interest, including capitalized interest
  $ 849     $ 680  
Cash paid for income taxes
    36       6  
Decrease in accounts payable for capital expenditures
    4,679       3,845  
Non-cash transactions:
               
Capital lease obligations incurred to finance capital equipment
          50  

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Acquisition
     On August 19, 2009, the Company acquired 100% of the outstanding common shares of SIT, a Los Angeles-based company that manufactures, designs and installs building integrated photovoltaic roofing systems for commercial rooftops. The acquisition 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, project implementation and value-added services. The Company expects to enhance its downstream presence by combining its strengths as a product innovator with the proven installation expertise and global footprint of SIT. The acquisition also strengthens and diversifies the Company’s business.
     The Company paid 6.75 pence per share, or approximately $11.3 million cash consideration for all of outstanding shares of SIT. The Company also recognized a gain of $0.4 million due to the effective settlement of the Company’s and SIT’s preexisting contractual supply relationship. The gain was determined using a discounted cash flow analysis and was recorded in “Selling, general and administrative” expenses in the Company’s Consolidated Statements of Operations. The Company incurred $3.0 million of acquisition-related costs during the quarter ended September 30, 2009 which are included in “Selling, general and administrative” expenses in the Company’s Consolidated Statements of Operations.
Purchase Price Allocation
     The following table summarizes the final amounts of assets acquired and liabilities assumed recognized at the acquisition date.
         
    (in thousands)  
Cash
  $ 9,180  
Accounts receivable
    9,962  
Inventory
    24,031  
Other current assets
    2,372  
Long-term receivables
    11,769  
Property, plant and equipment
    2,030  
Other long-term assets
    2,010  
Identifiable intangible assets
    2,780  
Goodwill
    35,299  
Warranty liability
    (38,548 )
Current liabilities
    (27,293 )
Long-term liabilities
    (21,913 )
 
     
Total net assets acquired
  $ 11,679  
 
     
     The fair value of the accounts receivable acquired was $10.0 million. The gross contractual amount due is $10.0 million, of which an insignificant amount is expected to be uncollectible. In addition, sales-type lease receivables with a fair value of $12.7 million were acquired. The gross contractual amount due is $18.8 million. A liability of $38.5 million has been recognized for estimated warranty claims on products sold by SIT.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Results of operations for SIT are included in the Company’s consolidated financial statements beginning August 19, 2009. The unaudited pro forma combined historical results for the amounts of SIT’s revenue and earnings that would have been included in the Company’s Consolidated Statements of Operations had the acquisition date been July 1, 2009 is as follows:
         
    Three Months Ended
    September 30, 2009(1)
    (in thousands, except per share amounts)
Pro Forma Information
       
Revenues
  $ 47,838  
Net loss attributable to ECD stockholders’
    (15,640 )
Loss per share
    (0.37 )
Diluted loss per share
    (0.37 )
 
(1)   As adjusted due to implementation of FASB ASC 470-20
     The pro forma information includes adjustments for depreciation and the effect of the amortization of intangible assets recognized in the acquisition, along with intercompany elimination entries. This pro forma information is not necessarily indicative of future operating results.
Goodwill and Intangible Assets
     In conjunction with the SIT acquisition, goodwill of approximately $35.3 million was recorded and consisted largely of the synergies and economies of scale from combining the operations of the Company and SIT. All of the goodwill has been allocated to the Company’s United Solar Ovonic Segment. It is estimated that none of the goodwill recognized will be deductible for income tax purposes.
     In addition, intangible assets with a fair value of $2.8 million were recorded, including trade name intangible assets with an indefinite life of $1.1 million. Amortization expense was $0.1 million for the three months ended September 30, 2009.
     During the third quarter of fiscal year 2010, changing market conditions, losses incurred to-date and the increased near-term capacity anticipated from our Technology Roadmap developed during the third quarter, caused us to evaluate the recoverability of our long-lived assets and goodwill. As a result, we wrote off all of our goodwill and intangible assets.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — 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)  
September 30, 2010
                               
Corporate bonds
  $ 118,092     $ 350     $ (1,050 )   $ 117,392  
Commercial paper
    6,979       5       (9 )     6,975  
 
                             
U.S. Government securities
    1,002                   1,002  
 
                       
 
  $ 126,073     $ 355     $ (1,059 )   $ 125,369  
 
                       
 
                               
June 30, 2010
                               
Corporate bonds
  $ 89,935     $ 5     $ (1,377 )   $ 88,563  
U.S. Government securities
    11,001       4             11,005  
Auction rate certificates
    14,200             (1,731 )     12,469  
Auction rate securities rights
          1,734             1,734  
 
                       
 
  $ 115,136     $ 1,743     $ (3,108 )   $ 113,771  
 
                       
     The following schedule summarizes the contractual maturities of the Company’s short-term investments:
                                 
    September 30, 2010     June 30, 2010  
    Amortized Cost     Market value     Amortized Cost     Market Value  
            (in thousands)          
Due in less than one year
  $ 65,504     $ 64,723     $ 38,586     $ 39,189  
Due after one year through five years
    60,569       60,646       76,550       74,582  
 
                       
 
  $ 126,073     $ 125,369     $ 115,136     $ 113,771  
 
                       
     The corporate bonds and U.S. government securities are classified as “available-for-sale.” On June 30, 2010, the Company elected its right to sell the remaining ARCs and liquidate its ARSRs. These transactions settled in July 2010.
Note 6 - Sales-Type Lease Receivables
     In 2005 and 2006, SIT entered into Energy Services Agreements (“ESAs”) whereby customers agreed to pay SIT, on a monthly basis over a 20-year period, for the electricity generated from the BIPV roofing systems installed on their buildings. The customers pay for the energy produced by solar systems at a rate specified in each contract. SIT recorded a lease receivable to reflect the future stream of energy services payments from customers over the 20-year period.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Sales-type lease receivables consisted of the following:
         
    September 30, 2010  
    (in thousands)  
Total minimum lease payments receivable
  $ 17,567  
Less: Unearned income
    (6,054 )
 
     
Net investment in sales-type leases
  $ 11,513  
 
     
     Executory costs included in total minimum lease payments were not significant. In addition, no value was assigned to the estimated residual value of the leased equipment due to the 20-year lease term. Future minimum receivables under all noncancelable sales-type leases as of September 30, 2010 are as follows:
         
Fiscal Year   (in thousands)  
2011
  $ 1,000  
2012
    1,020  
2013
    1,040  
2014
    1,061  
2015
    1,082  
Thereafter
    12,364  
 
     
 
  $ 17,567  
 
     
Note 7 - Inventories
     Inventories consisted of the following:
                 
    September 30,     June 30,  
    2010     2010  
    (in thousands)  
Finished products
  $ 31,420     $ 27,690  
Work in process
    17,430       13,905  
Raw materials
    14,746       19,900  
 
           
 
  $ 63,596     $ 61,495  
 
           
     Substantially all of the Company’s inventories are included in its United Solar Ovonic Segment. The above amounts are net of a reserve for slow moving and obsolete inventory of $12.9 million and $15.9 million as of September 30, 2010 and June 30, 2010, respectively.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Liabilities
Warranty Liability
     A summary of the warranty liability is as follows:
         
    (in thousands)  
Liability at June 30, 2010
  $ 41,335  
Warranty expense
    1,578  
Warranty claims
    (1,659 )
Foreign currency impact
    864  
 
     
Liability at September 30, 2010
  $ 42,118  
 
     
Other Long-Term Liabilities
     A summary of the Company’s other long-term liabilities is as follows:
                 
    September 30,     June 30,  
    2010     2010  
    (in thousands)  
Structured financing
  $ 12,717     $ 12,929  
Long-term retirement
    1,608       1,663  
Customer deposits
          120  
Deferred patent license fees
    3,095       3,333  
Deferred revenue and royalties
    297       297  
Rent payable
    1,195       1,145  
Other
    356       385  
 
           
 
  $ 19,268     $ 19,872  
 
           
Note 9 — Long-Term Debt
Lines of Credit
     During September 2010, the Company terminated its $30.0 million and $25.0 million secured revolving credit facilities entered into in February 2008 with JP Morgan Chase Bank, N.A. The security provided under the secured revolving credit facility has been released. The secured revolving credit facility was replaced with a Letter of Credit Facility, also with JP Morgan Chase Bank, N.A. Under the Letter of Credit Facility, we may issue up to $25.0 million in letters of credit, which will be secured by cash equal to 102% of the letters of credit exposure. The Letter of Credit Facility matures on February 4, 2013. Letters of credit totaling approximately $8.6 million as of September 30, 2010 were transferred from the cancelled secured revolving credit facility to the new Letter of Credit Facility.
Convertible Senior Notes
     In June 2008, the Company 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 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.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     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.
     During September 2010, the Company entered into exchange agreements with certain holders of the Company’s Notes whereby the Company issued an aggregate of 1,309,263 shares of its common stock in exchange for an aggregate principal amount of $9.1 million held by the holders of the Notes. In connection with this exchange the Company recorded a gain on debt extinguishment of $1.2 million.
     The effective interest rate for the three month periods ended September 30, 2010 and 2009 was 11.0% and 10.4%, respectively. At September 30, 2010 and June 30, 2010, the carrying amount of the conversion option recorded in stockholders’ equity was $81.8 million and $81.9 million, respectively.
     The net carrying amount of the Notes is as follows:
                 
    September 30, 2010     June 30, 2010  
    (in thousands)  
Outstanding principal
  $ 284,153     $ 293,250  
Less: unamortized discount
    44,508       49,596  
 
           
Net carrying amount
  $ 239,645     $ 243,654  
 
           
     The gross interest expense recognized is as follows:
                 
    Three Months Ended  
    September 30,  
    2010     2009  
    (in thousands)  
Contractual interest
  $ 2,199     $ 2,372  
Amortization of discount
    3,663       3,599  
Amortization of debt issue costs
    579       516  
 
           
Gross interest expense recognized
  $ 6,441     $ 6,487  
 
           
     The Company adopted the provisions of ASC 470-20 on July 1, 2010, with retrospective application to prior periods. (See Note 1 — Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies for additional information). 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

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
underwriter. The shares issued as part of the share lending arrangement coincide with the Notes term and will terminate on June 15, 2013. The fair value of the outstanding loaned shares as of September 30, 2010 and June 30, 2010 was $17.3 million and $14.1 million, respectively. The Company recognized debt issuance costs of $5.5 million which are amortized using the effective interest method over the life of the financing arrangement as interest cost and are included in “Other assets” in the Company’s Consolidated Balance Sheets. The Company has $3.7 million and $3.9 million of unamortized issuance costs associated with the share-lending arrangement as of September 30, 2010 and June 30, 2010, respectively. In addition, the Company recognized an additional $0.2 million of interest costs relating to the amortization of the issuance costs associated with the share lending arrangement for both of the periods ended September 30, 2010 and 2009, respectively. The counterparty to the share lending agreement is required to provide collateral at least equal to 100% of the market value of the loaned shares when the rating from Standard and Poor’s Ratings Group for its indebtedness falls below A-. No collateral was required as of September 30, 2010.
Note 10 — Commitments and Contingencies
     The Company is subject to 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 11 — Restructuring Charges
     The Company has incurred ongoing restructuring charges to better align operating expenses with near-term revenue expectations. In September 2010, the Company incurred additional restructuring charges as part of its manufacturing capacity realignment. The Company estimates that it will incur total restructuring costs of $0.5 million, all of which was recognized during the three months ended September 30, 2010 and was primarily related to employee severance. The restructuring is expected to be completed in the second quarter of fiscal year 2011. The restructuring charges were primarily incurred in the United Solar Ovonic segment.
     A summary of the Company’s restructuring liability is as follows:
                         
    Employee-Related     Other        
    Expenses     Expenses     Total  
    (in thousands)
Balance June 30, 2010
  $ 3,311     $     $ 3,311  
Charges
    473       18       491  
Utilization or payment
    (1,800 )     (18 )     (1,818 )
 
                 
Balance September 30, 2010
  $ 1,984     $     $ 1,984  
 
                 
Note 12 — Share-Based Compensation
     The Company records the fair value of stock-based compensation grants as an expense. Total share-based compensation expense for the three month periods ended September 30, 2010 and 2009 was $0.9 million and $1.1 million, respectively.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
     A summary of the transactions during the three months ended September 30, 2010 with respect to the Company’s stock options is as follows:
                         
                       
                    Aggregate Intrinsic  
            Weighted-Average     Value (1)  
    Shares     Exercise Price     (in thousands)  
Outstanding at June 30, 2010
    864,849     $ 25.06     $  
Granted
                   
Exercised
                 
Expired
    (15,625 )     24.94          
Forfeited
    (4,988 )     46.62          
 
                     
Outstanding at September 30, 2010
    844,236       24.94        
 
                     
 
(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.
The table below sets forth stock options exercisable:
                                 
                            Weighted-  
                            Average  
            Weighted-     Aggregate     Contractual  
            Average     Intrinsic     Life  
            Exercise     Value (1)     Remaining  
    Shares     Price     (in thousands)     in Years  
Exercisable at September 30, 2010
    740,913     $ 23.60     $       2.73  
 
                       
Exercisable at June 30, 2010
    726,944       22.75             2.80  
 
                       
 
(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.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     As of September 30, 2010, there was $1.0 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 1.3 years.
Restricted Stock Awards
     Restricted stock awards (“RSAs”) consist of shares of common stock the Company issued to employees and nonemployee directors. 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.
     Information concerning RSAs awarded during the three month period ended September 30, 2010 is as follows:
                 
    Number of     Weighted-Average  
    Shares     Grant Date Fair Value  
Nonvested at June 30, 2010
    101,668     $ 31.14  
Awarded
           
Vested
           
Forfeited
    (1,435 )     20.81  
Released from restriction
    (30,285 )     25.76  
 
             
Nonvested at September 30, 2010
    69,948       33.68  
 
             
     As of September 30, 2010, there was $2.1 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 1.4 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 and the 2009 Long Term Incentive Plan (collectively the “Plans”), as applicable. On September 30, 2009, the Company’s Board of Directors approved an offer to exchange approximately 98,000 previously issued RSUs for new RSUs on a one-for-one basis.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     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 three month period ended September 30, 2010 is as follows:
                 
            Weighted-Average  
    Number of     Grant Date  
    Shares     Fair Value  
Nonvested at June 30, 2010
    309,622     $ 18.57  
Awarded
    399,500       3.95  
Vested
           
Forfeited
    (132,570 )     12.52  
Released from restriction
    (1,070 )     4.59  
 
             
Nonvested at September 30, 2010
    575,482       9.84  
 
             
     As of September 30, 2010, there was $1.7 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. The cost is expected to be recognized over a weighted-average period of 2.6 years.
Note 13 — Fair Value Measurements
     Financial instruments held by the Company include corporate bonds, U.S. government securities, and money market funds. The Company measures certain financial assets at fair value on a recurring basis, including cash equivalents and available-for-sale securities. The fair value of these financial assets was determined based on observable and 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 September 30, 2010, 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, accounts receivable, and accounts payable approximate their fair values. The fair value of the derivative instruments recorded in

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company’s Consolidated Balance Sheets as of September 30, 2010 was not significant. The fair value of the Company’s convertible senior notes was estimated at $196.1 million as of September 30, 2010 using level 1 inputs. In addition, the fair value of the Company’s outstanding loaned shares related to the share-lending agreement was estimated at $17.3 million as of September 30, 2010 using level 1 inputs.
     Information regarding the Company’s assets measured at fair value is as follows:
                                 
    As of September 30, 2010  
                            Total Fair Value  
    Fair Value Measurements at     and Carrying  
    Reporting Date Using     Value on our  
    Level 1     Level 2     Level 3     Balance Sheet  
    (in thousands)  
Investments in corporate bonds
  $ 117,392                     $ 117,392  
Investments in commercial paper
    6,975                       6,975  
Investments in U.S. government securities
    1,002                       1,002  
Investments in money market funds
    52,141                       52,141  
                                 
    As of June 30, 2010  
                            Total Fair Value  
    Fair Value Measurements at     and Carrying  
    Reporting Date Using     Value on our  
    Level 1     Level 2     Level 3     Balance Sheet  
    (in thousands)  
Auction rate certificates
                  $ 12,469     $ 12,469  
Auction rate securities rights
                    1,734       1,734  
Investments in corporate bonds
  $ 88,563                       88,563  
Investments in U.S. government securities
    11,005                       11,005  
Investments in money market funds
    59,375                       59,375  
     The following table presents the changes in Level 3 assets for the period ended September 30, 2010:
                 
    Auction Rate     Auction Rate  
    Certificates     Securities Rights  
    (in thousands)  
Balance at June 30, 2010
  $ 12,469     $ 1,734  
Redeemed by UBS
    (14,200 )      
Net gain (loss) recognized in earnings
    1,731       (1,734 )
 
           
Balance at September 30, 2010
  $     $  
 
           

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Income Taxes
     The net tax expense of $0.2 million for the three months ended September 30, 2010 primarily relates to the Company’s non-U.S. operations.
     At September 30, 2010, the Company had a net deferred tax asset of $1.1 million resulting from the release of the valuation allowance in the second quarter of fiscal 2010 on the realizable portion of its net deferred tax assets.
     Included within the Company’s net operating losses (“NOLs”) of $422.8 million, are acquired NOLs of approximately $61.7 million in connection with the acquisition of SIT. Section 382 and 383 of the Internal Revenue Code limits the utilization of these NOLs and certain other tax attributes. These provisions apply after a Company has undergone an ownership change and is based on the value of the stock of the acquired loss corporation before the ownership change times a long-term tax exempt rate, a rate published by the Internal Revenue Service (“IRS”). The estimated annual limitation of the acquired SIT NOLs is approximately $0.5 million.
     The Company has a full valuation allowance against its remaining net deferred tax assets of $302.3 million (consisting primarily of U.S. net operating loss carryforwards which expire in various amounts between the current year and 2030, and basis differences in property, plant and equipment and intangible assets). Based on the Company’s operating results for the preceding years, it was determined that it was more likely than not that the deferred tax assets would not be realized.
Note 15 — Variable Interest Entity
     A variable interest entity (“VIE”) is an entity that by design has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIE’s are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets.
     In 2010, the Company entered into a development loan agreement and a development services agreement with Winch Energia S.R.L. and its affiliates (collectively, “Winch”) whereby it would fund Winch’s acquisition of development rights for solar installation projects in Italy and France. As part of these agreements, the Company provides Winch with the funding necessary to procure the development rights and defray third party development expenditures through the time permanent financing is obtained. The Company will also procure the solar modules for the projects. Winch manages the development of the solar projects, arranges the construction debt financing and procures the turnkey Engineering, Procurement and Construction (“EPC”) contractor, who will install the solar modules procured by the Company. In the event of a loan default, the Company may request that the Winch shareholders transfer 100% of their equity interests to it for a fee of 1 Euro. If this provision is enforced and the Company realizes the value of its loan by selling or otherwise monetizing the development rights, the net proceeds (after deducting costs, interest, and other amounts owed to it) are to be remitted to Winch. As of September 30, 2010 and June 30, 2010 the balance of the outstanding loan was $17.4 million and $14.2 million, respectively. The loan bears interest at 5% per annum and the Company will also receive a fee

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
equivalent to a 10% annual interest rate on the outstanding borrowings under the loan as compensation for services provided to support the development of the projects. These amounts are payable upon maturity of the development loan.
     The Company determined Winch was a VIE because its equity investment at risk is insufficient to permit it to finance its activities without additional financial support. As a result of a qualitative and quantitative analysis of Winch, the Company determined it was the primary beneficiary of the VIE because it has the power to direct the activities that most significantly impact Winch’s economic performance and it is expected to absorb a majority of Winch’s expected losses, should losses be incurred. Although the Company is the primary beneficiary, Winch has not been consolidated because it is not material to the Company’s results of operations, financial condition, or liquidity as of and for the period ended September 30, 2010. The Winch VIE had assets of $19.3 million and an insignificant amount of liabilities (other than amounts owed to the Company).
Note 16 — Business Segments
     The Company has two segments, United Solar Ovonic and Ovonic Materials. The Company includes SIT in its United Solar Ovonic segment.
     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 operating segment as it contains the Company’s headquarter costs, consolidating entries, and the Company’s investments in joint ventures, 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)  
Three Months Ended September 30, 2010
                               
Revenues
  $ 65,284     $ 3,061     $ 52     $ 68,397  
Operating (loss) income
    (4,486 )     1,824       (5,363 )     (8,025 )
 
                               
Three Months Ended September 30, 2009
                               
Revenues
    39,520       3,405       19       42,944  
Operating (loss) income
    (1,714 )     1,605       (8,169 )     (8,278 )
Note 17 — Litigation
     On July 13, 2009, Ovonic Battery Company (“OBC”), a majority-owned subsidiary of the Company, and Chevron Technology Ventures LLC (“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 Mercedes-Benz U.S. International, Inc. (“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

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 joint venture” and the $1.1 million paid to MBUSI as “Selling, general and administrative” expenses.

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Item 2: 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 month period ended September 30, 2010. The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in the Report should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended June 30, 2010 as filed with the Securities and Exchange Commission and 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. 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, and receive funds for product development agreements under government sponsored programs.
     In August 2009, we acquired SIT, a company that manufactures, designs, and installs building integrated PV systems for commercial rooftops. As a result of this acquisition, we are transitioning our business from focusing primarily on manufacturing and selling our PV products to providing complete solar solutions, project implementation and value-added services. The SIT business is included in our United Solar Ovonic segment, which represents more than 90% of our revenues.
     We continue to adjust our production in our United Solar Ovonic segment and reduce costs to respond to near-term market conditions and improve our overall competitiveness. We have incurred restructuring expenses, including expenses of approximately $0.6 million in the three months ended September 30, 2010, 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 overhead costs, and associated period costs, resulting from our production adjustments and may recognize similar costs in the future if we do not sustainably operate our facilities at full productive capacity. In addition, in August 2010, we announced a plan to realign our solar manufacturing capacity in our United Solar Ovonic segment among our existing facilities as part of our overall cost reduction activities. Effective in the fall of 2010, we will shift certain final assembly operations from our Auburn Hills, Michigan campus to our Tijuana, Mexico facility. We will continue to manufacture our proprietary solar cells at the Auburn Hills campus and continue to refine our production plans as we implement our Technology Roadmap designed to increase the conversion efficiency of our PV laminates and substantially reduce our cost per watt during fiscal year 2011.
Key Indicators of Financial Condition and Operating Performance
     In evaluating our business, we use product and system sales, gross profit, pre-tax income, earnings per share, net income, cash flow from operations and other key performance metrics. We also use production and shipments, measured in megawatts (“MW”), 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. During the quarter ended September 30, 2010, we produced 33.6 MW compared to 33.2 MW for the same period in 2009.

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Results of Operations
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
United Solar Ovonic Segment
                 
    Three Months Ended  
    September 30,  
    2010     2009  
    (in thousands)  
REVENUES
               
Product sales
  $ 53,260     $ 33,536  
System sales
    11,650       2,567  
Revenues from product development agreements
    374       3,417  
 
           
TOTAL REVENUES
    65,284       39,520  
 
           
EXPENSES
               
Cost of product sales
    44,919       23,595  
Cost of system sales
    10,555       3,726  
Cost of revenues from product development agreements
    89       2,880  
Product development and research
    1,862       1,526  
Preproduction costs
    64       10  
Selling, general and administrative
    11,644       7,862  
Loss on disposal of property, plant and equipment
    43       974  
Restructuring charges
    594       661  
 
           
TOTAL EXPENSES
    69,770       41,234  
 
           
OPERATING LOSS
  $ (4,486 )   $ (1,714 )
 
           
     Total revenues for the three months ended September 30, 2010 were $65.3 million, an increase of $25.8 million or 65.2%, compared to the same period in 2009. This increase in total revenues was primarily due to $9.1 million in system sales and $19.7 million in product sales, offset by $3.0 million in expenses from product development agreements due to an accounting reclassification. See Note 1 “Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies” paragraph “Revenues from Product Development Agreements” to our Notes to the Consolidated Financial Statements for additional information. The $19.7 million in product sales is comprised of an increase of $25.6 million due to higher sales volume, offset by $5.9 million due to lower average selling prices.
     Cost of product sales for the three months ended September 30, 2010 was $44.9 million, an increase of $21.3 million or 90.4%, compared to the same period in 2009. The increase was primarily due to $28.9 million comprised of increased sales volume and an unfavorable change in product mix and $0.8 million in increased warranty costs, offset by $5.1 million due to improved manufacturing efficiencies and $3.3 million of lower depreciation expense due to the impairment recorded in the third quarter of 2010.
     Cost of system sales for the three months ended September 30, 2010 was $10.6 million, an increase of $6.8 million or 183.3%, compared to the same period in 2009. The increase was primarily due to the completion of a large scale job in Italy.
     The combined cost of revenues from product development agreements and product development and research expenses for the three months ended September 30, 2010 was $2.0 million, a decrease of $2.4 million or 55.7%, compared to the same period in 2009. The decrease was primarily due to lower product

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development and research expenses on funded projects. The $3.3 million gross expense in the current quarter was partially offset by $1.3 million of funding from cost sharing agreements. Effective in the first quarter of fiscal year 2011, funding from cost sharing agreements is recorded net with product development and research expenses.
     Selling, general and administrative expenses for the three months ended September 30, 2010 were $11.6 million, an increase of $3.8 million or 48.1%, compared to the same period in 2009. The change is primarily related to a decrease in our allowance for doubtful accounts receivable by $2.5 million in 2009.
     During the three months ended September 30, 2010, we incurred restructuring charges to better align operating expenses with near-term revenue expectations. The $0.6 million of charges were primarily for employee severance. See Note 11 “Restructuring Charges” to our Notes to the Consolidated Financial Statements for additional information.
Ovonic Materials Segment
                 
    Three Months Ended  
    September 30,  
    2010     2009  
    (in thousands)  
REVENUES
               
Product sales
  $ 137     $ 607  
Royalties
    2,115       1,959  
Revenues from product development agreements
    453       574  
License and other revenues
    356       265  
 
           
TOTAL REVENUES
    3,061       3,405  
 
           
EXPENSES
               
Cost of product sales
    97       512  
Cost of revenues from product development agreements
    240       400  
Product development and research
    537       720  
Selling, general and administrative expenses
    363       168  
 
           
TOTAL EXPENSES
    1,237       1,800  
 
           
OPERATING INCOME
  $ 1,824     $ 1,605  
 
           
     Total revenues for the three months ended September 30, 2010 were $3.1 million, a decrease of $0.3 million or 10.1%, compared to the same period in 2009. The decrease in total revenues was primarily due to a decrease in sales of nickel hydroxide materials.
     Combined cost of revenues from product development agreements and product development and research expenses were $0.8 million, a decrease of $0.3 million or 30.6%, compared to the same period in 2009. The decrease was due to reduced research and development expenses resulting from the completion of certain product development contracts.
Corporate and Other
     Selling, general and administrative expenses, which consist primarily of corporate operations, including human resources, legal, finance, strategy, information technology, business development, and corporate governance, were $5.6 million for the three months ended September 30, 2010, a decrease of

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$2.6 million or 31.7%, compared to the same period in 2009. The decrease was primarily due to costs related to the acquisition of SIT and the divestiture of our minority interest in Cobasys in the prior period.
Other Income (Expense)
     Other expense was $5.3 million for the three months ended September 30, 2010 compared to $4.7 million in the same period in 2009. The $0.6 million increase was principally due to decreased interest expense and foreign currency transaction losses.
Income Taxes
     Income tax expense was $0.2 million for the three months ended September 30, 2010 compared to $0.9 million income tax benefit in the same period in 2009. The increase in income taxes primarily relates to a $1.1 million benefit for certain refundable research and development tax credits recorded by the Company during September 2009 that were not available in the current period. The Internal Revenue Service has not extended the election under IRC Section 168(k)(4) to monetize these credits as of September 30, 2010.
Liquidity and Capital Resources
     Our principal sources of liquidity are cash, cash equivalents and short-term investments. We believe that cash, cash equivalents and investments will be sufficient to meet our liquidity needs for our current operations. At September 30, 2010, we had consolidated net working capital of $267.5 million, including $194.3 million in cash, cash equivalents, and short-term investments consisting of Floating Rate Corporate Notes (“FRNs”), corporate notes, and U.S. Government agency notes.
Cash Flows
     Net cash provided by (used in) operating activities increased $45.1 million to $19.2 million for the three months ended September 30, 2010 from $(25.9) million for the three months ended September 30, 2009. This increase was driven by $52.3 million of favorable changes in net working capital, specifically due to inventory, accounts receivable, and accounts payable offset by $7.2 million of our net income (loss) adjusted for non-cash items.
     Net cash (used in) provided by investing activities decreased $57.2 million to $(27.6) million for the three months ended September 30, 2010 from $29.6 million for the three months ended September 30, 2009. This decrease was principally due to increased purchases of investments of $45.5 million, development loans of $3.3 million, offset by reduced proceeds from maturities and sales of our investments of $10.4 million.
     Net cash used in financing activities decreased $5.5 million to $0.4 million for the three months ended September 30, 2010 from $5.9 million for the three months ended September 30, 2009. This decrease was principally due to the $5.7 million repayment of the revolving credit facility made in the prior year.
Short-term Borrowings
     During September 2010, we terminated our $30.0 million and $25.0 million secured revolving credit facilities entered into in February 2008 with JP Morgan Chase Bank, N.A. The security provided under the secured revolving credit facility has been released. The secured revolving credit facility was replaced

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with a Letter of Credit Facility, also with JP Morgan Chase Bank, N.A. Under the Letter of Credit Facility, we may issue up to $25.0 million in letters of credit, which will be secured by cash equal to 102% of the letters of credit exposure. The Letter of Credit Facility matures on February 4, 2013. Letters of credit totaling approximately $8.6 million as of September 30, 2010 were transferred from the cancelled secured revolving credit facility to the new Letter of Credit Facility.
Convertible Senior Notes
     Our Convertible Senior Notes (“Notes”) bear interest at a rate of 3.0% per year, payable on June 15 and December 15 of each year. 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 our 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 our 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 our 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.
     In September 2010, we entered into exchange agreements with certain holders of our Notes whereby we issued an aggregate of 1,309,263 shares of common stock in exchange for an aggregate principal amount of $9.1 million of the Notes. In connection with this exchange we recorded a gain on debt extinguishment of $1.2 million. During fiscal year 2011 we expect to pursue additional debt-for-equity exchanges and other transactions to reduce the outstanding principal of our Notes prior to their maturity.
Significant Accounting Policies and Critical Accounting Estimates
     Our significant accounting policies and critical accounting estimates are disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010. In addition, new accounting policies adopted during the period are disclosed in Note 1 “Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies.”
Forward-Looking Statements
     This Quarterly Report on Form 10-Q 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.

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     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 Item 1A “Risk Factors,” of this report and in our Annual Report on Form 10-K for fiscal year ended June 30, 2010, and in other filings with the SEC from time to time. Any or all of these factors could cause our actual results and financial or legal status for future periods to differ materially from those expressed or referred to in any forward-looking statement. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Forward-looking statements speak only as of the date on which they are made. Except as required by law, we undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.
     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.

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Item 3: 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 (corporate notes, commercial paper and U.S. Government agency notes) represents funds held temporarily, pending use in our business and operations. We had $125.4 million of these investments as of September 30, 2010. It is our policy that investments 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 or decrease of 1% would increase or decrease the value of our portfolio by approximately $1.2 million as of September 30, 2010.
Foreign Exchange Risk
     We primarily conduct our business in U.S. Dollars, which may impact our foreign customers and suppliers as a result of changes in currency exchange rates. These factors may adversely impact our existing or future sales agreements and require us to reallocate product shipments or pursue other remedies.
     The majority of SIT’s sales in Europe are denominated in Euros while the related costs of sales are denominated in Euros and U.S. Dollars. For the three month period ended September 30, 2010, an increase or a decrease in exchange rates of 1% would increase or decrease our foreign currency transaction gain by approximately $0.4 million.
     We recognized a net foreign currency transaction loss of an insignificant amount for the three month period ended September 30, 2010 and a gain of $0.7 million for the three month period ended September 30, 2009.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
     Our Chief Executive Officer and our Chief Financial Officer, with the participation of management, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Report. Based upon this evaluation, we have concluded that our disclosure controls and procedures were effective.
Remediation of Prior Material Weakness in Internal Control Over Financial Reporting
     Our annual report on Form 10-K for the year ended June 30, 2010 disclosed that we had identified a material weakness in internal control over financial reporting relating to inventory accounting. A “material weakness” is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual

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or interim financial statements will not be prevented or detected on a timely basis. The material weakness disclosed in our annual report on Form 10-K related to the fact that the control that ensures the accuracy of adjustments to value inventory at actual cost in the financial statements did not operate effectively.
     We have been actively engaged during the quarter developing and implementing remediation efforts to address the material weakness in controls described above. In connection with these efforts, we have simplified the accounting for standard costs and cost variances by increasing automation of the calculation. In addition, we have enhanced our review procedures by performing additional steps evaluating the overall reasonableness of the valuation adjustment.
     Based upon these significant actions taken, as well as the testing and evaluation of the effectiveness of this enhanced control, we have concluded the material weakness relating to inventory accounting disclosed in our Form 10-K for the year ended June 30, 2010 has been remediated as of September 30, 2010.
Changes in Internal Control over Financial Reporting
     The only changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting are described above under the heading “Remediation of Prior Material Weakness in Internal Control Over Financial Reporting.”

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PART II — OTHER INFORMATION
Item 1: 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.
Item 1A: Risk Factors
     There were no material changes from the risk factors previously disclosed in “Item 1A: Risk Factors,” included in our Annual Report on Form 10-K for the year ended June 30, 2010.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
     During September 2010, we entered into exchange agreements with certain holders of our convertible senior notes whereby we issued an aggregate of 1,309,263 shares of our common stock in exchange for an aggregate principal amount of $9.1 million of the convertible senior notes.
Item 3: Defaults Upon Senior Securities
     Not applicable.
Item 4: Removed and Reserved
     Not applicable.
Item 5: Other Information
     Not applicable.
     
Item 6:   Exhibits
 
   
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

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SIGNATURES
     Pursuant to the requirements 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.
 
 
Dated: November 9, 2010  By:   /S/ William C. Andrews    
    William C. Andrews   
    Chief Financial Officer (Principal Financial and Accounting Officer)   
 
         
     
Dated: November 9, 2010  By:   /S/ Mark D. Morelli    
    Mark D. Morelli   
    President and Chief Executive Officer   
 

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