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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 quarter ended March 31, 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 April 16, 2004 there
were 16,086,604 shares of common stock outstanding.




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EVERGREEN SOLAR, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004 TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTSUnaudited Condensed Consolidated Balance Sheets at December 31, 2003 and March 31, 2004
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    9ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    24ITEM 4: CONTROLS AND PROCEDURES
    
    
    24PART II  OTHER INFORMATIONITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
    
    
    25SIGNATURESEXHIBIT INDEXEx-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, except share data)
 March 31,December 31,
    
    20042003
    
    (unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,620
    
    
    $
    2,440Short-term investments
    
    
    15,720
    
    
    
    12,303Accounts receivable, net of allowance for doubtful accounts of $227
and $211 at December 31, 2003 and March 31, 2004, respectively
    
    
    983
    
    
    
    2,029Interest receivable
    
    
    154
    
    
    
    195Inventory
    
    
    2,019
    
    
    
    1,974Other current assets
    
    
    543
    
    
    
    561Total current assets
    
    
    24,039
    
    
    
    19,502Restricted cash
    
    
    414
    
    
    
    414Fixed assets, net
    
    
    21,523
    
    
    
    23,313Total assets
    
    $
    45,976
    
    
    $
    43,229Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    905
    
    
    $
    1,886Accrued compensation
    
    
    425
    
    
    
    536Accrued warranty
    
    
    426
    
    
    
    462Other accrued expenses
    
    
    244
    
    
    
    264Total current liabilities
    
    
    2,000
    
    
    
    3,148Convertible preferred stockSeries A, $.01 par value, 26,227,668 shares authorized, 22,679,125 and
21,786,269 issued and outstanding at December 31, 2003 and March 31, 2004, respectively
    
    
    27,032
    
    
    
    26,613Stockholders equity:Common stock, $0.01 par value, 70,000,000 shares authorized,
15,126,268 and 16,086,604 issued and outstanding at December 31, 2003
and March 31, 2004, respectively
    
    
    151
    
    
    
    161Additional paid-in capital
    
    
    73,239
    
    
    
    73,649Deferred compensation
    
    
    (89
    )
    
    
    (58
    )Accumulated deficit
    
    
    (56,330
    )
    
    
    (60,293
    )Accumulated other comprehensive (deficit) income
    
    
    (27
    )
    
    
    9Total stockholders equity
    
    
    16,944
    
    
    
    13,468Total liabilities, convertible preferred stock and stockholders equity
    
    $
    45,976
    
    
    $
    43,229
 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 endedMarch 31,2003
    
    2004Revenues:Product revenues
    
    $
    1,067
    
    
    $
    2,830Research revenues
    
    
    381
    
    
    
    262Total revenues
    
    
    1,448
    
    
    
    3,092Operating expenses:Cost of product revenues
    
    
    2,666
    
    
    
    4,553Research and development expenses, including costs of research revenues
    
    
    713
    
    
    
    902Selling, general and administrative expenses
    
    
    1,317
    
    
    
    1,673Total operating expenses
    
    
    4,696
    
    
    
    7,128Operating loss
    
    
    (3,248
    )
    
    
    (4,036
    )Other income
    
    
    23
    
    
    
    73Net loss
    
    
    (3,225
    )
    
    
    (3,963
    )Dividends on Series A convertible preferred stock
    
    
    
    
    
    
    (665
    )Net loss attributable to common stockholders
    
    $
    (3,225
    )
    
    $
    (4,628
    )Net loss per share attributable to common stockholders (basic and diluted)
    
    $
    (0.28
    )
    
    $
    (0.30
    )Weighted average shares used in computing basic and diluted
net loss per share attributable to common stockholders
    
    
    11,411
    
    
    
    15,489
 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)
 Three months endedMarch 31,2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (3,225
    )
    
    $
    (3,963
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation expense
    
    
    514
    
    
    
    607Bad debt expense
    
    
    90
    
    
    
    (16
    )Amortization of bond premiums
    
    
    26
    
    
    
    120Compensation expense associated with employee stock options
    
    
    69
    
    
    
    31Changes in operating assets and liabilites:Inventory
    
    
    (723
    )
    
    
    45Other current assets
    
    
    208
    
    
    
    (18
    )Interest receivable
    
    
    19
    
    
    
    (41
    )Accounts receivable
    
    
    1,258
    
    
    
    (1,030
    )Accounts payable
    
    
    (262
    )
    
    
    981Accrued expenses
    
    
    (85
    )
    
    
    167Net cash used in operating activities
    
    
    (2,111
    )
    
    
    (3,117
    )Cash flows from investing activities:Purchases of fixed assets
    
    
    (538
    )
    
    
    (2,397
    )Restricted cash
    
    
    50
    
    
    
    Purchases of investments
    
    
    
    
    
    
    (1,000
    )Proceeds from sale and maturity of investments
    
    
    4,949
    
    
    
    4,333Net cash provided by investing activites
    
    
    4,461
    
    
    
    936Cash flows from financing activities:Financing costs on issuance of Series A convertible preferred stock
    
    
    (264
    )
    
    
    Proceeds from exercise of stock options and
shares purchased under Employee Stock Purchase Plan
    
    
    1
    
    
    
    1Net cash flow provided by (used in) financing activities
    
    
    (263
    )
    
    
    1Net increase (decrease) in cash and cash equivalents
    
    
    2,087
    
    
    
    (2,180
    )Cash and cash equivalents at beginning of period
    
    
    1,194
    
    
    
    4,620Cash and cash equivalents at end of period
    
    $
    3,281
    
    
    $
    2,440Supplemental cash flow information:Taxes paid
    
    
    1
    
    
    
    1Non-cash Series A convertible preferred stock dividends earned
    
    
    
    
    
    
    665Non-cash conversion of Series A convertible preferred stock to common
    
    
    
    
    
    
    1,084
 The accompanying notes are an integral part of these financial statements. 5




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EVERGREEN SOLAR, INC. 
 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. 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 March 31, 2004, the results of
operations for the three month periods ended March 31, 2004 and 2003, and the
cash flows for the three month periods ended March 31, 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 applies the accounting provisions of Accounting Principles Board
(APB) Opinion 25 and related interpretations and has elected the
disclosure-only alternative permitted under Statement of Financial Accounting
Standards Board (SFAS) No. 123, Accounting for Stock-Based Compensation.
The Company has disclosed herein pro forma net 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. Had compensation expense for the employee stock option plan been determined
based on the fair value at the grant dates for options granted under the plan
consistent with the method of SFAS No. 123, the Companys net loss would have
been as follows (in thousands, except per share data): Period Ended
    
    Period EndedMarch 31, 2003
    
    March 31, 2004Net Loss
    
    Net Loss
    
    Net Loss
    
    Net LossAttributable
    
    Per
    
    Attributable
    
    PerTo Common
    
    Common
    
    To Common
    
    CommonStockholders
    
    Share
    
    Stockholders
    
    ShareNet loss attributable to common stockholders, as reported
    
    $
    (3,225
    )
    
    $
    (0.28
    )
    
    $
    (4,628
    )
    
    $
    (0.30
    )Add: Stock-based employee compensation expense included in reported results
    
    
    69
    
    
    
    0.01
    
    
    
    31
    
    
    
    Deduct: Total stock-based employee compensation expense determined under
the fair-value-based method for all awards
    
    
    (287
    )
    
    
    (0.03
    )
    
    
    (645
    )
    
    
    (0.04
    )Pro forma net loss attributable to common stockholders
    
    $
    (3,443
    )
    
    $
    (0.30
    )
    
    $
    (5,242
    )
    
    $
    (0.34
    )
 The Company has historically financed operations and met capital expenditures
requirements primarily through sales of capital stock and, to a lesser extent,
research and product revenues. 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 financing expenses of
approximately $849,000, were approximately $28.6 million. The Company expects
to use the net proceeds from this transaction to fund the construction of the
second manufacturing line and other operations of the Company. The Company needs additional financing to execute its business plan and to
respond to business contingencies such as the need to enhance its operating
infrastructure, respond to competitive pressures and acquire complementary
businesses or necessary technologies. For example, in addition to capital
commitments as of March 31, 2004, substantial further capital expenditures will
be required over the next eight to ten months to increase the capacity at the
Companys manufacturing facility to its target level of 10 to 14 megawatts for
both manufacturing lines. The Company does not know whether it will be able to
raise additional financing on favorable financing terms. If 6




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adequate funds are not available or are not available on acceptable terms, the
Companys ability to fund its operations, develop and expand its manufacturing
operations and distribution network, or otherwise respond to competitive
pressures would be significantly limited. In such a situation, the Company
would need to implement fundamental changes to its business and operations
which would likely include substantially reducing, suspending, or terminating
the Companys capacity expansion and substantially reducing daily operating
expenditures from current levels, in which case the Company believes its cash,
cash equivalents and short-term investments will then be sufficient to fund
operations through the end of fiscal year 2004. The Company is subject to risks common to companies in the high technology and
energy industries including, but not limited to, development by the Company or
its competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology and compliance with government
regulations. Any delay in the Companys plan to scale up to full capacity may
result in increased costs and could impair business operations.  2.
    
    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
month period ended March 31, 2004 and 2003 does not include 31,489,151 and
1,160,225 potential shares of common stock equivalents outstanding at March 31,
2004 and 2003, respectively, as their inclusion would be antidilutive.  3.
    
    Inventory Inventory consisted of the following at December 31, 2003 and March 31, 2004
(in thousands): December 31,
    
    March 31,2003
    
    2004Raw materials
    
    $
    1,318
    
    
    $
    1,475Work-in-process
    
    
    4
    
    
    
    Finished goods
    
    
    697
    
    
    
    499$
    2,019
    
    
    $
    1,974
  4.
    
    Fixed Assets Fixed assets consisted of the following at December 31, 2003 and March 31, 2004
(in thousands): Useful
    
    December 31,
    
    March 31,Life
    
    2003
    
    2004Laboratory and manufacturing equipment
    
    3-7 years
    
    $
    13,542
    
    
    $
    14,495Computer and office equipment
    
    3-7 years
    
    
    280
    
    
    
    343Leasehold improvements
    
    Lesser of 15 to 20years or lease term
    
    
    6,273
    
    
    
    6,273Assets under construction
    
    
    
    
    
    
    6,812
    
    
    
    8,19326,907
    
    
    
    29,304Less: accumulated depreciation
    
    
    
    
    
    
    (5,384
    )
    
    
    (5,991
    )$
    21,523
    
    
    $
    23,313
 As of March 31, 2004, the Companys outstanding commitments for capital
expenditures were approximately $1.5 million. Nearly all of its commitments
for capital expenditures are associated with infrastructure improvements and
equipment purchases for its manufacturing facility. In addition to the current
capital commitments, substantial further capital expenditures will be required
over the next eight to ten months to increase the capacity at our manufacturing
facility to our target level of 10 to 14 megawatts for both lines. 7




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5.
    
    Guarantor Arrangements The following is a summary of the Companys agreements that are within the
scope of 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 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 during the first three
months of 2004: Balance at December 31, 2003
    
    $
    426,000Accruals for warranties issued during the period
    
    
    36,000Balance at the end of the period
    
    $
    462,000
 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,
directors and officers. The term of these indemnification agreements is
generally perpetual any time after execution of the agreement. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements under certain circumstances may be unlimited.
However, the Company has never incurred costs to defend lawsuits or settle
claims related to these indemnification agreements. Furthermore, the Company
has a director and officer insurance policy pursuant to which the Company may
recover all or a portion of amounts it pays to directors and officers under
their indemnification agreements. As a result of the Companys insurance policy
coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal. The Company believes the estimated fair
value of agreements with parties other than its directors and officers is
minimal as well. The Company agreed to indemnify, defend and hold harmless each of the
purchasers participating in the Companys Series A private placement financing
transaction, their affiliates and their respective officers, directors, agents,
employees, subsidiaries, partners, members and controlling persons to the
fullest extent permitted by law from and against any and all losses, claims or
written threats thereof, damages, expenses (including reasonable fees,
disbursements and other charges of counsel) resulting from or arising out of
the Companys breach of any representation or warranty, covenant or agreement
in the purchase agreement. The Company believes the estimated fair value of
this indemnification agreement is minimal.  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 $69,000 and
$31,000 for the three months ended March 31, 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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Three months endedMarch 31,2003
    
    2004By geography:U.S. distributors
    
    
    33
    %
    
    
    31
    %U.S. Government (research revenue)
    
    
    26
    %
    
    
    8
    %Germany
    
    
    41
    %
    
    
    56
    %All other
    
    
    0
    %
    
    
    5
    %100
    %
    
    
    100
    %By customer:European distributor #1
    
    
    34
    %
    
    
    37
    %European distributor #2
    
    
    0
    %
    
    
    19
    %National Institute of Industry Standards (research revenue)
    
    
    10
    %
    
    
    0
    %National Renewable Energy Laboratory (research revenue)
    
    
    16
    %
    
    
    8
    %All other
    
    
    40
    %
    
    
    36
    %100
    %
    
    
    100
    %
  8.
    
    Stockholders Equity At March 31, 2004, 7,650,000 shares of common stock were authorized for
issuance under the Companys 2000 Stock Option Plan and 40,000,000 shares were
reserved for issuance upon conversion of Series A convertible preferred stock
sold to several purchasers and upon exercise of a warrant issued to Beacon
Power Corporation. Dividend Rights of Series A Convertible Preferred Stock Shares of Series A convertible preferred stock pay a compounding dividend of
10% per annum, paid quarterly, in cash, or at the Companys election, to be
added to the liquidation preference of the Series A convertible preferred stock
on a quarterly basis, which would result in an increase in the number of shares
of common stock issuable upon conversion of the Series A convertible preferred
stock. To date, a total of $2.5 million in dividends has accrued on the
outstanding Series A convertible preferred stock, which the Company elected to
add to the liquidation preference of the Series A convertible preferred stock.
Subject to changes in business conditions, the Company presently anticipates
that the dividend will be added to the liquidation preference for the
foreseeable future.  9.
    
    Subsequent Event 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 97,227,668 to 127,227,668. The increase in the
total number of authorized shares of capital stock is subject to approval by
the Companys shareholders. The Companys shareholder meeting is currently
scheduled for June 15, 2004.  10.
    
    Other Comprehensive Income Other comprehensive income (loss) consists of unrealized gains and losses on
marketable securities. For the three months ended March 31, 2004, the Company
recorded other comprehensive income of $37,000, which, when added
to net loss, results in comprehensive loss of $3.9 million. For the three
months ended March 31, 2003, the Company recorded other comprehensive loss of
$6,000, which, when added to net loss, results in comprehensive loss of $3.2
million. 
 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 9




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statements may be identified with such
words as we expect, we believe, we anticipate or similar indications of
future expectations. These statements are neither promises nor guarantees and
involve risks and uncertainties, which could cause our actual results to differ
materially from such forward-looking statements. Such risks and uncertainties
may include, among other things, those risks and uncertainties described in
this 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 first quarter of
2004, our product sales were constrained by our manufacturing capacity despite
the fact that in April 2004, we doubled our manufacturing capacity over 2003.
The factory now has an installed capacity of 6 MW (megawatts, or million watts)
per year, up from the 3 MW capacity of Line 1 and has operated at a run rate of
4.5 MW per year. Since product revenue has been capacity limited, the planned
expansion should enable significant revenue growth during 2004 and should also
further improve our product gross margins. Implementation of our dual-ribbon growth technology, increased production
volume, adding key positions to staff across the organization, expanding and
establishing key customer relationships, and consummating the Series A
convertible preferred stock and warrant financing were the key factors in
determining our performance. We continue to demonstrate our dual-ribbon
growth technology (pulling two string ribbons out of one furnace) on an
increasing production basis, which we expect to substantially lower the
manufacturing cost of growing silicon wafers and roughly double the capacity of
one string ribbon furnace. We expect the new crystal growth furnaces we will
be installing throughout 2004 will all be dual-ribbon growth furnaces. During
the first quarter, we had about 100 crystal growth furnaces in production, 40
of which were new, double-ribbon growth furnaces delivered during the first
quarter. We added several key staff in sales, administration, manufacturing
and research and development to better position ourselves for the anticipated
growth of the company during the year. Most notably, we hired Richard M. Feldt
as our new President and CEO in December 2003. The cash raised as a result of the Series A convertible preferred stock and
warrant financing in May 2003 provided us with the resources necessary to
increase our capital spending program. However, our current cash, cash
equivalents and short-term investments will not be sufficient to fund this
capacity expansion and our expected increased level of operations through
fiscal year 2004 and, as a result, we will need to raise significant additional
financing or secure a working capital line of credit in order to successfully
fund such expanded operations. If we are
not able to complete a financing or secure a working capital line of credit in
a timely manner, we will need to implement fundamental changes to our business
and operations which will likely include substantially reducing, suspending, or
terminating our capacity expansion and substantially reducing our daily
operating expenditures from current levels, in which case we believe our cash,
cash equivalents and short-term investments will then be sufficient to fund our
operations through the end of fiscal year 2004. We may need additional financing to execute our business plan sooner if we need
to respond to business contingencies such as the need to enhance our operating
infrastructure, respond to competitive pressures and acquire complementary
businesses or necessary technologies. We do not know whether we will be able
to raise additional financing or financing on terms favorable to us. If
adequate funds are not available or are not available on acceptable terms, our
ability to fund our operations, develop and expand our manufacturing operations
and distribution network, or otherwise respond to competitive pressures would
be significantly limited. 10




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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. For new
customers requesting credit, we evaluate creditworthiness based on credit
applications, feedback from provided references, and credit reports from
independent agencies. For existing customers, we evaluate creditworthiness
based on payment history and known changes in their financial condition. We also evaluate the facts and circumstances related to each sales transaction
and consider whether risk of loss has not passed to the customer upon shipment.
We consider whether our customer is purchasing our product for stock, and
whether contractual or implied rights to return the product exist or whether
our customer has an end user contractually committed. To date, we have not
offered rights to return our products other than for normal warranty
conditions. We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, such that their ability to make
payments was impaired, additional allowances could be required. Revenue from research grants is recognized as services are rendered to the
extent of allowable costs incurred. Inventory Inventory is valued at the lower of cost or market. Certain factors may impact
the realizable value of our inventory including, but not limited to,
technological changes, market demand, changes in product mix strategy, new
product introductions and significant changes to our cost structure. Given our
current production levels and the market value of our products, we currently
sell our finished goods inventory at prices that are below the sum of our fixed
and variable costs per unit. Accordingly, we write down our finished goods
inventory to realizable value equal to the difference between the cost of
inventory and the estimated market value. In addition, estimates of reserves
are made for obsolescence based on the current product mix on hand and its
expected net realizability. If actual market conditions are less favorable or
other factors arise that are significantly different than those anticipated by
management, additional inventory write-downs or increases in obsolescence
reserves may be required. We treat lower of cost or market adjustments and
inventory reserves as an adjustment to the cost basis of the underlying
inventory. Accordingly, favorable changes in market conditions are not
recorded to inventory in subsequent periods. Warranty We provide for the estimated cost of product warranties at the time revenue is
recognized. Given our limited operating history, we use historical industry
solar panel failure rates as the basis for our warranty provision calculation.
While we engage in product quality programs and processes, including monitoring
and evaluating the quality of our component suppliers, our warranty obligation
is affected by product failure rates and material usage and service delivery
costs incurred in correcting a product failure. If our actual product failure
rates, material usage or service delivery costs differ from our estimates,
revisions to the estimated warranty liability would be required. Since we
have a limited operating history and our manufacturing process differs from
industry standards, our experience may be different from the industry data used
as a basis for our estimate. While our methodology takes into account these
uncertainties, adjustments in future periods may be required as our products
mature. 11




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Long-lived Assets Our policy regarding long-lived assets is to evaluate the recoverability or
usefulness of these assets when the facts and circumstances suggest that these
assets may be impaired. This analysis relies on a number of factors, including
changes in strategic direction, business plans, regulatory developments,
economic and budget projections, technological improvements, and operating
results. The test of recoverability or usefulness is a comparison of the asset
value to the undiscounted cash flow of its expected cumulative net operating
cash flow over the assets remaining useful life. If such a test indicates
that an impairment is required, then the asset is written down to its estimated
fair value. Any write-downs would be treated as permanent reductions in the
carrying amounts of the assets and an operating loss would be recognized. To
date, we have had recurring operating losses and the recoverability of our
long-lived assets is contingent upon executing our business plan that includes
further reducing our manufacturing costs and significantly increasing sales.
If we are unable to execute our business plan, we may be required to write down
the value of our long-lived assets in future periods. Income Taxes We are required to estimate our income taxes in each of the jurisdictions in
which we operate as part of our consolidated financial statements. This
involves estimating the actual current tax in addition to assessing temporary
differences resulting from differing treatments for tax and financial
accounting purposes. These differences together with net operating loss
carryforwards and tax credits may be recorded as deferred tax assets or
liabilities on the balance sheet. A judgment must then be made of the
likelihood that any deferred tax assets will be recovered from future taxable
income. To the extent that we determine that it is more likely than not that
deferred tax assets will not be utilized, a valuation allowance is established.
Taxable income in future periods significantly different from that projected
may cause adjustments to the valuation allowance that could materially increase
or decrease future income tax expense. Results of Operations 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 unless we are able to achieve greater manufacturing efficiencies,
higher yields, and higher production levels. Research and development expenses, including cost of research revenues.
Research and development expenses, including cost of research revenues, consist
primarily of salaries and related personnel costs, consulting expenses, and
prototype costs related to the design, development, testing and enhancement of
our products and manufacturing technology. We expense our research and
development costs as incurred. We believe that research and development is
critical to our strategic objectives of enhancing our technology, reducing
manufacturing costs and meeting the changing requirements of our customers. As
a result, we expect that our total research and development expenses will
increase in the future. Selling, general and administrative expenses.Selling, general and
administrative expenses consist primarily of salaries and related personnel
costs, professional fees, rent, insurance and other sales expenses. We expect
that selling expenses will increase substantially in absolute dollars as we
increase our sales efforts, hire additional sales personnel and initiate
additional marketing programs. We expect that general and administrative
expenses will increase as we add personnel and incur additional costs related
to the growth of our business. 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. 12




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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, and foreign currency 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. Shares of Series A convertible preferred stock pay a
compounding dividend of 10% per annum, paid quarterly, in cash, or at our
election to be added to the liquidation preference of the Series A convertible
preferred stock on a quarterly basis, which would result in an increase in the
number of shares of common stock issuable upon conversion of the Series A
convertible preferred stock. Subject to changes in business conditions, we
presently anticipate that the dividend will be added to the liquidation
preference for the foreseeable future. Net loss attributable to common stockholders.Net loss attributable to common
stockholders consists of net losses and dividends earned by the Series A
preferred stockholders. Other comprehensive income (loss).Our other comprehensive income consists of
net unrealized gains and losses on marketable securities, as well as foreign
currency gains and losses. Comparison of Three Months Ended March 31, 2004 and 2003 Revenues.Our product revenues for the three months ended March 31, 2004 were
$2.8 million, an increase of $1.7 million, or 165%, from $1.1 million for the
same period in 2003. The increase in product revenues was due to the increased
production capacity of our new manufacturing facility in Marlboro,
Massachusetts, and our increased marketing and sales activities. Research
revenues for the three months ended March 31, 2004 were $262,000, a decrease of
$119,000, or 31%, from $381,000 for the same period in 2003. Research revenue
decreased since during the first quarter of 2004 we had one active research
contract versus two during the same period in 2003. Product revenues represented 92% of total revenues for the three- month period
ended March 31, 2004 and 74% of total revenues for the three- month period
ended March 31, 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 increased production capacity and a
decrease in research revenues. International product sales accounted for
approximately 61% of total revenues for the three-month period ended March 31,
2004, and 43% for the three-month period ended March 31, 2003. The increased
share of total revenues represented by international product sales for the
three-month period ended March 31, 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: Three months endedMarch 31,2003
    
    2004By geography:U.S. distributors
    
    
    33
    %
    
    
    31
    %U.S. Government (research revenue)
    
    
    26
    %
    
    
    8
    %Germany
    
    
    41
    %
    
    
    56
    %All other
    
    
    0
    %
    
    
    5
    %100
    %
    
    
    100
    %By customer:European distributor #1
    
    
    34
    %
    
    
    37
    %European distributor #2
    
    
    0
    %
    
    
    19
    %National Institute of Industry Standards (research revenue)
    
    
    10
    %
    
    
    0
    %National Renewable Energy Laboratory (research revenue)
    
    
    16
    %
    
    
    8
    %All other
    
    
    40
    %
    
    
    36
    %100
    %
    
    
    100
    %
 13




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Cost of product revenues.Our cost of product revenues for the three months
ended March 31, 2004 was $4.6 million, an increase of $1.9 million, or 71%,
from $2.7 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 March 31, 2004 was -61%
versus -150% for the same period in 2003. Product gross margin improved due
primarily to yield and efficiency improvements associated with the scale-up of
our second manufacturing line and increased sales volume. Due to the
relatively large component of fixed costs, product gross margins will still be
highly dependent on sales volumes. Therefore, we do not expect substantial
improvements in product gross margin until we realize production capacity
increases associated with the ramp up of our second manufacturing line,
expected by the end of 2004. Research and development expenses, including cost of research revenues.Our
research and development expenses, including cost of research revenues, for the
three months ended March 31, 2004 were $902,000, an increase of $189,000, or
27%, from $713,000 for the same period in 2003. The increase was due mainly to
increased activity associated with other internal research and development
programs. Selling, general and administrative expenses.Our selling, general and
administrative expenses for the three months ended March 31, 2004 were $1.7
million, an increase of $356,000, or 27%, from $1.3 million for the same period
in 2003. The increase was primarily due to increased legal costs, increased
compensation costs associated with added personnel and increased costs
associated with sales and marketing initiatives. 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 $31,000 and $69,000 for the three month periods ended March 31,
2004 and 2003, respectively. Other income.Our other income for the three months ended March 31, 2004 was
$73,000, an increase of $50,000, or 217%, from $23,000 for the same period in
2003. The increase in other income was primarily due to an increase in net
interest income resulting from higher cash and investment balances resulting
from our May 2003 Series A preferred stock and warrant financing. 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. Shares of Series A convertible preferred stock pay a
compounding dividend of 10% per annum, paid quarterly, in cash, or at our
election to be added to the liquidation preference of the Series A convertible
preferred stock on a quarterly basis, which would result in an increase in the
number of shares of common stock issuable upon conversion of the Series A
convertible preferred stock. For the quarter ended March 31, 2004, $665,000 in
dividends accrued on the outstanding Series A convertible preferred stock,
which we elected to add to the liquidation preference of the Series A
convertible preferred stock. Subject to changes in business conditions, we
presently anticipate that the dividend will continue to be added to the
liquidation preference for the foreseeable future. Net loss attributable to common stockholders.Net loss attributable to common
stockholders was $4.6 million and $3.2 million for the period ended March 31,
2004 and March 31, 2003, respectively. The increase in net loss attributable
to common stockholders was due to the overall increase in net operating losses
associated with the scale-up of our operations combined with the dividend
charges associated with the Series A convertible preferred stock financing,
which was consummated on May 15, 2003. Other comprehensive income (loss).Our other comprehensive income for the
three months ended March 31, 2004 was $37,000, compared to a loss of $6,000 for
the same period in 2003, consisting of net unrealized gains and losses on
marketable securities. Liquidity and Capital Resources We have historically financed our operations and met our capital expenditures
requirements primarily through sales of our capital stock and, to a lesser
extent, product revenues. Research and development expenditures have
historically been partially funded by government research contracts. At March
31, 2004, we had working capital of $16.4 million, including cash, cash
equivalents and short-term investments of $14.7 million. Net cash used in operating activities was $3.1 million for the three months
ended March 31, 2004, as compared to $2.1 million for the three months ended
March 31, 2003. The increase in net cash used in operating activities was
primarily due to an increase in our operating loss and accounts associated with
an increase in sales volume towards 14




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the end of the quarter. For the first quarter in 2004, Days Sales Outstanding
(DSO) was approximately 59 days, versus approximately 38 days as of December
31, 2003. The increase in DSO was due mainly to increased sales volume towards
the later part of the first quarter of 2004. Product sales to customers can
fluctuate widely month-to-month, and depending on when sales occur during the
quarter, DSO can fluctuate significantly quarter-to-quarter. In general, we
anticipate DSO in excess of 60 days during 2004. Net cash provided by investing activities was $936,000 for the three months
ended March 31, 2004, as compared to $4.5 million for the three months ended
March 31, 2003. For the three months ended March 31, 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 $1,000 for the three months ended
March 31, 2004, as compared to net cash used in financing activities of
$263,000 for the three months ended March 31, 2003. The cash provided by
financing activities during the three months ended March 31, 2004 represents
proceeds from common stock issued in conjunction with the Employee Stock
Purchase Plan. Cash used in financing activities during the three months ended
March 31, 2003 primarily represents costs associated with our Series A
convertible preferred stock and warrant financing which closed on May 15, 2003. Capital expenditures were $2.4 million for the three months ended March
31, 2004, as compared to $538,000 for the three months ended March 31, 2003.
Capital expenditures for the three months ended March 31, 2004 were primarily
for equipment needed for our manufacturing facility. As of March 31, 2004, our
outstanding commitments for capital expenditures were approximately $1.5
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 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. In addition to the
current capital commitments, substantial further capital expenditures will be
required over the next eight to ten months to increase the capacity at our
manufacturing facility to our target level of 10 to 14 megawatts for both
lines. We expect the second manufacturing line will be completed in 2004.
However, our current cash, cash equivalents and short-term investments will not
be sufficient to fund this capacity expansion and our expected increased level
of operations through fiscal year 2004 and, as a result, we will need to raise
significant additional financing or secure a working capital line of credit in
order to successfully fund such expanded operations. Additionally,
the need to respond to business
contingencies such as the need to enhance our operating infrastructure, respond
to competitive pressures and acquire complementary businesses or necessary
technologies would also require additional financing. We do not know whether we will be able to raise additional
financing or financing on terms favorable to us. If we are not able to
complete a financing or secure a working capital line of credit in a timely
manner, we will need to implement fundamental changes to our business and
operations which will likely include substantially reducing, suspending, or
terminating our capacity expansion and substantially reducing our daily
operating expenditures from current levels, in which case we believe our cash,
cash equivalents and short-term investments will then be sufficient to fund our
operations through the end of fiscal year 2004. We do not have any special purpose entities or off-balance sheet financing
arrangements. As of March 31, 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. Certain Factors Which May Affect Future Results Risks Relating to Our Financial Results Evaluating our business and future prospects may be difficult due to our
limited operating history. We are at an early stage of development and there is limited historical
information available upon which you can base your evaluation of our business
and prospects. We were formed in 1994 to research and develop crystalline
silicon technology for use in manufacturing solar power products. Although we
began shipping product from our pilot manufacturing facility in 1997, the
primary objective of our pilot production line was the technical development
and further refinement of our String Ribbon technology and related
manufacturing processes. We shipped our first commercial products from our
Marlboro manufacturing facility in September 2001. We have shipped only a
limited number of solar power panels and have recognized limited revenues since
our inception. 15




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In addition, our early stage of development means that we have less insight
into how market and technology trends may affect our business. The revenue and
income potential of our business is unproven and the market we are addressing
is rapidly evolving. You should consider our business and prospects in light of
the risks, expenses and challenges that we will face as an early-stage company
seeking to develop and manufacture new products in a growing and rapidly
evolving market. We have a history of losses, expect to incur substantial further losses and may
not achieve or maintain profitability in the future, which may decrease the
market value of our stock. Since our inception, we have incurred significant net losses, including net
losses of $4.0 million for the three months ended March 31, 2004. As a result
of ongoing operating losses, we had a cumulative net loss of $60.3 million as
of March 31, 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 incur significant capital expenditures and anticipate that our
expenses will increase substantially in the foreseeable future as we seek to:
expand our manufacturing operations, develop our distribution network, continue
to research and develop our products and manufacturing technologies, implement
internal systems and infrastructure in conjunction with our growth and hire
additional personnel. We do not know whether our revenues will grow at all or grow rapidly enough to
absorb these expenses, and our limited operating history makes it difficult to
assess the extent of these expenses or their impact on our operating results. Our stock price could fall substantially if our quarterly revenue or operating
results fluctuate or are disappointing. Our quarterly revenue and operating results have fluctuated significantly in
the past and may fluctuate significantly from quarter to quarter in the future
due to a variety of factors, many of which are discussed elsewhere in this
section. We anticipate that our operating expenses will continue to increase
significantly. If sales in any quarter do not increase correspondingly, our net
losses for that period will increase. For these reasons, quarter-to-quarter
comparisons of our results of operations are not necessarily meaningful and you
should not rely on results of operations in any particular quarter as an
indication of future performance. If our quarterly revenue or results of
operations fall below the expectations of investors or public market analysts
in any quarter, the market value of our common stock would likely decrease, and
could decrease rapidly and substantially. Risks Relating to Our Industry, Products and Operations We have significant capital requirements in order to maintain and grow our
business. On May 15, 2003, we consummated a private placement financing transaction
that raised $29.5 million (before offering expenses of $849,000) through the
issuance of 26,227,668 shares of Series A convertible preferred stock and the
sale of a warrant to purchase 2,400,000 shares of our common stock. We will
fund our current capital commitments primarily with the proceeds from our
Series A convertible preferred stock and warrant financing. However, our
current cash, cash equivalents and short-term investments will not be
sufficient to fund this capacity expansion and our expected increased level of
operations through fiscal year 2004 and, as a result, we will need to raise
significant additional financing or secure a working capital line of credit in
order to successfully fund such expanded operations. If we are not able to
complete a financing or secure a working capital line of credit in a timely
manner, we will need to implement fundamental changes to our business and
operations which will likely include substantially reducing, suspending, or
terminating our capacity expansion and substantially reducing our daily
operating expenditures from current levels, in which case we believe our cash,
cash equivalents and short-term investments will then be sufficient to fund our
operations through the end of fiscal year 2004. We need additional financing to execute our business plan and to respond to
business contingencies such as the need to enhance our operating
infrastructure, respond to competitive pressures and acquire complementary
businesses or necessary technologies. In addition to our current capital
commitments, substantial further capital expenditures will be required over the
next eight to ten months to increase the capacity at our manufacturing facility
to our target level of 10 to 14 megawatts for both lines. We do not know
whether we will be able to raise additional financing or financing on terms
favorable to us. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our operations, develop and expand our
manufacturing operations and distribution network, or 16




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otherwise respond to competitive pressures would be significantly limited. In
addition, if we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our existing
stockholders will be reduced. These newly issued securities may have rights,
preferences and privileges senior to those of existing stockholders. If solar power technology is not suitable for widespread adoption or sufficient
demand for solar power products does not develop or takes longer to develop
than we anticipate, our sales would not significantly increase and we would be
unable to achieve or sustain profitability. The market for solar power products is emerging and rapidly evolving, and its
future success is uncertain. If solar power technology proves unsuitable for
widespread commercial deployment or if demand for solar power products fails to
develop sufficiently, we would be unable to generate enough revenues to achieve
and sustain profitability. In addition, demand for solar power products in the
markets and geographic regions we target may not develop or may develop more
slowly than we anticipate. Many factors will influence the widespread adoption
of solar power technology and demand for solar power products, including:  -
    
    cost-effectiveness of solar power technologies as compared with
conventional and non-solar alternative energy technologies;-
    
    performance and reliability of solar power products as compared with
conventional and non-solar alternative energy products;-
    
    success of alternative distributed generation technologies such as
fuel cells, wind power and micro turbines;-
    
    fluctuations in economic and market conditions which impact the
viability of conventional and non-solar alternative energy sources, such
as increases or decreases in the prices of oil and other fossil fuels;-
    
    continued deregulation of the electric power industry and broader energy industry; and-
    
    availability of government subsidies and incentives. 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
62,000 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. 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. 17




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The development of a successful market for our solar power products may be
adversely affected by a number of factors, many of which are beyond our
control, including:  -
    
    our failure to produce solar power products which compete favorably
against other solar power products on the basis of cost, quality and
performance;-
    
    our failure to produce solar power products which compete favorably
against conventional energy sources and alternative distributed
generation technologies, such as fuel cells, on the basis of cost,
quality and performance;-
    
    whether customers accept our new panel designs under development and
the techniques we are developing to mount them; and-
    
    our failure to develop and maintain successful relationships with
distributors, systems integrators and other resellers, as well as
strategic partners. If our solar power products fail to gain market acceptance, we would be unable
to increase our sales and market share and to achieve and sustain
profitability. Technological changes in the solar power industry could render our solar power
products obsolete, which could reduce our market share and cause our sales to
decline. Our failure to further refine our technology and develop and introduce new
solar power products could cause our products to become obsolete, which could
reduce our market share and cause our sales to decline. The solar power
industry is rapidly evolving and competitive. We will need to invest
significant financial resources in research and development to keep pace with
technological advances in the solar power industry and to effectively compete
in the future. We believe that there are a variety of competing solar power
technologies under development by other companies that could result in lower
manufacturing costs than those expected for our solar power products. Our
development efforts may be rendered obsolete by the technological advances of
others, and other technologies may prove more advantageous for the
commercialization of solar power products. The build-out of our manufacturing facility may take longer and cost more than
we expect, which would likely result in lower revenues and earnings than
anticipated. If we fail to successfully complete the build-out of our Marlboro manufacturing
facility, our business and results of operations would likely be materially
impaired. The first of the Marlboro facilitys two manufacturing lines entered
service in 2001. The Company expects the second manufacturing line to be
completed by the end of 2004. Completing the build-out of this facility to
capacity will require a significant investment of capital and substantial
engineering expenditures, and is subject to significant risks, including risks
of cost overruns, delays, equipment problems and other start-up and operating
difficulties. Our manufacturing processes also use custom-built equipment that
may not be delivered and installed in our new facility in a timely manner. In
addition, this equipment may take longer and cost more to debug than planned
and may never operate as designed. We plan to incorporate first-time equipment
designs and technology improvements, which we expect to lower unit capital and
operating costs, but this new technology may not be successful, which would
increase cost, limit capacity, and prevent us from achieving increases in
sales. If we experience any of these or similar difficulties, we may be unable
to complete the build-out of the facility, our manufacturing capacity could be
substantially constrained and our revenues and earnings would likely be
materially impaired. We may not be able to manufacture our solar power products in sufficient
quantities or at acceptable costs to meet customer demand. We may not be able to achieve our manufacturing cost targets, which could
prevent us from ever becoming profitable. If we cannot achieve our targeted
production volumes or capacity or if we experience capacity constraints,
quality control problems or other disruptions, we may not be able to
manufacture our products in large volumes or at acceptable costs and may be
unable to satisfy the demand of our customers, which would reduce our market
share and revenues and may harm our reputation. The expansion of our
manufacturing operations to achieve targeted production volumes will require
the successful deployment of advanced equipment and technology utilizing
manufacturing processes and components, which we are currently developing. 18




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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 three months ended March 31, 2004, we sold our solar power products to
approximately 15 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 March 31, 2004, approximately 66% of our product
sales have been made to resellers outside North America. Sales in Germany
constituted approximately 61% of our total product sales for the three months
ended March 31, 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;-
    
    difficulty of enforcing revenue collection internationally; and-
    
    our continued ability to sell our products in the German market. We expect that a portion of our international sales will be denominated in
United States dollars. As a result, increases in the value of the United States
dollar relative to foreign currencies would cause our products to become less
competitive in international markets and could result in limited, if any, sales
and profitability. We expect that during 2004, market conditions will require
us to denominate a majority of our sales in local currencies, which will
further expose us to foreign exchange gains or losses. Our strategy includes establishing local manufacturing facilities in
international markets, although we have not yet done so. As we implement our
strategy, we may encounter legal and commercial restrictions and incur taxes
and other expenses to establish our manufacturing facilities in certain
countries. In addition, we may potentially forfeit, voluntarily or
involuntarily, foreign assets due to economic or political instability in the
countries where our local manufacturing facilities are located. Our dependence on a small number of resellers may cause significant
fluctuations or declines in our product revenues. From our inception through March 31, 2004, our three largest resellers
accounted for approximately 57% of our product sales and our 10 largest
resellers accounted for approximately 82% of our product sales. We anticipate
that sales of our solar power products to a limited number of key resellers
will continue to account for a significant 19




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portion of our total product revenues for the foreseeable future. Consequently,
any one of the following events may cause significant fluctuations or declines
in our product revenues:  -
    
    reduction, delay or cancellation of orders from one or more of our significant resellers;-
    
    selection by one or more of our significant resellers of products competitive with ours;-
    
    loss of one or more of our significant resellers and our failure to
recruit additional or replacement resellers; and-
    
    failure of any of our significant resellers to make timely payment of
our invoices. Our dependence on a limited number of third party suppliers for raw materials,
key components for our solar power products and custom-built equipment for our
operations could prevent us from delivering our products to our customers
within required timeframes and we may experience order cancellation and loss of
market share. We manufacture all of our solar power products using materials and components
procured from a limited number of third-party suppliers. If we fail to develop
or maintain our relationships with these or our other suppliers, we may be
unable to manufacture our products or our products may be available only at a
higher cost or after a long delay, which could prevent us from delivering our
products to our customers within required time frames and we may experience
order cancellation and loss of market share. We currently do not have contracts
with many of our suppliers and may not be able to procure sufficient quantities
of the materials and components necessary to manufacture our products on
acceptable commercial terms or at all. To the extent the processes that our
suppliers use to manufacture materials and components are proprietary, we may
be unable to obtain comparable materials and components from alternative
suppliers. The failure of a supplier to supply materials and components in a
timely manner, or to supply materials and components that meet our quality,
quantity and cost requirements could impair our ability to manufacture our
products and/or increase their costs, particularly if we are unable to obtain
substitute sources of these materials and components on a timely basis or on
terms acceptable to us. In addition, our manufacturing processes utilize
custom-built equipment that is currently produced by a limited number of
suppliers. A suppliers failure to supply this equipment in a timely manner,
with adequate quality and on terms acceptable to us could delay our capacity
expansion of our manufacturing facility and otherwise disrupt our production
schedule or increase our costs of production. Our use of forecasts to manage our inventory could result in insufficient
quantities to meet reseller demand or excess inventory. We generally do not obtain long-term contracts or purchase orders prior to the
production of our solar power products. Instead, we rely on forecasts to
determine the timing of our production schedules and the volume and mix of
product to be manufactured. The level and timing of orders placed by our
resellers may vary for many reasons. As a result, at any particular time, we
may not have enough inventory to meet demand or we may have excess inventory,
each of which could negatively impact our operating results. In addition, as we
manufacture more solar power products without related purchase orders, we
increase our risk of loss of revenues due to the obsolescence of products held
in inventory for which we have already incurred production costs. The success of our business depends on the continuing contributions of our key
personnel and our ability to attract and retain new qualified employees in a
competitive labor market. We have attracted a highly skilled management team and specialized workforce,
including scientists, engineers, researchers, and manufacturing and marketing
professionals. If we were to lose the services of Richard M. Feldt, our Chief
Executive Officer, President and a director, or any of our other executive
officers and key employees, our business could be materially and adversely
impacted. We had 191 employees as of March 31, 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. 20




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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. We face intense competition from other companies producing solar power and
other energy generation products. If we fail to compete effectively, we may be
unable to increase our market share and sales. The solar power market is intensely competitive and rapidly evolving. Our
competitors have established a market position more prominent than ours, and if
we fail to attract and retain customers and establish a successful distribution
network for our solar power products, we may be unable to increase our sales
and market share. There are over 20 companies in the world that produce solar
power products, including BP Solar, Kyocera Corporation, Royal Dutch Shell,
Sharp Corporation, RWE, and Sanyo Corporation. Other existing and potential
competitors in the solar power market include universities and research
institutions. We also expect that future competition will include new entrants
to the solar power market offering new technological solutions. Further, many
of our competitors are developing and are currently producing products based on
new solar power technologies, including other crystalline silicon ribbon and
sheet technologies, that they believe will ultimately have costs similar to, or
lower than, our projected costs. Most of our competitors are substantially larger than we are, have longer
operating histories and have substantially greater financial, technical,
manufacturing and other resources than we do. Many also have greater name
recognition, a more established distribution network and a larger installed
base of customers. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our target markets. As a result, our competitors may be able to
devote greater resources to the research, development, promotion and sale of
their products and respond more quickly to evolving industry standards and
changing customer requirements than we can. If we are unable to protect our intellectual property adequately, we could lose
our competitive advantage in the solar power market. Our ability to compete effectively against competing solar power technologies
will depend, in part, on our ability to protect our current and future
proprietary technology, product designs and manufacturing processes through a
combination of patent, copyright, trademark, trade secret and unfair
competition laws. We may not be able to adequately protect our intellectual
property and may need to defend our intellectual property against infringement
claims, either of which could result in the loss 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; 21




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-
    
    we may not be successful in prosecuting or defending patent
infringement suits and, as a result, may need to seek to obtain a
license of the third partys intellectual property rights; however, a
license may not be available to us or may not be available to us on
commercially reasonable terms; and-
    
    the contractual provisions we rely on to protect our trade secrets
and proprietary information, such as our confidentiality and
non-disclosure agreements with our employees, consultants and other
third parties, may be breached and our trade secrets and proprietary
information disclosed to the public. Existing regulations and changes resulting from electric utility deregulation
may present technical, regulatory and economic barriers to the purchase and use
of solar power products, which may significantly reduce demand for our
products. The market for electricity generation products is heavily influenced by
federal, state and local government regulations and policies concerning the
electric utility industry, as well as internal policies and regulations
promulgated by electric utilities. These regulations and policies often relate
to electricity pricing and technical interconnection of customer-owned
electricity generation. In the United States and in a number of other
countries, these regulations and policies are being modified and may continue
to be modified. Customer purchases of, or further investment in the research
and development of, alternative energy sources, including solar power
technology, could be deterred by these regulations and policies, which could
result in a significant reduction in the potential demand for our solar power
products. We anticipate that our solar power products and their installation will be
subject to oversight and regulation in accordance with national and local
ordinances relating to building codes, safety, environmental protection,
utility interconnection and metering and related matters. Any new government
regulations or utility policies pertaining to our solar power products may
result in significant additional expenses to us, our resellers and their
customers and, as a result, could cause a significant reduction in demand for
our solar power products. The reduction or elimination of government subsidies and economic incentives
for on-grid applications could cause our sales to decline. We believe that the growth of some of our target markets, including the market
for on-grid applications, depends in part on the availability and size of
government subsidies and economic incentives. Accordingly, the reduction or
elimination of government subsidies and economic incentives may adversely
affect the growth of these markets, which could cause our sales to decline.
Today, the cost of solar power substantially exceeds the cost of power
furnished by the electric utility grid. As a result, federal, state and local
governmental bodies in many countries, most notably the United States, Japan
and Germany, have provided subsidies in the form of cost reductions, tax
write-offs and other incentives to end users, distributors, systems integrators
and manufacturers of solar power products to promote the use of solar energy in
on-grid applications and to reduce dependency on other forms of energy. These
government subsidies and economic incentives could be reduced or eliminated
altogether. The lack or inaccessibility of financing for off-grid solar power applications
could cause our sales to decline. One of our key markets is off-grid solar power applications to developed and
developing countries. In some developing countries, government agencies and the
private sector have, from time to time, provided subsidies or financing on
preferred terms for rural electrification programs. We believe that the
availability of financing could have a significant effect on the level 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 8% for the three months ended
March 31, 2004. As of March 31, 2004, we had one active research contract with
the National Renewable Energy Laboratory. 22




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These government agencies may not continue their commitment to programs to
which our development projects are applicable. Moreover, we may not be able to
compete successfully to obtain funding through these or other programs. A
reduction or discontinuance of these programs or of our participation in these
programs would increase our research and development expenses, which could
impair our ability to develop our solar power technologies. In addition, contracts involving government agencies may be terminated at the
convenience of the agency. Other risks include potential disclosure of our
confidential information to third parties and the exercise of march-in rights
by the government. Our government-sponsored research contracts require that we
provide regular written technical updates on a monthly, quarterly or annual
basis, and, at the conclusion of the research contract, a final report on the
results of our technical research. Because these reports are generally
available to the public, third parties may obtain some aspects of our sensitive
confidential information. March-in rights refer to the right of the United
States government or government agency to require us to grant a license to the
technology to a responsible applicant or, if we refuse, the government may
grant the license itself. The government can exercise its march-in rights if it
determines that action is necessary because we fail to achieve practical
application of the technology, because action is necessary to alleviate health
or safety needs, or to meet requirements of federal regulations, or to give the
United States industry preference. Funding from government contracts also may
limit when and how we can deploy our technology developed under those
contracts. Compliance with environmental regulations can be expensive and inadvertent
noncompliance may result in adverse publicity and potentially significant
monetary damages and fines. We are required to comply with all federal, state and local regulations
regarding protection of the environment. If more stringent regulations are
adopted in the future, the costs of compliance with these new regulations could
be substantial. We believe that we have all necessary permits to conduct our
business as it is presently conducted. If we fail to comply with present or
future environmental regulations, however, we may be required to pay
substantial fines, suspend production or cease operations. We use, generate and
discharge toxic, volatile and otherwise hazardous chemicals and wastes in our
research and development and manufacturing activities. Any failure by us to
control the use of, or to restrict adequately the discharge of, hazardous
substances could subject us to potentially significant monetary damages and
fines. In addition, under some federal and state statutes and regulations, a
governmental agency may seek recovery and response costs from operators of
property where releases of hazardous substances have occurred or are ongoing,
even if the operator was not responsible for such release or otherwise at
fault. Product liability claims against us could result in adverse publicity and
potentially significant monetary damages. Like other retailers, distributors and manufacturers of products that are used
by consumers, we face an inherent risk of exposure to product liability claims
in the event that the use of the solar power products we sell results in
injury. Since our products are electricity producing devices, it is possible
that consumers could be injured or killed by our products, whether by product
malfunctions, defects, improper installation or other causes. In addition,
since sales of our existing products have been modest and the products we are
developing incorporate new technologies and use new installation methods, we
cannot predict whether product liability claims will be brought against us in
the future or the effect of any resulting adverse publicity on our business.
Moreover, we may not have adequate resources in the event of a successful claim
against us. We have evaluated the potential risks we face and believe that we
have appropriate levels of insurance for product liability claims. We rely on
our general liability insurance to cover product liability claims and have not
obtained separate product liability insurance. The successful assertion of
product liability claims against us could result in potentially significant
monetary damages and if our insurance protection is inadequate, could require
us to make significant payments. Risks Associated With the Market for Our Common Stock Our officers and directors control 32% of our voting stock and may be able to
significantly influence corporate actions. As of April 16, 2004, our executive officers, directors and entities affiliated
with them controlled 32% of our voting stock. As a result, these stockholders,
acting together, may be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors, the approval
of charter and by-law amendments, and the approval of mergers or other business
combinations. 23




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The price of our common stock may be volatile. The stock market has, from time to time, experienced extreme price and trading
volume fluctuations, and the market prices of technology companies such as ours
have been extremely volatile. Our operating performance will significantly
affect the market price of our common stock. To the extent we are unable to
compete effectively and gain market share or the other factors described in
this section affect us, our stock price will likely decline. The market price
of our common stock also may be adversely impacted by broad market and industry
fluctuations regardless of our operating performance, including general
economic and technology trends. In addition, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. We may be involved in securities class
action litigation in the future. This litigation often results in substantial
costs and a diversion of managements attention and resources. The large number of shares eligible for public sale could cause our stock price
to decline. The market price of our common stock could decline as a result of the resale of
the shares of common stock issuable upon conversion of the Series A convertible
preferred stock and the exercise of the warrant issued in connection with the
private placement financing or the perception that these sales could occur.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate. We are subject to anti-takeover provisions in our charter and by-laws and under
Delaware law that could delay or prevent an acquisition of our company, even if
the acquisition would be beneficial to our stockholders. Provisions of our certificate of incorporation, our by-laws and Delaware law
could make it more difficult and expensive for a third party to pursue a tender
offer, change in control transaction or takeover attempt that is opposed by our
board of directors. Stockholders who wish to participate in these transactions
may not have the opportunity to do so. We also have a staggered board of
directors, which makes it difficult for stockholders to change the composition
of our board of directors in any one year. If a tender offer, change in control
transaction, takeover attempt or change in our board of directors is prevented
or delayed, the market price of our common stock could decline. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rate Risk We do not use derivative financial instruments. Interest income earned on our
cash, cash equivalents and short-term investments is subject to interest rate
fluctuations, but we believe that the impact of these fluctuations does not
have a material effect on our financial position due to the immediate available
liquidity or short-term nature of these financial instruments. For these
reasons, a hypothetical 100-basis point adverse change in interest rates would
not have a material effect on our consolidated financial position, results of
operations or cash flows. Foreign Currency Exchange Rate Risk For the three months ended March 31, 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 61% of total
revenues for the three months ended March 31, 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 10%. As we
expand our manufacturing operations and distribution network internationally,
our exposure to fluctuations in currency exchange rates may increase.
Additionally, from time to time we may purchase equipment and materials
internationally, and to the extent that such purchases are billed in foreign
currency, we will be exposed to currency gains or losses. 
 ITEM 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 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
is recorded, processed, summarized and reported as and when required. 24




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Internal Control Over Financial Reporting During the period covered by this report, there have been no changes in our
internal control over financial reporting that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting. 
 PART II. OTHER INFORMATION 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Number
    
    Description31.1
    
    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-Oxley 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.
 (b) Reports on Form 8-K: During the quarter ended March 31, 2004, the Company filed a Current Report on
Form 8-K dated March 3, 2004 regarding a press release regarding its financial
results for the quarter and year ended December 31, 2003. 
 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: May 12, 2004/s/ Richard G. ChleboskiRichard G. ChleboskiChief Financial Officer, Treasurer and Secretary
(Principal Financial Officer)
 25