##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 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 000-31687 EVERGREEN SOLAR, INC. (Exact name of registrant as specified in its charter)
 DELAWARE
    
    04-3242254(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)259 CEDAR HILL STREET
    
    01752MARLBORO, MASSACHUSETTS
    
    (Zip Code)(Address of principal executive offices)
 Registrants telephone number, including area code: 508-357-2221 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes x No o
 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 the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No x
 As
of March 17, 2004, there were 16,086,604 shares of the registrants
Common Stock, $.01 par value per share, outstanding. The aggregate market value
of the registrants voting equity held by non-affiliates as of June 30, 2003
was approximately $15 million. DOCUMENTS INCORPORATED BY REFERENCE The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2003. Portions of such proxy statement are incorporated by reference into Part
III of this Annual Report on Form 10-K.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR THE COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. Controls and ProceduresPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KREPORT OF INDEPENDENT AUDITORSCONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2003CONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSIGNATURESEx-21.1 SubsidiariesEx-23.1 Consent of PricewaterhouseCoopers LLPEx-31.1 Certification of CEOEx-31.2 Certification of CFOEx-32.1 Certification of CEO - Section 906Ex-32.2 Certification of CFO - Section 906    Table of Contents  
 PART I 
 ITEM 1. BUSINESS: OVERVIEW We develop, manufacture and market solar power products that are capable
of providing reliable and environmentally clean electric power throughout the
world. Our solar power products are targeted at the global solar power market.
We believe our proprietary and patented solar power technologies, based on our
String RibbonTM technology, offer significant design, cost and manufacturing
advantages over competing solar power technologies. We intend to become a
leading producer of high-quality solar power products by expanding our
manufacturing capacity, reducing our manufacturing costs, developing innovative
solar power products, increasing our distribution capabilities and pursuing
strategic relationships. Since our formation in 1994, we have conducted research and development of
advanced process and product technologies and, between 1997 and June 2001, we
used pilot manufacturing facilities to refine our solar power products and
manufacturing processes. Also in 1997, we began shipping small quantities of
commercial products. In 2001, we expanded our manufacturing capacity capability
by relocating our operations to a 56,250 square foot facility in Marlboro,
Massachusetts where we constructed a new manufacturing line. We are continuing
to refine, develop and commercialize a number of laboratory-demonstrated
advancements in our solar power technologies, including advanced String Ribbon
crystal growth, more efficient solar cells and improved solar panel designs.
Since our inception, we have shipped over 50,000 solar panels for residential,
commercial and industrial applications in the United States and
internationally. As we continue to increase production volumes, we intend to
actively expand existing and seek new distribution and marketing arrangements. FINANCING TRANSACTION On May 15, 2003, the Company consummated the transaction contemplated by a
Stock and Warrant Purchase Agreement which was entered into on March 21, 2003
with Perseus 2000, L.L.C., Nth Power Technologies Fund II, LP, Nth Power
Technologies Fund II-A, LP, RockPort Capital Partners, L.P., RP Co-Investment
Fund, I, Micro-Generation Technology Fund, LLC, UVCC Fund II, UVCC II Parallel
Fund, L.P., Caisse de depot et placement du Quebec, CDP Capital  Technology
Ventures U.S. Fund 2002 L.P., Beacon Power Corporation, Massachusetts
Technology Park Corporation, Zero Stage Capital VII, L.P., Zero Stage Capital
(Cayman) VII, L.P., Zero Stage Capital SBIC VII, L.P., IMPAX Environmental
Markets plc, Merrill Lynch New Energy Technology Plc, MLIIF New Energy Fund,
PNE Invest Limited, Odyssey Fund, SAM Private Equity Energy Fund LP, SAM
Sustainability Private Equity LP and SAM Smart Energy. As a result of the
consummation of this transaction, the Company issued 26,227,668 shares of
Series A convertible preferred stock at a per share purchase price of $1.12.
Additionally, Beacon Power Corporation purchased a warrant to purchase
2,400,000 shares of common stock at a per share exercise price equal to $3.37,
for $100,000. A total of $29.5 million was raised as a result of the
consummation of the transaction. The proceeds to the Company, net of financing
expenses of approximately $849,000, were approximately $28.6 million for the
transaction. The shares of Series A convertible preferred stock were initially
convertible into shares of common stock on a 1-to-1 basis which is subject to
adjustment to account for the payment of dividends, to take into account
certain changes to the Companys capital structure and to account for future
dilutive issuances. As a condition to the obligation of the purchasers to
consummate the financing transaction, the Company registered for resale the
shares of common stock issuable upon the conversion of the Series A convertible
preferred stock and the exercise of the warrant. 2




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HISTORICAL MILESTONES We were incorporated in August 1994 and, to date, we have achieved the
following milestones along our product development and commercialization
schedule: Date
    
    
    
    
    
    Historical MilestoneOctober
    
    
    1994
    
    
    Evergreen Solar founded with four employees in a 2,500 square foot laboratory.October
    
    
    1995
    
    
    First String Ribbon wafers produced.April
    
    
    1997
    
    
    9,400 square foot pilot manufacturing facility operational.October
    
    
    1997
    
    
    First commercial sale of solar panels produced using String Ribbon technology.June
    
    
    1999
    
    
    Total sales of solar panels of 2,500 units and 100 kilowatts achieved.December
    
    
    1999
    
    
    Kawasaki investment of $5 million and execution of a strategic distribution and
marketing agreement.March
    
    
    2000
    
    
    Leased 56,250 square foot manufacturing and headquarters facility located in
Marlboro, Massachusetts.August
    
    
    2000
    
    
    Renovation of our Marlboro manufacturing facility and headquarters begun.June
    
    
    2001
    
    
    First shipment of solar panels from our new Marlboro manufacturing facility.November
    
    
    2001
    
    
    New distribution relationships in the U.S. and Europe.December
    
    
    2001
    
    
    Shipment of our 10,000th solar panel.June
    
    
    2002
    
    
    Achieved first quarterly $1.0 million in product sales.December
    
    
    2002
    
    
    Demonstration of double ribbon growth to boost productivity.December
    
    
    2002
    
    
    Solar system installed on White House.May
    
    
    2003
    
    
    Close of $29.5 million preferred stock and warrant financing transactionDec
    
    
    2003
    
    
    Richard M. Feldt appointed as new Chief Executive OfficerJan
    
    
    2004
    
    
    Shipment of our 50,000th solar panelJan
    
    
    2004
    
    
    Demonstrated quad-ribbon growth process
 INDUSTRY BACKGROUND The electric power industry is one of the worlds largest industries.
Furthermore, electricity accounts for a growing share of overall energy use.
We believe that deregulation and technological innovations are creating
significant opportunities for new entrants and technologies within the electric
power industry, just as these changes have created similar opportunities in
other regulated industries such as telecommunications, banking and
transportation. We believe that distributed generation is one of the most promising areas
for growth in the global electric power industry. Distributed generation is
defined as point-of-use electricity generation that either supplements or
bypasses the electric utility grid, and employs technologies such as solar
power, microturbines and fuel cells. Distributed generation is expected to
provide greater portability, reliability, power quality and user control. We
believe capacity constraints, increased demand for power reliability and
quality, and new environmental initiatives will drive the demand for
distributed generation. We further believe that environmentally benign, locally sourced power
generation will become increasingly more important for economic development,
environmental policy, and national security. Increasing attention to global
warming, global energy policy, and regional stability and development will
support the deployment of distributed generation, particularly renewable
energy. SOLAR POWER APPLICATIONS AND
BENEFITS Unlike many other distributed generation technologies that have been under
development but not in widespread commercial use, solar power technology has
had a growing worldwide market for over 25 years in the following applications:  -
    
    On-grid. On-grid applications provide supplemental electricity to
customers that are served by an electric utility grid but choose to
generate a portion of their electricity needs on-site. On-grid
applications have been the fastest growing part of the solar power
market, largely driven by the worldwide trend toward deregulation and
privatization of the electric power industry as well as by government
initiatives, including incentive programs to subsidize and promote solar
power systems in several countries including Japan, Germany and the
United States. On-grid applications include residential and commercial
rooftops and building facades and are available for both new
construction and existing structures.  -
    
    Off-grid. Off-grid applications serve markets where access to
conventional electric power is not economical or physically feasible.
Solar power products can provide a cost-competitive, reliable
alternative for powering highway call 3




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boxes, microwave stations, portable highway road signs, remote street or
billboard lights, vacation homes, rural homes in developed and developing
countries, water pumps and battery chargers for recreational vehicles and
other consumer applications. Solar power has emerged as one of the primary distributed generation
technologies seeking to capitalize on the opportunities resulting from trends
affecting the electric power industry. Relative to other distributed generation
technologies, solar power benefits include:  -
    
    Modular and scaleable. From tiny solar cells powering a hand-held
calculator to an array of roof panels powering an entire home to acres
of panels on a commercial building roof or field, solar power products
can be deployed in many sizes and configurations and can be installed
almost anywhere in the world. Solar is among the best technologies for
power generation in urban areas, environmentally sensitive areas, and
geographically remote areas in both developing and developed countries.  -
    
    Reliable. With no moving parts and no fuel supply required, solar
power systems reliably power some of the worlds most sensitive
applications, from space satellites to microwave stations in the
mountains and other remote, harsh environments which typically require
reliable power sources. Solar panels typically carry warranties as long
as 25 years.  -
    
    Dual use. Solar panels are expected to increasingly serve as both a
power generator and the skin of the building. Like architectural glass,
solar panels can be installed on the roofs or facades of residential and
commercial buildings.  -
    
    Environmentally cleaner. Solar power systems consume no fuel and
produce no air or water emissions. THE SOLAR POWER CHALLENGE Although solar power has been technically proven for over 25 years and is
widely cost-effective for off-grid applications, we believe the principal
challenge to widespread adoption of solar power is reducing manufacturing costs
without impairing product performance or reliability. We believe the following
advancements in solar power technology are necessary to meet this challenge:  -
    
    Efficient material use. Reduce raw materials waste, particularly the
waste associated with slicing silicon blocks by conventional crystalline
silicon technology.  -
    
    Simplified and continuous processing. Reduce reliance on expensive,
multi-step manufacturing processes.  -
    
    Improved product design and performance. Increase product conversion
efficiency, longevity and ease of use. Conversion efficiency refers to
the fraction of the suns energy converted to electricity. We further believe the two principal solar power technologies, crystalline
silicon and thin films, have not adequately addressed this challenge: Crystalline Silicon. Crystalline silicon technology was the earliest
practiced solar power technology and remains the foundation for most solar
power applications. Conventional crystalline silicon technology involves
slicing thin wafers from solid crystalline silicon blocks. Crystalline silicon
products are known for their reliability, performance and longevity; however,
factors such as high materials waste from slicing, and multi-step processing
procedures have limited the ability of conventional crystalline silicon
manufacturers to reduce manufacturing costs. Thin Films. While most major solar power manufacturers currently rely on
crystalline silicon technology for the majority of their solar cell production,
many are also developing alternative thin film technologies to achieve lower
manufacturing costs. Thin film technology involves depositing several thin
layers of silicon or more complex materials on a substrate to make a solar
cell. Although thin film techniques may be able to use material more
efficiently than conventional crystalline silicon, we believe the commercial
acceptance of thin film technology is limited due to higher capital costs,
lower manufacturing yields, lower conversion efficiency, reduced product
performance and reliability, and, in some cases, concerns with toxic materials.
Recent curtailments of R&D programs as well as plant closures by some industry
participants, most notably BP Solar in 2002, highlight the commercial
challenges that thin films have faced. 4




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OUR TECHNOLOGY SOLUTION We believe our technologies and processes are unique among our
competitors. Both our technologies and processes have been designed to reduce
manufacturing costs while improving product design. We are developing
technology at the wafer, cell and panel stages of manufacturing, and we hold
patents and other intellectual property in all three areas. We believe our
String Ribbon wafer manufacturing technology is our core technology and offers
a substantial opportunity to reduce cost and otherwise advance our business
through reduced materials cost, simpler processing and lower required economies
of scale. In the String Ribbon technique, strings are pulled vertically through a
shallow pool of molten silicon, and the silicon solidifies between the strings
to form a continuous ribbon of crystalline silicon. The ribbon is then cut and
prepared for cell fabrication. The use of strings to aid in the simplified
growth of a silicon ribbon is what distinguishes our proprietary and patented
String Ribbon technology from other advanced crystalline silicon wafer
technologies that do not involve slicing. We believe our String Ribbon
technology for the growth of solar wafers has the following significant
advantages:  -
    
    Efficient materials use. Unlike conventional bulk crystalline silicon
wafer technology, in which solid blocks of silicon are sliced into thin
wafers at significant expense and silicon waste, our technology grows a
continuous, flat ribbon to the desired thickness. Since our technology
does not involve slicing solid blocks, we can use approximately half as
much silicon as conventional crystalline silicon techniques and we
believe we can reduce this amount to about one-fifth in the future
through production of thinner wafers.  -
    
    Continuous processing. Our technology permits the continuous growth
of crystalline silicon ribbon, which can lead to high automation,
efficient equipment use and improved productivity.  -
    
    Modularity. Dual-String Ribbon furnaces individually have a capacity
of approximately 0.1 megawatts per year, whereas conventional bulk
technology typically has an individual machine capability of 3 or more
megawatts per year, and the trend has been to increase minimum unit size
in recent years. We expect that this modularity may enable us to achieve
economies of scale at a smaller scale than conventional technologies,
which could enable us to manufacture internationally in more numerous,
smaller factories to better serve global markets. OUR PRODUCTS Solar power products in general are built-up through four stages of
production:  -
    
    Wafers. A crystalline silicon wafer is a flat piece of crystalline
silicon that can be processed into a solar cell. Our rectangular wafers
currently measure 81 millimeters by 150 millimeters and are
approximately as thick as a business card.  -
    
    Cells. A solar cell is a device made from a wafer that converts
sunlight into electricity by means of a process known as the
photovoltaic effect. Our solar cells produce approximately 1.5 watts of
power each.  -
    
    Panels. A solar panel is an assembly of solar cells that have been
electrically interconnected and laminated in a physically durable and
weather-tight package. A typical solar panel can produce from 20 to 200
watts of power and range in size from two to 15 square feet. A 100-watt
solar panel can power a standard 100-watt light bulb, or approximately
3% of the power requirements of a typical home in the United States. Our
current solar panels range from 47 to 115 watts in power.  -
    
    Systems. A solar system is an assembly of one or more solar panels
that have been physically mounted and electrically interconnected, often
with batteries and/or power electronics, to produce electricity.
Typical residential on-grid systems contain between 10-40 panels and
produce 1-4 kW. We sell primarily solar panels, although we may in the future also sell
wafers, cells, or systems. We believe our panels are competitive with other
products in the marketplace, and some customers have commented that our panels
have benefits regarding appearance, electrical design capability, and ease of
use. Our solar panels are certified to international standards for safety and
quality. If our development programs are successful, we expect to continue to
increase the conversion efficiency and power of our solar panels as we expand
our manufacturing capacity. 5




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SALES AND MARKETING Market Focus We intend to primarily target the on-grid markets and the off-grid rural
electrification market, where we believe growth prospects are the largest and
where we expect our solar power technology will provide us the greatest
competitive advantage. These markets are characterized as follows:  -
    
    On-grid. The on-grid market is currently the fastest growing solar
power market within which we are focused primarily on U.S. and European
markets.  -
    
    Off-grid rural electrification. Within the off-grid market, we
believe that rural electrification has the largest potential but is the
least penetrated market as evidenced by the two billion people in the
world without conventional electricity. Marketing, financing, local
infrastructure and support are projected to remain the principal
challenges to greater expansion of this market. To date, we have
primarily pursued sales in Central and South America and the Pacific
Rim. Since inception, over 89% of our product sales have been to on-grid market
segments, and over 65% of our product sales have been exported from the U.S.
The majority of our export sales to date have been to Europe. Distribution, Marketing and Other Strategic Relationships We bring our solar power products to market using distributors, system
integrators and other value-added resellers. Our resellers often add value
through system design by incorporating our panels with batteries, associated
electronics, structures and wiring systems. Most of our resellers have a
geographic or applications focus. Our channel partners include companies that
are exclusively solar distributors as well as others for whom solar power is an
extension of their core business, such as, engineering design firms or other
energy product marketers. We expect to collaborate closely with a relatively small number of
resellers throughout the world. We currently have approximately 25 distributors
worldwide and are actively adding new accounts and channel partners. We intend
to selectively pursue additional strategic relationships with other companies
worldwide for the joint marketing, distribution and manufacturing of our
products. These resellers are expected to range from large, multinational
corporations to small, development-stage companies, each chosen for their
particular expertise. We believe that these relationships will enable us to
leverage the marketing, manufacturing and distribution capabilities of other
companies, explore opportunities for additional product development, and more
easily and cost-effectively enter new geographic markets, attract new customers
and develop advanced solar power applications. We currently work with a relatively small number of resellers who have
particular expertise in a selected geographic or applications market segment.
Sales to our ten largest resellers have accounted for approximately 82% of our
total product revenues since inception. No single reseller has accounted for
more than 45% of total revenues over that period. As we continue to expand
manufacturing capacity and sales volumes, we anticipate developing
relationships with additional resellers. During fiscal year 2003, approximately
27% of our product sales were made to resellers in the United States, and all
of our research revenue was generated within the United States. During the
same period, revenue from a German distributor and the National Renewable
Energy Laboratory accounted for approximately 39% and 10% of total revenues,
respectively. In addition, we market our products through trade shows, on-going customer
communications, promotional material, our web site, direct mail and
advertising. Our staff provides customer service and applications engineering
support to our distribution partners while also gathering information on
current product performance and future product requirements. Our internal sales
force currently handles all solar power product sales. MANUFACTURING Our principal manufacturing objective is to provide for large-scale
manufacturing of our solar power products at low costs that will enable us to
penetrate price-sensitive solar power markets. Our 56,250 square foot facility
in Marlboro, Massachusetts includes approximately 35,000 square feet of
manufacturing space. This facility includes a complete line of equipment to
manufacture String Ribbon wafers, fabricate and test solar cells, and laminate
and test panels. The first of the facilitys two planned manufacturing lines
entered service in 2001. During 2002, we initiated the design and construction
of the second production line in our Marlboro facility. At the end of 2003,
equipment for parts of the cell processing and module fabrication operations
began production. 6




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In addition to our current investment in our Marlboro, Massachusetts
facility, we intend to selectively pursue opportunities to establish local
manufacturing arrangements on a worldwide basis. Because the market opportunity
for solar power encompasses numerous applications in both developed and
developing nations worldwide, we expect a significant portion of our future
sales will be made outside of the United States. Despite these opportunities,
manufacturing of solar power products has remained largely concentrated in the
United States, Europe and Japan due to factors such as reduced economies of
scale and technical process complexities of establishing local manufacturing
facilities. In spite of these barriers, we believe there are several advantages to
local manufacturing, including enhanced brand recognition in local markets,
avoidance of import tariffs and access to local private or public sector
financing. We believe that our String Ribbon technology and our innovative
manufacturing techniques offer greater advantages than other competing
technologies, which we believe will enable us to establish fully integrated
factories at a smaller scale that can better grow in concert with market
demands. Consequently, we expect to pursue local manufacturing of our products
in selected target markets. We also expect that our technologies will allow us
to efficiently scale our production to take advantage of market opportunities
as they arise. RESEARCH AND DEVELOPMENT Because we believe continuously improving our technology is an important
part of our overall strategy, we have maintained and intend to maintain a
strong research and development effort. To this end, our Marlboro,
Massachusetts facility has approximately 6,000 square feet dedicated to
research and development and contains equipment to support the development,
fabrication and evaluation of new solar power products and technologies. We intend to continue our policy of selectively pursuing contract
research, product development and market development programs funded by various
agencies of the United States, state and international governments to
complement and enhance our own resources. The percentage of our total revenues
derived from government-related contracts was approximately 17% for the year
ended December 31, 2003. During 2003, we had two active multi-year research
contracts summarized as follows (in millions): National Instituteof Standards and
    
    National RenewableTechnology
    
    Energy LaboratoryTotal
government funding
    
    $
    2.0
    
    
    $
    3.0Total funding authorized
as of December 31, 2003
    
    $
    2.0
    
    
    $
    2.0Revenue recorded through
December 31, 2003
    
    $
    2.0
    
    
    $
    1.6Remaining revenue
to be recorded
    
    $
    0.0
    
    
    $
    1.4Expiration date
    
    October 31, 2003
    
    May 31, 2005
 We have fully recognized all revenue associated with our contract with the
National Institute of Standards and Technology which expired on October 31,
2003, and we expect the remaining $1.4 million of revenue associated with the
contract with the National Renewable Energy Laboratory will be recognized as
work is performed over the remaining life of the contract, which expires on May
31, 2005. These and other research contracts we have obtained generally provide for
development of advanced materials and methods for wafer, cell and panel
manufacturing, product development and market development. In all cases to
date, we retain all rights to any intellectual property and technological
developments resulting from the government funding, with the exception of
government march-in rights to practice the technology on its own behalf and
certain rights universities retain for work they perform under subcontract to
us. These contracts usually require the submission by us of technical progress
reports, most of which may become publicly available. These contracts are
generally cost-shared between the funding agency and us with our share of the
total contract cost historically ranging from approximately 30% to 70%. The
contracts normally expire between six months and three years from their
initiation. We recognized research revenues of $932,000 in 2001, $1.4 million
in 2002, and $1.6 million in 2003 from several government-sponsored research
contracts. We recorded research and development expenditures, including the
cost of research revenue, of $3.1 million in 2001, $3.7 million in 2002 and
$3.8 million in 2003. 7




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The following table summarizes research revenues received from various
government agencies as a percentage of total revenues: 2001
    
    2002
    
    2003National Institute of Standards and Technology
    
    
    24
    %
    
    
    11
    %
    
    
    7
    %National Renewable Energy Laboratory
    
    
    15
    %
    
    
    10
    %
    
    
    10
    %39
    %
    
    
    21
    %
    
    
    17
    %
 INTELLECTUAL PROPERTY RIGHTS Patents We believe that our commercial success will significantly depend on our
ability to protect our intellectual property rights underlying our proprietary
technologies. We seek United States and international patent protection for
major components of our technology platform, including our crystalline silicon
wafers, solar cells and solar panels. We own or have licensed 20 issued United
States patents and 3 issued foreign patents in the solar power field. These
patents began to expire in 2003 and will all be expired by 2019. In addition,
we have 5 United States patent applications pending. We decide whether and in
what foreign countries to file counterparts of our United States patent
applications. We devote substantial resources to building a strong patent
position, and we intend to continue to file additional United States and
foreign patent applications to seek protection for technology we deem important
to our commercial success. Crystalline Silicon Wafers. Dr. Emanuel Sachs, a tenured Professor of
Mechanical Engineering at the Massachusetts Institute of Technology, developed
our core String Ribbon technology. Dr. Sachs has been awarded three issued
United States patents for the String Ribbon technology. An additional issued
patent for a related technology, invented by two employees of the United States
National Renewable Energy Laboratory, formerly the Solar Energy Research
Institute, was assigned to Dr. Sachs in 1984. In September 1994, Dr. Sachs granted us an irrevocable, worldwide,
royalty-bearing license to practice the String Ribbon technology and related
patents under a license and consulting agreement. The patents underlying this
agreement began to expire in 2003 and will all have expired by the end of 2004.
This agreement permits us to sublicense any of our license and other rights
under the agreement. The license is exclusive worldwide, subject only to
nonexclusive, nontransferable rights held by the United States Department of
Energy to practice the String Ribbon technology on its own behalf. Dr. Sachs
continues to actively consult with Evergreen Solar on new technological
developments. We have been awarded 3 issued United States patents and have filed 6
patent applications on our own, internally-developed inventions related to
String Ribbon and wafer fabrication, which are method inventions relating to
automated, high-yield production techniques. Solar Cell Fabrication. We have been awarded 5 issued United States
patents and 1 foreign patent relating to our solar cell processing technology.
The issued United States patents relate to the method for forming wrap-around
contacts on solar cells and a method for processing solar cells. Solar Panels. We have been awarded 8 issued United States patents and 1
foreign patent relating to advanced solar panel designs. The 8 issued United
States patents relate to solar cell modules with an improved backskin, solar
cell modules with an interface mounting system, an encapsulant material for
solar cell modules and a solar cell roof tile system. The long-term status of patents in our industry, as well as others, are
generally uncertain and involve complex legal and factual questions.
Furthermore, even if patents are licensed or issued to us, others may design
around the patented technologies. In addition, we could incur substantial costs
in litigation if we are required to initiate patent litigation to enforce our
patent rights, and the outcome of any patent litigation is uncertain. The
following may impair our patent positions:  -
    
    our pending patent applications may not result in issued patents;  -
    
    the claims of patents which are issued may not provide meaningful protection;  -
    
    we may not develop additional proprietary technologies that are patentable;  -
    
    patents licensed or issued to us may not provide a basis for
commercially viable products or may not provide us with competitive
advantages and may be challenged by third parties; or 8




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-
    
    patents of others may have an adverse effect on our ability to do
business. Although we do not believe that our technologies infringe the rights of
third parties, third parties could in the future assert infringement claims
against us, which may result in costly litigation or require us to obtain a
license to third-party intellectual property rights. We may be unable to obtain
required licenses or obtain these licenses on terms that are acceptable to us,
either of which would substantially impair our business. Trade Secrets and Other Rights With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests. We believe
that several elements of our solar power products and manufacturing processes
involve proprietary know-how, technology or data, which are not covered by
patents or patent applications including selected materials, technical
processes, equipment designs, algorithms and procedures. We have taken security
measures to protect proprietary know-how and technologies and confidential
data, and we continue to explore additional methods of protection. While we
require all employees, key consultants and other third parties to enter into
confidentiality agreements with us, we cannot be assured that proprietary
information will not be disclosed inappropriately, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, or that we can
meaningfully protect our trade secrets. Any material leak of confidential
information into the public domain or to third parties could result in the loss
of a competitive advantage in the solar power market. COMPETITION The market for solar power products is intensely competitive. There are
over 20 companies in the world that produce solar power products, including BP
Solar, Kyocera Corporation, Royal Dutch Shell, Sharp Corporation, RWE, and
Sanyo Corporation. All of these solar power product producers, as well as
several others, have historically derived all or a majority of their solar
power product sales from conventional manufacturing technology that involves
using wafers made from slicing solid blocks of crystalline silicon. In
addition, some of these companies are developing advanced crystalline silicon
or thin film technologies, including technologies such as advanced crystalline
sheet and ribbon technologies and thin films of amorphous silicon, cadmium
telluride and copper indium diselenide, and project future cost savings similar
to or greater than ours. We believe several of our competitors are developing
and are currently producing products based on crystalline silicon wafer
technologies that, like String Ribbon, do not involve slicing silicon blocks. We believe the technologies used in our current solar power products have
some similarities with those employed in our competitors products. However,
because our solar power products are made from crystalline silicon, we believe
our current products may be more reliable than those made from thin film
technologies which often use materials, such as amorphous silicon, which we
believe may be less stable. Solar power has certain advantages and disadvantages when compared to
other conventional energy sources. The advantages include the ability to deploy
products in many sizes and configurations, to install products almost anywhere
in the world, to provide reliable power for many applications, to serve as both
a power generator and the skin of a building and to eliminate air, water and
noise emissions. However, unlike most conventional energy generators, which can
produce power on demand, solar power cannot generate power when sunlight is not
available. In addition, based on current technology, the upfront cost,
including installation, of conventional energy generators is often lower than
that of solar power products. However, we believe that the relative cost of
power produced over the lifetime of solar products as compared with
conventional energy generators often depends on the application. For example,
solar power products may be more cost-effective over the long-term for remote
applications that are not connected to the utility grid and that have smaller
power requirements, while conventional power sources may be more cost effective
for larger, grid-connected applications. Many of our competitors have substantially greater financial resources,
research and development staff, manufacturing facilities, sales and marketing
experience, distribution channels and human resources than we do. In order to
compete effectively against these companies, we will need to demonstrate to
potential customers and partners that our solar power products perform better,
or are less expensive than those of our competitors. In addition, we believe that the market for solar power specifically, and
electric power in general, may be subject to rapid technological development.
This rapid development may result in some of our solar power products becoming
obsolete before we can recover development expenses. We also expect that future
competition will come not only from existing competitors, but also from new
entrants to the market with new technological solutions. We may be unable to
compete successfully against 9




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present and future competitors and our failure to successfully compete
could significantly reduce our market share, our revenues and our prospects for
profitability. ENVIRONMENTAL REGULATIONS We use, generate and discharge toxic, volatile or otherwise hazardous
chemicals and wastes in our research and development and manufacturing
activities. We are subject to a variety of federal, state and local
governmental regulations related to the storage, use and disposal of hazardous
materials. We believe that we have all environmental permits necessary to conduct our
business. We believe that we have properly handled our hazardous materials and
wastes and have not contributed to any contamination at any of our past or
current premises. We are not aware of any environmental investigation,
proceeding or action by federal or state agencies involving our past or current
facilities. If we fail to comply with present or future environmental
regulations, we could be subject to fines, suspension of production or a
cessation of operations. Any failure by us to control the use of or to
restrict adequately the discharge of hazardous substances could subject us to
substantial financial liabilities, operational interruptions and adverse
publicity, any of which could materially and adversely affect our business,
results of operations and financial condition. In addition, under some federal
and state statutes and regulations, a governmental agency may seek recovery and
response costs from operators of property where releases of hazardous
substances have occurred or are ongoing, even if the operator was not
responsible for the release or otherwise was not at fault. EMPLOYEES As of December 31, 2003, we had 151 full-time employees, including 18
engaged in research and development and 118 engaged in manufacturing. Nineteen
of our employees have advanced degrees, including 5 with Ph.D.s. None of our
employees are represented by any labor union nor are they organized under a
collective bargaining agreement. We have never experienced a work stoppage and
believe that our relations with our employees are good. AVAILABLE INFORMATION Our annual report on Form 10-K, quarterly reports, current reports on Form
8-K, and all amendments to those reports are made available free of charge
though our internet website (http://www.evergreensolar.com) as soon as
practicable after such material is electronically filed with, or furnished to,
the Securities and Exchange Commission. 
 ITEM 2. PROPERTIES: Our
headquarters is currently located in a leased space in Marlboro,
Massachusetts, where we currently occupy approximately 56,250 square feet of
administrative, laboratory and manufacturing space. Our lease expires on June
30, 2010. On January 24, 2004, we signed a new lease for 23,839 square feet of
additional warehouse and office space located in Marlboro, Massachusetts. This
lease expires on January 24, 2010. 
 ITEM 3. LEGAL PROCEEDINGS: We are not a party to any material legal proceedings. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: No matters were submitted to a vote of security holders during the quarter
ended December 31, 2003. 10




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR THE COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: Market for Our Common Stock Our common stock is traded on the Nasdaq National Market under the symbol
ESLR. The following table sets forth for the calendar periods indicated, the
high and low sales price of our common stock on the Nasdaq National Market. High
    
    Low2002:First Quarter
    
    $
    4.79
    
    
    $
    2.06Second Quarter
    
    $
    3.48
    
    
    $
    1.32Third Quarter
    
    $
    1.70
    
    
    $
    0.65Fourth Quarter
    
    $
    1.68
    
    
    $
    0.442003:First Quarter
    
    $
    2.32
    
    
    $
    1.00Second Quarter
    
    $
    1.98
    
    
    $
    1.26Third Quarter
    
    $
    3.25
    
    
    $
    1.01Fourth Quarter
    
    $
    2.89
    
    
    $
    1.48
 On
March 17, 2004 there were approximately 176 stockholders of record
of our common stock. We have never declared or paid cash dividends on shares of
our common stock. Holders of shares of Series A convertible preferred stock are
entitled to a quarterly dividend at an annual rate of 10% payable in cash or,
at our option, we may accrete the Series A convertible preferred stock 10%
dividend to the conversion price and liquidation preference of the Series A
convertible preferred stock. Apart from the dividend on the Series A
convertible preferred stock, we intend to retain any earnings for use in our
business. Please see Part III, Item 12: Securities Ownership of Certain Beneficial
Owners and Management for the information regarding securities authorized for
issuance under our equity compensation plans. 11




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA: You should read the data set forth below in conjunction with our financial
statements and related notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations appearing elsewhere in this
filing. The statement of operations data presented below for the fiscal years
ended December 31, 2001, 2002, and 2003 and the balance sheet data at December
31, 2002 and 2003 have been derived from our audited financial statements which
appear elsewhere in this filing. The statement of operations data presented
below for the years ended December 31, 1999 and 2000, and the balance sheet
data at December 31, 1999, 2000 and 2001 have been derived from our audited
financial statements, which are not included in this filing. Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands, except for per share data)STATEMENT OF OPERATIONS DATA:Product revenues
    
    $
    189
    
    
    $
    419
    
    
    $
    1,546
    
    
    $
    5,296
    
    
    $
    7,746Research revenues
    
    
    2,113
    
    
    
    1,753
    
    
    
    932
    
    
    
    1,448
    
    
    
    1,565Total revenues
    
    
    2,302
    
    
    
    2,172
    
    
    
    2,478
    
    
    
    6,744
    
    
    
    9,311Operating Expenses:Cost of product revenues
    
    
    997
    
    
    
    2,795
    
    
    
    9,649
    
    
    
    12,405
    
    
    
    15,379Research and development expenses, including
cost of research revenues
    
    
    3,091
    
    
    
    3,382
    
    
    
    3,063
    
    
    
    3,692
    
    
    
    3,791Selling, general and administrative expenses
    
    
    1,309
    
    
    
    2,505
    
    
    
    4,088
    
    
    
    4,520
    
    
    
    5,337Total operating expenses
    
    
    5,397
    
    
    
    8,682
    
    
    
    16,800
    
    
    
    20,617
    
    
    
    24,507Operating loss
    
    
    (3,095
    )
    
    
    (6,510
    )
    
    
    (14,322
    )
    
    
    (13,873
    )
    
    
    (15,196
    )Net interest income
    
    
    163
    
    
    
    1,305
    
    
    
    1,845
    
    
    
    674
    
    
    
    222Net loss
    
    
    (2,932
    )
    
    
    (5,205
    )
    
    
    (12,477
    )
    
    
    (13,199
    )
    
    
    (14,974
    )Accretion and dividends on Series A convertible preferred stock
    
    
    (1,231
    )
    
    
    (2,283
    )
    
    
    
    
    
    
    
    
    
    
    (13,498
    )Net loss attributable to common stockholders
    
    $
    (4,163
    )
    
    $
    (7,488
    )
    
    $
    (12,477
    )
    
    $
    (13,199
    )
    
    $
    (28,472
    )Net loss per share attributable to common stockholders (basic and diluted)
    
    $
    (5.18
    )
    
    $
    (2.96
    )
    
    $
    (1.10
    )
    
    $
    (1.16
    )
    
    $
    (2.39
    )Weighted average shares used in computing basic and
diluted net loss per share attributable to common stockholders
    
    
    803
    
    
    
    2,530
    
    
    
    11,304
    
    
    
    11,405
    
    
    
    11,899
 December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands)BALANCE SHEET DATA:Cash, cash equivalents and short-term investments
    
    $
    14,455
    
    
    $
    45,994
    
    
    $
    26,263
    
    
    $
    8,483
    
    
    $
    20,340Working capital
    
    
    14,982
    
    
    
    46,056
    
    
    
    26,591
    
    
    
    12,544
    
    
    
    22,039Total assets
    
    
    16,318
    
    
    
    55,783
    
    
    
    44,861
    
    
    
    31,963
    
    
    
    45,976Convertible preferred stock
    
    
    29,293
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,032Stockholders equity (deficit)
    
    
    (13,502
    )
    
    
    54,143
    
    
    
    43,055
    
    
    
    29,913
    
    
    
    16,944
 12




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: We caution readers that statements in this Annual Report on Form 10-K that
are not strictly historical statements, including, but not limited to:
statements reflecting our expectations regarding the timing, cost, and success
of our manufacturing scale-up at our new facility in Marlboro, Massachusetts
and future manufacturing expansion and production, as well as related financing
requirements; future financial performance; our technology and product
development, cost and performance; our current and future strategic
relationships and future market opportunities; and our other business and
technology strategies and objectives, constitute forward-looking statements
which are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements may be identified with such
words as we expect, we believe, we anticipate or similar indications of
future expectations. These statements are neither promises nor guarantees and
involve risks and uncertainties, which could cause our actual results to differ
materially from such forward-looking statements. Such risks and uncertainties
may include, among other things, those risks and uncertainties described in
this Annual Report and in our other filings with the Securities and Exchange
Commission, copies of which may be accessed through the SECs Web Site at
http://www.sec.gov. We caution readers not to place undue reliance on any
forward-looking statements contained in this Annual Report, which speak only as
of the date of this Annual Report. We disclaim any obligation to publicly
update or revise any such statements to reflect any change in our expectations,
or events, conditions, or circumstances on which any such statements may be
based, or that may affect the likelihood that actual results will differ from
those set forth in such forward-looking statements. EXECUTIVE OVERVIEW We develop, manufacture and market solar power products for the global
marketplace. Solar cells are semiconductor devices that convert sunlight into
electricity and form the building block for all solar power products. To date,
our product sales have been primarily solar panels, which have been used to
generate electricity for on-grid and off-grid applications. Off-grid
applications have included the electrification of rural homes, lighting for
small, rural schools and power supplies for water pumping. More recently, the
substantial majority of our products have been used by on-grid customers as a
clean, renewable source of alternative or supplemental electricity. During 2003, our product
sales were constrained by our manufacturing
capacity. During the second half of 2003, we made significant progress on our
capital expansion program aimed at roughly quadrupling our production capacity
by adding a second manufacturing line, which we expect to be completed by the
end of 2004. We completed a $29.5 million private equity
financing on May 15,
2003 which will help fund this expansion. Since product revenue has been
capacity limited, the planned expansion should enable significant revenue
growth during 2004 and should also further improve our product gross margins. In anticipation of the increase in product availability, we strengthened our
sales and marketing organization with three hires during the fourth quarter of
2003, and are focused on expanding sales channels. The combination of recent
governmental initiatives in Germany aimed at accelerating the adoption of solar
power for residential and commercial applications, our proactive sales efforts,
and our capacity expansion efforts should provide us with a foundation for
product revenue growth in 2004. Implementation of our dual-ribbon growth technology, increased production
volume, adding key positions to staff across the organization, expanding and
establishing key customer relationships, and consummating the Series A
convertible preferred stock and warrant financing were the key factors in
determining our performance for 2003. We demonstrated the dual-ribbon growth
technology (pulling two string ribbons out of one furnace) on a limited
production basis during the fourth quarter in 2003, which we expect to
substantially lower the manufacturing cost of growing silicon wafers and
roughly double the capacity of one string ribbon furnace. We expect the new
crystal growth furnaces we will be installing throughout 2004 will all be
dual-ribbon growth furnaces. We added several key staff in sales,
administration, manufacturing and research and development during 2003 to
better position ourselves for the anticipated growth of the company over the
next 12 months. Most notably, we hired Richard M. Feldt as our new President
and CEO in December 2003. Additionally, our marketing and sales organization
was expanded during the fourth quarter to develop our marketing and
distribution strategy in anticipation of future growth. The cash raised as a
result of the Series A convertible preferred stock and warrant financing
provided us with the resources necessary to increase our capital spending
program. However, our current cash, cash equivalents and short-term investments
will not be sufficient to fund this capacity expansion and our expected
increased level of operations through fiscal year 2004 and, as a result, we
will need to raise significant additional financing or secure a working capital
line of credit in order to successfully fund such expanded operations. If we
are not able to complete a financing or secure a working capital line of credit
in a timely manner, we will need to implement fundamental changes to our
business and operations which will likely include substantially reducing,
suspending, or terminating our capacity expansion and substantially reducing
our daily operating expenditures from current levels, in which case we believe
our cash, cash equivalents and short-term investments will then be sufficient
to fund our operations through the end of fiscal year 2004. 13




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We may need additional financing to execute our business plan sooner if we need
to respond to business contingencies such as the need to enhance our operating
infrastructure, respond to competitive pressures and acquire complementary
businesses or necessary technologies. We do not know whether we will be able
to raise additional financing or financing on terms favorable to us. If
adequate funds are not available or are not available on acceptable terms, our
ability to fund our operations, develop and expand our manufacturing operations
and distribution network, or otherwise respond to competitive pressures would
be significantly limited. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of consolidated financial statements in accordance with
generally accepted accounting principals requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements: Revenue Recognition and Allowance for Doubtful Accounts We recognize product revenue if persuasive evidence of an arrangement
exists, shipment has occurred, risk of loss has transferred to the customer,
sales price is fixed or determinable, and collectibility is reasonably assured.
The market for solar power products is emerging and rapidly evolving. We
currently sell our solar power products primarily to distributors, system
integrators and other value-added resellers within and outside of North
America, which typically resell our products to end users throughout the world.
For new customers requesting credit, we evaluate creditworthiness based on
credit applications, feedback from provided references, and credit reports from
independent agencies. For existing customers, we evaluate creditworthiness
based on payment history and known changes in their financial condition. We also evaluate the facts and circumstances related to each sales
transaction and consider whether risk of loss has not passed to the customer
upon shipment. We consider whether our customer is purchasing our product for
stock, and whether contractual or implied rights to return the product exist or
whether our customer has an end user contractually committed. To date, we have
not offered rights to return our products other than for normal warranty
conditions. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, such that their
ability to make payments was impaired, additional allowances could be required. Revenue from research grants is recognized as services are rendered to the
extent of allowable costs incurred. Inventory Inventory is valued at the lower of cost or market. Certain factors may
impact the realizable value of our inventory including, but not limited to,
technological changes, market demand, changes in product mix strategy, new
product introductions and significant changes to our cost structure. Given our
current production levels and the market value of our products, we currently
sell our finished goods inventory at prices that are below the sum of our fixed
and variable costs per unit. Accordingly, we write down our finished goods
inventory to realizable value equal to the difference between the cost of
inventory and the estimated market value. In addition, estimates of reserves
are made for obsolescence based on the current product mix on hand and its
expected net realizability. If actual market conditions are less favorable or
other factors arise that are significantly different than those anticipated by
management, additional inventory write-downs or increases in obsolescence
reserves may be required. We treat lower of cost or market adjustments and
inventory reserves as an adjustment to the cost basis of the underlying
inventory. Accordingly, favorable changes in market conditions are not
recorded to inventory in subsequent periods. Warranty We provide for the estimated cost of product warranties at the time
revenue is recognized. Given our limited operating history, we use historical
industry solar panel failure rates as the basis for our warranty provision
calculation. While we engage in product quality programs and processes,
including monitoring and evaluating the quality of our component suppliers, our
warranty obligation is affected by product failure rates and material usage and
service delivery costs incurred in correcting a 14




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product failure. If our actual product failure rates, material usage or
service delivery costs differ from our estimates, revisions to the estimated
warranty liability would be required. Since we have a limited operating
history and our manufacturing process differs from industry standards, our
experience may be different from the industry data used as a basis for our
estimate. While our methodology takes into account these uncertainties,
adjustments in future periods may be required as our products mature. Long-lived Assets Our policy regarding long-lived assets is to evaluate the recoverability
or usefulness of these assets when the facts and circumstances suggest that
these assets may be impaired. This analysis relies on a number of factors,
including changes in strategic direction, business plans, regulatory
developments, economic and budget projections, technological improvements, and
operating results. The test of recoverability or usefulness is a comparison of
the asset value to the undiscounted cash flow of its expected cumulative net
operating cash flow over the assets remaining useful life. If such a test
indicates that an impairment is required, then the asset is written down to its
estimated fair value. Any write-downs would be treated as permanent reductions
in the carrying amounts of the assets and an operating loss would be
recognized. To date, we have had recurring operating losses and the
recoverability of our long-lived assets is contingent upon executing our
business plan that includes further reducing our manufacturing costs and
significantly increasing sales. If we are unable to execute our business plan,
we may be required to write down the value of our long-lived assets in future
periods. Income Taxes We are required to estimate our income taxes in each of the jurisdictions
in which we operate as part of our consolidated financial statements. This
involves estimating the actual current tax in addition to assessing temporary
differences resulting from differing treatments for tax and financial
accounting purposes. These differences together with net operating loss
carryforwards and tax credits may be recorded as deferred tax assets or
liabilities on the balance sheet. A judgment must then be made of the
likelihood that any deferred tax assets will be recovered from future taxable
income. To the extent that we determine that it is more likely than not that
deferred tax assets will not be utilized, a valuation allowance is established.
Taxable income in future periods significantly different from that projected
may cause adjustments to the valuation allowance that could materially increase
or decrease future income tax expense. Results of Operations Product revenues. Product revenues consist of revenues from the sale of
solar cells, panels and systems. Product revenues represented 83% of total
revenues for the year ended December 31, 2003, 79% of total revenues for the
year ended December 31, 2002 and 62% of total revenues for the year ended
December 31, 2001. International product sales accounted for approximately 73%,
68% and 35% of total product revenues for the years ended December 31, 2003,
2002 and 2001, respectively. During 2003, product sales to a European
distributor accounted for approximately 47% of product revenue, and sales to
another European distributor accounted for approximately 10% of product
revenue. During 2002, sales to a European distributor accounted for
approximately 56% of product revenue. During 2001, sales to a U.S. distributor
and a Japanese distributor accounted for approximately 52% and 22% of product
revenue, respectively. We anticipate that international sales will continue to
account for a significant portion of our product revenues for the foreseeable
future. Through December 31, 2003, all product revenues were denominated in
United States dollars. Foreign exchange rate fluctuations have impacted the
relative competitiveness of our products in international markets, but we have
not had any direct foreign exchange exposure. However, we expect that during
2004, market conditions will require us to denominate a portion of our sales in
local currencies, which could expose us directly to foreign exchange gains or
losses. As we expand our manufacturing operations and distribution network
internationally, our exposure to fluctuations in currency exchange rates may
increase. Research revenues. Research revenues consist of revenues from various
state and federal government agencies to fund our ongoing research,
development, testing and enhancement of our products and manufacturing
technology. We have not in the past, nor is it our intention in the future, to
pursue contracts that are not part of our ongoing research activities. We
recognize research revenues as services are rendered. During 2003, we had two
active multi-year research contracts summarized as follows (in millions): 15




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National Instituteof Standards and
    
    National RenewableTechnology
    
    Energy LaboratoryTotal
government funding
    
    $
    2.0
    
    
    $
    3.0Total funding authorized
as of December 31, 2003
    
    $
    2.0
    
    
    $
    2.0Revenue recorded through
December 31, 2003
    
    $
    2.0
    
    
    $
    1.6Remaining revenue
to be recorded
    
    $
    0.0
    
    
    $
    1.4Expiration date
    
    October 31, 2003
    
    May 31, 2005
 We have fully recognized all revenue associated with our contract with the
National Institute of Standards and Technology which expired on October 31,
2003, and we expect the remaining $1.4 million of revenue associated with the
contract with the National Renewable Energy Laboratory will be recognized as
work is performed over the remaining life of the contract, which expires on May
31, 2005. Cost of product revenues. Cost of product revenues consists primarily of
salaries and related personnel costs, materials expenses, depreciation
expenses, maintenance, rent, royalties on licensed technology, warranty costs
and other support expenses associated with the manufacture of our solar power
products. We expect to continue to experience costs in excess of product
revenues unless we are able to achieve greater manufacturing efficiencies,
higher yields and higher production levels. Research and development expenses, including cost of research revenues.
Research and development expenses, including cost of research revenues, consist
primarily of salaries and related personnel costs, consulting expenses and
prototype costs related to the design, development, testing and enhancement of
our products and manufacturing technology. We expense our research and
development costs as incurred. We believe that research and development is
critical to our strategic objectives of enhancing our technology, reducing
manufacturing costs and meeting the changing requirements of our customers. As
a result, we expect that our total research and development expenses will
increase in the future. Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries and related personnel
costs, professional fees, rent, insurance and other sales expenses. We expect
that selling expenses will increase substantially in absolute dollars as we
increase our sales efforts, hire additional sales personnel and initiate
additional marketing programs. We expect that general and administrative
expenses will increase as we add personnel and incur additional costs related
to the growth of our business as well as increased compliance costs associated
with being a publicly traded company. Stock-based compensation expense, related to the issuance of stock options
to employees. Prior to December 31, 2000, we recorded total cumulative deferred
compensation of approximately $1.3 million representing the difference between
the estimated fair market value of the common stock and the
exercise price of the option at the grant date. These amounts were presented as
a reduction of stockholders equity and are being amortized ratably over the
vesting period of the options, which is generally four years. The amortization
resulted in charges to operations of $271,000, $289,000, and $290,000 for the
years ended December 31, 2003, 2002, and 2001, respectively, and is reflected
in operating expenses. We expect to recognize stock-based compensation expense
for these past grants of approximately $90,000 for the year ending December 31,
2004. Net interest income. Net interest income consists primarily of interest
earned on the holding of short-term, high quality commercial paper, corporate
bonds and United States government-backed securities, less any bond premium
amortization. COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002 Revenues. Our product revenues for the year ended December 31, 2003 were
$7.7 million, an increase of $2.5 million, or 46%, from $5.3 million for the
same period in 2002. The increase in product revenues was due to the increased
production capacity of our manufacturing facility in Marlboro, Massachusetts,
and our increased marketing and sales activities. Research revenues for the
year ended December 31, 2003 were $1.6 million, an increase of $117,000, or 8%,
from $1.4 million for the 16




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same period in 2002. The increase in research revenue was due to revenue
recognized associated with our research contract with the National Renewable
Energy Laboratory, for which work did not begin until late 2002. Cost of product revenues. Our cost of product revenues for the year ended
December 31, 2003 was $15.4 million, an increase of $3.0 million, or 24%, from
$12.4 million for the same period in 2002. This increase was associated with
increased production at our Marlboro facility. Approximately 25% of the
increase was due to higher depreciation expense resulting from equipment placed
in service at our Marlboro manufacturing facility, approximately 50% of the
increase was due to increases in materials purchased due to increased
production, and most of the remainder was due to increases in salaries
associated with additional personnel. Product gross margin for the year ended
December 31, 2003 was 99% versus -134% for the same period in 2002. Product
gross margin improved primarily due to yield and efficiency improvements
associated with the scale-up of our manufacturing line and higher
sales volumes. Due to the relatively
large component of fixed costs and scale-up of our production, product gross
margins will still be highly dependent on sales volumes. Therefore, we do not
expect substantial improvements in product gross margin until we realize
increased production volumes associated with the completion of our second
manufacturing line, expected by the end of 2004. Research and development expenses, including cost of research revenues.
Our research and development expenses, including cost of research revenues, for
the year ended December 31, 2003 were $3.8 million, an increase of $99,000, or
3%, from $3.7 million for the same period in 2002. The increase was due
primarily to increased activity associated with our two active government
contracts, as more costs were incurred for subcontractors providing research
services as well as for added personnel. Selling, general and administrative expenses. Our selling, general and
administrative expenses for the year ended December 31, 2003 were $5.3 million,
an increase of $817,000, or 18%, from $4.5 million in 2002. Approximately 50%
of the increase was due to increases in insurance costs, approximately 20% of
the increase was due to increases in advertising and other marketing programs,
and most of the remainder of the increase was due to higher professional
service fees. Net interest income. Our net interest income for the year ended December
31, 2003 was $222,000, a decrease of $452,000, or 67%, from $674,000 for the
same period in 2002. The decrease in interest income was due to declining cash
and investment balances for a portion of the period resulting from capital
equipment purchases and funding of operations and generally lower yields
realized on marketable securities. Accretion and dividends on preferred stock. On May 15, 2003, we issued
26,227,668 shares of Series A convertible preferred stock at a per share
purchase price of $1.12. Additionally, Beacon Power Corporation purchased a
warrant to purchase 2,400,000 shares of common stock at an exercise price equal
to $3.37 per share for $100,000. A total of $29.5 million was raised as a
result of the consummation of the transaction, which was partially offset by
financing costs of $849,000. As a result of the preferred stock financing,
accretion and dividends of $13.5 million were recorded through December 31,
2003. $11.7 million of this charge relates to accretion that was recognized
immediately (during the second quarter of 2003) because the holders of shares
of the Series A convertible preferred stock are entitled to convert their
shares into common stock at any time. The sources of the discounts on issuance
requiring this accretion charge are summarized in the following table: Beneficial conversion feature
    
    $
    10,314,000Proceeds allocated to the fair value of common stock warrant
    
    
    525,000Financing costs
    
    
    849,000Total preferred stock accretion and dividends
    
    $
    11,688,000
 The difference between the issuance price of the Series A convertible
preferred stock and the fair value of our common stock on the date of issuance
of the Series A convertible preferred stock resulted in a beneficial conversion
feature totaling approximately $10.3 million, which was calculated in
accordance with EITF 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments The total proceeds of $1.1 million from Beacon Power Corporation were
allocated between the Series A convertible preferred stock (approximately
$475,000) and the warrant (approximately $625,000) based on their relative fair
values. The value of the warrant was calculated using the Black-Scholes pricing
model with the following assumptions: dividend yield of zero percent; expected
volatility of 90%; risk free interest rate of approximately 2% and a term of
three years. The difference between the proceeds allocated to the relative
fair value of the warrant, $625,000, and the amount paid for the warrant,
$100,000, or $525,000 contributed to the accretion charge of $11.7 million for
the year ended December 31, 2003. Shares of Series A convertible preferred stock pay a compounding dividend
of 10% per annum, paid quarterly, in cash, or at our election to be added to
the liquidation preference of the Series A convertible preferred stock on a
quarterly basis, which 17




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would result in an increase in the number of shares of common stock
issuable upon conversion of the Series A convertible preferred stock. For the
year ended December 31, 2003, $1.8 million in dividends accrued on the
outstanding Series A convertible preferred stock, which we elected to add to
the liquidation preference of the Series A convertible preferred stock.
Subject to changes in business conditions, we presently anticipate that the
dividend will be added to the liquidation preference of the Series A
convertible preferred stock for the foreseeable future. Net loss attributable to common stockholders.Net loss attributable to
common stockholders was $28.5 million and $13.2 million for the years ending
December 31, 2003 and December 31, 2002, respectively. The increase in net
loss attributable to common stockholders was due to the overall increase in net
operating losses associated with the scale-up of our operations combined with
the accretion and dividend charges associated with the Series A convertible
preferred stock financing, which was consummated on May 15, 2003. Other comprehensive loss.Our other comprehensive loss for the year ended
December 31, 2003 was $34,000, compared to $242,000 for the same period in
2002, consisting of net unrealized losses on marketable securities. COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001 Revenues. Our product revenues for the year ended December 31, 2002 were
$5.3 million, an increase of $3.8 million, or 243%, from $1.5 million for the
same period in 2001. The increase in product revenues was due to the increased
production capacity of our manufacturing facility in Marlboro, Massachusetts,
and our increased marketing and sales activities. Research revenues for the
year ended December 31, 2002 were $1.4 million, an increase of $516,000, or
55%, from $932,000 for the same period in 2001. The increase in research
revenues reflects revenue recognized on a research contract with the National
Renewable Energy Laboratory accrued in 2002. Cost of product revenues. Our cost of product revenues for the year ended
December 31, 2002 was $12.4 million, an increase of $2.8 million, or 29%, from
$9.6 million for the same period in 2001. This increase was associated with
increased production at our Marlboro facility. Approximately one third of the
increase was due to higher depreciation expense resulting from equipment placed
in service at our Marlboro manufacturing facility, approximately one half of
the increase was due to increases in materials purchased due to increased
production, and most of the remainder was due to increases in salaries
associated with additional personnel. Research and development expenses, including cost of research revenues.
Our research and development expenses, including cost of research revenues, for
the year ended December 31, 2002 were $3.7 million, an increase of $629,000, or
21%, from $3.1 million for the same period in 2001. The increase was due
primarily to the addition of employees and increased spending on both contract
related and non-contract related research and development projects. Selling, general and administrative expenses. Our selling, general and
administrative expenses for the year ended December 31, 2002 were $4.5 million,
an increase of $432,000, or 11%, from $4.1 million in 2001. Approximately 20%
of the increase was due to increases in insurance costs, approximately 33% of
the increase was due to increases in salary and other costs associated with the
establishment of our Germany sales office, and the remainder of the increase
was due to higher depreciation and professional service fees (including audit
and legal fees). Net interest income. Our net interest income for the year ended December
31, 2002 was $674,000, a decrease of $1.2 million, or 63%, from $1.8 million
for the same period in 2001. The decrease in interest income was due to
declining cash and investment balances resulting from capital equipment
purchases and funding of operations. Net loss attributable to common stockholders.Net loss attributable to
common stockholders was $13.2 million and $12.5 million for the years ending
December 31, 2003 and December 31, 2002, respectively. The increase in net
loss attributable to common stockholders was due primarily to a decrease in
interest income resulting from declining cash and investment balances resulting
from capital equipment purchases and funding of operations. Other comprehensive income (loss).Our other comprehensive loss for the
year ended December 31, 2002 was $242,000, compared to other comprehensive
income of $249,000 for the same period in 2001, consisting of net unrealized
gains and losses on marketable securities. 18




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LIQUIDITY AND CAPITAL RESOURCES Financing Transaction On May 15, 2003, we consummated a private placement financing transaction
with Perseus 2000, L.L.C., Nth Power Technologies Fund II, LP, Nth Power
Technologies Fund II-A, LP, RockPort Capital Partners, L.P., RP Co-Investment
Fund, I, Micro-Generation Technology Fund, LLC, UVCC Fund II, UVCC II Parallel
Fund, L.P., Caisse de depot et placement du Quebec, CDP Capital - Technology
Ventures U.S. Fund 2002 L.P., Beacon Power Corporation, Massachusetts
Technology Park Corporation, Zero Stage Capital VII, L.P., Zero Stage Capital
(Cayman) VII, L.P., Zero Stage Capital SBIC VII, L.P., IMPAX Environmental
Markets plc, Merrill Lynch New Energy Technology Plc, MLIIF New Energy Fund,
PNE Invest Limited, Odyssey Fund, SAM Private Equity Energy Fund LP, SAM
Sustainability Private Equity LP and SAM Smart Energy. As a result of the
consummation of this transaction, on May 15, 2003, we issued 26,227,668 shares
of Series A convertible preferred stock at a per share purchase price of $1.12.
Additionally, Beacon Power Corporation purchased a warrant to purchase
2,400,000 shares of common stock at an exercise price equal to $3.37 per share
for $100,000. A total of $29.5 million was raised as a result of the
consummation of the transaction. The proceeds to us, net of financing expenses
of approximately $849,000, were approximately $28.6 million. The shares of
Series A convertible preferred stock were initially convertible into shares of
common stock on a 1-to-1 basis which is subject to adjustment to account for
the payment of dividends, to take into account certain changes to our capital
structure and to account for future dilutive issuances. As a condition to the
obligation of the purchasers to consummate the financing transaction, we
registered for resale the shares of common stock issuable upon the conversion
of the Series A convertible preferred stock and the exercise of the warrant. We have historically financed our operations and met our capital
expenditures requirements primarily through sales of our capital stock and, to
a lesser extent, product revenues. Research and development expenditures have
historically been partially funded by government research contracts. At
December 31, 2003, we had working capital of $22.0 million, including cash,
cash equivalents and short-term investments of $20.3 million. Net cash used in operating activities was $9.4 million for the year ended
December 31, 2003, $14.3 million for the year ended December 31, 2002, and
$11.4 million for the year ended December 31, 2001. The decrease in net cash
used in operating activities in fiscal year 2003 as compared with fiscal year
2002, was primarily due to a decrease in our accounts receivable and other
current assets. As of December 31, 2003, Days Sales Outstanding (DSO) was
approximately 38 days, versus approximately 152 days as of December 31, 2002.
The decrease in DSO reflects a significant amount of cash receipts during the
fourth quarter relating to sales made in prior quarters, combined with a
decrease in product revenue in the fourth quarter from the third quarter.
However, international customers are commonly offered longer payment terms than
domestic customers due to established business practices, and DSO in future
periods may fluctuate depending on the mix of international versus domestic
sales as well as the timing of when such sales are made. In general, we
anticipate DSO in excess of 60 days during 2004. Net cash used in investing activities was $15.8 million for the year ended
December 31, 2003, compared to net cash provided by investing activities of
$12.9 million for the year ended December 31, 2002, and net cash used in
investing activities of $16,000 for the year ended December 31, 2001. For the
year ended December 31, 2003, net cash was used to purchase equipment
associated with the build-out of the second manufacturing line at our Marlboro
manufacturing plant as well as the purchase of marketable securities
partially offset by the maturity and sales of marketable securities. For the
year ended December 31, 2002, net cash was provided by maturing and selling
short-term investments as required to fund operations and purchases of
equipment associated with the build-out of the second manufacturing line at our
Marlboro manufacturing plant, offset by purchases of corporate paper, corporate
bonds and United States government-backed obligations with contractual
maturities typically less than one year. For the year ended December 31, 2001,
net cash used in investing activities primarily represented capital
expenditures associated with the build-out of our manufacturing facility in
Marlboro, and also included purchases, sales and maturities of marketable
securities. Net cash provided by financing activities was $28.6 million for the year
ended December 31, 2003, $10,000 for the year ended December 31, 2002, and
$812,000 for the year ended December 31, 2001. For the year ended December 31,
2003, cash provided by financing activities principally represented the net
proceeds resulting from our Series A convertible preferred stock and warrant
financing which closed on May 15, 2003. During 2002 and 2001, cash provided by
financing activities represents proceeds from common stock shares issued under
our Employee Stock Purchase Plan, and proceeds from the exercise of options and
warrants to purchase common stock. Capital expenditures were $7.1 million for the year ended December 31,
2003, $2.9 million for the year ended December 31, 2002, and $9.4 million for
the year ended December 31, 2001. Capital expenditures for the year ended
December 31, 2003 were primarily for equipment needed for our manufacturing
facility. As of December 31, 2003, our outstanding commitments for capital
expenditures were approximately $3.0 million. Nearly all of our commitments
for capital expenditures are associated with infrastructure improvements and
equipment purchases for our manufacturing facility. The first of the Marlboro 19




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facilitys two manufacturing lines became operational in 2001. We have
purchased certain equipment that is planned for the second manufacturing line.
We will fund our current capital commitments primarily with the proceeds from
our Series A convertible preferred stock and warrant financing which closed on
May 15, 2003. In addition to the current capital commitments, substantial
further capital expenditures will be required over the next twelve months to
increase the capacity at our manufacturing facility to our target level of 10
to 14 megawatts for both lines. We expect the second manufacturing line will be
completed in 2004. However, our current cash, cash equivalents and short-term
investments will not be sufficient to fund this capacity expansion and our
expected increased level of operations through fiscal year 2004 and, as a
result, we will need to raise significant additional financing or secure a
working capital line of credit in order to successfully fund such expanded
operations. If we are not able to complete a financing or secure a working
capital line of credit in a timely manner, we will need to implement
fundamental changes to our business and operations which will likely include
substantially reducing, suspending, or terminating our capacity expansion and
substantially reducing our daily operating expenditures from current levels, in
which case we believe our cash, cash equivalents and short-term investments
will then be sufficient to fund our operations through the end of fiscal year
2004. We need additional financing to execute our business plan and to respond
to business contingencies such as the need to enhance our operating
infrastructure, respond to competitive pressures and acquire complementary
businesses or necessary technologies. In addition to the current capital
commitments, substantial further capital expenditures will be required over the
next twelve months to increase the capacity at our manufacturing facility to
our target level of 10 to 14 megawatts for both lines. We do not know whether
we will be able to raise additional financing or financing on terms favorable
to us. If adequate funds are not available or are not available on acceptable
terms, our ability to fund our operations, develop and expand our manufacturing
operations and distribution network, or otherwise respond to competitive
pressures would be significantly limited. We currently do not have any special purpose entities or off-balance sheet
financing arrangements. The following table summarizes our contractual obligations as of December
31, 2003 and the effect such obligations are expected to have on our liquidity
and cash flow in future periods: Total
    
    Less thanYears
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsNon-cancelable operating lease
    
    $
    4,082,161
    
    
    $
    628,765
    
    
    $
    1,965,732
    
    
    $
    1,359,707
    
    
    $
    292,020Minimum future royalty payments
    
    
    25,000
    
    
    
    25,000Capital expenditure obligations
    
    
    3,000,000
    
    
    
    3,000,000Raw materials purchase commitments
    
    
    2,200,000
    
    
    
    2,200,000Total contractual cash obligations
    
    $
    9,307,161
    
    
    $
    5,853,765
    
    
    $
    1,975,107
    
    
    $
    1,364,394
    
    
    $
    113,895
 INCOME TAXES As of December 31, 2003, we had federal and state net operating loss
carryforwards totaling approximately $47.9 million and $39.9 million,
respectively, available to reduce future taxable income and tax liabilities
which expire at various dates between 2004 and 2023. In addition, as of
December 31, 2003 we had federal and state research and development tax credit
carryforwards of approximately $804,000 and $433,000, respectively, available
to reduce future taxable income and tax liabilities which expire at various
dates between 2009 and 2023. Under provisions of the Internal Revenue Code,
substantial changes in our ownership may limit the amount of net operating loss
carryforwards and research and development credit carryforwards, which can be
used annually to offset future taxable income and income tax liability. We
have evaluated the positive and negative evidence bearing upon the
realizability of our deferred tax assets. We have considered our history of
losses and, in accordance with the applicable accounting standards, have fully
reserved the deferred tax asset. RECENT ACCOUNTING PRONOUNCEMENTS In November 2002, the FASB issued Emerging Issues Task Force 00-21 (EITF
00-21), Accounting for Revenue Arrangements with Multiple Deliverables. EITF
00-21 requires revenue arrangements with multiple deliverables to be divided
into separate units of accounting. If the deliverables in the arrangement meet
certain criteria, arrangement consideration should be allocated among the
separate units of accounting based on their relative fair values. Applicable
revenue recognition criteria are to be considered separately for separate units
of accounting. The guidance in EITF 00-21 was effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on our financial position
or results of operations. 20




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In January 2003, the FASB issued Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities (FIN 46) and, in December 2003,
issued a revision to that interpretation (FIN 46R). FIN 46R replaces FIN 46
and addresses consolidation by business enterprises of variable interest
entities that possess certain characteristics. A variable interest entity
(VIE) is defined as (a) an ownership, contractual or monetary interest in an
entity where the ability to influence financial decisions is not proportional
to the investment interest, or (b) an entity lacking the invested capital
sufficient to fund future activities without the support of a third party.
FIN 46R establishes standards for determining under what circumstances VIEs
should be consolidated with their primary beneficiary, including those to which
the usual condition for consolidation does not apply. The adoption of FIN 46R
did not have a material impact on our financial position or results of
operations. On December 17, 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition, which supersedes SAB 101, Revenue Recognition in Financial
Statements. SAB 104s primary purpose is to rescind the accounting guidance
contained in SAB 101 related to multiple-element revenue arrangements that was
superseded as a result of the issuance of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the
SECs related Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers issued with SAB 101 that had been codified in SEC Topic
13, Revenue Recognition. While the wording of SAB 104 has changed to reflect
the issuance of EITF 00-21, the revenue recognition principles of SAB 101
remain largely unchanged by the issuance of SAB 104, which was effective upon
issuance. The adoption of SAB 104 did not have a material effect on our
financial position or results of operations. Certain Factors Which May Affect Future Results Risks Relating to Our Financial Results Evaluating our business and future prospects may be difficult due to our
limited operating history. We are at an early stage of development and there is limited historical
information available upon which you can base your evaluation of our business
and prospects. We were formed in 1994 to research and develop crystalline
silicon technology for use in manufacturing solar power products. Although we
began shipping product from our pilot manufacturing facility in 1997, the
primary objective of our pilot production line was the technical development
and further refinement of our String Ribbon technology and related
manufacturing processes. We shipped our first commercial products from our
Marlboro manufacturing facility in September 2001. We have shipped only a
limited number of solar power panels and have recognized limited revenues since
our inception. In addition, our early stage of development means that we have less insight
into how market and technology trends may affect our business. The revenue and
income potential of our business is unproven and the market we are addressing
is rapidly evolving. You should consider our business and prospects in light of
the risks, expenses and challenges that we will face as an early-stage company
seeking to develop and manufacture new products in a growing and rapidly
evolving market. We have a history of losses, expect to incur substantial further losses and may
not achieve or maintain profitability in the future, which may decrease the
market value of our stock. Since our inception, we have incurred significant net losses, including net
losses of $15.0 million for the year ended December 31, 2003. As a result of
ongoing operating losses, we had a cumulative net loss of $56.3 million as of
December 31, 2003. We expect to incur substantial losses for the foreseeable
future, and may never become profitable. Even if we do achieve profitability,
we may be unable to sustain or increase our profitability in the future, which
could materially decrease the market value of our common stock. We expect to
continue to incur significant capital expenditures and anticipate that our
expenses will increase substantially in the foreseeable future as we seek to:
expand our manufacturing operations, develop our distribution network, continue
to research and develop our products and manufacturing technologies, implement
internal systems and infrastructure in conjunction with our growth and hire
additional personnel. We do not know whether our revenues will grow at all or grow rapidly enough to
absorb these expenses, and our limited operating history makes it difficult to
assess the extent of these expenses or their impact on our operating results. Our stock price could fall substantially if our quarterly revenue or operating
results fluctuate or are disappointing. Our quarterly revenue and operating results have fluctuated significantly in
the past and may fluctuate significantly from quarter to quarter in the future
due to a variety of factors, many of which are discussed elsewhere in this
section. 21




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We anticipate that our operating expenses will continue to increase
significantly. If sales in any quarter do not increase correspondingly, our net
losses for that period will increase. For these reasons, quarter-to-quarter
comparisons of our results of operations are not necessarily meaningful and you
should not rely on results of operations in any particular quarter as an
indication of future performance. If our quarterly revenue or results of
operations fall below the expectations of investors or public market analysts
in any quarter, the market value of our common stock would likely decrease, and
could decrease rapidly and substantially. Risks Relating to Our Industry, Products and Operations We have significant capital requirements in order to maintain and grow our
business. On May 15, 2003, we consummated a private placement financing transaction
that raised $29.5 million (before offering expenses of $849,000) through the
issuance of 26,227,668 shares of Series A convertible preferred stock and the
sale of a warrant to purchase 2,400,000 shares of our common stock. We will
fund our current capital commitments primarily with the proceeds from our
Series A convertible preferred stock and warrant financing. However, our
current cash, cash equivalents and short-term investments will not be
sufficient to fund this capacity expansion and our expected increased level of
operations through fiscal year 2004 and, as a result, we will need to raise
significant additional financing or secure a working capital line of credit in
order to successfully fund such expanded operations. If we are not able to
complete a financing or secure a working capital line of credit in a timely
manner, we will need to implement fundamental changes to our business and
operations which will likely include substantially reducing, suspending, or
terminating our capacity expansion and substantially reducing our daily
operating expenditures from current levels, in which case we believe our cash,
cash equivalents and short-term investments will then be sufficient to fund our
operations through the end of fiscal year 2004. We need additional financing to execute our business plan and to respond to
business contingencies such as the need to enhance our operating
infrastructure, respond to competitive pressures and acquire complementary
businesses or necessary technologies. In addition to our current capital
commitments, substantial further capital expenditures will be required over the
next twelve months to increase the capacity at our manufacturing facility to
our target level of 10 to 14 megawatts for both lines. We do not know whether
we will be able to raise additional financing or financing on terms favorable
to us. If adequate funds are not available or are not available on acceptable
terms, our ability to fund our operations, develop and expand our manufacturing
operations and distribution network, or otherwise respond to competitive
pressures would be significantly limited. In addition, if we raise additional
funds through the issuance of equity or convertible debt securities, the
percentage ownership of our existing stockholders will be reduced. These newly
issued securities may have rights, preferences and privileges senior to those
of existing stockholders. If solar power technology is not suitable for widespread adoption or sufficient
demand for solar power products does not develop or takes longer to develop
than we anticipate, our sales would not significantly increase and we would be
unable to achieve or sustain profitability. The market for solar power products is emerging and rapidly evolving, and its
future success is uncertain. If solar power technology proves unsuitable for
widespread commercial deployment or if demand for solar power products fails to
develop sufficiently, we would be unable to generate enough revenues to achieve
and sustain profitability. In addition, demand for solar power products in the
markets and geographic regions we target may not develop or may develop more
slowly than we anticipate. Many factors will influence the widespread adoption
of solar power technology and demand for solar power products, including:  -
    
    cost-effectiveness of solar power technologies as compared with
conventional and non-solar alternative energy technologies;-
    
    performance and reliability of solar power products as compared with
conventional and non-solar alternative energy products;-
    
    success of alternative distributed generation technologies such as
fuel cells, wind power and micro turbines;-
    
    fluctuations in economic and market conditions which impact the
viability of conventional and non-solar alternative energy sources, such
as increases or decreases in the prices of oil and other fossil fuels;-
    
    continued deregulation of the electric power industry and broader energy industry; and-
    
    availability of government subsidies and incentives. 22




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Problems with product quality or product performance may cause us to incur
warranty expenses and may damage our market reputation and prevent us from
achieving increased sales and market share. As is consistent with standard practice in our industry, the duration of our
product warranties is lengthy relative to expected product life and has
recently been increasing. Our current standard product warranty includes a one
or two-year warranty period for defects in material and workmanship and a
25-year warranty period for declines in power performance. We believe our
warranty periods are consistent with industry practice. Due to the long
warranty period, we bear the risk of extensive warranty claims long after we
have shipped product and recognized revenues. Although we have sold over
50,000 solar panels since 1997, none of these panels has been operating more
than six years, and over 50% of them have been operating less than one year.
The possibility of future product failures could cause us to incur substantial
expense 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. We may fail to successfully bring to market our new solar power products under
development, which may prevent us from achieving increased sales and market
share. Although we have been selling our solar power products since 1997, we expect to
derive a substantial portion of our revenues from sales of our new solar power
products which are under development and not yet commercially available. Many
of these new products are derived from our innovative cell fabrication and
advanced panel design technologies, which are under development. If we fail to
successfully develop our new solar power products or technologies, we will
likely be unable to recover the losses we will have incurred to develop these
products and technologies and may be unable to increase our sales and market
share and to become profitable. Many of our new product and manufacturing
technologies are novel and represent a departure from conventional solar power
technologies, and it is difficult to predict whether we will be successful in
completing their development. Our manufacturing technologies have been tested
only in our pilot manufacturing facility and, in most cases, only limited
pre-production prototypes of our new products have been field-tested. Our solar power products may not gain market acceptance, which would prevent us
from achieving increased sales and market share. The development of a successful market for our solar power products may be
adversely affected by a number of factors, many of which are beyond our
control, including:  -
    
    our failure to produce solar power products which compete favorably
against other solar power products on the basis of cost, quality and
performance;-
    
    our failure to produce solar power products which compete favorably
against conventional energy sources and alternative distributed
generation technologies, such as fuel cells, on the basis of cost,
quality and performance;-
    
    whether customers accept our new panel designs under development and
the techniques we are developing to mount them; and-
    
    our failure to develop and maintain successful relationships with
distributors, systems integrators and other resellers, as well as
strategic partners. If our solar power products fail to gain market acceptance, we would be unable
to increase our sales and market share and to achieve and sustain
profitability. Technological changes in the solar power industry could render our solar power
products obsolete, which could reduce our market share and cause our sales to
decline. Our failure to further refine our technology and develop and introduce new
solar power products could cause our products to become obsolete, which could
reduce our market share and cause our sales to decline. The solar power
industry is rapidly evolving and competitive. We will need to invest
significant financial resources in research and development to keep pace with
technological advances in the solar power industry and to effectively compete
in the future. We believe that there are a variety of competing solar power
technologies under development by other companies that could result in lower
manufacturing costs than those expected for our solar power products. Our
development efforts may be rendered obsolete by the technological advances of
others, and other technologies may prove more advantageous for the
commercialization of solar power products. 23




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The build-out of our manufacturing facility may take longer and cost more than
we expect, which would likely result in lower revenues and earnings than
anticipated. If we fail to successfully complete the build-out of our Marlboro manufacturing
facility, our business and results of operations would likely be materially
impaired. The first of the Marlboro facilitys two manufacturing lines entered
service in 2001. The Company expects the second manufacturing line to be
completed in 2004. Completing the build-out of this facility to capacity will
require a significant investment of capital and substantial engineering
expenditures, and is subject to significant risks, including risks of cost
overruns, delays, equipment problems and other start-up and operating
difficulties. Our manufacturing processes also use custom-built equipment that
may not be delivered and installed in our new facility in a timely manner. In
addition, this equipment may take longer and cost more to debug than planned
and may never operate as designed. We plan to incorporate first-time equipment
designs and technology improvements, which we expect to lower unit capital and
operating costs, but this new technology may not be successful, which would
increase cost, limit capacity, and prevent us from achieving increases in
sales. If we experience any of these or similar difficulties, we may be unable
to complete the build-out of the facility, our manufacturing capacity could be
substantially constrained and our revenues and earnings would likely be
materially impaired. We may not be able to manufacture our solar power products in sufficient
quantities or at acceptable costs to meet customer demand. We may not be able to achieve our manufacturing cost targets, which could
prevent us from ever becoming profitable. If we cannot achieve our targeted
production volumes or capacity or if we experience capacity constraints,
quality control problems or other disruptions, we may not be able to
manufacture our products in large volumes or at acceptable costs and may be
unable to satisfy the demand of our customers, which would reduce our market
share and revenues and may harm our reputation. The expansion of our
manufacturing operations to achieve targeted production volumes will require
the successful deployment of advanced equipment and technology utilizing
manufacturing processes and components, which we are currently developing. Our ability to increase market share and sales depends on our ability to
successfully maintain our existing distribution relationships and expand our
distribution channels. We currently sell our solar power products primarily to distributors, system
integrators and other value-added resellers within and outside of North
America, which typically resell our products to end users on a global basis.
For the year ended December 31, 2003, we sold our solar power products to
approximately 25 distributors, system integrators and other value-added
resellers. If we are unable to successfully maintain our existing distribution
relationships and expand our distribution channels, our revenues and future
prospects will be materially harmed. As we seek to grow our sales by entering
new markets in which we have little experience selling our solar power
products, our ability to increase market share and sales will depend
substantially on our ability to expand our distribution channels by
identifying, developing and maintaining relationships with resellers both
within and outside of North America. We may be unable to enter into
relationships with resellers in the markets we target or on terms and
conditions favorable to us, which could prevent us from entering these markets
or entering these markets in accordance with our plans. Our ability to enter
into and maintain relationships with resellers will be influenced by the
relationships between these resellers and our competitors, market acceptance of
our solar power products and our low brand recognition as a new entrant. We face risks associated with the marketing, distribution and sale of our solar
power products internationally, and if we are unable to effectively manage
these risks, it could impair our ability to expand our business abroad. From our inception through December 31, 2003, approximately 67% of our product
sales have been made to resellers outside North America. We expect that our
sales both to resellers and distributors outside of North America and through
our resellers and distributors to end users outside of North America will
continue to be significant. Sales in Germany constituted approximately 63% of
our total product sales for the year ended December 31, 2003. It will require
significant management attention and financial resources to successfully
develop our international sales channels. In addition, the marketing,
distribution and sale of our solar power products internationally exposes us to
a number of markets with which we have limited experience. If we are unable to
effectively manage these risks, it could impair our ability to grow our
business abroad. These risks include:  -
    
    difficult and expensive compliance with the commercial and legal
requirements of international markets, with which we have only limited
experience;-
    
    inability to obtain intellectual property protection; 24




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-
    
    encountering trade barriers such as export requirements, tariffs,
taxes and other restrictions and expenses, which could affect the
competitive pricing of our solar power products and reduce our market
share in some countries;-
    
    difficulty of enforcing revenue collection internationally; and-
    
    our continued ability to sell our products in the German market. We expect that a portion of our international sales will be denominated in United
States dollars. As a result, increases in the value of the United States dollar
relative to foreign currencies would cause our products to become less
competitive in international markets and could result in limited, if any, sales
and profitability. We expect that during 2004, market conditions will require
us to denominate a majority of our sales in local currencies, which will further
expose us to foreign exchange gains or losses. Our strategy includes establishing local manufacturing facilities in
international markets, although we have not yet done so. As we implement our
strategy, we may encounter legal and commercial restrictions and incur taxes
and other expenses to establish our manufacturing facilities in certain
countries. In addition, we may potentially forfeit, voluntarily or
involuntarily, foreign assets due to economic or political instability in the
countries where our local manufacturing facilities are located. Our dependence on a small number of resellers may cause significant
fluctuations or declines in our product revenues. From our inception through December 31, 2003, our three largest resellers
accounted for approximately 57% of our product sales and our 10 largest
resellers accounted for approximately 82% of our product sales. We anticipate
that sales of our solar power products to a limited number of key resellers
will continue to account for a significant portion of our total product
revenues for the foreseeable future. Consequently, any one of the following
events may cause significant fluctuations or declines in our product revenues:  -
    
    reduction, delay or cancellation of orders from one or more of our significant resellers;-
    
    selection by one or more of our significant resellers of products competitive with ours;-
    
    loss of one or more of our significant resellers and our failure to recruit additional or replacement resellers; and-
    
    failure of any of our significant resellers to make timely payment of our invoices. Our dependence on a limited number of third party suppliers for raw materials,
key components for our solar power products and custom-built equipment for our
operations could prevent us from delivering our products to our customers
within required timeframes and we may experience order cancellation and loss of
market share. We manufacture all of our solar power products using materials and components
procured from a limited number of third-party suppliers. If we fail to develop
or maintain our relationships with these or our other suppliers, we may be
unable to manufacture our products or our products may be available only at a
higher cost or after a long delay, which could prevent us from delivering our
products to our customers within required time frames and we may experience
order cancellation and loss of market share. We currently do not have contracts
with many of our suppliers and may not be able to procure sufficient quantities
of the materials and components necessary to manufacture our products on
acceptable commercial terms or at all. To the extent the processes that our
suppliers use to manufacture materials and components are proprietary, we may
be unable to obtain comparable materials and components from alternative
suppliers. The failure of a supplier to supply materials and components in a
timely manner, or to supply materials and components that meet our quality,
quantity and cost requirements could impair our ability to manufacture our
products and/or increase their costs, particularly if we are unable to obtain
substitute sources of these materials and components on a timely basis or on
terms acceptable to us. In addition, our manufacturing processes utilize
custom-built equipment that is currently produced by a limited number of
suppliers. A suppliers failure to supply this equipment in a timely manner,
with adequate quality and on terms acceptable to us could delay our capacity
expansion of our manufacturing facility and otherwise disrupt our production
schedule or increase our costs of production. Our use of forecasts to manage our inventory could result in insufficient
quantities to meet reseller demand or excess inventory. We generally do not obtain long-term contracts or purchase orders prior to the
production of our solar power products. Instead, we rely on forecasts to
determine the timing of our production schedules and the volume and mix of
product to be manufactured. The level and timing of orders placed by our
resellers may vary for many reasons. As a result, at any particular 25




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time, we may not have enough inventory to meet demand or we may have excess
inventory, each of which could negatively impact our operating results. In
addition, as we manufacture more solar power products without related purchase
orders, we increase our risk of loss of revenues due to the obsolescence of
products held in inventory for which we have already incurred production costs. The success of our business depends on the continuing contributions of our key
personnel and our ability to attract and retain new qualified employees in a
competitive labor market. We have attracted a highly skilled management team and specialized workforce,
including scientists, engineers, researchers, and manufacturing and marketing
professionals. If we were to lose the services of Richard M. Feldt, our Chief
Executive Officer, President and a director, or any of our other executive
officers and key employees, our business could be materially and adversely
impacted. We had 151 employees as of December 31, 2003, and anticipate that we
will need to hire a significant number of new highly-skilled technical,
manufacturing, sales and marketing, and administrative personnel if we are to
successfully develop and market our products, develop our distribution network,
and operate our expanded manufacturing facility. Competition for personnel is
intense, and qualified technical personnel are likely to remain a limited
resource for the foreseeable future. Locating candidates with the appropriate
qualifications, particularly in the desired geographic location, can be costly
and difficult. We may not be able to hire the necessary personnel to implement
our business strategy, or we may need to provide higher compensation or more
training to our personnel than we currently anticipate. Moreover, any officer
or employee can terminate his or her relationship with us at any time. Our management team may not be able to successfully implement our business
strategies because it has limited experience managing a rapidly growing
company. If our management team is unable to manage the rapid growth of our business
operations, then our product development, the expansion of our manufacturing
operations and distribution network, and our sales and marketing activities
would be materially and adversely affected. In connection with the planned
expansion of our manufacturing capacity, we have undergone and anticipate
undergoing further rapid growth in the scope of our operations and the number
of our employees, which is likely to place a significant strain on our senior
management team and other resources. In addition, we may encounter difficulties
in effectively managing the budgeting, forecasting and other process control
issues presented by this rapid growth. We may seek to augment or replace
members of our management team or we may lose key members of our management
team, and we may not be able to attract new management talent with sufficient
skill and experience. We face intense competition from other companies producing solar power and
other energy generation products. If we fail to compete effectively, we may be
unable to increase our market share and sales. The solar power market is intensely competitive and rapidly evolving. Our
competitors have established a market position more prominent than ours, and if
we fail to attract and retain customers and establish a successful distribution
network for our solar power products, we may be unable to increase our sales
and market share. There are over 20 companies in the world that produce solar
power products, including BP Solar, Kyocera Corporation, Royal Dutch Shell,
Sharp Corporation, RWE, and Sanyo Corporation. Other existing and potential
competitors in the solar power market include universities and research
institutions. We also expect that future competition will include new entrants
to the solar power market offering new technological solutions. Further, many
of our competitors are developing and are currently producing products based on
new solar power technologies, including other crystalline silicon ribbon and
sheet technologies, that they believe will ultimately have costs similar to, or
lower than, our projected costs. Most of our competitors are substantially larger than we are, have longer
operating histories and have substantially greater financial, technical,
manufacturing and other resources than we do. Many also have greater name
recognition, a more established distribution network and a larger installed
base of customers. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our target markets. As a result, our competitors may be able to
devote greater resources to the research, development, promotion and sale of
their products and respond more quickly to evolving industry standards and
changing customer requirements than we can. If we are unable to protect our intellectual property adequately, we could lose
our competitive advantage in the solar power market. Our ability to compete effectively against competing solar power technologies
will depend, in part, on our ability to protect our current and future
proprietary technology, product designs and manufacturing processes through a
combination of patent, copyright, trademark, trade secret and unfair
competition laws. We may not be able to adequately protect our intellectual
property and may need to defend our intellectual property against infringement
claims, either of which could result in the loss 26




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of our competitive advantage in the solar power market and materially harm our
business and profitability. We face the following risks in protecting our
intellectual property:  -
    
    we cannot be certain that our pending United States and foreign
patent applications will result in issued patents or that the claims
allowed are or will be sufficiently broad to protect our technology or
processes;-
    
    our license, but not our right, to practice the String Ribbon
technology terminates upon expiration of the underlying patents, the
first of which expired in June 2003, and our historical operating
experience with String Ribbon and our related patented and proprietary
manufacturing processes may not adequately protect our competitive
advantage after these patents have expired;-
    
    third parties may design around our patented technologies or seek to
challenge or invalidate our patented technologies;-
    
    we may incur significant costs and diversion of management resources
in prosecuting or defending patent infringement suits;-
    
    we may not be successful in prosecuting or defending patent
infringement suits and, as a result, may need to seek to obtain a
license of the third partys intellectual property rights; however, a
license may not be available to us or may not be available to us on
commercially reasonable terms; and-
    
    the contractual provisions we rely on to protect our trade secrets
and proprietary information, such as our confidentiality and
non-disclosure agreements with our employees, consultants and other
third parties, may be breached and our trade secrets and proprietary
information disclosed to the public. Existing regulations and changes resulting from electric utility deregulation
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 heavily influenced by
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 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. We anticipate that our solar power products and their installation will be
subject to oversight and regulation in accordance with national and local
ordinances relating to building codes, safety, environmental protection,
utility interconnection and metering and related matters. Any new government
regulations or utility policies pertaining to our solar power products may
result in significant additional expenses to us, our resellers and their
customers and, as a result, could cause a significant reduction in demand for
our solar power products. The reduction or elimination of government subsidies and economic incentives
for on-grid applications could cause our sales to decline. We believe that the growth of some of our target markets, including the market
for on-grid applications, depends in part on the availability and size of
government subsidies and economic incentives. Accordingly, the reduction or
elimination of government subsidies and economic incentives may adversely
affect the growth of these markets, which could cause our sales to decline.
Today, the cost of solar power substantially exceeds the cost of power
furnished by the electric utility grid. As a result, federal, state and local
governmental bodies in many countries, most notably the United States, Japan
and Germany, have provided subsidies in the form of cost reductions, tax
write-offs and other incentives to end users, distributors, systems integrators
and manufacturers of solar power products to promote the use of solar energy in
on-grid applications and to reduce dependency on other forms of energy. These
government subsidies and economic incentives could be reduced or eliminated
altogether. The lack or inaccessibility of financing for off-grid solar power applications
could cause our sales to decline. One of our key markets is off-grid solar power applications to developed and
developing countries. In some developing countries, government agencies and the
private sector have, from time to time, provided subsidies or financing on
preferred terms for rural electrification programs. We believe that the
availability of financing could have a significant effect on the level 27




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of sales of off-grid solar power applications, particularly in developing
countries where users may not have sufficient resources or credit to otherwise
acquire solar power systems. If existing financing programs for off-grid solar
power applications are eliminated or if financing is inaccessible, the growth
of the market for off-grid applications may be adversely affected, which could
cause our sales to decline. Our reliance on government contracts to partially fund our research and
development programs could impair our ability to commercialize our solar power
technologies and would increase our research and development expenses. We intend to continue our policy of selectively pursuing contract research,
product development, and market development programs funded by various agencies
of the United States, state and international governments to complement and
enhance our own resources. The percentage of our total revenues derived from
government-related contracts was approximately 17% for the year ended December
31, 2003. During 2003, we had two active research contracts with the National
Institute of Standards and Technology and the National Renewable Energy
Laboratory. These government agencies may not continue their commitment to programs to
which our development projects are applicable. Moreover, we may not be able to
compete successfully to obtain funding through these or other programs. A
reduction or discontinuance of these programs or of our participation in these
programs would increase our research and development expenses, which could
impair our ability to develop our solar power technologies. In addition, contracts involving government agencies may be terminated at the
convenience of the agency. Other risks include potential disclosure of our
confidential information to third parties and the exercise of march-in rights
by the government. Our government-sponsored research contracts require that we
provide regular written technical updates on a monthly, quarterly or annual
basis, and, at the conclusion of the research contract, a final report on the
results of our technical research. Because these reports are generally
available to the public, third parties may obtain some aspects of our sensitive
confidential information. March-in rights refer to the right of the United
States government or government agency to require us to grant a license to the
technology to a responsible applicant or, if we refuse, the government may
grant the license itself. The government can exercise its march-in rights if it
determines that action is necessary because we fail to achieve practical
application of the technology, because action is necessary to alleviate health
or safety needs, or to meet requirements of federal regulations, or to give the
United States industry preference. Funding from government contracts also may
limit when and how we can deploy our technology developed under those
contracts. Compliance with environmental regulations can be expensive and inadvertent
noncompliance may result in adverse publicity and potentially significant
monetary damages and fines. We are required to comply with all federal, state and local regulations
regarding protection of the environment. If more stringent regulations are
adopted in the future, the costs of compliance with these new regulations could
be substantial. We believe that we have all necessary permits to conduct our
business as it is presently conducted. If we fail to comply with present or
future environmental regulations, however, we may be required to pay
substantial fines, suspend production or cease operations. We use, generate and
discharge toxic, volatile and otherwise hazardous chemicals and wastes in our
research and development and manufacturing activities. Any failure by us to
control the use of, or to restrict adequately the discharge of, hazardous
substances could subject us to potentially significant monetary damages and
fines. In addition, under some federal and state statutes and regulations, a
governmental agency may seek recovery and response costs from operators of
property where releases of hazardous substances have occurred or are ongoing,
even if the operator was not responsible for such release or otherwise at
fault. Product liability claims against us could result in adverse publicity and
potentially significant monetary damages. Like other retailers, distributors and manufacturers of products that are used
by consumers, we face an inherent risk of exposure to product liability claims
in the event that the use of the solar power products we sell results in
injury. Since our products are electricity producing devices, it is possible
that consumers could be injured or killed by our products, whether by product
malfunctions, defects, improper installation or other causes. In addition,
since sales of our existing products have been modest and the products we are
developing incorporate new technologies and use new installation methods, we
cannot predict whether product liability claims will be brought against us in
the future or the effect of any resulting adverse publicity on our business.
Moreover, we may not have adequate resources in the event of a successful claim
against us. We have evaluated the potential risks we face and believe that we
have appropriate levels of insurance for product liability claims. We rely on
our general liability insurance to cover product liability claims and have not
obtained separate product liability insurance. The successful assertion of
product liability claims against us could result in potentially significant
monetary damages and if our insurance protection is inadequate, could require
us to make significant payments. 28




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Risks Associated With the Market for Our Common Stock Our officers and directors control 32% of our voting stock and may be able to
significantly influence corporate actions. As of March 17, 2004, our executive officers, directors and entities
affiliated with them controlled 32% of our voting stock. As a result, these
stockholders, acting together, may be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors, the approval of charter and by-law amendments, and the approval of
mergers or other business combinations. The price of our common stock may be volatile. The stock market has, from time to time, experienced extreme price and trading
volume fluctuations, and the market prices of technology companies such as ours
have been extremely volatile. Our operating performance will significantly
affect the market price of our common stock. To the extent we are unable to
compete effectively and gain market share or the other factors described in
this section affect us, our stock price will likely decline. The market price
of our common stock also may be adversely impacted by broad market and industry
fluctuations regardless of our operating performance, including general
economic and technology trends. In addition, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. We may be involved in securities class
action litigation in the future. This litigation often results in substantial
costs and a diversion of managements attention and resources. The large number of shares eligible for public sale could cause our stock price
to decline. The market price of our common stock could decline as a result of the resale of
the shares of common stock issuable upon conversion of the Series A convertible
preferred stock and the exercise of the warrant issued in connection with the
private placement financing or the perception that these sales could occur.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate. We are subject to anti-takeover provisions in our charter and by-laws and under
Delaware law that could delay or prevent an acquisition of our company, even if
the acquisition would be beneficial to our stockholders. Provisions of our certificate of incorporation, our by-laws and Delaware law
could make it more difficult and expensive for a third party to pursue a tender
offer, change in control transaction or takeover attempt that is opposed by our
board of directors. Stockholders who wish to participate in these transactions
may not have the opportunity to do so. We also have a staggered board of
directors, which makes it difficult for stockholders to change the composition
of our board of directors in any one year. If a tender offer, change in control
transaction, takeover attempt or change in our board of directors is prevented
or delayed, the market price of our common stock could decline. 29




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: INTEREST RATE RISK We do not use derivative financial instruments. Interest income earned on our
cash, cash equivalents and short-term investments is subject to interest rate
fluctuations, but we believe that the impact of these fluctuations does not
have a material effect on our financial position due to the immediate available
liquidity or short-term nature of these financial instruments. For these
reasons, a hypothetical 100-basis point adverse change in interest rates would
not have a material effect on our consolidated financial position, results of
operations or cash flows. FOREIGN CURRENCY EXCHANGE RATE RISK Through December 31, 2003, all of our sales were denominated in United States
dollars. Accordingly, we have not been materially exposed to fluctuations in
currency exchange rates with respect to our product sales. However, since we
sell a significant portion of our products internationally, the relative
competitiveness of our products is impacted by foreign currency exchange rates.
We expect that during 2004, a substantial portion of our sales will be
denominated in local currencies, which would further expose us to foreign
exchange gains or losses. As we expand our manufacturing operations and
distribution network internationally, our exposure to fluctuations in currency
exchange rates may increase. Additionally, from time to time we may purchase
equipment and materials internationally, and to the extent that such purchases
are billed in foreign currency, we will be exposed to currency gains or losses. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: The Companys Financial Statements and related Notes and the Report of
Independent Auditors are included beginning on page F-1 of this Annual Report
on Form 10-K. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None. 
 ITEM 9A. Controls and Procedures: Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer, after evaluating
the effectiveness and design of our disclosure controls and procedures as
defined in Exchange Act Rule 15d-15(e) as of the end of the period covered by
this report (the Evaluation Date), have concluded that as of the Evaluation
Date, our disclosure controls and procedures were effective, in all material
respects, to ensure that information required to be disclosed in the reports
that we file and submit under the Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required. Internal Control Over Financial Reporting During the period covered by this report, there have been no changes in our
internal control over financial reporting that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: The information required under this item may be found under the sections
captioned Election of Directors, Occupations of Directors and Executive
Officers, Section 16(a) Beneficial Ownership Reporting Compliance and Code
of Ethics in our Proxy Statement (the 2003 Proxy Statement), which will be
filed with the Securities and Exchange Commission not later than 120 days after
the close of our fiscal year ended December 31, 2003, and is incorporated
herein by reference. 
 ITEM 11. EXECUTIVE COMPENSATION: The information required under this item may be found under the section
captioned Compensation and Other Information Concerning Directors and
Officers in the 2003 Proxy Statement, and is incorporated herein by reference. 30




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The information required under this item may be found under the section
captioned Securities Ownership of Certain Beneficial Owners and Management in
the 2003 Proxy Statement, and is incorporated herein by reference. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The information required under this item may be found under the caption
Certain Relationships and Related Transactions in the 2003 Proxy Statement,
and is incorporated herein by reference. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES: The information required under this item may be found under the caption
[Principal Accounting Fees and Services] in the 2003 Proxy Statement, and is
incorporated herein by reference. 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: (a) The following documents are filed as part of this Annual Report on Form
10-K: 1. Consolidated Financial Statements. The financial statements included in
Item 8 of Part II which appear beginning on page 33 of this Annual Report on
Form 10-K. 2. Exhibits. The following exhibits: ExhibitNumber
    
    Description3.1 (1)
    
    Third Amended and Restated Certificate of Incorporation of the Registrant. (Exhibit 3.2)3.2 (1)
    
    Second Amended and Restated By-laws of the Registrant. (Exhibit 3.4)4.1(2)
    
    Certificate of Amendment of Third Amended and Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on May 15, 2003.
(Exhibit 4.3)4.2(2)
    
    Certificate of the Powers, Designations, Preferences and Rights of the Series A Convertible
Preferred Stock of the Registrant. (Exhibit 4.4)4.3(3)
    
    Form of Warrant issued to Beacon Power Corporation. (Exhibit 10.4)10.1 (1)*
    
    1994 Stock Option Plan. (Exhibit 10.1)10.2 (1)*
    
    2000 Stock Option and Incentive Plan. (Exhibit 10.2)10.3 (1)*
    
    2000 Employee Stock Purchase Plan. (Exhibit 10.3)10.4 (1)
    
    Lease Agreement between Registrant W9/TIB Real Estate Limited Partnership dated as of
January 31, 2000, as amended (Exhibit 10.5)10.5 (1)+
    
    Agreement between Registrant and Emanuel M. Sachs dated as of September 30, 1994, as
amended.
(Exhibit 10.7)10.6 (1)
    
    Series D Preferred Stock Purchase Agreement dated as of December 28, 1999. (Exhibit 10.8)10.7 (1)
    
    Form of Indemnification Agreement between Registrant and each of its directors and executive
officers. (Exhibit 10.9)10.8 (2)
    
    Stock and Warrant Purchase Agreement dated as of March 21, 200310.9 (2)
    
    Form of Registration Rights Agreement10.10 (2)
    
    Voting Agreement dated as of March 21, 200321.1
    
    Subsidiaries of the Registrant. (filed herewith).23.1
    
    Consent of PricewaterhouseCoopers LLP. (filed herewith)24.1
    
    Power of Attorney (included on Page II-2)31.1
    
    CEO Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).31.2
    
    CFO Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).32.1
    
    CEO Certification pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).32.2
    
    CFO Certification pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
 + Confidential treatment granted as to certain portions. * Indicates a management contract or compensatory plan, contract or arrangement. 31




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(1)
    
    Incorporated herein by reference to the exhibits to the Companys
Registration Statement on Form S-1, as amended (File No. 333-43140). The
number given in parenthesis indicates the corresponding exhibit number
in such Form S-1.(2)
    
    Incorporated herein by reference to the exhibits to the Companys
Registration Statement on Form S-8 (File No. 333-105963). The number
given in parenthesis indicates the corresponding exhibit number in such
Form S-8.(3)
    
    Incorporated herein by reference to the exhibits to the Companys
Registration Statement on Form S-3 (File No. 333-106126). The number
given in parenthesis indicates the corresponding exhibit number in such
Form S-3.(4)
    
    Incorporated herein by reference to the exhibits to the Companys
Current Report on Form 8-K filed on March 24, 2003 (b)Reports on Form 8-K: During the quarter ended December 31, 2003, the Company filed a report on
form 8-K dated November 5, 2003, reporting information under Item 5 relating to
the press release regarding its financial results for the quarter ending
September 30, 2003. The Company also filed a report on form 8-K dated December
12, 2003, reporting information under Item 5 and Item 7 relating to the press
release regarding the appointment of Richard M. Feldt as the Companys new
Chief Executive Officer. (c)Exhibits: The Company hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 15(a)(3) set forth above. Exhibits which are
incorporated herein by reference may be inspected and copied at the public
reference facilities maintained by the SEC at the SECs Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SECs regional
offices located at 233 Broadway, New York, New York 10279, and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611-2511.
Copies of such material may be obtained by mail from the Public Reference
Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The public may obtain information on the operation
of the Public Reference Room by calling 1-800-SEC-0330. The SEC also maintains
a web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC at the
address http://www.sec.gov. 32




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INDEX TO FINANCIAL STATEMENTS PageReport of Independent Auditors
    
    
    34Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    35Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003
    
    
    36Consolidated Statements of Stockholders Equity for the years ended December 31, 2001,
2002 and 2003
    
    
    37Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003
    
    
    38Notes to Financial Statements
    
    
    39
 33




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REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Evergreen Solar, Inc. In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders equity, and of cash
flows present fairly, in all material respects, the financial position of
Evergreen Solar, Inc. and its subsidiary at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Companys management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts
February 27, 2004 34




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EVERGREEN SOLAR, INC.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA) December 31,
    
    December 31,2002
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,194
    
    
    $
    4,620Marketable securities
    
    
    7,289
    
    
    
    15,720Accounts receivable, net of allowance for doubtful accounts of $140
and $227 at December 31, 2002 and December 31, 2003, respectively
    
    
    2,848
    
    
    
    983Interest receivable
    
    
    57
    
    
    
    15424,039Restricted cash
    
    
    464
    
    
    
    414Fixed assets, net
    
    
    16,905
    
    
    
    21,523Total assets
    
    $
    31,963
    
    
    $
    45,976Liabilities, convertible preferred stock and stockholders equityCurrent liabilities:Accounts payable
    
    $
    861
    
    
    $
    905Accrued employee compensation
    
    
    569
    
    
    
    425Accrued warranty
    
    
    326
    
    
    
    426Other accrued expenses
    
    
    294
    
    
    
    244Total current liabilities
    
    
    2,050
    
    
    
    2,000Convertible preferred stock:Series A, $0.01 par value, 0 and 26,227,668 shares authorized, 0 and 22,679,125
issued and outstanding at December 31, 2002 and December 31, 2003, respectively
(stated at liquidation value)
    
    
    
    
    
    
    27,032Stockholders equity:Common stock, $0.01 par value, 30,000,000 and 70,000,000 shares authorized,
11,410,826 and 15,126,268 issued and outstanding at December 31, 2002
and December 31, 2003, respectively
    
    
    114
    
    
    
    151Additional paid-in capital
    
    
    71,508
    
    
    
    73,239Deferred compensation
    
    
    (360
    )
    
    
    (89
    )Accumulated deficit
    
    
    (41,356
    )
    
    
    (56,330
    )Accumulated other comprehensive income (loss)
    
    
    7
    
    
    
    (27
    )Total stockholders equity
    
    
    29,913
    
    
    
    16,944Total liabilities, convertible preferred stock and stockholders equity
    
    $
    31,963
    
    
    $
    45,976
 The accompanying notes are an integral part of these consolidated financial statements. 35




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EVERGREEN SOLAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) For the Years Ended December 31,2001
    
    2002
    
    2003Revenues:Product revenues
    
    $
    1,546
    
    
    $
    5,296
    
    
    $
    7,746Research revenues
    
    
    932
    
    
    
    1,448
    
    
    
    1,565Total revenues
    
    
    2,478
    
    
    
    6,744
    
    
    
    9,311Operating expenses:Cost of product revenues
    
    
    9,649
    
    
    
    12,405
    
    
    
    15,379Research and development expenses, including costs of research revenues
    
    
    3,063
    
    
    
    3,692
    
    
    
    3,791Selling, general and administrative expenses
    
    
    4,088
    
    
    
    4,520
    
    
    
    5,337Total operating expenses
    
    
    16,800
    
    
    
    20,617
    
    
    
    24,507Operating loss
    
    
    (14,322
    )
    
    
    (13,873
    )
    
    
    (15,196
    )Interest income, net
    
    
    1,845
    
    
    
    674
    
    
    
    222Net loss
    
    
    (12,477
    )
    
    
    (13,199
    )
    
    
    (14,974
    )Accretion and dividends on Series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    (13,498
    )Net loss attributable to common stockholders
    
    
    (12,477
    )
    
    
    (13,199
    )
    
    
    (28,472
    )Other comprehensive income (loss):Unrealized gain (loss) on marketable securities
    
    
    249
    
    
    
    (242
    )
    
    
    (34
    )Comprehensive loss
    
    $
    (12,228
    )
    
    $
    (13,441
    )
    
    $
    (28,506
    )Net loss per share attributable to common stockholders (basic and diluted)
    
    $
    (1.10
    )
    
    $
    (1.16
    )
    
    $
    (2.39
    )Weighted average shares used in computing basic and diluted
net loss per share attributable to common stockholders
    
    
    11,304
    
    
    
    11,405
    
    
    
    11,899
 The accompanying notes are an integral part of these consolidated financial statements. 36




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EVERGREEN SOLAR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(IN THOUSANDS) Common Stock

    AdditionalPaid-In
    
    
    Deferred
    
    
    
    Accumulated
    
    
    AccumulatedOtherComprehensive
    
    TotalStockholdersShares
    
    Amount
    
    Capital
    
    Compensation
    
    Deficit
    
    Income (loss)
    
    EquityBalance at December 31, 2000
    
    
    11,170
    
    
    $
    111
    
    
    $
    70,671
    
    
    $
    (959
    )
    
    $
    (15,680
    )
    
    $
    
    
    
    $
    54,143Issuance of common stock pursuant to exercise of options
    
    
    20
    
    
    
    1
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Issuance of common stock pursuant to exercise of warrants
    
    
    209
    
    
    
    2
    
    
    
    798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    800Compensation expense associated with stock options
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    290
    
    
    
    
    
    
    
    
    
    
    
    327Terminated options
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    249
    
    
    
    249Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,477
    )
    
    
    
    
    
    
    (12,477
    )Balance at December 31, 2001
    
    
    11,399
    
    
    $
    114
    
    
    $
    71,497
    
    
    $
    (649
    )
    
    $
    (28,157
    )
    
    $
    249
    
    
    $
    43,054Issuance of common stock pursuant to exercise of options
    
    
    12
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11Compensation expense associated with stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    289
    
    
    
    
    
    
    
    
    
    
    
    289Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (242
    )
    
    
    (242
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,199
    )
    
    
    
    
    
    
    (13,199
    )Balance at December 31, 2002
    
    
    11,411
    
    
    $
    114
    
    
    $
    71,508
    
    
    $
    (360
    )
    
    $
    (41,356
    )
    
    $
    7
    
    
    $
    29,913Issuance of common stock pursuant to exercise of options
    
    
    5
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Shares of common stock issued under ESPP
    
    
    3
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Conversion of Series A convertible preferred stock to common stock
    
    
    3,707
    
    
    
    37
    
    
    
    4,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,153Compensation expense associated with stock options
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    271
    
    
    
    
    
    
    
    
    
    
    
    351Accretion of Series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    (11,688
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,688
    )Beneficial conversion feature of Series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    10,314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,314Dividend on Series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,810
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,810
    )Issuance of warrants in connection with Series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    625Reversal of overaccrued IPO financing costs
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    (34
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,974
    )
    
    
    
    
    
    
    (14,974
    )Balance at December 31, 2003
    
    
    15,126
    
    
    $
    151
    
    
    $
    73,239
    
    
    $
    (89
    )
    
    $
    (56,330
    )
    
    $
    (27
    )
    
    $
    16,944
 The accompanying notes are an integral part of these consolidated financial statements. 37




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EVERGREEN SOLAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) 2001
    
    2002
    
    2003Cash flows from operating activities:Net loss
    
    $
    (12,477
    )
    
    $
    (13,199
    )
    
    $
    (14,974
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation expense
    
    
    1,003
    
    
    
    1,968
    
    
    
    2,005Bad debt expense
    
    
    
    
    
    
    127
    
    
    
    87Amortization of bond premiums
    
    
    
    
    
    
    331
    
    
    
    381Write-off of fixed assets
    
    
    
    
    
    
    43
    
    
    
    513Issuance of stock options to consultants
    
    
    37
    
    
    
    
    
    
    
    80Compensation expense associated with employee stock options
    
    
    290
    
    
    
    289
    
    
    
    271Changes in operating assets and liabilites:Inventory
    
    
    (591
    )
    
    
    (1,195
    )
    
    
    175Interest receivable
    
    
    (189
    )
    
    
    332
    
    
    
    (97
    )Accounts receivable
    
    
    461
    
    
    
    (2,487
    )
    
    
    1,778Other current assets
    
    
    (113
    )
    
    
    (754
    )
    
    
    469Accounts payable
    
    
    197
    
    
    
    3
    
    
    
    44Accrued expenses
    
    
    (31
    )
    
    
    241
    
    
    
    (94
    )Net cash used in operating activities
    
    
    (11,413
    )
    
    
    (14,301
    )
    
    
    (9,362
    )Cash flows from investing activities:Purchases of fixed assets
    
    
    (9,380
    )
    
    
    (2,916
    )
    
    
    (7,136
    )Restricted cash
    
    
    
    
    
    
    
    
    
    
    50Purchases of marketable securities
    
    
    (87,041
    )
    
    
    (10,762
    )
    
    
    (26,850
    )Proceeds from sale and maturity of marketable securities
    
    
    96,405
    
    
    
    26,609
    
    
    
    18,088Net cash provided by (used in) investing activites
    
    
    (16
    )
    
    
    12,931
    
    
    
    (15,848
    )Cash flows from financing activities:Issuance of Series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    29,375Financing costs on issuance of Series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    (849
    )Proceeds from issuance of common stock warrant
    
    
    
    
    
    
    
    
    
    
    100Proceeds from exercise of stock options and
shares purchased under Employee Stock Purchase Plan
    
    
    812
    
    
    
    10
    
    
    
    10Net cash flow provided by financing activities
    
    
    812
    
    
    
    10
    
    
    
    28,636Net increase (decrease) in cash and cash equivalents
    
    
    (10,617
    )
    
    
    (1,360
    )
    
    
    3,426Cash and cash equivalents at beginning of period
    
    
    13,171
    
    
    
    2,554
    
    
    
    1,194Cash and cash equivalents at end of period
    
    $
    2,554
    
    
    $
    1,194
    
    
    $
    4,620Supplemental cash flow information:Taxes paid
    
    
    50
    
    
    
    32
    
    
    
    36Realized gains on sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    16Non-cash Series A convertible preferred stock dividends earned
    
    
    
    
    
    
    
    
    
    
    1,810Non-cash conversion of Series A convertible preferred stock to common
    
    
    
    
    
    
    
    
    
    
    4,153
 The accompanying notes are an integral part of these consolidated financial statements. 38




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EVERGREEN SOLAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    
    NATURE OF BUSINESSEvergreen Solar, Inc. (the Company), incorporated in August 1994, develops,
manufactures and markets solar power products, including solar cells, panels
and systems. In April 1997 the Company commenced product sales. The Company
has incurred losses since inception and has an accumulated deficit, which has
been funded by issuing debt and equity securitiesThe Company has historically financed operations and met capital expenditures
requirements primarily through sales of capital stock and, to a lesser
extent, research and product revenues. The first of the Marlboro facilitys
two manufacturing lines became operational in 2001. As more fully described
in Note 6 Capital Stock, on May 15, 2003, the Company consummated the
private placement transaction contemplated by the purchase agreement entered
into on March 21, 2003 with certain investors to raise $29.5 million through
the issuance of 26,227,668 shares of Series A convertible preferred stock and
the sale of a warrant to purchase 2,400,000 shares of common stock. The
proceeds to the Company, net of financing expenses of approximately $849,000,
were approximately $28.6 million. The Company expects to use the net
proceeds from this transaction to fund the construction of the second
manufacturing line and other operations of the Company.The Company needs additional financing to execute its business plan and to
respond to business contingencies such as the need to enhance its operating
infrastructure, respond to competitive pressures and acquire complementary
businesses or necessary technologies. For example, in addition to capital
commitments as of December 31, 2003, substantial further capital expenditures
will be required over the next twelve months to increase the capacity at the
Companys manufacturing facility to its target level of 10 to 14 megawatts
for both manufacturing lines. The Company does not know whether it will be
able to raise additional financing on favorable financing terms. If adequate
funds are not available or are not available on acceptable terms, the
Companys ability to fund its operations, develop and expand its
manufacturing operations and distribution network, or otherwise respond to
competitive pressures would be significantly limited. In such a situation,
the Company would need to implement fundamental changes to its business and
operations which would likely include substantially reducing, suspending, or
terminating the Companys capacity expansion and substantially reducing daily
operating expenditures from current levels, in which case the Company
believes its cash, cash equivalents and short-term investments will then be
sufficient to fund operations through the end of fiscal year 2004.The Company is subject to risks common to companies in the high technology
and energy industries including, but not limited to, development by the
Company or its competitors of new technological innovations, dependence on
key personnel, protection of proprietary technology and compliance with
government regulations. Any delay in the Companys plan to scale up to full
capacity may result in increased costs and could impair business operations.2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESA summary of the major accounting policies followed by the Company in the
preparation of the accompanying financial statements is set forth below.BASIS OF PRESENTATIONThe consolidated financial statements include the accounts of the Companys
wholly owned subsidiary, Evergreen Solar Securities, Inc. All material
intercompany accounts and transactions have been eliminated.CASH AND INVESTMENTSCash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less from the date of purchase and whose
carrying amount approximates fair value.The Companys investments are classified as available-for-sale. At December
31, 2002 and 2003 the Company held US government agency bonds, treasury
notes, municipal bonds, corporate bonds and commercial paper. The investments
generally mature within one year from the date of purchase and are carried at
market value. During 2003, there were realized gains of $18,000. At December
31, 2003, there were unrealized losses of $27,000, which are reported as part
of stockholders equity. 39




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CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents, investments and accounts receivable. The Company places its cash
and cash equivalents with a high quality financial institution. With respect
to accounts receivable, such receivables are primarily from distributors and
integrators in the solar power industry located in the United States and
throughout the world. The Company performs ongoing credit evaluations of its
customers  ́ financial conditions. The Company does not require collateral or
other security against accounts receivable; however, it maintains reserves
for potential credit losses and such losses have historically been within
managements expectations. One individual customer accounted for
approximately 26% of total accounts receivable as at December 31, 2003, and
another customer accounted for approximately 67% and 46% of total accounts
receivable as at December 31, 2002 and 2001, respectively. The Companys five
largest individual customers accounted for 76%, 85% and 85% of total accounts
receivable at December 31, 2003, 2002, and 2001, respectively. Separately,
one individual customer accounted for approximately 47%, 57% and 8% of
product revenue for the years ended December 31, 2003, 2002 and 2001,
respectively. The Companys five largest individual customers accounted for
74%, 80% and 94% of product revenue in 2003, 2002, and 2001, respectively. INVENTORY Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market. Certain factors may impact the realizable value of the
Companys inventory including, but not limited to, technological changes,
market demand, changes in product mix strategy, new product introductions and
significant changes to its cost structure. Given the Companys current
production levels and the market value of its products, the Company currently
sells its finished goods inventory at prices that are below the sum of its
fixed and variable costs per unit. Accordingly, the Company writes down its
finished goods inventory to realizable value equal to the difference between
the cost of inventory and the estimated market value. In addition, estimates
of reserves are made for obsolescence based on the current product mix on
hand and its expected net realizability. If actual market conditions are less
favorable or other factors arise that are significantly different than those
anticipated by management, additional inventory write-downs or increases in
obsolescence reserves may be required. The Company treats lower of cost or
market adjustments and inventory reserves as an adjustment to the cost basis
of the underlying inventory. Accordingly, favorable changes in market
conditions are not recorded to inventory in subsequent periods. GUARANTOR ARRANGEMENTS In November 2002, the FASB issued FIN No. 45 Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and
107 and rescission of FASB Interpretation No. 34. The Interpretation
requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken by issuing the
guarantee. The Interpretation also requires additional disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees it has issued. The accounting
requirements for the initial recognition of guarantees are applicable on a
prospective basis for guarantees issued or modified after December 31, 2002.
The following is a summary of the Companys agreements that we have
determined are within the scope of FIN No. 45. 40




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##### Table of Contents



Product warranty The Company provides for the estimated cost of product warranties at the time
revenue is recognized. Given the Companys limited operating history,
historical industry solar panel failure rates are used as the basis for the
warranty provision calculation. While the Company engages in product quality
programs and processes, including monitoring and evaluating the quality of
component suppliers, its warranty obligation is affected by product failure
rates and material usage and service delivery costs incurred in correcting a
product failure. If the Companys actual product failure rates, material
usage or service delivery costs differ from estimates, revisions to the
estimated warranty liability would be required. Since the Company has a
limited operating history and its manufacturing process differs from industry
standards, its experience may be different from the industry data used as a
basis for its estimate. While the Companys methodology takes into account
these uncertainties, adjustments in future periods may be required as its
products mature. The following table summarizes the activity regarding the
Companys warranty accrual: Balance at December 31, 2001
    
    $
    138,000Accruals for warranties issued during the period
    
    
    188,000Balance at December 31, 2002
    
    $
    326,000Accruals for warranties issued during the period
    
    
    100,000Balance at December 31, 2003
    
    $
    426,000
 Indemnification agreements The Company enters into standard indemnification agreements in its ordinary
course of business. Pursuant to these agreements, the Company indemnifies,
holds harmless, and agrees to reimburse the indemnified party for losses
suffered or incurred by the indemnified party, generally our business
partners, customers, directors and officers. The term of these
indemnification agreements is generally perpetual any time after execution of
the agreement. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is
unlimited. However, the Company has never incurred costs to defend lawsuits
or settle claims related to these indemnification agreements. Furthermore,
the Company has a Director and Officer insurance policy that limits its
exposure with indemnification agreements specifically with its directors and
officers, which enables the Company to recover a portion of any future
amounts paid. As a result of the Companys insurance policy coverage, the
Company believes the estimated fair value of these indemnification agreements
is minimal. The Company believes the estimated fair value of agreements with
parties other than its directors and officers is minimal as well. The Company
agreed to indemnify, defend and hold harmless each of the purchasers
participating in the Companys Series A convertible preferred stock financing
transaction, their affiliates and their respective officers, directors,
agents, employees, subsidiaries, partners, members and controlling persons to
the fullest extent permitted by law from and against any and all losses,
claims or written threats thereof, damages, expenses (including reasonable
fees, disbursements and other charges of counsel) resulting from or arising
out of the Companys breach of any representation or warranty, covenant or
agreement in the purchase agreement. The Company believes the estimated fair
value of this indemnification agreement is minimal. FIXED ASSETS Fixed assets are recorded at cost. Provisions for depreciation are based on
their estimated useful lives using the straight-line method over three to
seven years for all laboratory and manufacturing equipment, computers, and
office equipment. Leasehold improvements are depreciated over the shorter of
the remainder of the leases term or the life of the improvements. Upon
retirement or disposal, the cost of the asset disposed of and the related
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in income. Expenditures for repairs and maintenance are expensed as
incurred. IMPAIRMENT OF LONG-LIVED ASSETS The Companys policy regarding long-lived assets is to evaluate the
recoverability or usefulness of these assets when the facts and circumstances
suggest that these assets may be impaired. This analysis relies on a number
of factors, including changes in strategic direction, business plans,
regulatory developments, economic and budget projections, technological
improvements, and operating results. The test of recoverability or usefulness
is a comparison of the asset value to the undiscounted cash flow of its
expected cumulative net operating cash flow over the assets remaining useful
life. If such a test indicates that impairment is required, then the asset is
written down to its estimated fair value. Any write-downs would be treated as
permanent reductions in the carrying amounts of the assets and an operating
loss would be recognized. To date,
the Company has had recurring operating losses and the recoverability of its
long-lived assets is contingent upon executing 41




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its business plan that includes
further reducing its manufacturing costs and significantly increasing sales.
If the Company is unable to execute its business plan, the Company may be
required to write down the value of its long-lived assets in future periods.
No impairments were required to be recognized during the years ended December
31, 2003, 2002 and 2001. REVENUE RECOGNITION The Company recognizes revenue if persuasive evidence of an arrangement
exists, shipment has occurred, risk of loss has transferred to the customer,
sales price is fixed or determinable, and collectibility is reasonably
assured. The market for solar power products is emerging and rapidly
evolving. The Company currently sells its solar power products primarily to
distributors, system integrators and other value-added resellers within and
outside of North America, which typically resell its products to end users
throughout the world. For new customers requesting credit, the Company
evaluates creditworthiness based on credit applications, feedback from
provided references, and credit reports from independent agencies. For
existing customers, the Company evaluates creditworthiness based on payment
history and known changes in their financial condition. The Company also evaluates the facts and circumstances related to each sales
transaction and considers whether risk of loss has passed to the customer upon
shipment. The Company considers whether its customer is purchasing its
product for stock, and whether contractual or implied rights to return the
product exist or whether its customer has an end user contractually committed.
The Company does not offer rights to return its product other than for normal
warranty conditions and has had no history of product returns. At the time revenue is recognized, the Company provides for the estimated cost
of product warranties. Revenue from research grants is recognized as services are rendered to the
extent of allowable costs incurred. While the Companys accounting for
research contract costs are subject to audit by the sponsoring agency, in the
opinion of management, no material adjustments are expected as a result of
such audits. RESEARCH AND DEVELOPMENT All research and development costs are expensed as incurred. INCOME TAXES The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets, subject to valuation allowances,
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Deferred income
taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. A valuation allowance is established if it is more likely than
not that all or a portion of the net deferred tax assets will not be realized. COMPREHENSIVE INCOME Comprehensive income consists of unrealized gains and losses on
available-for-sale securities. As of December 31, 2003, accumulated other
comprehensive loss was $27,000, and as of December 31, 2002, accumulated other
comprehensive income was $7,000. Other comprehensive income (loss) is
reflected in the Companys Consolidated Statement of Operations and the
Consolidated Statement of Stockholders Equity. STOCK-BASED COMPENSATION The Company applies the accounting provisions of Accounting Principles Board
(APB) Opinion 25 and related interpretations and has elected the
disclosure-only alternative permitted under Statement of Financial Accounting
Standards Board (SFAS) No. 123, Accounting for Stock-Based Compensation. The
Company has disclosed herein pro forma net income (loss) in the footnotes
using the fair value based method. All stock-based awards to non-employees are
accounted for at their fair market value, as calculated using the
Black-Scholes model in accordance with SFAS No. 123. 42




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Had compensation expense for the employee stock option plan been determined
based on the fair value at the grant dates for options granted under the plan
consistent with the method of SFAS 123, the net loss would have been as
follows (in thousands, except per share data): 2001
    
    2002
    
    2003Net Loss
    
    Net Loss
    
    Net Loss
    
    Net Loss
    
    Net Loss
    
    Net LossAttributable
    
    Per
    
    Attributable
    
    Per
    
    Attributable
    
    PerTo Common
    
    Common
    
    To Common
    
    Common
    
    To Common
    
    CommonStockholders
    
    Share
    
    Stockholders
    
    Share
    
    Stockholders
    
    ShareNet loss attributable to common stockholders, as reported
    
    $
    (12,477
    )
    
    $
    (1.10
    )
    
    $
    (13,199
    )
    
    $
    (1.16
    )
    
    $
    (28,472
    )
    
    $
    (2.39
    )Add: Stock-based employee compensation expense
included in reported results
    
    
    290
    
    
    
    0.03
    
    
    
    289
    
    
    
    0.03
    
    
    
    271
    
    
    
    0.02Deduct: Total stock-based employee compensation expense
determined under the fair value-based method for all awards
    
    
    (1,283
    )
    
    
    (0.12
    )
    
    
    (1,177
    )
    
    
    (0.10
    )
    
    
    (1,561
    )
    
    
    (0.13
    )Pro forma net loss attributable to common stockholders
    
    $
    (13,470
    )
    
    $
    (1.19
    )
    
    $
    (14,087
    )
    
    $
    (1.23
    )
    
    $
    (29,762
    )
    
    $
    (2.50
    )
 The fair value of employee options at the date of grant were estimated using
the Black-Scholes option pricing model with the following assumptions for the
years ended December 31, 2001, 2002 and 2003: 2001
    
    2002
    
    2003Expected options term
    
    
    7
    
    
    
    7
    
    
    
    7Risk-free interest rate
    
    
    4.0
    %
    
    
    4.0
    %
    
    
    4.0
    %Expected dividend yield
    
    None
    
    None
    
    NoneVolatility
    
    
    90
    %
    
    
    90
    %
    
    
    90
    %
 Through December 31, 2000, the Company accumulated deferred compensation of
$1.3 million related to stock option grants to employees. The deferred
compensation represents differences between the estimated fair value of common
stock on the date of grant and the exercise price. The deferred compensation
is being amortized and charged to operations over the vesting period of the
related options. NET LOSS PER COMMON SHARE The Company computes net loss per common share by dividing net loss
attributable to common stockholders by the weighted average number of common
shares outstanding. The calculation of diluted net loss per common share for
the years ended December 31, 2001, 2002 and 2003 does not include 1,525,246,
1,146,378 and 27,526,462 potential shares of common stock equivalents
outstanding at December 31, 2001, 2002 and 2003, respectively, as their
inclusion would be antidilutive. Common stock equivalents include outstanding
common stock options, common stock warrants and Series A convertible preferred
stock. SEGMENT REPORTING The Company operates in a single segment: the sale of solar panels that
generate electricity. The Company has no organizational structure dictated by
product lines, geography or customer type. Major customer and geographic area
revenue disclosures are presented in Note 12. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates. The Company bases its
estimates on historical experience and various other factors believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Estimates are used when accounting
for the collectibility of receivables, realizability of finished goods
inventory, estimated warranty costs,
and deferred tax assets. Some of these estimates can be subjective and
complex and, consequently, actual results may differ from these estimates
under different assumptions or conditions. While for any given estimate or
assumption made by the Companys management there may be other estimates or
assumptions that are reasonable, the Company believes that, given 43




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the current
facts and circumstances, it is unlikely that applying any such other
reasonable estimate or assumption would materially impact the financial
statements. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments, including cash equivalents, accounts receivable and
accounts payable are carried in the consolidated financial statements at
amounts that approximate fair values at December 31, 2002 and 2003. Fair
values are based on market prices and assumptions concerning the amount and
timing of estimated future cash flows and assumed discount rates, reflecting
varying degrees of perceived risk. RECENT PRONOUNCEMENTS In November 2002, the FASB issued Emerging Issues Task Force 00-21 (EITF
00-21), Accounting for Revenue Arrangements with Multiple Deliverables.
EITF 00-21 requires revenue arrangements with multiple deliverables to be
divided into separate units of accounting. If the deliverables in the
arrangement meet certain criteria, arrangement consideration should be
allocated among the separate units of accounting based on their relative fair
values. Applicable revenue recognition criteria are to be considered
separately for separate units of accounting. The guidance in EITF 00-21 was
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did not have a material impact
on the Companys financial position or results of operations. In January 2003, the FASB issued Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities (FIN 46) and, in December 2003, issued a
revision to that interpretation (FIN 46R). FIN 46R replaces FIN 46 and
addresses consolidation by business enterprises of variable interest entities
that possess certain characteristics. A variable interest entity (VIE) is
defined as (a) an ownership, contractual or monetary interest in an entity
where the ability to influence financial decisions is not proportional to the
investment interest, or (b) an entity lacking the invested capital sufficient
to fund future activities without the support of a third party. FIN 46R
establishes standards for determining under what circumstances VIEs should be
consolidated with their primary beneficiary, including those to which the
usual condition for consolidation does not apply. The adoption of FIN 46R did
not have a material impact on the Companys financial position or results of
operations. On December 17, 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition, which supersedes SAB 101, Revenue Recognition in Financial
Statements. SAB 104s primary purpose is to rescind the accounting guidance
contained in SAB 101 related to multiple-element revenue arrangements that was
superseded as a result of the issuance of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the
SECs related Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers issued with SAB 101 that had been codified in SEC Topic
13, Revenue Recognition. While the wording of SAB 104 has changed to
reflect the issuance of EITF 00-21, the revenue recognition principles of SAB
101 remain largely unchanged by the issuance of SAB 104, which was effective
upon issuance. The adoption of SAB 104 did not have a material effect on the
Companys financial position or results of operations. 3. INVENTORY Inventory consisted of the following at December 31, 2002 and 2003 (in
thousands): December 31,
    
    December 31,2002
    
    2003Raw materials
    
    $
    1,236
    
    
    $
    1,318Work-in-process
    
    
    148
    
    
    
    4Finished goods
    
    
    810
    
    
    
    697$
    2,194
    
    
    $
    2,019
 44




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4. FIXED ASSETS Fixed assets consisted of the following at December 31, 2002 and 2003 (in
thousands): Useful
    
    December 31,Life
    
    2002
    
    2003Laboratory and manufacturing equipment
    
    3-7 years
    
    $
    10,997
    
    
    $
    13,542Computer and office equipment
    
    3-7 years
    
    
    245
    
    
    
    280Leasehold improvements
    
    Lesser of 15 to 20years or lease term
    
    
    6,273
    
    
    
    6,273Assets under construction
    
    
    
    
    
    
    2,769
    
    
    
    6,81220,284
    
    
    
    26,907Less accumulated depreciation
    
    
    
    
    
    
    (3,379
    )
    
    
    (5,384
    )$
    16,905
    
    
    $
    21,523
 Depreciation expense for the years ended December 31, 2001, 2002 and 2003 was
$1.0 million, $2.0 million and $2.0 million, respectively. During 2003, the
Company disposed of assets that were no longer in service that had a cost of
$718,340 and associated accumulated depreciation of $205,239. These assets
were associated with the Companys single ribbon furnace technology, which
were retrofitted to accommodate the Companys double ribbon furnace
technology. The asset disposal resulted in a loss of $513,101 to operations.
As of December 31, 2003, the Company had outstanding commitments for capital
expenditures of approximately $3.0 million. 5. INCOME TAXES Income taxes computed using the federal statutory income tax rate differ from
the Companys effective tax rate primarily due to the following for the years
ended December 31, 2001, 2002 and 2003: 2001
    
    2002
    
    2003Income tax benefit at US federal statutory tax rate
    
    $
    (4,242,000
    )
    
    $
    (4,488,000
    )
    
    $
    (5,091,000
    )State income taxes, net of federal tax effect
    
    
    (786,000
    )
    
    
    (661,000
    )
    
    
    (758,000
    )Permanent items
    
    
    101,000
    
    
    
    102,000
    
    
    
    95,000Other
    
    
    (78,000
    )
    
    
    (52,000
    )
    
    
    (3,000
    )Change in deferred tax asset valuation allowance
    
    
    5,005,000
    
    
    
    5,099,000
    
    
    
    5,757,000$
    
    
    
    $
    
    
    
    $
    
 As of December 31, 2003, we had federal and state net operating loss
carryforwards totaling approximately $47.9 million and $39.9 million,
respectively, available to reduce future taxable income and tax liabilities
which expire at various dates between 2004 and 2023. In addition, as of
December 31, 2003 we had federal and state research and development tax credit
carryforwards of approximately $804,000 and $433,000, respectively, available
to reduce future taxable income and tax liabilities which expire at various
dates between 2009 and 2023. Under provisions of the Internal Revenue Code,
substantial changes in our ownership may limit the amount of net operating
loss carryforwards and research and development credit carryforwards, which
can be used in future years. Management of the Company has evaluated the
positive and negative evidence bearing upon the realizability of its deferred
tax assets. Management has considered the Companys history of losses and, in
accordance with the applicable accounting standards, has fully reserved the
deferred tax asset. Deferred tax assets consist of the following at December 31, 2002 and 2003: 2002
    
    2003Gross deferred tax assetsNet operating loss carryforwards
    
    $
    13,796,000
    
    
    $
    18,793,000Research and develppment credit carryforwards
    
    
    1,036,000
    
    
    
    1,090,000Capitalized R&D expenses
    
    
    2,364,000
    
    
    
    3,114,000Accrued expenses and deferred compensation
    
    
    604,000
    
    
    
    620,000Other
    
    
    199,000
    
    
    
    281,000Total gross deferred tax assets
    
    
    17,999,000
    
    
    
    23,898,000Gross deferred tax liabilitiesDepreciation
    
    
    (847,000
    )
    
    
    (990,000
    )Deferred tax valuation allowance
    
    
    (17,152,000
    )
    
    
    (22,908,000
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 45




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6. CAPITAL STOCK The Company has two classes of capital stock: common and preferred. In May
2003, the Company increased the number of authorized shares of common stock to
70,000,000. At December 31, 2003, there were 2,859,771 shares of common stock
reserved for grant under both the Companys 1994 Stock Option Plan and the
Companys 2000 Stock Option and Incentive Plan. At December 31, 2003,
7,650,000 shares of common stock were authorized for issuance under the
Companys 2000 Stock Option Plan and 40,000,000 shares were reserved for
issuance upon conversion of Series A convertible preferred stock sold to
several purchasers and upon exercise of a warrant issued to Beacon Power
Corporation. In May 2003, the Company increased the number of authorized shares of
preferred stock to 27,227,668, of which 26,227,668 shares were designated
Series A convertible preferred stock. On May 15, 2003, the Company
consummated the transaction contemplated by a Stock and Warrant Purchase
Agreement which was entered into on March 21, 2003 with Perseus 2000, L.L.C.,
Nth Power Technologies Fund II, LP, Nth Power Technologies Fund II-A, LP,
RockPort Capital Partners, L.P., RP Co-Investment Fund, I, Micro-Generation
Technology Fund, LLC, UVCC Fund II, UVCC II Parallel Fund, L.P., Caisse de
depot et placement du Quebec, CDP Capital - Technology Ventures U.S. Fund 2002
L.P., Beacon Power Corporation, Massachusetts Technology Park Corporation,
Zero Stage Capital VII, L.P., Zero Stage Capital (Cayman) VII, L.P., Zero
Stage Capital SBIC VII, L.P., IMPAX Environmental Markets plc, Merrill Lynch
New Energy Technology Plc, MLIIF New Energy Fund, PNE Invest Limited, Odyssey
Fund, SAM Private Equity Energy Fund LP, SAM Sustainability Private Equity LP
and SAM Smart Energy. As a result of the consummation of this transaction, the
Company issued 26,227,668 shares of Series A convertible preferred stock at a
per share purchase price of $1.12. Additionally, Beacon Power Corporation
purchased a warrant to purchase 2,400,000 shares of common stock at a per
share exercise price equal to $3.37, for $100,000. A total of $29.5 million
was raised as a result of the consummation of the transaction. The proceeds
to the Company, net of financing expenses of approximately $849,000, were
approximately $28.6 million for the transaction. The shares of Series A
convertible preferred stock were initially convertible into shares of common
stock on a 1-to-1 basis which is subject to adjustment to account for the
payment of dividends, to take into account certain changes to the Companys
capital structure and to account for future dilutive issuances. As a condition
to the obligation of the purchasers to consummate the financing transaction,
the Company agreed to register for resale the shares of common stock issuable
upon the conversion of the Series A convertible preferred stock and the
exercise of the warrant. As a result of the preferred stock financing, accretion and dividends of $13.5
million were recorded through December 31, 2003. $11.7 million of this charge
relates to accretion that was recognized immediately (during the second
quarter of 2003) because the holders of shares of the Series A convertible
preferred stock are entitled to convert their shares into common stock at any
time. The sources of the discounts on issuance requiring this accretion charge
are summarized in the following table: Beneficial conversion feature
    
    $
    10,314,000Proceeds allocated to the fair value of common stock warrant
    
    
    525,000Financing costs
    
    
    849,000Total preferred stock accretion and dividends
    
    $
    11,688,000
 The difference between the issuance price of the Series A convertible
preferred stock and the fair value of the Companys common stock on the date
of issuance of the Series A convertible preferred stock resulted in a
beneficial conversion feature totaling approximately $10.3 million, which was
calculated in accordance with EITF 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments. Liquidation Preference of Series A Convertible Preferred Stock In the event of voluntary or involuntary liquidation under applicable
bankruptcy or reorganization legislation, dissolution or winding up, the
holders of shares of Series A convertible preferred stock will be paid in cash
for each share of Series A convertible preferred stock held thereby, out of
the Companys assets legally available for distribution to stockholders,
before any payment or distribution is made to any other class or series of the
Companys capital stock, an amount equal to the greater of (i) the sum of (x)
the Accreted Value of each share of Series A convertible preferred stock as of
such date, plus (y) all dividends accrued since the previous Compounding Date,
or (ii) the aggregate amount then payable with respect to the number of shares
of common stock into which such share of Series A convertible preferred stock
is convertible immediately prior to such liquidation event. The liquidation
preference of the Series A convertible preferred stock initially was the
purchase price per share paid by the purchasers for the Series A convertible
preferred stock of $1.12, subject to adjustment. The liquidation preference of
the Series A convertible preferred stock was $1.19 per share as of December
31, 2003. 46




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In the event of the merger, consolidation or sale of all or substantially all
of the Companys assets or in the event of certain other change of control
transactions, the holders of shares of Series A convertible preferred stock
will be paid for each share
of Series A convertible preferred stock held thereby, before any payment or
distribution is made to any other class or series of our capital stock, an
amount equal to the greater of (i) the sum of the Accreted Value of each share
of Series A convertible preferred stock as of such date, plus all dividends
accrued since the previous Compounding Date, or (ii) the aggregate amount
payable in the applicable change of control transaction with respect to the
number of shares of our common stock into which a share of Series A
convertible preferred stock is convertible immediately prior to the
consummation of the change of control transaction. If the assets available for
distribution to the holders of shares of Series A convertible preferred stock
are insufficient to permit payment in full to the holders thereof of the
amount described above, then all of the assets available for distribution to
holders of shares of Series A convertible preferred stock will be distributed
among and paid to those holders ratably in proportion to the amounts that
would be payable to those holders if such assets were sufficient to permit
payment in full. Any liquidation payment due upon a change of control
transaction will be paid in the form of consideration paid in such change of
control transaction on the closing date of the transaction. Accreted Value means, as of any date, with respect to each share of Series A
convertible preferred stock, the purchase price paid for such share, plus the
amount of dividends that have accrued and compounded and have been added
thereto to such date pursuant to the terms of the Certificate of the Powers,
Designations, Preferences and Rights of the Series A Convertible Preferred
Stock. Compounding Date means March 31, June 30, September 30 or December 31
of each year, each of which is a date upon which holders of shares of Series A
convertible preferred stock are entitled to receive cumulative dividends
quarterly in arrears. Dividend Rights of Series A Convertible Preferred Stock Shares of Series A convertible preferred stock pay a compounding dividend of
10% per annum, paid quarterly, in cash, or at the Companys election, to be
added to the liquidation preference of the Series A convertible preferred
stock on a quarterly basis, which would result in an increase in the number of
shares of common stock issuable upon conversion of the Series A convertible
preferred stock. As of December 31, 2003, a total of $1.8 million in
dividends has accrued on the outstanding Series A convertible preferred stock,
which the Company elected to add to the liquidation preference of the Series A
convertible preferred stock. Subject to changes in business conditions, the
Company presently anticipates that the dividend will be added to the
liquidation preference for the foreseeable future. Conversion of Series A Convertible Preferred Stock The holders of shares of Series A convertible preferred stock are entitled to
convert their shares into common stock at any time. The number of shares of
common stock issuable upon the conversion of a share of Series A convertible
preferred stock is equal to the product of (x) the number of shares of Series
A convertible preferred stock to be converted and (y) the quotient obtained by
dividing the sum of the Accreted Value, plus all dividends accrued since the
previous Compounding Date by the conversion price per share of the Series A
convertible preferred stock, which conversion price initially was $1.12. The
liquidation preference of the Series A convertible preferred stock was $1.19
per share as of December 31, 2003. The applicable conversion price is subject to adjustment for stock splits,
stock dividends, combinations, and other similar structural events.
Additionally, the Series A convertible preferred stock provides for
full-ratchet anti-dilution protection, subject to standard exceptions, with
respect to the issuance of the Companys capital stock at a purchase price per
share which is below the conversion price of the Series A convertible
preferred stock then in effect. If, on any date after May 15, 2005, the
average market price for a share of common stock for the trailing 180
consecutive trading days is at least $7.50 (subject to adjustment for stock
splits, stock dividends, combinations, and other similar structural events),
then the Company may elect, at its option, to convert all, but not less than
all, of the outstanding shares of Series A convertible preferred stock into
the number of shares of common stock as is equal to the product of (x) the
number of shares of Series A convertible preferred stock to be converted and
(y) the quotient obtained by dividing the sum of (i) $1.12 and (ii) all
accrued and unpaid dividends on such shares by the then applicable conversion
price. Voting Rights of Series A Convertible Preferred Stock Holders of the Series A convertible preferred stock will have the right to
vote on all matters that the holders of common stock vote on, voting together
with the holders of common stock as single class. Each share of Series A
convertible preferred stock will be entitled to the number of votes as is
equal to the number of shares of the Companys common stock into which it is
convertible. However, the maximum number of votes to which a share of Series A
convertible preferred stock will be entitled is capped at 0.7417, subject to
adjustment to reflect stock splits, stock dividends, recapitalizations and the
like. 47




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Preemptive Rights of Series A Convertible Preferred Stock For so long as 5,350,000 of the shares of Series A convertible preferred stock
remain outstanding, subject to adjustment to reflect stock splits, stock
dividends, recapitalizations and the like, the purchasers will have preemptive
rights for any private placement of equity securities by the Company. 7. STOCK BASED COMPENSATION On October 24, 1994, the Board of Directors approved the Companys 1994 Stock
Option Plan (the 1994 Plan), whose purpose is to encourage employees and
other individuals who render services to the Company, by providing
opportunities to purchase stock in the Company. The 1994 Plan authorizes the
issuance of incentive stock options and nonqualified stock options. The 1994
Plan was terminated as to all new issuances of options effective as of the
closing of the Companys initial public offering. All options granted will
expire ten years from their date of issuance. Incentive stock options granted
generally have a four-year vesting period from their date of issuance and
nonqualified options granted vest immediately upon their issuance. In August 2000, the Board of Directors and stockholders approved the Companys
2000 Stock Option and Incentive Plan (the 2000 Plan), which became effective
on the closing of the Companys initial public offering. The purpose is to
encourage employees and other individuals who render services to the Company,
by providing opportunities to purchase stock in the Company. The 2000 Plan
authorizes the issuance of incentive stock options and nonqualified stock
options. All options granted will expire ten years from their date of
issuance. Incentive stock options granted generally have a four-year vesting
period from their date of issuance and nonqualified options granted vest
immediately upon their issuance. The following is a summary of stock option activity: Weighted-AverageShares
    
    Exercise PriceOutstanding at January 1, 2001
    
    
    739,644
    
    
    $
    4.66Granted
    
    
    400,100
    
    
    
    5.14Exercised
    
    
    (19,391
    )
    
    
    0.95Terminated
    
    
    (5,041
    )
    
    
    3.23Outstanding at December 31, 2001
    
    
    1,115,312
    
    
    
    4.94Granted
    
    
    60,000
    
    
    
    1.86Exercised
    
    
    (11,429
    )
    
    
    0.84Terminated
    
    
    (17,505
    )
    
    
    3.34Outstanding at December 31, 2002
    
    
    1,146,378
    
    
    
    4.84Granted
    
    
    4,137,447
    
    
    
    1.75Exercised
    
    
    (5,500
    )
    
    
    1.21Terminated
    
    
    (14,388
    )
    
    
    3.65Outstanding at December 31, 2003
    
    
    5,263,937
    
    
    $
    2.42
 Summarized information about stock options outstanding is as follows: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Remaining
    
    Average
    
    
    
    
    
    AverageExercise
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExercisePrices
    
    Outstanding
    
    Life (Years)
    
    Price
    
    Exercisable
    
    Price$0.22
    
    
    -
    
    
    $
    1.54
    
    
    
    774,348
    
    
    
    9.16
    
    
    $
    1.27
    
    
    
    381,848
    
    
    $
    1.011.55
    
    
    -
    
    
    
    1.60
    
    
    
    45,000
    
    
    
    10.34
    
    
    
    1.58
    
    
    
    35,000
    
    
    
    1.591.61
    
    
    -
    
    
    
    1.61
    
    
    
    2,000,000
    
    
    
    12.38
    
    
    
    1.61
    
    
    
    
    
    
    
    1.68
    
    
    -
    
    
    
    1.95
    
    
    
    61,000
    
    
    
    10.60
    
    
    
    1.71
    
    
    
    12,000
    
    
    
    1.852.00
    
    
    -
    
    
    
    2.00
    
    
    
    1,518,000
    
    
    
    12.34
    
    
    
    2.00
    
    
    
    
    
    
    
    2.08
    
    
    -
    
    
    
    5.00
    
    
    
    530,093
    
    
    
    7.56
    
    
    
    3.00
    
    
    
    322,407
    
    
    
    3.016.38
    
    
    -
    
    
    
    11.04
    
    
    
    186,477
    
    
    
    6.99
    
    
    
    8.44
    
    
    
    128,731
    
    
    
    8.2612.65
    
    
    -
    
    
    
    12.65
    
    
    
    6,000
    
    
    
    7.42
    
    
    
    12.65
    
    
    
    6,000
    
    
    
    12.6514.00
    
    
    -
    
    
    
    14.00
    
    
    
    127,019
    
    
    
    6.84
    
    
    
    14.00
    
    
    
    95,262
    
    
    
    14.0019.00
    
    
    -
    
    
    
    19.00
    
    
    
    16,000
    
    
    
    6.84
    
    
    
    19.00
    
    
    
    13,500
    
    
    
    19.00December 31, 2003
    
    
    5,263,937
    
    
    
    11.02
    
    
    $
    2.42
    
    
    
    994,748
    
    
    $
    4.18
 48




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##### Table of Contents



At December 31, 2001, 2002 and 2003, options exercisable were 342,622,
614,394, and 994,748, respectively. Estimated weighted average fair value of
options granted in fiscal years 2001, 2002 and 2003 were $5.14, $1.86 and
$1.75, respectively, on the date of grant. 8. EMPLOYEE STOCK PURCHASE PLAN In September 2000, the Companys Board of Directors adopted a non-compensatory
Employee Stock Purchase Plan (the ESPP). Under the ESPP, eligible employees
of the Company who elect to participate are granted options to purchase common
stock at a 15% discount from the market value of such stock. The ESPP permits
an enrolled employee to make contributions to purchase shares of common stock
by having withheld from their salary an amount between 0.1 percent and 10
percent of compensation, and a maximum of 25 shares per employee can be issued
during each six-month payment period. The total number of shares of common
stock that may be issued pursuant to options granted under the ESPP is
120,000. As of December 31, 2003, there were 3,100 shares issued under the
ESPP. 9. WARRANTS In connection with the Series A convertible preferred stock financing
transaction (described in Note 6), Beacon Power Corporation purchased a
warrant for $100,000, which is exercisable for 2,400,000 shares of the
Companys common stock at an exercise price of $3.37 per share. The warrant
issued to Beacon Power Corporation is exercisable in whole (and not in part)
at any time prior to May 14, 2006 and may not be exercised on a cashless
basis. Additionally, Beacon Power Corporation purchased 892,857 shares of
Series A convertible preferred stock for $1,000,000. The total proceeds of
$1.1 million from Beacon Power Corporation were allocated between the Series A
convertible preferred stock ($475,000) and the warrant ($625,000) based on
their relative fair values. The fair value of the warrant was calculated using
the Black-Scholes pricing model with the following assumptions: dividend yield
of zero percent; expected volatility of 90%; risk free interest rate of 2% and
a term of three years. The difference between the proceeds allocated to the
relative fair value of the warrant, $625,000, and the amount paid for the
warrant, $100,000, or $525,000 contributed to the accretion charge of $11.7
million for the year ended December 31, 2003. 10. EMPLOYEES SAVINGS PLAN The Company established a 401(k) plan in 1996 for eligible employees. Under
the provisions of the plan, eligible employees may voluntarily contribute a
portion of their compensation up to the statutory limit. In addition, the
Company can make a matching contribution at its discretion. As of December 31,
2003, the Company has not made any contributions to the plan. 11. COMMITMENTS LEASE On March 13, 2000, the Company entered into a ten-year lease commencing July
1, 2000, for office and manufacturing space in Marlboro, Massachusetts.
Pursuant to the terms of the lease agreement, the Company will pay annual rent
ranging from $464,000 in the first year to $534,000 during the last year of
the lease. Rent is payable on the first day of each month and is
collateralized by a $414,000 standby letter of credit. In connection with this
arrangement, the Company invested in a certificate of deposit pledged to a
commercial bank. This certificate of deposit was classified as restricted
cash on the December 31, 2002 and 2003 balance sheet. The following is a
schedule, by year, of future minimum rental payments required under the
ten-year lease that have remaining noncancelable lease terms in excess of one
year as of December 31, 2003: 2004
    
    $
    492,1882005
    
    
    499,2192006
    
    
    506,2502007
    
    
    513,2812008
    
    
    527,344Thereafter
    
    
    801,563Total
    
    $
    3,339,845
 49




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##### Table of Contents



Occupancy expense, which includes rent, property taxes, and other operating
expenses associated with our Marlboro manufacturing facility, was $795,000,
$674,000, and $680,000 for the years ended December 31, 2001, 2002, and 2003,
respectively. LICENSE AGREEMENT In September 1994, the Company signed an agreement to license String Ribbon
technology from a professor at Massachusetts Institute of Technology.
Concurrently, the Company hired the professor as a consultant. This agreement
provides the Company, its successors, assigns, and legal representatives an
irrevocable, worldwide right and license in and to the technology and licensed
patents, including the right to make, have made, use, lease, sub-license, and
sell products and to enforce any of the patent rights of the licensed patents.
The license is exclusive except for rights to the licensed patents held by the
U.S. Department of Energy. In exchange for these rights, the consultant will
earn royalties on sales of products through 2004. The Company incurred
$25,000, $25,000 and $54,767 in royalty expense for the years ended December
31, 2001, 2002 and 2003, respectively. The Company can, at any time, cease
utilization of the technology with no further royalty payments. 12. SEGMENT INFORMATION The Company operates as one segment. The following table summarizes the
Companys concentration of total revenue: % of Total
revenue
    
    2002
    
    2003By geography:U.S. distributors
    
    
    25
    %
    
    
    29
    %U.S. Government (research revenue)
    
    
    21
    %
    
    
    24
    %Germany
    
    
    44
    %
    
    
    36
    %Japan
    
    
    2
    %
    
    
    4
    %All other
    
    
    8
    %
    
    
    7
    %100
    %
    
    
    100
    %By customer:European distributor
    
    
    44
    %
    
    
    39
    %National Institute of Industry Standards (research revenue)
    
    
    11
    %
    
    
    7
    %National Renewable Energy Laboratory (research revenue)
    
    
    10
    %
    
    
    10
    %All other
    
    
    35
    %
    
    
    44
    %100
    %
    
    
    100
    %
 50




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13. UNAUDITED QUARTERLY RESULTS The following tables set forth unaudited selected financial information for
the periods indicated. This information has been derived from unaudited
consolidated condensed financial statements, which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information. The
Companys independent auditors have not audited this information. The results
of operations for any quarter are not necessarily indicative of the results to
be expected for any future period. QUARTERLY STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED MAR 31,
    
    JUN 30,
    
    SEP 30,
    
    DEC 31,
    
    MAR 31,
    
    JUN 30,
    
    SEP 30,
    
    DEC 31,2002
    
    2002
    
    2002
    
    2002
    
    2003
    
    2003
    
    2003
    
    2003Revenues:Product revenues
    
    $
    913
    
    
    $
    1,075
    
    
    $
    1,461
    
    
    $
    1,847
    
    
    $
    1,067
    
    
    $
    2,659
    
    
    $
    2,642
    
    
    $
    1,378Research revenues
    
    
    236
    
    
    
    207
    
    
    
    641
    
    
    
    364
    
    
    
    381
    
    
    
    508
    
    
    
    463
    
    
    
    213Total revenues
    
    
    1,149
    
    
    
    1,282
    
    
    
    2,102
    
    
    
    2,211
    
    
    
    1,448
    
    
    
    3,167
    
    
    
    3,105
    
    
    
    1,591Operating expenses:Cost of product revenues
    
    
    2,904
    
    
    
    2,791
    
    
    
    3,041
    
    
    
    3,669
    
    
    
    2,666
    
    
    
    4,242
    
    
    
    4,061
    
    
    
    4,410Research and development expenses
    
    
    854
    
    
    
    989
    
    
    
    935
    
    
    
    915
    
    
    
    713
    
    
    
    1,072
    
    
    
    1,087
    
    
    
    919Selling, general and administrative expenses
    
    
    1,054
    
    
    
    1,187
    
    
    
    991
    
    
    
    1,287
    
    
    
    1,317
    
    
    
    1,202
    
    
    
    1,301
    
    
    
    1,517Total operating expenses
    
    
    4,812
    
    
    
    4,967
    
    
    
    4,967
    
    
    
    5,871
    
    
    
    4,696
    
    
    
    6,516
    
    
    
    6,449
    
    
    
    6,846Operating loss
    
    
    (3,663
    )
    
    
    (3,685
    )
    
    
    (2,865
    )
    
    
    (3,660
    )
    
    
    (3,248
    )
    
    
    (3,349
    )
    
    
    (3,344
    )
    
    
    (5,255
    )Interest income
    
    
    242
    
    
    
    210
    
    
    
    133
    
    
    
    89
    
    
    
    23
    
    
    
    50
    
    
    
    83
    
    
    
    66Net loss
    
    
    (3,421
    )
    
    
    (3,475
    )
    
    
    (2,732
    )
    
    
    (3,571
    )
    
    
    (3,225
    )
    
    
    (3,299
    )
    
    
    (3,261
    )
    
    
    (5,189
    )Accretion of Series A convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,055
    )
    
    
    (747
    )
    
    
    (696
    )Net loss attributable to common stockholders
    
    
    (3,421
    )
    
    
    (3,475
    )
    
    
    (2,732
    )
    
    
    (3,571
    )
    
    
    (3,225
    )
    
    
    (15,354
    )
    
    
    (4,008
    )
    
    
    (5,885
    )Other comprehensive income (loss):Unrealized gain (loss) on investments
    
    
    155
    
    
    
    (62
    )
    
    
    (46
    )
    
    
    (40
    )
    
    
    (6
    )
    
    
    (55
    )
    
    
    22
    
    
    
    5Comprehensive loss attributable to common stockholders
    
    $
    (3,266
    )
    
    $
    (3,537
    )
    
    $
    (2,778
    )
    
    $
    (3,611
    )
    
    $
    (3,231
    )
    
    $
    (15,409
    )
    
    $
    (3,986
    )
    
    $
    (5,880
    )Net loss per common share (basic and diluted)
    
    $
    (0.30
    )
    
    $
    (0.30
    )
    
    $
    (0.24
    )
    
    $
    (0.31
    )
    
    $
    (0.28
    )
    
    $
    (1.35
    )
    
    $
    (0.35
    )
    
    $
    (0.43
    )Weighted average shares used in computing basic and diluted
net loss per common share
    
    
    11,398
    
    
    
    11,404
    
    
    
    11,408
    
    
    
    11,410
    
    
    
    11,411
    
    
    
    11,412
    
    
    
    11,497
    
    
    
    13,600
 51




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##### Table of Contents



14. VALUATION AND QUALIFYING ACCOUNTS The following table sets forth activity in the Companys valuation and
qualifying accounts: Balance atbeginning
    
    Charged to
    
    
    
    
    
    Balance atDescription
    
    of period
    
    operations
    
    Deductions
    
    end of periodYear ended December 31, 2001Reserves and allowances deducted from assets accounts:Valuation allowance for deferred tax assets
    
    $
    7,047,000
    
    
    $
    5,005,000
    
    
    $
    
    
    
    $
    12,052,000Allowance for doubtful accounts
    
    
    13,000
    
    
    
    
    
    
    
    
    
    
    
    13,000Accrued warranty
    
    
    48,000
    
    
    
    90,000
    
    
    
    
    
    
    
    138,000Year ended December 31, 2002Reserves and allowances deducted from assets accounts:Valuation allowance for deferred tax assets
    
    $
    12,052,000
    
    
    $
    5,099,000
    
    
    $
    
    
    
    $
    17,151,000Allowance for doubtful accounts
    
    
    13,000
    
    
    
    127,000
    
    
    
    
    
    
    
    140,000Accrued warranty
    
    
    138,000
    
    
    
    188,000
    
    
    
    
    
    
    
    326,000Year ended December 31, 2003Reserves and allowances deducted from assets accounts:Valuation allowance for deferred tax assets
    
    $
    17,151,000
    
    
    $
    5,757,000
    
    
    $
    
    
    
    $
    22,908,000Allowance for doubtful accounts
    
    
    140,000
    
    
    
    87,000
    
    
    
    
    
    
    
    227,000Accrued warranty
    
    
    326,000
    
    
    
    100,000
    
    
    
    
    
    
    
    426,000
 52




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##### Table of Contents



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 on this 23d day of March, 2004, thereunto duly
authorized. EVERGREEN SOLAR, INC.By:
    
    /s/ Richard M. FeldtRichard M. FeldtChief Executive Officer,President and Director
 53




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##### Table of Contents



POWER OF ATTORNEY AND SIGNATURES We, the undersigned officers and directors of Evergreen Solar, Inc., hereby
severally constitute and appoint Richard M. Feldt and Richard G. Chleboski, and
each of them singly, our true and lawful attorneys, with full power to both of
them and each of them singly, to sign for us and in our names in the capacities
indicated below, any amendments to this Annual Report on Form 10-K, and
generally to do all things in our names and on our behalf in such capacities to
enable Evergreen Solar, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all the requirements of the Securities
and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Name
    
    Title
    
    Date/s/ Richard M. Feldt

Richard M. Feldt
    
    Chief Executive Officer,
President and Director
(Principal Executive Officer)
    
    March 23, 2004/s/ Mark A. Farber

Mark A. Farber
    
    Vice President,
Director
    
    March 23, 2004/s/ Brown F. Williams

Brown F. Williams
    
    Chairman of the Board of Directors
    
    March 23, 2004/s/ Luc Charron

Luc Charron
    
    Director
    
    March 23, 2004/s/ Philip J. Deutch

Philip J. Deutch
    
    Director
    
    March 23, 2004/s/ Charles J. McDermott

Charles J. McDermott
    
    Director
    
    March 23, 2004/s/ Robert W. Shaw, Jr.

Robert W. Shaw, Jr.
    
    Director
    
    March 23, 2004/s/ William P. Sommers

William P. Sommers
    
    Director
    
    March 23, 2004/s/ Timothy Woodward

Timothy Woodward
    
    Director
    
    March 23, 2004
 54