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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 2, 2005
 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition
period from ______ to ______
 COMMISSION FILE NUMBER 000-31687 EVERGREEN SOLAR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 DELAWARE
    
    04-3242254(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
    
    (I.R.S. EMPLOYER
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. þ o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). þ o
 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 19, 2005 there were 60,957,679 shares of common stock
outstanding.




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EVERGREEN SOLAR, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 2, 2005 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
    
    
    3ITEM 1. FINANCIAL STATEMENTS
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    11ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    33ITEM 4. CONTROLS AND PROCEDURES
    
    
    33PART II. OTHER INFORMATION
    
    
    34ITEM 1. LEGAL PROCEEDINGS
    
    
    34ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    34ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    34ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    34ITEM 5. OTHER INFORMATION
    
    
    34ITEM 6. EXHIBITS
    
    
    36SIGNATURES
    
    
    38Exhibit 31.1 - CERTIFICATIONS
    
    
    39Exhibit 31.2 - CERTIFICATIONS
    
    
    40Exhibit 32.1
    
    
    41Exhibit 32.2
    
    
    42EX-10.20 EVERGREEN SOLAR, INC. MANAGEMENT INCENTIVE POLICYEX-31.1 SECTION 302 CERTIFICATION OF C.E.O.EX-31.2 SECTION 302 CERTIFICATION OF C.F.O.EX-32.1 SECTION 906 CERTIFICATION OF C.E.O.EX-32.2 SECTION 906 CERTIFICATION OF C.F.O.
  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)
 (unaudited)
 December 31,
    
    
    April 2,2004
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,379
    
    
    $
    53,134Marketable securities
    
    
    6,563
    
    
    
    16,905Accounts receivable, net of allowances for doubtful accounts and sales discounts
of $84 and $100 at December 31, 2004 and April 2, 2005, respectively
    
    
    6,166
    
    
    
    4,999Inventory
    
    
    2,906
    
    
    
    3,151Interest receivable
    
    
    57
    
    
    
    201Other current assets
    
    
    1,411
    
    
    
    1,771Total current assets
    
    
    22,482
    
    
    
    80,161Restricted cash
    
    
    414
    
    
    
    414Fixed assets, net
    
    
    26,825
    
    
    
    26,900Total assets
    
    $
    49,721
    
    
    $
    107,475Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    3,074
    
    
    $
    2,333Short term borrowings
    
    
    1,500
    
    
    
    1,500Accrued employee compensation
    
    
    1,187
    
    
    
    798Accrued warranty
    
    
    705
    
    
    
    705Other accrued expenses
    
    
    1,295
    
    
    
    901Deferred revenue
    
    
    440
    
    
    
    Total current liabilities
    
    
    8,201
    
    
    
    6,237Minority interest in EverQ
    
    
    
    
    
    
    602Stockholders equity:Common stock, $0.01 par value, 100,000,000 shares authorized,
47,541,823 and 60,894,179 issued and outstanding at December 31, 2004
and April 2, 2005, respectively
    
    
    475
    
    
    
    609Additional paid-in capital
    
    
    116,764
    
    
    
    178,982Accumulated deficit
    
    
    (75,693
    )
    
    
    (78,913
    )Accumulated other comprehensive loss
    
    
    (26
    )
    
    
    (42
    )Total stockholders equity
    
    
    41,520
    
    
    
    100,636Total liabilities and stockholders equity
    
    $
    49,721
    
    
    $
    107,475
 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)
 Quarter endedMarch 31,
    
    
    April 2,2004
    
    
    2005Revenues:Product revenues
    
    $
    2,830
    
    
    $
    10,287Research revenues
    
    
    262
    
    
    
    235Total revenues
    
    
    3,092
    
    
    
    10,522Operating expenses:Cost of product revenues
    
    
    4,553
    
    
    
    9,936Research and development expenses, including costs of research revenues
    
    
    902
    
    
    
    2,325Selling, general and administrative expenses
    
    
    1,673
    
    
    
    1,960Total operating expenses
    
    
    7,128
    
    
    
    14,221Operating loss
    
    
    (4,036
    )
    
    
    (3,699
    )Other income, netForeign exchange gains, net
    
    
    8
    
    
    
    280Interest income, net
    
    
    65
    
    
    
    158Loss before minority interest
    
    
    (3,963
    )
    
    
    (3,261
    )Minority interest in EverQ
    
    
    
    
    
    
    41Net loss
    
    
    (3,963
    )
    
    
    (3,220
    )Accretion and dividends on Series A convertible preferred stock
    
    
    (665
    )
    
    
    Net loss attributable to common stockholders
    
    $
    (4,628
    )
    
    $
    (3,220
    )Net loss per share attributable to common stockholders (basic and diluted)
    
    $
    (0.30
    )
    
    $
    (0.06
    )Weighted average shares used in computing basic and diluted
net loss per share attributable to common stockholders
    
    
    15,489
    
    
    
    54,914
 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)
 Quarter endedMarch 31,
    
    
    April 2,2004
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (3,963
    )
    
    $
    (3,220
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation expense
    
    
    607
    
    
    
    867Minority interest in EverQ
    
    
    
    
    
    
    573Bad debt expense
    
    
    (16
    )
    
    
    (27
    )Amortization of bond premiums
    
    
    120
    
    
    
    6Compensation expense associated with employee stock options
    
    
    31
    
    
    
    Changes in
operating assets and liabilities:Inventory
    
    
    45
    
    
    
    (245
    )Other current assets
    
    
    (18
    )
    
    
    (360
    )Interest receivable
    
    
    (41
    )
    
    
    (144
    )Accounts receivable
    
    
    (1,030
    )
    
    
    1,194Accounts payable
    
    
    981
    
    
    
    (741
    )Deferred
revenue
    
    
    
    
    
    
    (440
    )Accrued expenses
    
    
    167
    
    
    
    (783
    )Net cash used in operating activities
    
    
    (3,117
    )
    
    
    (3,320
    )Cash flows from investing activities:Purchases of fixed assets
    
    
    (2,397
    )
    
    
    (942
    )Purchases of investments
    
    
    (1,000
    )
    
    
    (10,892
    )Proceeds from sale and maturity of investments
    
    
    4,333
    
    
    
    557Net cash
provided by (used in) investing activities
    
    
    936
    
    
    
    (11,277
    )Cash flows from financing activities:Financing costs on issuance of Series A convertible preferred stock
    
    
    
    
    
    
    (4,396
    )Proceeds from the issuance of common stock
    
    
    
    
    
    
    66,731Proceeds from exercise of stock options and
shares purchased under Employee Stock Purchase Plan
    
    
    1
    
    
    
    17Net cash flow provided by financing activities
    
    
    1
    
    
    
    62,352Net (decrease) increase in cash and cash equivalents
    
    
    (2,180
    )
    
    
    47,755Cash and cash equivalents at beginning of period
    
    
    4,620
    
    
    
    5,379Cash and cash equivalents at end of period
    
    $
    2,440
    
    
    $
    53,134Supplemental cash flow information:Interest paid
    
    
    
    
    
    
    29Non-cash
Series A convertible preferred stock accretion and dividends earned
    
    
    665
    
    
    
    Non-cash conversion of Series A convertible preferred stock to common stock
    
    
    1,084
    
    
    
    
 The accompanying notes are an integral part of these financial statements. 5




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Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation The accompanying condensed consolidated interim financial statements of Evergreen Solar, Inc.
(Evergreen Solar or the Company) are unaudited and have been prepared on a basis substantially
consistent with the Companys audited financial statements for the year ended December 31, 2004.
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, 2004, which are contained in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2004, which was filed with the
Securities and Exchange Commission on March 10, 2005 and as subsequently amended. The unaudited
condensed consolidated interim financial statements, in the opinion of management, reflect all
adjustments necessary for a fair presentation of the
financial position at April 2, 2005, the results of operations for the quarters ended April 2, 2005
and March 31, 2004, and the cash flows for the quarters ended April 2, 2005 and March 31, 2004.
The balance sheet at December 31, 2004 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. Beginning with the first quarter of 2005, the Company adjusted its fiscal
reporting period to better align with its internal manufacturing schedule. Our adjusted quarterly
fiscal reporting periods will end upon the conclusion of thirteen consecutive weeks, rather than
upon the conclusion of three consecutive calendar months. Such an adjustment may result in interim
periods ending on days that differ slightly from the calendar month-end. For example, our first
fiscal quarter of 2005 ended on April 2, 2005, our second fiscal quarter of 2005 ends on July 2,
2005, and our third fiscal quarter of 2005 will end on October 1, 2005. In 2005, the adjustment to
our interim reporting periods will have no effect on our fiscal year
end, which  remains December 31. The change of the interim
periods was not material for the quarter. The condensed consolidated interim financial statements include the accounts of the Companys
wholly owned subsidiaries, Evergreen Solar Securities, Inc. and Evergreen Solar GmbH. All material
intercompany accounts and transactions have been eliminated. The functional currency for Evergreen
Solar GmbH is Euros. Revenues and expenses of Evergreen Solar GmbH are translated into U.S. dollars
at the average rates of exchange during the quarter, and assets and liabilities are translated into
U.S. dollars at quarter-end rates of exchange. In January 2005, the Company entered into a
strategic partnership agreement with Q-Cells AG to form a separate company called EverQ GmbH
(EverQ). EverQ will be governed by a three-member advisory board consisting of two
representatives of the Company and one Q-Cells representative. Under the strategic partnership
agreement, the Company and Q-Cells have made a total equity commitment of 46 million euro
(approximately $60 million at the April 2, 2005 exchange rate) to finance a significant part of the
construction of this facility and initial working capital requirements, of which the Company will
contribute 75.1% and Q-Cells will contribute 24.9%. The functional currency of EverQ GmbH is Euros.
Therefore, revenues and expenses are translated into U.S. dollars at the average rates of exchange
during the quarter, and assets and liabilities are translated into U.S. dollars at quarter-end
rates of exchange. The Company consolidates the financial statements of EverQ in accordance with
the provisions of Financial Accounting Standards Board
(FASB) FIN 46(R), Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51. The Companys preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosures of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenue and expenses during the reported periods.
Estimates are used when accounting for the collectibility of receivables, valuing deferred tax
assets, provisions for warranty claims and inventory obsolescence. The Company is subject to risks common to companies in the high technology and energy industries
including, but not limited to, development by the Company or its competitors of new technological
innovations, dependence on key personnel, protection of proprietary technology and compliance with
government regulations. Any delay in the Companys plan to scale its capacity may result in
increased costs and could impair business operations. The Company applies the accounting provisions of Accounting Principles Board (APB) Opinion 25,
and related interpretations, as they relate to stock-based compensation and has elected the
disclosure-only alternative permitted under Statement of Financial Accounting Standards, (SFAS)
No. 123, Accounting for Stock-Based Compensation. The Company has disclosed herein pro forma net
loss using the fair value based method. All stock-based awards to non-employees are accounted for
at their fair market value, as calculated using the Black-Scholes 6




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model in accordance with SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. Had compensation expense for the Companys employee stock option plan been determined based on the
fair value at the grant dates for options granted under the plan consistent with SFAS No. 123, the
Companys net loss would have been as follows (in thousands, except per share data): Quarter Ended
    
    
    Quarter EndedMarch 31, 2004
    
    
    April 2, 2005Net 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
    
    $
    (4,628
    )
    
    $
    (0.30
    )
    
    $
    (3,220
    )
    
    $
    (0.06
    )Add: Stock-based employee compensation expense included in reported results
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    Deduct: Total stock-based employee compensation expense determined under
the fair-value-based method for all awards
    
    
    (645
    )
    
    
    (0.04
    )
    
    
    (710
    )
    
    
    (0.01
    )Pro forma net loss attributable to common stockholders
    
    $
    (5,242
    )
    
    $
    (0.34
    )
    
    $
    (3,930
    )
    
    $
    (0.07
    )
 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 quarters ended March 31, 2004
and April 2, 2005 does not include 31,489,151 and 11,377,498 potential shares of common stock
equivalents outstanding at March 31, 2004 and April 2, 2005, respectively, as their inclusion would
be anti-dilutive. 3. Inventory Inventory consisted of the following at December 31, 2004 and April 2, 2005 (in thousands): December 31,
    
    
    April 2,2004
    
    
    2005Raw materials
    
    $
    2,230
    
    
    $
    2,766Work-in-process
    
    
    138
    
    
    
    248Finished goods
    
    
    538
    
    
    
    137$
    2,906
    
    
    $
    3,151
 4. Fixed Assets Fixed assets consisted of the following at December 31, 2004 and April 2, 2005 (in thousands): Useful
    
    December 31,
    
    April 2,Life
    
    2004
    
    2005Laboratory and manufacturing equipment
    
    3-7 years
    
    $
    20,310
    
    
    $
    20,433Computer and office equipment
    
    3-7 years
    
    
    457
    
    
    
    471Leasehold improvements
    
    Lesser of 15 to 20
years or lease term
    
    
    7,433
    
    
    
    7,433Assets under construction
    
    
    
    
    5,084
    
    
    
    5,89033,284
    
    
    
    34,227Less: accumulated depreciation
    
    
    
    
    (6,459
    )
    
    
    (7,327
    )$
    26,825
    
    
    $
    26,900
 7




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5. Guarantor Arrangements The following is a summary of the Companys agreements that are within the scope of FASB
Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). Product Warranty The Companys 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. The Company has provided for estimated future warranty costs of $705,000, representing
its best estimate of the likely expense associated with fulfilling its obligations under such
warranties. The actual warranty experience in future periods may result
in higher costs being incurred. The Company engages in product quality programs and processes, including monitoring
and evaluating the quality of component suppliers, in an effort to ensure the quality of its
product and reduce its warranty exposure. The Companys warranty obligation will be affected not
only by its product failure rates, but also the costs to repair or replace failed products and
potentially service and delivery costs incurred in correcting a product failure. If the Companys
actual product failure rates, repair or replacement costs, service or delivery costs differ from
these estimates, accrued warranty costs would be adjusted in the period that such events or costs
become known. The following table summarizes the activity regarding the Companys warranty accrual: 2004
    
    
    2005Balance at December 31
    
    $
    426,000
    
    
    $
    705,000Accruals for warranties issued during the period
    
    
    36,000
    
    
    
    Balance at
the end of the quarter
    
    $
    462,000
    
    
    $
    705,000
 Indemnification Agreements The Company enters into standard indemnification agreements in its ordinary course of business.
Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the
indemnified party for losses suffered or incurred by the indemnified party, generally our business
partners, customers, directors and officers. The term of these indemnification agreements is
generally perpetual any time after execution of the agreement. The maximum potential amount of
future payments the Company could be required to make under these indemnification agreements is
unlimited. However, the Company has never incurred costs to defend lawsuits or settle claims
related to these indemnification agreements. The Company believes the estimated fair value of such
agreements is minimal. The Company agreed to indemnify, defend and hold harmless each of the
purchasers participating in the Companys Series A convertible preferred stock financing
transaction, their affiliates and their respective officers, directors, agents, employees,
subsidiaries, partners, members and controlling persons to the fullest extent permitted by law from
and against any and all losses, claims or written threats thereof, damages, expenses (including
reasonable fees, disbursements and other charges of counsel) resulting from or arising out of the
Companys breach of any representation or warranty, covenant or agreement in the purchase
agreement. The Company believes the estimated fair value of this indemnification agreement is
minimal. 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 $31,000 and $0 for the quarters ended March 31, 2004 and April 2, 2005, 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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Quarter endedMarch 31,
    
    
    April 2,2004
    
    
    2005By geography:U.S. distributors
    
    
    31
    %
    
    
    25
    %U.S. Government (research revenue)
    
    
    8
    %
    
    
    2
    %Germany
    
    
    56
    %
    
    
    68
    %All other
    
    
    5
    %
    
    
    5
    %100
    %
    
    
    100
    %By customer:European distributor #1
    
    
    37
    %
    
    
    30
    %European distributor #2
    
    
    19
    %
    
    
    18
    %All other
    
    
    44
    %
    
    
    52
    %100
    %
    
    
    100
    %
 8. Stockholders Equity The Company has two classes of capital stock: common and preferred. At April 2, 2005, 7,650,000
shares of common stock were authorized for issuance under the Companys 2000 Stock Option Plan and
4,913,806 shares were reserved for issuance upon conversion of outstanding warrants issued in the
Series A Private Placement and the Common Stock Private Placement and to Silicon Valley Bank in
connection with the Company securing its line of credit in August 2004. In February 2005, the Company completed a $62.3 million common stock offering, net of offering
costs of approximately $4.4 million, to satisfy existing capital requirements and to fund the
continuing capacity expansion of its Marlboro, Massachusetts manufacturing facility and the
expenditures necessary for the build-out and initial operation of the strategic partnership with
Q-Cells. A portion of the proceeds from the financing will also be used to increase research and
development spending on next generation technologies and to explore further expansion
opportunities. The Company issued 13,346,000 shares of its common
stock in the offering at a per share price of $5.00 (before underwriting discounts), which
represented a 6% discount to the $5.30 closing price of shares of its common stock as reported on
the Nasdaq National Market as of the close of business on February 3, 2005. 9. EverQ GmbH As of April 2, 2005, EverQ had assets consisting mainly of cash totaling $2.5 million, accounts
payable and accrued expenses of $87,000 and losses from operations of $165,000, all of
which are consolidated in the Companys financial statements. Although the expenditures related to
EverQ are not significant to the Companys overall financial position as of April 2, 2005, the
company expects such amounts to become material in future periods as
EverQ increases its factory
construction activities. 10. Short-term Borrowings On August 26, 2004, the Company entered into a one-year revolving credit facility in the amount of
$5.0 million with Silicon Valley Bank pursuant to a Loan and Security Agreement dated August 26,
2004 (the Loan Agreement). The credit facility is collateralized by a first-priority security
interest granted to Silicon Valley Bank by the Company in substantially all of the Companys
assets. The Company issued a warrant to purchase 89,955 shares of common stock to Silicon Valley Bank, as
compensation for establishing the revolving credit facility. The warrant entitles Silicon Valley
Bank to shares of the Companys common stock at an exercise price of $3.34. The warrants are
exercisable at any time on or prior to August 25, 2009. The fair value of the warrant
(approximately $187,000) has been recorded as a deferred financing charge, along with $100,000 of
other direct expenses associated with the revolving credit facility, and will be charged to
interest expense ratably over the term of the facility, which is twelve months. The Loan Agreement contains certain financial and other covenants that restrict the Companys
ability to, among other things, dispose of property, incur indebtedness, make certain acquisitions,
merge into another entity, declare or pay dividends above an aggregate threshold of $500,000 and
redeem, retire, repurchase or otherwise acquire shares of capital stock of the Company in excess of
$500,000 in the aggregate. In addition, the Company must comply with certain financial thresholds
including minimum tangible net worth and minimum cash or excess availability. As of April 2, 2005, the Company had drawn $1.5 million under the revolving line of credit. 9




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11. Other Comprehensive Loss Other comprehensive loss consists of unrealized gains and losses on available-for-sale securities
as well as accumulated currency translation adjustments associated with the consolidation of the
Companys foreign subsidiaries, which is reflected in stockholders equity section of the Companys
balance sheet. As of March 31, 2004 accumulated other comprehensive loss was $26,000, which
consisted entirely of net unrealized losses on available-for-sale securities. As of April 2, 2005
accumulated other comprehensive loss was $42,000 which consisted of cumulative translation
adjustment (loss) of $29,000 and net unrealized losses on available-for-sale securities of $13,000. 12. Foreign Currency Derivative Transactions In 2004, the Company began to manage its foreign exchange risk through the use of derivative
financial instruments. These financial instruments serve to protect cash flow against the impact of
the translation into U.S. dollars of foreign exchange denominated transactions. As of April 2,
2005, the Company had forward currency contracts denominated in foreign currencies totaling 4.0
million. At April 2, 2005, the fair market value of outstanding forward exchange contracts was $5.2
million. The difference between the fair market value and the book value of the contracts as of
April 2, 2005 was $29,000, which is recorded as a current liability in the Companys balance sheet. 13. Recent Accounting Pronouncements On April 14, 2005, the Securities and Exchange Commission (SEC) approved a new rule that for public
companies that delays the effective date of FASB Statement No. 123 (revised 2004), giving a number
of those companies more time to develop their implementation strategies. Except for this deferral
of the effective date, the guidance in FAS 123(R) is unchanged. Under
the SECs rule, FAS 123(R) is
now effective for public companies for annual, rather than interim, periods that begin after June
15, 2005. The Company will adopt this for the year ended
December 31, 2006. 14. Subsequent Event On April 25, 2005, the
Companys strategic partnership, EverQ, received notification
that, subject to certain conditions, it will receive approximately
28 million euros, or $35 million at April 2, 2005
exchange rates, in German government grants for the manufacturing
facility to be built in Thalheim, Germany. 10




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONCERNS REGARDING FORWARD-LOOKING STATEMENTS This quarterly report contains forward-looking statements within the meaning of the federal
securities laws, including, without limitation, statements concerning Evergreen Solars
expectations, beliefs and/or intentions regarding the following:
trends in revenues; future warranty expenses; benefits and expenses resulting from our
strategic partnership with Q-Cells; our future equity ownership position in our strategic
partnership with Q-Cells; receipt of public grant awards; capital requirements to respond to
competitive pressures and acquire complementary businesses and necessary technologies; pursuit of
future research contracts that are not part of our current ongoing research activities; costs
associated with research and development, building or improving manufacturing facilities, general
and administrative expenses, business growth and our status as a public company; shifts in our
geographic product revenue mix; international expansion of strategic partnerships, manufacturing
operations and distribution networks; operating efficiency of manufacturing facilities including
increases in manufacturing scale and technological improvements; the occurrence of and the use of
proceeds from sales of our securities; the sufficiency of our cash, cash equivalents, marketable
securities and borrowings available under our revolving credit facility to satisfy our anticipated cash requirements; sufficiency
of our insurance levels for product liability claims; payments of cash dividends; use of derivative
financial instruments to manage foreign currency exchange risks; and the potential impact of our
critical accounting policies and changes in financial accounting standards or practices. Actual
results and events could differ materially from those contemplated by these forward-looking
statements due to various risks and uncertainties, including those discussed in the Certain
Factors Which May Affect Future Results section and elsewhere in this quarterly report. Evergreen
Solar undertakes no obligation to update forward-looking statements to reflect events or
circumstances occurring after the date of this report. EXECUTIVE OVERVIEW We develop, manufacture and market solar power products enabled by our String Ribbon technology
that provide reliable and environmentally clean electric power throughout the world. Solar power
products use interconnected photovoltaic cells to generate electricity from sunlight. To date, our
product sales have been primarily solar modules, which are used to generate electricity for on-grid
and off-grid applications. Off-grid applications serve markets where access to conventional
electric power is not economical or physically feasible. Solar power products can provide a
cost-competitive, reliable alternative for powering highway call boxes, microwave stations,
portable highway road signs, remote-street or billboard lights, vacation homes, rural homes in
developed and developing countries, water pumps and battery chargers for recreational vehicles and
other consumer applications. 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 have essentially completed our capital program aimed at increasing our production capacity in
our Marlboro factory to a nameplate capacity of approximately
15 megawatts (MW). We will however continue
capital programs to increase the capabilities and improve the operational efficiency of this
factory throughout 2005 and beyond. While these expenditures may add incremental capacity, they
are primarily intended to improve the efficiency, capabilities and product attributes of our
Marlboro factory. To date, our product sales have been constrained by our manufacturing capacity, despite the fact
that (as compared to 2004) by April 2005, we had approximately quadrupled our plants annualized
production rate to approximately 12 MW. Since product revenue has been limited by capacity, the
expansion in Marlboro should enable revenue growth and improvement in product gross margins as compared
to 2004. Specifically, our product revenues for the first quarter
2005 represent a 263% increase
over our product revenues for the first quarter of 2004. Furthermore, we had positive product gross
margin for the second consecutive quarter of 3.4%. On January 14, 2005, we entered into a strategic partnership agreement with Q-Cells AG, or Q-Cells.
Q-Cells is the worlds largest independent manufacturer of solar cells, whose crystalline solar
cells are among the highest efficiency solar cells commercially available. The agreement provides
for the organization and capitalization of EverQ GmbH, or EverQ, which is a limited liability
company incorporated under the laws of Germany. The purpose of the strategic partnership is to
develop and operate a facility in Germany to manufacture, market and sell solar products based on
our proprietary String Ribbon technology using fabrication processes that combine our and Q-Cellss
manufacturing technologies. The manufacturing facility contemplated by the strategic partnership agreement is expected to be
located in Thalheim, Germany and have an initial capacity of
30 MW. Based upon the
success of the initial 11




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operations of this facility, we and Q-Cells intend over the long term, if economically viable, to
expand the capacity of this facility up to approximately 120 MW. As part of the strategic
partnership, subject to certain conditions under the strategic partnership agreement, we and
Q-Cells have agreed to finance a majority of the expenditures necessary for the establishment and
initial operation of EverQ through cash contributions in amounts payable over time that total to 46
million euros (approximately $60 million at the April 2, 2005 exchange rate), of which we would be
responsible for 75.1%. The financing of this 46 million euros
may take the form of equity, debt, or a continuation of the two.
After reduction of the 46 million euro commitment for any debt
incurred by EverQ, including loans from the parents, we will be
responsible for 75.1% of the remaining equity contributions. In
addition to these amounts, it is our intention, and the financing
plans currently require, that we finance approximately 28 million euros of
such expenditures through public grants under a German
government grant program. We believe this strategic partnership will accelerate the availability of
wafer, cell and module manufacturing capacity based on String Ribbon technology and provide greater
access to the European solar market. Financing Transactions In February 2005, we completed a common stock offering with gross proceeds of $66.7 million. We
received proceeds of $62.3 million, net of offering costs of approximately $4.4 million, which are
available to satisfy existing capital requirements, to fund the continuing development of our
Marlboro, Massachusetts manufacturing facility and the expenditures necessary for the initial
build-out and initial operation of the strategic partnership with Q-Cells. A portion of the
proceeds from the financing will also be used to increase research and development spending on
promising next generation technologies and to explore further expansion opportunities. In this
common stock offering, we issued 13,346,000 shares of our common stock. The shares of common stock
were sold at a per share price of $5.00 (before deducting underwriting discounts), which
represented a 6% discount to the $5.30 closing price of shares of our common stock as reported on
the Nasdaq National Market as of the close of business on February 3, 2005. We believe that our current
cash, cash equivalents, marketable securities and borrowings
available under our revolving credit
facility will be sufficient to fund our currently planned capital programs aimed at increasing the
capabilities of our Marlboro, Massachusetts manufacturing facility, fund our expected commitments
with our strategic partnership with Q-Cells for its initial 30 megawatts of capacity and to fund
our operating expenditures over the next twelve months. We will need to raise significant
additional capital in order to further enhance our operating infrastructure and to further increase
capacity. We may also require significant additional capital to respond to competitive pressures
and acquire complementary businesses or necessary technologies. We do not know whether we will be
able to raise additional financing or financing on terms favorable to us. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our operations, develop and
expand our manufacturing operations and distribution network, or otherwise respond to competitive
pressures would be significantly limited. 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, if applicable. 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. In addition to the critical accounting policies disclosed in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December
31, 2004, we believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements. Warranty 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 have provided for estimated future warranty
costs of $705,000, representing our best estimate of the likely
expense associated with fulfilling our obligations under such
warranties. The actual warranty experience in future periods may
result in higher costs being incurred. We engage in product quality
programs and processes, including monitoring and evaluating the
quality of component suppliers, in an effort to ensure the quality of
our product and reduce our warranty exposure. Our warranty obligation
will be affected not only by our product failure rates, but also the
costs to repair or replace failed products and potentially service
and delivery costs incurred in correcting a product failure. If our
actual product failure rates, repair or replacement costs, service or
delivery costs differ from these estimates, accrued warranty costs
would be adjusted in the period that such events or costs become
known. 12




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Sales Discount Allowance During the first quarter of 2005, we began offering certain customers early payment discounts as an
incentive aimed at improving our short-term cash flow. We estimate the allowance for sales
discounts based on actual and historical payment practices of customers, and record provisions at
the time when revenue is recognized. While our methodology takes into account these uncertainties,
adjustments in future periods may be required as our customers change their payment practices.
During the first quarter of 2005, total sales discounts taken and accrued for was $130,000. RESULTS OF OPERATION Revenues.Total revenues for the Company consist of revenues from the sale of products and research
revenues. Product revenues consist of revenues from the sale of solar cells, panels and systems.
Research revenues consist of revenues from various state and federal government agencies to fund
our ongoing research, development, testing and enhancement of our products and manufacturing
technology. Our current intention is not to pursue contracts that are not part of our ongoing
research activities. We recognize research revenues as services are rendered. Cost of product revenues.Cost of product revenues consists primarily of salaries and related
personnel costs, materials expenses, depreciation expenses, maintenance, rent, royalties on
licensed technology, warranty costs, and other support expenses associated with the manufacture of
our solar power products. 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, engineering, development,
testing and enhancement of our products, manufacturing equipment and manufacturing technology. We
expense our research and development costs as incurred. We believe that research and development is
critical to our strategic objectives of enhancing our technology, reducing manufacturing costs and
meeting the changing requirements of our customers. As a result, we expect that our total research
and development expenses will increase in the future. Selling, general and administrative expenses.Selling, general and administrative expenses consist
primarily of salaries and related personnel costs, professional fees, rent, insurance and other
sales expenses. We expect that selling expenses will increase substantially in absolute dollars as
we increase our sales efforts, hire additional sales personnel and initiate additional marketing
programs. We expect that general and administrative expenses will increase as we add personnel and
incur additional costs related to the growth of our business, as well as increasing costs
associated with being a public company. Other income.Other income, net consists of net interest income primarily from interest earned on
the holding of short-term, high-quality commercial paper, corporate bonds and United States
government-backed securities, (less any bond premium amortization), interest on any outstanding
debt, and net foreign exchange gains. Minority interest.As of April 2, 2005, EverQ incurred losses from continuing operations of
$165,000, all of which are consolidated in the Companys financial statements. However, $41,000
represents the portion of EverQ losses attributed to minority interest. Dividends on preferred stock.On June 21, 2004, holders of all outstanding shares of Series A
convertible preferred stock agreed to convert all of their shares of Series A convertible preferred
stock into shares of our common stock in connection with the Common Stock Private Placement. During
the first quarter of 2004, the Series A preferred stock earned a dividend of approximately $0.7
million, which the Company elected to add to the liquidation preference of the Series A convertible
preferred stock. Net loss attributable to common stockholders.Net loss attributable to common stockholders
consists of net losses and dividends earned by the Series A convertible preferred stockholders. Comparison of Quarters Ended April 2, 2005 and March 31, 2004 Revenues.Our product revenues for the quarter ended April 2, 2005 were $10.3 million, an increase
of $7.5 million, or 263%, from $2.8 million for the quarter ended March 31, 2004. The increase in
product revenues was due to the increased production capacity of our manufacturing facility in
Marlboro, Massachusetts, our increased marketing and sales activities, and favorable foreign
exchange rates. Research revenues for the quarter ended April 2, 2005 were $235,000, a decrease of
$27,000, or 10%, from $262,000 for the quarter ended March 31, 2004. 13




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Research revenue decreased because our last active research contract with the National Renewable
Energy Laboratory expired during the first quarter of 2005. Product revenues represented 98% of total revenues for the quarter ended April 2, 2005 and 92% of
total revenues for the quarter ended March 31, 2004. The share of total revenues represented by
product revenues in the first quarter of 2005 increased from the first quarter of 2004 due to an
increase in product revenues from expanded production capacity and a decrease in research revenues.
International product sales accounted for approximately 73% of total revenues for the quarter ended
April 2, 2005, and 61% for the quarter ended March 31, 2004. 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: Quarter endedMarch 31,
    
    
    April 2,2004
    
    
    2005By geography:U.S. distributors
    
    
    31
    %
    
    
    25
    %U.S. Government (research revenue)
    
    
    8
    %
    
    
    2
    %Germany
    
    
    56
    %
    
    
    68
    %All other
    
    
    5
    %
    
    
    5
    %100
    %
    
    
    100
    %By customer:European distributor #1
    
    
    37
    %
    
    
    30
    %European distributor #2
    
    
    19
    %
    
    
    18
    %All other
    
    
    44
    %
    
    
    52
    %100
    %
    
    
    100
    %
 Cost of product revenues.Our cost of product revenues for the quarter ended April 2, 2005 was
$9.9 million, an increase of $5.4 million, or 118%, from $4.6 million for the quarter ended March
31, 2004. 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 quarter ended April 2, 2005 was 3.4%
versus -61% for the quarter ended March 31, 2004. Product gross margin improved due primarily to
improvements in yield and efficiency associated with the scale-up of our second manufacturing line,
increased sales volume and favorable exchange rates. Due to the relatively large component of fixed costs, product gross margins are highly dependent on
sales volumes and prices. We do not expect substantial further improvements in product gross margin
during 2005. We realize positive gross margins when our Marlboro manufacturing facility operates at
about its target capacity of about 15 megawatts. However, we expect that significant portions of
manufacturing capacity at our Marlboro manufacturing facility will be dedicated to research and
development programs for purposes of achieving faster commercialization of technology improvements,
which will keep gross margins lower than could potentially be realized throughout 2005. Further
improvements in gross margin will result from increases in manufacturing scale and technology
improvements. For example, during late 2004 we demonstrated in research a new wafer growth process
that can reduce the thickness of wafers thereby significantly reducing raw materials costs.
Although this technology is still very much under development and we cannot be certain that it will
ever be commercialized, it holds the promise of significant cost
reductions in the future. Additionally,
further capacity expansion beyond 15 megawatts as well as further process and technology
improvements will be required to achieve overall profitability. Research and development expenses, including cost of research revenues.Our research and
development expenses, including cost of research revenues, for the quarter ended April 2, 2005 were
$2.3 million, an increase of $1.4 million, or 158%, from $902,000 for the quarter ended March 31,
2004. The increase was due mainly to increased labor and consulting costs associated with internal
initiatives aimed to improve our manufacturing technology and activities associated with the
planning for the next manufacturing capacity expansion, as well as engineering costs associated
with the design of the manufacturing facility of EverQ GmbH. Selling, general and administrative expenses.Our selling, general and administrative expenses for
the quarter ended April 2, 2005 were $2.0 million, an increase of $287,000, or 17%, from $1.7
million for the quarter ended March 31, 2004. Approximately 49% of the increase was due to
increases in salaries associated with additional personnel, approximately 75% of the increase was
due to activities associated with EverQ and approximately 22% 14




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of the increase was due to increased
depreciation costs, offset by a 28% decrease in professional fees and an 18% decline in insurance
costs. Other income, net.Other income, net for the period ended April 2, 2005 was comprised of $280,000
in net foreign exchange gains and $158,000 in net interest income. Other income, net for the
quarter ended March 31, 2004 consisted of $65,000 in net interest income and $8,000 in net foreign
exchange gains. Net loss attributable to common stockholders.Net loss attributable to common stockholders was
$3.2 million and $4.6 million for the quarters ended April 2, 2005 and March 31, 2004,
respectively. The decrease in net loss attributable to common stockholders was due to an
improvement in gross margin and decrease in accretion and dividends associated with the Series A
convertible preferred stock. Liquidity and Capital Resources We have historically financed our operations and met our capital expenditure requirements primarily
through sales of our capital stock and, to a lesser extent, product revenues. Research and
development expenditures have historically been partially funded by government research contracts.
At April 2, 2005, we had working capital of $73.9 million, including cash, cash equivalents and
marketable securities of $70.0 million. Net cash used in operating activities was $3.3 million for the quarter ended April 2, 2005, as
compared to $3.1 million for the quarter ended March 31, 2004. The use of cash for operating
activities in the period ended April 2, 2005 was due primarily to losses from operations of $3.2
million, and decreases in deferred
revenue of $0.4 million and decreases in accounts payable and accrued expenses of
$1.6 million, offset by decreases
in accounts receivable of $1.2 million and depreciation expense of $867,000. Net loss improved in
the first quarter of 2005 due mainly to improved gross margin. We have not experienced any significant trends in accounts receivable other than changes relative
to the increase in revenue. Fluctuations in accounts receivable from period to period relative to
changes in revenue are a result of timing of customer invoicing and receipt of payments from
customers. For both the first quarter of 2005 and 2004, Days Sales Outstanding (DSO) was
approximately 44 days and 59 days, respectively. Net cash used in investing activities was $11.3 million for the quarter ended April 2, 2005, as
compared to $936,000 provided by investing activities for the quarter ended March 31, 2004. For
the quarter ended April 2, 2005, net cash was used for purchases of marketable securities resulting
from the cash proceeds from our February common stock financing and purchases of equipment
associated with the build-out of the second manufacturing line at our Marlboro manufacturing plant. Net cash provided by financing activities was $62.4 million for the quarter ended April 2, 2005, as
compared to $1,000 for the quarter ended March 31, 2004. The cash provided by financing activities
during the quarter ended April 2, 2005 primarily represents net proceeds from common stock issued
in conjunction with the common stock public offering completed in February 2005. Capital expenditures were $942,000 for the quarter ended April 2, 2005, as compared to $2.4 million
for the quarter ended March 31, 2004. Capital expenditures for the quarter ended April 2, 2005
were primarily for equipment needed for our Marlboro manufacturing facility. As of April 2, 2005, our
outstanding commitments for capital expenditures were approximately $100,000. Nearly all of our
commitments for capital expenditures are associated with infrastructure improvements and equipment
purchases for our Marlboro manufacturing facility. We have
essentially completed our capital program aimed at increasing our
production capacity in our Marlboro factory to a nameplate capacity
of approximately 15 MW. We will however continue capital
programs to increase the capabilities and improve the operational
efficiency of this factory throughout 2005 and beyond. While these
expenditures may add incremental capacity, they are primarily
intended to improve the efficiency, capabilities and product
attributes of our Marlboro factory. In February 2005, we completed a $62.3 million common stock offering, net of offering costs of
approximately $4.4 million, to satisfy existing capital requirements and to fund the continuing
capacity expansion of our Marlboro, Massachusetts manufacturing facility and the expenditures
necessary for the initial build-out and initial operation of the strategic partnership with
Q-Cells. A portion of the proceeds from the financing will also be used to increase research and
development spending on promising next-generation technologies and to explore further expansion
opportunities. For this public stock offering, we issued 13,346,000 shares of our common stock at a per share price of $5.00 (before deducting underwriting
discounts), which represented
a 6% discount to the $5.30 closing price of shares of our common stock as reported on the Nasdaq
National Market as of the close of business on February 3, 2005. 15




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We believe that our current
cash, cash equivalents, marketable securities and borrowings
available under our revolving credit facility will be sufficient to
fund our currently planned capital programs aimed at increasing the
capabilities of our Marlboro, Massachusetts manufacturing facility,
fund our expected commitments with our strategic partnership with
Q-Cells for its initial 30 megawatts of capacity and to fund our
operating expenditures over the next twelve months. We will need to
raise significant additional capital in order to further enhance our
operating infrastructure and to further increase capacity. We may
also require significant additional capital to respond to competitive
pressures and acquire complementary businesses or necessary
technologies. We do not know whether we will be able to raise
additional financing or financing on terms favorable to us. If
adequate funds are not available or are not available on acceptable
terms, our ability to fund our operations, develop and expand our
manufacturing operations and distribution network, or otherwise
respond to competitive pressures would be significantly limited. We do not have any special purpose entities or off-balance sheet financing arrangements. As of
April 2, 2005, our cash commitments, as disclosed in Note 12 to our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended December 31, 2004, have
not significantly changed. There have been no material changes since December 31, 2004 to our contractual obligations reported
in Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities
and Exchange Commission. Certain Factors Which May Affect Future Results Investors should carefully consider the risks described below before deciding whether to invest in
our common stock. The risks described below are not the only ones we face. Additional risks not
presently known to us or that we currently believe are immaterial may also impair our business
operations and financial results. If any of the following risks actually occurs, our business,
financial condition or results of operations could be adversely affected. In such case, the trading
price of our common stock could decline and you could lose all or part of your investment. Our
filings with the Securities and Exchange Commission also contain forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including the risks we face
described below. Risks Relating to Our Financial Results Evaluating our business and future prospects may be difficult due to the rapidly changing market
landscape. There is limited historical information available about our company upon which you can base your
evaluation of our business and prospects. Although we were formed in 1994 to research and develop
crystalline silicon technology for use in manufacturing solar power products and began shipping
product from our pilot manufacturing facility in 1997, we first shipped commercial products from
our Marlboro manufacturing facility in September 2001. Relative to the entire solar industry, we
have shipped only a limited number of solar power modules and have recognized limited revenues. The market we are addressing is rapidly evolving and is experiencing technological advances and new
market entrants. Our future success will require us to scale our manufacturing capacity
significantly beyond the capacity of our Marlboro, Massachusetts manufacturing facility, and our
business model and technology are unproven at significant scale. Moreover, our strategic
partnership with Q-Cells is only in the early planning stages and because it is our first strategic
partnership relationship, we have limited experience upon which to predict whether it will be
successful. As a result, you should consider our business and prospects in light of the risks,
expenses and challenges that we will face as an early-stage company seeking to develop and
manufacture new products in a growing and rapidly evolving market. We have a history of losses, expect to incur substantial further losses and may not achieve or
maintain profitability in the future, which may decrease the market value of our stock. Since our inception, we have incurred significant net losses, including net losses of $19.4 million
for the year ended December 31, 2004 and $3.2 million for the quarter ended April 2, 2005.
Principally as a result of ongoing operating losses, we had an accumulated deficit of $78.9 million
as of April 2, 2005. We expect to incur substantial losses for the foreseeable future, and we may
never become profitable. Even if we do achieve profitability, we may be unable to sustain or
increase our profitability in the future, which could materially decrease the market value of our
common stock. We expect to continue to make significant capital expenditures and anticipate that
our expenses will increase substantially in the foreseeable future as we seek to: 16




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
    expand our manufacturing operations, whether domestically or internationally, including
the manufacturing facility in Germany contemplated by our strategic partnership with
Q-Cells;
    develop our distribution network;
    continue to research and develop our products and manufacturing technologies;
    implement internal systems and infrastructure in conjunction with our growth; and
    hire additional personnel. We do not know whether our revenues will grow at all or grow rapidly enough to absorb these
expenses, and our limited operating history makes it difficult to assess the extent of these
expenses or their impact on our operating results. Our stock price could fall substantially if our quarterly revenue or operating results fluctuate or
are disappointing. Our quarterly revenue and operating results have fluctuated significantly in the past and may
fluctuate significantly from quarter to quarter in the future due to a variety of factors,
including:  
    the size and timing of customer orders for or shipments of our products;
    the rate and cost at which we are able to expand our manufacturing capacity to meet
product demand, including the rate and cost at which we are able to implement advances in
our String-Ribbon technology;
    our ability to establish and expand key customer and distributor relationships;
    our ability and the terms upon which we are able to raise capital sufficient to finance
the expansion of our manufacturing capacity and our sales and marketing efforts;
    our ability to establish a manufacturing facility in Germany as contemplated by our
strategic partnership with Q-Cells at the costs and on the time frame that we expect;
    the extent to which Q-Cells increases its ownership in the strategic partnership in the
future and thereby reduces our share of profits and losses of the strategic partnership in
future periods;
    our ability to establish strategic relationships with third parties to accelerate our
growth plans;
    the amount and timing of expenses associated with our research and development programs
and our ability to develop enhancements to our manufacturing processes and our products;
    delays associated with the supply of specialized material necessary for the manufacture
of our solar power products;
    our ability to execute our cost reduction programs;
    one-time charges resulting from replacing existing equipment or technology with new or
improved equipment or technology as part of our strategy to expand our manufacturing
capacity and to decrease our per unit manufacturing cost;
    developments in the competitive environment, including the introduction of new products
or technological advancements by our competitors; and
    the timing of adding the personnel necessary to execute our growth plan. We anticipate that our operating expenses will continue to increase significantly, particularly as
we increase our capital expenditures to build our planned manufacturing facility in Germany, as
contemplated by our strategic
partnership with Q-Cells. If our product revenues in any quarter do not increase correspondingly,
our net losses for that period will increase. Moreover, given that a significant portion of our
operating expenses is largely fixed in nature and cannot be quickly reduced, if our product
revenues are delayed or below expectations, our operating 17




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results are likely to be adversely and
disproportionately affected. 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 it could decrease rapidly and
substantially. Risks Relating to Our Industry, Products and Operations We will need to raise significant additional capital in order to fund our operations and to
continue to grow our business, which subjects us to the risk that we may be unable to maintain or
grow our business as planned and that our stockholders may be subject to substantial additional
dilution. In order to satisfy our existing capital requirements and to fund the continuing capacity expansion
of our Marlboro, Massachusetts manufacturing facility, in June 2004 we consummated a $18.8 million,
net of financing costs of $1.2 million private placement financing and in August 2004 we secured a
$5 million line of credit. We also raised an additional $62.3 million, net of offering costs of
approximately $4.4 million, from the public sale of our common stock in February 2005. We believe
that our current cash, cash equivalents and short-term investments, together with the proceeds
available under our line of credit, will be sufficient to fund our operating expenditures over the
next 12 months. However, we will need to raise significant additional capital in order to further
enhance our operating infrastructure, to further increase manufacturing capacity through the
build-out of other manufacturing facilities, including the manufacturing facility we plan to build
in Germany as contemplated by our strategic partnership with Q-Cells and to advance our research
and development programs that are key to refining our products and to lowering our manufacturing
costs. We may also require additional capital to respond to competitive pressures and acquire
complementary businesses or necessary technologies. We do not know whether or not we will be able
to raise additional financing or financing on terms favorable to us. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our operations, develop and
expand our manufacturing operations and distribution network, maintain our research and development
efforts or otherwise respond to competitive pressures would be significantly impaired. In such a
case, our stock price would likely be materially and adversely impacted. In addition, if we raise additional funds through the issuance of equity or convertible or
exchangeable 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. Our ability to expand our manufacturing capacity and therefore to increase revenue and achieve
profitability depends to a large extent upon the success of our strategic partnership with Q-Cells.
Our strategic partnership with Q-Cells is subject to numerous risks, many of which are outside of
our control, and we cannot assure you that the strategic partnership will achieve its objective or
otherwise be successful. If the strategic partnership is not successful, our business would be
materially and adversely harmed and our stock price would decline. In January 2005, we entered into a strategic partnership agreement with Q-Cells. The purpose of the
strategic partnership is to develop and operate a facility in Germany to manufacture, market and
sell solar products based on our proprietary String Ribbon technology. As part of the strategic
partnership, subject to certain conditions under the strategic partnership agreement, we and
Q-Cells have agreed to finance a majority of the expenditures necessary for the establishment and
initial operation of the strategic partnership through cash capital contributions in amounts
payable over time that total to 46 million euros (approximately $60 million at April 2, 2005
exchange rates), of which we would be responsible for 75.1%. The
financing of this 46 million euros may take the form of equity,
debt or a combination of the two. After reduction of the
46 million euro commitment for any debt incurred by EverQ,
including loans from the parents, we will be responsible for 75.1% of
the remaining equity contributions. In addition to these amounts, it
is our intention and the financing plans currently require that we
finance approximately 28 million euros through public grants
under a German government grant program. If we and Q-Cells are unable
to finance the venture, we and Q-Cells would have
the ability to terminate the strategic partnership. As a result, the strategic partnership remains
subject to the risk that the parties may be unable to finance, both directly and through government
or third party sources, the costs of building the facility, which could cause the strategic
partnership to be terminated before the facility is built and result in a significant delay in our
ability to expand our manufacturing capacity and our ability to significantly grow revenues and
achieve profitability. In addition, our strategic partnership with Q-Cells subjects us to the risks
inherent in complex strategic partnership transactions with third parties located in international
markets, including the following:  
    the strategic partnership will be highly dependent on Q-Cellss expertise in the rapid
development of solar product manufacturing facilities in Germany; therefore, if for any
reason, Q-Cells does not devote the personnel necessary to assist us in the development of
our facility, the strategic partnership may experience delays and cost-overruns or may be
unsuccessful in the establishment of the operation; 18




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
    the strategic partnership contemplates that both we and Q-Cells will contribute certain
technologies to the strategic partnership in order to establish a novel manufacturing
processes based on a combination of our respective technologies; as such, the success of the
strategic partnership depends on our ability to integrate our respective technologies and
manufacturing processes in order to produce competitive solar products in the world
marketplace; such integration is unproven and if we are unable to integrate our technologies
and manufacturing processes, the prospects for the strategic partnership would be limited;
    the establishment of the facility may result in cost overruns, delays, equipment problems
and construction, start-up and other operating difficulties, any of which could adversely
affect the ability of the strategic partnership to achieve or grow revenue on the timeframe
we expect;
    although initially a minority shareholder in the strategic partnership, Q-Cells will have
the ability to influence the strategic direction of the strategic partnership and other
material decisions of the strategic partnership; as a result, we may be unable to take
certain actions that we believe would be in our best interests, which, given the expected
materiality of the strategic partnership to our combined operations, could significantly
harm our business; further, we may be liable to third parties for the material decisions and
actions of Q-Cells in the strategic partnership, which actions may harm the strategic
partnership and our business;
    the establishment of the strategic partnership will require significant management
attention and will place significant strain on our ability to manage effectively both our
operations in Marlboro and the operations of the strategic partnership in Germany;
    the strategic partnership may subject us to multiple, conflicting and changing laws,
regulations and tax schemes;
    the strategic partnership may be unable to obtain, maintain or enforce adequate
intellectual property rights and protection due to limited or unfavorable intellectual
property protection and may be subject to claims or suits alleging infringement of third
party intellectual property rights;
    under certain circumstances, if we exit the strategic partnership with Q-Cells, the
strategic partnership entity will continue to have certain rights to our proprietary
technologies that we are licensing to it and thereby compete with us;
    two years after the date of the strategic partnership agreement, Q-Cells may engage in
ribbon technology-related activities in competition with us;
    limitations on dividends or restrictions against repatriation of earnings may limit our
ability to capitalize on earnings from the strategic partnership;
    the operation of the manufacturing facility may experience seasonal reductions in
productivity common in certain foreign countries, such as the summer months in Europe;
    the strategic partnership may be subject to increases in tariffs, duties, price controls
or other restrictions on foreign currencies or trade barriers imposed by foreign countries;
    the strategic partnership may be unable to successfully hire and retain the additional
personnel necessary to operate the facility, which is expected to require approximately 400
employees for the initial capacity expansion;
    we will be exposed to fluctuations in currency exchange rates; and
    we may experience difficulties in staffing and managing international operations,
including the difficulty in managing a geographically dispersed workforce in compliance with
diverse local laws and customs. As a result, there can be no assurance that the strategic partnership will be successful in
establishing the facility or, once established, that the strategic partnership will attain the
manufacturing capacity or the financial results that we currently expect. 19




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The continuing improvement of our manufacturing facility in Marlboro, Massachusetts may take
longer, cost more than we expect and may not deliver the performance improvements that we expect,
which would likely result in lower revenues and earnings than anticipated. If we fail to successfully continue the improvement of our Marlboro manufacturing facility, our
business and results of operations would likely be materially impaired. We are in the process of
implementing improvements to the manufacturing equipment in order to decrease the operating costs
and increase production output. This process has required and will continue to require a significant
investment of capital and substantial engineering expenditures and is subject to significant risks
including:  
    we may experience cost overruns, delays, equipment problems and other operating
difficulties;
    our manufacturing processes use custom-built equipment that may not be delivered and
installed in a timely manner;
    our custom-built equipment may take longer and cost more to debug than planned and may
never operate as designed;
    we are incorporating first-time equipment designs and technology improvements, which we
expect to lower unit capital and operating costs, but this new technology may not be
successful; and
    we may elect to use a portion of our manufacturing capacity for research and development
purposes, thereby reducing our commercial output from our Marlboro facility. If we experience any of these or similar difficulties, we may be unable to complete the build-out
of our Marlboro facility and our manufacturing capacity could be substantially constrained, in
which case our per unit manufacturing costs would increase, we would be unable to increase sales as
planned and our revenues and earnings would likely be materially impaired. Our future success substantially depends on our ability to significantly increase our manufacturing
capacity through the development of additional manufacturing facilities. We may be unable to
achieve our capacity expansion goals as a result of a number of risks, which would limit our growth
potential, impair our operating results and financial condition and cause our stock price to
decline. Our future success depends on our ability to increase our manufacturing capacity through the
development of additional manufacturing facilities. If we are unable to do so, we may not be able
to achieve the production volumes and per unit costs that will allow us to meet customer demand,
maintain our competitive position and achieve profitability. Our ability to develop additional
manufacturing facilities is subject to significant risk and uncertainty, including:  
    we may need to continue to raise significant additional capital through the issuance of
equity or convertible or debt securities in order to finance the costs of development of any
additional facility, which we may be unable to do on reasonable terms or at all, and which
could be dilutive to our existing stockholders;
    the build-out of any additional facility will be subject to the risks inherent in the
development of a new manufacturing facility, including risks of delays and cost overruns as
a result of a number of factors, many of which may be out of our control, such as delays in
government approvals or problems with supplier relationships;
    our manufacturing processes, particularly those that incorporate improvements to our
String Ribbon technology, are unproven at large scale and may prove difficult to implement
in any new facility;
    we may be required to depend on third parties or strategic partnerships that we establish
in the development and operation of a facility, which may subject us to risks that such
third parties do not fulfill their obligations to us under our arrangements with them;
    the establishment of any new facility will require significant management attention, and
our management team, which has limited experience in the development of such facilities, may
be unable to execute the expansion plan effectively; and 20




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
    if a new facility is established internationally, we may encounter legal restrictions and
liability, encounter commercial restrictions and incur taxes and other expenses to do so and

otherwise be subject to the risks inherent in conducting business in a foreign jurisdiction
as described elsewhere in this section. If we are unable to develop and successfully operate additional manufacturing facilities, or if we
encounter any of the risks described above, we may be unable to scale our business to the extent
necessary to achieve profitability, which would cause our stock price to decline. Moreover, there
can be no assurance that if we do expand our manufacturing capacity that we will be able to
generate customer demand for our solar power products at these production levels or that we will
increase our revenues or achieve profitability. Because we depend on single and sole source suppliers for a number of specialized materials,
including silicon, string and others necessary to manufacture our solar power products, we are
susceptible to supplier and industry-wide supply shortages and price volatility, which could
adversely affect our ability to meet existing and future customer demand for our products and cause
us to make fewer shipments, generate lower than anticipated revenues and manufacture our products
at higher than expected costs. We have single and sole source suppliers for a number of specialized materials necessary to
manufacture our solar power products, which makes us susceptible to quality issues, shortages and
price changes for these materials. Specifically, our supplier of the silicon we use in the
manufacture of our solar power products is also a supplier to the semiconductor industry, which has
significantly greater buying power and market influence than we have or anyone else in the solar
power industry has. As a result, the recent increase in the demand for silicon from the
semiconductor industry may cause us to encounter shortages or delays in obtaining the specialized
silicon to be used in the manufacture of our solar power products, which could result in customer
dissatisfaction and decreased revenues. In addition, by December 2004 our silicon supplier raised
prices approximately 43% since the second quarter of 2004, and as of April 2, 2005, our supplier
has since raised prices an additional 38%. Price increases have in the past negatively impacted,
and could in the future negatively impact, our manufacturing costs. We acquire silicon from our
supplier through purchase orders and we have no long-term commitments regarding supply or price
from this supplier, which leaves us vulnerable to the risk that our supplier may stop supplying
silicon to us for any reason, including its financial viability. If this occurs, our ability to
manufacture our solar power products may be limited in any given period, which would cause our
revenues to decline in any such period. 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, which could result in order
cancellations 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 timeframes 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 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. Certain of the capital equipment used in
the manufacture of our solar power products has been developed and made specifically for us, is not
readily available from multiple vendors and would be difficult to repair or replace if it were to
become damaged or stop working. Consequently, any damage to or break down of our manufacturing
equipment at a time we are manufacturing commercial quantities of our products may have a material
adverse impact on our business. For example, 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. 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 that are under
development and not yet commercially available. Some of these new products are derived from our
innovative cell fabrication and advanced module design 21




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technologies, which are under development. Our total research and development expenses were $2.3
million and $902,000 for the quarters ended April 2, 2005 and March 31, 2004, respectively. If we
fail to successfully develop our new solar power products or technologies, we will likely be unable
to recover the losses we have incurred to develop these products and technologies and may be unable
to increase our sales and market share and to become profitable. Many of our new product and
manufacturing technologies are novel and represent a departure from conventional solar power
technologies, and it is difficult to predict whether we will be successful in completing their
development. Our manufacturing technologies have been tested only in our pilot manufacturing
facility and, in most cases, only limited pre-production prototypes of our new products have been
field-tested. Our solar power products may not gain market acceptance, which would prevent us from achieving
increased sales and market share. The development of a successful market for our solar power products may be adversely affected by a
number of factors, many of which are beyond our control, including:  
    our failure to produce solar power products that compete favorably against other solar
power products on the basis of cost, quality and performance;
    our failure to produce solar power products that compete favorably against conventional
energy sources and alternative distributed generation technologies, such as wind and
biomass, on the basis of cost, quality and performance;
    whether or not customers accept our new module designs under development and the
techniques we are developing to mount them; and
    our failure to develop and maintain successful relationships with distributors, systems
integrators and other resellers, as well as strategic partners. If our solar power products fail to gain market acceptance, we would be unable to increase our
sales and market share and to achieve and sustain profitability. Technological changes in the solar power industry could render our solar power products
uncompetitive or obsolete, which could reduce our market share and cause our sales to decline. Our failure to further refine our technology and develop and introduce new solar power products
could cause our products to become uncompetitive or obsolete, which could reduce our market share
and cause our sales to decline. The solar power industry is rapidly evolving and competitive. We
will need to invest significant financial resources in research and development to keep pace with
technological advances in the solar power industry and to effectively compete in the future. We
believe that a variety of competing solar power technologies are under development by other
companies that could result in lower manufacturing costs or higher product performance than those
expected for our solar power products. Our development efforts may be rendered obsolete by the
technological advances of others and other technologies may prove more advantageous for the
commercialization of solar power products. Our ability to increase market share and sales depends on our ability to successfully maintain our
existing distribution relationships and expand our distribution channels. We currently sell our solar power products primarily to distributors, system integrators and other
value-added resellers within and outside of North America, which typically resell our products to
end users on a global basis. During the first quarter of 2005, we sold our solar power products to
approximately 20 distributors, system integrators and other value-added resellers, and during 2004
we sold our solar power products to approximately 40 distributors, system integrators and other
value-added resellers. If we are unable to successfully refine 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. 22




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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 April 2, 2005, approximately 70% of our product sales have been made to
distributors outside of the United States. Sales in Germany constituted approximately 69% of our
total product sales for the quarter ended April 2, 2005. 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, which could increase upon the establishment and operation of the
manufacturing facility contemplated by our strategic partnership with Q-Cells, 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 expose 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, maintain or enforce intellectual property rights;
    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;
    fluctuations in currency exchange rates relative to the U.S. dollar;
    difficulty in recruiting and retaining individuals skilled in international business operations;
    increased costs associated with maintaining international marketing efforts;
    difficulty of enforcing revenue collection internationally; and
    inability to develop, manufacture, market and sell our products and services in German
and other international markets due to, for example, third-party intellectual property
rights. 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. For the foreseeable future, market conditions will
require us to denominate a majority of our sales in local currencies, which will further expose us
to foreign exchange gains or losses. Our strategy includes establishing local manufacturing facilities in international markets.
Although we have not yet constructed such a facility, our strategic partnership with Q-Cells
contemplates the establishment of a manufacturing facility in Germany in 2005. As we implement our
strategy, we may encounter legal restrictions and liability, encounter 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 April 2, 2005, our three largest resellers accounted for approximately
60% of our product sales and our 10 largest resellers accounted for approximately 78% of our
product sales. Substantially all of our sales to these resellers are made through purchase orders
without long-term commitments, including under arrangements that may be cancelled without cause on
short notice and that generally do not require them to make minimum purchases. Consequently, our
resellers are generally permitted to obtain products from other providers of solar power products
without further obligation to us. The concentration of our product sales also exposes us to credit
risks associated with the financial viability of these resellers. We anticipate that sales of our
solar power products to a limited number of key resellers will continue to account for a
significant portion of our total product revenues for the foreseeable future. Consequently, any one
of the following events may cause material fluctuations or declines in our product revenues and
negatively impact our operating results: 23




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
    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. 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 solar modules since 1997, none of these modules has been operating more than seven years,
and a majority of them have been operating less than two years. The possibility of future product
failures could cause us to incur substantial expense to repair or replace defective products.
Furthermore, widespread product failures may damage our market reputation and reduce our market
share and cause sales to decline. Our success in the future may depend on our ability to establish and maintain strategic alliances,
and any failure on our part to establish and maintain such relationships would adversely affect our
market penetration and revenue growth. As part of our plan to accelerate the expansion of our manufacturing capacity and our distribution
channels, we have recently entered into a strategic partnership with Q-Cells, a German company that
is a leading manufacturer of solar cells. We intend to continue to establish strategic
relationships with third parties in the solar power industry, particularly in international
markets. Our ability to establish strategic relationships will depend on a number of factors, many
of which are outside our control, such as the competitive position of our technology and our
products relative to our competitors. We can provide you with no assurance that we will be able to
establish other strategic relationships in the future, or that our strategic partnership with
Q-Cells will be successful, and our inability in this regard will materially adversely affect our
market penetration, our revenue growth and our ability to achieve profitability. In addition, our strategic partnership with Q-Cells, as well as any other strategic alliances that
we establish, will subject us to a number of risks, including risks associated with sharing
proprietary information, loss of control of operations that are material to our business and
profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement and
subject us to the risk that the third party will not perform its obligations under the
relationship, which may subject us to losses over which we have no control or expensive termination
arrangements. As a result, even if our strategic alliances with third parties are successful, our
business may be adversely affected by a number of factors that are outside of our control, which
would in turn cause our stock price to decline. The success of our business depends on the continuing contributions of our key personnel and our
ability to attract and retain new qualified employees in a competitive labor market. We have attracted a highly skilled management team and specialized workforce, including scientists,
engineers, researchers and manufacturing and marketing professionals. If we were to lose the
services of Richard M. Feldt, our Chief Executive Officer, President and a director, or any of our
other executive officers and key employees, our business could be materially and adversely
impacted. We do not carry key person life insurance on any of our senior management or other key
personnel. We had approximately 275 employees as of April 2, 2005, and we 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 and the manufacturing facility
we plan to be build in Germany as contemplated by our strategic partnership with Q-Cells.
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
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our personnel than we currently anticipate. Moreover, any officer or employee can terminate his or
her relationship with us at any time. We may be affected by skilled labor shortages and labor disputes. We require experienced engineers, technicians and machinists to conduct our business. No assurance
can be given that the supply of these skilled persons will always be adequate to meet our
requirements or that we will be able to attract an adequate number of skilled persons. Labor
disputes could also occur at our manufacturing facilities, which may affect our business. While our
employees are not currently represented by labor unions or organized under collective bargaining
agreements, labor disputes could occur at any of our facilities, including our Marlboro facility
and the facility we plan to build in Germany in connection with our strategic partnership with
Q-Cells, which could adversely impact our revenues and operations. If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud. As a result, current and potential stockholders
could lose confidence in our financial reporting, which could harm our business and the trading
price of our common stock. Effective internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. We have in the past discovered, and may in the future discover, areas of
our internal controls that need improvement. In addition, Section 404 of the Sarbanes-Oxley Act of
2002 requires us to evaluate and report on our internal controls over financial reporting and have
our independent registered public accounting firm annually attest to our evaluation, as well as
issue their own opinion on our internal control over financial reporting, which was completed for
the first time in connection with our Annual Report on Form 10-K for the fiscal year ended December
31, 2004. We prepared for compliance with Section 404 by strengthening, assessing and testing our
system of internal controls to provide the basis for our report. However, the continuous process of
strengthening our internal controls and complying with Section 404 is expensive and time consuming,
and requires significant management attention. We cannot be certain that these measures will ensure
that we will maintain adequate controls over our financial processes and reporting in the future.
Furthermore, as we rapidly grow our business, including expansion related to our strategic
partnership with Q-Cells, our internal controls will become more complex and will require
significantly more resources to ensure our internal controls overall remain effective. Failure to
implement required new or improved controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our reporting obligations. If we or
our auditors discover a material weakness, the disclosure of that fact, even if quickly remedied,
could reduce the markets confidence in our financial statements and harm our stock price. In
addition, future non-compliance with Section 404 could subject us to a variety of administrative
sanctions, including the suspension or delisting of our common stock from the Nasdaq National
Market and the inability of registered broker-dealers to make a market in our common stock, which
would further reduce our stock price. 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, including the manufacturing facility we plan to
build in Germany as contemplated by our strategic partnership with Q-Cells, we have undergone and
anticipate undergoing further rapid growth in the scope of our operations and the number of our
employees, which is likely to place a significant strain on our senior management team and other
resources. In addition, we may encounter difficulties in effectively managing the budgeting,
forecasting and other process control issues presented by this rapid growth. We may seek to augment
or replace members of our management team or we may lose key members of our management team, and we
may not be able to attract new management talent with sufficient skill and experience. If solar power technology is not suitable for widespread adoption or sufficient demand for solar
power products does not develop or takes longer to develop than we anticipate, our sales would not
significantly increase and we would be unable to achieve or sustain profitability. The market for solar power products is emerging and rapidly evolving, and its future success is
uncertain. If solar power technology proves unsuitable for widespread commercial deployment or if
demand for solar power products fails to develop sufficiently, we would be unable to generate
enough revenues to achieve and sustain profitability. In addition, demand for solar power products
in the markets and geographic regions we target may not develop or may develop more slowly than we
anticipate. Many factors will influence the widespread adoption of solar power technology and
demand for solar power products, including: 25




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
    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 that 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;
    capital expenditures by customers that tend to decrease when the United States or global economy slows;
    continued deregulation of the electric power industry and broader energy industry; and
    availability of government subsidies and incentives. We face intense competition from other companies producing solar power and other energy generation
products. If we fail to compete effectively, we may be unable to increase our market share and
sales. The solar power market is intensely competitive and rapidly evolving. Our competitors have
established a market position more prominent than ours, and if we fail to attract and retain
customers and establish a successful distribution network for our solar power products, we may be
unable to increase our sales and market share. There are over 20 companies in the world that
produce solar power products, including BP Solar, Kyocera Corporation, Royal Dutch Shell, Sharp
Corporation, RWE SCHOTT Solar, GE Energy and Sanyo Corporation. Other existing and potential
competitors in the solar power market include universities and research institutions. We also
expect that future competition will include new entrants to the solar power market offering new
technological solutions. Further, many of our competitors are developing and are currently
producing products based on new solar power technologies, including other crystalline silicon
ribbon and sheet technologies, that they believe will ultimately have costs similar to, or lower
than, our projected costs. Most of our competitors are substantially larger than we are, have longer operating histories and
have substantially greater financial, technical, manufacturing and other resources than we do. Our
competitors greater size in some cases provides them with a competitive advantage with respect to
manufacturing costs due to their ability to allocate fixed costs across a greater volume of
production and purchase raw materials at lower prices. 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 resellers and
their 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 products and services 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 and in
developing, manufacturing, marketing and selling our products and services:  
    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;
    given the costs of obtaining patent protection, we may choose not to protect certain
innovations that later turn out to be important;
    our license, but not our right, to practice the String Ribbon technology terminated upon
the expiration of the underlying patents, which occurred during 2003 and 2004, and our
historical operating experience with String 26




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Ribbon technology and our related patented and proprietary manufacturing processes may not
adequately protect our competitive advantage;
    third parties may design around our patented technologies or seek to challenge or
invalidate our intellectual property rights and there is no assurance that our intellectual
property rights will deter infringement or misappropriation of our intellectual property;
    we may incur significant costs and diversion of management resources in prosecuting or
defending intellectual property infringement suits;
    we may not be successful in prosecuting or defending intellectual property infringement
suits and, as a result, may need to seek to obtain a license of the third partys
intellectual property rights, which may not be available to us, whether on reasonable terms
or at all;
    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 may be disclosed to competitors, strategic partners and the public; and
    while our license to the underlying patents directed to the String Ribbon technology has
expired, we own 5 United States patents, 8 pending United States patent applications, 2
granted European patent applications that have enforceable rights in 10 foreign
jurisdictions and 16 pending foreign patent applications directed to various aspects of the
String Ribbon technology; however, our historical operating experience with String Ribbon
technology and our related patented and proprietary manufacturing processes may not
adequately protect our competitive advantage now that the licensed patents have expired. If we are subject to litigation and infringement claims, they could be costly and disrupt our
business. In recent years, there has been significant litigation involving patents and other intellectual
property rights in many technology-related industries. There may be patents or patent applications
in the United States or other countries that are pertinent to our business of which we are not
aware. The technology that we incorporate into and use to develop and manufacture our current and
future solar power products may be subject to claims that they infringe the patents or proprietary
rights of others. The success of our technology efforts will also depend on our ability to develop
new technologies without infringing or misappropriating the proprietary rights of others. We may receive notices from third parties alleging patent, trademark or copyright infringement,
claims regarding trade secrets or contract claims. Receipt of these notices could result in
significant costs as a result of the diversion of the attention of management from our technology
efforts. No third party has a current filed intellectual property lawsuit, arbitration or other
proceeding against us. If a successful claim were brought against us, we would have to attempt to
license the intellectual property right from the claimant or to spend time and money to design
around or avoid the intellectual property. Any such license may not be available at reasonable
terms, or at all. We may, however, be involved in future lawsuits, arbitrations or other legal proceedings alleging
patent infringement or other intellectual property rights violations. In addition, litigation,
arbitration or other legal proceedings may be necessary to:  
    assert claims of infringement or misappropriation of or otherwise enforce our intellectual property rights;
    protect our trade secrets or know-how; or
    determine the enforceability, scope and validity of our intellectual property rights or those of others. We may be unsuccessful in defending or pursuing these lawsuits or claims. Regardless of the
outcome, litigation can be very costly and can divert managements efforts. An adverse
determination may subject us to significant liabilities or require us to seek licenses to other
parties intellectual property rights. We may also be restricted or prevented from developing,
manufacturing, marketing or selling a solar power product or service that we develop. Further, we
may not be able to obtain any necessary licenses on acceptable terms, if at all. In addition, we may have to participate in proceedings before the United States Patent and
Trademark office, or before foreign patent and trademark offices, with respect to our patents,
patent applications, trademarks or trademark applications or those of others. These actions may
result in substantial costs to us as well as a diversion of 27




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management attention. Furthermore, these actions could place our patents, trademarks and other
intellectual property rights at risk and could result in the loss of patent, trademark or other
intellectual property rights protection for the products and services on which our business
strategy depends. We may be unable to adequately protect or enforce our proprietary information, which may result in
its unauthorized use or reduced sales or otherwise reduce our ability to compete. Our business and competitive position depend upon our ability to protect our proprietary
technology, including any solar power products that we develop. Despite our efforts to protect this
information, unauthorized parties may attempt to obtain and use information that we regard as
proprietary. Any patents issued in connection with our efforts to develop new technology for solar
power products may not be broad enough to protect all of the potential uses of the technology. In addition, when we do not control the prosecution, maintenance and enforcement of certain
important intellectual property, such as a technology in-licensed to us, the protection of the
intellectual property rights may not be in our hands. If the entity that controls the intellectual
property rights does not adequately protect those rights, our rights may be impaired, which may
impact our ability to develop, market and commercialize the related solar power products. Our means of protecting our proprietary rights may not be adequate, and our competitors may:  
    independently develop substantially equivalent proprietary information, products and techniques;
    otherwise gain access to our proprietary information; or
    design around our patents or other intellectual property. We pursue a policy of having our employees, consultants and advisors execute proprietary
information and invention agreements when they begin working for us. However, these agreements may
not provide meaningful protection for our trade secrets or other proprietary information in the
event of unauthorized use or disclosure. If we fail to maintain trade secret and patent protection,
our potential, future revenues may be decreased. If the effective term of our patents is decreased due to changes in patent laws or if we need to
refile some of our patent applications, the value of our patent portfolio and the revenues we
derive from it may be decreased. The value of our patents depends in part on their duration. A shorter period of patent protection
could lessen the value of our rights under any patents that we obtain and may decrease the revenues
we derive from our patents. For example, the United States patent laws were amended in 1995 to
change the term of patent protection from 17 years after the date of a patents issuance to 20
years after the earliest effective filing date of the application for a patent, unless the
application was pending on June 8, 1995, in which case the term of a patents protection expires
either 17 years after its issuance or 20 years after its filing, whichever is later. Because the
average time from filing of patent application to issuance of a patent there from is usually at
least one year and, depending on the subject matter, may be more than three years, a 20-year patent
term from the filing date may result in substantially shorter patent protection. Also, we may need
to refile some of our patent applications to disclose additional subject matter and, in these
situations, the patent term will be measured from the date of the earliest priority application to
which benefit is claimed in such a patent application. This would shorten our period of patent
exclusivity and may decrease the revenues that we might obtain from the patents. International intellectual property protection is particularly uncertain and costly, and we have
not obtained or sought patent or trademark protection in many foreign countries where our solar
power products and services may be developed, manufactured, marketed or sold. Intellectual property law outside the United States is even more uncertain and costly than in the
United States and is currently undergoing review and revision in many countries. Further, the laws
of some foreign countries may not protect our intellectual property rights to the same extent as
United States laws. Moreover, we have not sought, obtained or maintained patent and trademark
protection in many foreign countries in which our solar power products and services may be
developed, manufactured, marketed or sold by us or by others. 28




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Existing regulations and changes to such regulations may present technical, regulatory and economic
barriers to the purchase and use of solar power products, which may significantly reduce demand for
our products. The market for electricity generation products is heavily influenced by foreign, federal, state and
local government regulations and policies concerning the electric utility industry, as well as
internal policies and regulations promulgated by electric utilities. These regulations and policies
often relate to electricity pricing and technical interconnection of customer-owned electricity
generation. In the United States and in a number of other countries, these regulations and policies
are being modified and may continue to be modified. Customer purchases of, or further investment in
the research and development of, alternative energy sources, including solar power technology,
could be deterred by these regulations and policies, which could result in a significant reduction
in the potential demand for our solar power products. For example, utility companies commonly
charge fees to larger, industrial customers for disconnecting from the electric grid or for having
the capacity to use power from the electric grid for back-up purposes. These fees could increase
the cost to our customers of using our solar power products and make them less desirable, thereby
harming our business, prospects, results of operations and financial condition. We anticipate that our solar power products and their installation will be subject to oversight and
regulation in accordance with national and local ordinances relating to building codes, safety,
environmental protection, utility interconnection and metering and related matters. There is also a
burden in having to track the requirements of individual states and design equipment to comply with
the varying standards. Any new government regulations or utility policies pertaining to our solar
power products may result in significant additional expenses to us and our resellers and their
customers and, as a result, could cause a significant reduction in demand for our solar power
products. The reduction or elimination of government subsidies and economic incentives for on-grid
applications could cause our revenues to decline. We believe that the growth of some of our target markets, including the market for on-grid
applications, depends in part on the availability and size of government subsidies and economic
incentives. Accordingly, the reduction or elimination of government subsidies and economic
incentives may adversely affect the growth of these markets or result in increased price
competition, which could cause our revenues to decline. Today, the cost of solar power
substantially exceeds the cost of power furnished by the electric utility grid. As a result,
federal, state and local governmental bodies in many countries, most notably the United States,
Japan and Germany, have provided subsidies in the form of cost reductions, tax write-offs and other
incentives to end users, distributors, systems integrators and manufacturers of solar power
products to promote the use of solar energy in on-grid applications and to reduce dependency on
other forms of energy. These government subsidies and economic incentives could be reduced or
eliminated altogether. The lack or inaccessibility of financing for off-grid solar power applications could cause our
sales to decline. One of the markets our products address is off-grid solar power applications to developed and
developing countries. In some developing countries, government agencies and the private sector
have, from time to time, provided subsidies or financing on preferred terms for rural
electrification programs. We believe that the availability of financing could have a significant
effect on the level of sales of off-grid solar power applications, particularly in developing
countries where users may not have sufficient resources or credit to otherwise acquire solar power
systems. If existing financing programs for off-grid solar power applications are eliminated or if
financing is inaccessible, the growth of the market for off-grid applications may be adversely
affected, which could cause our sales to decline. Our reliance on government contracts to partially fund our research and development programs could
impair our ability to commercialize our solar power technologies and would increase our research
and development expenses. We intend to continue our policy of selectively pursuing contract research, product development and
market development programs funded by various agencies of the United States, state and
international governments to complement and enhance our own resources. The percentage of our total
revenues derived from government-related contracts was approximately 2% for the quarter ended April
2, 2005. As of April 2, 2005, we did not have any active research contracts. 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 29




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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 or modified 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 are subject to audit and 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. Moreover, the failure to provide these reports or to provide inaccurate
or incomplete reports may provide the government with rights to any intellectual property arising
from the related research. 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 or because action is necessary to alleviate health or safety needs, 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 noncompliance with these
regulations may result in adverse publicity and potentially significant monetary damages and fines. We are required to comply with all foreign, federal, state and local regulations regarding
protection of the environment. If more stringent regulations are adopted in the future, the costs
of compliance with these new regulations could be substantial. We believe that we have all
necessary permits to conduct our business as it is presently conducted. If we fail to comply with
present or future environmental regulations, however, we may be required to pay substantial fines,
suspend production or cease operations. We use, generate and discharge toxic, volatile and
otherwise hazardous chemicals and wastes in our research and development and manufacturing
activities. Any failure by us to control the use of, or to restrict adequately the discharge of,
hazardous substances could subject us to potentially significant monetary damages and fines or
suspensions in our business operations. In addition, under some foreign, 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 or not 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 to cover these claims, they could
require us to make significant payments. Risks Related to Our Common Stock Our officers and directors control approximately 21% of our voting stock and may be able to
significantly influence corporate actions. As of April 2, 2005, our executive officers and directors and entities affiliated with them
beneficially owned approximately 21% of our voting stock. As a result, these stockholders, acting
together, may be able to significantly influence all matters requiring approval by our
stockholders, including the election of directors, the approval of charter and by-law amendments
and the approval of mergers or other business combinations. The interests of these and other of our
existing stockholders may conflict with the interests of our other stockholders. The price of our common stock has been volatile. Our common stock is quoted on the Nasdaq National Market. The trading price of our common stock has
been and may continue to be volatile. The closing sale prices of our common stock, as reported by
the Nasdaq National 30




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Market, have ranged from $2.04 to $7.45 for the 52-week period ended April 2, 2005. 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. The Nasdaq National 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 quarterly revenue and operating results have fluctuated significantly in the past and may
fluctuate significantly from quarter to quarter in the future due to a variety of factors,
including:  
    the size and timing of customer orders for or shipments of our products;
    the rate and cost at which we are able to expand our manufacturing capacity to meet
product demand, including the rate and cost at which we are able to implement advances
in our String-Ribbon technology;
    our ability to establish and expand key customer and distributor relationships;
    our ability and the terms upon which we are able to raise capital sufficient to
finance the expansion of our manufacturing capacity and our sales and marketing
efforts;
    our ability to establish a manufacturing facility in Germany as contemplated by our
joint venture with Q-Cells at the costs and on the time frame that we expect;
    the extent to which Q-Cells increases its ownership in the joint venture in the
future and thereby reduces our share of profits and losses of the joint venture in
future periods;
    our ability to establish strategic relationships with third parties to accelerate
our growth plans;
    the amount and timing of expenses associated with our research and development
programs and our ability to develop enhancements to our manufacturing processes and our
products;
    delays associated with the supply of specialized materials necessary for the
manufacture of our solar power products;
    our ability to execute our cost reduction programs;
    one time charges resulting from replacing existing equipment or technology with new
or improved equipment or technology as part of our strategy to expand our manufacturing
capacity and to decrease our per unit manufacturing cost;
    developments in the competitive environment, including the introduction of new
products or technological advancements by our competitors; and
    the timing of adding the personnel necessary to execute our growth plan. In addition, the stock market in general, and the Nasdaq National Market and the market for
technology companies in particular, have experienced significant price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of those companies.
These broad market and industry factors may seriously harm the market price of our common stock,
regardless of our operating performance. In the past, following periods of volatility in the
market price of a companys securities, securities class action litigation has often been
instituted. A securities class action suit against us could result in substantial costs, potential
liabilities and the diversion of managements attention and resources. We anticipate that our operating expenses will continue to increase significantly, particularly as
we increase our capital expenditures to build our planned manufacturing facility in Germany, as
contemplated by our strategic 31




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partnership with Q-Cells. If our product revenues in any quarter do not increase correspondingly,
our net losses for that period will increase. Moreover, given that a significant portion of our
operating expenses is largely fixed in nature and cannot be quickly reduced, if our product
revenues are delayed or below expectations, our operating results are likely to be adversely and
disproportionately affected. 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 it could decrease rapidly and
substantially. Because we do not intend to pay dividends, stockholders will benefit from an investment in our
common stock only if it appreciates in value. We have never declared or paid any cash dividends on our common stock. We anticipate that we will
retain our earnings to support operations and to finance the growth and development of our business
and do not expect to pay cash dividends in the foreseeable future. Additionally, under the terms of
the Loan Agreement with Silicon Valley Bank we are prohibited from declaring or paying dividends
above an aggregate threshold of $500,000. As a result, the success of an investment in our common
stock will depend upon any future appreciation in its value. There is no guarantee that our common
stock will appreciate in value or even maintain the price at which stockholders have purchased
their shares. 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 and by-laws, as well as 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. Even in the absence of a takeover attempt, the existence of these provisions
may adversely affect the prevailing market price of our common stock if they are viewed as
discouraging takeover attempts in the future. We can issue shares of preferred stock that may adversely affect the rights of a stockholder of our
common stock. Our certificate of incorporation authorizes us to issue up to 27,227,668 shares of preferred stock
with designations, rights and preferences determined from time-to-time by our board of directors.
Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights superior to those of
stockholders of our common stock. For example, an issuance of shares of preferred stock could:  
    adversely affect the voting power of the stockholders of our common stock;
    make it more difficult for a third party to gain control of us;
    discourage bids for our common stock at a premium;
    limit or eliminate any payments that the stockholders of our common stock could expect to
receive upon our liquidation; or
    otherwise adversely affect the market price of our common stock. We have in the past and we may in the future issue additional shares of authorized preferred stock
at any time. Our failure to comply with applicable listing standards could result in the ineligibility of our
common stock for quotation on the Nasdaq National Market and severely limit the ability to sell our
common stock. Our common stock is quoted on the Nasdaq National Market. Under Nasdaqs listing maintenance
standards, if the closing bid price of our common stock is under $1.00 per share for 30 consecutive
trading days, Nasdaq will notify us that we may be de-listed from the Nasdaq National Market. If
the closing bid price of our common stock does not thereafter regain compliance for a minimum of
ten consecutive trading days during the 90 days following notification by Nasdaq, our common stock
may no longer be eligible for quotation on the Nasdaq National Market. 32




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There can be no assurance that our common stock will remain eligible for quotation on the Nasdaq
National Market. In addition, if our common stock were no longer eligible for such quotation, our
stockholders would not be able to sell our common stock on the Nasdaq National Market, and their
ability to sell any of our common stock could be severely if not completely limited. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK INTEREST RATE RISK We do not use derivative financial instruments to manage interest rate risk. Interest income earned
on our cash, cash equivalents and marketable securities 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 quarter ended April 2, 2005, 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 69% of product revenues for the quarter ended April 2, 2005. Since our
Euro-denominated sales represent a significant portion of our total revenue, a hypothetical 10
percent weakening in exchange rates against the U.S. dollar would have had a material effect on
our consolidated financial position, reducing revenue and earnings by approximately 7%. As we
expand our manufacturing operations and distribution network internationally, our exposure to
fluctuations in currency exchange rates may increase. Additionally, from time to time we may
purchase equipment and materials internationally, and to the extent that such purchases are billed
in foreign currency, we will be exposed to currency gains or losses. In 2004, we began to manage our foreign exchange risk through the use of derivative financial
instruments. These financial instruments serve to protect cash flow against the impact of the
translation into U.S. dollars of foreign exchange denominated transactions. As of April 2, 2005, we
had forward currency contracts denominated in foreign currency totaling 4.0 million. At April 2,
2005, the translated fair market value of outstanding forward exchange contracts was $5.2 million.
The difference between the fair market value and the book value of the contracts as of April 2,
2005 was $29,000, which is recorded as a current liability in our balance sheet. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of the end of the period covered by this report (the Evaluation Date), have concluded that as
of the Evaluation Date, our disclosure controls and procedures are effective, in all material
respects, to ensure that information required to be disclosed in the reports that we file and
submit under the Exchange Act (i) is recorded, processed, summarized and reported as and when
required and (ii) is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Internal Control Over Financial Reporting During the period covered by this report, there have been no significant changes in our internal
control over financial reporting that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting. Limitations Inherent in all Controls. The Companys management, including the Chief Executive Officer and Chief Financial Officer,
recognize that our disclosure controls and our internal controls (discussed above) cannot prevent
all errors or all attempts at fraud. Any controls system, no matter how well crafted and operated,
can only provide reasonable, and not absolute, assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Because of the inherent limitations
in 33




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any control system, no evaluation or implementation of a control system can provide complete
assurance that all control issues and all possible instances of fraud have been or will be
detected. 
 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not a party to any material legal proceedings within the meaning of Item 103 of Regulation S-K. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS In February 2005, we completed a $62.3 million common stock offering, net of offering costs of
approximately $4.4 million, to satisfy existing capital requirements and to fund the continuing
capacity expansion of our Marlboro, Massachusetts manufacturing facility and the expenditures
necessary for the initial build-out and initial operation of the strategic partnership with
Q-Cells. A portion of the proceeds from the financing will also be used to increase research and
development spending on promising next generation technologies and to explore further expansion
opportunities. In this common stock offering, we issued 13,346,000 shares of our common stock. The
shares of common stock were sold at a per share price of $5.00 (before deducting underwriting
discounts), which represented a 6% discount to the $5.30 closing price of shares of our common
stock as reported on the Nasdaq National Market as of the close of business on February 3, 2005. We have never declared or paid cash dividends on our common stock. We anticipate that we will
retain our earnings to support operations and to finance the growth and development of our business
and do not expect to pay cash dividends in the foreseeable future. On August 26, 2004, the Company
entered into a one-year revolving credit facility in the amount of $5.0 million with Silicon Valley
Bank pursuant to a Loan and Security Agreement dated August 26, 2004 (the Loan Agreement). The
Loan Agreement contains certain financial and other covenants that restrict the Companys ability
to, among other things, dispose of property, incur indebtedness, make certain acquisitions, merge
into another entity, declare or pay dividends above an aggregate threshold of $500,000 and redeem,
retire, repurchase or otherwise acquire shares of capital stock of the Company in excess of
$500,000 in the aggregate. In addition, the Company must comply with certain financial thresholds
including minimum tangible net worth and minimum cash or excess availability. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5. OTHER INFORMATION On December 15, 2004, the Compensation Committee (the Compensation Committee) of the Board of
Directors recommended for approval by the Board of Directors, and the Board approved (i) a bonus
pool for non-CEO employees of up to $300,000, (ii) an stock option bonus pool for non-CEO employees
of up to 300,000 shares, and (iii) a cash bonus to the Chief Executive Officer of $150,000 (of
which $100,000 is due pursuant to the Chief Executive Officers employment offer letter and $50,000
of which is in addition to such amounts due). In February 2005, the Compensation Committee approved cash bonus payments from the previously
approved bonus pool for the non-CEO named executive officers as follows: 34




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Name
    
    Position
    
    Cash BonusRichard G. Chleboski
    
    Chief Financial Officer, Vice
President, Treasurer and Secretary
    
    $
    17,852Mark A. Farber
    
    Vice President, Strategic Planning
    
    $
    22,314Dr. Jack I. Hanoka
    
    Vice President and Chief Technical
Officer
    
    $
    17,757John J. McCaffrey, Jr.
    
    Vice President, Manufacturing and
Engineering
    
    $
    19,764
 On April 13, 2005, the Board of Directors of the Company approved a Management Incentive Plan,
which is intended to recognize and reward key employees of the Company for the business performance
of the organization. The Management Incentive Plan is based on company performance results,
compared to annually established plan goals. Plan participants will include the Chief Executive Officer, Senior Vice Presidents, Vice
Presidents, Directors and all other professional staff. The plan allows the inclusion of other
non-referenced employees as approved by the Chief Executive Officer or the Compensation Committee
of the Companys Board of Directors. The four level bonus matrix is based on achievement by the Company of a combination of performance
targets, corporate strategic goals, and departmental objectives. Level 3 and Level 4 plan
participants become eligible for bonus payments of 25% and 40%, respectively, of their annual
salary, based on attainment of Company performance targets and the achievement of corporate
strategic goals. Level 1 and Level 2 plan participants become eligible for 40-60% of their bonus
amount based on attainment of Company performance targets. The remaining 40-60% of the eligible
bonus amount is earned based on the attainment of strategic and/or departmental objectives. Bonus
payments for Level 1 and Level 2 plan participants are 5% and 15%, respectively, of their annual
salary. Participation in the Management Incentive Plan will be based on position level in the Company at
the beginning of each calendar year. The Chief Executive Officer
will recommend performance targets and corporate strategic goals for the
coming year to the Compensation Committee of the Companys Board of Directors. The Compensation Committee of the Companys Board of Directors will set the coming years
targets. Departmental objectives will be established by
the appropriate department manager and approved by the Chief Executive Officer. Stockholders interested in
submitting a proposal for inclusion in the proxy materials for our
2005 annual meeting of stockholders may do so by following the
procedures prescribed in Rule 14a-8 under the Securities
Exchange Act of 1934, as amended. Our Board of Directors has recently
selected July 11, 2005 as the date of our 2005 annual meeting of
stockholders (the Annual Meeting). Because the date of
the Annual Meeting is more than 30 days prior to the one-year
anniversary date of our 2004 annual meeting of stockholders, in order
for a stockholder proposal to be eligible for inclusion in the proxy
materials for the Annual Meeting, such stockholder proposal must be
received by the Companys Corporate Secretary within a
reasonable time prior to the printing of the proxy materials related
to the Annual Meeting. Proposals must be sent to Evergreen Solar,
Inc., 138 Bartlett Street, Marlboro, Massachusetts 01752, Attn:
Corporate Secretary. 35




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##### Table of Contents



ITEM 6. EXHIBITS Number
    
    Description1.1 (1)
    
    Underwriting Agreement dated as of February 3, 2005, by and among the Company, SG Cowen
& Co., LLC and First Albany Capital Inc.3.1 (2)
    
    Third Amended and Restated Certificate of Incorporation. (Exhibit 3.2)3.2 (2)
    
    Second Amended and Restated By-laws. (Exhibit 3.4)3.3 (3)
    
    Certificate of Amendment of Third Amended and Restated Certificate of Incorporation
filed with the Secretary of State of the State of Delaware on May 15, 2003. (Exhibit
4.3)3.4 (3)
    
    Certificate of the Powers, Designations, Preferences and Rights of the Series A
Convertible Preferred Stock of the Company. (Exhibit 4.4)3.5 (4)
    
    Certificate of Amendment of Third Amended and Restated Certificate of Incorporation
filed with the Secretary of State of the State of Delaware on August 20, 2004. (Exhibit
4.5)4.1 (5)
    
    Warrant issued to CRT Capital Group LLC. (Exhibit 4.1)4.2 (6)
    
    Warrant to Purchase Stock issued to Silicon Valley Bank on August 26, 2004. (Exhibit 4.1)4.3 (6)
    
    Registration Rights Agreement dated as of August 26, 2004. (Exhibit 4.2)10.1 (2)*
    
    1994 Stock Option Plan. (Exhibit 10.1)10.2 (2)*
    
    2000 Stock Option and Incentive Plan. (Exhibit 10.2)10.3 (3)*
    
    Amended 2000 Stock Option and Incentive Plan. (Exhibit 4.5)10.4 (2)*
    
    2000 Employee Stock Purchase Plan. (Exhibit 10.3)10.5 (2)
    
    Lease Agreement between Company and W9/TIB Real Estate Limited Partnership dated as of
January 31, 2000, as amended. (Exhibit 10.5)10.6 (5)
    
    Lease Agreement between Company and One Hundred Twenty Bartlett Street Marlboro LLC
dated as of January 26, 2004. (Exhibit 10.6)10.7 (2)+
    
    Agreement between Company and Emanuel M. Sachs dated as of September 30, 1994, as
amended. (Exhibit 10.7)10.8 (2)
    
    Series D Preferred Stock Purchase Agreement dated as of December 28, 1999. (Exhibit 10.8)10.9 (2)
    
    Form of Indemnification Agreement between Company and each of its directors and
executive officers. (Exhibit 10.9)10.10 (7)
    
    Stock and Warrant Purchase Agreement dated as of March 21, 2003. (Exhibit 10.1)10.11 (7)
    
    Form of Registration Rights Agreement. (Exhibit 10.3)10.12 (7)
    
    Voting Agreement dated as of March 21, 2003. (Exhibit 10.2)10.13 (8)
    
    Stock and Warrant Purchase Agreement dated June 16, 2004. (Exhibit 10.1)10.14 (8)
    
    Warrant Agreement dated June 21, 2004. (Exhibit 10.2)
 36




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##### Table of Contents



Number
    
    Description10.15 (8)
    
    Form of Warrants. (Exhibit 10.3)10.16 (8)
    
    Registration Rights Agreement dated June 21, 2004. (Exhibit 10.4)10.17 (8)
    
    Conversion, Consent, Voting and Lock-Up Agreement dated June 21, 2004. (Exhibit 10.5)10.18 (9)++
    
    Master Strategic Partnership Agreement entered into as of January 14, 2005 by and
between Evergreen Solar, Inc. and Q-Cells AG. (Exhibit 10.1)10.19 (9)++
    
    License and Technology Transfer Agreement by and between Evergreen Solar, Inc. and EverQ
GmbH, dated January 14, 2005. (Exhibit 10.2)10.20
    
    Evergreen Solar, Inc. Management
Incentive Plan. (filed herewith)31.1
    
    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-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.
   +
    
    Confidential treatment granted as to certain portions.++
    
    Confidential treatment requested as to certain portions.*
    
    Indicates a management contract or compensatory plan, contract or arrangement.(1)
    
    Incorporated herein by reference to the exhibits to the Companys Current Report on Form 8-K
dated February 3, 2005 (File No. 000-31687). The number given in parenthesis indicates the
corresponding exhibit number in such Form 8-K.(2)
    
    Incorporated herein by reference to the exhibits to the Companys Registration Statement on
Form S-1, as amended (file No. 333-43140). The number given in parenthesis indicates the
corresponding exhibit number in such Form S-1.(3)
    
    Incorporated herein by reference to the exhibits to the Companys Registration Statement on
Form S-8 dated June 9, 2003, as amended (file No. 333-105963). The number given in parenthesis
indicates the corresponding exhibit number in such Form S-8.(4)
    
    Incorporated herein by reference to the exhibits to the Companys Registration Statement on
Form S-3 filed on October 21, 2004 (file No. 333-119864). The number given in parenthesis
indicates the corresponding exhibit number in such Form S-3.(5)
    
    Incorporated herein by reference to the exhibits to the Companys Annual Report on Form 10-K
for the period ended December 31, 2004 filed on March 10, 2005.(6)
    
    Incorporated herein by reference to the exhibits to the Companys Quarterly Report on Form
10-Q for the period ended September 30, 2004 filed on November 12, 2004. The number given in
parenthesis indicates the corresponding exhibit number in such Form 10-Q.(7)
    
    Incorporated herein by reference to the exhibits to the Companys Current Report on Form 8-K
dated March 24, 2003 (File No. 000-31687). The number given in parenthesis indicates the
corresponding exhibit number in such Form 8-K.(8)
    
    Incorporated herein by reference to the exhibits to the Companys Current Report on Form 8-K
dated June 22, 2004 (File No. 000-31687). The number given in parenthesis indicates the
corresponding exhibit number in such Form 8-K. 37




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##### Table of Contents



(9)
    
    Incorporated herein by reference to the exhibits to the Companys Current Report on Form 8-K
dated January 14, 2005 (File No. 000-31687). The number given in parenthesis indicates the
corresponding exhibit number in such Form 8-K. 
 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 2, 2005 /s/ Richard G. ChleboskiRichard G. ChleboskiChief Financial Officer, Vice President, Treasurer and Secretary
(Principal Financial Officer) 38