##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004
 OR [   ] 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 NUMBER)
 138 Bartlett Street
Marlboro, Massachusetts 01752(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (508) 357-2221(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE) 259 Cedar Hill Street
Marlboro, Massachusetts 01752(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [   ] No [X] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: As of October 29, 2004 there
were 47,532,582 shares of common stock outstanding.




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EVERGREEN SOLAR, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
    
    
    3ITEM 1. FINANCIAL STATEMENTS
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    11ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    31ITEM 4. CONTROLS AND PROCEDURES
    
    
    31PART II. OTHER INFORMATION
    
    
    32ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    32ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    32ITEM 5. OTHER INFORMATION
    
    
    33ITEM 6. EXHIBITS
    
    
    33SIGNATURES
    
    
    34EX-4.1 Warrant to Purchase StockEX-4.2 Registration Rights AgreementEX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO CertificationEX-32.2 Section 906 CFO Certification
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS Evergreen Solar, Inc. 
 Condensed Consolidated Balance Sheets
 (in thousands)
 (unaudited)
 December 31,
    
    September 30,2003
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,620
    
    
    $
    8,514Short-term investments
    
    
    15,720
    
    
    
    8,102Accounts receivable, net of allowance for doubtful accounts of $227
and $78 at December 31, 2003 and September 30, 2004, respectively
    
    
    983
    
    
    
    4,429Interest receivable
    
    
    154
    
    
    
    159Inventory
    
    
    2,019
    
    
    
    3,276Other current assets
    
    
    543
    
    
    
    791Total current assets
    
    
    24,039
    
    
    
    25,271Restricted cash
    
    
    414
    
    
    
    414Fixed assets, net
    
    
    21,523
    
    
    
    24,640Total assets
    
    $
    45,976
    
    
    $
    50,325Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    905
    
    
    $
    1,839Short term borrowings
    
    
    
    
    
    
    1,500Accrued compensation
    
    
    425
    
    
    
    750Accrued warranty
    
    
    426
    
    
    
    589Other accrued expenses
    
    
    244
    
    
    
    439Total current liabilities
    
    
    2,000
    
    
    
    5,117Convertible preferred stockSeries A, $.01 par value, 26,227,668 shares authorized; 22,679,125 and
0 shares issued and outstanding at December 31, 2003 and September 30, 2004, respectively
    
    
    27,032
    
    
    
    Stockholders equity:Common stock, $0.01 par value, 100,000,000 shares authorized;
15,126,268 and 47,532,582 shares issued and outstanding at December 31, 2003
and September 30, 2004, respectively
    
    
    151
    
    
    
    475Additional paid-in capital
    
    
    73,239
    
    
    
    116,684Deferred compensation
    
    
    (89
    )
    
    
    (22
    )Accumulated deficit
    
    
    (56,330
    )
    
    
    (71,902
    )Accumulated other comprehensive deficit
    
    
    (27
    )
    
    
    (27
    )Total stockholders equity
    
    
    16,944
    
    
    
    45,208Total liabilities, convertible preferred stock and stockholders equity
    
    $
    45,976
    
    
    $
    50,325
 The accompanying notes are an integral part of these financial statements. 3




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Evergreen Solar, Inc. 
 Condensed Consolidated Statements of Operations
 (in thousands, except per share data)
 (unaudited)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Revenues:Product revenues
    
    $
    2,642
    
    
    $
    5,604
    
    
    $
    6,368
    
    
    $
    12,975Research revenues
    
    
    463
    
    
    
    369
    
    
    
    1,352
    
    
    
    861Total revenues
    
    
    3,105
    
    
    
    5,973
    
    
    
    7,720
    
    
    
    13,836Operating expenses:Cost of product revenues
    
    
    4,061
    
    
    
    7,230
    
    
    
    10,969
    
    
    
    20,945Research and development expenses, including costs of research revenues
    
    
    1,087
    
    
    
    1,335
    
    
    
    2,872
    
    
    
    3,233Selling, general and administrative expenses
    
    
    1,301
    
    
    
    2,126
    
    
    
    3,821
    
    
    
    5,460Total operating expenses
    
    
    6,449
    
    
    
    10,691
    
    
    
    17,662
    
    
    
    29,638Operating loss
    
    
    (3,344
    )
    
    
    (4,718
    )
    
    
    (9,942
    )
    
    
    (15,802
    )Other income, net
    
    
    83
    
    
    
    111
    
    
    
    157
    
    
    
    230Net loss
    
    
    (3,261
    )
    
    
    (4,607
    )
    
    
    (9,785
    )
    
    
    (15,572
    )Dividends and conversion premiums on Series A convertible preferred stock
    
    
    (747
    )
    
    
    
    
    
    
    (12,802
    )
    
    
    (2,904
    )Net loss attributable to common stockholders
    
    $
    (4,008
    )
    
    $
    (4,607
    )
    
    $
    (22,587
    )
    
    $
    (18,476
    )Net loss per share attributable to common stockholders (basic and diluted)
    
    $
    (0.35
    )
    
    $
    (0.10
    )
    
    $
    (1.97
    )
    
    $
    (0.66
    )Weighted average shares used in computing basic and diluted
net loss per share attributable to common stockholders
    
    
    11,497
    
    
    
    47,523
    
    
    
    11,440
    
    
    
    28,187
 The accompanying notes are an integral part of these financial statements. 4




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Evergreen Solar, Inc. 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (unaudited)
 Nine months endedSeptember 30,2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (9,785
    )
    
    $
    (15,572
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation expense
    
    
    1,544
    
    
    
    2,579Loss on disposal of fixed assets
    
    
    
    
    
    
    1,985Bad debt expense
    
    
    114
    
    
    
    41Amortization of bond premiums
    
    
    216
    
    
    
    280Compensation expense associated with stock options
    
    
    244
    
    
    
    67Changes in
operating assets and liabilities:Inventory
    
    
    249
    
    
    
    (1,257
    )Other current assets
    
    
    401
    
    
    
    (61
    )Interest receivable
    
    
    (238
    )
    
    
    (5
    )Accounts receivable
    
    
    358
    
    
    
    (3,487
    )Accounts payable
    
    
    414
    
    
    
    934Accrued expenses
    
    
    75
    
    
    
    683Net cash used in operating activities
    
    
    (6,408
    )
    
    
    (13,813
    )Cash flows from investing activities:Purchases of fixed assets
    
    
    (5,994
    )
    
    
    (7,681
    )Restricted cash
    
    
    50
    
    
    
    Purchases of investments
    
    

    (22,201
    )
    
    
    (2,418
    )Proceeds from sale and maturity of investments
    
    
    8,700
    
    
    
    9,754Net cash
used in investing activities
    
    
    (19,445
    )
    
    
    (345
    )Cash flows from financing activities:Proceeds from the issuance of Series A convertible preferred stock, net of offering costs
    
    
    28,526
    
    
    
    Proceeds from the issuance of common stock warrant
    
    
    100
    
    
    
    Proceeds from issuance of common stock and warrants, net of offering costs
    
    
    
    
    
    
    18,771Dividend and conversion premium paid on Series A convertible preferred stock
    
    
    
    
    
    
    (2,230
    )Increase in short-term borrowings
    
    
    
    
    
    
    1,500Proceeds from exercise of stock options and shares purchased under Employee Stock Purchase Plan
    
    
    10
    
    
    
    11Net cash flow provided by financing activities
    
    
    28,636
    
    
    
    18,052Net increase in cash and cash equivalents
    
    
    2,783
    
    
    
    3,894Cash and cash equivalents at beginning of period
    
    
    1,194
    
    
    
    4,620Cash and cash equivalents at end of period
    
    $
    3,977
    
    
    $
    8,514Supplemental cash flow information:Non-cash Series A convertible preferred stock dividends earned
    
    
    1,114
    
    
    
    674Non-cash conversion of Series A convertible preferred stock to common stock
    
    
    257
    
    
    
    27,704Issuance of common stock warrant to Silicon Valley Bank
    
    
    
    
    
    
    187
 The accompanying notes are an integral part of these financial statements. 5




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Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation The accompanying condensed consolidated interim financial statements of
Evergreen Solar, Inc. (Evergreen Solar or the Company) are unaudited and
have been prepared on a basis substantially consistent with the Companys
audited financial statements for the year ended December 31, 2003. The
condensed consolidated interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information. Consequently, these statements
do not include all disclosures normally required by generally accepted
accounting principles for annual financial statements. These condensed
consolidated interim financial statements should be read in conjunction with
the Companys audited financial statements for the year ended December 31,
2003, which are contained in the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, which was filed with the Securities and
Exchange Commission on March 23, 2004 and as subsequently amended. The
unaudited condensed consolidated interim financial statements, in the opinion
of management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial position at
September 30, 2004, the results of operations for the three and nine month
periods ended September 30, 2004 and 2003, and the cash flows for the nine
month periods ended September 30, 2004 and 2003. The balance sheet at December
31, 2003 has been derived from audited financial statements as of that date.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for any other interim
period or for the full fiscal year ending December 31, 2004. The Companys preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reported
periods. Estimates are used when accounting for the collectibility of
receivables, valuing deferred tax assets, provisions for warranty claims and
inventory obsolescence. 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. The Company applies the accounting provisions of Accounting Principles Board
(APB) Opinion 25, and related interpretations, as they relate to stock-based
compensation and has elected the disclosure-only alternative permitted under
Statement of Financial Accounting Standards, (SFAS) No. 123, Accounting for
Stock-Based Compensation. The Company has disclosed herein pro forma net loss
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, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure. Had compensation expense for the Companys employee stock option plan been
determined based on the fair value at the grant dates for options granted under
the plan consistent with SFAS No. 123, the Companys net loss would have been
as follows (in thousands, except per share data): Three Month Period Ended
    
    Nine Month Period EndedSeptember 30, 2003
    
    September 30, 2004
    
    September 30, 2003
    
    September 30, 2004Net Loss
    
    Net Loss
    
    Net Loss
    
    Net Loss
    
    Net Loss
    
    Net Loss
    
    Net Loss
    
    Net LossAttributable
    
    Per
    
    Attributable
    
    Per
    
    Attributable
    
    Per
    
    Attributable
    
    PerTo Common
    
    Common
    
    To Common
    
    Common
    
    To Common
    
    Common
    
    To Common
    
    CommonStockholders
    
    Share
    
    Stockholders
    
    Share
    
    Stockholders
    
    Share
    
    Stockholders
    
    ShareNet loss attributable to common stockholders, as reported
    
    $
    (4,008
    )
    
    $
    (0.35
    )
    
    $
    (4,607
    )
    
    $
    (0.10
    )
    
    $
    (22,587
    )
    
    $
    (1.97
    )
    
    $
    (18,476
    )
    
    $
    (0.66
    )Add: Stock-based employee compensation expense included in reported results
    
    
    69
    
    
    
    0.01
    
    
    
    12
    
    
    
    
    
    
    
    244
    
    
    
    0.02
    
    
    
    67
    
    
    
    Deduct: Total stock-based employee compensation expense determined under
the fair-value-based method for all awards
    
    
    (289
    )
    
    
    (0.03
    )
    
    
    (501
    )
    
    
    (0.01
    )
    
    
    (857
    )
    
    
    (0.07
    )
    
    
    (1,783
    )
    
    
    (0.06
    )Pro forma net loss attributable to common stockholders
    
    $
    (4,228
    )
    
    $
    (0.37
    )
    
    $
    (5,096
    )
    
    $
    (0.11
    )
    
    $
    (23,200
    )
    
    $
    (2.02
    )
    
    $
    (20,192
    )
    
    $
    (0.72
    )
 2. Net Loss per Common Share The Company computes net loss per common share in accordance with SFAS No. 128,
Earnings Per Share (SFAS 128), and SEC Staff Accounting Bulletin No. 98
(SAB 98). Under the provisions of SFAS 128 and SAB 98, basic net loss per
common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding during
the period. The calculation of diluted net loss per common share for the three
and nine month periods ended September 30, 2004 and 2003 does not include 6




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10,621,004 and 30,042,944 potential shares of common stock equivalents
outstanding at September 30, 2004 and 2003, respectively, as their inclusion
would be anti-dilutive. 3. Inventory Inventory consisted of the following at December 31, 2003 and September 30,
2004 (in thousands): December 31,
    
    September 30,2003
    
    2004Raw materials
    
    $
    1,318
    
    
    $
    2,278Work-in-process
    
    
    4
    
    
    
    Finished goods
    
    
    697
    
    
    
    998$
    2,019
    
    
    $
    3,276
 4. Fixed Assets Fixed assets consisted of the following at December 31, 2003 and September 30,
2004 (in thousands): Useful
    
    December 31,
    
    September 30,Life
    
    2003
    
    2004Laboratory and manufacturing equipment
    
    3-7 years
    
    $
    13,542
    
    
    $
    17,691Computer and office equipment
    
    3-7 years
    
    
    280
    
    
    
    409Leasehold improvements
    
    Lesser of 15 to 20 years or lease term
    
    
    6,273
    
    
    
    7,341Assets under construction
    
    
    
    
    
    
    6,812
    
    
    
    4,74126,907
    
    
    
    30,182Less: accumulated depreciation
    
    
    
    
    
    
    (5,384
    )
    
    
    (5,542
    )$
    21,523
    
    
    $
    24,640
 During the second quarter of 2004 and as a result of the Companys successful
closing of the Common Stock Private Placement consummated on June 21, 2004, the
Company disposed of several pieces of manufacturing equipment in order to
replace them with more technologically advanced equipment expected to increase
total manufacturing capacity in its Marlboro facility to a target level of 15
megawatts. Equipment with a gross value of $3.7 million was
disposed of during the second quarter, for no proceeds, and the Company
realized a loss on disposal of $2.0 million. The loss on disposal of fixed
assets is included in cost of product revenues. In addition to the equipment
disposals, the Company had accelerated the rate of depreciation of some of its
other equipment in the second quarter of 2004 that was disposed at the end of
the third quarter 2004, resulting in incremental depreciation expense of
approximately $133,000 for the three month period ended June 30, 2004, and
$400,000 for the three month period ended September 30, 2004, which is also
included in cost of product revenues. 5. Guarantor Arrangements The following is a summary of the Companys agreements that are within the
scope of FASB Interpretation No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45). 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, the
Company uses historical industry solar panel failure rates as the basis for the
accrued warranty costs during the period. 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 these estimates, accrued warranty costs
would be adjusted in the period that such events or costs become known. Since
the Company has a limited operating history and its manufacturing process
differs from industry standards, its 7




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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: 2003
    
    2004Balance at January 1
    
    $
    326,000
    
    
    $
    426,000Accruals for warranties issued during the period
    
    

    84,000
    
    
    
    163,000Balance at September 30
    
    $
    410,000
    
    
    $
    589,000
 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.
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 under certain circumstances may be unlimited. However, the Company
has never incurred costs to defend lawsuits or settle claims related to these
indemnification agreements. The Company believes the estimated fair value of
agreements with parties is minimal as well. The Company agreed to indemnify, defend and hold harmless each of the
purchasers participating in the Companys Series A Private Placement, 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. The Company agreed to indemnify, defend and hold harmless each of the
purchasers participating in the Companys Common Stock Private Placement, 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. 6. Deferred Compensation Prior to December 31, 2000, the Company recorded total cumulative deferred
compensation of approximately $1.3 million, representing the difference between
the fair market value of the Companys common stock and the exercise price on
the option 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 $207,000 and $67,000 for the nine months ended
September 30, 2003 and 2004, respectively. 7. Segment Information The Company operates as one operating segment. The following table summarizes
the Companys concentration of total revenue: 8




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Nine months endedSeptember 30,2003
    
    2004By geography:U.S. distributors
    
    
    22
    %
    
    
    26
    %U.S. Government (research revenue)
    
    
    18
    %
    
    
    6
    %Germany
    
    
    56
    %
    
    
    66
    %All other
    
    
    4
    %
    
    
    2
    %100
    %
    
    
    100
    %By customer:European distributor #1
    
    
    40
    %
    
    
    43
    %European distributor #2
    
    
    10
    %
    
    
    21
    %National Renewable Energy Laboratory (research revenue)
    
    
    9
    %
    
    
    6
    %All other
    
    
    41
    %
    
    
    30
    %100
    %
    
    
    100
    %
 8. Stockholders Equity At September 30, 2004, 7,650,000 shares of common stock were authorized for
issuance under the Companys 2000 Stock Option Plan and 4,823,851 shares were
reserved for issuance upon conversion of outstanding warrants issued in the
Series A Private Placement and the Common Stock Private Placement. On May 15, 2003, the Company consummated a private placement transaction 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
offering costs of approximately $849,000, were approximately $28.6 million. In order to satisfy the Companys existing capital requirements and to fund the
continuing capacity expansion of its Marlboro, Massachusetts manufacturing
facilities, on June 21, 2004, the Company consummated a $18.8 million private
placement financing transaction, net of offering costs of approximately $1.2
million, whereby the Company issued 7,662,835 shares of its common stock, and
warrants to purchase up to 2,298,851 shares of its common stock, to certain
institutional investors pursuant to a stock and warrant purchase agreement
dated June 16, 2004, and a warrant agreement dated June 21, 2004 (Common Stock
Private Placement). Additionally, in connection with the Common Stock Private
Placement, the Company issued a warrant to purchase 125,000 shares of common
stock to CRT Capital Group LLC, as compensation for CRT Capital Groups
services as the placement agent for the Common Stock Private Placement. The
terms of the placement agent warrant is identical to the terms of the warrants
issued to the investors participating in the Common Stock Private Placement.
The shares of common stock were sold at a per share price of $2.61, which
represented a 10% discount to the $2.90 closing price of shares of the
Companys common stock on the Nasdaq National Market as of the close of
business on June 15, 2004. The warrants entitle the holders to shares of the
Companys common stock at an exercise price of $3.34. The warrants are
exercisable at any time on or after December 22, 2004 and prior to June 22,
2009. The warrants provide that they may only be exercised with respect to
350,000 shares of common stock in the aggregate prior to approval of the
exercisability of the remaining warrants by stockholders of the Company. On April 21, 2004, the Companys Board of Directors approved a resolution
increasing the number of authorized shares of common stock from 70,000,000 to
100,000,000 and correspondingly increasing the total number of authorized
shares of capital stock from 96,227,668 to 127,227,668. The Companys shareholder meeting was subsequently held on August 20, 2004. At
this meeting, the shareholders approved a resolution increasing the number of
authorized shares of common stock from 70,000,000 to 100,000,000 and
correspondingly increasing the total number of authorized shares of capital
stock from 96,227,668 to 127,227,668. The Company used the proceeds of the Series A Private Placement and intends to
use the proceeds of the Common Stock Private Placement to execute its business
plan and for further capital expenditures required over the next six months to
increase the capacity at the Companys manufacturing facility to its target
level of 15 megawatts for both manufacturing lines, an increase from its
previous target of 10 to 14 megawatts, as well as for operating expenditures.
In addition to the capacity expansion, the Company intends to use a portion of
the proceeds to increase research and development spending on promising next
generation technologies and to explore opportunities for further expansion. 9




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Dividend Rights of Series A Convertible Preferred Stock On June 21, 2004, holders of all outstanding shares of Series A convertible
preferred stock agreed to convert all of their shares of Series A convertible
preferred stock into shares of our common stock in connection with the Common
Stock Private Placement. During the first quarter of 2004, the Series A
preferred stock earned a dividend of approximately $0.7 million, which the
Company elected to add to the liquidation preference of the Series A
convertible preferred stock. As an inducement to convert their shares into common stock in connection with
the Common Stock Private Placement consummated on June 21, 2004, the remaining
Series A preferred shareholders received the dividend earned for the period
between April 1, 2004 and June 21, 2004 in cash, which totaled approximately
$0.5 million. In addition, the Series A preferred shareholders received a cash
conversion premium of 7% of the accreted value of Series A Preferred Stock as
of March 31, 2004, which totaled $1.7 million. Therefore, the total dividend
charged recorded by the Company for the nine month period ended September 30,
2004 was approximately $2.9 million. 9. Short-term Borrowings On August 26, 2004, the Company entered into a one-year revolving credit
facility in the amount of $5.0 million with Silicon Valley Bank pursuant to a
Loan and Security Agreement dated August 26, 2004 (the Loan Agreement). The
credit facility is collateralized by a first-priority security interest granted
to Silicon Valley Bank by the Company in substantially all of the Companys
assets. Borrowings under the Loan Agreement bear interest at a rate per annum equal to
the sum of 2% and the Prime Rate, which is defined in the Loan Agreement as
the greater of 4.00% or the rate announced from time to time by Silicon Valley
Bank as its Prime Rate. Interest is payable on a monthly basis with the
principal payable upon the maturity date of the credit facility, the maturity
date being 364 days from the date of the Loan Agreement. However, upon the
occurrence and during the continuance of any event of default set forth in the
Loan Agreement, Silicon Valley Bank may accelerate and declare all or any
portion of the Companys obligations to Silicon Valley Bank due and payable.
The repayment obligations of the Company are guaranteed by the Companys wholly
owned subsidiary, Evergreen Solar Securities Corp. Additionally, the Company
issued a warrant to purchase 89,955 shares of common stock to Silicon Valley
Bank, as compensation for establishing the revolving credit facility. The
warrant entitles Silicon Valley Bank to shares of the Companys common stock at
an exercise price of $3.34. The warrants are exercisable at any time on or
prior to August 25, 2009. The fair value of the warrant (approximately
$187,000) has been recorded as a deferred financing charge, along with $100,000
of other direct expenses associated with the revolving credit facility, and
will be charged to interest expense ratably over the term of the facility,
which is twelve months. The Loan Agreement contains certain financial and other covenants that restrict
the Companys ability to, among other things, dispose of property, incur
indebtedness, make certain acquisitions, merge into another entity, declare or
pay dividends above an aggregate threshold of $500,000 and redeem, retire,
repurchase or otherwise acquire shares of capital stock of the Company in
excess of $500,000 in the aggregate. In addition, the Company must comply with
certain financial thresholds including minimum tangible net worth and minimum
cash or excess availability. As of September 30, 2004, the Company has drawn $1.5 million under the
revolving line of credit. 10. Other Comprehensive Income Other comprehensive income (loss) consists of unrealized gains and losses on
marketable securities. For the three months ended September 30, 2003 and 2004,
the Company recorded other comprehensive income of $22,000, and $18,000 which,
when added to net loss, results in comprehensive losses of $3.2 million and
$4.6 million, respectively. For the nine months ended September 30, 2003 and
2004, the Company recorded other comprehensive losses of $39,000 and $0,
respectively, which, when added to net loss, results in comprehensive losses of
$9.8 million and $15.8 million, respectively. 11. Foreign Currency Hedging Transactions The Company enters into foreign currency forward contracts to hedge against
potential losses relating to fluctuations in its receivables denominated in
Euros. As of September 30, 2004, the Company had forward currency contracts
with a notional amount of approximately $2.8 million. The Company recognized
gains of approximately $41,000 10




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and $49,000 for the three and nine month periods
ended September 30, 2004, respectively in connection with the marking to market
of its forward contracts. 12. Recent Accounting Pronouncements In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on
Issue 03-6, Participating Securities and the Two-Class Method under Financial
Accounting Standards Board (FASB) Statement No. 128, Earnings per Share.
This issue involves the computation of earnings per share for companies that
have multiple classes of common stock or have issued securities other than
common stock that participate in dividends with common stock (participating
securities). The EITF concluded that companies having participating securities
are required to apply the two-class method to compute earnings per share. The
two-class method is an earnings allocation method under which earnings per
share is calculated for each class of common stock and participating security
considering both dividends declared (or accumulated) and participation rights
in undistributed earnings as if all such earnings had been distributed during
the period. This issue is effective for fiscal periods beginning after March
31, 2004. The Company has incurred losses for the three and nine month periods
ended September 30, 2004 and 2003 and as its Series A preferred shares
outstanding did not have a contractual obligation to share in the losses of the
Company, EITF 03-6 has no effect on its reported earnings per share. 13. Subsequent Event On October 21, 2004, the Company filed a registration statement on Form S-3
with the U.S. Securities and Exchange Commission. After the registration
statement is declared effective by the SEC, the Company will be able to offer
and sell up to an aggregate of $75 million of its common stock, preferred
stock, depositary shares, warrants and debt securities from time to time in one
or more public offerings. The terms of any such future offerings will be
established at the time of such offerings. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CAUTION CONCERNING FORWARD-LOOKING STATEMENTS We caution readers that statements in this Quarterly Report on Form 10-Q 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 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 below
under the heading RISK FACTORS and elsewhere in this Quarterly 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 Quarterly Report, which speak only as of the date of this Quarterly
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. 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. During the 11




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first nine
months of 2004, our product sales were constrained by our manufacturing
capacity despite the fact that by September 2004, we had
approximately tripled our
manufacturing capacity over 2003. By quarter end, we had increased our plants
annual capacity to approximately 10 megawatts and all single ribbon and Gemini
I furnaces have been converted to Gemini II (representing our most
cost-effective, dual-ribbon furnace technology)  about six weeks ahead of
schedule. Since product revenue has been capacity limited, the planned
expansion should enable additional revenue growth during the remainder of 2004,
and the increased production volumes should also improve our product gross
margins. We have already begun to realize revenue growth resulting from the
expansion that has been completed thus far. Specifically, our product revenues
for the nine months ended September 30, 2004 represent a 104% increase over our
product revenues from the same period of the previous fiscal year. In addition,
our recent common stock and warrant financing consummated on June 21, 2004 (the
Common Stock Private Placement) provided us with the capital to further
expand the Marlboro manufacturing facility to a target of 15 megawatts, an
increase from the previously reported target of 10-14 megawatts. In addition
to the Common Stock Private Placement, on August 27, 2004 we secured a $5.0
million working capital line of credit facility with Silicon Valley Bank. The
facility will be used to further support our ongoing expansion plans and our
strategy to be a leader in the global solar energy industry. A portion of the
proceeds from the Common Stock Private Placement will also be used to increase
research and development spending on promising next generation technologies and
to explore further expansion opportunities. Implementing our Gemini II technology, increasing production volume, adding key
positions to staff across the organization, expanding and establishing key
customer relationships, and consummating the Common Stock Private Placement and
working capital line of credit facility were the key factors in determining our
performance. We continue to demonstrate our Gemini II technology on an
increasing production basis, which we expect to substantially lower
our manufacturing cost of growing silicon wafers and roughly double
the capacity of a single string ribbon furnace. We added several key staff in sales,
administration, manufacturing and research and development to better position
ourselves for the anticipated continued growth of the company. Most notably,
we hired Richard M. Feldt as our new President and CEO in December 2003. Financing Transactions In order to satisfy our existing capital requirements and to fund the
continuing capacity expansion of our Marlboro, Massachusetts manufacturing
facilities, on June 21, 2004, we consummated a $18.8 million private placement
financing transaction, net of offering costs of approximately $1.2 million,
whereby we issued 7,662,835 shares of our common stock, and warrants to
purchase up to 2,298,851 shares of our common stock, to certain institutional
investors pursuant to a stock and warrant purchase agreement dated June 16,
2004, and a warrant agreement dated June 21, 2004. Additionally, in connection
with the Common Stock Private Placement, we issued a warrant to purchase
125,000 shares of common stock to CRT Capital Group LLC, as compensation for
CRT Capital Groups services as the placement agent for the Common Stock
Private Placement. The terms of the placement agent warrant is identical to the
terms of the warrants issued to the investors participating in the Common Stock
Private Placement. The shares of common stock were sold at a per share price of
$2.61, which represented a 10% discount to the $2.90
closing price of shares of our common stock on the Nasdaq National Market as of
the close of business on June 15, 2004. The warrants entitle the holders to
shares of our common stock at an exercise price of $3.335. The warrants are
exercisable at any time on or after December 22, 2004 and prior to June 22,
2009. The warrants provide that they could only be exercised with respect to
350,000 shares of common stock in the aggregate prior to approval of the
exercisability of the remaining warrants by our stockholders, which
was approved by our stockholders at our annual meeting of
stockholders on August 20, 2004. On August 26, 2004, we entered into a one-year revolving credit facility in the
amount of $5.0 million with Silicon Valley Bank pursuant to a Loan and Security
Agreement dated August 26, 2004 (the Loan Agreement). The credit facility is
secured by a first-priority security interest granted to Silicon Valley Bank by
the Company in substantially all of our assets. We believe that our current cash, cash equivalents and
short-term investments and revolving credit facility will be sufficient to fund our planned manufacturing capacity expansion to our
target level of 15 megawatts for both lines and to fund our operating
expenditures over the next twelve months. We will need to raise additional
capital in order to further enhance our operating infrastructure and to further
increase capacity through the construction of a second manufacturing facility.
We may also require additional capital to 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. 12




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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. We currently
do not have any post-shipment obligations, including installation, training or
customer acceptance clauses with any of our distributors that could have an
impact on revenue recognition. 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. Other than early payment discounts in the ordinary course of
business, we offer no other sales incentive, discounts or credits, or any other
special arrangements with any of our distributors, that could have an
impact on revenue recognition. 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 over the term of the contract. 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, the effects of favorable changes in market conditions
are not considered in our evaluation of previously established obsolescence
reserves 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 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 13




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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. Derivative Financial Instruments and Hedging Activities We enter into foreign currency forward contracts to hedge against potential
losses relating to fluctuations in our receivables denominated in Euros. As of
September 30, 2004, we had forward currency contracts with a notional amount of
approximately $2.8 million. We recognized gains of approximately $41,000 and
$49,000 for the three and nine month periods ended September 30, 2004,
respectively in connection with the marking to market of our forward contracts. RESULTS OF OPERATION Revenues.Total revenues for the Company consist of revenues from the sale of
products and research revenues. Product revenues consist of revenues from the
sale of solar cells, panels and systems. 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. Our current intention is not to pursue contracts that
are not part of our ongoing research activities. We recognize research revenues
as services are rendered. 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 until we are able to achieve greater manufacturing efficiencies,
higher yields, and production levels near our targeted 15 megawatts,
which we currently anticipate in mid-2005. 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 14




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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 increasing costs associated with being a public
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. Other income.Other income consists of net interest income primarily from
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, interest on any outstanding debt and foreign currency translation gains and losses. 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 to
several purchasers. Outstanding shares of Series A convertible preferred stock
paid 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 would result in an increase in the
number of shares of common stock issuable upon conversion of the Series A
convertible preferred stock. On June 21, 2004, holders of all outstanding
shares of Series A convertible preferred stock agreed to convert all of their
shares of Series A convertible preferred stock into shares of our common stock
in connection with the Common Stock Private Placement. During the first quarter
of 2004, the Series A preferred stock earned a dividend of approximately $0.7
million, which the Company elected to add to the liquidation preference of the
Series A convertible preferred stock. As an inducement to convert their shares into common stock in connection with
the Common Stock Private Placement consummated on June 21, 2004, the remaining
Series A preferred shareholders received the dividend earned for the period
between April 1, 2004 and June 21, 2004 in cash, which totaled approximately
$0.5 million. In addition, the Series A preferred shareholders received a cash
conversion premium of 7% of the accreted value as of March 31, 2004, which
totaled $1.7 million. Therefore, the total dividend charged recorded by the
Company for the nine month period ended September 30, 2004 was approximately
$2.9 million. Net loss attributable to common stockholders.Net loss attributable to common
stockholders consists of net losses and dividends earned by the Series A
convertible preferred stockholders. Other comprehensive income (loss).Our other comprehensive income (loss)
consists of net unrealized gains and losses on marketable securities. Comparison of Three Months Ended September 30, 2004 and 2003 Revenues.Our product revenues for the three months ended September 30, 2004
were $5.6 million, an increase of $3.0 million, or 112%, from $2.6 million for
the same period in 2003. The increase in product revenues was due to the
increased production capacity of our manufacturing facility in Marlboro,
Massachusetts, our increased marketing and sales activities, and favorable
foreign exchange rates. Research revenues for the three months ended September
30, 2004 were $369,000, a decrease of $94,000, or 20%, from $463,000 for the
same period in 2003. Research revenue decreased during the second quarter of
2004 as we had only one active research contract during the period ended
September 30, 2004 versus two active contracts during the same period in 2003. Product revenues represented 94% of total revenues for the three-month period
ended September 30, 2004 and 85% of total revenues for the three-month period
ended September 30, 2003. The share of total revenues represented by product
revenues in the first quarter of 2004 increased from previous quarters due to
an increase in product revenues from expanded production capacity and a
decrease in research revenues. International product sales accounted for
approximately 71% of total revenues for the three-month period ended September
30, 2004, and 67% for the three-month period ended September 30, 2003. We
anticipate that international sales will continue to account for a significant
portion of our product revenues for the foreseeable future. Currently, all
European sales are denominated in Euros, which increases our risk of incurring
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. 15




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The following table summarizes our concentration of total revenue: Three months endedSeptember 30,2003
    
    2004By geography:U.S. distributors
    
    
    17
    %
    
    
    23
    %U.S. Government (research revenue)
    
    
    16
    %
    
    
    6
    %Germany
    
    
    60
    %
    
    
    69
    %All other
    
    
    7
    %
    
    
    2
    %100
    %
    
    
    100
    %By customer:European distributor #1
    
    
    50
    %
    
    
    44
    %European distributor #2
    
    
    7
    %
    
    
    25
    %All other
    
    
    43
    %
    
    
    31
    %100
    %
    
    
    100
    %
 Cost of product revenues.Our cost of product revenues for the three months
ended September 30, 2004 was $7.2 million, an increase of $3.2 million, or 78%,
from $4.1 million for the same period in 2003. Most of the increase was due to
an increase in materials consumption and labor costs due to increased product
sales. Product gross margin for the three months ended September 30, 2004 was
-29% versus -54% for the same period in 2003. Product gross margin improved
due primarily to improvements in yield and efficiency associated with the
scale-up of our second manufacturing line and increased sales volume, offset
slightly by accelerated depreciation associated with taking several pieces of
manufacturing equipment out of service earlier than originally scheduled. We
accelerated the rate of depreciation of some of our equipment in the second
quarter of 2004 that was disposed at the end of the third quarter 2004,
resulting in incremental depreciation expense of approximately $400,000 for the
three month period ended September 30, 2004, which is also included in cost of
product revenues. Due to the relatively large component of fixed costs, product gross margins are
highly dependent on sales volumes. We do not expect substantial improvements
in product gross margin until we realize production increases
associated with the ramp up of our manufacturing lines, the
installation of which are expected to be
completed by the end of 2004. We expect that we will begin to realize
positive gross margins when the Marlboro manufacturing facility
reaches targeted capacity of 15 megawatts by mid-2005. Further improvements in
gross margin will result from increases in manufacturing scale and technology
improvements. For example, during 2004 we demonstrated in research a new wafer
growth process that can grow four ribbons from a single furnace. Although this
technology is still in the early stages of development and we cannot be certain that
it will ever be commercialized, it holds the promise of significant further
cost reductions. Additionally, further capacity expansion beyond 15 megawatts
as well as further process and technology improvements will be required to
achieve overall profitability. Research and development expenses, including cost of research revenues.Our
research and development expenses, including cost of research revenues, for the
three months ended September 30, 2004 were $1.3 million, an increase of
$248,000, or 23%, from $1.1 million for the same period in 2003. The increase
was due mainly to increased labor and consulting costs associated with internal
initiatives aimed to improve our manufacturing technology and
activities associated with the planning for the next manufacturing
capacity expansion. Selling, general and administrative expenses.Our selling, general and
administrative expenses for the three months ended September 30, 2004 were $2.1
million, an increase of $825,000, or 63%, from $1.3 million for the same period
in 2003. The increase was primarily due to increased legal and accounting
costs, compensation costs associated with added personnel and increased costs
associated with sales and marketing initiatives. As a result of the shorter
timelines imposed upon us for complying with various aspects of the
Sarbanes-Oxley Act, most notably Section 404 regarding reporting on internal controls, we expect that activities
undertaken in response to the Act in this shorter timeline will substantially
increase our administrative costs for the foreseeable future. Stock-based compensation expense, related to the issuance of stock options to
employees. The amortization of total cumulative deferred compensation of
approximately $1.3 million recorded prior to December 31, 2000, representing
the difference between the estimated fair market value of the common stock and
the exercise price of the option at the grant date resulted in charges to
operations of $12,000 and $69,000 for the three month periods ended September
30, 2004 and 2003, respectively. 16




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Other income.Our other income for the three months ended September 30, 2004
was $111,000, a increase of $28,000, or 34%, from $83,000 for the same period
in 2003. The increase in other income was primarily due to larger unrealized
gains on foreign currency translations for the period ended September 30, 2004
as compared to the same period in 2003. Net loss attributable to common stockholders.Net loss attributable to common
stockholders was $4.6 million and $4.0 million for the period ended September
30, 2004 and September 30, 2003, respectively. The increase in net loss
attributable to common stockholders was due to an increase in our overall
operating losses. Comparison of Nine Months Ended September 30, 2004 and 2003 Revenues.Our product revenues for the nine months ended September 30, 2004
were $13.0 million, an increase of $6.6 million, or 104%, from $6.4 million for
the same period in 2003. The increase in product revenues was due to the
increased production volumes at our manufacturing facility in Marlboro,
Massachusetts, our increased marketing and sales activities and favorable
foreign exchange rates. Research revenues for the nine months ended September
30, 2004 were $861,000, a decrease of $491,000, or 36%, from $1.4 million for
the same period in 2003. Research revenue decreased during the nine months
ended September 30, 2004, as a result of our engaging in only one active
research contract during the period as compared to the two active research
contracts we engaged in during the same period in 2003. Product revenues represented 94% of total revenues for the nine-month period
ended September 30, 2004 and 82% of total revenues for the nine-month period
ended September 30, 2003. The share of total revenues represented by product
revenues in the third quarter of 2004 increased from previous quarters due to
an increase in product revenues from expanded production capacity and a
decrease in research revenues. International product sales accounted for
approximately 68% of total revenues for the nine-month period ended September
30, 2004, and 60% for the nine-month period ended September 30, 2003. The
increased share of total revenues represented by international product sales
for the nine-month period ended September 30, 2004 resulted from an expanded
focus on international sales channels. We anticipate that international sales
will continue to account for a significant portion of our product revenues for
the foreseeable future. Currently, all European sales are denominated in Euros,
which increases our risk of incurring 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. The following table summarizes our concentration of total revenue: Nine months endedSeptember 30,2003
    
    2004By geography:U.S. distributors
    
    
    22
    %
    
    
    26
    %U.S. Government (research revenue)
    
    
    18
    %
    
    
    6
    %Germany
    
    
    56
    %
    
    
    66
    %All other
    
    
    4
    %
    
    
    2
    %100
    %
    
    
    100
    %By customer:European distributor #1
    
    
    40
    %
    
    
    43
    %European distributor #2
    
    
    10
    %
    
    
    21
    %National Renewable Energy Laboratory (research revenue)
    
    
    9
    %
    
    
    6
    %All other
    
    
    41
    %
    
    
    30
    %100
    %
    
    
    100
    %
 Cost of product revenues.Our cost of product revenues for the nine months
ended September 30, 2004 was $20.9 million, an increase of $9.9 million, or
91%, from $11.0 million for the same period in 2003. Most of the increase was
due to a loss on disposal of fixed assets which occurred in the second quarter,
and an increase in materials consumption and labor costs due to increased
product sales. Product gross margin for the nine months ended September 30,
2004 was -61% versus -72% for the same period in 2003. Product gross margin
improved due primarily to improvements in yield and efficiency associated with
the scale-up of our second manufacturing line and increased sales volume offset
by losses realized upon disposal of fixed assets. During the second quarter of
2004 and as a result of our successful closing of the Common Stock Private
Placement consummated on June 21, 2004, we disposed of several pieces of
manufacturing equipment in order to replace them with more technologically
advanced equipment expected to increase total manufacturing capacity in its
Marlboro facility to a target level of 15 17




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megawatts. Equipment with a gross
value of $3.7 million was disposed of during the second quarter, for no
proceeds, and we realized a loss on disposal of $2.0 million. The loss on
disposal of fixed assets is included in cost of product revenues. In addition
to the equipment disposals, we accelerated the rate of depreciation of some of
our other equipment in the second quarter of 2004 that was disposed at the end
of the third quarter 2004, resulting in incremental depreciation expense of
approximately $133,000 for the three month period ended June 30, 2004, and
$400,000 for the three month period ended September 30, 2004, which is also
included in cost of product revenues.. Due to the relatively large component of fixed costs, product gross margins are
highly dependent on sales volumes. We do not expect substantial improvements
in product gross margin until we realize production capacity increases
associated with the ramp up of our manufacturing lines, the
installation of which is expected to be
completed by the end of 2004. We expect that we will begin to realize
positive gross margins when the Marlboro manufacturing facility
reaches targeted capacity of 15 megawatts by mid-2005. Further improvements in
gross margin will result from increases in manufacturing scale and technology
improvements. For example, during 2004 we demonstrated in research a new wafer
growth process that can grow four ribbons from a single furnace. Although this
technology is still very much under development and we cannot be certain that
it will ever be commercialized, it holds the promise of significant further
cost reductions. Additionally, further capacity expansion beyond 15 megawatts
as well as further process and technology improvements will be required to
achieve overall profitability. Research and development expenses, including cost of research revenues.Our
research and development expenses, including cost of research revenues, for the
nine months ended September 30, 2004 were $3.2 million, an increase of
$361,000, or 13%, from $2.9 million for the same period in 2003. The increase
was due mainly to increased labor and consulting costs associated with internal
initiatives aimed to improve our manufacturing technology and
activities associated with the planning for our next manufacturing
capacity expansion. Selling, general and administrative expenses.Our selling, general and
administrative expenses for the nine months ended September 30, 2004 were $5.5
million, an increase of $1.6 million or 43%, from $3.8 million for the same
period in 2003. The increase was primarily due to increased legal and
accounting costs, increased compensation costs associated with added personnel
and increased costs associated with sales and marketing initiatives. As a
result of the shorter timelines imposed upon us for complying with various
aspects of the Sarbanes-Oxley Act, most notably Section 404 regarding reporting
on internal controls, we expect that activities undertaken in response to the
Act in this shorter timeline will substantially increase our administrative
costs for the foreseeable future. Stock-based compensation expense, related to the issuance of stock options to
employees. The amortization of total cumulative deferred compensation of
approximately $1.3 million recorded prior to December 31, 2000, representing
the difference between the estimated fair market value of the common stock and
the exercise price of the option at the grant date resulted in charges to
operations of $67,000 and $207,000 for the nine month periods ended September
30, 2004 and 2003, respectively. Other income.Our other income for the nine months ended September 30, 2004
was $230,000, an increase of $73,000, or 47%, from $157,000 for the same period
in 2003. The increase in other income was primarily due to larger unrealized
gains on foreign currency translations for the period ended September 30, 2004
as compared to the same period in 2003. Net loss attributable to common stockholders.Net loss attributable to common
stockholders was $18.5 million and $22.6 million for the nine month period
ended September 30, 2004 and September 30, 2003, respectively. The decrease in
net loss attributable to common stockholders was due to a decrease in the
dividend and other charges associated with the Series A convertible preferred
stock (which was converted to common stock on June 21, 2004) partially offset
by an increase in our overall operating losses. Liquidity and Capital Resources We have historically financed our operations and met our capital expenditure
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
September 30, 2004, we had working capital of $20.2 million, including cash,
cash equivalents and short-term investments of $16.6 million. Net cash used in operating activities was $13.8 million for the nine months
ended September 30, 2004, as compared to $6.4 million for the same period in
2003. The use of cash for operating activities for the nine months ended September 30, 2004 was
due primarily to losses from operations of $15.6 million, increases in raw
material and finished goods inventory of $1.3 million and an increase in
accounts receivable of $3.5 million. The use of cash for
operating activities in the nine month period 18




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ended September 30, 2004 was partially offset by depreciation expense
of $2.6 million, losses on equipment disposals of $2.0 million, an increase in
accounts payable of $934,000 and an increase in accrued expenses of $683,000.
The increases in net loss, inventory, accounts receivable and accounts payable
are all attributable to the overall growth of the business and associated
increases in working capital requirements. We have not experienced any significant trends in accounts receivable other
than changes relative to the increase in revenue. Fluctuations in accounts
receivable from period to period relative to changes in revenue are a result of
timing of customer invoicing and receipt of payments from customers. For both
the second and third quarter 2004, Days Sales Outstanding (DSO) was
approximately 68 days. Net cash used in investing activities was $345,000 for the nine months ended
September 30, 2004, as compared to $19.4 million for the same period in 2003.
For the nine months ended September 30, 2004, 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 and purchases of equipment. Net cash provided by financing activities was $18.1 million for the nine months
ended September 30, 2004, as compared to $28.6 million for the same period in
2003. The cash provided by financing activities during the nine months ended
September 30, 2004 represents net proceeds from common stock issued in
conjunction with the Common Stock Private Placement, offset by dividends and
conversion premiums paid to the Series A convertible preferred shareholders. A
portion of the proceeds from the Common Stock Private Placement will also be
used to increase research and development spending on promising next generation
technologies and to explore further expansion opportunities. In addition to
the Common Stock Private Placement, on August 27, 2004 we secured a $5.0
million working capital line of credit facility with Silicon Valley Bank, of
which $1.5 million was drawn as of September 30, 2004. The facility will be
used to further support our ongoing expansion plans and our strategy to be a
leader in the global solar energy industry. The cash provided by financing
activities during the nine months ended September 30, 2003 represents net
proceeds from the shares of Series A convertible preferred stock and the
warrant issued in conjunction with the Series A convertible preferred stock and
warrant financing consummated on May 15, 2003. Capital expenditures were $7.7 million for the nine months ended September 30,
2004, as compared to $6.0 million for the same period in 2003. Capital
expenditures for the nine months ended September 30, 2004 were primarily for
equipment needed for our manufacturing facility. As of September 30, 2004, our
outstanding commitments for capital expenditures were approximately $2.5
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 facilitys two manufacturing lines became
operational in 2001. We have purchased certain equipment that is planned for
the second manufacturing line. We expect to complete the addition of the second
manufacturing line by the end of 2004. We will continue to 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 as well as
from our common stock and warrant private placement financing which closed on
June 21, 2004. In addition to the current capital commitments, substantial
further capital expenditures will be required over the next six months to
increase the capacity at our manufacturing facility to our target level of 15
megawatts for both lines. We expect improvements to our manufacturing lines
will be completed by mid-2005. We believe that our current cash, cash equivalents and short-term investments
and revolving credit facility will be sufficient to fund our planned manufacturing capacity expansion to our
target level of 15 megawatts for both lines and to fund our operating
expenditures over the next twelve months. We will need to raise additional
capital in order to further enhance our operating infrastructure,
increase our capacity through the build out of a second manufacturing facility and
fund our operating expenditures. We may also require additional capital to 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. We do not have any special purpose entities or off-balance sheet financing
arrangements. As of September 30, 2004, our cash commitments, as disclosed in
Note 11 to our consolidated financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2003, have not significantly
changed. 19




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There have been no material changes since December 31, 2003 to our contractual
obligations reported in Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the year ended December 31, 2003 as filed with the Securities and Exchange
Commission. RISK FACTORS Set forth below and elsewhere in this Quarterly Report on Form 10-Q, and in
other documents we file with the SEC, are risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward-looking statements contained in this Quarterly Report on Form 10-Q.
Because of the following factors, as well as other variables affecting our
operating results, past financial performance should not be considered a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. 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. Although we were formed in 1994 to research and develop
crystalline silicon technology for use in manufacturing solar power products
and began shipping product from our pilot manufacturing facility in 1997, we
first shipped commercial products from our Marlboro manufacturing facility in
September 2001. To date, we have shipped only a limited number of solar power
panels and have recognized limited revenues. Our early stage of development means that we have limited insight into how
market and technology trends may affect our business. The market we are
addressing is rapidly evolving and is experiencing technological advances and
new market entrants. Moreover, our future success will require us to scale our
manufacturing capacity significantly beyond the capacity of our Marlboro,
Massachusetts manufacturing facility, and our business model and technology is
unproven at significant scale. As a result, 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 $15.6 million for the nine months ended September 30, 2004. As a
result of ongoing operating losses, we had a cumulative net loss of $71.9
million as of September 30, 2004. 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 make 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, including:  
    
    the size and timing of customer orders for or shipments
of our products;
    
    the rate and cost at which we are able to expand our
manufacturing capacity to meet product demand, including the rate
and cost at which we are able to implement advances in our
String-Ribbon technology;
    
    our ability to establish and expand key customer and
distributor relationships; 20




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
    
    our ability and the terms upon which we are able to
raise capital sufficient to finance the expansion of our
manufacturing capacity and our sales and marketing efforts;
    
    our ability to establish strategic relationships with
third parties to accelerate our growth plans;
    
    amount and timing of expenses associated with our
research and development programs and our ability to develop
enhancements to our manufacturing processes and our products;
    
    delays associated with the supply of specialized
material necessary for the manufacture of our solar power
products;
    
    our ability to execute our cost reduction programs;
    
    one time charges resulting from replacing existing
equipment or technology with new or improved equipment or
technology as part of our strategy to expand our manufacturing
capacity and to decrease our per unit manufacturing cost;
    
    developments in the competitive environment, including
the introduction of new products or technological advancements by
our competitors; and
    
    the timing of adding the personnel necessary to execute
our growth plan. 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 will need to raise significant additional capital in order to fund our
operations and to continue to grow our business, which subjects us to the risk
that we may be unable to maintain or grow our business as planned and that our
stockholders may be subject to substantial additional dilution. In order to satisfy our existing capital requirements and to fund the
continuing capacity expansion of our Marlboro, Massachusetts manufacturing
facilities, in June 2004 we consummated a $20 million private placement
financing and in August 2004 we secured a $5 million line of credit. We
believe that our current cash, cash equivalents and short-term investments,
together with the proceeds available under our line of credit, will be
sufficient to fund our planned manufacturing capacity expansion to our target
level of 15 megawatts for both production lines, which will be completed by
mid-2005, and to fund our operating expenditures over the next twelve months.
However, we will need to raise additional capital in order to further enhance
our operating infrastructure, to further increase manufacturing capacity
through the build out a second manufacturing facility, and to advance our
research and development programs that are key to refining our products and to
lowering our manufacturing costs. We may also require additional capital to
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, maintain our research and development efforts or
otherwise respond to competitive pressures would be significantly impaired. In
such a case, our stock price would likely be materially and adversely impacted. 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. 21




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The build-out of our manufacturing facility in Marlboro, Massachusetts 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. We are in the process of building-out our second manufacturing line,
which we expect to be completed by the end of 2004. We are also in the process
of implementing improvements to the manufacturing equipment in order to
increase the total capacity of the manufacturing facility to a target level of
15 megawatts, which we expect to be completed by mid-2005. Completing the
build-out of this facility to capacity has required and will continue to
require a significant investment of capital and substantial engineering
expenditures, and is subject to significant risks including:  
    
    we may experience cost overruns, delays, equipment
problems and other start-up and operating difficulties;  
    
    our manufacturing processes uses custom-built equipment
that may not be delivered and installed in our new facility in a
timely manner;  
    
    our custom-built equipment may take longer and cost
more to debug than planned and may never operate as designed; and  
    
    we are incorporating 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. 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, in which case our per unit manufacturing costs would
increase, we would be unable to increase sales as planned and our revenues and
earnings would likely be materially impaired. Our future success substantially depends on our ability to significantly
increase our manufacturing capacity through the development of a second
manufacturing facility. We may be unable to achieve our capacity expansion
goals as a result of a number of risks, which would limit our growth potential,
impair our operating results and financial condition, and cause our stock price
to decline. Our future success depends on our ability to increase our manufacturing
capacity through the development of a second, large-scale manufacturing
facility. If we are unable to do so, we may not be able to achieve the
production volumes and per unit costs that will allow us to meet customer
demand, maintain our competitive position and achieve profitability. Our
ability to develop a second, large-scale manufacturing facility is subject to
significant risk and uncertainty, including:  
    
    we will need to raise significant additional capital
through the issuance of equity or debt securities in order to
finance the costs of development of the facility, which we may be
unable to do on reasonable terms or at all, and which likely
would be dilutive to our existing stockholders;  
    
    the build-out of the facility will be subject to the
risks inherent in the development of a new manufacturing
facility, including risks of delays and cost over-runs as a
result of a number of factors, many of which may be out of our
control, such as delays in government approvals or problems with
supplier relationships;  
    
    our manufacturing processes, particularly those that
incorporate improvements to our advanced String Ribbon
technology, are unproven at large scale and may prove difficult
to implement in such a new facility;  
    
    we may be required to depend on third parties or
strategic partnerships that we establish in the development and
operation of the facility, which may subject us to risks that
such third parties do not fulfill their obligations to us under
our arrangements with them;  
    
    the establishment of such a facility will require
significant management attention, and our management team, which
has limited experience in the development of such facilities, may
be unable to execute the expansion plan effectively; and 22




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
    
    if such a facility is established in an international
markets, we may encounter legal and commercial restrictions and
incur taxes and other expenses to do so and otherwise be subject
to the risks inherent in conducting business in a foreign
jurisdiction as described elsewhere in these Risk Factors. If we are unable to develop and successfully operate a second, large-scale
manufacturing facility, or if we encounter any of the risks described above, we
may be unable to scale our business to the extent necessary to achieve
profitability, which would cause our stock price to decline. Moreover, there
can be no assurance that if we do expand our manufacturing capacity that we
will be able to generate customer demand for our solar power products at these
production levels or that we will increase our revenues or achieve
profitability. Because we depend on a single and sole source suppliers for a number of
specialized materials, including silicon, necessary to manufacture our solar
power products, we are susceptible to supplier and industry-wide supply
shortage and price volatility that could adversely affect our ability to meet
existing and future customer demand for our products and cause us to make fewer
shipments, generate lower than anticipated revenues, and manufacture our
products at higher than expected costs. We have single and sole source suppliers for a number of specialized materials
necessary to manufacture our solar power products which makes us susceptible to
quality issues, shortages, and price changes for these materials.
Specifically, our supplier of the silicon we use in the manufacture of our
solar power products is also a supplier to the semi-conductor industry which
has significantly greater buying power and market influence than we have or
that anyone else in the solar power industry has. As a result, an increase in
the demand for silicon from the semi-conductor industry may lead us to
encounter shortages or delays in obtaining the specialized silicon to be used
in the manufacture of our solar power products which could result in customer
dissatisfaction and decreased revenues. In addition, our silicon supplier has
in the past raised, and may in the future raise, the price at which it sells
silicon to us, which has in the past negatively impacted, and could in the
future, negatively impact, our manufacturing costs. We acquire silicon from our
supplier through purchase orders and we have no long-term commitments regarding
supply or price from this supplier, which leaves us vulnerable to the risk that
our supplier may stop supplying silicon to us for any reason. If this occurs,
our ability to manufacture our solar power products may be limited in any given
period, which would cause our revenues to decline in any such period. 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; 23




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
    
    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 uncompetitive or 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 uncompetitive or
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 a variety of competing solar power
technologies are 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. 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 nine months ended September 30, 2004, we sold our solar power products
to approximately 30 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 September 30, 2004, approximately 68% of our product
sales have been made to resellers outside North America. Sales in Germany
constituted approximately 69% of our total product sales for the nine months
ended September 30, 2004. 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. 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;  
    
    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; 24




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
    
    fluctuations in currency exchange rates relative to the U.S. dollar;  
    
    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. During the remainder of 2004 and for the foreseeable
future, 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 September 30, 2004, our three largest resellers
accounted for approximately 63% of our product sales and our 10 largest
resellers accounted for approximately 83% 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. 25




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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 commitments 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 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, due to
the rapid pace of technological advancements in the solar power industry, 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. 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
90,000 solar panels since 1997, none of these panels has been operating more
than seven years, and over 50% of them have been operating less than two years.
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. Our success in the future may depend on our ability to establish and maintain
strategic alliances, and any failure on our part to establish and maintain such
relationships would adversely affect our market penetration and revenue growth. We may seek to establish strategic relationships with third parties in the
solar power industry as part of our plan to accelerate the expansion of our
manufacturing capacity and our distribution channels, particularly in
international markets. Our ability to establish strategic relationships will
depend on a number of factors, many of which are outside our control, such as
the competitive position of our technology and our products relative to our
competitors. We can provide you with no assurance that we will be able to
establish strategic relationships in the future, and our inability to do so
will materially adversely affect our market penetration, our revenue growth and
our ability to achieve profitability. In addition, if we are successful in establishing strategic alliances, such
alliances may subject us to a number of risks, including risks associated with
sharing proprietary information, loss of control of operations that are
material to our business, and the fact that such alliances may involve profit
sharing arrangements. Moreover, strategic alliances may be expensive to
implement and subject us to the risk that the third party will not perform its
obligations under the relationship, which may subject us to losses over which
we have no control or expensive termination arrangements. As a result, even if
we do establish a strategic alliance with a third party, our business may be
adversely affected by a number of factors that are outside of our control,
which would in turn cause our stock price to decline. 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 230 employees as of September 30, 2004, 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. 26




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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. 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. 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. Our competitors greater size in
some cases provides them with a competitive advantage with respect to
manufacturing costs due to their ability to allocate fixed costs across a
greater volume of production. Many also have greater name recognition, a more
established 27




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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 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;  
    
    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; and  
    
    while our license to patents directed to the String
Ribbon technology has expired, the Company owns three issued US
patents, three pending US patent applications, two foreign
patents, and several foreign patent applications directed to
various aspects of the String Ribbon technology; however, our
historical operating experience with String Ribbon and our
related patented and proprietary manufacturing processes may not
adequately protect our competitive advantage now that the
licensed patents have expired. 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. 28




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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 revenues 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 or result in increased price competition,
which could cause our revenues 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 the markets our products address 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
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 6% for the nine months ended
September 30, 2004. As of September 30, 2004, we had one active research
contract with 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. 29




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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 or suspensions in our business operations. 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. Risks Associated With the Market for Our Common Stock Our officers and directors control approximately 30% of our voting stock and
may be able to significantly influence corporate actions. As of September 30, 2004, our executive officers, directors and entities
affiliated with them controlled approximately 30% 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 issued in the June 2004 private placement financing
and the shares of common stock issued upon conversion of all of the outstanding
shares of Series A convertible preferred stock which were converted in
connection with the consummation of the June 2004 private placement financing
or the perception that these sales could occur. Additionally, we may need to
sell additional shares of common stock, or securities convertible into or
exercisable for common stock, in the future in either private or public
transactions in order to satisfy our financing requirements 30




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and we do not know whether we will be able to sell additional shares of our
common stock or other securities convertible into or exercisable for common
stock on terms favorable to us. 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. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rate Risk We do not use derivative financial instruments as a hedge against interest rate
fluctuations. 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 For the nine months ended September 30, 2004, all of our product sales into
Europe were denominated in Euros, which exposes us to foreign exchange gains or
losses. Product sales into Europe accounted for approximately 66% of total
revenues for the nine months ended September 30, 2004. Since our
Euro-denominated sales represent a significant portion of our total revenue, a
hypothetical 10 percent adverse change in exchange rate would have had a
material effect on our consolidated financial position, reducing revenue by
approximately 7%. 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. We seek to manage our foreign exchange risk through the use of derivative
financial instruments. These financial instruments serve to protect net income
against the impact of the translation into U.S. dollars of foreign exchange
denominated transactions. As of September 30, 2004, the Company had forward
currency contracts with a notional amount of approximately $2.8 million. The
Company seeks to manage its foreign exchange risk through the use of derivative
financial instruments. These financial instruments serve to protect net income
against the impact of the translation into U.S. dollars of foreign exchange
denominated transactions. We recognized gains of approximately $41,000 and
$49,000 for the three and nine month periods ended September 30, 2004,
respectively in connection with the marking to market of its forward contracts. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act of 1934 Rules 13a-15(e) and 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 are 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 (i) is recorded,
processed, summarized and reported as and when required and (ii) is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. 31




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Internal Control Over Financial Reporting During the period covered by this report, there have been no significant
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. Limitations Inherent in all Controls. The Companys management, including the Chief Executive Officer and Chief
Financial Officer, recognize that our disclosure controls and our internal
controls (discussed above) cannot prevent all errors or all attempts at fraud.
Any controls system, no matter how well crafted and operated, can only provide
reasonable, and not absolute, assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitations in any control system, no evaluation or
implementation of a control system can provide complete assurance that all
control issues and all possible instances of fraud have been or will be
detected. 
 PART II. OTHER INFORMATION 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On August 26, 2004, the Company issued a warrant to purchase 89,955 shares of
the Companys common stock to Silicon Valley Bank as compensation for
establishing the revolving credit facility. Silicon Valley Bank is an accredited
investor as defined the Securities Act of 1933, as amended (the Act). The
warrant was issued pursuant to Regulation D under the Act and has not been
registered with the Securities and Exchange Commission. The
warrant entitles Silicon Valley Bank to purchase shares of the Companys common
stock at an exercise price of $3.34 per share. Upon issuance, such shares will be deemed
to be fully paid and non-assessable. The warrant is exercisable in whole or in
part at any time on or prior to August 25, 2009. Until such time as the warrant
is exercised in full or expires, the purchase price per share and the number of
shares to be issued upon exercise are subject to adjustment from time to time
as set forth in the Warrant to Purchase Stock, dated August 26, 2004. Silicon
Valley Bank also holds certain registration rights with respect to the warrant
as set forth in a Registration Rights Agreement dated August 26, 2004. In accordance with the terms of the warrant, and for regulatory reasons and not
with a view to sale or distribution in violation of applicable federal and
state securities laws, this warrant was subsequently transferred from Silicon
Valley Bank to Silicon Valley Bancshares, an affiliate of Silicon Valley Bank.
Proceeds received by the Company upon the exercise of the warrant, if any, will
be used for general and working capital purposes. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our Annual Meeting of Stockholders was held on August 20, 2004 in Marlboro,
Massachusetts. The following three proposals were adopted: Proposal One: Election of three Class I directors to hold office until the 2007 Annual
Meeting of Stockholders, or until their respective successors are duly elected
and qualified: Number of SharesNominees
    
    For
    
    WithheldDr. William P. Sommers
    
    
    38,135,618
    
    
    
    173,731Luc Charron
    
    
    38,143,968
    
    
    
    165,381Richard M. Feldt
    
    
    38,141,343
    
    
    
    168,106
 In addition, the following individuals continued to be directors following the
Annual Meeting of Stockholders: Mark A. Farber, Philip J. Deutch, Timothy
Woodward, Dr. Robert W. Shaw, Jr., Charles J. McDermott and Dr. Brown F.
Williams. 32




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Proposal Two: Approval of the exercisability of warrants to purchase up to 2,423,851 shares
of our common stock and the issuance of a corresponding number of shares of our
common stock upon the exercise of such warrants, which warrants were issued
pursuant to a private placement financing transaction consummated on June 21,
2004: Number of SharesFor
    
    Against
    
    Abstain
    
    Broker Non-Votes31,313,442
    
    
    
    210,185
    
    
    
    68,277
    
    
    
    6,717,445
 Proposal Three: Amendment of Article Fourth of our Third Amended and Restated Certificate of
Incorporation to increase the total number of authorized shares of our common
stock from 70,000,000 to 100,000,000, and to increase the total number of
authorized shares of our capital stock from 97,227,668 to 127,227,668: Number of SharesFor
    
    Against
    
    Abstain
    
    Broker Non-Votes37,819,646
    
    
    
    353,445
    
    
    
    136,258
    
    
    
    0
 
 ITEM 5. OTHER INFORMATION On October 5, 2004, Mark A. Farber, a member of the Board of Directors (the
Board) of Evergreen Solar, Inc. (the Company) who also serves as the
Companys Vice President, Strategic Planning, resigned from the Board. Mr.
Farber is continuing, however, in his capacity as the Companys Vice President,
Strategic Planning. 
 ITEM 6. EXHIBITS (a) Exhibits: Number
    
    Description3.1(1)
    
    Third Amended and Restated Certificate of Incorporation. (Exhibit 3.2)3.2(1)
    
    Second Amended and Restated By-laws. (Exhibit 3.4)3.3(2)
    
    Certificate of Amendment of Third Amended and Restated Certificate of
Incorporation filed with the Secretary of State of the State of Delaware
on May 15, 2003. (Exhibit 4.3)3.4(2)
    
    Certificate of the Powers, Designations, Preferences and Rights of the
Series A Convertible Preferred Stock of the Registrant. (Exhibit 4.4)3.5(3)
    
    Certificate of Amendment of Third Amended and Restated Certificate of
Incorporation filed with the Secretary of State of the State of Delaware
on August 20, 2004. (Exhibit 4.5)4.1
    
    Warrant to Purchase Stock issued to Silicon Valley Bank on August 26, 2004.4.2
    
    Registration Rights Agreement dated as of August 26, 2004.31.1
    
    Certification of the Chief Executive Officer 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-
 33




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##### Table of Contents



Number
    
    DescriptionOxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer 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 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
  (1)
    
    Incorporated by reference to the exhibits to the Registrant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 by reference to the exhibits to the Registrants
Registration Statement on Form S-8 dated June 9, 2003, as amended (file
No. 333-105963). The number given in parenthesis indicates the
corresponding exhibit number in such Form S-8.(3)
    
    Incorporated by reference to the exhibits to the Registrants Registration
Statement on Form S-3 filed on October 21, 2004 (file No. 333-119864). The
number given in parenthesis indicates the corresponding exhibit number in such
Form S-3. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. EVERGREEN SOLAR, INC.Date:
November 12, 2004/s/ Richard G. ChleboskiRichard G. ChleboskiChief Financial Officer, Vice President, Treasurer and Secretary(Principal Financial Officer)
 34