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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[Fee Required]
For the fiscal year ended December 31, 1997.
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[No Fee Required]
For the transition period from to
Commission file Number 333-42591
ASTROPOWER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0315869
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
19716-2000
SOLAR PARK, NEWARK, DE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICERS)
Registrant's telephone number, including area code (302) 366-0400
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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(TITLE OF CLASS)
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(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [_] Yes [_] No
(Registrant became subject to filing requirements on February 12, 1998.)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of March 20, 1998, 8,521,355 shares of $0.01 per value common stock were
outstanding. The aggregate market value of shares held by non-affiliates as of
March 20, 1998 was $44,125,613 based on the bid price of the Common Stock on
that date.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this document, the words
"anticipate", "believe", "estimate", "expect", "going forward", and similar
expressions, as they relate to the Company or Company management, are intended
to identify forward-looking statements. Such statements reflect the current
views of the Company with respect to future events and are subject to certain
risks, uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward-looking statements.
ITEM 1. BUSINESS
AstroPower, Inc. ("AstroPower" or the "Company") develops, manufactures,
markets and sells photovoltaic "PV" solar cells, modules and panels for
generating solar electric power. Solar cells are semiconductor devices which
convert sunlight directly into electricity. Solar electric power is used off
the electric utility grid for many applications in the communications and
transportation industries and in remote villages and homes. Solar electric
power is also used in on-grid applications by existing electric utility
customers to provide a clean, renewable source of alternative or supplementary
electric power.
THE SOLAR ELECTRIC POWER MARKET
PV Energy Systems Inc., an independent solar energy research firm ("PV
Energy Systems") estimates 1997 worldwide solar electric power industry
shipments at 114 MW, corresponding to system revenues of approximately $1.8
billion. Over the 17 year period since 1980, industry shipments have increased
at a compound annual rate of 22% and are forecast to continue to increase
through the year 2005 at an approximate compound annual rate of 24%. In
particular, the solar electric power market has grown by approximately 43%
from 1996 to 1997. The growth of the solar electric power market is being
driven by the expanding number of rapidly growing needs for electricity off-
grid where solar electric power is the most cost-effective energy source and
by widespread demand for an environmentally friendly alternative source of on-
grid electricity. Current demand for solar electric power systems
significantly exceeds aggregate industry manufacturing capacity. The Company
expects that, due to its low-cost Silicon-Film(TM) products, it will
experience revenue growth rates in excess of the market's overall growth rate.
The use of solar electric power in commercial applications has grown over
the past two decades from initial satellite power supplies to a diversified
industry serving a large variety of terrestrial applications. Solar electric
power systems supply electrical power using only sunlight as "fuel", producing
electricity even under low light conditions on cloudy days. Because of their
reliability, modularity, low maintenance and lack of conventional fuel
requirements, such systems are used for a wide variety of stand-alone (not
connected to a utility network or grid) applications where conventional
sources of power are impractical or too expensive.
Solar electric power systems compete in their commercial use with other
sources of off-grid electric power, such as diesel engine generators. Solar
electric power systems are also used to supplement power from electric utility
grids. The electric power industry comprises one of the world's largest
industrial segments, with annual equipment revenues in excess of $200 billion.
Currently, annual shipments of electric power equipment, as defined by
equipment capacity, are approximately 90,000 MW. By contrast, shipments of
solar electric power systems are only about 0.1% of the electrical generating
capacity installed each year. Since the scale of solar electric power
shipments is very small compared to that of the electric power equipment
industry as a whole, small changes in solar electric power cost can have a
material impact on the size of the solar electric power equipment industry.
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SOLAR ELECTRIC POWER PRODUCTS
The solar electric power industry sells four main classes of products: solar
cells, modules, panels and systems. Solar Cells are semiconductor devices that
convert light, usually sunlight, directly into electricity according to a
phenomenon of physics known as the photovoltaic effect. The rated power of the
typical solar cells ranges from 1.0 to 3.3 watts. Modules are assemblies of
solar cells connected together and encapsulated in a weatherproof package. The
rated power of typical modules ranges from 50 to 120 watts. Industry revenues
in 1997 at the module level were estimated to be approximately $450 million.
Panels are assemblies of several modules connected together.
Solar electric power systems typically include one or more modules, a
storage battery and electric equipment for power conditioning and control. As
noted above, 1997 industry revenue at the system level is estimated to be $1.8
billion.
SOLAR ELECTRIC POWER PRODUCTS
LOGO
ASTROPOWER'S MANUFACTURING TECHNOLOGY
The conventional processing technology used to process raw silicon into
wafers comprises one-half to two-thirds of the total cost of a solar cell. The
raw material is formed into ingots of single crystal silicon, or blocks of
polycrystalline silicon, and must be sawed into wafers in a time-consuming and
costly process that also results in significant waste of material. As solar
cell sizes become larger, the limitations of the block-forming and
ingotforming processes and the wafer sawing process become more acute and add
significantly more expense. The Company has developed new technology that it
believes avoids costs inherent in conventional silicon wafer processing and
provides an important competitive advantage in the solar electric power
market. The Company believes it is uniquely positioned to capture increasing
market share as a result.
New Low-Cost Silicon-Film(TM) Technology. The Company's Silicon-Film(TM)
technology involves a continuous production process to manufacture crystalline
silicon sheets and layers. This proprietary process is designed to
substantially reduce wafer cost while retaining the appearance, performance,
stability and reliability
3
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of conventionally-manufactured silicon wafers. The Company believes that its
proprietary Silicon-Film(TM) process is different from any other process
presently identified for producing solar cells and that its Silicon-Film(TM)
technology offers a number of advantages for both wafer and solar cell
production including:
Low-cost raw material. The Silicon-Film(TM) process does not require the
use of high-purity silicon as raw material feedstock for the process.
Continuous process. Silicon-Film(TM) technology is a continuous sheet
manufacturing process, leading to lower capital costs and lower
manufacturing cost than conventional batch processes.
Size versatility. Silicon-Film(TM) wafers and solar cells can be
manufactured to virtually any desired size (at least up to 12 inches by 24
inches). This provides the ability to make a large variety of solar cell and
module designs, capturing economies of scale in both manufacturing and
material utilization.
Ease of scale-up. The Silicon-Film(TM) process uses equipment that is
easily scaled up for large volume production wafers.
Technology base. The Silicon-Film(TM) process capitalizes on an existing
base of silicon material technology and market experience already
established for the solar cell and semiconductor industries.
Potential for new products. Silicon-Film(TM) technology offers the
promise of a series of new products based on improvement of existing
technology and development of next-generation technologies.
Recycled Semiconductor Wafer Technology. The Company also manufactures
silicon solar cells using wafers recycled from the semiconductor industry. The
Company has developed a sequence of proprietary processes that allows these
recycled wafers to be fabricated into high performance solar cells. By using
recycled wafers, it is not necessary to prepare bulk silicon which must be
subsequently sawed into wafers. In addition, an external source of supply
allows for flexible manufacturing, where production can be rapidly increased
without the purchase of expensive crystal growing, casting or sawing
equipment. As a result of these advantages, the Company believes that by
purchasing recycled wafers its silicon wafer costs are less than those for
wafers produced by other companies for the manufacture of solar cells.
Commercial sales of such products by the company started in 1989. In 1997
solar cell and module revenues from recycled wafers represented 95% of the
Company's total product sales.
BUSINESS STRATEGY
The Company's goal is to become the leading supplier of high-quality, low-
cost solar cells and modules. To achieve this goal, the Company intends to:
Capitalize on the advantages of the Silicon-Film(TM) process. The Company
intends to capitalize on the advantages of its unique proprietary Silicon-
Film(TM) process. These include (i) lower cost, which the Company believes
will allow it to capture increasing market share while achieving favorable
gross margins, and (ii) size scaleability, providing a broader range of
product sizes, shapes and power ratings from a high-volume manufacturing
process that is amenable to extensive automation.
Rapidly expand manufacturing capacity. The Company is scaling-up a 9 MW
capacity Silicon-Film(TM) plant, and is expanding the capacity of its
existing single crystal silicon solar cell manufacturing line. These two
expansions will approximately triple the Company's aggregate production
capacity over the next 12 months. The Company is also planning significant
additional capacity expansion in 1999 which would further increase capacity
by a factor of two or more, with anticipated full production reached in the
year 2000. It has not been decided whether this new capacity will be an
expansion of existing manufacturing locations or be constructed at a new
manufacturing location or locations.
Add new strategic customers. The Company plans to continue to
sequentially add targeted new strategic customers including module
manufacturing companies, system integrators and distributors, as its
manufacturing volume scale-up allows. New customers will be selected to
further broaden the Company's presence in high growth market segments. The
Company intends to use this customer additional strategy to diversity its
customer base geographically and across all major market segments.
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Increase sales volume with existing customers. Following the initial
acquisition of a strategic customer, the Company seeks to build sales
volume over time by transitioning from a secondary supplier to a primary
supplier to each customer and by increasing each customer's volume through
the referral of sales leads.
Develop the AstroPower brand. The Company intends to broaden and extend
its "AstroPowered" promotional campaign to (i) created brand identity and
awareness as a technology and cost leader in solar electric power products
and (ii) assist the Company's OEM customers and distributors in promoting
their products to end users through association with the Company's
"AstroPowered" brand and technical leadership.
Develop next-generation Silicon-Film(TM) technologies. The Company
believes that its present Silicon-Film(TM) products are the first
generation of a series of new products that it will develop using its
technical expertise and proprietary technology. Intended future products
will advance the state-of-the-art in Silicon-Film(TM) solar cell technology
and enhance its competitive position in the solar electric power industry.
PRODUCTS AND PRODUCT STRATEGY
The Company designs, manufactures, markets and sells solar cells, modules
and panels. Since their initial development, solar cells and modules have
progressively increased in size. This trend is primarily due to two factors:
(i) the ability to form and slice larger ingots of silicon has advanced
considerably over the past two decades, driven largely by the semiconductor
industry's switch from 4 inches wafers to 6 inches wafers, and most recently to
8 inches wafers; and (ii) larger solar cells are generally more cost effective,
since per-unit handling and processing costs are spread over more watts per
cell, and since certain module assembly costs can be allocated over more watts.
Solar Cells. From 1991 through 1995, the Company introduced three
generations of progressively larger single crystal silicon solar cells. The
latest of these products, the AP-106, was the first six inch solar cell to be
commercially introduced, and remains to this date the largest and most
powerful solar cell commercially available.
LOGO
The AP-225 is the Company's first Silicon-Film(TM) solar cell to be produced
in volume. Through December 31, 1997, more than 130,000 of these solar cells
have been produced and shipped to customers as fully assembled modules and
panels. The Company has begun to supply its key solar cell customers with AP-
225 Silicon-Film(TM) samples, and plans to formally introduce this product in
the first half of 1998. The Company intends to introduce the AP-225 as a
lower-cost, higher-power alternative to five inch single crystal silicon solar
cells, currently the standard component for supply to independent module
assembly companies. Although larger in area than five inch single crystal
solar cells, AP-225 Silicon-Film(TM) solar cells can be assembled into modules
utilizing the same basic equipment and production processes.
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LOGO
One of the Company's key product strategies is to continue to exploit
economies of scale in solar cell manufacturing. The Company believes that
Silicon-Film(TM) technology is uniquely capable of achieving solar cell sizes
larger than any other crystalline silicon technology, and that this represents
a significant cost advantage for the Company. The Company has incorporated
this strategy into the marketing message printed on its promotional material,
which reads: "AstroPower--The Large Solar Cell Company."
The Company plans to continue to capitalize on the scaleability of the
Silicon-Film(TM) process by developing solar cell configurations larger than
6 inches. The Company has fabricated 12 inches by 24 inches Silicon-Film(TM)
solar cells in the laboratory. Such large-area solar cells may either be
utilized directly in panels for use in grid-connected applications, or cut into
a variety of smaller sizes for assembly into modules covering a range of rated
power. The Company believes that the planned next-generation product
configuration will have two primary advantages compared with other currently
available solar cells: (i) economies of scale to reduce manufacturing costs; and
(ii) flexibility of size to meet a broad range of end-use configuration
requirements more effectively than its competitors.
Modules. Module sales represent an important complement to the Company's
solar cell business. Presently, the Company primarily manufactures and sells
two types of modules. The Company's AP-7105 contains 36 series-connected 5
inches single crystal solar cells and is rated at 75 watts, which is the most
common type of 12-volt battery charging module sold today. The AP-1206 contains
36 series-connected 6 inches single crystal solar cells and is rated at 120
watts. The Company has also begun selling limited quantities of modules
incorporating Silicon-Film(TM) solar cells.
The Company's strategy is to sell fully-assembled modules to distributors
and system integrators in those regions around the world such as the U.S.,
Japan and Central America which do not yet have a large number of independent
module assemblers. The Company currently sells approximately 50% of its total
solar cell production in the form of assembled modules.
Panels. The Company recently introduced a large area panel consisting of
four individual modules mounted on a common mechanical support structure and
electrically interconnected at the factory. The rated power of this product
ranges from 300 watts to 450 watts, depending on the specific model, and is
designed to be the largest increment of PV capacity which can be handled and
installed by two people.
The Company's strategy is to design and sell panels for use in large arrays
such as the grid-connected residential rooftop systems being marketed by GPU
Solar, a joint venture between the Company and GPU International.
6
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SOLAR ELECTRIC POWER APPLICATIONS
Solar cells, modules and panels are utilized in a wide range of end-use
applications, which can be grouped into three primary market segments: Remote
Electric Power, Grid-Connected Power and Consumer Electronics. The Remote
Electric Power market segment is typically divided into segments:
Communications and Transportation Infrastructure and Village & Home. The
following table shows (i) the breakdown of estimated 1997 industry shipments
into these market segments, (ii) the historical compounded annual growth rate
by segment for the period 1993 through 1997 and (iii) the projected compounded
annual growth rate by segment through the year 2000, according to PV Energy
Systems.
<TABLE>
<CAPTION>
PROJECTED
ESTIMATED 1997 % OF TOTAL 1993-1997 1997-2000
MARKET SEGMENT SHIPMENTS SHIPMENTS CAGR CAGR
-------------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Remote Electric Power........... 86 MW 76% 13% 19%
Communications and
Transportation................. 41 MW 36% 12% 13%
Infrastructure.................. 45 MW 40% 15% 23%
Village & Home..................
Grid-Connected Power............ 22 MW 19% 53% 40%
Consumer Electronics............ 6 MW 5% 5% 0%
</TABLE>
REMOTE ELECTRIC POWER MARKET SEGMENT. The Remote Electric Power market
segment involves the use of solar electric power systems to supply electricity
in locations not served by the utility grid. Historically, the most common
method of supplying power in such locations has been diesel generator sets.
However, in remote locations where regular transportation of fuel is expensive
or impractical, or in locations where no trained maintenance personnel are
available, or if electricity is required only sporadically, or if only a
relatively small amount of electricity is required, solar electric power
systems can supply electricity at lower cost because of two inherent
advantages compared with diesel generations. These advantages include (i)
solar electric power systems require very little maintenance and no fuel, and
(ii) unlike diesel generators, which typically have a minimum output of 5,000
to 10,000 watts, and which do not operate efficiently when partially loaded or
sporadically utilized, solar electric power systems are highly modular, having
typical generating capacity increments of 50 to 75 watts. Accordingly, solar
electric power systems can be configured to supply the exact amount of energy
required for a particular application.
There are two primary application groups within the Remote Electric Power
market segment: Communication and Transportation Infrastructure and Village &
Home.
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SELECTED SOLAR ELECTRIC POWER APPLICATIONS AND USES IN THE REMOTE ELECTRIC
POWER MARKET SEGMENT
<TABLE>
<S> <C>
Communication and .Repeater stations for line-of-sight data communication radio-links
Transportation .Repeater stations on fiber-optic data transmission lines
Infrastructure
. Base stations and repeaters for cellular and personal
communication service ("PCS") networks
. Direct broadcast satellite communication networks
. Emergency call boxes located on highways or in other public areas
. Monitoring, telemetry and remote actuation systems for highways;
railroads; oil and gas pipelines; water reservoirs, tributaries
and tanks; electricity transmission and distribution networks
. Navigation radio becons for airline traffic control, illuminated
obstruction lights on towers and chimneys, runway lights for
remote airfields and illuminated beacons for marine navigation on
buoys and lighthouses
. Portable warning sighs used at highway construction sites
. Lighting systems for compounds, streets, parking lots, billboards
and signs
Village & Home . ""Solar Home Systems" supplying basic services such as light,
Applications radio and television
. Coleman(TM) -style "solar lanterns"
. Wireless pay telephones
. Deep-well pumps for potable water
. Vaccine refrigeration, lighting and medical equipment for health
clinics
. Schools
. Remote (off-grid) homes
. Vacation cabins
. Battery charging on boats and RVs
</TABLE>
Growth in the Communication and Transportation Infrastructure market segment
is expected to be driven by the proliferation of wireless communications
products and services, and by increased efforts within the transportation
industry to optimize the economic utilization of fixed assets through system
automation. Growth in the Village & Home market is expected to be driven by
economic growth in the developing world, increasing availability of system
financing and maturation of the distribution infrastructure for system
installation and maintenance.
GRID-CONNECTED POWER MARKET SEGMENT. Grid-connected applications related to
the utilization of solar electric power systems in locations where electricity
is already available from a utility grid. Most grid-connected solar electric
power systems are located on single-family homes or are integrated into the
exterior surface of commercial buildings. Power generated by such systems can
be utilized directly at the site or sold back into the utility grid for other
consumers to use. Grid-connected solar electric power systems may also include
a small amount of battery storage to provide power during a utility outage.
Most grid-connected solar electric power systems generate only a portion of
the annual electrical energy consumed at the site. However, in some cases,
homes or buildings with such systems actually become net providers of energy
to the utility grid.
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There are many factors which affect the cost of solar electric power in
grid-connected installations, including system installation cost, sunlight
availability, financing cost and tax issues. However, the installed cost of
grid-connected solar electric power systems will have to be reduced by
approximately a factor of two before significant market penetration can be
expected. It is the Company's belief that if this costs goal can be achieved,
the market for grid-connected solar electric power systems could expand
dramatically.
The Company believes that growth in the Grid-Connected Power market segment
for the foreseeable future will be driven by public interest in the
environment, government policies and utility industry restructuring. Most
grid-connected solar electric power systems are currently installed in Japan,
Europe and the U.S. under a variety of subsidy programs. In Japan, over 10,000
residential grid-connected solar electric power systems are being installed
annually under a government program offering a subsidy of approximately 30% of
the total system costs. In Germany and Switzerland, over 40 municipalities and
states offer "rate-based" incentive programs for consumers who install solar
electric power systems. In the U.S., a utility consortium named Utility
PhotoVoltaic Group has funded over $64 million in projects since 1995, and
several states, including California and Arizona, have enacted legislation to
provide incentives for increased utilization of grid-connected solar electric
power systems. The U.S. federal government recently proposed a "Million Solar
Roofs" program which, if implemented, would sharply increase the number of
grid-connected solar electric power systems installed in the U.S.
CONSUMER ELECTRONIC MARKET SEGMENT. The Consumer Electronic market segment
comprises a variety of applications where solar electric power is used for
small consumer products such as calculators, radios, watches and toys. Such
applications are often novelty applications for solar electric power that
require only small amounts of electricity. They do not require higher-power
solar electric power products such as those manufactured by the Company.
CUSTOMERS
The Company sells its solar cells and modules to a limited group of key
customers. These customers are distribution or module manufacturing companies
that either sell to other marketing intermediaries or directly to end users.
The Company classified its customers into one of three types: (i) independent
local module manufacturing companies ("MODCOs"); (ii) system integrators; and
(iii) distributors. The table below explains the role of each of these types
of customers in the distribution of the Company's products.
<TABLE>
<CAPTION>
NUMBER OF THIS TYPE
IN THE COMPANY'S CURRENT
CUSTOMER TYPE CUSTOMER DESCRIPTION TOP TEN CUSTOMERS
------------- -------------------- ------------------------
<S> <C> <C>
MODCO................... Purchases solar cells from the Company and 5
assembles them into finished modules
System Integrator....... Purchased finished modules from the Company and 3
incorporates them into solar electric power
systems.
Distributor............. Purchased finished modules from the Company and 2
resells them to lower volume users including
home owners, OEMs and other professional
customers.
</TABLE>
The Company uses a "tiered" customer acquisition and growth strategy aimed
at acquiring new key customers while growing volume with existing customers.
First, the Company targets new customer who provide access to high growth
market segment while maintaining geographical diversity. Often a new supply
relationship with such a customer is as a secondary product supplier. Once a
successful supply relationship has been established, the Company's objective
is to become the primary product supplier to each new key customer, growing
volume within each account through a progressively increased share of each
customer's business. The combination of growth within each account and
selective new customer acquisition drives the Company's strategy for rapid
sales growth.
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Sales to the Company's ten largest customers accounted for approximately
44.0%, 46.0% and of 68.0% its total revenues is fiscal 1995 and 1996 and 1997,
respectively.
During fiscal 1995, Showa Solar Energy K.K., a Siemens AG affiliated based
in Singapore, accounted for 10.4% of the Company's total revenues,
respectively. During fiscal 1996, Tata BP Solar, an Indian joint venture of
British Petroleum Co. p.l.c. and the Tata Group, accounted for 12.9% of the
Company's total revenues, respectively. During the year ended December 31,
1997, Solar Fabrik, an independent MODCO based in Germany; Photocomm, Inc., a
systems integrator located in Arizona and Atersa, an independent Spanish
MODCO, accounted for 17.0%, 12.6% and 12.0% of the Company's total revenues,
respectively. No other customers represented more than 10% of the Company's
total revenues for any such periods. The Company expects that sales of its
products to a limited number of customers will continue to result in a high
concentration of net sales to relatively few customers for the foreseeable
future, and that the loss of certain of these customers could have a material
adverse effect on the Company's business, results of operations and financial
condition.
A large percentage of the Company's product sales are to international
customers. For the years ended December 31, 1996 and 1997, the approximate
geographic breakdown of product revenue is shown in the table below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
REGION DECEMBER 31, 1996 DECEMBER 31, 1997
------ ----------------- -----------------
<S> <C> <C>
North America............................ 13.2% 26.8%
Europe................................... 49.4% 55.9%
Africa................................... 6.6% 5.3%
Asia..................................... 30.7% 12.0%
</TABLE>
The Company anticipates the international customers will continue to account
for the majority of product sales for the foreseeable future.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company markets its products through trade shows, on-going customer
communications, promotional material, direct mail and advertising. In
addition, the Company's customer service and applications engineering
personnel provide support to customers and gather information on current
product performance and future product requirements. Sales of the Company's
solar cells and modules are handled by an internal sales force based on the
Company's offices in Newark, Delaware and in Germany.
MANUFACTURING AND RESEARCH FACILITIES
The Company's research and development and manufacturing facilities are
currently located at its Newark, Delaware headquarters. The solar cell line
used to manufacture solar cells, the module production facility and the pilot
Silicon-Film(TM) production line are located at this facility. The
manufacturing facility includes a full complement of equipment for solar cell
and module manufacturing and is continually upgraded to improve capacity and
product quality. Included in this facility are equipment to condition wafers
by mechanical and chemical means, tube furnaces for diffusion, equipment for
effecting junction edge-isolation, continuous process screen-printing and
firing equipment for applying electrical contacts to solar cells, coating
deposition equipment for applying anti-reflection coating on solar cells, a
solar cell tester and tabbing/stringing, lamination and test equipment for
assembling modules.
The Company is scaling-up a new 9 MW plant that will be primarily used for
the production of Silicon-Film(TM) wafers, solar cells, and modules. This
facility will utilize manufacturing technology and equipment developed during
the pilot phase of Silicon-Film(TM) production with the addition of mechanized
and automated product handling and manufacturing enhancements to improve
productivity and quality. The Company believes that a dedicated high-volume
plant is necessary to manufacture the volume of Silicon-Film(TM) product it
expects
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to sell. Such a single-purpose plant is expected to improve quality by
focusing worker training and product improvement activities in a manner not
possible in a multi-product manufacturing facility. Initial production from
the new plant is planned to start in the second quarter of 1998 and to reach
capacity in 1999. The Company plans additional major capacity expansion in
1999 to accommodate increases in sales of Silicon-Film(TM) product anticipated
in future years. The Company anticipates that its new plants will be in the
immediate area of its existing Newark, Delaware location.
The research and development portion of the Newark, Delaware facility is
equipped with standard semiconductor device development, fabrication and
evaluation equipment, including wafer polishing facilities; seven liquid phase
epitaxial growth systems for silicon and III-V compounds; tube furnaces for
diffusion, oxidation, alloying, and heat treatment; photolithography
equipment, vacuum (thermal, e-beam, and magnetron sputtering) deposition for
metals and antireflection coatings; plating baths for obtaining low resistance
contracts; and standard process evaluation equipment including a scanning
electron microscope with energy dispersive spectroscopy capability. The wafer
production pilot line facility includes high volume wafer production equipment
that is being operated for pilot production of Silicon-Film(TM) wafers and
associated equipment for handling and sizing of wafers before they are
transferred to solar cell manufacturing.
QUALITY ASSURANCE
The Company intends to maintain its reputation as a manufacturer and
supplier of quality products and to continuously improve the quality of its
products and services. Quality testing starts with the wafer, is continued at
a several steps during solar cell and module manufacturing, and is implemented
at each solar cell and module manufacturing step by the staff directly
responsible for the daily operation of the manufacturing line. Each operator
is trained to recognize and report on the quality of his or her work. Process
control issues are communicated to technicians, engineering personnel,
supervisors and co-workers and this team works together to effect an immediate
corrective action and eliminate the cause of the problem.
Quality assurance measures have enabled the Company to achieve international
and domestic product certifications for many of its modules. In June 1996, the
Commission of European Communities ("CEC") issued Qualification Certificates
for environmental stability and performance for the Company's standard modules
types AP-1106, AP-1206, AP-6105, and AP-7105. In August 1997, the Company
received UL listing for Silicon-Film(TM) module products. UL listing confirms
that the Company's modules meets the UL 1703 Standard for Flat-Plate
Photovoltaic Modules and Panels. The Company intends to submit all new module
products for such approval.
STRATEGIC ALLIANCES
The Company has leveraged, and plans to continue to leverage, its resources
in manufacturing technology, marketing and sales of solar electric power
products through collaborative agreements with corporate partners and
customers. It has developed several strategic alliances which the Company
feels will substantially assist in commercializing its Silicon-Film(TM)
technology. Such strategic alliances aid the Company by providing access to
technology, markets customers and useful competitive information that
otherwise would be difficult or expensive to obtain. The Company has the
following ongoing manufacturing and technology relationships:
Corning Incorporated. In August 1997, the Company and Corning entered into
agreements (the "Corning Agreements") under which the Company borrowed $5.0
million from Corning and which provide that Corning will provide research,
development, engineering and manufacturing assistance to the Company for a
three year period. The two companies will work jointly to accelerate the
implementation and ramp-up of a new manufacturing facility for the Company
which will produce photovoltaic solar cells and modules based on the Company's
Silicon-Film(TM) technology.
Corning manufactures optical fiber and photonic components, high-performance
glass and components for televisions, and other electronic displays and
equipment; advanced material for scientific and environmental markets; and
consumer products. Corning's total revenues in 1996 were $3.7 billion.
11
<PAGE>
The Corning Agreements provide that the Company and Corning each grant to
the other a non-exclusive and royalty free worldwide license with respect to
new technology developed pursuant to the Corning Agreements which is either
owned by Corning or the Company or jointly owned by the Company and Corning
with respect to products relating to photovoltaic energy cells, modules and
arrays, but which does not involve a license to the Company's existing
technology including its Silicon-Film(TM) technology.
With respect to each project under the Corning Agreements in which Corning
elects to participate at the Company's request, Corning shall be compensated
monthly in the form of options to purchase shares of the Company's Common
Stock based on man-years of personnel contributed by Corning to the project.
The $5.0 million borrowed from Corning is to be used towards the
engineering, design, lease, construction or expansion of facilities and
purchase of equipment and related tooling or working capital devoted to the
manufacture of products derived from the Company's Silicon-Film(TM)technology.
The loan which is due on August 19, 2001 and bears interest at 7% per annum,
is convertible into Common Stock of the Company at a conversion price per
share equal to 75% of the price per share to the public in the initial public
offering of Common Stock by the Company. In the event the loan remains unpaid
after the due date, the Company, if requested by Corning, shall grant to
Corning a non-exclusive licensing of its technology or assets.
Until the loan from Corning is repaid or converted by Corning into the
Company's capital stock, Corning has certain first offer rights to provide
equity financing for the Company and with respect to any sale or merger of the
Company or sale or licensing of its technology or assets.
If the Company sells more than 5% of its capital stock or other securities
convertible into more than 5% of its capital stock. Corning may, at its
option, purchase all or part of such securities. This option does not apply to
this offering. On August 19, 1999, the 5% exclusion expires and thereafter
Corning's rights apply to all sales of the Company's equity securities.
Corning also has a right of first offer in respect of any merger,
consolidation or similar transaction involving the Company, or a sale of its
assets or business, or a sale or licensing of the Company's Silicon-Film(TM)
technology.
The Company must notify Corning of any subsequent financing needs or of any
plans or proposals involving any of the other transactions described above and
the terms on which the Company is willing to enter into any such transaction,
and Corning has thirty days to express its intent to participate and if so, to
what extent or not to participate in such transaction. In the event that
Corning declines to participate in such transaction, the Company is free for a
period of one year after the date of its notice to Corning to consummate such
transaction or transaction(s) with third parties under terms no more favorable
to such third parties as the Company had proposed to Corning. Corning has not
entered into a standstill agreement prohibiting its acquisition of Company
stock from third parties.
GPU International. In July 1997, the Company and GPU International, Inc.
("GPUI") concluded an agreement to form a 50/50 joint venture named GPU Solar
to develop, manufacture, and test market grid-connected residential rooftop PV
systems for the U.S. market using the Company's solar electric power modules.
GPUI is an unregulated subsidiary of General Public Utilities ("GPU"), a major
New Jersey based electric utility company and one of the top 10 independent
power developers world-wide. During the first year of operation, GPU Solar
plans to install between 20 and 40 pilot systems (approximately 100 kW total)
in several locations around the country. All of these systems will utilize the
Company's large area Silicon-Film(TM)panels. The Company believes that GPU's
expertise involving electrical system design and installation will help
facilitate the development of high reliability, low cost PV products
appropriate for use in typical U.S. residences, and that GPUI's power
marketing experience and credibility will help GPU Solar develop its strategy
for this rapidly growing market segment.
COMPETITION
The market for solar electric power components and systems is intensely
competitive. The Company believes that this market will continue to be
intensely competitive, particularly if products with significant cost
12
<PAGE>
and performance advances are developed. The Company also believes that while a
single technology (crystalline silicon) has been dominate throughout the
industry's approximately 20 year history, this market will be characterized by
future technological change.
A number of large U.S., Japanese, and European companies are actively
engaged in the development, manufacturing and marketing of solar electric
power components and systems. These include Siemens Solar Industries,
Amoco/Enron Solar, Kyocera Corporation, British Petroleum Co. p.l.c., Sanyo
Electric Co., Ltd., Sharp Corp., Shell Solar Energy B.V., ASE GmbH (an
affiliate of RWE) and Canon. All of these companies have significantly greater
resources to devote to the research, development, manufacturing and marketing
than the Company. There are also a large number of smaller companies involved
in both the development of, as well as the ongoing manufacturing and marketing
of, solar electric power components and systems.
There are a variety of competing technologies currently under active
development by a large number of organizations. These technologies include
amorphous silicon, cadmium telluride and cooper indium diselenide, as well as
advanced concepts for both bulk (ingot based) and thin film crystalline
silicon. Any of these competing technologies could theoretically achieve
manufacturing costs per watt lower than the Silicon-Film(TM) technology
developed by the Company.
The Company believes that the principal competitive factors in the market
for solar electric power components are the following: price per watt; long
term stability and reliability, product performance (primarily conversion
efficiency); ease of handling/installation; product quality; and reputation.
CONTRACT RESEARCH AND DEVELOPMENT
The Company selectively pursues contract research programs funded by third
parties to help support the development of new technical capabilities and
products. These programs have been selected to complement and enhance the
Company's long-term development strategy under conditions that permit the
Company to retain the technology it develops. Substantial third-party funding
has been received from various agencies of the U.S. government. Total sums
expected for research, development and manufacturing engineering in the years
ended December 31, 1995, 1996 and 1997 were $3.3 million, $2.7 million and
$3.5 million respectively. Of those amounts, approximately $3.0 million, $2.6
million and $2.5 million respectively, were externally funded and are a
component of contract revenue and approximately $314,000, $775,000 and $1.0
million respectively were internally funded expenditures by the Company.
The Company's research and development effort is divided into two area:
Advanced Silicon-Film(TM) Solar Cell Products and Advanced Optoelectronic
Products.
Advanced Silicon-Film(TM) Solar Cell Products. The Company believes that its
present Silicon-Film(TM) products are the first generation of a series of
future products that it will develop using its technical expertise and
proprietary technology. The Company believes that these products will advance
the state-of-the-art in Silicon-Film(TM) solar cell technology and provide it
with new products to enhance the Company's competitive position in the solar
electric power business. A portion of this research has been and is currently
funded by the Department of Energy through subcontracts administered by the
National Renewable Energy Laboratory in Golden, Colorado.
The designs of future generation Silicon-Film(TM)products are characterized
by thin (less than 150 micrometer) layers of crystalline silicon on a low-cost
substrate and incorporate various other materials to enhance the current- and
power-generating efficiency of the solar cells. These advanced solar cells are
expected to result in materials and manufacturing cost reductions on a per
watt basis relative to the Silicon-Film(TM)products presently manufactured by
the Company. The Company is also developing new design for solar modules using
its advanced solar cell technology which incorporate thin solar cells and new
interconnection methods. New designs will enable lower cost modules, which the
Company believes will lead to new portable solar power applications.
13
<PAGE>
Advanced Optoelectronic Products. Optoelectronic products combine optical
processing and electronic processing within a single device. Familiar examples
of optoelectronic products or devices are the remote channel switching unit
used to change channels on a television set and the numerical displays of
common digital home appliances such as microwave ovens or digital alarm
clocks.
The Company is developing several optoelectronic devices based upon energy
conversion from light into electrical signals. Funding for most of this
research has come from third parties, including the National Science
Foundation, the Department of Commerce through the National Institute of
Science and Technology, the Department of Energy, the Department of the Air
Force, the National Aeronautics and Space Administration, the Ballistic
Missile Defense Organization and the Defense Advanced Research Products
Agency. The optoelectronic products under investigation and development by the
Company are focused on specialized market opportunities, primarily military
applications at the present time. There can be no assurance that such products
will ever become revenue-generating commercial products.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's policy is to protect its technologies by filing patent
applications with respect to technology considered important to business
development. The Company also relies upon unpatented know-how, continuing
technological innovation and the pursuit of licensing opportunities in order
to develop and maintain its competitive position. The Company has been awarded
ten U.S. patents in the field of photovoltaics and had three patents pending
as of December 31, 1997. Seven of the ten U.S. patents that have been issued
and two of the three patents that are pending relate to the Silicon-Film(TM)
product design and manufacturing process. Of the remaining three patents that
have been issued, two protect the design of high performance solar cells using
compound semiconductors, and one protects the design of an optical sensor
using a compound semiconductor that provides for sensor operation at
temperatures much higher than can be employed with conventional elemental
materials. The remaining pending patent covers the utilization of a unique
device design and process for manufacture that enhances the optical efficiency
of opto-electronic devices.
The Company decides on a case-by-case basis whether and in what countries it
will file foreign counterparts of a U.S. patent application. International
counterparts of four issued patents have been filed under the Patent
Cooperation Treaty. The Company will continue to file other U.S. and
international patent applications to protect technology it considers important
to providing a market advantage for its products. The Company believes that
its patents offer it a competitive advantage but there can be no assurance
that any patents, issued or in process, will not be intentionally circumvented
or infringed upon by others.
In addition to patent protection, the Company relies on the law of unfair
competition and trade secrets to protect its proprietary rights, including its
proprietary rights in its Silicon-Film(TM) technology. The Company considers
several elements of the Silicon-Film(TM) manufacturing process to be trade
secrets. The Company attempts to protect its trade secrets and other
proprietary information through non-disclosure agreements with customers,
suppliers and consultants and limits dissemination of information to a need-
to-know basis. Although the Company seeks to protect its proprietary
information, there can be no assurance that others will not either develop
independently the same or similar information or obtain access to information
that the Company believes is proprietary.
Employees are required to sign confidential information non-disclosure
agreements upon the commencement of employment with the Company. The Company's
non-disclosure agreements provide that all confidential information developed
or made known to the individual during the course of the individual's
relationship with the Company is to be kept confidential and not disclosed to
third parties except in specific circumstances. In the case of employees, the
agreements provide that all inventions made by the individual shall be the
exclusive property of the Company. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's trade
secrets or adequate remedies in the event of unauthorized use or disclosure of
such information.
Silicon-Film(TM) is a trademark of the Company.
14
<PAGE>
SUPPLY AND COST OF SILICON WAFERS AND OTHER RAW MATERIALS
The Company purchases and recycles silicon wafers from the semiconductor
industry for use in its single crystal solar cell manufacturing process.
Although the Company has generally been successful in obtaining sufficient
quantities of quality wafers in the past, there can be no assurance that such
wafers will be available at cost effective prices in the future. The absence
of cost effective sources of supply and the inability of the Company to locate
alternative sources of low-cost, high-quality wafers could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company presently has multiple sources of supply for its required raw
materials, including silicon, although for economic and quality control
reasons the Company utilizes single sources of supply for certain materials.
In situations where it relies on single sources of supply, the Company
believes that an adequate supply of material is available to meet its
foreseeable needs and, to date, the Company generally has been able to obtain
supplies of such materials in a timely manner. There can be no assurance that
supplies of the Company's critical materials will be adequate in the future or
that the cost of such materials will remain low enough for the Company to
maintain a cost-competitive market position for its solar electric power
products.
ENVIRONMENTAL REGULATIONS
The Company uses, generates and discharges toxic, volatile or otherwise
hazardous chemicals and wastes in its research and development and
manufacturing activities. Therefore, the Company is subject to a variety of
federal, state and local governmental regulations related to the storage, use
and disposal of these materials. The Company believes that it has all the
permits necessary to conduct its business. However, failure to comply with
present or future regulations could result in fines being imposed on the
Company, suspension of production or a cessation of operations. The Company
believes that it has properly handled its hazardous materials and wastes and
has not contributed to any contamination at it premises. The Company is not
aware of any environmental investigation, proceeding or action by federal or
state agencies involving these premises. However, under certain federal and
state statutes and regulation, a governmental agency may seek recovery and
response costs from both operators and owners of property where releases of
hazardous substances have occurred or are ongoing. Any failure by the Company
to control the use of, or to restrict adequately the discharge of, hazardous
substances could subject it to substantial financial liabilities and could
have a material adverse effect on the Company's business, result of operations
and financial condition.
BACKLOG
Backlog for the Company's products as of December 31, 1997 totaled $8.6
million. Backlog for the Company's research contracts as of December 31, 1997
totaled $3.1 million. Backlog for products consists of purchase orders for
which a customer has scheduled delivery within the next 12 months. Orders
included in the backlog may be canceled or rescheduled by customers without
significant penalty. Backlog for government contracts consists of signed, open
contracts only. Backlog as of any particular date should not be relied upon as
indicative of the Company's net revenues for any future period.
EMPLOYEES
As of March 20, 1998, the Company has 167 full time employees, of whom 33
were engaged in research and development, 117 in manufacturing, four in sales
and marketing and 13 in administration. None of the Company's employees are
covered by collective bargaining agreements. The Company has experienced no
work stoppages and believes that its employee relations are good.
Ten of the Company's management and professional employees have advanced
degrees in engineering and science, including six Ph.D.s. To date, the Company
has been able to attract the scientific, engineering, technical and other
personnel required by its business. Such experienced professionals are in
demand and the Company must compete for their services with other
organizations which may be able to offer more favorable salary and benefits.
Historically, turnover among technical and professional employees has been
low.
15
<PAGE>
ITEM 2. PROPERTIES
Since July 1991, the Company's administrative, research and manufacturing
facilities have been located in a 40,000 square foot, one-story building built
by and leased from University of Delaware, Newark Delaware. The term of the
lease is 20 years with an option by the Company to cancel at the end of nine
years (July 2000). The annual cash rental payment for 1996 was $187,800 and
increases approximately 6% each year. See "Note 8 of Notes to Financial
Statements."
In January 1998, the Company entered into a lease with Liberty Property
Limited Partnership for a 60,300 square foot facility in which it is
constructing its new 9 MW plant for the production of Silicon-
Film(TM)products. Completion is expected in the second quarter of 1998. The
facility is part of a 130,000 square foot one-story building located in
Newark, Delaware, which is approximately six miles from the Company's present
facility. The term of the lease is 10 years with two five year renewal
options. While the commencement date of the lease is June 1, 1998, occupancy
was immediate upon signing of the lease.
The annual rental payment for the first year of the lease is $284,808 and
increases an average of approximately 2% each year thereafter. In addition,
the Company is responsible for its share of annual operating expenses of the
building presently estimated at $54,300. The lease also provides for rights of
first refusal for the Company to lease additional space in the building if it
becomes available, and to purchase the entire building if the owner decides to
sell it.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of
any pending or threatened litigation against the Company that could have a
material adverse affect upon the Company's business, operating results or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company became subject to the Commissions' reporting requirements and
proxy rules on February 12, 1998 and accordingly this item is not applicable.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company made an initial public offering of its Common Stock on February
12, 1998 and trading on the NASDAQ National Market commenced on February 13,
1998 under the symbol "APWR". Accordingly, information with respect the high
and low sales prices for such common equity within the two most recent fiscal
years is not available.
As of March 20, 1998, there were approximately 527 shareholders of record.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends, and does not
anticipate that it will do so in the foreseeable future. The Company currently
intends to retain future earnings, if any, to provide funds for the growth and
development of the Company's business. Any future determination to pay
dividends will be at the discretion of the Company's Board of Directors and
will be dependent upon the Company's earnings, capital requirements, operating
and financial condition, and such other factors as the Board of Directors may
deem relevant.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1995, 1996
and 1997 and for each of the three years in the period ended December 31, 1997
have been derived from the audited Financial Statements of the Company
included elsewhere in this Form 10-K. The selected financial data except for
net income per share and related share data as of December 31, 1993 and 1994
and for each of the two years in the period ended December 31, 1994 are
derived from audited financial statements not included herein. Net income per
share data for 1993 and 1994 have been restated in accordance with SFAS No.
128. The information set forth below should be read in conjunction with the
Company's Financial Statements and the Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Product sales.................. $ 2,476 $ 3,434 $ 5,356 $ 6,237 $13,095
Research contracts............. 3,694 3,676 4,589 4,346 3,512
------- ------- ------- ------- -------
Total revenues............... 6,170 7,110 9,945 10,583 16,607
COST OF REVENUE:
Cost of product sales.......... 2,224 2,954 4,483 6,896 9,311
Cost of research contracts..... 2,168 2,299 3,029 2,580 2,540
------- ------- ------- ------- -------
Total cost of revenues....... 4,392 5,253 7,512 9,476 11,851
------- ------- ------- ------- -------
Gross profit................. 1,778 1,857 2,433 1,107 4,756
OPERATING EXPENSES:
Product development costs...... 125 220 314 776 1,007
General and administrative
expenses...................... 898 1,172 1,469 1,859 1,972
Selling expenses............... 268 377 444 660 854
------- ------- ------- ------- -------
Operating income (loss)...... 487 88 206 (2,188) 923
OTHER EXPENSE (INCOME):
Interest expense............... 30 42 115 169 369
Other expense (income)......... 34 29 (7) 6 (118)
------- ------- ------- ------- -------
Income (loss) before income
taxes....................... 423 17 98 (2,363) 672
INCOME TAXES..................... 166 -- -- -- 20
------- ------- ------- ------- -------
Net income (loss).............. $ 257 $ 17 $ 98 $(2,363) $ 652
======= ======= ======= ======= =======
NET INCOME (LOSS) PER SHARE:
Basic.......................... $ 0.07 $ 0.01 $ 0.03 $ (0.64) $ 0.18
Diluted........................ $ 0.05 $ 0.01 $ 0.02 $ (0.64) $ 0.13
NUMBER OF SHARES USED IN NET
INCOME PER SHARE CALCULATION:
Basic.......................... 3,620 3,673 3,697 3,700 3,710
Diluted........................ 5,157 5,356 5,362 3,700 6,220
<CAPTION>
DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital (deficiency)..... $ 1,515 $ 1,309 $ 1,420 $ (970) $ 5,608
Total assets..................... 6,412 7,148 8,615 7,887 15,115
Short-term debt.................. 168 264 812 955 316
Long-term debt................... 356 250 651 528 6,277
Total liabilities................ 2,495 2,657 3,894 4,948 11,356
Redeemable Convertible Preferred
Stock........................... 5,798 5,798 5,798 5,798 5,798
Total stockholders' (deficit).... (1,881) (1,308) (1,077) (2,860) (2,039)
</TABLE>
On February 12, 1998 the Company made an initial public offering of its
common stock pursuant to which it increased equity by net proceeds of $16.7
million.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, manufactures, markets and sells photovoltaic ("PV")
solar cells, modules, and panels for generating solar electric power. Solar
cells are semiconductor devices which convert sunlight directly into
electricity. Solar electric power is used off the electric utility grid for
many applications in the communications and transportation industries and in
remote villages and homes. Solar electric power is also used in on-grid
applications by existing electric utility customers to provide a clean,
renewable source of alternative or supplementary electric power.
The Company was founded in 1989 as a successor to a business that was
organized in 1983 to develop thin crystalline silicon photovoltaic and related
optoelectronic technology. Initial revenue came from contract research
performed primarily for the United States government. The Company commenced
commercial solar cell manufacturing operations in 1988 with wafers purchased
from third parties. Since then the commercial portion of the business has
grown steadily. Recently, the growth of product revenue has accelerated,
accounting for 79% of total revenue for the year ended December 31, 1997.
The Company has received significant assistance in its transition from
primarily a contract research organization to a commercial manufacturer of
solar cells and modules. Such assistance originated from the U.S. Department
of Energy in the form of cost-sharing contracts designed to assist the Company
in expanding its manufacturing capabilities and in reducing its manufacturing
costs.
The Company currently generates product revenues from the sale of solar
cells, modules and panels. Although the Company plans a significant expansion
of its Silicon-Film(TM)manufacturing capacity in 1998, the predominant source
of its product revenues to date has been recycled wafer products. Product
sales are recognized upon shipment. Solar cell prices and manufacturing costs
vary depending upon supply and demand in the market for solar cells and
modules and the costs of raw materials, particularly reclaimed silicon wafers,
order size, yields, the costs of raw materials, particularly reclaimed silicon
wafers recycled from the semiconductor industry and other factors. In
addition, the Company also earns revenue from contracts with various federal
governmental agencies to conduct research on Advanced Silicon-Film(TM)products
as well as optoelectronic devices. Generally, these contracts last from six
months to three years. The Company recognizes research contract revenue at the
time costs benefiting the contracts are incurred, which approximates the
percentage of completion method.
Solar cells manufactured by the Company are sold to original equipment
manufacturers that assemble the solar cells into modules. Modules are sold to
distributors and value-added resellers ("VARs"). The sale of a module results
in substantially more revenue to the Company than the sale of solar cells, due
to the value of the additional materials, labor and overhead added during the
module assembly process. Accordingly, the Company's product sales are affected
not just by changes in total solar cells produced, but by changes in the mix
between solar cells and modules sold. In 1994 the Company commenced
manufacturing modules in substantial quantities as a means of expanding its
customer base. Currently, the gross margin percentages for modules are less
than that of solar cells.
The Company has developed a proprietary process called Silicon-Film(TM) for
the manufacture of sheets of polycrystalline silicon. Wafers made from these
sheets are used in the Company's solar cell manufacturing process. Silicon-
Film(TM) technology has been under development since the Company's inception
in 1983 and, after several successful field tests, Silicon-Film(TM)products
are currently being shipped to selected customers. In order to speed up the
technical and commercial viability of Silicon-Film(TM), the Company
accelerated its commitment to this technology in 1996 by investing $776,000 in
product development, thus contributing to the net loss for the year of $2.4
million. The Company is preparing to expand its Silicon-Film(TM) capacity and
product and signed a lease for space in January 1998 for a new plant for
production of Silicon-Film(TM) solar cells, modules and panels. This facility
is being partially funded by the $5.0 million borrowed from Corning.
19
<PAGE>
For the year ended December 31, 1997, 73% of the Company's product revenues
were generated by sales to customers located outside of the United States. The
Company believes that international sales will continue to account for a
significant portion of its product sales for the foreseeable future. Current
sales are denominated in U.S. dollars and foreign exchange rate fluctuations
have not had an impact on the Company's results of operations.
Substantially all of the Company's revenues from government contracts are
subject to audit under various federal statutes. The Company has received
final approval of its overhead rates through 1993. Audits of 1994 and 1995
rates began in December 1997. It is management's opinion that adjustments to
such revenue, if any, will not have a material effect on the Company's results
of operation and financial condition.
As described in Note 13 of Notes to Financial Statements, the Company has
entered into an agreement with Corning that provides for the issuance of stock
options to Corning in return for services performed. Such services will be
accounted for based on the fair value of the services provided or the fair
value of the options issued, whichever is more reliably measurable, as
required by the provisions of paragraph 8 of SFAS No. 123. The value of such
options, when granted, will be included in operating expenses. The Company's
annual and quarterly operating results may fluctuate as a result of the
issuance of the options. In addition, during 1998 (particularly in the second
quarter) the Company's product gross profit may be affected by costs of
ramping up production in the new manufacturing facility that may not be offset
by product revenues.
On February 12, 1998, the Company made an initial public offering of its
Common Stock pursuant to which it sold 3,105,000 shares at $6.00 per share,
resulting in proceeds to the Company of approximately $16.7 million after
deducting underwriting discounts and commissions and offering costs paid by
the Company.
The following table sets forth selected financial data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Product sales..................................... 53.9% 58.9 % 78.9%
Research contracts................................ 46.1 41.1 21.1
------- ------- -------
Total revenues.................................. 100.0 100.0 100.0
------- ------- -------
Cost of revenues:
Product sales..................................... 45.1 65.1 56.1
Research contracts................................ 30.4 24.4 15.3
------- ------- -------
Total cost of revenues.......................... 75.5 89.5 71.4
------- ------- -------
Gross profit........................................ 24.5 10.5 28.6
Product development expenses........................ 3.2 7.3 6.1
General and administrative expenses................. 14.7 17.7 11.9
Selling expenses.................................... 4.5 6.2 5.1
------- ------- -------
Income (loss) from operations....................... 2.1 (20.7) 5.5
Other expense....................................... 1.1 1.6 1.5
------- ------- -------
Net income (loss) before income taxes............... 1.0 (22.3) 4.0
Income taxes........................................ -- -- 0.1
------- ------- -------
Net income (loss)................................... 1.0% (22.3)% 3.9%
======= ======= =======
</TABLE>
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996.
Revenues. Total revenues for the year ended December 31, 1997 were $16.6
million, an increase of $6.0 million, or 56.9%, from $10.6 million for the
year ended December 31, 1996. Product sales for the year ended
20
<PAGE>
December 31, 1997 were $13.1 million, an increase of $6.9 million, or 109.9%,
from $6.2 million for the year ended December 31, 1996. The increase in
product sales was attributable to increased levels of production as a result
of improvements in manufacturing technology and manufacturing productivity,
allowing the Company to satisfy a greater percentage of backlog orders.
Research contract revenue for the year ended December 31, 1997 was $3.5
million, a decline of $834,000, or 19.2%, from $4.3 million for the year ended
December 31, 1996. The decline in research contract revenue was primarily
attributable to a reduction in the Company's contract overhead rates as a
result of the ongoing transformation from a government contractor to a
manufacturing company.
Gross Profit. Gross profit for the year ended December 31, 1997 was $4.8
million, an increase of $3.6 million, or 330% from $1.1 million for the year
ended December 31, 1996. Gross profit on product revenues for the year ended
December 31, 1997 was $3.8 million, an increase of $4.4 million from
($659,000) for the year ended December 31, 1996. Gross profit margin on
product revenues for the year ended December 31, 1997 was 28.9%, as compared
to (10.6%) for the year ended December 31, 1996. During 1996 the Company
significantly increased its staffing and overhead in its manufacturing
operation but did not experience a proportionate increase in manufacturing
output. For several months, the Company's manufacturing costs exceeded the
revenues generated from the sales of such products. In addition, during the
year ended December 31, 1996, the Company reevaluated its ability to process
certain of the silicon wafers in its inventory, and determined that a downward
adjustment in their carrying value of $220,000 was appropriate. During 1997,
the Company began to realize the benefits of the costs incurred in 1996, as
production capacity and output increased significantly. As a result, the
Company was able to realize the significant increases in revenue noted above
without a commensurate increase in costs.
Gross profit on research contract revenues for the year ended December 31,
1997 was $972,000, a decrease of $794,000, or 44.1%, from $1.8 million for the
year ended December 31, 1996. Gross profit margin on research contracts
revenue for the year ended December 31, 1997 was 27.7% as compared to 40.6%
for the year ended December 31, 1996. The decrease in gross profit and gross
profit margin was attributable to a reduction in the Company's contract
overhead rates as a result of the ongoing transition to a manufacturing
company, which reduces the amount of reimbursable overhead expenses that were
previously allocated to government contracts.
Product Development Expenses. Product development expenses for the year
ended December 31, 1997 were $1.0 million, an increase of $231,000, or 29.8%,
from $776,000 for the year ended December 31, 1996. The increase in product
development expenses was attributable to increased levels of engineering and
manufacturing support dedicated to the acceleration of Silicon-Film(TM)
production.
General and Administrative Expenses. General and administrative expenses for
the year ended December 31, 1997 were $2.0 million, an increase of $113,000 or
6.1% from $1.9 million in 1996. Reduced personnel expenses and a reduction in
the provision for bad debt expense were offset by an increase in employee
benefit costs due to increased company contributions to employee retirement
and bonus plans, and increased compensation expense of stock options.
Selling Expenses. Selling expenses for the year ended December 31, 1997 were
$854,000, an increase of $194,000, or 29.3%, from $660,000 for the year ended
December 31, 1996. The increase in selling expenses was attributable to
increased salary and benefit expenses to employees as well as increased sales
commissions paid to third-parties, reflecting a higher level of sales to
certain customers.
Interest Expense. Interest expense for the year ended December 31, 1997 was
$369,000, an increase of $200,000, or 118.8%, from $169,000 for the year ended
December 31, 1996. The increase in interest expenses was attributable to
higher levels of debt outstanding as well as higher interest rates provided
for in the forbearance agreements with the Company's primary lender. The
increased debt levels resulted from the issuance of the $5.0 million
promissory note to Corning, as well as a $1.0 million advance from a customer.
Interest and Other Income. Other income for the year ended December 31, 1997
was $118,000, as compared with expense of $6,000 for the year ended December
31, 1996. The increase in other income was attributable to increased interest
income and corresponding cash balances as a result of the proceeds from the
convertible note issued to Corning.
21
<PAGE>
Income Taxes. Income tax expense for the year ended December 31, 1997 was
$20,000 as compared with $0 for the year ended December 31, 1996. The 1997
expense represents the Company's Alternative Minimum Tax liability.
Years Ended December 31, 1996 and 1995.
Revenues. Total revenues for 1996 were $10.6 million, an increase of
$639,000, or 6.4%, from $9.9 million for 1995. Product sales for 1996 were
$6.2 million, an increase of $882,000, or 16.5%, from $5.4 million for 1995.
The increase in product sales was attributable to increased levels of
production, thereby allowing the Company to satisfy a greater number of
product orders, and a shift in product mix from solar cells to modules.
Research contract revenue for 1996 was $4.3 million, a decline of $243,000, or
5.3%, from $4.6 million for 1995. The decline in research contract revenues
was primarily attributable to the completion of a large contract in 1995.
Gross Profit. Gross profit for 1996 was $1.1 million, a decrease of $1.3
million, or 54.5% from $2.4 million for 1995. Gross profit on product sales
for 1996 was ($659,000), a decrease of $1.5 million, or (175.5%) from $873,000
for 1995. The decrease in product gross profit was attributable to several
factors. First, in preparation for an anticipated increase in manufacturing
output, the Company increased its labor and overhead cost structure through
the hiring of additional personnel. The anticipated increase in manufacturing
output did not occur because the Company experienced difficulty in purchasing
recyclable silicon wafers so that the Company's revenue level could not
support its expanding infrastructure. For several months, manufacturing costs
exceeded revenues generated from the sales of such products. Second, the
Company reevaluated its ability to process certain of the silicon wafers in
its inventory which had been purchased over the preceding several years and
determined that a downward adjustment in their carrying value of $220,000 was
required. The Company has since implemented significant changes in its wafer
procurement activities. Finally, the Company's Silicon-Film(TM) pilot
production activities reduced revenues and gross margin from the Company's
single crystal business. As a result of the foregoing, gross profit margin on
product revenues for 1996 was (10.6%), as compared to 16.3% for 1995.
Gross profit on research contracts for 1996 was $1.8 million, an increase of
$206,000, or 13.2%, from $1.6 million for 1995. The increase in contract gross
profit was attributable to the completion of two projects in 1995 that had
large cost-sharing provisions, requiring the Company to fund a portion of the
operating costs of the affected contracts. As a result, gross profit margin on
contract revenues for 1996 was 40.6%, as compared to 34.0% for 1995.
Product Development Expenses. Product development expenses for 1996 were
$776,000, an increase of $462,000, or 147.1%, from $314,000 for 1995. The
increase in product development expenses was attributable to increased
engineering and related resources dedicated toward improving the performance
of the Company's Silicon-Film(TM) product.
General and Administrative Expenses. General and administrative expenses for
1996 were $1.9 million, an increase of $390,000, or 26.5%, from $1.5 million
for 1995. The increase in general and administrative expenses was attributable
to increased salary and employee benefit expenses, due to the addition to a
full year's salary and benefit expense for a senior executive of the Company
who was hired in mid-1995, combined with an increased provision for bad debts
and less absorption of general and administrative expenses into self-
constructed assets.
Selling Expenses. Selling expenses for 1996 were $660,000, an increase of
$216,000, or 48.6%, from $444,000 for 1995. The increase in selling expenses
was attributable to increased salary expenses resulting from the addition of
additional sales personnel, as well as higher travel costs and commissions
paid to third-parties.
Interest Expense. Interest expense for 1996 was $169,000, an increase of
$53,000, or 46.0%, from $116,000 for 1995. The increase in interest expenses
was attributable to higher levels of debt outstanding, due to borrowings for
the purchase of manufacturing equipment and to a certain extent, higher
interest rates on the outstanding balances provided for in the forebearance
agreements with the Company's primary lender.
22
<PAGE>
Years Ended December 31, 1995 and 1994.
Revenues. Total revenues for 1995 were $9.9 million, an increase of $2.8
million, or 39.9%, from $7.1 million for 1994. Product sales for 1995 were
$5.4 million, an increase of $1.9 million, or 56.0%, from $3.4 million for
1994. The increase in product sales was attributable to an approximate 21.0%
increase in solar cell sales and an approximate 165.0% increase in module
sales resulting from a shift in production from a focus primarily on solar
cells to an increased focus on modules. Research contract revenue for 1995 was
$4.6 million, an increase of $914,000, or 24.9%, from $3.7 million for 1994.
The increase in research contract revenue was primarily attributable to a
higher level of contract research as well as the completion in mid-1995 of two
contracts with provisions for the Company to share operating costs.
Gross Profit. Gross profit for 1995 was $2.4 million, an increase of
$576,000 or 31.0% from $1.9 million for 1994. Gross profit on product sales
for 1995 was $873,000, an increase of $392,000, or 81.5%, from $481,000 for
1994. The increase in gross profit was attributable to increased product
shipments resulting from an expansion of the Company's manufacturing capacity
and a related increase in revenues. Gross profit margin on product revenues
for 1995 was 16.3%, as compared to 14.0% for 1994. The decrease in gross
profit margin was attributable to costs related to the scale-up of the
Company's module manufacturing operations in 1994.
Gross profit on research contracts revenues for 1995 was $1.6 million, an
increase of $200,000, or 14.4%, from $1.4 million for 1994. The increase in
research contract gross profit was attributable to the completion in mid 1995
of two contracts with provisions for the Company to share operating costs.
Gross profit margin on contract revenues for 1995 was 34.0% a decrease from
37.5% for 1994. The decrease in gross profit margin was attributable to fixed
overhead rates on certain of the Company's longer-term contracts and the
Company's inability to recover increased operating costs.
Product Development Expenses. Product development expenses for 1995 were
$314,000, an increase of $93,000, or 42.3%, from $220,000 for 1994. The
increase in product development expenses was attributable to an expansion of
the Company's engineering efforts related to its Silicon-Film(TM) product.
General and Administrative Expenses. General and administrative expenses for
1995 were $1.5 million, an increase of $297,000, or 25.3%, from $1.2 million
for 1994. The increase in general and administrative expenses was attributable
to increased salary expenses due to staff additions, higher travel expenses,
higher depreciation as a result of additions to its information systems
hardware increased insurance expenses and lower absorption of general and
administrative expenses into self-constructed assets.
Selling Expenses. Selling expenses for 1995 were $444,000, an increase of
$68,000, or 18.0%, from $377,000 for 1994. The increase in selling expenses
was attributable to higher levels of advertising and consulting expenses.
Interest Expense. Interest expense for 1995 was $116,000, an increase of
$73,000, or 173.8%, from $42,000 for 1994. The increase in interest expenses
was attributable to higher levels of debt outstanding due to back borrowing
for the purchase of manufacturing equipment.
Interest and Other Income. Other income for 1995 was $7,000, an increase of
$36,000 ($29,000) for 1994. The increase in other income was attributable to
the absence of the amortization of organizational expenses which were present
for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $5.6 million, and ($970,000), as of
December 31, 1997 and 1996, respectively. The Company had cash and cash
equivalents of $4.9 million and $25,000 for the same respective periods. At
December 31, 1997, $4.8 million of the cash balance was restricted for use in
connection with the Company's planned scale-up of its new Silicon-Film(TM) 9
MW plant.
23
<PAGE>
Net cash provided by (used in) operating activities was $590,000, $367,000
and ($88,000) for the years ended December 31, 1997, 1996, and 1995
respectively. The net cash from operating activities represents primarily the
cash flows from income (loss) plus depreciation partially offset by changes in
working capital. The fluctuations in cash provided by or used in operations is
due primarily to changes in accounts receivable, accounts payable, inventories
and net income (loss).
Net cash used in investing activities was $894,000, $970,000 and $864,000
for the years ended December 31, 1997, 1996 and 1995 respectively, all of
which represented expenditures for capital equipment. In connection with the
establishment of a new Silicon-Film(TM) manufacturing facility, the Company
expects its capital expenditures will increase significantly for the year
ended December 31, 1998. As of December 31, 1997, the Company's outstanding
commitments for capital expenditures aggregated $1.4 million.
Net cash provided by financing activities were $5.2 million, $599,000 and
$905,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
In August 1997, the Company issued a convertible note for $5 million to
Corning. The $5.0 million borrowed from Corning is to be used towards the
engineering, design, lease, construction or expansion of facilities and
purchase of equipment and related tooling or working capital devoted to the
manufacture of products derived from the Company's Silicon-Film(TM)technology.
The loan is for four years with interest at 7% per annum and is convertible
into Common Stock of the Company at a conversion price per share equal to 75%
of the price per share to the public in an initial public offering of Common
Stock by the Company. Corning has a security interest in certain physical
assets purchased with the proceeds of this loan. The cash provided by
financing activities for the years ended December 31, 1995 and 1996
represented private placements of securities and bank debt.
At December 31, 1996, the Company was not in compliance with financial
covenants relating to its ratio of current assets to current liabilities and
its ratio of total liabilities to tangible net worth contained in its
borrowing agreements with two of its financial lenders. The Company obtained
waivers from both lenders with respect to non-compliance with such covenants.
During 1997, the Company entered into several forbearance agreements with its
primary lender. In November 1997, the Company negotiated a new agreement with
this lender to provide for additional term loan borrowing for equipment
purchases of $250,000 and to increase its line of credit by $200,000, thereby
eliminating the forbearance agreements. The maturity date of the new agreement
is March 31, 1999. Total amounts outstanding with this lender at December 31,
1997 were $905,000. During the term of the agreement, the Company must comply
with certain covenants relating to the Company's ratio of debt to equity and
minimum tangible net worth.
In January 1997, the Company renegotiated its borrowing agreement with
another lender. The agreement provides for the borrowing of up to $750,000 for
capital equipment secured by equipment. At December 31, 1997, the amount
outstanding under this facility was $630,000.
In April 1997, the Company received an advance payment from a customer for
$1 million, as part of a $5 million supply agreement for the delivery of
products through the end of 1998. This amount will be credited to the customer
against future shipments during the term of the agreement. The customer has
the right to convert any or all of the unapplied advance payment for an
equivalent amount of the Company's common stock at the then prevailing market
price.
The Company believes that cash generated from operations, its current cash
balance (including the proceeds of the initial public offering), and the funds
available under its bank borrowings, will be sufficient to satisfy the
Company's projected working capital and planned capital expenditures for the
next 24 months, including the scale-up of its new Silicon-Film(TM) plant and
the equity capital requirements of planned future expansion.
INCOME TAXES
Net operating loss carry forwards totaling approximately $5.1 million are
available to reduce future federal and state taxable income as of December 31,
1997. The net operating loss carry forwards expire through 2012.
24
<PAGE>
The Tax Reform Act of 1986 and other income tax regulations contain provisions
which may limit the net operating loss carry forwards available to be used in
any given year, if certain events occur, including changes in ownership
interests. The Company has established a valuation allowance for the entire
amount of the net deferred tax asset since inception.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", was issued in June 1997.
This statement establishes standards for the way public business enterprises
report information about operating segments. It also establishes standards for
related disclosure about products and services, geographical areas, and major
customers. This statement is effective for the Company's financial statements
for the year ended December 31, 1998 and the adoption of this statement is not
expected to have a material effect on the Company's financial statements.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", was issued in June 1997. The statement establishes
standards for reporting and display of comprehensive income in financial
statements. This statement is effective for the Company's financial statements
for the year ended December 31, 1998 and the adoption of this statement is not
expected to have a material effect on the Company's financial statements.
EFFECTS OF INFLATION AND EXCHANGE RATES
The Company has not been materially affected by inflation or changes in
foreign exchange rates. However, there can be no assurance that the Company's
business will not be affected by inflation or foreign exchange rates in the
future.
YEAR 2000
The Company's current data processing systems are not year 2000 compliant.
The Company believes that, within the next 18 months, it will have replaced
its current systems with new systems that are year 2000 compliant. The cost of
such systems is currently estimated at approximately $500,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and the Independent Auditors' Report thereon are listed
under Item 14(a)(1) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
PART III
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dr. Allen M. Barnett..... 57 President and Chief Executive Officer and
Director
Dr. George W. Roland..... 58 President and Chief Executive Officer, Solar
Power Business and Director
Peter C. Aschenbrenner... 42 Vice President, Marketing and Sales
Louis C. DiNetta......... 47 Vice President, Advanced Optoelectronic Products
Dr. Robert B. Hall....... 56 Vice President, Chief Scientist
Thomas J. Stiner......... 43 Vice President, and Chief Financial Officer
Dr. George S. 68
Reichenbach(1).......... Director
Charles R. Schaller...... 62 Director and Secretary
Clare E. 62
Nordquist(1)(2)......... Director
Gilbert H. 66
Steinberg(1)(2)......... Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Dr. Allen M. Barnett is a founder of the Company and has served as its
President and Chief Executive Officer and as a director since the Company's
incorporation as a separate entity in 1989. From 1983 to 1989, Dr. Barnett
served as General Manager of the AstroPower Division of Astrosystems, Inc.
From 1976 to 1993, Dr. Barnett was a Professor of Electrical Engineering at
the University of Delaware. From 1976 to 1979, Dr. Barnett served as Director
of the Institute of Energy Conversion at the University of Delaware. Dr.
Barnett is a technical expert in thin-film materials and devices and has been
active in photovoltaic research and development since 1975, during which time
he has been awarded 21 U.S. patents, authored or co-authored numerous
technical publications and garnered several professional awards. Dr. Barnett
is Chairman of the Solar Energy Industries Association and serves on a number
of national and international committees in the field. Dr. Barnett received a
B.S. and M.S. in Electrical Engineering from the University of Illinois, and a
Ph.D. in Electrical Engineering from Carnegie Institute of Technology.
Dr. George W. Roland has served as President and Chief Executive Officer of
the Company's Solar Power Business since 1996 and was elected a director in
March 1997. From 1995 to 1996, Dr. Roland served as Vice President and General
Manager of the Company's Solar Power Business. From 1993 to June 1995 Dr.
Roland served as President of Siemens Solar Industries L.P., an affiliate of
Siemens Corporation (USA). Prior to that, Dr. Roland served in various
positions, including Vice President and Division Manager of the Metalworking
Systems Division, at Kennametal, Inc. Dr. Roland began his industry career in
1968 as a research and development engineer at Westinghouse Electric
Corporation's Research and Development Center in Pittsburgh, Pennsylvania,
throughout which time he has been awarded 15 U.S. patents and has authored
numerous technical publications. Dr. Roland received a B.S. in Geology from
Acadia University and a Ph.D. in Geological Science from Lehigh University.
26
<PAGE>
Peter C. Aschenbrenner has served as Vice President, Marketing and Sales
since 1995. From 1994 to 1995 Mr. Aschenbrenner served as Director of
Marketing with the Company. From 1991 to 1994, Mr. Aschenbrenner served in a
number of capacities with Siemens Solar Industries, L.P., including Director
of Marketing from 1992 to 1994 and Director of Technology Development from
1991 to 1992. From 1988 to 1990, Mr. Aschenbrenner served as a Managing
Director of PV Electric GmBH, a joint venture between Siemens AG and Arco
Solar, Inc. He served in various positions with Arco Solar from 1978 to 1988.
Mr. Aschenbrenner received a B.A. in Product Design from Stanford University.
Louis C. DiNetta has served as Vice President, Advanced Optoelectronic
Products since 1996. He joined the AstroPower Division of Astrosystems, Inc.
in 1985. Mr. DiNetta is responsible for the research and development of new
photonic energy conversion devices and related optoelectronic products. From
1976 to 1985, Mr. DiNetta worked at the Institute of Energy Conversion at the
University of Delaware, where he was responsible for planning and organization
of device fabrication, as well as process and equipment development to support
various research projects. Mr. DiNetta received a B.S.A.S. in Physics from the
University of Delaware.
Dr. Robert B. Hall has served as Vice President and Chief Scientist since
joining the AstroPower Division of Astrosystems, Inc. in 1983. Dr. Hall's
responsibilities include research and development of thin-film crystalline
materials and ceramic structures for thin-film polycrystalline devices. From
1974 to 1983, Dr. Hall served as Manager, Device Development at the Institute
of Energy Conversion at the University of Delaware. Dr. Hall has more than 18
years of solar cell development experience. His accomplishments include
development of copper sulfide/cadmium sulfide CdS as the first thin film solar
cell with greater than 10.0% conversion efficiency, development of the first
zinc phosphide solar cell and the development of a reliable deposition process
for copper indium selenide solar cells. Dr. Hall received a B.A. in Physics
from Gettysburg College and an M.S. and Ph.D. in Physics from the University
of Delaware.
Thomas J. Stiner has served as Chief Financial Officer of the Company since
December 1997. From June 1993 to November 1997, Mr. Stiner served as
Controller and Treasurer. Mr. Stiner was elected Vice President in 1995. From
1984 to 1993 Mr. Stiner served as a Senior Manager at KPMG Peat Marwick LLP.
Mr. Stiner is a Certified Public Accountant and received a B.S. in Business
Administration from Bloomsburg University.
Dr. George S. Reichenbach has served as a director of the Company since
1989. Dr. Reichenbach is a Senior Vice President of Advent International
Corporation, a venture capital firm, and serves as a director of Progressive
Systems Technology, a semiconductor capital equipment manufacturer.
Previously, Dr. Reichenbach worked at the Massachusetts Institute of
Technology where he served as an Assistant Professor and Associate Professor
of Mechanical Engineering. Dr. Reichenbach received a B.S. in Mechanical
Engineering from Yale University and a Ph.D. in Mechanical Engineering from
the Massachusetts Institute of Technology.
Charles R. Schaller has served as Secretary and a director of the Company
since 1989. Mr. Schaller is a management consultant specializing in the
petrochemicals industry and a venture developer concentrating in the area of
specialty materials, and serves as Chairman of the Board of Directors of
Medarex Inc., a publicly held biotechnology firm. From 1985 to 1989, Mr.
Schaller served as President and Chief Operating Officer of Essex Vencap,
Inc., a venture development subsidiary of Essex Chemical Corporation. Mr.
Schaller has more than 33 years of experience in sales, marketing, management,
business and venture development and management consulting in the chemical,
petrochemical and specialty materials areas. Mr. Schaller received a B.E. in
Chemical Engineering from Yale University and is a graduate of the Harvard
Business School Program for Management Development.
Clare E. Nordquist has served as a director of the Company since 1995. Mr.
Nordquist is the Managing General Partner of Material Ventures Associates LP,
a venture capital partnership specializing in advanced technology materials
companies and serves as a director of Leading Edge Ceramics, LLC, a
manufacturer and distributor of ceramic powders and shapes; Minco Acquisition
Corporation, the parent of numerous companies which manufacture fused silica
and fused magnesia; and Viox Corporation, a custom producer of electronic
grade, high purity glass powders utilized primarily in electronics
applications. Mr. Nordquist received a B.S. in Ceramic Engineering from the
University of Washington and an M.B.A. from the University of Denver.
27
<PAGE>
Gilbert Steinberg has served as a director of the Company since 1989. Mr.
Steinberg is Vice President and Chief Financial Officer of Astrosystems, Inc.,
which is a manufacturer of electronic, electromechanical and power conversion
devices. Mr. Steinberg is the founder of Mentortech, Inc., a publicly held
company specializing in software development and computer training consulting.
Mr. Steinberg received a B.S. in Industrial Engineering at the Massachusetts
Institute of Technology and an M.S. in Mathematics from Adelphi College.
All directors hold office until the next annual meeting of stockholders or
until their successors have been elected. Officers serve at the discretion of
the Board of Directors. There are no family relationships between any of the
directors or executive officers of the Company. The Company does not currently
pay any cash or other compensation to its directors for serving in that
capacity. The Board of Directors has a Compensation Committee that makes
recommendation concerning salaries and incentive compensation for executive
officers of the Company and administers the Company's employee stock plans and
an Audit Committee that reviews the results and scope of the audit and other
services provided by the Company's independent auditors. Dr. Reichenbach and
Mr. Nordquist are the designees of Advent International Corporation and Arete
Ventures, Inc., respectively, and were elected directors pursuant to the
provisions of a 1989 Stock Purchase Agreement relating to the purchase of
shares of Series A Redeemable Convertible Preferred Stock, which are no longer
applicable as the Preferred Stock has been converted into Common Stock.
The Amended and Restated By-Laws of the Company provide for a classified
Board of Directors. At the 1998 annual meeting of stockholders, the directors
shall be divided into three classes, as nearly equal in number as possible,
with the directors of the first class elected for a term of one year, the
directors of the second class elected for a term of two years, and the
directors of the third class elected for a term of three years. Thereafter,
following such initial classification and election, directors elected to
succeed those directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and those other executive officers
of the Company whose total salary, bonus and other compensation earned for
1995, 1996 or 1997 exceeded $100,000:
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION($)(1)
- ------------------------- ---- ---------- --------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Allen M. Barnett......... 1997 $191,458(2) $50,000(2) 203,250 $4,750
President and Chief
Executive 1996 225,819(2) 25,275(2) 21,000 2,375
Officer 1995 232,378(2) 43,531(2) 21,000 2,310
George W. Roland......... 1997 151,840 50,000 -- 4,750
President and Chief
Executive 1996 139,034 15,000 187,500 2,375
Officer, Solar Power
Business 1995 63,173(3) 30,000 60,000 527
Peter C. Aschenbrenner... 1997 116,449 20,000 19,875 1,353(4)
Vice President,
Marketing and 1996 106,779 7,000 0 1,416(4)
Sales 1995 96,833 12,000 0 1,626(4)
Thomas J. Stiner......... 1997 88,670 25,000 22,500 4,750
Vice President and Chief 1996 80,800 20,000 7,500 2,375
Financial Officer 1995 75,004 8,000 0 2,168
</TABLE>
- --------
(1) Includes matching contributions by the Company under its 401(k) Plan.
(2) Dr. Barnett elected to postpone receipt of salary payments of $23,945,
$79,047 and $64,755, for the years ended December 31, 1997, 1996 and 1995,
respectively, as well as all bonus amounts for the years ended December
31, 1996 and 1995.
(3) Dr. Roland joined the Company in June 1995.
(4) Includes $1,200 annual expense allowance for all years.
28
<PAGE>
STOCK OPTIONS
The following table provides information regarding grants of stock options
made during the fiscal year ended December 31, 1997 to the persons named in
the Cash Compensation Table above:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES OPTION TERM
OPTIONS IN FISCAL EXERCISE EXPIRATION ---------------------
NAME GRANTED (#) YEAR PRICE ($/SHARE) DATE 5% ($) 10%
---- ----------- ---------- --------------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Allen M. Barnett.... 15,750 4.4% $3.12 1/1/07 $ 30,904 $ 78,317
187,500 52.3% 5.33 4/1/07 628,502 1,592,746
Dr. George W. Roland.... -- -- -- -- -- --
Peter C. Aschenbrenner.. 19,875 5.5% 4.00 4/1/07 49,997 126,703
Thomas J. Stiner........ 22,500 6.3% 4.00 4/1/07 56,601 143,437
</TABLE>
- --------
(1) Options awarded under the Plan generally provide for vesting over a period
of four years, with vesting occurring 25% per year on the anniversary date
of the option award. The Board of Directors has the discretion, subject to
plan limits, to modify the terms of outstanding options. The options
listed for Dr. Barnett with an exercise price of $3.12 per share are
immediately vested. The options listed for Dr. Barnett with an exercise
price of $5.33 per share vest over a five-year period. The options listed
for Dr. Roland vested upon the effective date of the registration
statement for the Company's initial public offering.
(2) All options were granted with an exercise price equal to the fair market
value of the Common Stock as determined by the Board of Directors on the
date of grant other than the 15,750 shares granted to Dr. Barnett on
January 1, 1997. In determining the fair market value of the Common Stock,
for which no trading market existed, the Board of Directors took into
consideration such factors as the most recent sale prices and preferences
of Preferred Stock, recent results of operations and other relevant data.
The 15,750 options granted to Dr. Barnett were granted in connection with
an amendment to his employment agreement in 1991. The option price
approximates the average price per share paid by the purchasers of Series
A Convertible Preferred Stock, which price was in excess of the fair
market value of the Common Stock on the date of grant.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options at the end of the 10-year option term. The assumed 5%
and 10% rates of stock appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent the Company's
estimate of the future Common Stock price. This table does not take into
account any appreciation in the price of the Common Stock to date, which
exceeds the hypothetical gains shown in the table.
29
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth, for each person named in the Cash
Compensation Table above, information regarding the exercise of stock options
during the fiscal year ended December 31, 1997 and the year-end value of
unexercised options. No options were exercised by the Named Executive Officers
during 1997:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT YEAR-END (#) OPTIONS AT YEAR END ($)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen M. Barnett........ -- -- 162,750 187,500 468,720 125,625
George W. Roland........ -- -- 30,000 217,500 60,000 435,000
Peter C. Aschenbrenner.. -- -- 28,125 29,250 56,250 58,500
Thomas J. Stiner........ -- -- 43,125 31,875 86,250 63,750
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the Common Stock at
December 31, 1997 of $6.00 per share, as determined by the Company's Board
of Directors, minus the per share exercise price, multiplied by the number
of shares underlying the option. See note (2) of the preceding table.
BENEFIT PLANS
Stock Option Plan
The Company adopted a Stock Option Plan (the "Plan") in 1989 under which a
total of 1,200,000 shares are currently reserved for issuance to employees
(including officers and directors who are employees or consultants). Options
granted pursuant to the Plan may be either incentive stock options or non-
qualified stock options. The Plan is administered by the Compensation
Committee of the Board of Directors which selects the employees to whom the
options are granted, determines the number of shares subject to each option,
sets the time or times when the options will be granted, determines the time
when the options may be exercised and establishes the market value of the
shares at the date of grant and exercise date. The Plan provides that the
purchase price under the option shall be at least 100 percent of the fair
market value of the shares of the Company's common stock at the date of grant.
The options are not transferable. There are limitations on the amount of
incentive stock options that an employee can be granted in a single calendar
year. The term of each option granted under the Plan is determined by the
Compensation Committee, but in no event may such term exceed ten years.
Options granted under the Plan generally provide for vesting in four equal
annual installments beginning on the first anniversary of the date of grant.
As of December 31, 1997, options to purchase an aggregate of 1,088,938 shares
were outstanding at a weighted average exercise price of $4.00 per share and
32,889 shares remained available for future option grants under the Plan.
Compensatory Stock Plan
Prior to the adoption of the 1989 Plan, the Company had a compensatory stock
plan for the issuance of shares to employees and consultants. At December 31,
1997, the only remaining obligation under this plan was the reservation of
39,999 shares for issuance to a former consultant of the Company.
Retirement Savings Plan
The Company maintains a Retirement Savings Plan (the "401(k) Plan") which is
intended to qualify under Section 401(k) of the Internal Revenue Code.
Employees of the Company who have attained age 21 and completed at least one
month of service with the Company are eligible to make contributions to the
401(k) Plan on a pre-tax basis of up to 15% of the participant's compensation
in any year in accordance with limitations defined in the Code. Under the
401(k) Plan, the Company may make a discretionary contribution to the Plan.
The total contribution made by a participant and by the Company on behalf of
that participant cannot exceed the lesser of 25% of the participant's annual
compensation or $30,000 for any one plan year. The pre-tax contributions made
by a participant and the earnings thereon are at all times fully vested. The
participant's interest in Company contributions and the earnings thereon will
become vested at the rate of 20% per year for
30
<PAGE>
each year of service with the Company or, if earlier, upon such participant's
death or disability. A participant's fully vested benefit under the 401(k)
plan may be distributed to the participant upon his retirement, death,
disability or termination of employment or upon reaching age 59 1/2.
At December 31, 1997, the Company had accrued a contribution to the 401(k)
Plan of $145,000. The Company's contribution on behalf of the officers named
under "Executive Compensation" were as follows: Dr. Allen M. Barnett--$4,750;
Dr. George W. Roland--$4,750; Peter Aschenbrenner--$153; Thomas J. Stiner--
$4,750.
EMPLOYMENT ARRANGEMENTS
Dr. Allen M. Barnett entered into a new employment agreement with the
Company, effective April 1, 1997 providing for a base salary of $175,000 per
year. The agreement is for an initial term ending March 31, 2000. After the
initial term the agreement will continue in effect for an indefinite period
until the Company or Dr. Barnett elects to terminate the agreement by written
notice to the other party at least six months prior to the effective date of
termination. Other principal terms of the agreement provide for yearly vesting
of options to purchase 37,500 shares of the Company's Common Stock at $5.33
per share and yearly bonuses of not less than $50,000 if contemplated
financial or other objectives determined each year by the Board of Directors
and Dr. Barnett are achieved. In the event of the termination of the agreement
due to disability, or death, Dr. Barnett or his estate would be entitled to
receive his base salary for the longer of the remaining term of the agreement
or two years plus all other compensation and benefits in the case of
disability and a pro rata portion in the case of death. In the event of
termination due to a change of control of the Company, Dr. Barnett would be
entitled to a lump sum payment of one years salary and bonus; a payment of
salary and bonus from the date of termination through the remaining term of
the agreement and the immediate vesting of all remaining options. In the event
of termination (other than for death or disability) Dr. Barnett is restricted
from competing with the Company for one year thereafter.
Dr. George W. Roland entered into an employment agreement with the Company
effective May 1, 1996, providing for a base salary of $155,000 per year for an
unspecified term. In the event of termination for any reason other than cause
(as defined in the employment agreement), the Company must pay him nine months
salary. Dr. Roland was granted a non-qualified option to acquire 187,500
shares of the Company's Common Stock which will vest and be exercisable as
follows: all of these options will vest upon the effective date of a
registration statement covering the Company's first bona fide, firm
commitment, public offering of Common Stock ("Public Offering") or if the
Company merges or consolidates into or with, or sells or transfers all or
substantially all of its assets to, or transfers all of its capital stock to,
another corporation or entity which is not an affiliate of the Company
("Sale"). If the Company terminates his employment within twelve months prior
to such Public Offering or Sale and he was not terminated for cause, he shall
continue to be vested with respect to all his options upon the effective date
of the Registration Statement relating to the Public Offering or the effective
date of a Sale. If he voluntarily terminates his employment prior to such
Public Offering or Sale he forfeits all rights to his options to purchase the
187,500 shares. All vested options are exercisable, in whole or part in, at a
price of $4.00 per share upon the following terms and conditions: (i) at any
time for a period of seven years following the completion of the Public
Offering or Sale, provided that he is employed by the Company at the time of
such exercise; (ii) at any time for a period of two years following the
completion of the Public Offering or Sale, provided that he shall have been
terminated by the Company, other than for cause, within the twelve months
preceding such Public Offering or Sale; or (iii) at any time for a period
equal to the lesser of two years from the date of his termination from the
Company, or seven years from the date of the Public Offering or Sale, provided
that he shall not have been terminated by the Company for cause and he shall
have been employed by the Company at the time of such Public Offering or Sale.
Dr. Roland also was granted a qualified option to purchase 60,000 shares of
the Company's Common Stock at $4.00 per share in connection with his initial
employment in June 1995.
The Company's employment agreements with Dr. Barnett and Dr. Roland and its
employment arrangements with other executive officers and significant
employees impose customary confidentiality obligations and provide for the
assignment to the Company of all rights to any technology developed by the
employee during the time of his employment.
31
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company consists of Messrs. Nordquist,
Reichenbach and Steinberg. During the fiscal year ended December 31, 1997, no
executive officer of the Company served on the board of directors or
compensation committee of another company that had an executive officer
serving on the Company's Board of Directors or Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of March 20,
1998, (i) each shareholder who is known by the Company to own beneficially 5%
or more of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each named Executive Officer and (iv) all directors and
officers of the Company as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power
with respect to such shares, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT OF TOTAL
- ------------------------------------ --------- ----------------
<S> <C> <C>
Astrosystems, Inc.(2)............................... 1,193,750 13.2%
1220 Market Street, Suite 603
Wilmington, DE 19801
Cede & Company*..................................... 3,098,523 34.2%
P.O. Box 20
Bowling Green Station
New York, NY 10004
Entities Affiliated with(3)......................... 477,081 5.3%
Advent International Corp.
101 Federal Street
Boston, MA 02110
Entities Affiliated with(4)......................... 162,819 1.8%
Materia Ventures Associates
3435 Carillon Point
Kirkland, WA 98033
Dr. Allen M. Barnett(5)............................. 1,472,706 16.3%
Dr. George W. Roland(6)............................. 217,500 2.4%
Peter C. Aschenbrenner(7)........................... 42,469 **
Louis C. DiNetta(8)................................. 20,625 **
Robert B. Hall(9)................................... 91,001 1.00%
Thomas J. Stiner(10)................................ 54,375 **
Dr. George S. Reichenbach(3)........................ 477,081 5.3%
Charles R. Schaller................................. 5,250 **
Clare E. Nordquist(4)............................... 162,819 1.8%
Gilbert Steinberg(2)................................ 1,193,750 13.2%
All directors and officers as a group (ten 3,737,576 41.3%
persons)(11).......................................
</TABLE>
32
<PAGE>
- --------
* This company is nominee for beneficial owners of these shares purchased in
the Company's initial public offering on February 12, 1998 and in open
market transactions thereafter, and whose identity is unknown to the
Company.
** Less than one percent.
(1) Applicable percentage of ownership is based on 9,061,824 shares of Common
Stock outstanding as of March 20, 1998 and treats as outstanding all
shares (540,469) issuable on exercise of options exercisable within 60
days of the date of this Form 10-K held by beneficial owners that are
included in the first column.
(2) Represents 1,193,750 shares held by Astrosystems, Inc. Mr. Steinberg, a
director of the Company is an officer, director and shareholder of
Astrosystems, Inc. and disclaims beneficial ownership of shares held by
Astrosystems, Inc. except to the extent of his pecuniary interest
therein.
(3) Includes the ownership by the following venture capital funds managed by
Advent International Corporation: 89,095 shares owned by Adhill Limited
Partnership, 59,396 shares owned by Adval Limited Partnership, 59,396
shares owned by Advent Future Limited Partnership, 1,909 shares owned by
Advent International Investors Limited Partnership, 89,095 shares owned
by Advent Performance Materials Limited Partnership, 89,095 shares owned
by Adwest Limited Partnerhsip and 89,095 shares owned by World Technology
Limited Partnership. In its capacity as manager of these funds, Advent
International Corporation exercises sole voting and investment power with
respect to all shares held by these funds. Dr. Reichenbach is a Senior
Vice President of Advent International Corporation, the venture capital
firm, which is the manager of the funds affiliated with the Advent
International Group. Dr. Reichenbach disclaims beneficial ownership of
the shares held by the Advent International Group except to the extent of
his pecuniary interest therein.
(4) Represents an aggregate of 159,069 shares held by two limited
partnerships of which Materia Ventures Associates is the general partner.
Mr. Nordquist is the Managing General Partner of Materia Ventures
Associates and disclaims beneficial ownership of the shares held by
Materia Ventures Associates except to the extent of his pecuniary
interest therein.
(5) Includes 1,181,365 shares held by a family trust of which Dr. Barnett is
a beneficiary and also 200,250 shares subject to currently exercisable
options within 60 days from the date of this Form 10-K. Dr. Barnett
disclaims beneficial ownership of the shares held by the Trust except to
the extent of his pecuniary interest therein.
(6) Includes 217,500 shares subject to options within 60 days from the date
of this Form 10-K.
(7) Includes 42,469 shares subject to options within 60 days from the date of
this Form 10-K .
(8) Includes 16,125 shares subject to options within 60 days from the date of
this Form 10-K.
(9) Includes 9,750 shares subject to options within 60 days from the date of
this Form 10-K.
(10) Includes 54,375 shares subject to options within 60 days from the date of
this Form 10-K.
(11) Includes an aggregate of 540,469 shares held by all directors and
officers that are subject to options exercisable within 60 days from the
date of this Form 10-K. See Notes (4) through (9) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1997, the Company owed its President $555,482 in the form of
salary, bonus and automobile reimbursements. The amounts are related to the
excess of his salary and bonus and auto allowance over the amounts actually
paid from July 1990 to March 1997. On December 15, 1997, the Company agreed
that one-third of this amount will be paid per year in each of 1998, 1999 and
2000, with interest on the unpaid balance at 6% per annum from January 1,
1998.
At December 31, 1997, the Company owed Astrosystems, Inc. $58,000 in
principal and $40,846 in accrued interest under the terms of an unsecured
promissory note.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K
(A)1. FINANCIAL STATEMENTS
Independent Auditor's Report
Balance Sheets--December 31, 1997 and 1996
Statements of Operations--Years Ended December 31, 1997, 1996, and 1995.
Statements of Stockholders' Deficit--Years ended December 31, 1997, 1996 and
1995.
Statements of Cash Flows--Years ended December 31, 1997, 1996 and 1995.
Notes to Financial Statements
2. FINANCIAL SCHEDULES ATTACHED HERETO ARE AS FOLLOWS:
Independent Auditor's Report
Schedule II--Valuation and Qualifying Accounts. Other schedules are omitted
because of the absence of conditions under which they are required or because
the required information is given in the financial statements or notes
thereto.
3. EXHIBITS
Unless otherwise noted, the following exhibits are incorporated by reference
to the Registration Statement (No. 333-42591) on Form S-1 filed on December
18, 1997.
<TABLE>
<C> <S>
2.1 Series A Preferred Stock Purchase Agreement dated September 20, 1989 by
and among AstroPower, Inc., et al and the Purchasers named therein.
2.2 Series B Stock Purchase Agreement dated between August 1993 and
September 1996 by among AstroPower, Inc. et al and the Purchasers
named therein.
3.1 Certificate of Incorporation of the Registrant, as Amended.
3.2 By-Laws of the Registrant.
3.3 Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be effective immediately prior to the effectiveness of
the Offering.
3.4 Form of Amended and Restated By-Laws of the Registrant, to be effective
immediately prior to the effectiveness of the Offering.
4.1 Specimen certificate representing the Common Stock of the Registrant.
10.1 1989 Stock Option Plan, as amended.
10.2 Lease for premises at Solar Park, Newark, Delaware dated July 1, 1991
between the Company and the University of Delaware.
10.3 Employment Agreement between the Company and Dr. Allen M. Barnett dated
April 1, 1997.
10.4 Employment Agreement between the Company and Dr. George W. Roland dated
May 1, 1997.
10.5 1997 Bonus Plan for Drs. Barnett and Roland.
10.6 Amended and Restated Loan Agreement between the Company and Mellon Bank
(DE), N.A. dated November 24, 1997.
10.7 Amended and Restated Security Agreement between the Company and Mellon
Bank (DE), N.A. dated November 24, 1997.
10.8 Amended and Restated Line of Credit Note between the Company and Mellon
Bank (DE), N.A. dated November 24, 1997.
10.9 Amended and Restated Term Loan Note between the Company and Mellon Bank
(DE), N.A. dated November 24, 1997.
</TABLE>
34
<PAGE>
<TABLE>
<C> <S>
10.10 Business Loan Agreement between the Company and Artisans' Savings Bank
dated January 10, 1997.
10.11 Promissory Note between the Company and Artisans' Savings Bank dated
January 10, 1997.
10.12 Commercial Security Agreement between the Company and Artisans'
Savings Bank dated January 10, 1997.
10.13 Commercial Guaranty between Allen M. Barnett and Artisans' Savings
Bank dated January 10, 1997.
10.14 Operating Agreement between the Company and GPU International dated
July 1, 1997.
10.15 Performance Agreement between the Company and GPU International dated
July 1, 1997.
10.16 Note Purchase Agreement between the Company and Corning Inc. dated
August 19, 1997.
10.17 Security Agreement between the Company and Corning Inc. dated August
19, 1997.
10.18 Promissory Note between the Company and Corning Inc. dated August 19,
1997.
10.19 Research and Development Umbrella Agreement between the Company and
Corning Inc. dated August 19, 1997.
10.20 Promissory note to Astrosystems, Inc.
10.21 Lease for premises at 231 Lake Drive, Newark, Delaware dated January
16, 1998 between the Company and Liberty Property Limited
Partnership.
27.1 Financial Data Schedule.
</TABLE>
35
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
AstroPower, Inc.
Date: March 26, 1998 /s/ Allen M. Barnett
By: _________________________________
Allen M. Barnett
Chief Executive Officer, President
and Director
Date: March 26, 1998 /s/ Thomas J. Stiner
By: _________________________________
Thomas J. Stiner
Vice President, Principal Financial
Officer and Principal Accounting
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 26, 1998.
/s/ Allen M. Barnett Director /s/ Gilbert Steinberg Director
_________________________ _________________________
Allen M. Barnett Gilbert Steinberg
/s/ George S. Director /s/ Clare E. Nordquist Director
Reichenbach _________________________
_________________________ Clare E. Nordquist
George S. Reichenbach
/s/ George W. Roland Director /s/ Charles R. Schaller Director
_________________________ _________________________
George W. Roland Charles R. Schaller
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AstroPower, Inc.:
We have audited the accompanying balance sheets of AstroPower, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' deficit, and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AstroPower, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997,
in conformity with generally accepted accounting principles.
s/KPMG Peat Marwick LLP
Wilmington, DE
February 20, 1998, except as to
the last paragraph of Notes 3
and 8, which are as of March 19,
1998
F-1
<PAGE>
ASTROPOWER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
ASSETS ------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (including restricted
cash of $4,788,519 at December 31, 1997)......... $ 4,908,177 $ 24,930
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$72,962 in 1997 and $47,836 in 1996............. 3,326,200 2,012,936
Other, including amounts due from employees and a
stockholder..................................... 35,872 32,223
Inventories....................................... 1,602,321 1,214,188
Prepaid expenses.................................. 350,471 59,270
------------ -----------
Total current assets............................ 10,223,041 3,343,547
PROPERTY AND EQUIPMENT:
Machinery and equipment........................... 6,856,031 6,038,393
Furniture and fixtures............................ 152,617 145,882
Leasehold improvements............................ 205,298 184,077
Construction in progress.......................... 536,370 488,044
------------ -----------
7,750,316 6,856,396
Less accumulated depreciation and amortization.... (2,858,195) (2,313,129)
------------ -----------
4,892,121 4,543,267
------------ -----------
Total assets.................................... $ 15,115,162 $ 7,886,814
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
ASTROPOWER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.................................... $ 2,314,495 $1,799,973
Note payable--stockholder........................... 58,000 58,000
Note payable--bank.................................. 203,357 531,200
Current maturities of longterm debt................. 55,000 365,683
Accrued payroll and payroll taxes (includes $185,161
in 1997 and $530,412 in 1996 due to the Company's
President and Chief Executive Officer)............. 978,256 1,034,841
Accrued expenses.................................... 394,564 190,086
Advance from customer............................... 610,891 333,536
----------- ----------
Total current liabilities......................... 4,614,563 4,313,319
OTHER LIABILITIES:
Long-term debt, excluding current maturities........ 6,277,174 527,811
Deferred compensation and other (including amounts
due to officers and a stockholder)................. 463,900 106,493
----------- ----------
6,741,074 634,304
----------- ----------
Total liabilities................................. 11,355,637 4,947,623
----------- ----------
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series A Convertible Preferred Stock, 1,331,250
shares authorized; 1,309,626 shares issued and
outstanding, $.01 per share par value, liquidation
preference of $8,808,188, redeemable, 8% dividend
rate, non-cumulative............................... 5,798,725 5,798,725
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Series B Convertible Preferred Stock, 750,000 shares
authorized; 336,409 in 1997 and 328,909 in 1996
shares issued and outstanding, $.01 per share par
value, 8% dividend rate, non-cumulative............ 3,364 3,289
Common Stock, 15,000,000 shares authorized;
3,769,772 in 1997 and 3,701,775 in 1996 shares
issued and outstanding, $.01 per share par value... 37,698 37,018
Additional paid-in capital.......................... 3,288,017 2,697,396
Note receivable..................................... (79,125) --
Unearned compensation............................... (343,743) --
Accumulated deficit................................. (4,945,411) (5,597,237)
----------- ----------
Total stockholders' deficit....................... (2,039,200) (2,859,534)
----------- ----------
Total liabilities and stockholders' deficit..... $15,115,162 $7,886,814
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ASTROPOWER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
REVENUES:
Product sales....................... $ 13,094,871 $ 6,237,349 $ 5,355,710
Research contracts.................. 3,511,898 4,346,118 4,589,098
------------ ------------ -----------
Total revenues.................... 16,606,769 10,583,467 9,944,808
COST OF REVENUES:
Product sales....................... 9,311,140 6,896,109 4,482,957
Research contracts.................. 2,539,915 2,579,994 3,028,488
------------ ------------ -----------
Total cost of revenues............ 11,851,055 9,476,103 7,511,445
------------ ------------ -----------
Gross profit...................... 4,755,714 1,107,364 2,433,363
OPERATING EXPENSES:
Product development expenses........ 1,006,979 775,963 313,551
General and administrative
expenses........................... 1,972,144 1,858,862 1,468,779
Selling expenses.................... 853,812 660,468 444,393
------------ ------------ -----------
Income (loss) from operations..... 922,779 (2,187,929) 206,640
OTHER EXPENSE (INCOME):
Interest expense.................... 369,233 168,782 115,593
Interest income..................... (113,730) (5,685) (6,695)
Other expense (income).............. (4,550) 11,959 (228)
------------ ------------ -----------
Total other expense............... 250,953 175,056 108,670
NET INCOME (LOSS) BEFORE INCOME
TAXES................................ 671,826 (2,362,985) 97,970
INCOME TAXES.......................... (20,000) 0 0
------------ ------------ -----------
NET INCOME (LOSS)..................... $ 651,826 $ (2,362,985) $ 97,970
============ ============ ===========
NET INCOME (LOSS) DATA:
Net income (loss) per share--
basic.............................. $ 0.18 (0.64) 0.03
============ ============ ===========
Net income (loss) per share--
diluted............................ $ 0.13 (0.64) 0.02
============ ============ ===========
Weighted average shares outstanding
-- basic........................... 3,710,258 3,699,702 3,697,630
============ ============ ===========
Weighted average shares outstanding
-- diluted ........................ 6,220,161 3,699,702 5,362,336
============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ----------------- PAID--IN NOTE UNEARNED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT TOTAL
-------- ------- --------- ------- ---------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1995........ 234,751 $ 2,348 3,679,320 $36,794 $1,985,363 -- -- $(3,332,222) $(1,307,717)
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs................. 17,250 172 -- -- 82,318 -- -- -- 82,490
Common Stock issued.... -- -- 18,312 183 49,848 -- -- -- 50,031
Net income............. -- -- -- -- -- -- -- 97,970 97,970
-------- ------- --------- ------- ---------- -------- --------- ----------- -----------
BALANCE,
DECEMBER 31, 1995...... 252,001 2,520 3,697,632 36,977 2,117,529 -- -- (3,234,252) (1,077,226)
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs................. 76,908 769 -- -- 574,736 -- -- 575,505
Common Stock issued.... -- 4,143 41 5,131 -- -- -- 5,172
Net loss............... -- -- -- -- -- -- -- (2,362,985) (2,362,985)
-------- ------- --------- ------- ---------- -------- --------- ----------- -----------
BALANCE,
DECEMBER 31, 1996...... 328,909 3,289 3,701,775 37,018 2,697,396 -- -- (5,597,237) (2,859,534)
Issuance of Series B
Convertible Preferred
Stock................. 11,250 112 -- -- 89,888 -- -- -- 90,000
Purchase and retirement
of Series B
Convertible Preferred
Stock................. (3,750) (37) -- -- (29,963) -- -- -- (30,000)
Common Stock issued.... -- -- 67,997 680 113,471 (79,125) -- -- 35,026
Stock options granted.. -- -- -- -- 417,225 -- (417,225) --
Amortization of
unearned
compensation.......... -- -- -- -- -- -- 73,482 -- 73,482
Net income............. -- -- -- -- -- -- 651,826 651,826
-------- ------- --------- ------- ---------- -------- --------- ----------- -----------
BALANCE,
DECEMBER 31, 1997...... 336,409 $ 3,364 3,769,772 $37,698 $3,288,017 $(79,125) $(343,743) $(4,945,411) $(2,039,200)
======== ======= ========= ======= ========== ======== ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ASTROPOWER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ 651,826 $(2,362,985) $ 97,970
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization........... 545,066 474,569 432,842
Common stock issued for services........ 18,500 -- 37,500
Stock options issued.................... 73,482 -- --
Changes in working capital items:
Accounts receivable.................... (1,313,264) 278,164 (740,700)
Inventories............................ (388,133) 921,855 (267,408)
Prepaid expenses....................... (291,201) 5,587 20,862
Accounts payable and accrued expenses.. 719,000 595,790 16,945
Accrued payroll and payroll taxes...... 313,736 330,684 140,562
Estimated costs to complete loss con-
tracts................................ -- -- (19,956)
Advance from customer.................. 277,355 111,260 151,520
Other.................................. (16,562) 12,143 41,493
----------- ----------- ---------
Net cash provided by (used in) operating
activities.............................. 589,805 367,067 (88,370)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................... (893,920) (970,431) (863,881)
----------- ----------- ---------
Net cash used in investing activities... (893,920) (970,431) (863,881)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............. 6,033,076 202,097 600,000
Net borrowings from line of credit....... (327,843) 175,000 380,050
Repayment of long-term debt.............. (594,396) (358,200) (161,036)
Proceeds from issuance of common stock... 16,525 4,875 3,031
Proceeds from issuance of preferred
stock................................... 90,000 575,505 82,490
Repurchase of preferred stock............ (30,000) -- --
----------- ----------- ---------
Net cash provided by financing activi-
ties..................................... 5,187,362 599,277 904,535
----------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 4,883,247 (4,087) (47,716)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR..................................... 24,930 29,017 76,733
----------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.. $ 4,908,177 $ 24,930 $ 29,017
=========== =========== =========
SUPPLEMENTAL DISCLOSURE:
Interest paid............................ $ 160,544 $ 129,555 $ 102,203
=========== =========== =========
OTHER NONCASH FINANCING AND INVESTING
ACTIVITIES:
During 1995, 2,375 shares of Common Stock
valued at $9,500 were issued to settle a
liability accrued at December 31, 1994..
During 1995, the Company acquired
approximately $131,000 of equipment
under a capital lease agreement.........
During 1997, the Company issued 34,213
shares of common stock in exchange for a
6% promissory note in the amount of
$79,125, with a maturity date of August
15, 1998................................
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
AstroPower, Inc. was incorporated in April 1989. In September 1989 it
purchased the assets and assumed certain liabilities of the AstroPower
Division, an unincorporated division of Astrosystems, Inc., a public company.
The Company develops, manufactures, markets and sells PV solar cells,
modules and panels for generating solar electric power. Solar cells are
semiconductor devices which convert sunlight directly into electricity. Solar
electric power is used off the electric utility grid for many applications in
the communications and transportation industries and in remote villages and
homes. Solar electric power is also used in on-grid applications by existing
electric utility customers to provide a clean, renewable source of alternative
or supplementary electric power. Availability of silicon wafers, a significant
raw material in the Company's manufacturing process, is subject to market
conditions in the semiconductor industry, however, the Company is not
dependent on a single supplier or only a few suppliers. See Note 11.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, accrued expenses, note payable-stockholder and
borrowings. The carrying values of cash, accounts receivable, accounts
payable, accrued expenses and note payable-stockholder are considered to be
representative of their respective fair values because of the short-term
nature of these balances. The carrying value of the Company's bank borrowings
are considered to approximate their fair values, due to the market rates of
interest on the borrowings. The Company's convertible note does not have a
readily ascertainable market value due to the conversion feature of the note
and the various rights granted to the noteholder with respect to certain
future transactions. See Note 13.
Inventories
Inventories are reported at lower of cost or market. Cost is determined
using the weighted average method.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method based on the assets' estimated useful lives, ranging
from 5 to 15 years. Maintenance, repairs and minor renewals are charged to
expense as incurred.
Included in machinery and equipment at December 31, 1997 is $4,776,886
representing self-constructed assets. In costing the equipment, the Company
uses a full cost approach whereby direct material, direct labor and related
overhead costs are capitalized. The total labor and overhead costs of self-
constructed assets capitalized for the years ended December 31, 1995 and 1996
and 1997, were $307,833, $303,677, and $176,397 respectively.
F-7
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Revenue from product sales is recognized when products are shipped. Revenue
related to the Company's fixed price, cost-plus and cost-sharing research
contracts are recognized at the time costs benefiting the contracts are
incurred, which approximates the percentage of completion method. Provisions
for estimated losses are made in the period in which losses are determined.
Accounts receivable includes unbilled accounts receivable consisting of
material, labor and overhead expended on contracts.
Product Development Expenses
These expenses represent the material, labor and overhead costs incurred to
develop processes in support of the Company's Silicon-Film(TM) wafer, solar
cell and module engineering effort which are not funded by research contracts.
Income Taxes
The Company accounts for income taxes in accordance with the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues and expense, and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
Net Income Per Share
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" in the fourth quarter of 1997. SFAS No. 128 requires
the Company to use methods for calculating earnings per share that differ from
methods used in prior periods and requires the Company to restate net income
per share reported in prior periods. The adoption of this statement had no
effect on the results of operations, or financial condition.
(2) Inventories
A summary of inventories is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Raw materials.......................................... $1,173,850 $ 491,085
Work-in-process........................................ 210,380 105,538
Finished goods......................................... 218,091 617,565
---------- ----------
$1,602,321 $1,214,188
========== ==========
</TABLE>
F-8
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) DEBT
A summary of the Company's long-term debt follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Bank term loans--primary lender; initial interest to be
prime plus 1% (9.5% at December 31, 1997); secured by
accounts receivable, inventory and equipment; payable
in principal installments of $17,500 per month through
March 31, 1999, at which time the balance is due....... $ 702,000 $ 641,428
Bank term loan, with interest at prime plus 1.5% (10.0%
at December 31, 1997) secured by property and equipment
and the guarantee of the Company's President and Chief
Executive Officer; payable in principal installments of
$10,000 per month beginning February 10, 1997 through
January 10, 2000, at which time the balance is due..... 630,174 202,097
Delaware Economic Development Authority term loan, with
interest at 4.8%, due in 60 equal installments of
$1,878, commencing February 1, 1993, secured by
property and equipment................................. -- 21,961
Capital lease obligation, payable through June 1997,
with interest at 9%, secured by equipment.............. -- 28,008
7% convertible promissory note due August 19, 2001,
collateralized by certain physical assets, as described
in Note 13............................................. 5,000,000 --
---------- ---------
6,332,174 893,494
Less current maturities................................. (55,000) (365,683)
---------- ---------
$6,277,174 $ 527,811
========== =========
</TABLE>
The aggregate maturities of long-term debt (excluding the $1,277,173 of term
loans which were repaid on March 19, 1998 as described below) for the years
subsequent to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998........................................................ $ 55,000
2001........................................................ 5,000,000
----------
$5,055,000
==========
</TABLE>
The unsecured note payable to a stockholder, bears interest at the rate of
9.01% and is payable on demand. The Company has not made any interest payments
on the note since October 31, 1990. The accrued interest on the note was
$40,840 and $35,615 at December 31, 1997 and 1996, respectively, and is
included in the caption "Accrued expenses" in the balance sheet.
At December 31, 1996, the Company was not in compliance with covenants
contained in borrowing agreements with its primary lender. During 1997, the
Company entered into several forebearance agreements with the lender, and on
November 24, 1997, the Company entered into an amended and restated loan
agreement providing for an increase in its line of credit from $400,000 to
$600,000, subject to borrowing base limitations, and an increase in its term
loan facility to $737,000. The Company must comply with covenants to measure
Tangible Net Worth, Ratio of Liabilities to Tangible Net Worth and Cash Flow
Coverage, as defined in the agreement. Amounts available under the line of
credit facility as of December 31, 1997 were approximately $397,000.
F-9
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In January 1997, the Company renegotiated its borrowing agreement with
another bank, which provided for a loan of $750,000 for capital improvements
secured by equipment and requires the Company to maintain a maximum ratio of
total liabilities to total net worth, of 2.25 to 1. At December 31, 1997, the
outstanding balance was $630,174.
On March 19, 1998 the Company repaid the remaining amounts outstanding under
its bank term loans amounting to $1,277,173 from the proceeds of the March 12,
1998 exercise of the over allotment option granted to the underwriters as part
of the initial public offering (as described in Note 8). Accordingly, $275,000
representing the remaining 1998 payments under these term loans were excluded
from current maturities as of December 31, 1997.
(4) INCOME TAXES
No income tax provision was recorded for the years ended December 31, 1996,
and 1995. An income tax provision of $20,000 was recorded for the year ended
December 31, 1997. Income tax expense (benefit) differed from the amounts
computed by applying the U.S. federal income tax rate of 34% to pretax income
(loss) from operations as a result of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).. $ 228,421 $(803,415) $ 33,310
Reduction in income taxes resulting from
utilization of net operating loss
carryforwards............................. (208,421) -- (33,310)
Increase in valuation allowance for
deferred tax assets--net operating loss
carry forwards............................ -- 770,392 --
Other...................................... -- 33,023 --
--------- --------- --------
Actual tax expense......................... $ 20,000 $ -- $ --
========= ========= ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Deferred revenue..................... $ 242,780 $ 133,000 $ 85,247
Advances from customer and accrued
expenses............................ 323,698 161,958 133,690
Federal and state net operating loss
carryforward........................ 2,021,628 1,750,000 1,015,000
Other................................ -- -- 8,188
----------- ----------- ---------
Total gross deferred tax assets...... 2,588,106 2,044,958 1,242,125
Less valuation allowance............. (1,809,315) (1,673,387) (902,995)
----------- ----------- ---------
Net deferred tax assets................ 778,791 371,571 339,130
Deferred tax liabilities:
Plant and equipment, due to
differences in depreciation methods
and basis........................... (778,791) (371,571) (339,130)
----------- ----------- ---------
Net deferred amount.................... $ -- $ -- $ --
=========== =========== =========
</TABLE>
F-10
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The change in the valuation allowance results from management's assessment
of whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. At
December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $5.1 million which are available
to offset future federal and state taxable income, if any, through 2012.
(5) OPERATING LEASE OBLIGATIONS
The Company leases a 40,000 square foot building from the University of
Delaware (the "University"). Although the lease agreement is for a term of 20
years (expiring June 30, 2011), the Company may cancel the lease after nine
years (June 30, 2000). Under the agreement with the University, the scheduled
cash payments over the next five years differ from rental expense calculated
under the straight-line method. The following summarizes expected charges to
rent expense contrasted with expected cash outflow as required by the lease
agreement:
<TABLE>
<CAPTION>
ANNUAL RENT EXPECTED
EXPENSE CASH PAYMENTS
----------- -------------
<S> <C> <C>
December 31, 1998.................................. $184,489 $209,200
December 31, 1999.................................. 184,489 220,800
December 31, 2000.................................. 184,489 233,600
December 31, 2001.................................. 184,489 245,800
December 31, 2002.................................. 184,489 259,400
</TABLE>
In addition, the Company has agreed to fund anticipated renovations to the
facility after lease expiration. The amounts to be paid to the University for
this purpose are $26,000 annually through 2001.
In January 1998, the Company entered into an operating lease agreement for a
60,300 square foot facility to be used in its manufacturing expansion. The
lease commencement date is June 1, 1998. The annual rental payment for the
first year of the lease is $284,808, and increases an average of approximately
2% each year thereafter. In addition, the Company is responsible for its share
of annual operating expenses of the building presently estimated at $54,300.
The term of the lease is 10 years, with two five-year renewal options.
Total rent expense charged to operations for the years ended December 31,
1997, 1996 and December 31, 1995 amounted to approximately $242,000, and
$219,000 and $229,000 respectively.
(6) RELATED PARTIES
At December 31, 1997 and 1996, the Company owed its President and Chief
Executive Officer $555,482 and $530,412, respectively, in the form of salary
and automobile reimbursements. The amounts are related to the excess of the
negotiated annual salary and monthly auto allowance under a contract which
ended March 31, 1997 over the amounts actually paid to such person. On
December 15, 1997, the Company agreed that one-third of this amount will be
paid per year in each of 1998, 1999 and 2000, with interest on the unpaid
balance at 6% per year from January 1, 1998.
(7) EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan under the provisions of
Internal Revenue Code Section 401(k). Employees having attained the age of 21
and with one month of service are eligible to participate and
F-11
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
make voluntary contributions to the plan. The amount charged to expense for
the years ended December 31, 1997, 1996 and 1995 was $145,000, $66,800 and
$50,600, respectively. The Company does not provide any postemployment
benefits.
(8) CAPITAL STOCK
At December 31, 1997, the Company had outstanding 1,309,623 shares of Series
A Redeemable Convertible Preferred Stock (Series A) and 336,409 shares of
Series B Convertible Preferred Stock (Series B). The Series A stockholders
could, at their option, request that the Company redeem the Series A stock on
or after May 15, 1994. At December 31, 1997 and 1996, the value of the Series
A Redeemable Preferred Stock has been accreted to its redemption value of
$5,798,725.
At the Company's option, it could require that shares of Series A Redeemable
Convertible Preferred Stock and Series B Convertible Preferred Stock be
converted to Common Stock on a share for share basis upon the closing of the
sale of shares of Common Stock in an initial public offering at a price of at
least $10 per share, resulting in gross proceeds to the Company of at least
$12 million. In October 1997, the Series A and Series B stockholders agreed to
waive the requirement for an initial public offering price of at least $10 per
share.
On February 19, 1998, the Company completed an initial public offering of
its common stock, raising net proceeds to the Company of $14.5 million, and
converted all the then outstanding shares of Series A and Series B Preferred
Stock into Common Stock so that no shares of Preferred Stock are currently
outstanding. Contemporaneous with the initial public offering, the Company
amended and restated its Certificate of Incorporation to provide for, among
other things, an increase in the number of authorized shares of Common Stock
from 15,000,000 to 25,000,000; authority to issue up to 5,000,000 shares of
one or more series of preferred stock and authorized the Board of Directors to
fix and determine the relative rights, preferences and limitations of each
class or series so authorized without any further vote or action by the
stockholders; and to effect a reverse stock split in the form of three shares
for every four shares outstanding. All share and per share information in the
accompanying financial statements have been retroactively adjusted to give
effect to the reverse stock split. On March 12, 1998, the Company received
additional net proceeds of $2,259,900, pursuant to the exercise of the over-
allotment option granted to the underwriters as part of the initial public
offering, of which $1,277,173 was used to repay bank term loans on March 19,
1998, as described in Note 3.
(9) EMPLOYEE STOCK OPTION PLAN
The Company adopted a Stock Option Plan ("the Plan") in 1989 under which a
total of 1,200,000 shares are currently reserved for issuance to employees
including officers and directors who are employees or consultants. Options
granted pursuant to the Plan may be either incentive stock options or non-
qualified stock options. The Plan is administered by the Board of Directors
which selects the employees to whom the options are granted, determines the
number of shares subject to each option, sets the time or times when the
options will be granted, determines the time when the options may be exercised
and establishes the market value of the shares at the date of grant and
exercise date. The Plan provides that the purchase price under the option
shall be at least 100 percent of the fair market value of the shares of the
Company's Common Stock at the date of grant. The options are not transferable.
There are limitations on the amount of incentive stock options that an
employee can be granted in a single calendar year. The terms of each option
granted under the Plan are determined by the Board of Directors, but in no
event may such term exceed ten years. The Plan provides for vesting of the
incentive stock options over a four-year period, with vesting occurring 25%
per year on the anniversary date of the option award.
F-12
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock option transactions during the years ended December 31, 1995, 1996 and
1997 under the 1989 Plan, are summarized below:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
PRICE RANGE-- AVERAGE
SHARES PER SHARE EXERCISE PRICE(1)
------- ------------- -----------------
<S> <C> <C> <C>
Balance, December 31, 1994............. 392,354 0.33-$4.00 2.91
Granted.............................. 125,475 3.12-$4.00 3.86
Exercised............................ (6,561) 0.33-$4.00 0.47
Cancelled............................ (12,480) 0.33-$4.00 3.01
-------
Balance, December 31, 1995............. 498,788 0.33-$4.00 3.17
Granted.............................. 179,325 3.12-$4.00 3.95
Exercised............................ (4,069) 0.33-$4.00 1.20
Cancelled............................ (45,132) 0.67-$4.00 3.57
-------
Balance, December 31, 1996............. 628,912 0.33-$4.00 3.51
Granted.............................. 358,725 3.12-$5.33 4.65
Exercised............................ (63,352) 0.33-$4.00 1.51
Cancelled............................ (22,847) 0.67-$4.00 3.89
------- -----
Balance, December 31, 1997............. 901,438 $4.00
======= =====
</TABLE>
- --------
(1) Includes options described below.
The following is a summary of stock options exercisable as of December 31,
1995, 1996 and 1997:
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED
RANGE PER AVERAGE
SHARES SHARE EXERCISE PRICE
------- -------------- --------------
<S> <C> <C> <C>
December 31, 1995...................... 269,747 $0.33--$4.00 $2.64
December 31, 1996...................... 357,825 $0.33--$4.00 $2.88
December 31, 1997...................... 416,476 $0.33--$4.00 $3.39
</TABLE>
Prior to the adoption of the Plan, the Company had a compensatory stock plan
for the issuance of shares to employees and consultants. At December 31, 1997,
the Company had reserved 39,999 shares for a commitment under this plan. The
balance sheet caption "Accrued payroll and payroll taxes" contains a provision
for these shares.
In addition to the options in the table above, during 1996 the Company
granted an option for 187,500 shares to an officer of the Company, at an
exercise price of $4.00 per share, which became fully vested on February 12,
1998, the effective date of the Company's initial public offering.
The Company applies APB Opinion 25 and related interpretations in accounting
for stock options issued to employees. During the year ended December 31,
1997, unearned compensation expense with respect to stock options granted at
less than fair market value at the date of grant was $417,225, which is being
amortized to expense over the periods that the options vest (4-5 years). The
amount amortized to expense during the year ended December 31, 1997 was
$73,482. The unamortized amount of unearned compensation is classified as a
contra equity account in stockholders' deficit. Had compensation cost for the
plan been determined based on the fair value at the grant dates for awards
consistent with the method required by SPAS No. 123, the Company's net income
(loss) would have been changed to the pro forma amounts for the periods
indicated below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net loss for the year ended December 31, 1996..... $(2,362,985) $(2,442,769)
Net income for the year ended December 31, 1997... 651,826 377,011
</TABLE>
F-13
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As a private entity at December 31, 1997, the Company used the minimum value
method for valuing options and an interest rate of 6.5%.
(10) GOVERNMENT CONTRACTS
During the years ended December 31, 1995, 1996 and 1997, substantially all
of the Company's contract revenues were attributable to U.S. government
contracts under which the Company was either a prime contractor or a
subcontractor.
To date, a large percentage of the Company's revenues have been generated by
research and development contracts, principally with the U.S. government.
Orders under government prime or subcontracts are customarily subject to
termination at the convenience of the government, in which event the
contractor is normally entitled to reimbursement for allowable costs and to a
reasonable allowance for profits, unless the termination of a contract was due
to a default on the part of the contractor. No termination of contracts by the
government occurred during the years ended December 31, 1997, 1996 and 1995.
Substantially all of the Company's revenues from government contracts are
subject to audit under various federal statutes. The Company has received
final approval of its overhead rates through 1993. Audits of 1994 and 1995
rates began in December 1997. It is management's opinion that adjustments to
such revenue, if any, will not have a material effect on the Company's
financial position or results of operation.
Certain of the Company's contracts contain retainage provisions. At December
31, 1997 and December 31, 1996, retainage amounts included in accounts
receivable were approximately $167,000 and $112,000, respectively. The Company
estimates that approximately 30% of the retainage amounts at December 31, 1997
will be collected during 1998. At December 31, 1997 and December 31, 1996,
unbilled accounts receivable were approximately $211,000.
(11) BUSINESS AND CREDIT CONCENTRATIONS
The following table shows the percentage of total revenues contributed by
significant customers for the periods presented. A significant customer is
defined as one contributing 10% or more of total revenues:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Customer A.................................................... 46% 41% 21%
Customer B.................................................... 10% 12% 17%
Customer C.................................................... -- -- 13%
Customer D.................................................... -- -- 12%
</TABLE>
Customer A represents the federal government. Included in the December 31,
1997 amount is a total of 17 contracts $3,511,898 administered by six agencies
of the U.S. Government, with contract revenues ranging from 0.1% to 10.% of
total revenues.
During the year ended December 31, 1997, the five largest product sales
customers accounted for approximately 54% of revenues and 68% of product
sales. At December 31, 1997, approximately 74% of accounts receivable were due
from the Company's six largest customers, of which 28% represented amounts due
from agencies of the U.S. government representing Customer A and 46%
represented amounts due from the Company's five largest product sales
customers in 1997. The loss of one or more of these major customers could have
a material adverse effect on the Company's business, results of operations and
financial conditions.
F-14
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(12) GEOGRAPHIC DISTRIBUTION OF PRODUCT REVENUES
Total product revenues are summarized as a percentage by geographic area as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Domestic............................................ 32% 14% 27%
Export..............................................
Europe.............................................. 22% 49% 56%
Asia................................................ 46% 30% 12%
Africa.............................................. 0% 7% 5%
</TABLE>
All of the Company's research contract revenues are within the United
States.
(13) STRATEGIC ALLIANCES
Corning Incorporated
In August 1997, the Company and Corning Incorporated ("Corning") entered
into a Research and Development Umbrella Agreement ("R&D Agreement") under
which Corning will provide research, development, engineering and
manufacturing assistance to the Company for a three year period. Corning will
be compensated for such services in the form of options to purchase shares of
the Company's Common Stock based upon man-years of personnel contributed by
Corning to the project. Such services will be accounted for based on the fair
value of the services provided or the fair value of the options issued,
whichever is more reliably measurable, as required by the provisions of
paragraph 8 of SFAS No. 123. The value of such options, when granted, will be
included in operating expenses. Unless otherwise agreed, such services shall
not exceed the equivalent of five man-years for each year of the R&D
Agreement. The exercise price per share and the options per man-year follow:
<TABLE>
<CAPTION>
OPTIONS PER
EXERCISE PRICE MAN-YEAR
-------------- -----------
<S> <C> <C>
Year 1............................................ $ 8.00 50,000
Year 2............................................ $10.67 30,000
Year 3............................................ $13.33 21,428
</TABLE>
At December 31, 1997, no options were issued to Corning.
As part of the R&D Agreement, the Company received $5.0 million in cash in
exchange for its 7% note, due on August 19, 2001, collateralized by all
physical assets described below, which is convertible into common stock of the
Company at a conversion price of per share equal to 75% of the price per share
in the initial public offering of the Company's common stock. The Company may
repay the note in full without penalty after two years from its date of
issuance. In the event the note remains outstanding after its scheduled
maturity date, the Company shall grant to Corning a non-exclusive license to
use all of the Company's Silicon-Film(TM) intellectual property under fair
market terms and conditions as shall be then negotiated. The granting of the
license does not prevent Corning from seeking payment of the note. The
proceeds of the note are restricted for the engineering, design, lease,
construction or expansion of facilities and purchase of equipment and related
tooling or working capital devoted to the manufacture of products derived from
the Company's Silicon-Film(TM) technology.
In addition, under certain circumstances, Corning has future rights to
participate in (i) equity or other financings involving instruments
convertible into equity of the Company; (ii) proposals in respect of any
merger, consolidation or similar transaction involving the Company, or any
sale of other disposition of a material portion of the capital stock of the
Company or its assets of business; and (iii) any plans or proposals to sell or
license any intellectual property relating to the Company's Silicon-Film(TM)
technology.
F-15
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
GPU Solar
In July 1997, the Company entered into a joint venture with GPU
International to form GPU Solar to develop, manufacture and test market grid-
connected residential rooftop photovoltaic systems for the U.S. market using
the Company's modules. The Company's contribution to the joint venture will be
specified services and reduced pricing on sales to the joint venture.
(14) ADVANCE FROM CUSTOMER
On March 26, 1997, the Company entered into a supply agreement with a
customer for the purchase of solar cells through December 31, 1998, for a
total sales value of approximately $5.0 million. The advance payment of $1.0
million, which bears interest at 6%, will be credited to the customer against
future shipments during 1997, with the balance at December 31, 1997 to be
credited to the customer's account in equal monthly amounts during 1998. The
customer has the right to convert any or all of the unapplied advance payment
for an equivalent amount of the Company's common stock at the then prevailing
market price. The balance of the advance at December 31, 1997 was $610,756.
(15) NET INCOME PER SHARE
The following table presents the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
1997 1996 1995
------------------------ -------------------------- ------------------------
INCOME AVERAGE INCOME (LOSS ) AVERAGE INCOME AVERAGE
AVAILABLE COMMON AVAILABLE COMMON AVAILABLE COMMON
TO COMMON SHARES TO COMMON SHARES TO COMMON SHARES
STOCKHOLDERS OUTSTANDING STOCKHOLDERS OUTSTANDING STOCKHOLDERS OUTSTANDING
------------ ----------- -------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Basic................... $651,826 3,710,258 $(2,362,985) 3,699,702 $97,970 3,697,630
Dilutive Effect
Stock Options......... -- 344,786 -- -- -- 103,083
Convertible Debt...... 157,377 518,460 -- -- -- --
Convertible Preferred
Stock................ -- 1,646,657 -- -- -- 1,561,623
-------- --------- ----------- --------- ------- ---------
Diluted................. $809,203 6,220,161 $(2,362,985) 3,699,702 $97,970 5,362,336
======== ========= =========== ========= ======= =========
</TABLE>
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AstroPower, Inc.:
Under date of February 20, 1998, we reported on the balance sheets of
AstroPower, Inc. as of December 31, 1997 and 1996, and the related statements
of operations, stockholders' deficit, and cash flows for each of the years in
the three-year period ended December 31, 1997, as contained in the annual
report on Form 10-K for the year 1997. In connection with our audits of the
aforementioned financial statements, we also audited the related financial
statement schedule II, Valuation and Qualifying Accounts as of December 31,
1997 and for each of the years in the three-year period ended December 31,
1997. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
s/KPMG Peat Marwick LLP
Wilmington, DE
February 20, 1998, except as to the last
paragraph of Notes 3 and 8, which are as of
March 19, 1998
F-17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
ART. 5 FINANCIAL DATA SCHEDULE FOR ANNUAL 10-K
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,908,177
<SECURITIES> 0
<RECEIVABLES> 3,399,162
<ALLOWANCES> 72,962
<INVENTORY> 1,602,321
<CURRENT-ASSETS> 10,223,041
<PP&E> 7,750,316
<DEPRECIATION> 2,858,195
<TOTAL-ASSETS> 15,115,162
<CURRENT-LIABILITIES> 4,889,563
<BONDS> 0
5,798,725
37,698
<COMMON> 3,364
<OTHER-SE> (2,001,137)
<TOTAL-LIABILITY-AND-EQUITY> 15,115,162
<SALES> 13,094,871
<TOTAL-REVENUES> 16,606,769
<CGS> 9,311,140
<TOTAL-COSTS> 15,683,990
<OTHER-EXPENSES> (4,550)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 369,233
<INCOME-PRETAX> 671,826
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 651,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 651,826
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.13
</TABLE>
